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breach of trust, Deed of Trust, Trustee Act, Trustee liability, Trustees, Trusts

First up, best dressed

Representation of the Rawlinson & Hunter Trusts SA re Z Trusts relates to appeals against three judgments of the Jersey Royal Court regarding the equitable rights of a former trustee and whether those rights take priority over the rights of other claimants to the assets of a trust whose liabilities exceed its assets, in other words, an insolvent trust.

The background is set out at [5] to [9] of the judgment as follows:

“5. The circumstances relate to eight trusts of which the late C was the settlor and all of which bear the title “Z”. C was a beneficiary of seven of those trusts and her son, who as an individual is the ninth respondent, is a beneficiary of all of them. C died subsequently and E is her Executor and as such is the tenth respondent and the respondent in this appeal.

6. Only two of these trusts have any material bearing on the matters before this Court. One of those trusts is entitled “Z II” and it was established as a Jersey discretionary trust on 10th December, 2004 (“the Z II Trust”). Equity Trust was the original trustee of the Z II Trust. At the request of E acting on behalf of C, Equity Trust retired as trustee on 11th October, 2006, and was replaced as trustee by Volaw Trustees Limited (“Volaw”). A Deed of appointment and resignation of trustees was entered into on that date which included an indemnity in favour of Equity Trust (“the Volaw Indemnity”). The Commissioner has observed that documents attached to this Deed demonstrate that there were numerous companies within the trust structure which he believed were predominantly involved in property development in the United Kingdom.

7. The other of the Z trusts which is relevant is entitled “Z III” and it was established as a Jersey discretionary trust on 23rd December, 2005 (“the Z III Trust”). Equity Trust was also the original trustee of the Z III Trust and it was similarly replaced as trustee on 26th October, 2006, by Barclays Private Bank & Trust Limited. Equity Trust was provided with an equivalent indemnity by Deed of appointment and resignation of trustees.

8. On 31st July, 2012, Angelmist Properties Limited, a company in compulsory liquidation (“Angelmist”) instituted through its joint liquidators a claim in the High Court of England and Wales against two of its former directors and against Equity Trust (“the Angelmist proceedings”). Angelmist was one of the companies within the Z II Trust structure and was registered in England. The claim alleged a breach of duty against the two directors who were employees of Equity Trust, and claimed against Equity Trust for vicarious liability and upon the basis that it acted as a de facto or shadow director of Angelmist. The amount of the claims made by Angelmist totalled some £42 million together with interest and costs. On 22nd April 2013, Equity Trust notified Volaw of its intention to rely upon the Volaw Indemnity and sought confirmation that its rights were not prejudiced.

9. On 11th March, 2015, Volaw issued the Representation before the Royal Court which is the basis of these proceedings. Volaw sought directions in relation to a scheme for the winding-up of the Z II Trust. On 29th April, 2015, Volaw was authorised by the Royal Court to continue administering the assets of the Z II Trust and to be paid from those assets in priority to all other claims. On 20th October, 2015, Volaw was given leave by the Royal Court to retire as trustee of the Z II Trust and on 13th November, 2015, Rawlinson & Hunter Trustees SA (“R&H “) was appointed as trustee in succession to Volaw. No fees or expenses are to be charged against the trust find by R&H as these are being funded separately. This means that R&H, both for itself and as successor trustee to Volaw, has no claim against the assets of the Z II Trust for reimbursement of any liabilities which it has incurred, but rather the claims that it has are the claims of creditors with whom Volaw and R&H have transacted.”

As noted at [13]:

“The amounts of the only asset and of the liabilities of the Z II Trust demonstrate that its liabilities substantially exceed its assets. Although a trust is not a distinct legal person, and therefore cannot be said to be insolvent in the way that an individual person or legal corporation can, the Commissioner and the parties have used the expressions “solvent” and “insolvent” to describe a trust whose assets held on trust are respectively either sufficient or insufficient to meet the claims to its assets. I am content to adopt these expressions also. This means that for the purposes of the issues before the Court, the Z II Trust can be described as an insolvent trust, as can the Z III Trust.”

Equity Trust’s claims reimbursement out of the assets of the Z II Trust of £18 m in priority to other creditors.  If successful Equity Trust will recover a total of £6 m as partial satisfaction of its claim.  Otherwise it will receive £330,000 if it ranks pari passu with the other creditors of the Z Trust.

The administration of trusts in Jersey is subject to the Trusts (Jersey) Law 1984.  Article 26 of which provides at (2) that “A trustee may reimburse himself or herself out of the trust for or pay out of the trust all expenses and liabilities reasonably incurred in connection with the trust.”

Editor’s note: Although this is in accord with the position in New Zealand, the Trusts (Jersey) Law also provides at Article 32 for the situation where a party does not know that it is dealing with a person acting as a trustee, rather than personally.  It is also noted that the Trusts (Jersey) Law has specific provisions dealing with  the security or indemnity that may be provided to a trustee who ceases to hold office or who distributes trust property.

The relevant indemnification principles are set out at [29] as follows:

(i) By reason of Article 26(2) of the Trusts Law, a trustee is entitled to be indemnified out of the trust fund in respect of liabilities, costs and expenses reasonably incurred in connection with the performance of its duties as trustee;
(ii) The right of indemnity is not limited to the recouping of payments made but extends to a trustee’s liabilities: Re Blundell (1889) LR Ch D 370 at pp 376-377;
(iii) In practical terms, this means that a trustee has a right of reimbursement in respect of liabilities which he has satisfied from his own resources, and a right of exoneration which entitles him to satisfy a liability directly from the trust property.

Of note (from a New Zealand perspective) is the reference to Butterfield v Public Trust as authority for these principles.

The primary matter of contention is set out at [37], where it is stated that:

“…  The issue was whether Equity Trust’s right of indemnity and associated lien (whether exercised by Equity Trust in respect of its personal liability to an Article 32(1)(b) creditor or being exercised by an Article 32(1)(a) creditor by way of subrogation) has priority over the right of indemnity and equitable lien of a successor trustee.”

Importantly, as commented on at [126] the matter was determined on the basis of agreed assumptions.

Also of significance is the observation at [128] that “On the issue of the priority of a former trustee’s lien over a successor trustee’s lien, it is accepted by the parties that there is no authority directly in point whether in Jersey, in Guernsey or England, or elsewhere.”

With regard to a trustee’s right of indemnity:

  • A trustee is entitled to procure payment out of the trust estate or to be indemnified out of the trust estate in respect of debts properly incurred as trustee. This means that a trustee has a claim on the trust assets for the debts which it has incurred as trustee. In order to satisfy such a claim, the trustee has a right of indemnity which is secured by an equitable lien on the trust assets. That equitable lien does not depend on possession, and it normally survives after it has ceased to be a trustee: [133]
  • Per Lewin:

“21-043 A trustee, and each of the trustees separately where the trustees are more than one in number, has a first charge or lien upon the trust fund, conferring an equitable interest in the trust fund, in respect of the liabilities, costs and expenses covered by his right of indemnity. The trustee’s charge takes priority over the claims of the beneficiaries, and of purchasers or mortgagees claiming under them. The trustee’s right of indemnity as secured by the charge or lien comprises rights of reimbursement, exoneration, retention, and realisation, as follows:

(1) A trustee who incurs a liability may discharge the liability out of his own resources and then reimburse himself from the trust property.

(2) Alternatively a trustee may, and usually will, discharge or pay the liability directly from the trust property so as to exonerate himself from the liability. A trustee, if solvent, may assign or charge his right of exoneration to a creditor to the extent necessary to discharge the liability of the creditor in respect of which the right to indemnity arose. While a right of reimbursement is a proprietary charge or interest freely disposable by a trustee for his own benefit or for the benefit of his own general creditors, a right of exoneration, however, benefits a trustee only to the extent that it allows him to resort to the trust fund for the purpose of payment of an expense of the trustee within the scope of his right of indemnity which otherwise would be borne by the trustee personally and so does not confer any proprietary charge or interest allowing the trustee to resort to the trust property for the purpose of satisfying claims of his own general creditors.

(3) A trustee may retain trust assets or income until he has been indemnified, both as regards present liabilities, to the extent needed for the purpose, and, in general, as regards contingent or future liabilities for which he may become accountable, to the extent required to meet the worst case on the basis of reasonable but not fanciful assumptions. A beneficiary cannot compel a transfer of the trust fund to a new trustee, or to a beneficiary who has become absolutely entitled to some or all of the trust property or his assign, until the trustee’s just demands have been met. A trustee must make proper enquiries as to what the contingent or future liabilities consist of and the extent of his potential liability at the time that he asserts a right of retention.

(4) A trustee need not wait until the trust property has been turned into money before recovering his proper expenses. He may realise trust assets for the purpose of meeting his costs, or if need be apply to the court for an order for sale. Ordinarily, in a case where trust money is not readily available to reimburse a trustee’s expenses, the trustee may require assets to be sold at once to reimburse a trustee’s expenses, even assets which are held for occupation or use by beneficiaries. However, the court has refused to enforce a lien where the result would be the destruction of the trust itself. In such cases the court goes so far as it can by delivering the deeds into the trustee’s custody and prohibiting any disposition of the property without the previous discharge of the trustee’s lien…” (emphasis in the original).”

To paraphrase (as set out at [145]) “a trustee possesses by virtue of its office an equitable right of indemnification which arises by operation of law upon its appointment as a trustee. The right of indemnification is an equitable interest in, and is secured over, the trust assets and it can be vindicated by the exercise by the trustee of its right of lien which secures that right of indemnification. In particular, the right of a trustee to be reimbursed and indemnified out of the trust assets is demonstrated by Re The Exhall Coal Company where Lord Romilly MR said at pp 971-972 that:

“… in my opinion, it is a right incidental to the character of trustee and inseparable from it, that he should be saved harmless from obligations which are attached inseparably to his office, and by which anyone taking a charge … from the cestui que trust is bound.”

Importantly:

146. Thus, a trustee obtains its priority over the trust assets by virtue of its office and it has a priority ranking ahead of beneficiaries and those deriving title from beneficiaries. This is the starting point and it means that each and every trustee which holds office will possess its own equitable interest and right of lien enforceable as a first charge against the assets of the trust.

147. At this point, the nature of a trustee’s lien in the law of Jersey, which is derived from the law of England, may be said to have the following characteristics. A trustee obtains by virtue of its appointment as trustee an equitable interest in the trust fund in respect of the liabilities which it incurs as trustee. That equitable interest represents a first charge or lien upon the trust fund which takes priority over the claims of beneficiaries. The trustee need not wait until the trust property has been realised but may by itself or by application to the court bring about a sale of assets so as to satisfy its charge. That may be done even where the interests of beneficiaries are affected (although the court may exercise some ultimate level of control if the existence of the trust itself would be prejudiced).

148. I now turn to other passages in Lewin which have a bearing on this issue. In paragraph 21-044, it is stated that “a trustee’s charge or lien extends over the whole of the trust fund so a liability in respect of a part of the trust fund may be discharged out of any other part of the trust fund.” In paragraph 21-047, it is stated that as between creditors there is no authority in England as to whether creditors’ claims will rank pari passu or in order of time, but adoption of the former would tend to “avoid difficult and cumbersome enquiries”. It is noted that in the case of EC Investment Holdings v Ridout Residence in the High Court of Singapore, competing creditors agreed to a ranking pari passu. It may be noted that paragraphs 21-044 and 21-047 appear in the section of Lewin on the insolvency of a trustee and they do not on the face of it give guidance on the appropriate ranking between the claims of trustees in succession in the case of an insolvent trust (as does paragraph 21-043 although no point was made about that either before this Court or in the judgment of the Privy Council in Investec).

The judgment goes on to consider the rules regarding the ranking of priorities and concludes that the rules relating to priority do not change where the is insolvency.

Rather as stated at [177] “The establishment of the appropriate ranking should be straightforward in any particular case because it will depend solely upon the date when a trustee took up appointment as a trustee. This is because the rights of indemnity and lien are incidents of the holding of the office of trustee. The rights of indemnity and lien exist throughout the period of time that a trustee holds office and they do not, in my opinion, depend upon there being any actual liability to be secured against either at the outset of a trustee’s appointment or during its period of office as trustee. There is therefore no question of the right of lien arising and then ceasing as the trustee incurs and discharges liabilities as the administration of the trust continues as I understood Advocate Harvey-Hills to suggest. This is because it is a right of indemnity and a right of lien which a trustee possesses and these rights continue to exist even if there are no actual liabilities to be secured against at one time or another during the administration of the trust.”

That a former trustee’s rights of indemnity and lien take priority over of those of a successor trust (see [179] is clearly expressed in the case of Lemery Holdings v Reliance Financial Services in the Supreme Court of New South Wales. In that case Brereton J set out nine principles concerning a trustee’s right of indemnity against trust assets. At paragraph 21 in that case he note that:

“Eighthly, if the trust property is transferred to a new trustee, the lien survives and the new trustee takes subject to the lien of the old trustee – except perhaps in the exceptional case of a bona fide purchaser for value without notice”.

The conclusion was that “a former trustee’s right of lien ranks in priority over the right of lien of a successor trustee”

That said it was considered that the priority of first in time might be departed from, perhaps where a former trustee had acted to mislead a successor trustee.  See [186].

A trustee’s lien is a single right of lien that exists to indemnify the trustee in respect of all liabilities incurred as trustee during its period of office as trustee, whether current, future or contingent.  See [188].

The lien was considered to be able to be characterised as being in the nature of a floating charge the value of which “expands and contracts with the liabilities incurred by the trustee on behalf of the trust.”  See [190].  This observation is the essence of the matter.  Because trusts are not legal entities, trustees necessarily act personally and as such are liable in the first instance, such liability being a fluid liability modified only to the extend of properly claimed indemnities.

Perhaps surprisingly, given their importance, a trustee’s lien is nevertheless not well understood.  The obiter statement at [190] is an excellent summary of as to the actual nature of a trustee’s lien.

As noted by Robson J in the Supreme Court of Victoria in Re Amarind at paras 386-388,  it was “clearly the case” that a trustee’s lien was in the nature of a floating charge “as the charge’s value expands and contracts with the liabilities incurred by the trustee on behalf of the trust.”

Also as noted in Snell  “Equitable liens are similar to mortgages in the sense that they provide security without possession” (although they differ from mortgages because they arise by operation of law rather than being created by the parties). The analogy of a mortgage is also consistent with a single form of security possessed by a party and exercisable by reference to the assets secured against in respect of all of the individual liabilities incurred by that party which are secured by that single security.

A lawyer’s or accountant’s lien by contrast rely on possession, which perhaps explains much of the misunderstanding as to what a trustee’s lien actually is.

The decision is long (83 pages) but well worth the read for the wealth of consideration and analysis.  The references to recent Antipodean decisions warrants the consideration of practitioners in those jurisdictions.

Also see leave to appeal in Rawlinson & Hunter Trustees SA v Chiddicks and others.

References:

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