Insolvent trusts – can trustees rely upon their indemnity?

Insolvent trusts – can trustees rely upon their indemnity?

About Michael GoulbornMichael Goulborn

Mike Goulborn’s expertise includes trust and contentious probate disputes (he represented two of the plaintiffs in the Alhamrani litigation, which remains Jersey’s longest-running civil trial), and he also has experience of a wide range of contractual and commercial disputes, regulatory investigations, compliance and connected non-contentious advice.

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Equity Trust (Jersey) Ltd (Respondent) v Halabi (in his capacity as Executor of the Estate of the late Madam Intisar Nouri) (Appellant) (Jersey) ITG Ltd and others (Respondents) v Fort Trustees Ltd and another (Appellants) (Guernsey)  – Privy Council Appeal No 0199 of 2019

On 13 October 2022, the Judicial Committee of the Privy Council (the “Board”) delivered a long-awaited judgment in two cases from the Courts of Appeal of Jersey and Guernsey[1], concerning the nature and scope of the right of a trustee to recover from or be indemnified out of the trust assets in respect of liabilities and expenditure incurred as trustee. 

The facts

The Jersey Appeal

Equity Trust (Jersey) Ltd (“ETJL”) was the original sole trustee of a Jersey trust.   ETJL entered into a deed of retirement and removal with its successor, Volaw Corporate Trustee Ltd (“Volaw”), and Volaw held £2.5 million as security for its indemnity to EJTL for liabilities properly incurred as trustee. Volaw was later replaced by a further trustee, Geneva Trust Company.

In 2012, ETJL was sued for £53 million by liquidators of a company in the trust structure.  Following the settlement of the proceedings, ETJL sought to recover £18.9 million under its indemnity, comprising £16.5 million paid by way of settlement and £2.4 million in costs. This gave rise to a trial before the Royal Court of Jersey, which held that successive trustees and the creditors claiming through them by way of subrogation ranked pari passu (or equally) in their claims on the trust assets. The Court also held that ETJL was not entitled to the costs of proving its claim.

On appeal, the Jersey Court of Appeal reversed this decision, holding that ETJL’s right of indemnity ranked ahead of those of successor trustees on a first in time basis. The Court of Appeal also held that ETJL’s costs of proving its claim were recoverable under the indemnity.

The Guernsey Appeal

Investec Trust (Guernsey) Ltd (“ITG”) was the original trustee of the Tchenguiz Discretionary Trust (“TDT”).  Bayeux Trustees Ltd (“Bayeux”) became its co-trustee. Over the following years, three further trustees held office. ITG and Bayeux, in their capacity as trustees of the TDT, assumed liabilities under a loan agreement with Kaupthing Bank HF (“Kaupthing”) totalling approximately £100 million and further loans due to two BVI companies, Glenalla Properties Ltd and Thorson Investment Limited (together the “BVI Companies”) totalling €78.825 million and £80.541 million respectively.

In October 2018, the BVI Companies commenced proceedings to identify and resolve the various claims against the assets of TDT.  As part of a settlement with Kaupthing, the then trustees of the TDT took an assignment of the (now) judgment debts due to the BVI Companies and submitted proofs of debt in respect of the judgment debts. The TDT did not have sufficient assets to satisfy the claims against it, giving rise to a trial before the Royal Court.

The Royal Court held that the claims of a former trustee and its trust creditors had priority over those of successor trustees and that trustee claims had priority over creditors claiming through them as subrogated to their lien. This was upheld by the Guernsey Court of Appeal.

Both cases were appealed to the Privy Council.  The four principal issues considered by the Board were:

  1. Does the right of indemnity confer on the trustee a proprietary interest in the trust assets?

The Board unanimously held that the right of indemnity confers on the trustee a proprietary (rather than merely possessory) interest in the trust assets.

A trustees’ right of indemnity is an equitable lien which is not dependent upon possession but arises by operation of law. Such an approach is consistent with English authorities which have treated the right of indemnity as a charge or lien on the trust assets, and with Australian authorities which have explicitly held that the trustee’s right creates a proprietary interest in the trust assets

  • If so, does the proprietary interest of a trustee survive the transfer of the trust assets to a successor trustee?

The proprietary interest of a trustee survives the transfer of the trust assets to a successor trustee.  As the indemnity creates a proprietary interest in the trust assets, it would be contrary to ordinary equitable principles if it automatically ceased to exist when the trustee parted with legal title to and/or possession of the trust property.  This position is supported by Australian authorities and the leading textbooks.

  • If so, does a former trustee’s proprietary interest in the trust assets take priority over the equivalent interests of successor trustees?

Noting a lack of authority on the point, the Board held (by a majority) that successive trustees’ interest in trust assets rank pari passu (or equally) where those assets are insufficient to meet all the claims on them made by or through the trustees pursuant to their indemnities.

  • Does a trustee’s indemnity extend to the costs of proving its claim against the trust if the trust is “insolvent”, in the sense that trustees’ claims to indemnity exceed the value of the trust fund?

The Board unanimously held that the indemnity extends to the costs of proving the trustee’s claim against the trust assets.  There is no basis for suggesting it did not extend to such costs incurred after a trustee’s retirement, given that the indemnity survived the retirement of a trustee, and there was no analogy with the rule applicable to the costs of creditors in proving their debts in a formal bankruptcy proceeding.

How is this decision relevant to Bermuda trustees?

The Privy Council’s decision concerned the right of a trustee under Article 26(2) of the Trusts (Jersey) Law 1984 to be indemnified out of trust assets for their proper expenditure[2].  The Article provides:

Art. 26 (2)     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.

If one compares the wording of Art 26(2) with Section 22(2) of Bermuda’s Trustee Act 1975, it is apparent that the wording is near-identical for all practical purposes:

Section 22 (2) A trustee may reimburse himself or pay or discharge out of the trust premises all expenses incurred in or about the execution of the trusts or powers.

Bermudian law is based on the common law principle of precedent.  Although a decision of the Privy Council on appeals from Jersey and Guernsey is not binding upon the Bermuda courts, it will be highly persuasive to the extent it is relevant.  Given the very close similarity between the Jersey and Bermuda legislation with regard to a trustee’s right to an indemnity, it is highly likely that this decision would be followed in Bermuda in appropriate cases.

[1] The two appeals were unconnected but heard together: the trusts in both cases were governed by Jersey law.

[2] The Board held that Art 26(2) was the same in all relevant respects as English law.