
Nick Williams
Partner | Legal
Jersey

Nick Williams
Partner
Jersey
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This article first appeared in ThoughtLeaders4 FIRE Q1 2021 magazine.
It is important that trustees understand their obligations if their trust structure comes under financial stress. Helpfully, the Jersey courts have provided guidance on the principles applicable to 'insolvent' trusts, which is likely to be highly persuasive in other jurisdictions.
When is a trust insolvent?
As the Royal Court noted in Re Z Trusts [2015] JRC 196C, "[t]o talk of an insolvent trust is, of course, a misnomer. A trust is not a separate legal entity and cannot, as a matter of law, be insolvent." Nonetheless, the Court described the term as a useful shorthand.
Whether a trust is insolvent is determined using the cash-flow test: is the trustee unable to meet its debts as trustee as they fall due out of the trust property?
Why does it matter?
Insolvency in a trust brings about a shift towards the interests of creditors (analogous to that seen in company law). This means the trust should be administered by the trustee on the basis that the creditors, not the beneficiaries, have the economic interest. Importantly, the trust is to be administered for the benefit of the creditors as a class, not simply a majority of them.
Trustees may find administering a trust for the benefit of creditors to be an unusual and uncomfortable experience. The Royal Court has cautioned that "[t]he trustee or fiduciary of [an insolvent] trust would be wise … to exercise their powers either with the consent of all of the creditors or under directions given by the Court".
What insolvency regime applies?
In Re Z Trusts [2015] JRC 214 the Royal Court concluded it has a discretion as to the appropriate insolvency regime to implement, reasoning as follows:
On the facts, the Court saw "little point" in a formal claims process when, with one exception, the creditor claims were all accepted. In contrast (and demonstrating the Court's 'flexible approach'):
Priority of a trustee's equitable lien
Jersey's Court of Appeal in Re Z II Trust [2019] JCA 106 considered important questions as to whether a former trustee's equitable rights have priority over the rights of other claimants to the assets of an insolvent trust (including successor trustees).
The starting point was the Privy Council's judgment in Investec Trust (Guernsey) Ltd v Glenella Properties Ltd [2018] UKPC 7, which recognised that (under Jersey law) a trustee has an equitable lien on trust assets to secure its right of indemnity for liabilities properly incurred as trustee.
The Court went on to conclude that:
Conclusion
The above cases give rise to various practical considerations for trustees. Importantly, they must ensure they give due regard to creditors' interests where the trust comes under financial stress. Further, before being appointed they should consider how to mitigate the risk that a predecessor 'scoops the pot' in connection with a past liability.
Ultimately, trustees should remember that they are subject to the Court's supervision, and are therefore entitled to expect the Court's assistance in cases of genuine difficulty – including when administering an insolvent trust.
Ogier is a professional services firm with the knowledge and expertise to handle the most demanding and complex transactions and provide expert, efficient and cost-effective services to all our clients. We regularly win awards for the quality of our client service, our work and our people.
This client briefing has been prepared for clients and professional associates of Ogier. The information and expressions of opinion which it contains are not intended to be a comprehensive study or to provide legal advice and should not be treated as a substitute for specific advice concerning individual situations.
Regulatory information can be found under Legal Notice
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