Privy Council considers the personal liability of trustees

Investec Trust (Guernsey) Limited and another v Glenalla and others [23.04.18]

On 23 April 2018, judgment was handed down by the Privy Council in the long running dispute of Investec Trust (Guernsey) Limited and another v Glenalla and others. The judgment has a number of important implications in respect of trustees' limitations of liability, but also in aspects of private international law that reach beyond trustee law.

Background

This litigation involved a trust called the Tchenguiz Discretionary Trust (the TDT) which was set up for the benefit of Robbie Tchenguiz and his family in 2007. The TDT was subject to the law of Jersey, but operated out of Guernsey.

A number of companies within the TDT claimed repayment of loans said to be owed to them by Investec Trust (Guernsey) Limited (ITG) and another company, as former trustees of the TDT. Kaupthing Bank had exercised rights of security over these companies when the financial crisis hit in 2008. It was the liquidators of those companies (Grant Thornton) who sought repayment of the loans from ITG as the party to the relevant loans.

Privy Council

The Privy Council was asked to consider whether the former trustees were personally liable for the loans, or whether Article 32 of the Trust (Jersey) Law 1984 protected them, and limited Grant Thornton’s right of recourse to the TDT fund. The Privy Council considered the law that governed the discharge of the liabilities by the former trustees, with the majority noting:

The time has come to recognise that as a general rule the common law will recognise and give effect to limitations of liability which arise under an entity's constitutive law by reason of the particular status or capacity in which its members or officers assume an obligation.

The Privy Council held that the Jersey trust law limits a trustee's liability to a third party where that third party knows that they are contracting as a trustee, which was the case in this instance.

With regard to the trust assets, the Privy Council panel also held that Article 32 of the Trust (Jersey) Law 1984 does not create a direct right of access to the trust assets in respect of liabilities to third parties. A trustee is entitled to an indemnity out of trust assets and the creditor can "piggy back" on that right (subject to any limits imposed by the law or the relevant trust deed). However, if that trustee has acted in breach of trust, they may lose their right of indemnity, and as they will not be personally liable for the debts either, the relevant creditors may lose out.

Private international law

The panel also considered whether the Jersey Trust law would apply in Guernsey, where the former TDT trustees operated (the relevant loans were governed by either English or Guernsey law). This was a matter of private international law, and for a number of reasons, the panel concluded that Article 32 should apply. Amongst those reasons was the fact that the common law should recognise that issues around trustees’ capacity and liabilities are to be governed by the law of the relevant trust.

Comment

It should also be noted that Guernsey has an equivalent provision providing protection for trustees of a Guernsey Trust, where they contract with a third party who knows they are acting as a trustee (Section 42 of the Trusts (Guernsey) Law, 2007). Section 42 provides that they have no personal lability in this instance.

Looking at another off shore jurisdiction, under Section 98 of the BVI Trustee Act 1961 (as amended), a Trustee will be personally liable in respect of a contract with a third party that was properly entered into, but only to the extent of the trust property, if the third party is aware of the fiduciary capacity in which they were acting.

The position set out above is contrasted with the UK, where liabilities incurred by a trustee of an English trust can be enforced against their personal assets. However, the trustee can still limit his liability by contract. The offshore jurisdictions of Bermuda and the Cayman Islands, like England, do not have any legislation that specifically limits the liability of trustees to third parties in certain situations.

As a consequence of the Investec judgment, if a party is contracting with an entity that was created subject to the law of another jurisdiction, it would be wise to consider seeking local advice on the effect of the law governing that entity’s formation documents.

One further important point of note in the judgment of the Privy Council related to the ability to appeal from the Guernsey Court of Appeal. The panel held that under Section 16 of the Court of Appeal (Guernsey) Law 1961, a party can appeal to the Privy Council as a matter of right, where the value of the dispute is equal to or exceeds £500.

Read other items in Professions and Financial Lines Brief - December 2018

Read other items in Offshore Professional Risks Brief - June 2019