Enforcement against discretionary beneficiaries – A thing writ in water

Introduction

The Royal Court of Jersey has held in the case of Kea Investments Ltd v Watson[1] that it is not possible for a judgment creditor to obtain execution against the interest of a discretionary beneficiary under a Jersey trust. Although a beneficiary’s interest is a species of movable property, it is not transmissible (by way of either assignment or execution) unless expressly provided for under the terms of the trust.

Facts

At the suit of Kea Investments Limited (“Kea Investments”), in long running proceedings in England, Mr Watson had been judged to be a fraudster.  Kea Investments obtained a judgment against Mr Watson for equitable compensation to the tune of £43.5m with an interim payment order for over £25m and nearly £4m in costs. Kea Investments registered its judgment debt in the Royal Court of Jersey pursuant to the Judgments (Reciprocal Enforcement) (Jersey) Law 1960, allowing Kea Investments to take steps and to enforce its judgment against Mr Watson’s assets in Jersey.

Kea Investments had identified three Jersey trusts of which Mr Watson (along with his children and remoter issue) is an object of the trustee’s discretionary powers over income and capital. Kea Investments contended that Mr Watson’s rights as a discretionary object of the trusts constituted movable property which under Jersey law could be distrained upon by way of an arrêt.

Arrêt

An arrêt is a Jersey customary law remedy for the satisfaction of a debt. An arrêt works by appropriating the debtor’s movable property to the creditor in satisfaction of the debt.  An arrêt may be made against the debtor, his or her property directly, or against a third party, over property owed to the debtor (known as an arrêt entre mains), whether existing or future, vested or contingent. An arrêt operates in rem to charge the thing arrested and create a proprietary security interest in it, in favour of the arresting creditor, who is to all intents and purposes subrogated to the debtor’s interest in respect of the property subject to the arrêt.

The result

While holding that Mr Watson’s interest as a discretionary beneficiary under each trust was a species of Jersey movable property (albeit of a highly attenuated kind, having no real value to anyone but him), the Royal Court refused to confirm the arrêts over those interests.

The court held that the rights held by a discretionary object of a trust[2] were not inherently transmissible (whether by way of assignment or distraint) nor were they amenable to execution. While Article 10(11) Trusts (Jersey) Law 1984 provided that “a beneficiary may sell, pledge, charge, transfer or otherwise deal with his or her interest in any manner”, this was expressed to be “subject to the terms of the trust” and there was nothing in the terms of the specific trust instruments which provided that Mr Watson could alienate his beneficial interest.

Imposing an arrêt over Mr Watson’s beneficial interest, so the judgment creditor stood in his shoes, would in effect be to impermissibly extend the beneficial class to a non-beneficiary via a mechanism not provided for in the terms of the trust itself.

Neither were the rights of a discretionary beneficiary equivalent to a positive entitlement to the trust assets. Were Kea Investments to step into Mr Watson’s shoes in respect of his beneficial interest, the most it could do would be to ask the trustee to consider making a distribution to it (or to Mr Watson) for Kea Investments’ benefit.

If the trustee were to attempt to appoint trust assets directly to a creditor of a beneficiary, or to the beneficiary knowing it would be immediately appropriated by a creditor, that would likely constitute a fraud on the power, because its exercise was to benefit a non-beneficiary. The Court put it neatly in asking what possible utility there could be in non-objects having any of the rights of a discretionary beneficiary which they can never exercise in a way that benefits them.

The court held that the rights of a discretionary beneficiary are indivisible from the person of the discretionary beneficiary and cannot exist or be exercised independently of them.

Trust Busting

The Royal Court’s judgment in Kea Investments serves to reiterate the orthodox position that a Jersey law discretionary trust is an ownership structure which, while holding assets for the benefit of discretionary beneficiaries, is separate and distinct from the personal assets (and liabilities) of those beneficiaries.

The decision raises a familiar policy issue: whether discretionary trusts should afford a safe harbour to those with nefarious intent who can structure their affairs through a discretionary trust so as to make themselves judgment proof. On the other hand, asset protection is a well-recognised and legitimate reason for settling a discretionary trust. Many would regard the sheltering of assets if something disastrous were to befall the wealth creator as the purpose of a discretionary trust.

Disposing of assets into a discretionary trust does make the pursuit of civil recovery claims more difficult for creditors. That being said, and particularly when dealing with a fraudster, there are other legal avenues available to either unlock value in a discretionary trust or to deprive a wrongdoer of their ill-gotten gains.

Alternative routes to civil recovery

While the availability of these options will be highly fact sensitive, it is possible to access assets held in a discretionary trust using a range of civil legal arguments. The trust may successfully be argued to be a sham – the assets are not held on trust at all. The possibility of establishing the trust is ‘illusory’ as was achieved in the English decision of Pugachev, remains ripe for development in Jersey law (and may not be blocked by Jersey’s firewall legislation). The transfer of assets into trust may constitute a transaction at undervalue, unlawful preference or a fraud on creditors capable of being clawed back. Where there has been a fraud and the assets transferred into trust constitute stolen property or the proceeds of corruption, that can give rise to proprietary remedies for the return of the assets regardless that they are now held subject to a trust.

Confiscation

Jersey’s regime to deprive fraudsters and other criminals of the benefit of their unlawful conduct (by way of saisie (seizure) and confiscation) has found discretionary beneficiary interests under trusts difficult to digest. Property can only be subject to a saisie if it is ‘realisable property’. In Tantular [2014 (2) JLR 25] it was held that a beneficiary of a discretionary trust is not ‘beneficially entitled’ to any of the trust assets and the court therefore has no power to grant a saisie over any of the assets of a discretionary trust merely on the grounds that the offender (or suspected offender) is a beneficiary of that trust.

The Government of Jersey is currently consulting on amendments to the Proceeds of Crime legislation[3] so as to bring property held under a discretionary trust within the scope of ‘realisable property’ for the purposes of a saisie judiciaire (a restraint order) pending a confiscation order. If enacted, these proposals fill the gaps identified in Tantular  by making certain transfers to a trust vulnerable to confiscation.

The draft Proceeds of Crime (Miscellaneous Amendments No. 2) (Jersey) Regulations would catch transfers of property by a defendant to a trust within a period of 5 years before the commission of a qualifying offence or at any time after the offence is committed.

A gift into trust would be vulnerable to be treated as ‘realisable property’ and subject to seizure if i) the defendant is a beneficiary of the trust, ii) the trustees have power to add him as a beneficiary or iii) if there is a letter of wishes which anticipates the defendant benefitting from the trust at some point in the future. This formulation gets around the issue identified in Tantular and developed in Kea Investments that in the context of a discretionary trust, the trust property itself is not property to which the beneficiary is beneficially entitled, nor is the beneficial interest of a discretionary beneficiary, of itself, a thing of any value to anyone besides the beneficiary to whom it belongs

 

[1] [2021] JRC 009

[2] Identified as i) a right to be considered for the exercise of the trustees’ discretion, ii) a right to compel the due administration of the trust iii) a prima facie right to obtain information and accounts from the trustees) and iv) a right to sue for breach of trust

[3] The amendments do not take effect in relation to Jersey’s non-conviction based confiscation regime under Civil Asset Recovery (International Co-Operation) (Jersey) Law 2007 and Forfeiture of Assets (Civil Proceedings) (Jersey) Law 2018

 

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