Baker & Partners Secure Jurisdiction Victory in Application to Remove a Trustee

In a recent decision of the Jersey Royal Court In the Matter of the V & W Trusts,[1] Baker & Partners acting for a beneficiary, have secured a significant early victory in a legal battle for the court ordered removal of a Panamanian trustee of significant Jersey real estate.

 

In a significant intervention in the administration of what, on their face, appeared to be foreign law trusts, administered from Panama, with a non-resident trustee, the Royal Court has accepted jurisdiction to hear an urgent application to remove and replace the Panamanian corporate trustee, with a regulated Jersey trustee; G.B. Trustees Limited (an affiliate of Garfield-Bennett Trust Company).

 

Background

The trusts were originally established in Jersey in the late 1970s.

In 2007 the administration of the trusts was uprooted from Jersey and taken to Panama. Trusteeship was transferred to a new Panamanian corporate trustee and the proper law of the trusts was purportedly changed from that of Jersey to Panama (the “2007 DORAs”).

Following an extensive investigation by the Panamanian authorities into its affairs, the Panamanian trustee was banned by the Panamanian regulator from conducting trust business from February 2015. The Panamanian regulator also ordered the Panamanian trustee to retire as trustee in favour of a new trustee, nominated by the settlor.

In response, two directors of the Panamanian trustee purported to transfer trusteeship to themselves without the consent of either the settlor or the beneficiaries, contrary to the order of the Panamanian regulator.

For a number of years, the Panamanian trustee and the beneficiaries have also been engaged in a parallel legal battle in the US state of Colorado concerning US law trusts of which the beneficiary in the Jersey proceedings was also interested.

The Jersey Proceedings

The primary beneficiary of the trusts, the settlor’s daughter, commenced proceedings before the Royal Court for the removal and substitution of the Panamanian trustee and its directors with a new, Jersey regulated trustee.

The Panamanian trustee and its directors responded by inter alia challenging the Royal Court’s jurisdiction, seeking a stay of the Jersey proceedings pending the determination of the proceedings in Colorado (and proceedings it had commenced against the regulator in Panama) and alleging that the trusts were in fact a sham arrangement, designed and operated for the benefit of the settlor.

Before the court could grant the substantive relief sought (i.e. the removal of the trustee and transfer of assets), it had to consider whether it should assume jurisdiction over the dispute.

Jurisdictional Gateways

The jurisdictional gateway relied upon by the beneficiary was Article 5(c) of the Trusts (Jersey) Law 1984 (“the Trusts Law”) that there was Jersey situs trust property; namely the shares in the Jersey registered companies that held the Jersey real estate. Jersey’s trust law prohibits the direct holding of Jersey immovable property on trust.[2]

The beneficiary also relied upon Article 5(a) of the Trusts Law; that despite the apparent change of proper law to Panama by the 2007 DORAs, the proper law of the trusts remained that of Jersey.  There is Jersey authority to the effect that a power to change the proper law of a trust, when vested in a trustee, is a fiduciary power.[3]

The Court’s approach to jurisdiction

The court was satisfied that the dispute was within at least one of the ‘gateways’; the trusts clearly held Jersey situs property.

Without reaching a determination on whether the trusts were still Jersey law trusts, the court considered that the inclusion of this point in the pleadings was an important factor in why Jersey should take jurisdiction over the removal application and that on the merits, the beneficiary had ‘the better of the argument’ on that point.

Following the Judicial Committee of the Privy Council decision in Crociani v Crociani[4] the court’s approach to the construction of an alleged jurisdiction clause was as follows:

  1. First to consider whether the provisions in question amount to a jurisdiction clause at all.
  2. If the answer to the first question is yes, the court should then consider whether the jurisdiction clause is intended to be exclusive or non-exclusive.
  3. Next, the court should consider the scope of the jurisdiction clause, and whether the matters in issue between the parties are within its scope.
  4. Finally, the court should ask, to the extent that the matter in question is within its scope, which jurisdiction the clause in question provides for in relation to the matters in question.

The relevant provisions under examination were as follows:

In clause 1 of the trust deeds, the interpretation clause, “The Proper Law of this Settlement” was defined as:-

“the law to the [exclusive][5] jurisdiction of which the rights of all parties and the construction and effect of each and every provision of this Settlement be subject and by which such rights construction and effect be construed and regulated.”

Clause 2 of the trust deeds, headed “Proper Law”, was worded as follows:-

“THIS Settlement is established under the laws of the Island of Jersey and subject and without prejudice to any transfer of the administration of the trusts hereof to any change in the Proper Law of this Settlement and to any change in the law of interpretation of this Settlement duly made according to the powers and provisions hereinafter declared the Proper Law of this Settlement shall be the law of the Island of Jersey which said Island shall be the forum for the administration hereof.”

Clause 12(a) of the trust deeds provided as follows:-

“The Trustees may at any time or times and from time to time during the Trust Period by deed declare that this Settlement shall from the date of such declaration take effect in accordance with the law of some other state or territory in any part of the world (not being any place under the law of which (1) any of the trusts powers and provisions herein declared and contained would not be enforceable or capable of being exercised and so taking effect or (2) this Settlement would not be irrevocable and that the forum for the administration thereof shall thenceforth be the Courts of that state or territory AND as from the date of such declaration the law of the state or territory named therein shall be the law applicable to this Settlement and the Courts thereof shall be the forum for the administration thereof but subject to the power conferred by this Clause and until any further declaration be made hereunder PROVIDED ALWAYS that so often as any such declaration as aforesaid shall be made the Trustees shall be at liberty to make such consequential alterations or additions in or to the trusts powers and provisions of this Settlement as the Trustees may consider necessary or desirable to ensure that the trusts powers and provisions of this Settlement shall (mutatis mutandis) be as valid and effect as they are under the law of the Island of Jersey.”

The 2007 DORAs provided at clause 4:-

“In exercise of the power conferred upon it by Clause 12(a) of the Settlement and all other powers it enabling the Retiring Trustee hereby declares that with effect from the Retirement Date the Trust shall take effect in accordance with the laws of the Republic of Panama and that the forum for the administration thereof shall be the courts of the Republic of Panama so that the law of the Republic of Panama shall be the law applicable to the Trust and the Courts thereof shall be the forum for the administration of the Trust.”

The court considered that these provisions, relied upon by the Panamanian trustee in support of its case that the courts of Panama now had exclusive jurisdiction over the trusts, were in fact concerned only with the scope of the proper law of the trusts.

The court further considered that the references in the trust deeds to ‘forum for administration’ (a phrase described by the Privy Council in Crociani as ‘imprecise’ and ‘without a well-established technical meaning’) referred to a geographical location from which the trust’s affairs were managed day-to-day rather than the courts of a particular jurisdiction.[6]

Having dispensed with the Panamanian trustee’s submission that the trusts contained an exclusive jurisdiction clause, the court then went on to consider whether, having regard to all the issues and circumstances in the case, the beneficiary was able to persuade the court that Jersey rather than Panama or Colorado was clearly the most appropriate place or ‘forum’ in which to seek the removal of the trustee.[7]

On the face of the proceedings the beneficiary faced an uphill struggle to convince the court that Jersey was indeed clearly the most appropriate forum in which to seek the removal of the trustee.  The trustee was a Panamanian corporation, the trusts were, from 2007, actually administered from Panama, the directors of the trustee (now purporting to be the trustees) were also resident in Panama and the proper law of the trust (which would govern the administration of the trust) was apparently Panamanian.[8]

Panama versus Colorado versus Jersey

Following the banning order of the Regulator in Panama, the Panamanian trustee commenced proceedings challenging the legality of the Regulator’s process in its investigation and subsequent orders.  The Panamanian trustee argued that the Jersey proceedings should be stayed pending the outcome of the Panamanian proceedings because the issues therein were the same. In fact, the beneficiary was not a party to those proceedings and it was obvious to the Royal Court, on reading of the trustee’s own papers in the Panamanian proceedings, that they had nothing to do with the trusts or the relief the Royal Court was being asked to give. The beneficiary also adduced expert evidence of Panamanian law which suggested that a similar application to remove the trustee in the Panamanian courts would take between 2 and 5 years with an additional 2 years for the determination of any appeal.

As regards the continuing litigation in Colorado, the court considered that, having read the pleadings and the affidavit of the beneficiary’s lawyer in the Colorado proceedings, (that analysed the issues in the two sets of pleadings),it was satisfied that the Colorado court was not seized of any issue that would preclude the Jersey court from replacing the Panamanian trustee.  The beneficiary had also indicated that such liabilities that were properly found owing to the outgoing trustee would be satisfied when proven in the US proceedings.

Sham

The court was unmoved by the Panamanian trustee’s argument that the trusts were a sham and that the beneficiary had no standing to bring the application for removal.  A jurisdiction hearing was not the appropriate place to determine this issue.  On their face the trusts appeared to be valid; with a series of trust documents executed over a period of 30 years, a trustee, a beneficial class and trust property.

A sham trust describes a trust whose documents are, and are intended to be by both the settlor and the trustee, a deception upon the world. As a matter of Jersey law, for a trust to be a sham, it must be the shared intention of the settlor and trustee for the trust to be a sham from the date on which it was executed.[9]  As the trusts were originally settled under Jersey law, it would be a question of Jersey law, (and for the reasons set out below, only Jersey law) as to whether the trusts were a sham or not.[10]  The court also identified an apparent inconsistency in the respondents’ argument on sham; the Panamanian trustee relied upon the 2007 DORAs, which affirmed the trusts, as part of its own case on jurisdiction.

Jersey Law Issues

Without deciding the merits, the court held that the beneficiary’s challenge to the exercise of the power to change the proper law of the trusts from Jersey to Panama fell to be determined in accordance with Jersey law (i.e. that was the law under which the power was exercised).   Were this issue to be decided in the beneficiaries’ favour, the trust would be a Jersey law trust for the purposes of Article 5(a) of the Trusts Law and all the issues in the proceedings, including whether the trustee should be removed, would also fall to be determined in accordance with Jersey law.  The court considered that on the documentary evidence and expert foreign law evidence before it, the beneficiary had ‘the better of the argument’ that the 2007 exercise of the powers to change the proper law was void or otherwise of no effect.[11]

Jersey’s trust legislation also contains ‘firewall’ provisions which prevent the determinations of foreign courts concerning Jersey trusts, being given effect to in Jersey unless they apply Jersey law.  As regards the question of sham (which goes to the validity of the trusts)[12]  and of the challenge to the 2007 change in proper law (the exercise of powers)[13]  Jersey law requires that Jersey law must be applied before any foreign decision on those questions will be given effect to in Jersey.

The Panamanian law evidence also cast serious doubt as to whether the trusts were valid and in compliance with the minimum requirements of Panamanian law when the proper law was purportedly changed in 2007. The effect of this being that if the proper law of the trusts was not validly changed to Panama, by default the proper law of the trusts must either have remained that of Jersey (by the operation of clause 12(a)) of the trust deeds or Jersey would be the proper law with which the trusts, at the time of their creation had the closest connection.[14]

Weighing all these factors, together with what it was able to deduce from the merits of the application itself, the court was persuaded that Jersey was clearly the most appropriate forum in which to hear the application to remove the Panamanian trustee and the directors as trustee(s).

Having assumed jurisdiction the court will now determine the substantive merits of the application for the trustee’s removal within 3 weeks. This is a rapid expedition of the usual process to trial in Jersey, the court being persuaded of the need for urgency.

Conclusions

This decision demonstrates that where there are exceptional circumstances the Jersey court can and will exercise its supervisory jurisdiction swiftly to intervene and protect the interests of beneficiaries and trust property.  That will be of considerable comfort to beneficiaries of trusts within the scope of Article 5 of the Trusts Law. The court in this case concluded that it did not regard it as exorbitant to assume jurisdiction as a necessary means to end and to ensure the ongoing good administration of the trusts.

Whether a trust deed contains an exclusive jurisdiction clause, its scope and effect is a matter of construction of the trust documents.  Particularly in older trust deeds, even those that have been professionally drafted, there is sometimes a tendency by the draftsman to elide provisions governing which courts have jurisdiction over the trust and provisions governing the proper law of the trust.  Following the decision of the Privy Council in Crociani, a court is likely to require some persuasion that a particular provision amounts to an exclusive jurisdiction clause if that is not clearly apparent from the face of the trust instrument.  As in Crociani, the court was not so persuaded here.

Where the court concludes that the trust deeds provide only for a non-exclusive jurisdiction, then the court will proceed to weigh the factors for and against Jersey being clearly the most appropriate forum for the trust dispute in the usual way. The burden in such a case will be on the Plaintiff seeking to uphold service out of the jurisdiction on a foreign defendant.[15]

The inclusion of a number of issues (both by the Representor in respect of the challenges to the 2007 DORAs and by the Respondents in their arguments about sham) that were obviously questions of Jersey law were clearly weighty issues in favour of the Royal Court accepting jurisdiction.

The decision also touches on the potential dangers for trustees and other power holdings moving a trust from a common law jurisdiction to a civil law jurisdiction and the importance of obtaining local advice at both ends of the transaction to ensure that trust powers are exercised appropriately and that the trusts will be effective in the new jurisdiction.  Very often the power to change the proper law of a trust will be construed as a fiduciary power, making it liable to be set aside if it is not exercised properly and/or for a proper purpose.

It remains to be seen what approach the Royal Court would take in jurisdiction hearing to a case where the sole gateway relied upon was Article 5(a) in circumstances where there had been a purported change in proper law from Jersey that is subject to challenge. This is an issue the court in this case did not have to grapple with (because of the presence of Jersey situs trust property) and which was side-stepped by the Privy Council in Crociani.[16]

This decision follows Baker & Partners recent success in long-running litigation relating to the administration of a very substantial family charitable trust which resulted in orders for the removal of a corporate trustee.  Baker & Partners regularly advises and acts for both for beneficiaries and trustees in proceedings before the Jersey Royal Court.

 

James Sheedy
Associate
jamessheedy@bakerandpartners.com
 
Simon Thomas
Advocate
simonthomas@bakerandpartners.com

 

[1] [2015] JRC 208
[2] Article 11 Trusts (Jersey) Law 1984
[3] Crociani v Crociani 2014 (1) JLR 426, CA.
[4] [2014] UKPC 40
[5] Only one of the trust deeds contained the word ‘exclusive’, the other did not.
[6] See Crociani v Crociani [2014] UKPC 40 at paragraph 23
[7] See Crociani [2014] UKPC 40 paragraphs 14 and 19
[8] Spiliada Maritime Corp v Cansulex Limited [1986] 3 All ER 843 at 858c
[9] In re Esteem Settlement 2003 JLR 188
[10] In The Matter Of The Fountain Trust [2005] JLR 359 at [16-17]
[11] Crociani v Crociani 2014 (1) JLR 426, CA. at paragraph 56–58
[12] Article 9(1)(a) Trusts (Jersey) Law 1984
[13] Article 9(1)(e) Trusts (Jersey) Law 1984
[14] Article 4 Trusts (Jersey) Law 1984
[15] Gheewala v Compendium Trust Com Ltd [2003] JLR 627 at 28 per Lord Walker, Jaiswal v Jaiswal [2007] JLR 305 at 70-73 per Beloff JA
[16] See paragraph 46.

 


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