The Eighth Amendment to the Trusts (Jersey) Law: A Necessary Tightening of the Edges

Why The Changes

There are a number of similarities between the Trusts (Jersey) Law and its Guernsey counterpart.  In particular, Article 43 of the Trust Law has its counterpart in section 53 of the Trusts (Guernsey) Law 2007 (the Guernsey Trust Law). Section 53(3) provides:

“Without prejudice to the powers of the Royal Court under subsection (4), and notwithstanding the terms of the trust, where all the beneficiaries are in existence and have been ascertained, and none is a minor or a person under legal disability, they may require the trustees to terminate the trust and distribute the trust property among them.”

The equivalent Jersey provision is in materially similar terms, namely Article 43, which before the Amendment read as follows:

“(1) On the termination of a trust the trust property shall be distributed by the trustee within a reasonable time in accordance with the terms of the trust to the persons entitled thereto.

(2) Notwithstanding paragraph (1), Article 43A [concerning provisions relating to security] applies on the termination of a trust.

(3) Without prejudice to the powers of the court under paragraph (4) and notwithstanding the terms of the trust, where all the beneficiaries are in existence and have been ascertained and none are interdicts or minors they may require the trustee to terminate the trust and distribute the trust property among them.

(4) The court may –

(a) require the trustee to distribute the trust property;

(b) direct the trustee not to distribute the trust property; or

(c) make such other order as it thinks fit.

(5) In this Article “liabilities” includes contingent liabilities.

(6) An application to the court under this Article may be made by any person referred to in Article 51(3).”

Under English law, the rule in Saunders v Vautier has never been codified. It is a principle of equity which permits beneficiaries to terminate a trust where, being of full age and capacity, they are together absolutely entitled to the whole beneficial interest. As a matter of substance, that requirement will ostensibly not be satisfied where the beneficial class is capable of expansion, for example where there is a power to add further beneficiaries.

Article 43 of the Trust Law (and Section 53(3) of the Guernsey Trust Law) had previously generally been regarded as encapsulating the principle in Saunders v Vautier.  However, those statutory provisions did not reproduce it in terms: they defined the circumstances in which termination may be required by reference to the position of existing beneficiaries, without expressly addressing whether the beneficial class must be closed.

The difference was not necessarily therefore one of underlying principle, but of drafting. The Trust Law and the Guernsey Trust Law provisions articulated the conditions for termination by reference to the status of existing beneficiaries, without expressly addressing whether the beneficial class is capable of expansion.  Neither Article 43 of the Jersey Trust Law nor section 53 the Guernsey Trust Law was intended to be a codification of the rule from Saunders v Vautier, but because of the interplay between the origins of the rule and the wording of the statutory provisions, the question arose as to how the Court should apply the underlying principles of rule when considering an application under the provision.

This issue was at the heart of a decision by the Guernsey Royal Court in Rusnano Capital AG (in liquidation) v Molard International (PTC) Limited [2019] GRC011, and then by the Court of Appeal ([2019] GC077) (Rusnano Capital).

The trust in Rusnano Capital, had one existing beneficiary, but the terms of the trust contained discretionary powers for the addition of further beneficiaries, although those powers had not been exercised.

The trustee contended that section 53(3) should be construed consistently with the English rule, such that the existence of a power to add beneficiaries would prevent termination. The Court of Appeal rejected that approach. It held that section 53(3), although derived from the rule in Saunders v Vautier, is a statutory provision which must be interpreted according to its own language. It was not appropriate to determine the content of the English rule and then read those requirements into the Guernsey statute. On its proper construction, the reference to “all the beneficiaries” meant all existing beneficiaries and did not extend to potential objects of a power to add.

The Court held that, where the statutory conditions were met, the existence of unexercised powers to add beneficiaries did not prevent the beneficiary (or beneficiaries) from requiring termination of the trust.

The result was therefore a divergence between the English equitable principle, which depends upon complete beneficial entitlement, and the statutory formulation adopted in Guernsey (and, prior to amendment, in Jersey), which does not expressly impose that requirement.

The Guernsey court decision reflected an orthodox approach to statutory interpretation. The Court applied the language enacted by the legislature, rather than extending it by reference to broader conceptual considerations as to how to apply the rule from Saunders v Vautier.

The decision highlighted a tension between:

• the literal wording of the statutory provision; and
• the practical reality of modern discretionary trust structures, in which the class of beneficiaries is often intentionally open or capable of expansion.

It is against that background that the Jersey amendment to Article 43 should be understood.

Article 43: Termination of Trusts

Prior to the Amendment Law, Article 43 permitted beneficiaries who were all in existence, ascertained, of full age and capacity to require termination of the trust, subject to the Court’s supervisory jurisdiction.

The Amendment Law inserts a new paragraph (3A):

“(3A) But paragraph (3) does not apply in relation to a trust—
(a) if there are any other persons who could become beneficiaries in accordance with the terms of, or pursuant to the exercise of any power under, the trust; or

(b) if the terms of the trust provide for the disposition of trust property for a charitable or non-charitable purpose.”

This is a targeted but significant qualification. The effect is that the statutory right of beneficiaries to compel termination no longer arises where:

• the beneficial class is not closed, because there remains a power to add beneficiaries; or
• the trust includes a purpose element, whether charitable or non-charitable.

In practical terms, a discretionary trust with a power to add beneficiaries may not be terminated under Article 43(3) by the unanimous consent of existing beneficiaries alone. Furthermore, a purpose trust, or a trust containing a purpose limb, will similarly fall outside the scope of the statutory termination mechanism.

The amendment has the effect of moving the focus of the provision away from the identity of current beneficiaries to the structure, or purpose, of the trust itself. The statutory provision now depends on the absence of any mechanism by which the beneficial class may expand, or the trust may continue to operate for a purpose.

This brings the statutory position into closer alignment with the equitable principle which underpins the rule in Saunders v Vautier. It recognises that, in modern trust drafting, the existence of powers to add beneficiaries or to sustain a purpose is often fundamental to the settlor’s intention. The amendment ensures that those structural features cannot be circumvented.

Importantly, the amendment does not remove the ability to bring a trust to an end. It instead channels that process through appropriate mechanisms:

• consensual variation; or
• application to the Royal Court.

Article 43A: Security and Priority

The Amendment Law also refines Article 43A, which concerns a trustee’s right to require security. The following provisions are inserted:

“(1A) No account is to be taken of any lien arising by operation of law in considering a trustee’s right to require to be provided with reasonable security under paragraph (1).”

“(4) An interest in or over trust property, granted or created at any time by the trustee of the trust, that secures the payment or performance of an obligation (including an obligation owed to a trustee or former trustee) takes priority over any lien arising in favour of the trustee or former trustee by operation of law, unless the secured party agrees otherwise.”

“(5) For the purposes of paragraph (4), it is immaterial whether the interest is granted or created under the law of Jersey or another jurisdiction.”

These amendments introduce a statutory rule governing priority, which, until now, has been determined by reference to equitable principles in cases such as Investec Trust (Guernsey) Ltd v Glenalla Properties Ltd and others [2018] UKPC 7 and the Jersey proceedings in Equity Trust (Jersey) Ltd v Halabi [2022] UKPC 36 (the “Z Trusts” litigation).

Those authorities clarified the nature and operation of a trustee’s right of indemnity and the equitable lien which supports it, including as between successive trustees. However, they did not address the priority as between such liens and security interests granted over trust assets, leaving that question to be resolved as a matter of general principle. The amendment addresses that potential uncertainty.

For practitioners, the effect is not to alter the underlying rights of trustees, but to clarify how those rights are to be treated in practice.

First, the amendment separates clearly the existence of a trustee’s lien from the question of what constitutes “reasonable security”. As a result of the amendment, it is now clear that a trustee will be in a position to require an appropriate indemnity or similar when parting with the trust property, notwithstanding the existence of any lien arising at law.

Secondly, Article 43A now provides a statutory ordering as between competing rights of a particular kind. Where a trustee has granted an interest in or over trust property to secure the performance of an obligation, that interest will take priority over any lien arising by operation of law in favour of a current or former trustee, unless otherwise agreed. This removes uncertainty as to how such rights are to rank in those circumstances, without displacing the underlying equitable principles. For those advising on transactions involving trust assets, this provides a clearer framework within which competing claims must be analysed.

Thirdly, the amendment reinforces the importance of evidence. In circumstances where there are successive trustees, the protection of outgoing trustees will depend on the terms of any indemnities and security arrangements which have been put in place, rather than reliance on liens arising by operation of law alone.

The overall effect is to clarify the position as regards competing rights and to emphasise the primacy of contractual indemnity and security arrangements.

Further Significant Amendments

Beyond Articles 43 and 43A, the Amendment Law introduces a number of more targeted refinements.

Article 19 now makes clear that a sole trustee cannot resign if that would leave the trust without a trustee, confirming that continuity of trusteeship must be maintained.

Article 55 replaces “actual notice” with “notice” in the context of third parties dealing with trustees, a change which may have broader implications for the scope of protection available in practice.

The Amendment Law also develops the reserved powers regime in Article 9A, expressly recognising the ability to direct the appointment and removal of officers of underlying entities. This reflects the way in which modern trust structures are typically managed, particularly in a private wealth context.

These changes are more limited in scope than the amendments to Articles 43 and 43A, but they form part of the same overall exercise: refining the statutory framework so that it operates coherently in contemporary trust structures.

Practical Observations

The amendments clarify how a number of provisions within the Trust Law is to operate in practice and, in doing so, reduce scope for assumptions which might previously have been made.

In relation to termination, the analysis can no longer be confined to the position of the existing beneficiaries. The availability of Article 43(3) now turns on whether there are any persons who could become beneficiaries, or any continuing purpose, within the meaning of Article 43(3A). Where there remains a power to add beneficiaries, or where the trust includes a continuing purpose, Article 43(3) will not apply.

In those circumstances, termination will need to be achieved by way of:

• variation; or
• with the involvement of the Court.

The focus of advice should therefore firmly be on the terms of the trust instrument, both at the drafting stage and when considering whether termination is available.

In relation to security, the amendments do not disturb the trustee’s right of indemnity or the lien which supports it. They do, however, clarify how those rights are to be treated for the purposes of Article 43A. A lien arising by operation of law is no longer to be taken into account in assessing what constitutes “reasonable security”, and, as between competing claims, an expressly created security interest will take priority over such a lien unless otherwise agreed. The practical effect is to reduce scope for dispute as to priority and to place greater emphasis on the terms of any indemnities and security arrangements which have been put in place.

The more targeted amendments operate in a similar vein. As noted above, Article 19 confirms that a sole trustee cannot resign if that would leave the trust without a trustee. The amendment to Article 55 replaces “actual notice” with “notice”, which may affect how third parties dealing with trustees assess their position. Article 9A develops the reserved powers regime by expressly recognising the ability to direct the appointment and removal of officers of underlying entities.

For trustees and advisers, the consequence is that greater weight will need to be given to the structure of the trust and the terms of the relevant documentation. In particular:

• whether the beneficial class is capable of expansion, and how that affects the availability of statutory termination;
• how indemnities, security and priority are intended to operate, particularly on a change of trustee; and
• whether key protections are expressly documented, rather than left to arise by operation of law.

These amendments do not alter the underlying principles. They do, however, require those principles to be applied by closer reference to the terms of the trust and the arrangements put in place around it.

How Can Baker & Partners Help?

The Baker & Partners team has worked on some of the highest profile trust disputes in the jurisdictions in which we operate.

Due to the nature and number of the disputes we have worked on, we know why trust disputes arise. We can review your current trust structure and stress test it for common scenarios that lead to a dispute and recommend proactive measures to avoid a future dispute.

For those that need support on a trusts dispute, we are well practised in navigating multiple parties towards a resolution. We have represented and worked with all those who are involved in trust disputes, including beneficiaries and trustees.

If you would like advice, please get in touch with your usual Baker & Partners contact or any of the team listed.

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