Vol 13 (2016) - Issue 3

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The Approach in Jersey to ‘Insolvent’ Trusts: The Z Trusts

Much has been written in recent years regarding the somewhat vexed question of what happens when a trust becomes 'insolvent'. That bald question of itself begs closer analysis, particularly in view of the fundamental principle that a trust has no legal personality and therefore cannot technically be insolvent. The position in Jersey is further complicated by the presence of the statutory protection afforded to trustees whereby their liability, when contracting as trustee with another party who knows them to be so acting, is limited to the trust assets. The traditional (English law) position differs in that (absent a contractual limitation) a trustee is personally liable for all debts it incurs in its capacity as trustee, and must rely on its right of indemnity to recover those liabilities from the trust estate.
Whilst the statutory protection provision in Jersey is a very relevant consideration in this area and will be touched upon, this article will consider the recent decisions of the Royal Court of Jersey in the cases concerning the Z Trusts. These entailed a scenario in which trustees of related trusts were unable to meet liabilities incurred as trustees of the trusts as they fell due. Directions were sought from the Royal Court. The Royal Court, therefore, was called upon to provide guidance on the underlying principles that apply to ‘insolvent’ trusts and, in the context of the parties’ positions, provide a framework for tackling the situation that had arisen.

Factual background
There were eight Z Trusts, all of which had been established by a Mrs C and of which Equity Trust (Jersey) Limited ('Equity') was the original trustee. Equity retired as trustee of all of the Trusts in 2006 with Volaw Trustee Limited ('Volaw') becoming trustee of the Z Trust and Z II Trust and Barclays Private Bank and Trust Limited ('Barclays') trustee of the remaining six trusts. Under the terms of the deeds by which it retired in 2006, Equity handed over the assets of the Trusts in return for standard indemnities.
After retiring, Equity had been put on notice of certain claims for which it said it was entitled to be indemnified both contractually and in law from the assets of the Z II Trust. However, the Z II Trust, as well as the Z III Trust were 'insolvent', in that the trustees of those Trusts could not meet out of trust assets the liabilities incurred in respect of those Trusts when they fell due. The remaining Trusts, whilst solvent, faced a number of financial difficulties. Mrs C was critical of the conduct of Equity as trustee and, with others, had brought breach of trust proceedings against Equity in which counterclaims were also raised by Equity. In short, there was a general background of hostility.

Court administration: insolvency regime and change of trustee considered
The Trusts were being administered pursuant to directions of the Royal Court. In this context, discussions had commenced about a proposed Court-sanctioned insolvency regime in relation to the Z II Trust, which would involve the ascertainment of claims and priorities and the realisation of assets. The beneficiaries of the Z II and Z III Trusts (Mrs C and her family) took the view that the imposition of such a regime would be calamitous, not least as it would likely lead to the forced sale of assets considered to be of importance to the family. Mrs C and her family had been pressing for new trustees to be appointed in respect of the Z II and Z III Trusts and considered that resolving the difficulties and hostility affecting the Trusts would be facilitated by the appointment of a single new trustee to replace Volaw and Barclays. Rawlinson & Hunter Trustees SA ('R&H'), based in Switzerland, had agreed to take on that role. Mrs C envisaged that, once R&H were appointed, a wide ranging review and restructuring would take place for both the Z II and Z III Trusts with the anticipation of a more stable administration, which might potentially thereby overcome the cash flow insolvency.