Follow the leaders?
27 July 2009
12 September 2014
Jersey Court of Appeal confirms rights of non-trustee fiduciaries to an indemnity out of the trust fund
21 November 2013
4 April 2014
Delaware Supreme Court permits stockholders to overcome corporation’s attorney-client privilege for ‘good cause’
19 August 2014
3 July 2014
The English concept of trusts has remained relatively unchanged, but offshore and US ‘advancements’ to make them more commercial throw up some tricky questions for legislators. By James Corbett QC
The Chancery Division may, as the successor to the Court of Chancery, still be regarded by some as the fountainhead of equity and its institutions, obligations and remedies. That once pre-eminent position has long been under attack by critics (ideological and academic). Perhaps the most insidious challenge has come from the development in offshore jurisdictions of very different approaches to traditional concepts. Nowhere is this better exemplified than with trusts.
A change of trust
The very picture of the traditional trust is of the settlor concerned to preserve wealth for future generations, beneficiaries to be protected by that preservation and the respectable and cautious trustee appointed to effect that preservation and protection. The transfer of property into trust involved an absolute alienation by the settlor - trust property was no longer theirs. The duties of the trustee were onerous, their room for manoeuvre (in particular as to their powers of investment) were circumscribed and they were usually unpaid other than perhaps for direct expenses. A ‘commercial’ trustee was a contradiction in terms.
The trust in offshore jurisdictions is commonly utterly different. What is provided is not just a trust, but a ‘structure’. It still requires someone to transfer property to a trustee for the benefit of someone (although the need for the latter is now qualified), but beyond that the resemblance is hazy.
Trusteeship has become not only a business, but big business. Witness the sheer number of trust and fiduciary service providers from the Channel Islands and the Isle of Man close to home to the Cook Islands in the South Pacific. With that growth has comes the idea that the settlor is not simply the outright transferor of property for the benefit of beneficiaries, but a ‘client’ of the trustee. That client relationship has frequently involved a more or less open and continuing role for the settlor in the management of trust assets. If, as is often the case, they are themself a beneficiary of a discretionary trust settled by themself, then the terms of the trust, or its administration, or both may well make them effectively the only beneficiary and permit them indirect access to trust assets for the purposes of their business. The scope for benefit of other beneficiaries can be heavily circumscribed - even to the extent of provision of information about the trust.
Likewise, the services provided by the trustee to the ‘client’ have come to extend far beyond those of the eponymous Victorian paterfamilias. Structures commonly involve holding a variety of limited companies in various jurisdictions. Nominee shareholders, directors and secretaries will be provided by the trustee as part of the service - and charged for. The link between beneficiary or even trustee and trust assets thus becomes increasingly remote.
Offshore: taking trusts to new levels
Between the offshore jurisdictions there is competition to provide the most user-friendly base for trust and fiduciary services. An effect is to make the trust itself ever more flexible. A further effect has been to take the trust into completely new territory.
It is inherent in the nature of a trust that it must be enforceable: see Morice v Bishop of Durham (1804). The requirement was sufficient to ensure that English law would not (with virtually insignificant exceptions) permit non-charitable purpose trusts. Not so in the offshore world. Slowly but surely, beginning with ‘STAR trusts’ in the Cayman Islands in 1997, such trusts have become possible over 20 jurisdictions. The flexibility of the trust, its confidentiality and the relative lack of trust regulation has made it an attractive alternative to other commercial entities.
The uses of purpose trusts include the creation and operation of voting trust arrangements (separating the economic and control aspects of share ownership) and in securitisations the acquisition and exploitation of risky assets, the ownership of private trust companies and so on. Previously unthought of and complex relationships - or the lack of them - in and between companies, their shareholders and the trustees of the trust will arise in consequence, but usually off balance sheet and with a high measure of confidentiality.
It is sometimes said that English trust law is less ‘commercial’ than that of some US jurisdictions. There is truth in the comment in respect of some states. One substantive area of which that may be said is when asking whether trusts now have – or effectively have - legal personality. Some US state courts have been prepared to go almost that far. English law has not. But it has the potential, if it follows the lead of its own offshore progeny in conceptual flexibility and administrative and substantive innovation, to be ’commercial’.
The matter that English lawyers and legislators must decide is whether that is a term of approbation or abuse.
James Corbett QC is a member of the Chancery Bar Association, and a barrister at Serle Court