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31 July 2013
There are potential weaknesses inherent in the BVI Vista trust structure, warns Jonathan Russen QC
Like the non-charitable purpose trusts that may be established in other offshore jurisdictions, the Virgin Islands Special Trusts Act 2003 (Vista) trust recognised under the laws of the British Virgin Islands (BVI) is a useful vehicle for the medium- to long-term retention of a family business.
It is a recognisable trust structure under which beneficial interests for the next generation may be created in a tax-efficient manner, while ensuring that control over the trading company or companies whose assets provide the core value of the trust fund remains in the hands of the settlor and any other present members of the executive management.
Keeping a grip
Such vehicles were perhaps the inevitable result of so much of the wealth in the modern world being attributable to corporate success in business. The strong-willed and skilled businesspeople responsible for building up that corporate wealth may not be ready to relinquish control of their corporate empires.
Nevertheless, as family patriarch and putative settlor for the next generation, a businessman may wish to make fiscally effective plans for his family’s succession to the business, or the proceeds of its eventual sale, in a way that would ordinarily entail
the surrender of such control.
Under a traditional English trust the settlement of a majority shareholding in a trading company would, subject to an effective exclusion clause, have the effect of passing to trustees responsibility for acting as ’prudent men of business’ in accordance with the standard laid down in Bartlett v Barclays Bank Trust Co Ltd (1980) insofar as monitoring and possibly intervening in the affairs of the company are concerned.
The Vista trust addresses the apparently conflicting aims of achieving an effective lifetime settlement of a significant shareholding interest while securing the settlor’s stewardship of the business for the time being. This is done by vesting in the trustee of the Vista trust (a licensed corporate trustee) a holding in the ’designated shares’ of a BVI holding company.
But corporate control does not lie with the trustee. The licensed trustee cannot be a director of the BVI company and its exclusion from its management forms part of the primary purpose of Vista. Still less, therefore, does the trustee have any say over the management of the BVI company’s trading subsidiaries, wherever they may be incorporated and operating.
Section 6(3) of Vista goes further in providing that a trustee of designated shares “shall take no steps to instigate or support any action by the company against any of its directors for breach of duty to the company” and “shall not apply to the court for any form of relief or remedy in relation to the company”.
This is subject to any specific terms of the trust, to any applicable office of director rules (reserving to the trustee powers over the composition of the BVI company’s board) and to the possibility of acting on an ’intervention call’ of the kind recognised under Section 8.
There are also limitations on the rights of interested persons, including beneficiaries, to call upon the trustee to intervene in the affairs of the company. One that stands out is the potentially flawed assumption - even when the trustee is persuaded by a valid intervention call to disregard the general admonition against interference in corporate matters - that this will necessarily enable it to prevent management wrongdoing at the level of the trading subsidiary, no matter what the effect might be on the value of the Vista trust fund.
In particular, in relation to an English trading subsidiary of a BVI holding company in which the trust’s designated shareholding is held, there seem to be difficulties in the way of a multiple derivative action.
Indeed, company legislation in both England and the BVI is expressed in terms that preclude a multiple derivative action in respect of the affairs of a sub-subsidiary, even if the trustee has managed to gain board control of the BVI parent. Consider the decision of the Court of Final Appeal in Hong Kong in Waddington Ltd v Chan Chun Hoo Thomas & Ors (2008). This statutory limitation led Lord Millett, who was a member of the court in Waddington, to observe that “the moral for would-be fraudsters is simple: choose an English company and be careful to defraud its subsidiary and not the company itself”.
The traditional equity lawyer might observe that these and other potential weaknesses, insofar as real trustee protection of beneficial interests is concerned, are inevitable byproducts of a structure that permits - and indeed requires - the office, powers and usual fiduciary obligations of the trustee to be subverted to such a degree.
They might be tempted to say that, when tested by reference to usual hallmarks of a trustee’s core fiduciary obligations, other than the one revealed by the basic separation of legal and beneficial ownership of the designated shareholding, the Vista trust is largely a trust in name only.
Jonathan Russen QC is a barrister at Maitland Chambers