Offshore: Asset protection – Power play

A recent Privy Council ruling will give pause for thought over the inclusion of reserved powers in trusts, says Stephen Moverley Smith

With its recent judgment in Tasarruf Mevduati Sigorta Fonu [TMSF] v Merrill Lynch Bank and Trust Company (Cayman) Ltd & Ors (2011) the Privy ­Council has given the offshore trust ­industry, and in particular the purveyors of asset ­protection trusts, a nasty shock.

Trust structures are often sold on the basis that they provide a means not only of relieving the tax burden, but also of ­protecting assets from creditor claims in the event of financial disaster. There is, ­however, a problem: to create an ­appropriate form of discretionary trust the settlor needs to give up ownership and ­control of their often hard-won assets to a trustee, usually a corporation of which they have no previous knowledge or experience.

Persuading wealthy entrepreneurs to ­follow such a path is a challenge, particularly if they come from a jurisdiction where trusts are an alien concept. The solution that has evolved to deal with this problem is to give the settlor powers in relation to the trust. One such power that has become popular is that reserved to the settlor to revoke the trust, thus providing them with the ­ultimate remedy should they become unhappy about the way the trust is being managed or require access to the assets.

Such revocable trusts have been around for a long time. There is mention of them in the 18th century. So it has been with some considerable consternation that trust providers have realised – following the Privy Council decision – that unwittingly, by including such a power, they have sown the seeds of the trust’s destruction at the hands of the settlor’s creditors.

Power breaking

Although it was an appeal from the Cayman Islands, TMSF v Merrill Lynch had its ­origin in a colourful bank fraud in Turkey. The plaintiff, TMSF, is the Turkish banking ­regulator. It obtained a $30m (£18.8m) judgment in Turkey in relation to the fraud against a Turkish individual, Yahya Demirel, the nephew of Turkey’s former president.

TMSF subsequently discovered that Demirel had established two discretionary trusts in Cayman that held some $24m. In relation to each trust he had reserved to himself a wholly unfettered power of ­revocation: he could revoke the trust ­whenever he liked for any reason, or indeed for no reason, simply by serving a deed on the trustee, Merrill Lynch.

Having exported its Turkish judgment to Cayman and obtained a local judgment, TMSF turned its attention to enforcement. The obvious route appeared to be to seek an order that Demirel exercise the powers of revocation and collapse the trusts.

However, while the statutory jurisdiction permitted an injunction to be granted ­whenever it was “just and convenient”, that course appeared unavailable in light of the 2003 case of Field v Field, where Mr Justice Wilson had held that a creditor was ­restricted to established methods to enforce a judgment that could not be bypassed by granting a freestanding injunction.

TMSF accordingly turned to receivership by way of equitable execution as a possible solution, but there were two significant ­difficulties. First, was a power the type of interest over which a receiver could be appointed? Second, if in theory a receiver could be appointed, was that something the court could properly do?

Get real

There was no precedent for any such appointment. Indeed, it appeared that the question had never been considered by the courts before, in Cayman or elsewhere.

At the centre of the debate in relation to the first of these questions was the ­proposition that a receiver could only be appointed over property, and a power was not property. Traditionally a distinction has been drawn between a ’power’, which is viewed as the ability to do something, and ’property’, which is what you may get when the power has been exercised.

In one celebrated 19th century case Lord Justice Fry, obviously peeved by submissions from counsel to the contrary, ­grumpily observed that a power was no more ­property than the ability to write a book or sing a song, and that he was almost embarrassed to deal with so elementary a proposition.

At first instance in TMSF v Merrill Lynch it was Fry LJ’s views that held sway, the chief justice concluding that to treat powers as property would involve setting aside ­common law principles that have ­distinguished powers from the property they effect for hundreds of years. In his view such a result could only be achieved by ­legislation.

The Court of Appeal (CoA) failed to engage on the point, which it considered largely irrelevant, but in the Privy Council the issue was considered in some depth. For Lord Collins, who gave the judgment of the Privy Council, there was no absolute rule. For some purposes a power was not ­property, for other purposes the holder of a general power could be regarded for all ­practical purposes as the owner. In the ­context of TMSF’s application he had no difficulty in accepting that an unfettered power of revocation granted a right that was tantamount to ownership of the ­underlying trust assets.

The right to rule

As to the second question, whether in any event the court could make such make an order, this raised a pure question of policy. TMSF’s arguments again fell on stony ground at first instance, when the chief justice went so far as to say that to accede to TMSF’s application would strike at the very heart of the trust concept. It failed again in the CoA, which concluded, somewhat paradoxically, that while in theory an appointment could be made, such a step would be unwise and ­inappropriate and that in consequence, in the absence of enabling legislation, it presently had no jurisdiction.

In the Privy Council these objections evaporated. It was fortuitous for TMSF that Collins had considered the matter before while sitting in the CoA in Masri v ­Consolidated Contractors International (UK) Ltd in 2009. He had concluded that the overriding consideration was the demands of justice and that the ­jurisdiction to appoint receivers by way of equitable ­execution could accordingly be developed incrementally, to apply old ­principles to new situations.

Taking that approach, Collins concluded that such ­incremental development ­extended to appointing receivers over an asset that was only tantamount to property and that it served the interests of justice for receivers to be ­appointed to make effective the judgment of the Cayman court.


The decision in TMSF v Merrill Lynch ­represents a ­milestone in the development of the law of receivership: for the first time the jurisdiction has been extended to ­encompass assets that are not current or future property. This is significant not only in the context of equitable ­execution, but also signals the possibility of appointing receivers over powers at an interlocutory stage. For ­example, in the context of ­matrimonial proceedings it may be ­important to ensure that a power is not dealt with ­inappropriately by a recalcitrant husband pending ­judgment.

It also represents a turning point in ­relation to the ­creation of asset protection trusts. In reserving to settlors powers of ­revocation, trust providers have provided ­creditors with a very useful tool to break open a trust that might otherwise have been inviolate. Indeed, it gets worse, for the same logic dictates that other reserved powers may be equally vulnerable to attack.

One reserved power that is included ­regularly in ­discretionary trusts is a ­general power of appointment – the ability of a ­settlor to direct without restriction who should benefit from the trust. There seems to be no reason to ­suppose that a receiver could not be appointed over such a power and exercise it in favour of themself or directly in favour of a creditor. In the future TMSF v Merrill Lynch will at least give pause for thought as to whether the ­inclusion of reserved powers is quite such a good idea.

Release cause

One possible solution to the problem could be to release the powers in question. There is no doubt that a donee of a power has the capacity to release it, but such a release might have adverse fiscal consequences. If the power ­confers a right tantamount to property, then its release could be ­considered as a disposition by the donee of a valuable right and might be ineffective if, for example, the release were to be ­construed in a subsequent bankruptcy as a transaction at an undervalue or, depending on the circumstances, a ­transaction defrauding creditors.
Perhaps more importantly, in terms of the rights enjoyed by a settlor, a trust that reserves to a settlor a power of ­revocation or general power of appointment is ­fundamentally different from one that does not contain such reservations. Settlors who were only persuaded to create trust structures on the basis that they would retain ultimate control may not take kindly to a subsequent ­suggestion that they should relinquish the residual right to recover the trust assets.

And finally, what of Field v Field, the case that started TMSF down the path of ­equitable receivership in the first place? Well, the Privy Council had something to say about that too, if only by way of an aside.

As far as the Privy Council was concerned it was almost certainly decided incorrectly, with the consequence that TMSF could in fact have sought an injunction directly against Demirel, albeit that it would have faced many of the same arguments, as the ability to appoint a receiver and grant an injunction derive from the same statutory ­provision.

It is perhaps going a little too far to suggest that Wilson J unwittingly instigated the development of equitable receivership in TMSF v Merrill Lynch, but it certainly goes some way towards proving the law of ­unintended ­consequences.

Stephen Moverley Smith QC is a barrister at XXIV Old Buildings