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Guernsey Royal Court decision places trustees at risk

Monday, 3 February, 2014

The Guernsey Royal Court's decision in the case of Investec Trust & Bayeux Trustees v Glenalla Properties reverses previous legal thinking on trustee liability in the Channel Islands. The law of England and Wales has always stated that a trustee is personally liable for the whole of any debt incurred when acting as a trustee, unless the contract specifies otherwise. However the trust laws of Guernsey and Jersey are different, generally limiting a trustee's liability to a counterparty to the assets of the trust, provided that the counterparty knows that the trustee is acting as such.

The Glenalla case concerned a Jersey discretionary trust linked to businessman Robert Tchenguiz. The original trustees of this trust, Investec and Bayeux, had borrowed GBP181 million from some BVI companies, which were now demanding repayment.

Investec and Bayeux duly sought protection from the Guernsey Royal Court, under s69 of the Trusts (Guernsey) Law 2007, to limit their liability to the BVI companies to the extent of the trust's available assets. (The two trust companies had been replaced as trustees in 2010 by new trustees but had exercised a lien to retain the trust assets.)

The current trustees which was challenging the BVI companies' claims for repayment, asked the court to order the former trustees to return the assets.

The court's decision was that the BVI companies' claim for payment was valid. However, it also ruled that the former trustees could use the trust property they still held to pay off these debts.

More significantly, though, it also decided that the contracts were governed by Guernsey law, because the trust was administered from Guernsey. Since the trust itself was governed by Jersey law, it was a 'foreign trust' for purposes of Guernsey trust law. The trustee protection provisions of that law do not apply to foreign trusts and thus the former trustees were liable for the whole of the debts incurred.

The judgment is as usual complex and readers are referred to the summary written by Carey Olsen, which acted for one of the parties. However, the import is clear.

‘The effect of the judgment is that, where a trustee contracts with a third party, it must now ensure that it contractually limits its liability,’ says Michael Morris of law firm Collas Crill.