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Bar experts oppose reform of English trust liability rules

Monday, 21 October, 2019

English trust law should retain its existing default rule that a trustee who enters into a transaction in their capacity as trustee with a third party is usually liable in their personal capacity, says a Chancery Bar Association expert working group.

Two recent Channel Islands cases have prompted debate on the possible limitation of English trustees' liability, leading the Trust Law Committee, a group of specialist academics and trust practitioners, to ask the Chancery Bar Association (CBA) for its opinion.

The cases were the Z Trusts litigation and, especially, Investec v Glenalla (2018 UKPC 7). In the latter, the Privy Council ruled that Jersey law limiting trustee liability overrode the English default rule, which would have made the trustees of the Jersey-based Tchenguiz Discretionary Trust (TDT) personally liable for hundreds of millions of pounds they had borrowed from some offshore companies.

The 2007-2008 financial crisis resulted in the companies going into liquidation and the liquidators pursued the former trustees for the money, ultimately unsuccessfully because the Trusts (Jersey) Law 1984 ensures that a Jersey trustee has no personal liability for trust obligations, and the creditor has no claim against the trust assets even if the trustee unreasonably incurs a liability or acts in breach of trust and thus invalidates its indemnity.

Despite this victory for trustees, the CBA working group considered that the ordinary 'default rule' of English trust law does not give rise to any practical problems for trustees in England and Wales, or at least none that would have been prevented by the introduction of trust legislation to replace the default rule.

'It is rare to find examples of contracts containing terms by which trustees have expressly sought to limit their personal liability, which might suggest that there is no general perception amongst trustees that they might be exposed to undue risk', says the CBA’s report. Although trading activities are often carried out as part of a trust structure, it is generally conducted through a corporate vehicle, thus minimising the risk of personal liability, it notes.

The group noted that legislation overriding the rule is the exception rather than the norm, limited to the BVI, Guernsey, Jersey and the Turks and Caicos Islands. The rationale for it is unclear, says the CBA, as it does not necessarily attract more business to a jurisdiction.

'We do not believe that new statutory default rules are required in England, in particular if drafted along the lines found in the trust legislation of the Channel Islands', says the report. 'The legislation of the Channel Islands has been interpreted as in effect protecting trustees at the expense of creditors...The introduction of legislation drafted along the same lines in England and Wales would inevitably start from the same premise and this appears to us to give rise to serious problems, as well as potentially raising policy considerations.'

Sources