Know your limitations

Tuesday, 01 April 2014
Elaine Gray stresses the importance for trustees of adopting limited recourse language, in light of the Royal Court of Guernsey’s decision in Investec Trust (Guernsey) Ltd and others v Glenalla Properties Ltd and others.

The recent Royal Court of Guernsey decision in the case of Investec Trust (Guernsey) Ltd and others v Glenalla Properties Ltd and others (issued in December 2013 following a trial in June 2013) has ramifications beyond the Channel Islands.1  This article examines the court’s finding on the Jersey law provision regarding a trustee’s right of indemnity and how the findings may affect other jurisdictions.


Investec, and its associated trust company, Bayeux, were trustees of a Jersey law trust, the Tchenguiz Discretionary Trust (TDT), established on 26 March 2007 under a declaration of trust. Investec and Bayeux (‘the former trustees’) were replaced as trustees on 2 July 2010 by Rawlinson & Hunter Trustees SA (‘the current trustee’). 

The other parties to the proceedings were four BVI companies: Glenalla Properties Ltd (Glenalla), Thorson Investments Ltd (Thorson), Eliza Ltd (Eliza) and Oscatello Investments Ltd (Oscatello) (collectively, ‘the BVI companies’).

The main beneficiary of the TDT was the well-known property businessman Robert Tchenguiz. Along with his brother, Vincent, Robert had been a beneficiary in the earlier family trust also administered by Investec, the Tchenguiz Family Trust (TFT), established by their father, Victor.

It was decided that Robert’s interests should be separated from Vincent’s and, in 2007, transactions were undertaken in line with this intention, including the establishment of the TDT.

The TDT started life with relatively modest assets but quickly took on a substantial and heavily geared investment portfolio that included interests in Sainsbury’s and Mitchells & Butlers. During the trial, the TDT’s operations, investments and borrowings were described as akin to a treasury clearing house. At its peak, the TDT was believed to have borrowings of approximately GBP4 billion.

Key transactions

From 2007 to 2008, the TDT borrowed approximately GBP183 million from the BVI companies, which were (at all material times) held directly or indirectly as assets of the TFT or TDT. The borrowing from the BVI companies arose through several key transactions. The first took place on 24 August 2007, when the former trustees entered into deeds of novation under which they assumed liability for: (a) monies then owing by the TFT to the Icelandic bank Kaupthing Bank hf (Kaupthing) under a loan agreement dated 20 August 2007; and (b) monies then said to be owing by the TFT to Glenalla and Thorson. The second key transaction was in December 2007, when the former trustees were party to a framework agreement and overdraft arrangements under which it was said they had become liable for monies paid by either Eliza, or alternatively Oscatello, towards the discharge of the liability owed by the TDT to Kaupthing under the 20 August 2007 loan agreement. The manner in which these arrangements were (or were not) entered into the accounting records of the TDT, the underlying companies and the former trustees became one of the key issues, as the court was asked to determine the meaning and effect of the arrangements.

In the course of 2007–2008, the TDT became increasingly dependent on third-party funding to stay afloat, with Kaupthing providing increased overdraft facilities. By 2008, Kaupthing had increased its lending to GBP600 million. In early October 2008, Kaupthing collapsed, resulting in the termination of any further credit facilities to the TDT and the sale of various underlying assets at a substantial loss. From December 2008 onwards, this led to the appointment of receivers and liquidators of the BVI companies. On 22 April 2010, the joint liquidators of the BVI companies wrote to the former trustees demanding repayment of the sums they claimed were due.

The former trustees sought declaratory relief regarding the nature and effect of the arrangements entered into and a declaration that the former trustees had no personal liability to the BVI companies, so that the BVI companies’ claims extended only to the trust property of the TDT because of article 32(1)(a) of the Trusts (Jersey) Law 1984 (TL 1984), as amended. The former trustees also asked for a declaration that the BVI companies could only enforce their claims to the extent that the former trustees had assets of the TDT available to satisfy those obligations. In relation to the current trustee, the former trustees sought confirmation that they were entitled to retain and realise the assets of the TDT to meet any liability they may be found to have.

The BVI companies sought a declaration that the monies claimed were due under valid loan agreements, and judgment against the former trustees in the aggregate sum of approximately GBP183 million. The BVI companies also argued that the former trustees were personally liable for the loans and that they were entitled to be subrogated to the former trustees’ rights in respect of the assets of the TDT.

For its part, the current trustee sought declarations that the BVI companies had no claim to monies due under the arrangements and that, in any event, the former trustees had no entitlement to any indemnity out of, or any right of exoneration over, the TDT assets, on the basis that the former trustees had been guilty of gross negligence in their administration of the TDT.

The Royal Court concluded that the BVI companies’ claims for payment under the loan arrangements should succeed and therefore directed the former trustees to pay the sums sought by the BVI companies. To that end, the former trustees were found entitled to retain and realise such of the assets of the trusts as remained vested in them in order to satisfy their obligations as borrowers. The current trustee’s arguments that the former trustees should be deprived of their indemnity failed. Both the former and current trustees have appealed against this decision, with the appeals due to be
heard in June 2014.

The effect of article 32

One of the key issues in the proceedings was the effect of article 32 of the TL 1984, which states:

‘32 Trustee’s liability to third parties

(1) Where a trustee is party to any transaction or matter affecting the trust –

(a) If the other party knows that the trustee is acting as trustee, any claim by the other party shall be against the trustee as trustee and shall extend only to the
trust property;

(b) If the other party does not know that the trustee is acting as trustee, any claim by the other party may be made against the trustee personally (though, without prejudice to his or her personal liability, the trustee shall have a right of recourse to the trust property by way of indemnity).

(2) Paragraph (1) shall not affect any liability the trustee may have for breach of trust.’

The former trustees argued that article 32 should be read in combination with article 26(2) of the TL 1984, which confers an express right on trustees to reimburse themselves, or pay out of the trust fund, expenses and liabilities reasonably incurred in connection with the trust. Taken together, this was argued to have the effect that Jersey law had no equivalent to the English equitable rule (that a trustee is not entitled to an indemnity for expenses incurred in the administration of a trust for so long as it remains liable to account for other breaches of trust). Accordingly, the effect of article 26(2) was to provide a right of indemnity to the former trustees for all expenses and liabilities reasonably incurred in connection with the TDT, regardless of any liability to account.

The BVI companies did not accept that the former trustees were entitled to rely on article 32 as claimed. They argued that, where article 32(1)(a) applied, it limited the liability of a trustee to liability only as trustee, rendering irrelevant the state of account
as between the trustee (personally) and the trust fund. The BVI companies also argued that, with the removal of the trustee’s personal liability, the trustee was under an obligation to have regard to the liability owed to third parties in its administration of the trust. Anything less would put third parties at a massive disadvantage – the creditor would be entirely at the mercy of the trustee and beneficiaries, who would be free to deal with the trust fund in any way they wished.

The court declined to deal with the article 32(1) issue, concluding that enforcement of the BVI companies’ claims was not enforcement of the trusts of the TDT (pursuant to s65 of the Trusts (Guernsey) Law, 2007) so that the court’s jurisdiction was not engaged. The former trustees were therefore personally liable to the BVI companies.

Final comments

The decision thus leaves open the proper construction of article 32, although this issue will form part of the appeals. However, the decision is a useful reminder of the importance of appropriate contractual limitations. The stark reality is that the former trustees’ predicament was one they could readily have avoided had appropriate limitations on the right of recourse been in place. Limited recourse language is essential, as trustees cannot safely assume that article 32 (in Jersey) or article 42 (in Guernsey) will step in to assist.

Due to the limited nature of statutory limitations elsewhere, the decision will be of interest outside the Channel Islands. Reviews of the relevant statutory provisions in the Cayman Islands and the Isle of Man indicate that the issue does not arise because the traditional English position prevails. In the BVI, there is some potential for trustees to limit their liability on an opt-in basis, whereas in Bermuda the limitation is limited. No doubt those jurisdictions will be interested to see how the Court of Appeal tackles the matter. 

  • 1Guernsey Legal Resources, judgment 38/2013
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Elaine Gray

Elaine Gray is Of Counsel at Carey Olsen.

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