Cayman Privy Council Provides Important Clarification Of The Rights Of Current And Former Trustees

• Published date: 19 December 2022
• Subject Matter: Corporate/Commercial Law, Litigation, Mediation & Arbitration, Insolvency/Bankruptcy/Re-structuring, Corporate and Company Law, Insolvency/Bankruptcy, Trials & Appeals & Compensation, Trusts
• Law Firm: Ogier
• Author: Ms Deborah Barker Roye and Kelsey Sabine

The Cayman Islands' Privy Council in a consolidated decision of two unconnected Court of Appeal cases from Jersey and Guernsey, clarified the method of dealing with a trust which has insufficient assets to settle its liabilities (colloquially referred to as an "insolvent trust"), ¹ in: Equity Trust (Jersey) Ltd (Respondent) v Halabi (in his capacity as Executor of the Estate of the late Madam Intisar Nouri) (Appellant); and ITG Ltd and others (Respondents) v Fort Trustees Ltd and another (Appellants) [2022] UKPC 36.

Both cases raise common issues about the nature and scope of the rights of a trustee to recover from, or be indemnified out of, trust assets in respect of liabilities and other expenditure properly incurred by the trustee and clarifies the position of not only current and former trustees of insolvent trusts, but also their respective creditors who can access the trust assets in satisfaction of claims by way of the trustee's right of indemnity.

The Cayman Islands' Privy Council considered four principal issues:

1. whether a trustee's right of indemnity confers a proprietary interest in the trust assets
2. whether that right of indemnity survives the transfer of the trust assets to a successor trustee
3. whether a former trustee's proprietary interest takes priority over a successor trustee's equivalent claim
4. whether the costs incurred by a trustee in proving its claim are included in the sum capable of recovery by the trustee

The first, second and fourth issues were unanimously decided by an enlarged seven-member Privy Council, but on the third issue the Board was split 4:3 giving three separate judgments.

Issues one and two: trustee's right of indemnity

The Privy Council held that the trustee's right of indemnity confers upon it a proprietary interest in the trust property and that this proprietary interest of a trustee survives the transfer of the trust assets to a successor trustee.

A trustee is therefore entitled to protect their interests by (i) applying, or seeking an order of the court to apply trust assets in their possession in payment of amounts due under their right of indemnity; or (ii) retaining sufficient assets or requiring security before transferring the assets to a successor trustee. The interest enjoyed by a trustee does not cease upon transfer of the assets to a new trustee, their rights will remain protected.

Issue three: priority as first in time or pari passu?

The Privy Council was divided on the third issue: whether a former...