Confirming Established Principles

Offshore trusts have long been used as a vehicle for estate planning and wealth management, providing shelter from economic, political, family and business uncertainty. An important objective in creating such trusts is the protection of the interests of the settlor and other beneficiaries against creditors, in particular creditors of the settlor. This article considers some recent case-law developments in the Cayman Islands where a judgment creditor of the settlor of Cayman Islands trusts sought to enforce his judgment against trust assets via a power of revocation vested in the settlor.

Legal background

Under Cayman Islands law, subject to any expressly reserved power – such as a power of revocation or amendment – once a trust is completely constituted it is binding and irrevocable. Powers of revocation and/or amendment are commonly included in trusts drafted under Cayman Islands law. In particular, a power of revocation is typically reserved to the settlor to enable them, at some future date during their lifetime, and for any reason, to cause the trust fund (or part of it) to revert to them. Powers of revocation or amendment are typically drafted so that these powers are personal to the settlor, ie are not fiduciary powers. See, for example, Smith Barney Private Trust Company (Cayman) Ltd v Cebreros & ors [2006].

Generally speaking, a solvent settlor may create and settle their assets on Cayman Islands trusts for legitimate purposes, without the fear of such assets being vulnerable to creditors. This principle is subject to a number of well-known exceptions, such as where the settlor creates the trust as a sham, or where the settlor has already incurred the liability or contingent liability and seeks to use the trust to defraud a creditor by placing assets beyond reach. Subject to certain statutory provisions such as the Cayman Fraudulent Dispositions Law (1996 Revision) and the Cayman Bankruptcy Law (1997 Revision), such dispositions of assets are void or voidable under Cayman Islands law. This was examined in the decision of the Privy Council (on appeal from the Court of Appeal of the Cayman Islands) in Re Al-Sabah [2004-5]. Mr Al-Sabah settled assets in two Cayman Islands trusts. He was subsequently bankrupted in the Bahamas. It was alleged by his Bahamian trustee in bankruptcy that he had settled assets on the trusts when he was insolvent. The Bahamian court issued a letter of request to the Grand Court of the Cayman Islands seeking the recognition of the trustee in bankruptcy in the Cayman Islands, so he could apply to the Grand Court to avoid the trusts under s107 of the Bankruptcy Law.

Another remedy available to a creditor of the settlor is to bankrupt the settlor. Under s100(b) of the Bankruptcy Law, when the settlor becomes bankrupt the settlor's trustee in bankruptcy will be vested with:

... the capacity to exercise... all such powers in or over or in respect of property as might have been exercised by the debtor for his own benefit at the commencement of the bankruptcy, or at any time previous to his discharge.

The trustee in bankruptcy will therefore be able to exercise a power of revocation that is vested in the settlor, and so cause the trust assets to fall into the bankrupt's estate. However, the obvious disadvantage to the settlor's creditor of proceeding in this way is that they will have to share the proceeds pari passu with the settlor's other unsecured creditors.

Tasarruf

The Cayman Islands courts have recently examined whether a judgment creditor – Tasarruf Mevduati Sigorta Fonu (TMSF) – could enforce its money judgment against a settlor of two Cayman Islands trusts...