Equity Trust v Halabi (Privy Council)

• Published date: 08 February 2023
• Subject Matter: Employment and HR, Retirement, Superannuation & Pensions, Employee Benefits & Compensation
• Law Firm: Forsters
• Author: Nick Jacob

The retiring trustee (RT) sought to rely on the indemnity in the Deed of Retirement and Appointment (DORA) in respect of its claim from the trust fund in relation to its significant liability. The question at stake was whether RT's claim should rank in priority to other creditors and subsequent trustees. If all the liabilities were justified, then the trust would be "insolvent". RT argued that as their indemnity was the first in time, they should recover the whole of the trust fund (which was in any case insufficient to cover its liability). If they had no such priority, then RT would recover significantly less than the full value of the trust fund, and be more substantially out of pocket in view of other trustees and creditors' claims.

This issue had not been decided before anywhere in the world.

Decisions

The Jersey Royal Court said that RT had no priority and that all claims were to be on a pari passu (ie rateable) basis. The Jersey Court of Appeal reversed this saying that a former trustee's right of indemnity and lien ranks in priority to later claims. The Privy Council took the case on the priority issue and the status of a lien under Jersey law. It reversed the Jersey Court of Appeal's decision and decided that:

1. The lien conferred by the right of indemnity is not a form of security (so no priority);
2. The trustee has a proprietary interest in the trust assets;
3. The lien gives a trustee priority over the interests of beneficiaries;
4. Trustees' claims were to be dealt with on a pari passu basis - not first in time;
5. The trustees' indemnity covers costs of proving a claim.

Consequences

This decision has some potentially dramatic consequences for retired trustees, existing trustees and future trustees. Even though most trusts will not be "insolvent", it will affect the taking on of liabilities by trustees, and their approach on taking on a trusteeship and retirement of a trustee. Some of the consequences are:

1. DORAs will be much more complex to negotiate, as retiring trustees will want to try to secure priority in respect of their indemnity. But why would a...