Jersey Freezing Orders

KEY POINTS

WHAT IS THE ISSUE?

A number of court decisions have demonstrated that discretionary trust assets are not always immune from freezing injunctions obtained against settlors/beneficiaries.

WHAT DOES IT MEAN FOR ME?

A freezing injunction is likely to impact the trustee's duties and the day-to-day administration of the trust, and may lead to trustees being dragged into proceedings even if they are not alleged to have been involved in or aware of wrongdoing on the part of the settlor.

WHAT CAN I TAKE AWAY?

An understanding of the approach of the courts, including those in Jersey, to this issue.

The purpose of a standard freezing injunction is to freeze the defendant's assets,1 on an interim basis or post-judgment, so that they are available for the enforcement of a future judgment. In circumstances in which valuable assets can be moved to an obscure jurisdiction on the basis of a simple share-transfer form, the freezing injunction is an essential part of a litigator's armoury.

However, if a defendant has settled their assets on discretionary trusts, they no longer own them. Even if the defendant is a beneficiary, their rights do not confer any legal or beneficial interest in the trust assets.2 Such assets will therefore not be caught by a standard freezing order and would not be available for enforcement.

The idea that sophisticated defendants should be able to abuse trust structures to make themselves judgment-proof is obviously unattractive. Courts' desire to do justice in such circumstances has, on occasion, led to decisions that have raised eyebrows among trust practitioners by seeming to ignore the fundamental principles of trust law.

Aside from obvious policy concerns, the practical implications for a trustee who becomes subject to the terms of a freezing order can be serious.3 The restrictions imposed on the trustee by the injunction may well conflict with the day-to-day administration of the trust, but a breach of the order can lead to a finding of contempt. Can distributions be made? What about investments? What are the trustee's disclosure obligations, and how do these tie in with the duty of confidentiality? Should applications be made to the court for directions? All these questions are likely to arise, and the answers will not always be straightforward.

BENEFICIAL OWNERSHIP

It is well established that, if it can be shown that a trust was invalidly settled, the court can and will bring the trust assets within the scope of a freezing order - assuming that the other requirements for the granting of an injunction have been met. Alternatively, if the claimant can assert their own proprietary claim in respect of the trust assets - for example, if they are able to make...