Landmark Privy Council Decision On The Scope And Ranking Of Trustees' Indemnity

• Author: Mr James Sheedy
• Law Firm: Baker & Partners
• Published date: 05 January 2023

In October 2022 the Privy Council finally handed down judgment in the Z Trust (II) appeals (ETJL v Halabi; ITGL v Fort Trustees [2022] UKPC 36). This decision concerns the hitherto under examined (and rather dull) topic of the nature and scope of the right of a trustee to recover liabilities and expenses from the trust assets.

Although both appeals concerned Jersey law, the decision will have significance throughout the common law world. This is an important decision for trustees and anyone dealing with a trustee hoping to be paid from trust funds. It has particular importance in circumstances where the trust fund is 'insolvent', ie, where the trust's assets are insufficient to meet the amounts due for reimbursement under the trustee's indemnity.

SUMMARY OF ISSUES AND THE COURT'S ANSWERS

1. Does the trustees' indemnity confer a proprietary interest in the trust assets?

Answer: Yes.

2. Does that proprietary interest survive the transfer of the trust assets to a successor trustee?

Answer: Yes, this is described as the trustee's 'lien'.

3. Where does a former trustee's lien rank in priority over the lien of successor trustees?

Answer: The trustees' claims rank pari passu (ie, equally and in proportion vis-à-vis all successor trustees).

4. Does the trustee's indemnity extend to its legal costs of proving its claim if the trust is 'insolvent', in the sense that trustees' claims to indemnity exceed the value of the trust fund?

Answer: yes.

The key part of the decision focuses on issue 3, ie, the ranking of the former trustee's lien vis-à-vis lien of successor trustees. This means that where the trust fund is insufficient to meet all the liabilities that are secured by the trustee's lien, all those creditors can claim 'a slice of the pie' in proportion to their debts.

BACKGROUND

The litigation concerns a Jersey discretionary trust, (the 'Ironzar II' or 'Z II' Trust). The Z II Trust was 'insolvent', in the sense that its liabilities (incurred via a succession of trustees) far exceeded its assets from 2015.

Equity Trust (Jersey) Ltd (Equity) was a former trustee of the Trust and had retired in 2008. In 2012, Equity was sued and in December 2015; paid a settlement of '18m. Equity sought reimbursement from the Trust via its indemnity from the successor trustee. Equity argued its debt was first in time and consequently took priority over the later claims of the other creditors of the Jersey Trust .

The Royal Court of Jersey held that all the debts should rank pari...