Landmark Privy Council Ruling Establishes Scope And Ranking Of Ex-trustees' Interest In An Insolvent Trust

• Published date: 31 October 2022
• Subject Matter: Wealth Management, Litigation, Mediation & Arbitration, Wealth & Asset Management, Trials & Appeals & Compensation
• Law Firm: Herbert Smith Freehills
• Author: Mr Richard Norridge, Philip Lis and Hussein Mithani

Jersey law ruling will have far reaching ramifications for trust administration in common law jurisdictions

The Judicial Committee of the Privy Council (the Privy Council) in Equity Trust (Jersey) Ltd (Respondent) v Halabi (in his capacity as Executor of the Estate of the late Madam Intisar Nouri) (Appellant) (Jersey) ITG Ltd and others (Respondents) v Fort Trustees Ltd and another (Appellants) (Guernsey) [2022] UKPC 36 has considered appeals from the Jersey and Guernsey Courts of Appeal on four issues of Jersey law (which it confirmed was the same in all relevant aspects as English law) as follows:

1. Whether the right of a trustee indemnity confers a proprietary interest in trust assets on the trustee.
2. If such an interest is conferred does this survive the transfer of the trust assets to a successor trustee.
3. Does a former trustee's proprietary interest in the trust assets take priority over the equivalent interests of successor trustees or do these rank equally.
4. Does a trustee's indemnity/lien extend to the costs of proving its claim against the trust even if the trust is "insolvent" such that the trustees' claim to indemnity exceeds the value of the trust fund.

The key part of the decision focused on for the purposes of this article is issue 3, ie, whether a former trustee's proprietary interest in the trust assets deriving from the right to indemnity takes priority over the equivalent interests of successor trustees.

The Court held on a 4:3 majority that a former trustee's proprietary interest does not take priority over the interest of a new trustee and this ranks pari passu (meaning equally) with the new trustee where the trust's assets are insufficient to meet all indemnity claims. Trustee's liens were not intended to be in competition with each other where trust assets were inadequate and they should be recovered pari passu because the trustees had suffered a shared misfortune.

Hussein Mithani, an associate in our disputes and private wealth team, and Philip Lis, a senior associate in our insolvency disputes team, consider the decision in further detail below.

Background

The Jersey Court case concerns a Jersey discretionary trust called the Ironzar II Trust (the Jersey Trust). The Jersey Trust was settled by Madam Intisar Nouri (the Jersey Settlor) and is "insolvent" on the basis that its liabilities far exceeded its assets in or around October 2015.

Equity Trust (Jersey) Ltd (the Jersey Respondent) was a former trustee of the Jersey Trust and had retired from its...