She Sells Sanctuary: Firewall Legislation And Bermuda's Recent Reforms

• Published date: 08 July 2021
• Subject Matter: Corporate/Commercial Law, Real Estate and Construction, Conveyancing, Real Estate, Trusts
• Law Firm: Carey Olsen
• Author: Mr Ashley Fife

Ashley Fife provides an overview of the current state of Bermuda's firewall legislation and its recent trust law reforms.

ABSTRACT

• To what extent are assets in trusts existing under the laws of an 'offshore international financial centre (IFC) sheltered from claims made under other jurisdictions' laws against settlors, beneficiaries trustees or trust property? Many IFCs have experienced challenges drafting clear, effective and appropriate firewall legislation.
• This article considers factors relevant to the protection that firewall legislation provides to trust property; primarily from the perspective of Bermuda, which recently updated the firewall provisions contained in the Trusts (Special Provisions) Act 1989 (the Act). ¹
• The article also outlines competing policy considerations and practical realities that legislatures weigh up when developing, and courts consider when applying, IFC firewall legislation.

WHAT IS AN ASSET PROTECTION TRUST?

A trust is not a legal person. An 'express trust' refers to the legal relationship created, either inter vivos or on death, by a person (the settlor) when assets have been placed under the control of a trustee for the benefit of a beneficiary or for a specified purpose. ²

There is no legal definition of an asset protection trust under Bermuda law or under the laws of most other jurisdictions. An asset protection trust might be described as an express trust with specific terms that aim to protect the trust property from claims brought against the trust's settlor or beneficiaries. The asset protection qualities of the trust are also impacted by conflict of laws rules of the governing law of the trust and fraudulent transfer legislation. However, asset protection is rarely the sole reason a person might wish to form a trust. One might say that the primary reason trusts remain attractive to most private clients is the flexibility they provide for long‑term succession planning.

CONFLICT OF LAWS

Conflict of laws rules are procedural rules applied by a court (the Domestic Court) that has jurisdiction to determine an issue having a connection with another jurisdiction (a foreign jurisdiction) to ultimately determine whether to apply the substantive laws (i.e. a jurisdiction's laws without reference to its procedural, including conflict of laws, rules) of:

• the jurisdiction in which the Domestic Court is situated (Domestic Laws); or
• a foreign jurisdiction (Foreign Laws).

The connecting factor with a foreign jurisdiction might be, for example, that the defendant is resident or domiciled in a foreign jurisdiction or that the property (which is the subject of the issue or dispute) is situated in a foreign jurisdiction.

In common-law jurisdictions, the source of conflict of laws rules is the common law (including customary law where applicable, such as in Guernsey and Jersey) as reiterated, clarified or varied by domestic statutes and international conventions and statute, including, where applicable, EU law.

The relevance of the Hague Trusts Convention

The Hague Conference on Private International Law (HCCH) developed a multilateral treaty known as the Hague Convention of 1 July 1985 on the Law Applicable to Trusts and on their Recognition (the Convention) to address issues concerning the non‑recognition of the concept of trusts in civil‑law jurisdictions and paucity of clear and appropriate conflict of laws rules in relation to trusts.

Thirty-one of the 87 HCCH Member States have approved the Convention, but only a small number of Member States have ratified it or enacted legislation to introduce some or all of the Convention's provisions into Domestic Law.

The Convention represents a positive step towards developing consistent conflict of laws rules applicable to trusts. In summary, it provides that once a trust is validly established, the existence and governing law of the trust will be respected. However, it does not deal with the law that is to apply to questions concerning the governing law applicable to the formation and transfers into the trust.

Further, even if a Member State has ratified the Convention, this does not necessarily mean that the provisions have been included verbatim into its Domestic Law, or included at all. ³ Article 18 of the Convention provides that a Member State is not required to apply provisions of the Convention to the extent that doing so would be 'manifestly incompatible' with the public policy in the Member State. Further, each Member State's court may have different levels of experience in trust cases and may not interpret or apply the Convention's provisions in the same way.

Certain provisions of the Convention were introduced into the laws of Bermuda, the British Virgin Islands and certain other British Overseas Territories by the UK's Recognition of Trusts Act 1987 (Overseas Territories) Order 1989, ⁴ made under the Recognition of Trusts Act 1987.

In some instances, firewall legislation might be regarded as inconsistent with the Convention if not 'manifestly incompatible' with matrimonial property regimes or decisions of Member States. For example, the power of the Family Division of the England and Wales High Court to vary and make orders, in respect of trusts governed by laws of other jurisdictions, may be directly at odds with art.8 of the Convention, ⁵ which provides that the governing law of the trust 'shall govern the validity of the trust, its construction, its effects and the administration of the trust', but justified in England and Wales on public policy grounds.

WHAT IS THE OBJECTIVE OF FIREWALL LEGISLATION?

The objective of firewall legislation, in summary, is to clarify, reiterate or vary Domestic Law conflict of laws rules applicable to trusts governed by Domestic Law (Domestic Law Trusts) to:

• require that Domestic Law shall apply to determine certain questions relating to the formation, validity and administration of Domestic Law Trusts; and
• prevent the recognition or enforcement of orders made by courts other than the Domestic Court (i.e., a foreign court) and in some jurisdictions, including Bermuda, awards of arbitrators or tribunals in a foreign jurisdiction (collectively, Foreign Orders) in relation to property held pursuant to Domestic Law Trusts where they are inconsistent with Domestic Law firewall legislation.

WHAT IS THE OBJECTIVE OF FRAUDULENT TRANSFER LEGISLATION IN A TRUST CONTEXT?

In relation to trusts, the objective of fraudulent transfer legislation is to require the Domestic Court to apply Domestic Law to determine:

• whether a creditor is eligible to have transfers (i.e dispositions) into a Domestic Law Trust made at an undervalue set aside;
• limitation periods within which eligible creditors may bring claims to set aside such transfers; and
• rights of trustees, beneficiaries sand others who received transfers or distributions in good faith.

As with firewall legislation, the location of the property that has been transferred into the trust or distributed from it will impact on how successfully Domestic Law may be able to apply to resist enforcement of Foreign Orders in relation to such property.

The historical basis of many common‑law jurisdictions' fraudulent transfer legislation is the Fraudulent Conveyances Act 1571, ⁶ also known as the Statute of Elizabeth. Bermuda's fraudulent transfer legislation is contained in s.36A-G of the Conveyancing Act 1983. Guernsey and Jersey have not included provisions from the Statute of Elizabeth into their legislation and do not have fraudulent transfer legislation. Creditors may explore whether they may set aside transfers into a Guernsey or Jersey law trust by bringing a 'Pauline action', which is derived from Roman law as developed by French customary law.

JURISDICTION

The question of forum or jurisdiction is intimately related to conflict of laws rules. A court might determine, based on its conflict of laws rules (being procedural rules) or its interpretation of an exclusive...