The Z Trusts Equation ' Z2 + Z3 = 1T + IP

• Published date: 07 August 2020
• Subject Matter: Corporate/Commercial Law, Wealth Management, Insolvency/Bankruptcy/Re-structuring, Insolvency/Bankruptcy, Wealth & Asset Management, Trusts
• Law Firm: Collas Crill
• Author: Sam Williams

The below article, written by Collas Crill's Of Counsel in Jersey Sam Williams and first published on Lexis PSL provides an update on the latest developments in the Z Trusts insolvency case, which has so far this year led to three ground-breaking judgements from the Royal Court of Jersey in the developing and controversial area of 'insolvent' trusts.

Private Client analysis: The Royal Court of Jersey has released three judgments in the first half of 2020 which continue to break new ground in the developing and controversial area of 'insolvent' trusts, culminating in the appointment of an insolvency practitioner to conduct a winding up of the two trusts in question. The Royal Court was also asked to consider a pre-emptive costs application by the appellant in the forthcoming Privy Council appeal on the issue of priority ranking and the equitable lien of a former trustee. Sam Williams, of counsel at Collas Crill LLP (Jersey), provides an update on the latest developments in the Z Trusts insolvency saga.

What was the background?

The two trusts at the centre of the litigation are the ZII Trust and the ZIII Trust. The trusts were part of a series of connected trusts established by a common settlor, Mrs C, now deceased.

In 2015, the Royal Court had decided that the ZII and ZIII Trusts should be deemed 'insolvent' and administered for the benefit of creditors, albeit that is a misnomer in the context of a trust. Insolvency was to be assessed on the basis of the cashflow insolvency test. In other words, the trust funds were unable to meet their liabilities as they fell due. The Royal Court clarified that in such circumstances the trustee ceased to owe duties to the beneficiaries of the trust in the administration of the trust assets but owed a duty to act in the best interests of the trust's creditors as a whole. It therefore set aside the appointment of new trustees of the ZII Trust installed in the interest of beneficiaries for the express purpose of avoiding a winding up of the trusts (In the matter of the ZII Trust: Volaw Trustee Ltd v Chiddicks (for the minor beneficiary of the Z II Trust) 2015 (2) JLR 108). A decision earlier in 2015 recognised as a matter of Jersey law the concept of a former trustee's continuing equitable lien over the trust assets in the hands of its successors for reasonably incurred liabilities (In re Z Trusts [2015] JRC 031).

The next question for the Royal Court to consider was how best to conduct the winding up of such a trust (In the case of In re Z Trusts [2015] JRC 214) Should this be left to the incumbent trustees, on the basis that they were familiar with the assets and likely to be relatively cost effective, or should an independent insolvency practitioner (IP) with greater expertise in winding up procedures and no risk of conflict of interest be appointed? The Royal Court emphatically preferred to leave matters in the hands of the trustees. The issue of winding up the trusts was avoided and the assets were to be administered for the benefit of creditors under the supervision of the Court. The ZIII Trust was in fact then restored to cash flow solvency for a period.

In 2018, the former trustee of the ZII Trust, Equity Trust sought to argue that it had a priority over the other creditors,...