TMSF v Merrill Lynch Bank - Breaking into Discretionary Trusts

It is a common source of frustration for creditors that the legally available assets of an apparently wealthy debtor are housed in a discretionary trust and placed beyond reach. Conversely, it is likely to be a source of anxiety for a debtor-beneficiary of a discretionary trust as to how well it is able to protect itself against claims of the beneficiaries creditors.

A Turkish fraud

A recent decision of the United Kingdom's Privy Council TMSF v Merrill Lynch Bank [2011] UKPC 17 found that the assets of a discretionary trust established in the Cayman Islands were available to creditors of an extremely wealthy individual. The decision has caused some consternation in the common law world (including in Australia).

The case concerned (of all things) a failed Turkish bank. The bank was ultimately owned by a Mr Demirel who now finds himself housed in a Turkish gaol.

In the 1990s, Mr Demirel was the beneficiary of $30 million in fraudulent loan transactions entered into by the bank. The Turkish equivalent of APRA – TMSF – commenced proceedings against Mr Demirel and obtained judgment for $30 million. On paper, Mr Demirel appeared to own very little. TMSF was unable to satisfy its judgment in Turkey, and Mr Demirel was...