Where There's Smoke There's A Fire(Wall)

• Published date: 09 June 2022
• Subject Matter: Corporate/Commercial Law, Corporate and Company Law, Trusts
• Law Firm: Collas Crill
• Author: David Harby, Simon A. Hurry, David O'Hanlon and Andrew Peedom

Trust practitioners will be all too familiar with the fact that, in recent years, there has been a significant increase in judgments issued from onshore jurisdictions that creditors seek to enforce against the assets of trusts established in offshore jurisdictions. In some instances, such proceedings also challenge the validity of an offshore trust (validity proceedings). Fundamental to these proceedings is an allegation that the sole purpose of establishing the trust was to put assets beyond the reach of another party (usually a divorcing spouse, a creditor or insolvency practitioner). Forced-heirship laws also continue to feature in these types of claims.

This article focuses on the offshore jurisdictions of the British Virgin Islands (BVI), the Cayman Islands, Guernsey and Jersey (the Jurisdictions), which have statutory provisions designed to protect trust assets from being susceptible to such attacks. Colloquially, those provisions are known as 'firewall legislation'. Although this legislation does not prevent the enforcement of an onshore judgment against, for example, UK-situs assets of such trusts, it acts as both a shield and a sword against any attempt to enforce an onshore judgment against an offshore trust.

Recently, however, there has been a paradigm shift in how that legislation

'Recently, however, there has been a paradigm shift in how that legislation is construed insofar as it concerns Proceedings'

is construed insofar as it concerns validity proceedings. This article offers a comparative analysis of these issues and how they impact the Jurisdictions.

THE FIREWALL LEGISLATION

The key statutory provisions in force in each of the Jurisdictions are designed to ensure that all questions regarding a trust will be determined according to the laws governing the trust (usually specified in the trust instrument); and foreign law does not apply to such trusts. The second limb extends to heirship rights and foreign judgments not being recognised in relation to a trust. The purpose of such provisions is to ensure that the trusts are adequately protected against foreign claims.

By way of example, the Cayman Islands' Trusts Act (2021 Revision) specifically addresses those matters as follows:

• '[a] term of the trust expressly selecting the laws of the Islands to govern the trust is valid, effective and conclusive regardless of any other circumstances';¹
• '[N]o trust governed by the laws of the Islands and no disposition of property to be held upon...