Why The BVI Is A Trust Jurisdiction Of Choice

The introduction of ATED1 in the UK has led to more trustees of family trusts holding UK residential real estate directly, rather than via an underlying company, creating additional risks and complications for both creditors and trustees.

A BVI trust provides commercial certainty via a unique legislative framework which gives protection to both parties, allowing commercial transactions to proceed speedily and cost effectively.

The Problem

As every law student learns in their first Equity and Trusts lecture, a trust is not a legal person. A trustee contracts as principal in its capacity as trustee and is personally liable on that contract.

Of course, as the same law student will also have learnt, the trustee has a right to be indemnified from the trust fund in respect of those liabilities, provided - and this is the heart of the problem - that the trustee has acted properly in accordance with the terms of the trust in incurring them. In practice, the creditor will be more interested in satisfying any claim from the trust assets and may be relieved to learn that it has a right of subrogation to the trustee's right.

So far, so good. But as subrogation is a derivative right - the creditor is substituted for the trustee with regard to the claim - it can be no greater than the trustee's right. As a result, it creates a number of significant risks for creditors because the right of indemnity depends on the trustee having acted properly. If it has not, the creditor must fall back on suing the trustee personally. That is not much help if the trustee does not have the funds to meet the claim, nor if the contract contains a provision limiting the trustee's liability to its right of reimbursement from the trust fund. It is true that the creditor might, with the aid of the same law student - now a capable trust lawyer - negotiate those provisions so that the trustee gives appropriate personal warranties and indemnities. In our experience, however, those kinds of provisions are not often included and in any event, suing the trustee personally in what will almost certainly be contested proceedings is not an attractive option.

The Risks for Creditors

Which takes us back to the trustee's right of indemnity from the trust fund and the creditor's right of subrogation to it. The trustee's liability may have been improperly incurred for any one of three reasons:

Lack of capacity. The Trustee may not have had the power to enter into the agreement. Lack of due authorisation. The relevant power may not have been exercised in accordance with a procedure internal to the trust (such as obtaining the consent of a protector). Breach of equitable duties. The power may have been exercised in breach of the trustee's duties, either in relation to their powers of investment or ancillary powers (such as a power of delegation or to supervise agents or a failure to take into account relevant considerations and ignore irrelevant ones). All three areas (and particularly the third) will require detailed investigation to ascertain whether the trustee has properly incurred the relevant liabilities. Those investigations will be time-consuming and expensive, and the depth of the required enquiries may not find favour with the trustees or the beneficiaries.

None of this is conducive to certainty in commercial transactions.

But that is not all. There are two additional risks for trustees unrelated to the transaction itself, which makes things even worse for the unsuspecting creditor:

Unconnected Indebtednessof the trustee to the trust. For...