The Royal Court of Jersey (Commissioner Clyde-Smith) has in the recent case of Representation of the Z Trusts  JRC 031 (“Z Trusts”) provided useful guidance as to whether Jersey law recognises the existence of a former trustee’s equitable lien, being a right in favour of a former trustee to be indemnified by its successor trustee up to the limit of the trust assets held by the successor. A former trustee’s equitable lien is separate from any contractual right to an indemnity a former trustee may have under a deed of retirement of trustees.
The Court referred to the recent landmark decision of the Guernsey Court of Appeal in Investec Trust (Guernsey) Limited v Glenalla Properties Limited and Ors  (29 October 2014) (“Investec v Glenalla”). Please refer to our briefing note from November 2014 for a detailed summary of Investec v Glenalla.
The Representation was brought by Mrs C, who established eight Jersey law trusts known as the Z Trusts. Mrs C is a beneficiary of all but one of the trusts. The original trustee of all eight trusts was Equity Trust (Jersey) Limited (“Equity”). Equity retired as trustee of all of the trusts in 2006. Volaw Trustee Limited (“Volaw”) became trustee of the Z Trust and Z II Trust and Barclays Private Bank and Trust Limited (“Barclays”) became trustee of the Z III to Z VIII
Trusts. The deeds by which Equity retired contained standard indemnities in favour of Equity, including chain indemnity provisions which would apply in the event Equity’s successor were to retire as trustee.
All of the trusts face a number of financial difficulties and the Z II and Z III Trusts are insolvent (the Royal Court acknowledged that as a trust is not a separate legal entity, it cannot as a matter of trusts law be insolvent, but it used the term as a form of shorthand). The trusts also face other difficulties, including being involved in litigation in England and Jersey.
Mrs C considered that appointing one trustee, Rawlinson & Hunter Trustees SA (“R&H”) (a Swiss based trust company), to replace Volaw and Barclays, would make it easier to resolve the various difficulties.
Since its retirement as trustee, Equity had been put on notice of two claims against it in connection with the Z II Trust. It said it was entitled to be indemnified in respect of these claims, firstly, under the terms of the deeds of retirement and, secondly, in law pursuant to an equitable lien over the trust assets.
Mrs C said that Equity had refused to be a party to the draft deeds of appointment and retirement of trustees that had been prepared to effect the change of trustee to R&H and that Equity was otherwise obstructing the proposed change of trusteeship.
Equity was concerned that Mrs C’s wish to appoint a trustee resident outside of Jersey would make enforcement of its rights under its contractual indemnities and separate equitable lien more difficult and accordingly it sought an acknowledgment by the Court of Equity’s equitable lien over the assets of the Z II Trust.
The Court considered whether the law of Jersey recognises the existence of a former trustee’s equitable lien for liabilities properly incurred in the conduct of its trusteeship. In doing so, it considered the Guernsey Court of Appeal’s decision in Investec v Glenalla. In that case, the Court held that a former trustee has the right to be indemnified by a subsequent trustee out of and up to the limit of the trust assets. The Court’s view in the Z Trusts case was that the decision of the Guernsey Court of Appeal reflects the law of Jersey and accordingly Equity, as a former trustee, does have an equitable interest in the trust property, namely a right to be indemnified by its successor trustee up to the value of the trust assets.
Accordingly, it was held that Equity had the right to ensure that Volaw and Barclays did not take steps which would “destroy, diminish or jeopardise” that right. The Court said that it hoped that, in acknowledging Equity’s rights, it would assist in the resolution of the matter in relation to the Z II and Z III Trusts.
This case also raised the question of the priority of Equity’s equitable right over the rights of creditors of the trusts. It was submitted that the former trustee’s equitable rights constitute a first charge or lien upon the trust funds in priority to the claims of both the beneficiaries and other creditors of the trusts. While a decision on this point was held over to a subsequent hearing, Commissioner Clyde-Smith made the initial observation that “it is tolerably clear…that a trustee’s equitable right takes priority over the claims of the beneficiaries”. However, the observation was also made that “the issue of priority of other creditors is not straightforward”. As a trust has no legal personality and there are in law no creditors of a trust but only of the trustees, current and former trustees all have equitable rights in respect of the liabilities, costs and expenses they have each properly incurred. In circumstances where liabilities exceed the assets of the trust, does the earlier trustee have priority for the liabilities generated during its tenure over the liabilities generated by subsequent trustees? Commissioner Clyde-Smith indicated that he wished to be addressed further on these points at a second hearing if an agreement between the parties on these issues could not be reached.
In relation to the trusts other than the Z II and Z III Trusts, the Court assisted in the administration of the trusts by declaring that, if an indemnity is given by R&H to Equity in the same terms as the indemnity contained in the deeds by which Equity had retired and without Equity being a party to that indemnity, Barclays and Volaw would have discharged their obligations under those deeds. This enabled the proposed change of trusteeship, at least in relation to the trusts other than the Z II and Z III Trusts, to proceed.
The Z Trusts decision is interesting as it confirms for the first time that Jersey law recognises the existence of a former trustee’s equitable lien over trust assets. While it will still be preferable for a trustee to seek a contractual indemnity upon its retirement, it is nevertheless a useful decision for trustees.
The decision also demonstrates the Royal Court’s willingness to supervise and assist in the administration of trusts in circumstances where an impasse has been reached between the various parties.
Any further decisions of the Court in connection with the Z Trusts is awaited with interest, particularly in relation to the issue of priority of trustees’ equitable rights in relation to the rights of creditors.