Guernsey was the first of the Crown Dependencies to look at introducing foundations law but will be the last to actually do so. Has Guernsey missed the boat or taken the lessons from other jurisdictions and given us the best of breed?

TIMING…

The Foundations (Guernsey) Law 2012 was approved on 25 July 2012 and is awaiting Privy Council consent. The Guernsey Registry for Foundations is envisaged to be open for business by 2 January next year.

It is difficult to predict the level of take up but the legislation has certainly been well received by commentators and advisers are now getting to grips with the key features of the new offering.

KEY FEATURES….

At the risk of oversimplification, foundations have been described as “looking like a company but working like a trust”. Compared to the format adopted by its Channel Islands neighbour, the Guernsey foundation could be described as less obviously corporate than the Jersey model. For example, it has separate legal personality but, unlike the Jersey foundation, is not described as a “body corporate”. Other key features of the Guernsey foundation are as follows:-

The Status of Beneficiaries

The Guernsey legislation contains an innovative distinction in the status of beneficiaries - those with rights to information and those without rights to information (known as “enfranchised” and “disenfranchised” beneficiaries respectively).

Section 31(5)(c) of the Law envisages the promotion and demotion of beneficiaries between these classes.

It is anticipated that this innovation will appeal to clients wishing to incorporate distinct beneficial class rights . It may lend itself particularly well to Middle Eastern families where a foundation is often used to hold an underlying operating company and where Shariah may dictate that males are enfranchised.

The promotion provisions in section 31(5) (c) will also be appealing for Middle Eastern families as they can be used to distinguish between family members who have taken a genuine and active role in the family business and those who have not.

The Local Presence

Unlike the Jersey model, the Guernsey foundation does not require a Guernsey fiduciary licence holder to be on the Council. This is likely to be well received by entrepreneurs using a foundation as a holding vehicle for an operating company, as, in principle, it removes the need for a “stranger” having a controlling influence over the company.

That said, if a Guernsey fiduciary is neither a Councillor nor a Guardian, the foundation must appoint a “Resident Agent”. The Resident Agent must be resident in Guernsey and must hold a Guernsey fiduciary licence.

Given that the Registered Agent will have record keeping and AML compliance obligations, from a risk management perspective, it may be unlikely that fiduciary licence holders will be willing to take on the exposure of acting as Registered Agent without also being appointed to the Council. It will be interesting to see whether the selling point of not requiring a local regulated person involved at the foundation’s management level will prevail in practice.

Control

Reserved powers are often high on the menu for those considering an offshore holding structure for an underlying operating company, perhaps particularly so for Middle Eastern and Far Eastern entrepreneurs.

The Guernsey reserved powers, (section 11 of the Law), are restricted to enabling the founder to amend, revoke, vary and terminate the foundation. As well as being restrictive in terms of activity, the powers are also only available during the founder’s lifetime or, where the founder is an entity, for 50 years.

This is more limited than the reserved powers available with a Jersey foundation. Jersey’s foundations law allows for considerable flexibility.

That said, in Guernsey, control can be achieved by the founder in that the foundation Council can delegate its wider powers to the founder.

However, council members would need to ensure that the extent of any delegation was appropriate. Care, must also be taken to ensure that the extent of control by the founder is not excessive. Commentators have argued that the doctrine of sham does not strictly apply to foundations because they are registered entities and unquestionably exist. That said, the corporate veil can still be pierced and the structure attacked as was established in the Isle of Man case of Kakay in 2008.

Duties - the Role of the Guardian

Trusts and foundations are distinct in terms of the application of fiduciary duties.

The Jersey foundation avoids the application of fiduciary duties from Council to beneficiaries. A more balanced approach is introduced in the Guernsey model while still respecting the key difference between trusts and foundations. With the Guernsey foundation, the Council/Registered Agent owe a duty to the foundation and the Guardian owes duties to the founder and any disenfranchised beneficiaries.

A Jersey foundation must have a Guardian, whose role is, essentially, to ensure the Council carries out its functions. A Guernsey foundation, however, only requires a Guardian where there is a purpose in respect of which there are no beneficiaries, or there are disenfranchised beneficiaries. As such, the Guardian in the Guernsey context is more akin to the enforcer of a purpose trust.

ADVANTAGES OF FOUNDATIONS OVER TRUSTS

The Guernsey foundation can be used as a direct alternative to a trust and has several advantages such as…

Separate Legal Personality

Unlike a trust, a Guernsey foundation has separate legal personality and is registered. The ability to prove the existence of the foundation not only has advantages in connection with sham attacks (as set out above) but can also make it much easier to transact on behalf of the foundation.

By way of an example, and looking once more to the Middle East, onshore Dubai property is often structured using a Dubaibased “JAFZA” company. The shares in the JAFZA company can only be registered in Dubai in the name of a company or an individual - trusts and trustees are not recognised. As such, it has proved difficult to structure onshore real estate into an offshore trust. BVI companies have historically been required to be interposed between the JAFZA company and the offshore trust in order for this to work.

However, foundations have recently been successfully regarded as “companies” in Dubai for the purpose of registering land which cuts out the BVI layer and reduces the running costs of the offshore structure.

The fact that foundations are registered and clearly identifiable can also mean that opening bank accounts and dealing with authorities in general is a speedier process than for trusts.

Saunders v Vautier

Unlike a trust, the beneficiaries cannot come together to collapse the foundation. This is comforting for the founder who is likely to want his legacy to endure for as long as possible.

WHY GUERNSEY?

The best jurisdiction for the client’s foundation will usually be dictated by the client’s own location and circumstances and the location of his/her trusted advisers.

That said, there are specific advantages for using Guernsey for foundations:-

  • The Channel Islands are a highly regulated and secure jurisdiction.
  • The Law has been carefully crafted after observing the lessons from other jurisdictions so it can be viewed as “best of breed”.
  • The Channel Islands are established fiduciary and financial centres with a large pool of experienced professionals.
  • The Law is detailed which will assist the courts in the event that a dispute arises.
  • Guernsey has a reputable Royal Court with sensible jurisprudence in the event that directions are required or in the event of a dispute.

SET UP AND RUNNING COSTS

It is anticipated that the costs of setting up a foundation are likely to be in the same range as for trusts (possibly slightly higher) and that the basic running costs will be in the same range as for companies.

CONCLUSION

The Law is viewed as an innovative and sensible piece of legislation and has been well received by commentators and advisers.

The extent to which Guernsey foundations will be taken up is difficult to predict. By way of comparison, as at the time of writing, 174 Jersey foundations have been introduced since the Jersey legislation came in in 2009. This was slower than expected as compared to, say, Panama which has seen an estimated 50,000 foundations since the introduction of the Private Interest Foundation Law in 1995.

That said, the introduction of the Jersey legislation came at a time of severe economic crisis and it will be interesting to see how the new Law fares.