Facts
Decision
Comment


The deputy bailiff recently made certain remarks regarding the situation of a qualified member of a foundation, which could amount to a criticism of the foundation regime. While the deputy bailiff's comments are arguably understandable, it could be considered unfair to malign the Foundations (Jersey) Law 2009. A service provider could have found itself in the same position if it had been in a minority on the board of a private trust company or a private investment company owned outside a trust.

Facts

In May 2010 the plaintiff obtained two judgments against the first defendant. A total of $43 million remained outstanding under such judgments. The plaintiff brought proceedings in Jersey seeking to enforce the foreign judgments against the first defendant in the sums outstanding and seeking orders enabling the plaintiff to pierce the corporate veil of the second defendant (the foundation), so as to be able to get to the foundation's assets. These assets included the shares in the fourth defendant, itself a holding company of a structure holding valuable real estate assets. The order of justice contained wide disclosure orders against the defendants, including the foundation, requiring the defendants to provide details of their assets. The hearing, which was the subject of this judgment, saw the defendants justify to the court why they had failed to comply with the disclosure orders within the stated time period. In the context of delivering judgment against the foundation, the Royal Court made a number of remarks on the Foundations Law.

The case concerned three council members and a guardian. One of the council members was the qualified member. In the affidavit filed on behalf of the foundation by an officer of the qualified member, it was confirmed that the foundation held shares in the fourth defendant, the ultimate holding company of the valuable real estate. The officer of the qualified member stated that she fully expected an affidavit would be lodged on behalf of the fourth defendant in respect of its assets.

In giving evidence, the officer of the qualified member stated that she had never met the other council members and that council meetings took place by written resolution. It was not known whether the other council members were directors of the underlying companies. The foundation apparently had little information regarding the companies in the structure. As far as the qualified member was concerned, it was always intended that it would play no part in the administration of the underlying corporate structure.

The court noted that under the specific regulations of the foundation, key decisions - such as acceptance by the foundation of endowments, the application of any of the foundation's assets and any payments or other distributions to the beneficiaries - could not be taken without consent from the qualified member. The court questioned how those decisions could practicably be taken or any control exerted when the qualified member had such limited information.

Decision

The court found all the defendants, including the foundation, to be in contempt.(1) The defendants were given a fresh date by which to file comprehensive affidavits. In finding against the foundation, the court noted that under the law and the regulations of the foundation, it was possible for a foundation to be formed where the qualified member was in a minority and where in practice the qualified member did not have any information regarding the foundation's assets, liabilities or business. In such a case the qualified member is reliant on the cooperation of its fellow council members who were resident elsewhere than Jersey.

The court concluded that this situation was unsatisfactory and it invited the authorities to give consideration to the structure of the law and to the requirements put upon qualified members. Without sufficient information, the court stated that it was difficult to prevent underlying structures from being used for money laundering or other criminal purposes.

Comment

The court was concerned that the service provider in this case did not have sufficient information on the assets underlying the foundation. It was also troubled that under the law, the qualified member did not appear to have any obligation to obtain such information.

Under Article 36 of the law, a foundation itself must keep at its business address (which will be the qualified member's address in Jersey) both records "sufficient to show and explain its transactions" and records "that disclose with reasonable accuracy, its financial position". Coupled with a service provider's obligations under the anti-money laundering regime, provisions under the law are arguably sufficient to enable service providers to require the provision of information on entities underlying a foundation.

Second, had the service provider been in a minority on the board of a private trust company, it would have been in the same position of potentially being unable to obtain information on underlying entities. Thus, criticism of the law in this case might be said to be unfair.

In future, service providers should ensure that clients offer sufficient disclosure on assets underlying a foundation and agree to an up-front agreement with on a mechanism for the provision of updated documentation.

For further information on this topic please contact Edward Mackereth at Ogier by telephone (+44 1534 504 000), fax (+44 1534 504 444) or email (edward.mackereth@ogier.com).

Endnotes

(1) Dalemont Limited v Senatorov, Unreported Judgments, March 21 2012, Royal Court.

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