In a recent judgment of the Royal Court of Guernsey, the Court stressed the importance of using express wording in agreements when trustees are contracting in their capacity as trustee to ensure the trustee’s liability does not extend beyond that which is intended. In Investec Trust (Guernsey) Limited & Bayeux Trustees Limited v Glenalla Properties Limited and others [Civ 1462/2010] the Guernsey Royal Court was asked to review whether trustees were personally liable to repay loans obtained in their capacity as a trustee.
Investec Trust (Guernsey) Limited and Bayeux Trustees Limited were the former trustees (“Former Trustees”) of a Jersey law trust, The TDT (“Trust”). During their trusteeship, the Former Trustees entered into deeds of novation to assume the liability for monies owing to four BVI companies all of which were owned by the Trust. The loans made to the companies were viewed as inter-group arrangements designed to move funds within the group structure as opposed to corporate borrowing. The loans, which were unsecured, repayable on demand and interest free, had not been documented in formal written agreements.
The four BVI companies were put into liquidation and the liquidators of the companies demanded repayment from the Former Trustees of the monies owed to the companies.
The Former Trustees applied to the Guernsey Royal Court for determination as to whether they were liable to repay the loans they had taken out as trustees of the Trust and if so on what terms. In particular, the Former Trustees sought a declaration that, pursuant to Article 32(1)(a) of the Trusts (Jersey) Law, 1984 (“Jersey Trust Law”), they had no personal liability and that any liability only extended to the value of the Trust assets.
Article 32 of the Jersey Trust Law confirms that where a trustee enters into a transaction with a third party then, if the third party knows that the trustee is acting as trustee, any claim made by that third party in respect of the transaction shall extend only to the trust property. If the third party is not aware that the trustee is acting as trustee then any claim made by the third party may be made against the trustee personally. However, even if the trustee is personally liable the trustee may have a right of recourse to the trust property by way of an indemnity, either under the governing law and/or trust Instrument of the trust, unless the trustee has committed a breach of trust.
Article 32 offers similar protection to a trustee to that offered by section 42 of The Trusts (Guernsey) Law, 2007.
Crucially, in this case the Former Trustees were Guernsey corporate entities administering a Jersey law trust from Guernsey and, as such, all material decisions concerning the Trust were being made in Guernsey.
The loans had not been documented by way of written agreement and there was, therefore, no express confirmation of the proper law of the loans. It was determined by the Court that the law of the loans was Guernsey law and so Guernsey law was applied to determine the liability of the Former Trustees.
The Former Trustees sought to argue that, if they were held liable to repay the loans, then Article 32 of the Jersey Trust Law should be applied in order to limit their liability to the value of the Trust assets.
The Guernsey Court disagreed. The Court found that whilst questions concerning the enforceability of the trusts of foreign trusts brought before the Guernsey Courts should be governed by the law of the trust (and not Guernsey law), in this case the question being determined was unrelatedto the enforceability of the Trust, but instead concerned the enforceability of the loan arrangements (to which Guernsey law applied). As such, the Court found it had no power to apply the provisions of Jersey Trust Law to this question and so the Former Trustees could not rely on the protection under Article 32 of that law.
Importantly, the Court highlighted that this protection would not have been lost if the loans were governed by Jersey law.
The Court applied Guernsey law to establish the extent of the Former Trustees’ liability. However, as section 42 of the Guernsey trust law can only assist trustees of a Guernsey trust the Court found there was no express limitation of liability under Guernsey law that the Former Trustees could rely on in this instance. Essentially, the former Trustees fell between two stools.
The Court instead had to assess the terms of the written deeds of novation to determine the extent of the Former Trustees’ liability. These deeds included an express statement that the Former Trustees were entering into the deeds in their capacity as trustees of the Trust and that all parties were aware that the Former Trustees were acting in this capacity. However, the Court held that whether a trustee’s liability is limited to the trust assets is determined by construing the contract in light of all the circumstances of the case and noted that express wording is usually required to limit a trustee’s liability to the value of the trust assets. Simply stating the capacity in which the trustee was contracting was not sufficient. In this case, the Court, therefore, held there was no basis on which it could hold that the Former Trustees were not personally liable.
This case highlights the real risk of trustees inadvertently risking personal liability when entering into legal obligations.
Many trust companies in both Guernsey and Jersey administer trusts with a proper law different to that of the law of the jurisdiction where the administration takes place. When transacting, trustees must ensure that such transactions are documented appropriately by way of written agreement and that the agreements specify the law pursuant to which the transaction will be governed.
Trustees must also apply their minds as to what protection they may be entitled to under the relevant law(s) in order to establish whether further steps need to be taken to expressly limit their liability. If there is no statutory protection that a trustee can rely on, more may need to be included in the agreement than simply stating that a trustee enters into the agreement in its capacity as trustee.