The English Supreme Court has delivered a ruling that provides helpful guidance on the enforceability of trusts in respect of assets located in foreign jurisdictions that do not recognise trusts. The ruling also highlights potential issues in holding foreign assets on trust, particularly when the trustee transfers assets.
When a security trustee holds assets on trust for a group of finance parties, the risk of unauthorised transfer of assets is limited. This is because a security trustee will be required to, and will usually want to, seek instructions from the beneficiaries before exercising any powers of disposal. However, the Akers case is particularly relevant to project financing transactions that involve an English law security trust created over assets located in other jurisdictions that may not recognise trusts.
In the Akers case, the trust property consisted of shares in certain Saudi Arabian corporations, held on trust under Cayman Islands law trust arrangements. It was accepted in the case that because the relevant corporations were incorporated in Saudi Arabia and the shares were registered in Saudi Arabia, the lex situs (the law of the jurisdiction in which the relevant property is located) was Saudi Arabian law. Saudi Arabian law does not recognise trusts or the division of legal ownership and beneficial interest.
As part of its ruling, the Supreme Court confirmed that, under English law, a trust may be created, and enforced in respect of assets located in jurisdictions that do not recognise trusts. However, the case highlighted potential issues in holding trust assets located in jurisdictions that do not recognise common law trusts, especially in the context of a transfer of trust assets by trustees. In the Akers decision, the Supreme Court followed prior English court decisions that held that a beneficiary’s trust rights always are subject to the effect of dispositions under the applicable lex situs. Under English law for example, a beneficiary’s interest in trust assets can be overridden by equitable principles, including the fundamental principle of protecting good faith third-party purchasers for value without notice of the trust arrangements, often referred to as “equity’s darling”. As the Akers case highlights, a beneficiary’s interest in trust assets is inherently limited and is always vulnerable to being overridden by the rights of protected third-party transferees in the relevant jurisdiction. Furthermore, the relevant jurisdiction may list different and more extensive protected transferees than under English law.
For further analysis from Latham & Watkins’ Litigation & Trial Practice Team, please see:
For the full judgment, please see: