A recent case before the Royal Court(1) concerned an application for directions by the qualified member of F Foundation's council. This was the first case in which the court has been asked to consider its supervisory powers under the Foundations (Jersey) Law 2009.
The judgment included an overview of Jersey foundations and the salient points of the law. The decision will also be of wider interest to practitioners and parties outside Jersey, as it appears to be the first of any common law jurisdiction where the courts have powers analogous to those contained in the law. However, foundations established in other jurisdictions should be considered on their own merits, as they may give rise to different rights and duties.
The founders of F Foundation were two companies registered in the British Virgin Islands, originally owned by the first respondents B and G. The council had three members: A Limited (the qualified member) and two lawyers (D and E) from a Cyprus law firm (I), which also acted for B.
The guardian was another BVI company, C Limited (the second respondent), which was beneficially owned by B and administered by the administrative arm of I (J Limited).
F Foundation's charter stipulated that its assets were to be administered and applied for the benefit of the beneficiaries. At the time of the hearing, B was the sole beneficiary.
F Foundation owned a Cyprus company (K Limited), which itself owned a number of BVI and Cypriot companies. Together, these companies owned substantial assets in Russia and Eastern Europe. The assets had previously belonged to another company (L Limited).
A Limited sought directions in relation to proceedings brought by N Limited (a Cyprus company owned by P, a Russian bank) in Jersey against B, the F Foundation, L Limited and K Limited.
In May 2010 N Limited had obtained a judgment from a Russian court against B for a sum of approximately $44 million. N Limited brought proceedings in Jersey to enforce the Russian judgment against F Foundation's assets.
N Limited alleged that F Foundation's whole corporate structure "was established as a façade to disguise [B's] beneficial ownership and control of the companies and underlying assets within the structure". N Limited also pleaded that pursuant to a Pauline action under Jersey law, a material purpose of the chain of transfers by which K Limited had come to hold the assets was to prejudice P and N Limited (as its assignee) such that the Royal Court should order K Limited and F Foundation to transfer those assets to N Limited in satisfaction of B's liability to it.
A Limited sought to secure F Foundation's compliance with court orders for disclosure of documentation and information relating to the underlying assets. Neither the council members nor M (a director of K Limited) were able to provide the information. This led to a finding in March 2012 that F Foundation was in contempt of court.
A Limited instructed lawyers at its own cost and gave notice to its fellow council members of its intention to apply to the court for a direction that F Foundation adopt a neutral stance in the Jersey proceedings going forward.
The Royal Court summarised F Foundation's position as follows:
- F Foundation held the underlying assets through a company in line with the circumstances through which they were donated to it; neither it, nor its council members, had detailed knowledge of the background to the donation, or therefore as to the merits of N Limited's claim.
- N Limited's claim did not appear to include any allegations of personal wrongdoing against F Foundation, its council members or the guardian.
- Despite the substantial value of the underlying assets, F Foundation had no liquid funds to finance an active defence in the Jersey proceedings.
- B was a co-defendant to the claim and was (better) able to raise a proper defence.
- In order for the relevant issues to be fully aired and argued at trial, it was unnecessary for F Foundation to participate in the proceedings, other than by acting as a neutral party and complying with court orders (in relation to discovery in particular) as necessary.
The court was therefore required to consider whether A Limited had properly invoked the court's jurisdiction to give directions in accordance with Articles 43 to 46 of the law.
The court has jurisdiction to give a direction if it is satisfied that such direction will assist the foundation to administer its assets or carry out its objectives, or that it is one that "it is otherwise desirable for the Court to give".
The court held that its jurisdiction had been properly invoked for the following reasons:
- Articles 43 to 46 of the law are intended to give the court supervisory jurisdiction. To a significant extent, this is unique, as there is no equivalent in company law and although analogies can be drawn with trust law principles, this was not deemed to be exact.
- The situation differed from the court's well-established Beddoe jurisdiction, whose function was to predetermine the question of recoverability of the costs of proceedings from the trust fund by way of an indemnity to the trustee, since there is no issue as to a foundation's entitlement to spend its own funds as it sees fit. The foundation was the beneficial owner of all its assets, so no question arose as to a right of indemnification from its own funds.
- Article 46 was more like the court's jurisdiction in relation to trusts to approve (or not) major decisions that the trustee wishes to take where the trustee surrenders discretion to the court.
- ThIs was likely to have been taken into account when the provisions were drafted, given the express provision within Article 47 for the appointment by the court of a person to represent any unborn persons or other persons unable to act on his or her own behalf.
- The legislature suggests strongly that applications to the court concerning important administrative and governance issues should be readily available.
- Council members owe no duties to beneficiaries, but do owe fiduciary duties and duties of care and skill to their foundation, in respect of which they may be sued by the foundation for breach.
- While the position of council members might be analogous to that of company directors, the court held that it may be more challenging in some senses than that of a director of a trading company. Because council members may not have the same level of knowledge of the background to donations to the foundation and the merits of any claim against the foundation (as was the case here).
The court concluded that the proposed change in F Foundation's stance to neutral was a major decision. It would be made late in the proceedings in respect of a claim which extended to the entirety of the substantial assets of the foundation. Accordingly, the court held that such a decision justified invoking the court's jurisdiction to give a direction and fell within the statutory framework. In summary, it was appropriate to give A Limited the assistance and protection of the court that it sought.
The court determined that this was best achieved by directing A Limited to use its reasonable endeavours as a council member to ensure that F Foundation adopt a neutral role in the Jersey proceedings, complying with any orders the trial court may make in the course of those proceedings. If the guardian and the other council members did not cooperate with A Limited, at least A Limited would be protected by the direction given to it.
The judgment provides helpful clarification of the general principles that apply to Jersey foundations and clear guidance on the approach that the court will take in exercising its supervisory powers.
In recognising that foundations draw on an inheritance from both company law and trust law, this judgment suggests that the nature of a foundation may be more analogous to a company than it is to a trust. However, the council members of a foundation may invoke the benefit of the wide-ranging jurisdiction of the court to give directions and to approve major decisions.
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