Trusts decision: ‘far-reaching’ and ‘long-lasting’ impact on industry

A decision made by the Privy Council in the case of Halabi (Appellant) v Equity Trust (Jersey) Ltd (Respondent) in re the ZII Trusts 2022 UKPC 36 will “undoubtedly have a far-reaching and long-lasting impact on the Jersey trust industry, and likely on offshore trusts generally”, according to law firm Collas Crill who acted for the successful lead appellant.

The primary question on appeal related to the correct method of dealing with the assets of what is colloquially referred to as an 'insolvent trust'. Given that a trust is not, as a matter of Jersey law, a legal personality, it cannot incur debts in its own name and so cannot technically be 'insolvent'; but the term is widely used to refer to a trust where the trustee is unable to settle liabilities incurred as trustee out of the available assets of the trust.

Collas Crill's team was led by partners Damian James and Simon Hurry. Along with leading counsel Shân Warnock-Smith KC and Clare Stanley KC, Collas Crill represented Mr Simon Halabi, a creditor of the trustee of the ZII Trust, in proceedings initially instituted by a former trustee seeking to recover an alleged debt. The matter proceeded on an agreed assumption that the debt was indeed owing, and that there were no secured or preferred debts.

The Royal Court of Jersey ruled at first instance that the assets of an 'insolvent trust' should be distributed pari passu – distributed between all of the trustees so that each (and each creditor claiming from that trustee) receives partial satisfaction of their debt, irrespective of the order in which the trustees assumed trusteeship. However, on appeal, the Jersey Court of Appeal found the assets should be distributed on a first-in-time basis, so the claims of earlier-ranking trustees are preferred over those of later trustees.

On appeal to the Privy Council, the matter was heard alongside a Guernsey appeal on similar issues. Over three days, extensive argument was made by leading counsel. In its judgment of 13 October 2022, the Privy Council considered four principal issues:

·       Whether a trustee's right of indemnity confers a proprietary interest in the trust assets;

·       Whether that right of indemnity survives the transfer of the trust assets to a successor trustee;

·       Whether a former trustee's claim ranks in priority to a successor trustee's equivalent claim; and

·       Whether the costs incurred by a trustee in proving its claim are included in the sum capable of recovery by the trustee.

The first, second and fourth issues were unanimously decided by the Privy Council. The third question, however, gave rise to three separate judgments and was decided on the basis of a 4:3 split of the seven-member board, in favour of the appellant.