Laying foundations
As Jersey's fledgling foundations system beds down, Alan Binnington asks what assets are in store for the lazy trustee and the power-hungry settlor
Jersey's introduction of foundations legislation in 2009 provoked significant interest on the part of professional trustees and prospective trust settlors alike. Those professionals who felt that being a trustee would be fine if it wasn't for the beneficiaries may have thought that a vehicle in which fiduciary duties to beneficiaries were specifically excluded could be the answer to their prayers. Prospective settlors who wished to exercise a degree of control despite not being a beneficiary saw the foundation as an opportunity. Were their respective hopes well founded?
At first sight, excluding beneficiary information rights and fiduciary duties might seem to make the job of a council member of a foundation somewhat less onerous than that of a trustee. However, when Jersey introduced its legislation it was keen to ensure that people using the structures could still expect a high degree of care to be exercised in the administration of their assets, irrespective of the type of structure used. Accordingly, the 2009 law not only requires council members to exercise the 'care, diligence and skill of a reasonably prudent person' but also prevents them from relieving, releasing or excusing themselves from liability for fraud, wilful misconduct or gross negligence, whether by means of provisions in the foundation's charter or regulations or by contract. This mirrors a provision in Jersey's trust law. Jersey case law has established that a trustee, and by extension a council member, will have some difficulty in persuading a court that he was guilty of 'mere' negligence rather than gross negligence.
Holding members to account
However, imposing a high duty of care is of little use if there is no one to enforce it. In the case of a trust, beneficiaries not only have rights to information to enable them to police the activities of the trustee but they are also owed fiduciary duties enabling them to bring a claim. The solution adopted for the Jersey foundation was to require that all foundations have a guardian, whose duty is to 'take such steps as are reasonable in all the circumstances to ensure that the council of the foundation carries out its functions'. Accordingly, it is vitally important when appointing a guardian to ensure that they have the necessary degree of competence to enable them to monitor the activities of the council and to take action if the council or its members are found to fall short of the duty of care required of them.
As well as tasking guardians with holding council members to account, the 2009 law enables applications to be made to the Jersey court in respect of foundations by a wide class of people, referred to in the law as a 'person with standing'. This class includes the founder, a beneficiary, council members, and the guardian, as well as the island's Attorney General. So, even if the guardian failed to take action against council members acting in breach of their duties, it would be open to a beneficiary to make an application to the court either for the guardian to be replaced or possibly for an action to be brought in the name of the foundation against its council members in a manner analogous to a derivative action under company law.
A 'qualified person'
A further safeguard is that the 2009 law requires one of the council members to be a 'qualified person', who is a person regulated in Jersey to carry on trust company business. This should ensure that there will always be at least one member of the council resident in Jersey and subject to regulatory supervision by the Jersey Financial Services Commission. Accordingly, any trustee who had high hopes of leading an easy life by becoming a council member of a foundation will be bitterly disappointed.
Greater control
What of the settlor who sees a foundation as offering greater opportunities for control? It is true that the 2009 law offers the creator of a foundation the opportunity to reserve, in the charter and regulations, such rights as he wishes over the foundation. If the charter and regulations so provide, he may also assign those rights. While this may provide the means to reserve a significant degree of control it should be remembered that much the same can now be done by a settlor reserving powers to themselves in a Jersey trust.
However, in both cases care should be exercised in deciding just how much control to reserve. While the reservation of powers may not invalidate the foundation or trust there is a risk that the more control that is exercised by a founder or settlor the more likely it is that a revenue authority will seek to argue that they never really divested themselves of the assets and should be taxed accordingly.
The Foundations (Jersey) Law 2009 is of course an entirely new piece of legislation and so there is an absence of Jersey case law relating to foundations. To the extent that they resemble companies, it is likely that the courts will adapt and apply company law principles. Equally, to the extent that they resemble trusts '“ for example in respect of their ability to apply to the court for directions '“ the Jersey court has a wealth of precedent to draw upon. However, it is likely that applications to the court for directions in respect of foundations will be required rather less often than in respect of trusts, given the absence of fiduciary duties to beneficiaries.
The lazy trustee, if he still exists in this world of increased regulation and liability, would be well-advised to avoid the Jersey foundation and preferably retire from business. The power-hungry settlor can do much the same with a foundation as he can do with a trust, but if he exercises too much control he does so at his peril.