25 October 2022

The seven member board of the Privy Council has handed down their judgment in the joined cases of Equity Trust (Jersey) Ltd v Halabi and Investec Trust (Guernsey) Ltd v Fort Trustees [2022] UKPC 36. The appeals concerned successive trustee’s rights of indemnity for liabilities and expenditure, where claims made under trustees’ indemnities exceeded the value of the trust fund – ie where the trusts in question were insolvent.

The law of Jersey applied in both cases, however given the Privy Council’s view that the applicable Jersey law was in all relevant respects the same as English law, the decision is set to have a substantial impact within the English trust sphere.

The cases involved Guernsey and Jersey trust structures under which the original trustees Equity Trust (Jersey) Ltd (“ETJL”) and Investec Trust (Guernsey) Ltd (“ITGL”) respectively, were replaced with successor trustees.

In the case of ETJL v Halabi, ETJL, following its removal as trustee, was sued for £53 million by liquidators of a company in the trust structure, for being vicariously liable for the alleged breach of fiduciary duties by two of its directors in relation to the Trust. The proceedings were settled however ETJL sought to recover £18.9 million relating to the settlement sum and associated costs, under its indemnity (contained in a deed of removal previously entered into with its successor trustee). The trust assets were insufficient to meet the indemnity being claimed by ETJL.

In the case of ITGL v Fort Trustees, ITGL as original trustee had, along with a co-trustee, assumed liabilities under a loan agreement with an Icelandic bank with further liabilities to various BVI companies being novated to the co-trustees. Liabilities totalled over £200 million and the liquidators of the BVI companies demanded repayment of the sums due. The co-trustees issued proceedings in Guernsey seeking determination by the Court as to whether they had incurred liabilities to the BVI companies, and seeking an indemnity against the assets of the Trust. Both co-trustees were subsequently replaced, with the new trustee being added to the proceedings and the judgment debts being assigned to the new trustee. The appeal to the Privy Council focused on ITGL’s right to indemnity for the costs incurred in the earlier proceedings and their unpaid remuneration.

The Privy Council was asked to determine 4 questions:

1) Does the right of indemnity confer on the trustee a proprietary interest in the trust asset rather than being merely possessory?

2) If so, does the proprietary interest of a trustee survive the transfer of the trust assets to a successor trustee?

3) Does a former trustee’s proprietary interest in the trust assets take priority over the equivalent interest of a successor trustee?

4) Does a trustee’s indemnity/ lien extend to the costs of proving its claim against the trust if the trust is “insolvent”, in the sense that trustees’ claims to indemnity exceed the value of the trust fund?

The Privy Council ruled unanimously in respect of 3 of the questions put to it, ruling that:

  • The right of indemnity confers on the trustees a proprietary interest in trust assets. This was not dependent on possession of the trust assets (question 1);
  • The proprietary interest in the trust assets survives the transfer of the trust assets to successor trustees (question 2); and
  • A trustee’s indemnity/lien extends to the costs of proving its claim against the trust where the trust is “insolvent”. This also extends to costs incurred after a trustee’s retirement (question 4).

The Privy Council’s rulings on the above three questions were largely uncontroversial.

The most important issue to be decided by the Privy Council, was the third question: Does a former trustee’s proprietary interest take priority over successor trustees’ interests? This was a question for which limited authorities existed.

The Privy Council were unable to come to a unanimous decision, however by slim majority (4 in favour, 3 against) held that a trustee’s claim should rank equally (“pari passu”) with successor trustees. The reasoning included that prioritising claims made by previous trustees would create an unjust result whereby the timing of a trustee’s appointment would impact on their ability to recover. There was also concern, given trust creditors’ rights to payment are subrogated to trustees’ liens, that it would be inequitable for the priority of creditors to depend upon the date of appointment of the trustee they have contracted with. This was particularly so where dates of trustees’ appointments are not usually known to third party creditors and trust creditors would expect that all unsecured creditors would share equally in insufficient trust assets.

The dissenting minority considered that interests of successive trustees were competing and accordingly trustees’ claims should be prioritised according to the chronological order in which they were appointed. That is perhaps a more traditional and less commercial view.

Practical Implications of the Decision:

Given the importance of the Privy Council’s decision and previous lack of authority in this area, we are likely to see the decision’s impact in Trustees’ future conduct:

  • It is likely that outgoing trustees will give increasing consideration to the ability of a trust to meet their existing, future and contingent liabilities before surrendering trust property. Outgoing trustees may be more inclined to seek the retention of trust assets or express security to meet estimated future liabilities.
  • If there are significant liabilities that could be met in the near future, outgoing trustees may try to delay their removal until such liabilities have been satisfied, in order to avoid claims for indemnity ranking equally with any claims arising from an incoming trustee.
  • There is likely to be increasing interest from professional trustees in professional indemnity insurance, in order to reduce the risk of reduced recovery under an indemnity if a trust were to become insolvent. This may also lead to an increase in professional indemnity insurance premium given the lesser value of a former trustee’s indemnity in the case of an insolvent trust.
  • Trustees and legal practitioners should pay particular attention to this developing area of law. Lord Briggs noted the possibility that it was foreseeable that exceptional circumstances may arise where the Court may need to exercise exceptional discretion to depart from the rule of “pari passu” [269]. Future case law is likely to develop on the exact scope of these “exceptional circumstances”, meaning the rights of successive trustees may not rank equally in all circumstances.

Written by Justin Briggs and Genna Hancock.

Key contact

Justin Briggs

Justin Briggs Partner

  • Trust Disputes
  • Tax Negligence
  • Pension Disputes

Subscribe to news and insight

Burges Salmon careers

We work hard to make sure Burges Salmon is a great place to work.
Find out more