Guernsey Court of Appeal Extends Trustees’ Statutory Protection to Litigation Costs

Tuesday 11 October 2016

On 19 April 2016, the Guernsey Court of Appeal of Guernsey handed down its costs judgment in the long-running Investec Trust litigation.

In Investec Trust (Guernsey) Limited et al v Glenalla Properties Limited et al (15/2016) the court held that Article 32 of the Trusts (Jersey) Law 1984 (TJL) provided statutory protection to trustees against personal liability for litigation costs involved with a trust. It is likely, however, that the court’s decision will be the subject of a further appeal to the Privy Council.

Background to the Litigation

The plaintiffs were the former trustees of the Tchenguiz Discretionary Trust (Trust), a Jersey law trust administered out of Guernsey. Most of the trust assets were held by a number of holding companies incorporated in the British Virgin Islands (BVI companies) which effected intercompany loans for investment purposes, usually through the trustees.

The BVI companies sought repayment of a number of loans but, because the amounts exceeded the value of the Trust, they looked to the former trustees personally for repayment. The former trustees brought proceedings seeking indemnity from the Trust and a declaration that they were not personally liable. The new trustees and the BVI companies counterclaimed and sought declarations that the former trustees were not entitled to any indemnity, lien or exoneration from the trust assets.

The former trustees relied upon Section 42 of the Trusts (Guernsey) Law 2007 (TGL) and Article 32 of the TJL, both of which exonerate trustees from personal liability to third parties ‘in matters affecting the trust’ where the third parties know the trustees are acting in their capacity as trustees. 

The primary issue was whether the TGL or the TJL (if either) protected the former trustees from personal liability.  The BVI companies (seeking to maximise their recovery) and the new trustees (seeking to protect the trust) argued that the former trustees could not rely on these provisions. At first instance, the Royal Court agreed. As a result, the former trustees were indemnified from the Trust but, without the statutory protection, they were held personally liable for the shortfall.

The Royal Court’s decision was reversed by the Guernsey Court of Appeal in June 2014. The Court of Appeal held that the former trustees were entitled to the protection of Article 32 of the TJL. The BVI companies’ recovery was accordingly limited to the Trust assets and the new trustees’ personal claims against the former trustees were rejected.

The Guernsey Court of Appeal’s decision on these substantive issues is already the subject of a pending appeal to the Privy Council.

The Costs Arguments

Given the complexity of the case, it was agreed that the Guernsey Court of Appeal would deal with matters relating to costs following the determination of the substantive issues. 

The BVI companies, seeking to maximise their costs recovery, argued that Article 32 did not extend to costs liabilities, and that the trustees, both former and new, were personally liable to pay the costs of the proceedings. The former trustees, having been successful in the substantive proceedings, sought an indemnity from the Trust for their costs, despite the fact that they were no longer the trustees. The new trustees, who were unsuccessful in their counterclaim, sought their own costs indemnity, and they also argued that the former trustees should not be afforded any costs protection under the statute.

In its decision dated 19 April 2016, the Court of Appeal found that both the TJL and the TGL provided a statutory right of indemnity with respect to the trustees’ costs, since litigation costs were characterised as a ‘matter affecting the trust’. Although the court could contemplate certain circumstances in which a dispute might not relate to a ‘matter affecting the trust’ (if it related, for example, to a wholly peripheral transaction), the Court of Appeal could see no principled reason why the statutory protections against personal liability would not apply to litigation costs as well.

In a subsequent decision handed down on 19 July 2016, the Guernsey Court of Appeal refused the parties’ applications for leave to appeal to the Privy Council on the costs issues. However, the parties are at liberty to apply directly to the Privy Council for special leave to appeal.

The Guernsey Court of Appeal’s reasoning, if it is confirmed by the Privy Council to be correct in its approach to both Guernsey law and Jersey law, provides Guernsey and Jersey trustees, and their professional indemnity insurers, with a considerable degree of comfort as to the extent of their adverse costs liabilities.

Conversely, however, the current state of the law exposes third party litigants (whether suing trustees or being sued by trustees) to the risk that their costs might not be paid, even if they are successful in the litigation. Various commentators have noted that this is controversial, from a public policy perspective.

 

Original article part of Sedgwick’s Offshore Professional Risks Newsletter of October 2016 and included here with permission from Sedgwick LLP.

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