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On 3 December 2019 the Royal Court declared void certain actions of a trustee by which the assets of two Jersey law trusts had been transferred into a circular ownerless corporate structure, terminating the trusts (Re D and E Trusts [2019] JRC 246). The Royal Court considered its jurisdiction to declare voidable the exercise of a power on the grounds of both a mistake or a failure to take into account relevant considerations.
Certain beneficiaries of the trusts were French tax residents. During the latter part of 2011, the trustee was advised by John Dewhurst of Chown Dewhurst LLP to transfer the assets of the trusts to companies incorporated in the British Virgin Islands in response to France's introduction of tax legislation which was due to come into effect on 1 January 2012. Dewhurst considered that the French tax legislation could lead to a change in the way in which foreign trusts were fiscally treated in France. As a result, he sought to engage the services of French tax specialist Jean-Marc Tirard.
Dewhurst proposed to the trustee the form of corporate structure which was ultimately used – namely, two BVI companies which would own each other. The trustee implemented the restructuring, under which:
- the trusts' assets were transferred into newly incorporated holding companies, which at that stage were owned by the trustee in its capacity as trustee of each trust, respectively;
- two BVI companies were formed which owned each other (the BVI structure);
- the shares in the holding companies were transferred by the trustee to one of the companies in the BVI structure;
- the trustee entered into deeds by which the trust periods of the trusts were brought forward to expire on the same day, thus bringing the trusts to an end; and
- consultancy agreements were entered into with two of the beneficiaries of the trusts (which was the only way to extract value).
Thus, all of the trust assets were transferred out of the trusts into a circular ownerless corporate structure (the 2011 restructuring).
Following the implementation of the 2011 restructuring, the trustee did not consider that the French tax legislation applied to the assets held within the BVI structure, as it no longer considered the trusts to exist. Therefore, it filed no declarations with the French tax authorities.
The trustee first became aware of the potential implications of the 2011 restructuring in 2017. In early 2019 it obtained expert advice from a French tax lawyer who advised that:
- the trustee had reporting obligations to the French tax authorities in 2011 and still had these obligations now;
- the 2011 restructuring would be viewed from a French tax viewpoint as having created a de facto or constructive new trust;
- as the trustee had implemented the 2011 restructuring, it would be deemed to be the trustee of the new trust;
- the trustee should have filed an event disclosure with the French tax authorities before 31 December 2012 and disclosures each year from 2012;
- the settlors of the trusts may be taxed on the assets originally transferred into the trusts;
- the inheritance tax (60%) on the death of the settlors would be higher than if no new trust had been created; and
- the French tax authorities were likely to regard the 2011 restructuring as an artificial arrangement and might claim penalties of up to 80% for fraudulent manoeuvres.
The French tax advice was that if the transfer into the BVI structure was set aside, it would likely be viewed by the French tax authorities more favourably than the BVI structure.
Dewhurst accepted – with the benefit of hindsight and on reviewing the files for the purposes of the application – that Tirard had provided no specific advice on the BVI structure or formally advised on the 2011 restructuring; rather, he had provided only a general commentary in respect of certain aspects or relevant provisions of French law as they were understood at the time.
In 2019 the trustee also received BVI law advice relating to the BVI structure to the effect that:
- the structure raised an issue of public policy because it tied up property indefinitely without any clear legitimate public purpose or private benefit and it was unclear what duties the directors of the two BVI companies would have in these circumstances; and
- if valid, it would seem that no one may benefit from the assets owned by the companies while they existed and that after their dissolution, their assets would pass either to the Crown or in trust to the trustee in its capacity as the trustee of the trusts from which those assets were appointed.
The trustee originally sought relief under Articles 47G and 47H of the law. Article 47G permits the donee of a power to apply for a declaration that the exercise of that power relating to a trust is voidable on the grounds of mistake. The guardian ad litem for the minor beneficiaries (and representative of the unborn class) argued that the application was best dealt with under Article 47H, which similarly permits such a donee to seek relief where it has failed to take into account any relevant considerations or has taken into account irrelevant considerations.
The court agreed with the guardian ad litem and found that:
- the only relevant tax advice was French tax advice, and Dewhurst had confirmed that Tirard had not formally advised on the 2011 restructuring or the use of the BVI structure. Therefore, the trustee had proceeded without considering the French tax implications of the 2011 restructuring; and
- the trustee had proceeded without considering BVI law advice on the use of the BVI structure or Jersey law advice on the use of the relevant powers under the trust deeds to place the trust assets into such a structure. Without that advice, it was impossible for the interests of the beneficiaries to be considered.
The court noted that it had previously made clear that what may fall within the class of aggressive tax avoidance schemes may go to the exercise of its discretion to grant relief. However the 2011 restructuring was characterised, the court found that the most egregious aspect of it was the transferring away of substantial assets to a circular ownerless set of entities, out of which no distributions could be made to the beneficiaries, with the possibility of all of it being lost to the Crown.
A trustee's duty to account to beneficiaries is at the core of the trustee-beneficiary relationship (Armitage v Nurse [1998] CH 241 at 253). The court found that the beneficiaries in this case had gone from trusts where they had been able to monitor their interests and hold the trustee accountable to a corporate structure in which they appeared to have no such ability. The BVI advice made clear that there was a serious question over whether the directors of the BVI companies (provided by the trustee) had any duties to perform for the former beneficiaries of the trusts. Ordinarily, directors owe their fiduciary duties to the shareholders as a whole, but in this case the directors of the BVI companies owed their duties to a company which was owned by the company of which they were directors.
The court also noted that the beneficiaries under the trusts had the added protection of the supervisory jurisdiction of the court, but that the court has no supervisory jurisdiction over companies (and certainly not BVI-incorporated companies). The assets had been transferred to a BVI structure which was, on the face of it, unaccountable.
There was no evidence that any of the beneficiaries (other than one) had known about the 2011 restructuring and the court could not see how any properly informed beneficiary would consider a transfer to an unaccountable circular ownerless structure from which no distributions could be made, to be in their interests, whatever the tax advice.
Accordingly, because the trustee had failed to take relevant considerations into account (ie, French tax advice and BVI law advice) and it would not have exercised the relevant powers had it done so, the court declared the transfers and the deed shortening the trust periods void.
The court concluded that, notwithstanding Article 47H(4) (which allows the court to set aside the exercise of a power irrespective of whether there was a lack or care or fault on the part of the person exercising the power), it was difficult to escape the conclusion that there had been a lack of care on the part of the trustee.
This case highlights the need for trustees to obtain detailed legal and tax advice when considering a restructuring of assets held in trust and is a helpful reminder that a trustee's duty to account is at the heart of the trustee-beneficiary relationship.
