RESOLUTION

PRACTICE UPDATE

OFFSHOREQ1 2014

CONTENTS2 Banking Secrecy in the Cayman Islands4 Data Protection - A Warning to Bloggers! 6 Shareholder Disputes in the British Virgin Islands 8 International Tax Information Exchange in BermudaClarified10 How Can a Trustee Limit its Liability

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PRACTICE UPDATE

TheConfidentialRelationships(Preservation)Lawwasintroduced in the Cayman Islands in 1976. There hadbeenaprevious1966Lawseekingtoestablishbanking secrecy, based on a piece of Bahamian legislation introduced the year before. In proposing the new legislation in 1976, the major concerns were firstly,thethenrecent FieldcaseintheUS(inwhichaCaymanbankerhadbeenservedwithasubpoenaatMiami Airport and was held in contempt for refusing to answer questions which would cause him to commit anoffenceintheCaymanIslandsunderthe1966Law)andsecondly,theactivitiesofforeigninvestigatorsontheIslands(seetheUSSupremeCourtdecisionofPayner 447US727foradiscussionoftheftsbyIRSagents in pursuit of information offshore around this time,aspartof“OperationTradeWinds”).

ThecurrentlawiscontainedintheConfidentialRelationships(Preservation)Law(2009Revision).TheLawcreatesoffencesof(1)divulgingconfidentialinformationor(2)attempting,offeringorthreateningtodivulgeconfidentialinformationor(3)wilfullyobtainingorattemptingtoobtainconfidentialinformation(Section5).Section3(2)setsoutthe8exceptions to the offence.

InApril2013,theFinancialServicesDivisionoftheGrand Court heard an in camera application which puttheConfidentialRelationships(Preservation)Lawback in the spotlight. A Magistrates’ Court in England had granted a Production Order against a London Bank pursuant to the Proceeds of Crime Act 2002. The application had been made in support of a money launderinginvestigationbytheMetropolitanPolice.

Section 4 of the Law expressly refers to the holder of the information’s obligation to apply for directions wheretheyintend,orarerequired,to“giveinevidencein, or in connection with, any proceeding being tried, inquired into or determined by any court, tribunal, or otherauthority(whetherwithinorwithouttheIslands)anyconfidentialinformationwithinthemeaningofthisLaw …”. The Judge found that in this case there was no“proceeding”inrespectofwhichtheconfidentialinformationconcernedwasrequiredtobegiveninevidence.

Production OrderThe Judge rejected a submission that the application for a Production Order was a “preliminary or interlocutory matter” arising out of “any court proceeding,civilorcriminal”(thedefinitionof“proceeding” set out in Section4(7)),findinginsteadthat:

“It was clearly an application by the police for information held by the Bank to be produced to themforthepurposesoftheirinvestigations.Thereisnoevidencethatthatapplicationhasorinevitablywill lead to any other proceeding. The application havingbeengrantedthereisnolongeranycontinuing “proceeding” before the English court”.

There was an attempt to persuade the Court that thepoliceinvestigationsthemselvesconstitutedaproceeding being inquired into by an “other authority”.

It was submitted that, by analogy, the Metropolitan Police may be regarded as performing a similar

BANKINGSECRECYINTHECAYMANISLANDSSebastian Said

Theoffshorejurisdictionsarecommonlythoughttobehighlysecretive,withbankingsecrecy being an important part of what those jurisdictions offer to businesses and individualswhousethem.Forexample,in2000,theUSTreasuryDepartmentissuedanadvisorynoticestatingthatextravigilancewasrequiredindoingbusinessintheCayman Islands: “The Cayman Islands remains committed to strict bank secrecy, outside of a limited suspicious transaction reporting and international cooperation regime”.

PRACTICE UPDATE

function in determining whether or not a person should be charged on the basis of material acquired by them. The Judge also rejected this submission as a “step too far” which would “in effect amount to sanction of the acquisition by the police of a wide range of generalised materialthatisclearlyconfidential”;ineffectsanctionofa“fishingexpedition”.

Fundamental ObjectionsThe Judge ignored two more fundamental objections.Firstly that, in fact, the police in the UK do notdetermine whether a person is charged with the more seriouscriminaloffences(suchasmoneylaundering);this has been a role performed by the Crown ProsecutionServicesince2003and,secondly,thisveryargumenthadalreadybeenrejectedintheearliercase of In the Matter of Criminal Investigations by the Frankfurt Police[1999]CILR1,which(infairnesstotheJudge)doesnotappeartohavebeencitedtotheCourt.

AnargumentthattheBankcouldrelyonSection3(2)(b)(v)(i.e.thattheLawhasnoapplicationtoabankin “any proceedings, cause or matter when and tothe extent to which it is reasonably necessary for theprotection of the bank’s interest, either as againstits customers or as against third parties in respect oftransactionsofthebankfor,orwith,itscustomer”)was also rejected on the basis that the bank was not aparty to any proceedings in the UK in the sense requiredbythesection(followingRe BCCI Overseas Limited[1994–95]CILR56).Beingarespondenttothe application for a Production Order was not sufficienttoengagetheSection3(2)(b)(v)exception.

The judgment in the case correctly applies the Law in relation to the arguments made, although it seems toleavetheUKpolicewithnoabilitytoinvestigatepotential money laundering. That does seem to be atoddswiththevariousreassurancesmadewhenthe Law was introduced that the Law is decidedly not intendedtoprotectcriminalactivity.

So what is the solution for the UK police in investigatingpotentialmoneylaunderingintheCaymanIslands?Oneanswerwouldhavebeentoseek mutual legal assistance from the Cayman Islands authorities. Consistent with the desire to retain local controloverinvestigationsbuttopermitthesamewhere appropriate, the Law sets out the following exceptionatSection3(2):

“This Law has no application to the seeking, divulgingorobtainingofconfidentialinformation

…(b)byorto;…(iii)aconstableoftherankofInspectororabove,specificallyauthorisedbytheGovernorinthatbehalf,investigatinganoffencecommittedorallegedtohavebeencommittedoutside the Islands which offence, if committed in the Islands, would be an offence against its laws”.

ThereareadditionalavenuesformutuallegalassistanceprovidedbySections3–5oftheCriminalJustice(InternationalCooperation)Law(2010Revision)intheCaymanIslandsandSection7oftheCrime(InternationalCooperation)Act2003inEngland.Importantly,theCaymanLawprovidesatSection15that:

“Apersonwhodivulgesanyconfidentialinformationorgivesanytestimonyinconformitywitharequestshall not be considered to commit an offence under theConfidentialRelationshipsPreservationLaw(2009Revision)byreasononlyofsuchdisclosureorthegivingofsuchtestimony”.

Policy QuestionWhether the Law should be retained at all is a more difficultpolicyquestionandrequiressomeconsiderableanalysis of the future role of the offshore jurisdictions in a more connected world economy. There are certainlysomesigns,forexampleinthedevelopmentsrelating to tax information exchange agreements that the time may be approaching when banking secrecy legislation is seen as a relic from a bygone age and theLawhereisrepealed.However,forthemomentatleast,clientsandtheiradviserswillcontinuetograpple with problems such as that raised by the April 2013 application to the Grand Court, sometimes with considerabledifficulty.

“… the time may be approaching when banking secrecy legislation is seen as a relic from a bygone age …”

CONTACT Cayman Islands Sebastian SaidSenior AssociateLitigation&Insolvency+1 345 814 2766ssaid@applebyglobal.com

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It further had to determine important subsidiary issues such as the on-going tension between the European Conventionrighttofreespeechontheonehand,andtheConventionrighttoprivacyandtherightsofindividualsundertheDPLontheother.ThecasealsoledtotheCourtprovidingfurtherguidanceandobservationsonthegoverningprinciplesinrelationtoinprivatehearingsreportingrestrictions,andcontempt of court issues.

High ProfileThecasewasrelativelyhighprofileintheIslandasitconcernedtheoperationbytheRespondentwhowasaformermemberoftheStatesofJersey(theJerseyParliament)andwhohadservedasamemberoftheJerseyGovernment.TheRespondenthasoperatedacertainblogsite(the Blog)inwhichherepeatedlyidentifiedanumberofindividualsandalleged they had amongst other things engaged in extremecriminalbehaviour.Certainoftheindividuals(theRepresentors)withtheassistanceoftheDataProtectionCommissioner,servedStopProcessingNoticesontheRespondentunderArticle10oftheDPLallegingthattheRespondent’sactionsinconnectionwith the Blog were causing them substantial damage and distress, and requiring him to cease processing their personal data.

TheRespondentfailedtocomplywiththeNoticesandtheRepresentorsbroughttheproceedingsseekingordersthattheRespondentshouldceaseprocessingthe data and that the material already on the Blog should be deleted.

The Court ordered at an early stage that, not-withstanding the general importance of ensuring that proceedings in court take place in public, in the unusual circumstances of the case all the hearings shouldbeheldinprivate.TheCourtwassatisfiedthat

ifanypublicityweretobegiventothefactsofthecase, including the nature of the relief sought and the evidencegiven,thentheobjectoftheapplicationforinjunctivereliefwouldbedefeated.

TheCourtgrantedtheinjunctivereliefsoughtandmadesomeimportantfindingsofgeneralapplicationas follows:

■ The DPL extended to posts on blog sites. The CourtheldthatJerseylawshouldgiveawidemeaning to the term “data” to include information capturedand/orheldinaudiovisualandtextualfileformatsoncomputers.Sincepostsonblogsites were disseminated to others by computers and/or the internet it was held they fell within the scope of the DPL.

■ In determining public interest the Court had regard to establish English authority namely Campbell v Mirror Group Newspapers [2003] QB 633 before concluding that the publication of the Representors’datacouldnotbesaidtobeinthepublic interest.

■ TheRespondent’srighttofreedomofexpressionunderArticle10oftheEuropeanConventionofHumanRights(ECHR)hadtobebalancedagainsttherighttorespecttheprivateandfamilylifeunderArticle8oftheECHR.Onthefacts the Court was in no doubt that the right of theRespondenttofreedomofexpressionwasoutweighedbytheRepresentors’rightsunderArticle 8.

■ Although claims under the Data Protection legislation were often accompanied by claims for defamation or harassment, the Court concluded that a claim under the DPL could be a stand-alone

DATAPROTECTION–AWARNINGTOBLOGGERS!Fraser Robertson

IntherecentcaseofABandOthersvSyvret[2013]JLC170,theRoyalCourthadtoconsiderforthefirsttimeinJersey(inacivilcontext)theimpactoftheregulatoryregimeinJerseyundertheDataProtection(Jersey)Law2005(theDPL)upon online blog sites.

application and it was not necessary to plead any form of ancillary claim.

Against the background of an indication by the JerseyEveningPostthatitmightwishtointervenetoaddress the Court on reporting restrictions the Court gavesomeusefulguidanceastotheappropriatecourse to be adopted in cases where a party sought to limit the reporting of a hearing or judgment. The Court indicated that as a matter of course, when it is practical to do so, the media should be informed in advanceofanyhearingwhereonepartyoranotherintends to apply to the Court for an order that the proceedingsshouldbeheldinprivateandthatoftenitshould be the court that should so alert the media.

Redacted FormAs to publication of judgment, the Court endorsed the growing practice of the Court publishing in redacted formitsjudgments,evenincircumstanceswherethehearingmayhavebeenheldinprivate.TheCourtacceptedtheobservationsoftheDataProtectionCommissioner that there was a likelihood of similar cases relating to publications on blog sites arising in the future, and that guidance from the Court as to the general principles in this area would be of assistance. It therefore authorised the publication of redacted judgments.

Notwithstanding the clear terms of the injunction to ceaseprocessingandtoremovetheoffendingmaterialfromtheBlog,theRespondentfailedtodosoandindeedhadmadeclearincommentswheninterviewedbycertainmediathathehadnointentionofremovingthematerialandhadevenindicatedanintentiontopublishfurtherpostingsonhisBlogincontraventionofthe Court orders.

The Court accepted that the test in determining whether an alleged contemnor had been guilty ofcontemptwasanobjectiveonewhilealthough

intentionwasrelevanttothequestionofpenalty. The Court found that the respondent had deliberately and persistently breached the Court orders, and confirmedthatitwasappropriateforacustodialsentencetobeimposedfor“ablatantandaggravatedcontempt” particularly in cases where the contemnor had been warned as to the potential consequences of defying an order. On that basis the Court concluded thatacustodialsentencewasinevitableandsentencedtheRespondenttothreemonthsimprisonment.

Freedom of ExpressionThe right to freedom of expression is clearly an important one and can take many forms, particularly inlightoffastmovingdevelopmentsinthevariousforms of social media outlets. The right clearly howeverisnotandcannotbeanunfetteredoneandtheRoyalCourtinaseriesofjudgmentshasbrought some clarity and guidance to the application of the Law in this area and in particular in relation to publications on blog sites. In so doing it has also givenfurtherguidanceastoquestionsofreportingrestrictions, and redaction of judgments, and laid downaclearmarkerastothegravitywithwhichtheRoyalCourtviewsblatantbreachesofcourtorders.The impact of these judgments, and indeed the McAlpine affair in the UK in relation to postings on Twitter, upon future conduct in relation to the use of social media will be of considerable interest.

Fraser Robertson and Davida Blackmore of Appleby’s Jersey office acted for the Data Protection Commissioner and appeared on behalf of the Representors in AB and Others v Syvret.

“‘Data’ … includes information captured and/or held in audio visual and textual file formats on computers.”

CONTACT

JerseyFraserRobertsonPartnerGroup Head, JerseyLitigation&Insolvency+44(0)1534818032frobertson@applebyglobal.com

PRACTICE UPDATE PRACTICE UPDATE

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The latest statistics released by the British Virgin IslandsFinancialServicesCommissionshowthattherearesome480,072activecompaniesontheregister,andmanymorethatareinactive.Itistherefore natural that where differences arise betweenjointventureparties,itistotheBVI,andits successful Commercial Court, that they head to resolvetheirdisputes.

Such litigation may take a number of different forms. As in Liao v Upbeat Global Limited BVIHCM80/2010 apartymaychallengethevalidityofresolutions.In that case, the Claimant established at trial that noticeofashareholdersmeetinghadnotbeengivenandthatDHLpackageswhichhadbeensent(ontheDefendant’scase,containingnoticeofthatmeeting)were in fact an elaborate fraud, containing nothing other than marketing literature. It may, as in Royal Westminster v Nilon BVICVAP 2011/0001, take the form of a dispute in relation to the ownership of shares, usually in the form of an action for declaratory relief or an action under Section 43 of the BVI BusinessCompaniesAct2004forrectificationoftheregister,oritmaytaketheformofaderivativeactionor a claim for unfair prejudice.

Derivativeactionsemerged,firstatcommonlawandthen by statute, as one of the ways of ameliorating the harshness of the rule in Foss v Harbottle that

where a company suffers loss, an action for damages liesonlythroughthecompany.Thisruleisobviouslydefensible, in any case except where it is those in controlofthecompanythathavecommittedthewrong. In such circumstances, a loss suffered by the minorityderivativelythroughthecompanywouldgouncompensated;theyareunlikelytoresolvetobringproceedingsagainstthemselves.

Regulated by StatuteThe position in the British Virgin Islands is regulated by statute. Section 184C of the BVI Business CompaniesAct2004providesthataderivativeclaimmay be brought only with the permission of the Court, andthatindecidingwhethertogivepermissiontheCourtmusttakeintoaccount(a)whetherthememberisactingingoodfaith,(b)whetherthederivativeactionisintheinterestsofthecompany,(c)whethertheproceedingsarelikelytosucceed,(d)thecostsof the proceedings in relation to the relief likely to be obtainedand(e)whetheranalternativeremedytothederivativeclaimisavailable.

Analternativeisthebringingofanactionforunfairprejudice. This does not depend upon the Court’s permissiontobringit.Section184Iprovidesthat:

“A member of a Company who considers that the affairsofthecompanyhavebeen,orarelikelytobe, conducted in a manner that is, or any act or actsofthecompanyhavebeen,orare,likelytobeoppressive,unfairlydiscriminatoryorunfairlyprejudicial to him in that capacity, may apply to the Court for an order under this Section”.

Section184I(2)providesthattheCourtmaymakeanyorderitthinksfit,includinganyofthereliefsetoutinsub-sections(a)to(h).

Thelastcoupleofyearshaveseenanunusualnumberofsignificantjudgmentsinrelationtotheseprovisions.InGray v Ledra BVIHCM2011/79 it was established-tonobody’ssurprise-thataderivativeaction brought without permission was liable to be

SHAREHOLDERDISPUTESINTHEBRITISHVIRGINISLANDS

Andrew Willins

struck out. It also surprised no-one to learn that the wordsinSection184I(2)that“theCourtmaymakeanyorderitthinksfit,including…” mean exactly what they say, and that the Court is not limited to granting thereliefsetoutatsub-sections(a)to(h)(seeChemtrade v Fuchs Oil Middle East Limited BVICVAP 2013/0004).Inthatcase,thejudgeheldthatthepunishmenthadtofitthecrimeandherefusedtogrant relief winding up the company, or directing the acquisition of its shares. Instead, he made an order regulatingthefutureconductofboardmeetings(thesocalled,BusinessAdministrationOrder)onthebasisthat:

“The unfair prejudice of which the Brothers complainisofhavingbeenfrozenoutofmanagementatboardlevel.Theydonotcomplain that the affairs of FOMEL are going to be taken in directions unacceptable to them as shareholders,orthattheirinvestmenthasbeenorisgoingtobejeopardizedasaresultofactionstaken by their fellow shareholder or that if they are compelled to remain as shareholders they will befinanciallydisadvantagedbyarrangementsdesignedtobenefitFuchstotheprejudiceoftheBrothers. The unfairness of which they complain will disappear if I order …”

A similar theme arose in Re Oledo Petroleum Limited BVICVAP2013/0006, a case in which the Claimants – havingalreadycommenced,butnotserved,aclaimforunfairprejudice–soughtleavetobringderivativeproceedings. Bannister J held that they had a sufficientalternativeremedyintheirextantclaimforunfairprejudice,whichwascapableofgivingthemmonetarycompensationequivalenttoanyincrease

inthevalueoftheshares,ratherthanallowingthem,through the company, to lay claim to the shares themselves.TheCourtofAppealagreed.

Problematic IssueA more problematic issue emerges in relation to so-calledmultiple,ordouble,derivativeactions.Theproblem arises frequently in cases where multiple holding structures exist. If A and B are shareholders inC,itisclearthatAcanbegivenleavetobringproceedingsinC’sname.Thatisaderivativeaction.But if A and B are shareholders in C and C in turn holdssharesinD,andthatitisatthelevelofDthatthe fraud occurs – what is to be done?

It is now settled in the British Virgin Islands that Section 184C cannot be read so as to permit A to bringproceedingsinD’sname;thatwouldbeadoublederivativeaction.BannisterJsoheldinMicrosoft Corporation v Vadem BVICVAP2013/0007, a decision upheld by a decision of a Single Judge of the Court ofAppeal.ThereissomefirstinstanceauthorityinEngland which suggests that the right to bring double derivativeproceedingsmayexistatcommonlaw,independently of the statute, but whether or not such a right would be found to subsist in the BVI following thestatutorycodificationofderivativeactionsismuchmore debateable.

Appleby acted on behalf of the successful Claimant in Liao v Upbeat and for the successful Defendant/Respondent in Oledo Petroleum.

CONTACT

British Virgin IslandsAndrew WillinsPartnerGroup Head, BVILitigation&Insolvency+1 284 852 5323awillins@applebyglobal.com

“… a derivative action brought without permission was liable to be struck out …”

The British Virgin Islands is best known for its role as a holding company jurisdiction – a jurisdiction through whichjointventurepartieswilloftenco-operateinventuresfarremovedfrom the shores of the British Virgin Islands in sectors as disparate as energy and natural resources to shipping and trading goods.

PRACTICE UPDATE PRACTICE UPDATE

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In The Minister of Finance v Bunge Limited [2013] CA(BDA)4CIVtheCourtofappealconsideredanotice(Notice)issuedtoBungeLimited(Bunge)by the Attorney General pursuant to a request from theGovernmentofArgentina(Request)underanAgreement between Bermuda and the Argentine RepublicfortheExchangeofInformationRelatingtoTaxes(Argentina/Bermuda TIEA).

TherelevantprovisionoftheTIEAAct2005empowers the Minister of Finance to require production of any information which the Minister may require with respect to a request for assistance made pursuant to a TIEA.

Request for AssistanceBunge argued that the person on whom a notice undertheTIEAAct2005isservedmustknowtheterms of the request, in order to determine whether the information sought is in respect of a request for assistance at all, and if so, whether the request was madeinaccordancewiththerelevantTIEA.

The Minister of Finance argued that the TIEA Act

2005 did not require disclosure of a request and that such disclosure was restricted by the terms of the Argentina/Bermuda TIEA.

Inarulingwhichhassignificantimplicationsfortheoperation of the TIEA Act 2005, the Court ruled that:

1. On the true construction of the 2005 Act, the person on whom a notice to produce information isservedisentitledtosee,andtheMinisterofFinance is bound to produce, the terms of the Request,sofarastheyarerelevanttothenoticethatisgiventoenablethatpersontoknowwhetherthenoticeisvalid;and

2. There is a “principle of justice and fairness” which providesanindependentgroundforrequiringproductionofthetermsoftheRequestinaparticular case.

In addition, the Court ruled that disclosure of thetermsoftherequestineitheroftheabovecircumstanceswouldnotinvolveanybreachofBermuda’s international obligations because the Argentina/Bermuda TIEA expressly allowed disclosure in the course of judicial proceedings and the TIEA Act 2005 includes an express right to seek judicial review.

Judicial ReviewMoreover,theCourtofAppealheldthattherightsofthepersononwhomthenoticeisservedtoobtainthe terms of the notice through exercise of their righttojudicialreviewshouldberecognisedbeforeproceedings are begun. The Court of Appeal took the viewthattheextentofdisclosurebytheMinisterofFinancebeforeproceedingsarebegunshouldreflectthe disclosure that would be ordered by the Court if proceedings were brought.

In this regard, a redacted copy of the request which revealedsufficientinformationtodemonstratethatthe request had been made in accordance with the relevantTIEAwouldbesufficient.Alternatively,the

INTERNATIONALTAXINFORMATIONEXCHANGEINBERMUDACLARIFIEDHenry Tucker

Court of Appeal suggested that a notice setting out thetermsoftherequestverbatimmightbeheldtobesufficientdisclosureandtherewouldbenorighttosee the original.

The Court of Appeal declined to decide the point but thought it most unlikely that a hearing in the absence of the Applicant to allow the Court to consider the unredacted portions of the request would be permissible.

No Costs OrderThe Court also rejected an argument that regardless of the outcome, no costs order should be made against the Minister in proceedings of this type. The Minister of Finance submitted that the proceedings are necessary in order to ensure that Bermuda performsitsinternationalobligationstopreserveconfidentialityandtosafeguarditsreputationforobservingthem.ThiswasrejectedbecausetheCourtwould only order costs against the Minister in a case where the Court was unable to accept submissions made on his behalf as to the content of Bermudian law.

In what is perhaps a lesson learned for the Bermuda Government,theCourtofAppealalsopointedoutthat the Argentina/Bermuda TIEA, like many others, allows the Minister of Finance to decline a request

for assistance where the requesting party does not agreetopaythecostsofprovidingtheassistance,whether incurred by the Minister or any other person. On this basis the Court of Appeal assumed that the MinisterofFinancewasentitledtobeindemnifiedby Argentina against all costs properly incurred including any costs order made against him, unless for any reason it was decided to proceed without that safeguard.

Prior to the ruling in Bunge, the target of a notice under the TIEA Act 2005 was generally required to initiate proceedings in order to obtain the terms of a request to satisfy himself that the information demanded was in fact required for the legitimate purpose of a request made in accordance with the relevantTIEA.Inthesecircumstances,thecostandpublicity associated with such proceedings often led to blind compliance.

Blind ComplianceFollowing the Court of Appeal’s decision, the target ofarequestwillhaveanopportunitytoobtaintherelevanttermsoftherequestandtochallengeanynotice issued under such a request where it does notcomplywiththerelevantTIEA.Thisisexpectedto lead to considerably increased accountability for requesting states and increased certainty for domestic targets of such requests.

“… the target of a request will have an opportunity to obtain the relevant terms of the request and to challenge any notice issued …”

CONTACT

BermudaHenry TuckerAssociateLitigation&Insolvency+1 441 298 3267htucker@applebyglobal.com

The Bermuda Court of Appeal has ruled that the target of an inter-governmentalrequestforinformationunder a Tax Information Exchange Agreement(TIEA)mayrequiretheAttorney General to produce the terms oftherequestinordertoconfirmthat the request meets the statutory requirements under the International Co-operation(TaxInformationExchangeAgreements)Act2005(TIEAAct2005).

PRACTICE UPDATE PRACTICE UPDATE

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Forthosewhohaveconsiderableexperienceinthetrust industry, making a Public Trustee v Cooper application may be a well-trodden path. Trustees of discretionary settlements will often be faced with difficultsituations,suchasweighingupcompetingbeneficialinterestsorconsideringanexternalpressure which may threaten the trust funds, requiring the substantial reorganisation of trust assets, or settling a claim. The Court recognises that trusteeswillsometimesneedtoinvoketheCourt’ssupervisioninordertoresolvesuchsituations.Asset out in Public Trustee v Cooper, there are four categoriesofadministrativeapplication.Theyareasfollows:

1. A construction application: is a particular action within the trustee’s powers?

2. Ablessingsoughtforaparticularlysignificantor momentous course of action: is a particular course of action a proper exercise of the trustee’s powers?

3. Trustee asking the Court to decide upon a course ofaction:theseapplicationsinvolvetheCourttaking a decision in place of the trustees because thetrusteesaregenuinelyconflicted;and

4. Retrospectiveblessingsoughtforaparticularaction: were the trustees right to pursue a course of action?

Inevitably,thereispotentialforoverlapbetweenthecategories depending on the particular facts of the case, and in practice, it is not always a straightforward matter of whether an application should be made under a particular category.

In the recent Guernsey case of Re F(32/2013),theCourt of Appeal considered a trustee’s application forapprovalofamomentousdecision.Theappealrelated, amongst other issues, to an order of Guernsey’sRoyalCourtapprovingtherefinancingofatrust asset and for certain costs incurred in relation to thatrefinancingtobepaidfromtrustassets.

In Guernsey, the applicable test comes from the Re Mischa Trust case(RoyalCourt,15/2010),andisasfollows:

■ Doesthetrusteehavethepowertomakethismomentous decision?

■ IstheCourtsatisfiedthatthetrusteemadetherelevantdecisioningoodfaith,andthatinthecircumstances of the case, it is desirable and proper for the trustee to effect this decision?

■ IstheCourtsatisfiedthattheopinionthetrusteehas formed is one at which a reasonable trustee properlyinstructedcouldhavearrived?Inconsidering this aspect of the test, the Court will consider whether the trustee has taken into accountallmattersrelevanttothedecisioninhand,andnottakenintoaccountanyirrelevantmatters.

■ Isthecourtsatisfiedthattheopinionatwhichthetrusteehasarrivedhasnotbeenvitiatedbyanactualorpotentialconflictofinterestwhichhasormighthaveaffectedthedecision?

The Court of Appeal in Re F stated that when considering category two applications, if the Court is satisfiedthatthisfourparttesthasbeensatisfied,the

HOWCANATRUSTEELIMITITSLIABILITY

Amy Benest

Courthasverylimiteddiscretionwhenconsideringthe application. Such discretion will only extend to whether or not to “admit” the application, for example, deciding that the decision concerned is of insufficient“moment”.ThisisbecausetheCourtshould not seek to supplant a trustee’s decision in a category two application. If the trustee is unable to make a decision, the application should be framed as a category three application.

TheCourtofAppealindeliveringitsjudgmentin Re FupheldtheRoyalCourt’sdecisionrelatingtotherefinancingcosts.Indoingso,itrecognisedthat the effect of granting the trustee’s applications was “to protect the trustees from any challenge to their decision by persons interested in the trust, and to make clear that the trustees are entitled to an indemnity from trust assets in respect of the costs or otherfinancialconsequencesoftheirdecision”.

Court’s BlessingIfatrusteeistobenefitfromtheprotection(or‘insurance’)ofthecourt’sblessing,itislikelytohavetoconveneallthepartieswhoaretobeboundbythe court’s order. This will usually require all the beneficiaries(includingminorsandunborns)tobeconvenedandmay,dependingontheordersoughtand the particular circumstances of the trust require theprotectorsalsotobeconvened.

Inadditiontoconveningthecorrectparties,thetrustee is also required to ensure that all the partiestotheapplicationreceivefulldisclosureofmattersrelevanttothedecision,includingdocumentsreviewedintrusteemeetings.Thismeansthatbeneficiarieswillreceivesignificantlymoreinformation and documents than they could usually expecttoreceiveandreviewiftheyweretomakeanapplication for disclosure of trust documents.

A trustee should also consider the cost to the trust of any such application. These applications are inevitablyexpensive,withthecostsusuallybeing

paidoutofthetrustfundasanadministrativecost.Costs can escalate, particularly if there is a large classofbeneficiarieswhichdonotallsharethesameviewonthesubstanceoftheapplication.Dependingonthecircumstancesofthecase,conveningalltherelevantpartiestoameetingtoexplainthetrustee’sreasons for embarking upon a particular course of actionmaypersuadethebeneficiariesofthemeritsofdoing so, leading to an ‘uncontested’, or at least less contentious, application.

Insurance PolicyWhilst such an application can been seen as an ‘insurance’ policy for trustees against any potential future challenges to a course of action but trustees should be mindful that the Court has a “paternalistic role”inexercisingitssupervisoryjurisdiction(seeUnderhill and Hayton, The Law of Trusts and Trustees, 18thEdition,para.1.23).TheCourtandtheconvenedpartieswillreviewindetailtheconductanddeliberations of the trustee, and the trustee should be prepared for the Court to pronounce upon any matters itfindsconcerning.InonesuchJerseycase,Y Trust [2011]JLR464,althoughtheRoyalCourtgrantedtheordersought,thejudgmentnotedthatitwas“verytroubled by the high-handed manner” in which the trusteehadtreatedabeneficiary.

While the principle of obtaining the court’s blessing canbeanattractiveonetoatrusteeproposingtomakeamomentousanddifficultdecision,atrusteeshould be careful to ensure that it has prepared its application thoroughly before submitting the application to the Court. The consequences of failingtoprovideallthepartieswiththerelevantinformation,ornotconveningthenecessaryparties,could not only risk the protection which is sought but also the trustee’s indemnity in relation to the costs of making the application.

“Does the trustee have the power to make this momentous decision?”

CONTACT

Guernsey*Amy BenestAssociateLitigation&Insolvency+44(0)1534818009abenest@applebyglobal.com

BothstatuteandcommonlawprinciplesallowatrusteetoinvoketheCourt’ssupervisoryjurisdictionofatrustbymakingadministrativetrustapplicationstoseektheCourt’sapproval.ThecategoriesofsuchapplicationswerefirstsetoutinanunreportedjudgmentofRobertWalkerJ(ashethenwas)sittinginchambers.TheprinciplesofthatdecisionwerethenrecitedinPublicTrusteevCooper[2001]WTLR901.

PRACTICE UPDATE PRACTICE UPDATE

*Amy Benest is from the Jersey office, seconded to the Guernsey office

The articles in this newsletter are for information only. They should not be acted upon and are no substitute forspecificlegaladvice.Intheeventthatanyclarificationoradviceisrequired,pleasecontacttheeditor,GillianRobinson(grobinson@applebyglobal.com)

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Global/Cayman IslandsAndrew Bolton, PartnerGlobal Group Head+1 345 814 2011abolton@applebyglobal.com

BermudaKiernan Bell, PartnerGroup Head, Bermuda+1 441 298 3205kbell@applebyglobal.com British Virgin IslandsAndrew Willins, PartnerGroup Head, BVI+1 284 852 5323awillins@applebyglobal.com

Cayman IslandsJeremy Walton, PartnerGroup Head, Cayman Islands+1 345 814 2013jwalton@applebyglobal.com

GuernseyJeremy Le Tissier, PartnerGroup Head, Guernsey+44(0)1481755605jletissier@applebyglobal.com

Hong KongEliot Simpson, PartnerGroup Head, Hong Kong+852 2905 5765esimpson@applebyglobal.com

Isle of ManChristopher Cope, PartnerGroup Head, Isle of Man+44(0)1624647633ccope@applebyglobal.com

JerseyFraserRobertson,PartnerGroup Head, Jersey+44(0)1534818032frobertson@applebyglobal.com

MauritiusGilbert Noel, PartnerGroup Head, Mauritius+230 203 4302gnoel@applebyglobal.com

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