attacking offshore trusts in light of in re esteem settlement and ...[1]

8/3/2019 Attacking Offshore Trusts in Light of in Re Esteem Settlement and ...[1]

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ATTACKING OFFSHORE TRUSTS IN LIGHT OFIN RE ESTEEM

SETTLEMENT AND THE NUMBER 52 TRUST

2 JULY 2003

Nicolas Journeaux

Partner

Carey Olsen

Guernsey & Jersey Lawyers

________________________________________________

Background

1. The Esteem Settlement litigation has been being going on in various forms since

1993. The three judgments the subject of this paper in 20011, 20022 and 20033

(referred to below as the first, second and third judgments respectively)

followed and were the result of a six month trial to prove the fraud by the

Settlor which trial took place in the English High Court in 1999.

2. The Claimant, Grupo Torras S.A. (GT), is a company owned by the Kuwait

Investment Office as part of the strategic reserve fund of Kuwait. Sheikh Fahad

was the Chairman of both the KIO and GT.

1

Jersey Unreported Judgments, 17 September 200122002 JLR 533Jersey Unreported Judgments, 13 June 2003

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3. As a result of the English proceedings, Sheikh Fahad (the settlor of the Jersey

trusts which form the basis of this discussion) was found liable for conspiracy to

defraud GT and was ordered to pay it damages in the region of US$450m (of

which Sheikh Fahads personal share was $120 million). With interest added,

the total judgment stands at approximately US$800m. GT has been unable to

recover its judgment debt from the personal assets of Sheikh Fahad, who has

subsequently been declared bankrupt in the Bahamas where he continues to

reside.

4. Between 1981 and 1994 Sheikh Fahad set up a number of trusts in a number of

different jurisdictions. GT has sought to recover its judgment debt from those

trusts. Two of the trusts are situated in Jersey (insofar as the trustee is resident

in the Island) and the trusts are governed by Jersey Law. The first is the Esteem

Settlement, established in 1981 with Abacus (CI) Limited (Abacus) as the

Trustee. Abacus is also the Trustee of the second trust, namely the Number 52

Trust, which was established by Sheikh Fahad in August 1992.

5. Prior to the commencement of the fraud, Sheikh Fahad contributed his own

assets to the Esteem Settlement, including about $2m as well as his London

home at 97 Dulwich Village.

6. Between 1988 and 1992, and after he had begun to defraud GT, Sheikh Fahad

further contributed in excess of 9 million of his own funds to the Esteem

Settlement and to the Number 52 Trust. In April 1992 he contributed 4.4

million of monies stolen from GT to the Esteem Settlement.

7. An important aspect of the case was that part of the stolen moneys and part of

Sheikh Fahads own moneys (which he gifted to the Esteem Settlement after the

fraud was commenced) was subsequently lost by the Trustee when it used

some of that money to fund improvements to 97 Dulwich Village. The money

was lost because the amount spent on improvements was not reflected in a

commensurate increase in the value of the house. The Royal Courts

conclusions in respect of this point are set out later below.

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The Claims in overview

8. The proceedings were commenced in 1999 by the Trustee seeking a negative

declaration that GT had no claim after what appears to have been a contested

Finers v Miro type application for directions. This became known as the 1999

Action. GT laid claim to all of the assets in the two trusts on a number of

grounds. These grounds incorporated lines of attack from four principal

perspectives. The fact that all of these arguments have now been dealt with by

the court in the three judgments makes the case a useful case study. See the

diagram describing the battleground and the ways in which trusts may be

attacked. The four arrows shown on the diagram correspond to the four types of

attack which are outlined, in relation to GTs case, below. These are described

in more detail later on.

First line of attack: the gift into the trust

9. GT alleged that at any time after the fraud began in 1988 all transfers of

assets to the trusts were made by Sheikh Fahad with the intention on his

part of defrauding GT as his creditor. As such, it was argued that the

transfers were therefore liable to be set aside as a fraud on creditors.

This issue was tried in late 2001, as a result of which the Court ordered

in the second judgment that the remaining assets of the Number 52 Trust

were to be handed over to GT so that it was no longer the subject of the

remaining parts of the action.

10. GT claimed in the third trial that the gift of the assets to the trustee wasnot given on the terms set out in the trust deed but rather with the

intention that they should be held by them as his nominee and that

therefore the supposed settlement of those assets was a pretence or sham

and that the court should recognise that the real trust of the assets was

merely a bare trust for Sheikh Fahad now replaced by his Trustee in

Bankruptcy.

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Second line of attack: the trust structure itself

11. GT alleged that even if the trusts were not a sham Sheikh Fahad by his

control over the assets of the trust used of the trusts as a device to defeat

his creditors and that the result should be that the trusts be set aside on

the following four grounds, namely:

12.

(1) that the Esteem Settlement offends the Jersey rule against retaining

power of disposition over gifted assets (known in Jersey law as the

doctrine ofdonner et retenir ne vaut);

(2) that the Esteem Settlement is contrary to public policy;

(3) that the veil of the Esteem Settlement should be lifted; and

(4) that a remedial constructive trust in favour of GT should be

imposed on the assets of the Esteem Settlement.

These issues were dealt with by the Royal Court in the third or 2003 judgment.

Third line of attack: a proprietary tracing claim

13. GT alleged that there existed a proprietary tracing claim in respect of

1,267,686 of the trust assets in Esteem, being part of a sum of 4.4

million stolen from GT paid into the trust by Sheikh Fahad. This was

dealt with in the second judgment.

Fourth line of attack: a claim against the beneficial interest of the Settlor as

beneficiary.

14. GT claimed that the Trustee ought to be directed by the Court to exercise

its discretionary powers to distribute all of the trust assets to Sheikh

Fahad as a beneficiary so that he could meet his obligations to GT. This

was dealt with in the first judgment.

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The claims in more detail -The First line of attack

15. The Royal Court ordered that GTs proprietary claim and the claim to

set aside Sheikh Fahads gifts as a fraud on GT as his creditor should be

tried as separate issues prior to the trial of the remaining issues in the

1999 Action. This was the subject of the judgment given on 17 January,

2002. This part of the claim is referred to as the "Pauline action".

16. Taking thePauline action first, the Court was asked to consider the fact

that Sheikh Fahad had made a gift of 5 million into the Esteem

Settlement in March 1990 (after the fraud had commenced) against a

background where he was receiving advice from his lawyers (who knew

nothing of the fraud at that time) to the effect that any sensible settlor

with diplomatic immunity from tax should settle his assets on trust

whilst he still had immunity.

17. One interesting aspect of Jersey law is that, unlike most civilised

countries, Jersey does not have a statutory model for fraudulent

disposition claims such as sections 423-5 of the Insolvency Act 1986.

Instead, the Pauline action, as it is known to Jersey law, traces its

juridical origins back to civil law (as it was applied in France both

before and after the assimilation of those principles into the French Code

Civil - see Golder v Socit des Magasin Concorde Limited (1973) JJ

721).

18. The ambit of the Pauline action was defined in re Esteem Settlement4

(summarised at paragraphs 261-266 of the judgment) as follows:-

18.1. where the debtor has acted in such a way so as to give rise to a debt, or

other legal liability to another person (the creditor); and

42002 JLR 53

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18.2. thereafter , the debtor makes a gift or transfer to a third party at an

undervalue; and

18.3. the debtor is either insolvent at the time of such gift or becomes insolvent

as a consequence thereof; and

18.4. the gift is made with an intention on the part of the debtor (which need not

be his predominant purpose) to prejudice his creditors; and

18.5. such prejudice is caused;

then the Court may set aside the gift subject to (a) any "change of position"

defence of the third party, and (b) the claim being brought within 10 years of the

gift.

19. As can be seen from the above, and when compared to other legal systems,

Jersey has evolved a settlor-friendly test as regards the act required to create

the liability giving a claimant the locus to bring the claim as a creditor. The

Royal Court held that, in order to establish a claim, the events giving rise to the

claim must have happened before the gift was made. But consider this example:

19.1. on the Monday a fraudster decides that he is going to defraud his

employer on the Friday; and

19.2. he decides to place all his assets into trust on the Thursday with the

purpose of avoiding any subsequent claim from his employer.

Notwithstanding that the fraudster dishonestly gave away his assets to defeat a

future creditor, the trust would be unassailable in a Pauline action brought

under Jersey law. English law, based upon my understanding, does not operate

in the same way5. Perhaps one explanation for the rule expounded by the Royal

Court was the concern not to open the floodgates to asset protection trusts set

up, for example, by professionals.5

See paragraph B6.24 et seq of Glassons International Trust Laws, Volume 1

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20. A second key feature is that the Court further held that it was not necessary to

show that Sheikh Fahads intention to defraud creditors was his dominant

purpose when making the dispositions. It is sufficient to show that it was a

substantial purpose. For the development of English law since which has

adopted this test, see the case of Inland Revenue Commissioners v

Hashmi[2002] EWCA Civ 981. The fact that Sheikh Fahad had received tax

advice to dispose of his assets was therefore of little relevance.

Sham trusts

21. It has been long understood that assets may be returned to the Settlor or

his estate and thus be available to meet any claims against him where a

trust structure is devised by the trustee and the settlor in the manner

described by Diplock LJ in Snook v London and West Riding

Investments Ltd[1967] 2 QB 786 as follows:-

acts done or documents executed by the parties to the "sham" which

are intended by them to give to third parties or to the court the

appearance of creating between the parties legal rights and

obligations different from the actual legal rights and obligations (if

any) which the parties intend to create. But one thing, I think, is clear

in legal principle, morality and the authorities (see Yorkshire Railway

Wagon Co. v. Maclure and Stoneleigh Finance Ltd. v. Phillips), that

for acts or documents to be a "sham," with whatever legal

consequences follow from this, all the parties thereto must have a

common intention that the acts or documents are not to create the

legal rights and obligations which they give the appearance of

creating.

22. This was held to be the case in the Jersey case ofRahman v Chase Bank

Trust Company (CI) Limited (1991) JLR 103. The settlors widow in

that case also attacked the trust on the basis of donner et retenir ne

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vaut (literally translated, to give and to retain is not possible) and

argued that the trust was a sham.

23. GT argued in the third trial that assets may be returned to the settlor or his estate

and thus be available to meet any claims against him where the settlor alone

intended the trust deed to be a pretence and that it is not necessary that the

trustee be shown to have such intention. The Royal Court at paragraphs 41 to

54 of the third judgment however rejected this approach and held that a trust

deed will not be held to be a sham unless both the settlor and the trustee have

the necessary shamming intention. The Court appears to have reached its

decision primarily on the basis that, if it decided otherwise, a trust might be

invalid simply because of the secret unexpressed intention of the settlor and this

could be in circumstances that it had never been possible to put such intention to

any effect because the trustee was unaware of it and always acted in good faith

as a proper and independent trustee6. On the facts of the case, it was held that

neither the settlor nor the trustee had such intention.

The Third line of attack: a direct claim to the trust assets

24. I take this out of turn, and leave until last the second line of attack, for reasons

which will become clear. GT brought two claims on an alternative basis, as

follows:-

24.1. a proprietary tracing claim in respect of 1.276 million (being the balance

of the 4.4 million referred to above) and tracing this sum into the assets

of the Esteem Settlement;

24.2. as an alternative to the tracing claim, a claim in restitution for unjust

enrichment in the sum of 1.276 million against the assets of the Esteem

Settlement.

6 See paragraph 53

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Tracing

A What is tracing?

25. Tracing is not a remedy per se, but merely a process leading to a remedy. It is a

method by which a party who wishes to claim that value received in one form at

one moment is held in another form at another moment. In Boscawen v Bajwa

[1995] 1 WLR 328 (C.A.), Millett LJ stated:-

"tracing. is neither a claim nor a remedy but a process. It is the

process by which the plaintiff traces what has happened to his property,

identifies the persons who have handled or received it, and justifies his

claim that the money which they handled or received (and if necessary

which they still retain) can properly be regarded as representing his

money"

26. Tracing, therefore, identifies the value of a new asset as representing the

claimants property in a persons hands, and arises when an asset can no longer

be located because it has been substituted by something else. It is to be

distinguished from following which is a process whereby property is identified

and pursued in its original form as it moves from person to person7.

27. The right to trace will always be separate and distinct from the underlying claim

which gives rise to the right. Tracing may be employed both in the context of

proprietary and in personal claims. As to the former, examples where tracing

may be relevant are claims for unjust enrichment or for compensation in respect

of an equitable wrong. As to the latter, classic examples are a constructive trust

claim based on knowing receipt or a claim for money had and received.

7 In this respect, seeFoskett v McKeown (2000) 2 W.L.R. 129 at page 1322. See also the criticisms of the second judgment on

this part in Tracing, following, and claiming the proceeds of stolen assets by Charles Mitchell in the Jersey Law ReviewFebruary 2003.

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28. Until recently in England there were notable differences between tracing at

common law and equity, principally in relation to the inability of common law

tracing to trace into a mixed fund. The case ofFoskett v McKeown (2000) 2

W.L.R. 129 however appears to move away from such a distinction8.

B Common law tracing under English law

29. If a dishonest employee draws out cash from his employers account and gives

it to his innocent trustee, then the trustee is bound to pay an equivalent sum

back, provided that the trustee has not changed his position or, in other words,

acted to his detriment in reliance upon the receipt; see Lipkin Gorman v.

Karpnale Ltd[1991] AC 548. In English law this personal claim to recover cash

where it remains the property of the transferor is known as an action for money

had and received.

30. If a recipient replaces cash with another asset; for example the trustee buys a car

with that money, English law will allow that asset to be regarded as the

replacement for the money: see Taylor v Plummer(1815) 3M&S 562.

C Equitable Tracing

If money has been mixed with other assets either before or after receipt (usually by

paying it through the banking system or into an account with other money),

common law can no longer locate the actual asset or a fixed substitute because

the legal title has been lost either in the transfer or in the mixture.

31. In order to avoid the injustice that would result, English law has developed a

complex system of equitable rules designed to assist in the recovery of property

which the claimant has been wrongly deprived of. The approach is to identify

the property right of the claimant (known as an equitable interest) and then to

8The decision involves an important restatement and development of the tracing principles, particularly in relation to the r ight to

trace into profits accrued by a recipient in consequence of his receipt of the traced funds

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apply the tracing rules in order to establish what asset, if any, the original

property is represented by (and which he can then claim) in substitution for the

original property.

32. Typically, where a fraudster mixes his own assets (or those of others) with the

fraudulently obtained property of a particular claimant, that claimant will be

able to claim (in England, by means of a tracing action in equity) a share of the

resulting mixed product either on the basis of a pro rata share or a charge over

the resultant mixture (See Indian Oil Corporation Limited v Greenstone

Shipping SA (1988) QB 345 and ElAjou v Dollar Land Holdings (No 2) (1995)

2 All ER 213). Since the traced asset is the property of the claimant, he may

take it free from the claims of creditors of the person holding the asset.

33. In Esteem, the cash settled went into the current client account of Abacus and

was mixed with money representing the proceeds of the fraud. Money was later

taken out of that account and a large part of it was used to pay for the

refurbishment to 97 Dulwich Village (owned by the trust). How does the law

then decide whose money has been paid out of an account and whose money

remains, in circumstances where part of the funds belong to an innocent third

party?

D Equitable tracing rules

34. English law applies the first in, first out rule which evolved from the case of

Devaynes v Noble, Claytons case (1816) 1 Mer 572. Money is thereby deemed

to be paid out in the same order as it was deposited, where you have the mixture

of one trust fund with another in a current account.

35. The Royal Court (at paragraph 111 of the second judgment) however saw no

advantage in adopting into Jersey law a rule which has been much criticised

and which can clearly produce capricious and arbitrary results. The Court

instead preferred the Apportionment Method, as formulated in the United

States and Canada. This has the result that when a withdrawal is made from the

account it is treated as a withdrawal in the same proportions as the different

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interests in the account bear to each other at the moment before the withdrawal

is made. The application of this method to the facts ofEsteem is discussed

further under sub-heading H below.

E Limitations of tracing in equity

36. There are a number of factors which will prevent a claimant from being able to

trace in equity. The first is that there is no property identifiable to trace, that is

to say it has been dissipated.9 If for, instance, a fraudster misappropriates

money to buy a yacht, but then sells the yacht and uses the proceeds of sale to

buy a luxury cruise, a claimant cannot trace to the cruise as he could have done

to the yacht. The same would apply if the fraudster had used claimants money

to buy a meal in a restaurant or to purchase a racehorse which had since died. In

such a case the claimant would be limited to a personal claim against his debtor.

37. A further bar is that a plaintiff cannot trace into the hands of a bona fide

purchaser for value without notice of the plaintiffs equitable interest or any

person claiming through such a person.

38. A third and important bar is that a plaintiff cannot trace to an overdrawn mixed

bank account (or any assets purchased out of it). This is a point which for some

time was in doubt, but the issue seems now firmly resolved against being able to

trace into an overdrawn account, whether the account is overdrawn at the time

trust property is transferred or becomes so subsequently. This is the conclusion

which was reached by the Court of Appeal in Bishopsgate Investment

Management (in liquidation) v Homan and others [1995] 1 ALL ER 347.10

9 Eg. Re. Diplock [1948] 2 ALLER318@34 The equitable remedies pre-suppose the continuedexistence of the money either as a separate fund or as a part of a mixed fund or as latent in propertyacquired by means of such a fund, and earlier Jessel MR (quoting from Wood V-C in Frith v Cartland(1865) 2 H & M 417) inRe. Halletts Estate (1880) 13 CH D 696at p.719. The guiding principle, isthat a trustee cannot assert a title of his own to trust property. If he destroys a trust fund by dissipatingit altogether there remains nothing to be the subject of the trust. But so long as the trust property can betraced and followed into other property into which it has been converted that remains subject to thetrust.10

See also the decision of the Court of Session in Style Financial Services Ltd v Bank of Scotland, theTimes 23 May (1995) and the comments of Lord Mustill in Re. Goldcorp Exchange Ltd[1995] 1 AC74@104H;

12
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F Who can trace in equity?

39. In cases of dishonesty, the courts have been quick to provide the basis for an

equitable proprietary interest which may then be traced. For this reason, it is

well established in English law that a defrauded employer may recover the

proceeds of the fraud from his former servant or agent, or possibly trace the

funds into the hands of a third party. The same principles apply to the proceeds

of corruption. In Attorney General for Hong Kong v Reid(1994) 1 All ER 1,

Reid, the former acting director of public prosecutions in Hong Kong, had been

convicted of accepting HK$12.4 million (approximately 1 million) in bribes to

obstruct the prosecution of certain criminals. Reid had purchased property in

his native New Zealand allegedly with the proceeds of his corrupt activities.

The question arose as to whether the receipt of a bribe by a fiduciary only gave

rise to the relationship of debtor and creditor or to that of a cestui que trust and

beneficiary.

40. The Privy Council held, doubting the decision in Lister v Stubbs (1890) 45

Ch.D.1, that such a fiduciary held the bribe in trust for the person to whom he

owed the duty as fiduciary, in this case the Crown. If property representing the

bribe increases in value, the fiduciary is not entitled to retain any surplus in

excess of the initial value of the bribe, because he cannot be allowed to profit

out of his breach of duty.

41. The principle extends equally to cases involving profits from the misuse of

confidential information. In Attorney General v Blake [1997] Ch.84, the

defendant was a notorious former spy who had escaped from prison and fled to

the Soviet Union. Blake wrote a book about his experiences as a member of

Britains Secret Intelligence Service and the Crown claimed to be entitled to

damages and an order for payment up of all monies received by Blake in respect

of the book. Sir Richard Scott, the Vice-Chancellor, dismissed the claim on the

basis that the information in question was no longer secret or confidential. The

Vice-Chancellor however went on to make it clear that had the publication of

the book constituted a breach of confidentiality, then equity would require the

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wrongdoer to hold all benefits derived from that breach for the Crown (see also

IDC V Cooley [1972] 2 All ER 162).

G The application of the tracing rules in Jersey

42. UntilEsteem, English law in relation to equitable tracing had been adopted and

applied by the Royal Court without argument as to whether it should be; see for

example Representation of the Viscount in the matter of PKT Consultants

(Jersey) Limited (1st August, 1991) and Royal Bank of Scotland Ltd v. Kenny

Khan and Hamptonne International Ltd (19th October,1999). The Deputy

Bailiff inEsteem at paragraph 102 commented upon the status of tracing under

Jersey law as follows:

The upshot is that there is no Jersey authority which suggests that

tracing should not be part of our law; such authority as there is

suggests that tracing does form part of Jersey law. Although

accepting that our law of property has very different roots from that of

England, there would appear to be no practical difficulty or any

objection of principle to recognising tracing of movable property. On

the contrary, in our judgment, there are strong policy reasons for

doing so. Tracing offers an effective method of vindicating and

safeguarding proprietary rights, particularly in cases of fraud. It has

proved a useful tool in English law.

43. One question which necessarily arose for consideration inEsteem is whether the

victim has an equitable proprietary interest in the proceeds of the fraud (see

paragraphs 82-85 of the judgment). The Royal Court held that he does. In

reaching this conclusion, the Court relied on the following paragraph from

Matthews and Sowden: Jersey Law of Trusts (3rd Edition) at paragraph 1.20:-

Turning to consider trusts proper, it is also clear from the terms of

various of the provisions in [the Trusts (Jersey) Law 1984] that in a

Jersey trust the beneficiary is intended to have and does have a

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proprietary interest in the trust property and not merely a personal right

against the trustees to compel administration. Indeed, were this not so

Art. 50(1), (4) would mean that, in some circumstances at least, no one

had a proprietary interest in the trust assets (see also Arts. 9, 23, 29, 31,

34, 42 and 43). It is true that the beneficiarys interest is not stated to be

an equitable interest although in Art. 50(4) there is reference to

beneficial interest. On the other hand, the trustee has some interest in

the property that is the subject of the trust, however limited (see Arts 2,

50(1)). And so, whether or not the trustees and beneficiarys interests

are properly called legal and equitable in the English style, there is

little doubt that the [Trusts (Jersey) Law 1984] is referring to concepts

serving identical purposes: CF Hawksford and Renouf v Giffard (1885)

210 Ex 206 at 211, where the court drew the distinction, in the case of a

trust of immovables, between the owners en droit and those en quit.

44. As the Royal Court recognised, there is much debate in England as to whether

the common law tracing rules should be subsumed into the more flexible rules

of equitable tracing. In circumstances where the two systems of tracing had no

historical origin or application to Jersey, the Royal Court preferred to adopt the

more flexible rules of equitable tracing to all tracing actions which would

permit tracing through a mixed fund.

H The exercise of the Royal Courts discretion in Esteem

45. As a result of the application of the Apportionment Method outlined above, GT

was awarded an entitlement of 4.75% of the value of the Dulwich Village

property on the basis that this represented an apportionment of the 25% increase

in the value of the property that GT was entitled to trace into. GT could claim

only 19% of the 25% increase in the value of the property.

46. A further difficulty with this part of the claim, as is stated above, was that the

money was used to refurbish Sheikh Fahads property (97 Dulwich Village) and

was not reflected in a commensurate increase in the value of the property. From

the total sum of 5 million received from Sheikh Fahad (and which was used

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specifically to embellish the property), the property only increased by 931,250

in value as a result thereof. Only 4.75% of the traceable fund was recoverable

as representing 19% of the increase in value.

47. The Court also adopted a rather tough approach in applying the tracing rules by

ordering that Dulwich Village be sold in order to realise a 4% interest. The

Deputy Bailiff however justified the Courts finding (at paragraph 231) on the

following basis:

So far as the Settlement is concerned, it does not seem inequitable to

it to require a particular asset, namely 97 Dulwich Village, to be sold

in order to account for the equitable interest of GT which has been

traced into the asset. The Settlement will receive its share of the

proceeds and GT will receive its share. The Settlement will not be

treated unfairly from a financial point of view.

Restitution

48. GT alternatively claimed that, in the event that the Court rejected the rules of

tracing as being an alien concept to Jersey law, then a restitutionary liability

might nevertheless apply. The problem in England is that a claimant has no

claim in respect of an asset which can be traced into the hands of an innocent

recipient in circumstances where he had disposed of it unless he has been at

fault in some way.

49. Take this example:

49.1. you are about to go on holiday and have 5000 in your bank deposit

account for that purpose;

49.2. when you receive a letter from a solicitor enclosing a cheque for 5,000 as

an unexpected inheritance for your late aunts estate, you pay it into your

current account;

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49.3. you use the inheritance money to pay for your holiday;

49.4. you come back from holiday to a letter from the solicitor stating that they

have made a mistake and would like to have the 5,000 back. Can you

keep the money even though you are better off by 5,000?

Under English law, absent dishonesty by the recipient, there is no basis upon which

the aunts estate could recover the money because a tracing claim cannot

succeed. It is plainly unjust because you remain enriched by the receipt of

someone elses money; you would have otherwise spent the same amount of

your own money in your deposit account. The money is gone and you are back

where you started.

Lord Nicholls (a senior judge of the House of Lords), in a seminal article entitled

Knowing Receipt: The Need for a New Landmark11, argues strongly in

favour of the existence of a fault free personal restitutionary claim. He states

:-

... justice requires that, at least in some circumstances, a person wrongfully

deprived of property should have a personal right of recourse against a fault

free recipient of a benefit to which he was not entitled.,

50. Lord Nicholls points out that the development of an appropriate remedy

is not best achieved by extending the ambit of constructive trusteeship

which is the mainstay of the tracing concept. He advocates liability

founded on the mere fact of receipt. In this, he is not alone: see forexample Birks Misdirected Funds: Restitution from the Recipient

[1989] Lloyds Maritime and Commercial Law Quarterly.

51. The elements of a restitutionary claim are:

51.1. an unjust enrichment at the expense of the claimant; and

11Published as part of Restitution, Past, Present and Future 1998

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51.2. there being no change of position defence (for a recent

consideration of such a defence, see Gertsch v Aspasia (2000) 2

ITELR 342).

52. In Esteem the Royal Court at paragraph 242 of the second judgment,

expressed its view to a claim based upon unjust enrichment in the

following terms:-

This is a complex area. We are conscious that many ramifications may flow

from a decision to allow such a claim. Accordingly we deliberately express our

decision in terms that are no wider than is strictly necessary for the present

case, without wishing to be taken to suggest that a remedy would not also be

available in other analogous situations. We hold that, under the law of Jersey,

where property in respect of which a person (a beneficiary) has an equitable

proprietary interest (because the property has been taken from the beneficiary

by a person who is in a fiduciary position towards that beneficiary) is received

by an innocent volunteer, the beneficiary has a personal claim in restitution

against the recipient even where the recipient has not been guilty of any fault

in receiving the property. In other words, the state of mind required for a

knowing receipt claim under English law is not required in Jersey. It is a

strict restitutionary liability. However, the claim is based upon unjust

enrichment and, accordingly, the beneficiary can only succeed to the extent that

the recipient remains unjustly enriched. A defence of change of position is

therefore available. We emphasise that the liability is a personal one; the

recipient is not a constructive trustee for the beneficiary.

53. In our example above, if you had gone on holiday only because you had

received the money from the solicitor (i.e. but for the receipt of that

money you would not have gone on holiday), then the money is not

recoverable because you do not remain enriched by the receipt of the

gift.

The fourth line of attack

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54. You will recall that in the 1999 action, GT claimed that the Trustee

ought to be directed by the Court to exercise its discretionary powers to

distribute all of the trust assets to Sheikh Fahad as a beneficiary so that

he could meet his obligations to GT.

55. Abacus reaction to this was to seek the directions of the Court in a

separate action (which became described as the 2000 Action) as to

whether the assets of the two trusts should, pursuant to the discretionary

powers of the Court, be so distributed.

56. The Court of Appeal ordered that that this part of the case should be

heard before the hearing of the 1999 Action. The Royal Court gave

judgment in the 2000 Action on 9th January 2001. It was held that it did

not have jurisdiction, on the facts of the case, to make the suggested

distribution or, alternatively, that if it did have such jurisdiction, it would

not be right to make such a distribution. That decision was subsequently

upheld by the Court of Appeal in the first judgment12.

57. GT argued that the Trustee should use the funds for the benefit of Sheikh

Fahad on the basis that it was for his benefit, in an objective moral

sense, that he should meet his obligations to his creditors. The Trustee

was bound to behave morally and should so apply the funds.

58. The Court of Appeal firstly held that, in some circumstances, a debt may

be paid against the wishes of a beneficiary (one can think of common

sense examples where the trustee can override the wishes of a

beneficiary in acting for his benefit). However inRe Esteem Jersey

Unreported Judgments, 27 July 2000, the Court held that the payment of

the debt was not for Sheikh Fahads benefit on the basis that if 12

million worth of trust assets were distributed to Sheikh Fahad, he would

only be 12 million less insolvent. In that sense, there would be no real

benefit at all to Sheikh Fahad, nor to his family.

12See the unreported decision of the Court of Appeal of 17 September 2002

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The Second line of attack:An attack on the trust structure itself.

59. GT alleges that Sheikh Fahads use of the trusts as a device to defeat his

creditors, when combined with his complete control over them, has the

result that the trusts ought to be set aside in law on the following four

grounds.

Donner et retentir ne vaut

60. In the notorious case ofRahman the settlor had furnished the trust deed with a

number of provisions giving him direct powers over the assets of the trust. The

court found that those principles were in contradiction to the old Jersey/French

civil law concept known as donner et retenir ne vautdonner et retenir ne vaut

(literally translated ) to give and retain is worthless. If you do so, the gift fails.

61. GT argued that even if the the Esteem Settlement was not a pretence or sham

from the outset it should be set aside on the ground that Sheikh Fahad had

dominion and control over the assets that he gifted to the Settlement thereby

infringing the maxim). The Royal Court held at paragraph 61 to 73 of the third

judgment that the power of retention must exist at the time of the gift as

otherwise the gift is irrevocable and the maxim will not be infringed13. It held

that any other interpretation could have the consequence that a trust might drift

in and out of validity depending upon whether a trustee properly exercised his

fiduciary powers. GT did not argue that the trust deed itself contained a power

of retention but that the power was conferred because the trustee acted only as a

nominee or agent rather than as a genuine independent trustee. The Royal Court

held that this allegation involved consideration of the same requirements as

sham and, on the basis of its findings in relation thereto, GTs claim under this

head also failed14.

13 See paragraphs 64 to 66 of the third judgment.14 See paragraphs 67 to 73 of the third judgment.

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Lifting the veil of the trust

62. GT argued that the court may be able to look through the trust structure and to

borrow a concept from company law to pierce or lift the veil of the trust

where:

62.1. assets were under the effective or substantial control of the settlor (i.e. by

the trustee invariably carrying out the wishes of the settlor), and

62.2. the trust was set up or used to put assets out of the purported control of the

settlor, but with those assets still remaining freely available for the settlor

when so required.

63. In such circumstances GT argued the court may treat the assets as if they were

the settlors. and treat its assets as those of Sheikh Fahad.

64. The Royal Court however rejected this approach finding that there is no such

cause of action even on the assumption that there existed circumstances where a

settlor had managed to assume control of and misused the trust. The Court

justified its decision15 by an examination of the divergences between trusts and

companies, i.e. the different economic interests held by a shareholder of a

company and a settlor of a trust. Furthermore, it was held16 that the effect of

piercing the veil would be to transfer the assets to the settlor in circumstances

where, were that transfer to be made by the trustees without an order of the

court, it would be liable to be set aside as a breach of trust.

15 See paragraph 105 of the third judgment.16 See paragraph 106 of the third judgment.

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Article 10 of the Trusts (Jersey) Law 1984: Public Policy.

ARTICLE 10

Validity of a Jersey trust

(1) Subject to paragraphs (2) and (3), a trust shall be valid and enforceable in

accordance with its terms.

(2) [Subject to Article 10A,]17a trust shall be invalid -

(a) to the extent that -

(i) it purports to do anything the doing of which is contrary to the law of

Jersey; or

(ii) it purports to confer any right or power or impose any obligation the

exercise or carrying out of which is contrary to the law of Jersey; or

(iii) it purports to apply directly to immovable property situated in Jersey; or

(iv) it is created for a purpose in relation to which there is no beneficiary, not

being a charitable purpose;

(b) to the extent that the court declares that -

(i) the trust was established by duress, fraud, mistake, undue influence

or misrepresentation [or in breach of fiduciary duty]18; or

(ii) the trust is immoral or contrary to public policy; or

17 Words inserted by Trusts (Amendment No. 3) (Jersey) Law 1996 (Volume 1996-1997, page 149).18

Words inserted by Trusts (Amendment) (Jersey) Law 1989 (Volume 1988-1989, page 373).

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(iii) the terms of the trust are so uncertain that its performance is rendered

impossible. (Emphasis added).

65. Thirdly, GT argued that, whilst the Esteem Settlement was not contrary to

public policy when it was established, it would be contrary to public policy for

Jersey law to allow a settlor, by his substantial or effective control of the assets

of the Settlement, to ensure that the assets could be made freely available to him

but not to the victims of his fraud. The Royal Court dismissed this claim,

holding that, even in the event that Sheikh Fahad had controlled and misused

the Settlement as alleged, the Settlement would not be invalid as being contrary

to public policy. The Court held that it would be highlyexceptional that a

trust which is initially valid on grounds of public policy grounds would

subsequently become invalid19.

The imposition of a remedial constructive trust

66. Finally, GT claimed that a remedial constructive trust should be imposed upon

the assets of the Esteem Settlement on the basis that it would be unconscionable

for Sheikh Fahad to retain the assets and unjustly enrich himself at the expense

of GT. Whilst the Royal Court expressed its decision in this respect not to be

final, it held20 that it was inclined to the view that the remedial constructive trust

was not a remedy available in Jersey law. The Court held21 that it was not

necessary for it to exercise its jurisdiction to alter existing proprietary rights

under Jersey law. The Court indicated that this may be particularly so where

fraud is involved some jurisdictions recognise the remedial constructive trust as

a remedy to reverse unjust enrichment.

19

See paragraph 13020 See paragraph 14821 See paragraph 148

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2 July 2003

Nicolas Journeaux

Carey Olsen

47 Esplanade

St Helier

JE1 0BD

Tel: +44 (0) 1534 822205 Fax: +44 (0) 1534 887744e-mail: [email protected]

www.careyolsen.com
mailto:[email protected]://www.careyolsen.com/mailto:[email protected]://www.careyolsen.com/

attacking offshore trusts in light of in re esteem settlement and ...[1]

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