A Jersey ruling has just shone a light into a dark placer

By Philip Sinel, Senior Partner, Sinels Advocates

Opaque and often Byzantine in their apparent complexity, Trusts, on their face, can appear to be a nightmare to control let alone unpick. Many and varied are the uses of offshore trusts. In the words of Lord Walker of Gestingthorpe, who delivered the ruling in Schmidt vs Rosewood [2003] HCPC 26:

“1. It has become common for wealthy individuals in many parts of the world (including countries which have no indigenous law of trusts) to place funds at their disposition into trusts … These territories are chosen … because they are supposed to offer special advantages in terms of confidentiality and protection from fiscal demands (and, sometimes from problems under the insolvency law, or laws restricting freedom of testamentary disposition, in the country of the settlor’s domicile) … Typically, it will contain very wide discretions exercisable by the trustees … The exercise of those discretions may depend on the settlor’s wishes as confidentially imparted to the trustees and the protector.”

Special advantages in the real world include avoiding fiscal demands, creditors and family members to name but a few. Inevitably local tax haven judiciary DNA tends to be resistant to applications to unpick Trusts but it is starting to happen.

Headline grabbing cases concerning former Italian film starlet, Eddie Crociani, demonstrate that if pushed the lights go on, stones are unturned and shallow yet complex efforts to disenfranchise Courts and creditors (albeit after years of litigation) end in tears.

Aside from the headline-grabbing absurdity of many of these cases, trust fund disputes are routine – and routinely complex. Crucially, many hinge on whether the courts have sufficient power or desire to intervene, the bar for such activity being on the face of it set incredibly high.

Things, however, are changing, thanks to a recent ruling handed down in Jersey, arguably the global capital of the offshore fund world. It is a step in the right direction – once its implications set in and are absorbed we are looking at a new world order.

The case in question – B vs Erinvale PTC Limited [2020] JRC213 – centred on the efforts of the soon-to-be-divorcee Esther[1] to be added as a beneficiary of the trust her husband set up to hold nearly all of his assets, to limit the jurisdiction of any family Court and to cut Esther adrift with nothing if she divorced and to give her a measly widow’s stipend if she was still married when her husband died.

The story began for Esther on 25th April 2017 when Esther, ensconced in what she thought was the family home, received a letter from her husband’s Magic Circle lawyers informing her that the property was, in fact, held in trust and would she please leave forthwith, the trustee was coming round to help pack her bags, after some wrangling it did just that.

It subsequently emerged that, some years earlier, her husband had placed all of his free wealth into a trust, the trustee being a company he owned run by his employees. Divorce proceedings followed, which threw up another issue.

Esther was only a beneficiary of the trust – worth some £50m – in her capacity as a spouse. The issue of a decree absolute, or his prior death, which was not unlikely given his age and health, would see her lose this status and, with it, potentially all financial support.

The Trustee is a company formed by and for her husband, he directed it until the divorce when he stepped back in favour of employees who also own parts of the companies in the Trust. The application of Esther to be made a beneficiary as “Esther” represented an existential threat to their position.

The Trustees efforts to prevent her becoming a beneficiary in her own right - which could have seen her eventually deprived of her only means of financial support - were clearly indecent and in law “unreasonable”. Indecency is not a word that many folk in the offshore world can spell.

The three remaining directors of Erinvale PTC Limited all thought that implementing the settlor’s wishes, putting Esther through hell and related was just another day in the office.

After two years of uphill struggle the Court found as much – finding that this was no way to treat a wife of 23 years and mother of one of the settlor’s children - and ordered Erinvale to appoint her as a beneficiary without delay.

In the better parts of offshore, the wheels are turning, the case represents much more than a divorce. Hitherto, the bar for the Courts to intervene in trust disputes had been seen as being set very high. Previous efforts to have the Courts directly intervene, typified by S v Bedell Cristin [INSERT CITATION], have often failed to convince the judiciary there are sufficient grounds to act. This ruling, though, could be seen as turning much previously conceived wisdom on its head. A trustee is acting unreasonably in sticking to the Settlor’s plan to disenfranchise his wife and deny the Court’s jurisdiction over his assets. This is not rocket science but in the offshore world it is all too often why people get up in the morning.

This ruling is seismic, it builds on the earlier, seminal ruling in Schmidt vs Rosewood that broke new ground in upholding both the right and the duty of the judiciary to regulate Trusts and trustees: “The Courts inherent jurisdiction to supervise, and if necessary intervene in the administration of trusts” (paragraph 51).

It is almost certain that where iniquity exists and obligations are evaded that we will see further applications to courts citing this ruling. In a sector to often opaque and devoid of trust, stones will inevitably be cast back, and the grim underbelly of the trust sector exposed.

False succour could be drawn from the fact that this ruling was issued in Jersey. Jersey has, as it is bound to do, followed the edicts of the Privy Council, so as a matter of law must every other jurisdiction whose highest Court is the Privy Council, many “havens”, the better ones, are in that category. Those looking for darker caves should remember that if Trustees, who are beyond the reach of the law, get tempted to help themselves after all, who is going to stop them?

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