Investec & anr v Glenalla & ors [2019] WTLR 95

Analysis

The Background

The Privy Council heard eight appeals arising from the management of the Tchenguiz Discretionary Trust (“TDT”) between March 2007 and October 2008.

The TDT is a discretionary trust governed by the law of Jersey; in the period in question it had two trustees which were governed by Guernsey law: Investec Trust (Guernsey) Limited (“Investec”) and Bayeux Trustees Limited (collectively “the Trustees”). In July 2010 the Trustees were replaced as trustees of the TDT by Rawlinson & Hunter Trustees SA (“R&H”), a company incorporated in Switzerland.

The deed establishing the TDT provided, at clause 3.1, that it was governed by the laws of Jersey, and at clause 9.1, that a trustee would only be liable for any loss to the trust fund or its income if the loss arose due to the trustee’s own fraud, wilful misconduct or gross negligence.

On 24 August 2007, Investec, as trustee of the Tchenguiz Family Trust (“TFT”), appointed a number of assets to be held on the trusts of the TDT. These assets comprised of shares in 30 companies (all registered in the BVI), and loans owed to the TFT by 34 companies. At the same time Investec (as trustee of the TFT) transferred to the Trustees the liabilities which were associated with these transferred assets.

Among these transferred liabilities were a sum of €78,825,988·98 owed to Glenalla Properties Ltd (“Glenalla”), a sum of £80,541,936 owed to Thorson Investments Ltd (“Thorson”), both companies incorporated in the BVI, and a significant liability to the Icelandic bank Kaupthing Bank hf (“Kaupthing”).

The companies which were transferred to the TDT in August 2007 held many of their investments in public equity through contracts for differences and other margin contracts. This was the result of investment advice given by R20 Ltd (“R20”), whose chairman was Robert Tchenguiz. The emerging financial crisis resulted in increasing margin calls on these companies.

As a result of these financial pressures, in December 2007 the trustees agreed to the reorganisation of the trust assets into a new corporate structure (“the Oscatello Structure”). Under this new structure, the Trustees owned Eliza Ltd, which owned Oscatello Ltd, which in turn owned another 11 BVI companies (including Glenalla and Thorson). The shares of these BVI companies were charged to Kaupthing as security for a loan to Oscatello. This loan was to be used, inter alia, to repay the sum owed by the TDT to Kaupthing.

The intention was to create a ring-fenced structure so that the bank could not claim trust assets which were outside of it. However, the instrument of transfer failed to include the Trustees’ liability to repay the loans owed to Glenalla and Thorson.

In October 2008 Kaupthing collapsed and it went through a process akin to nationalisation in Iceland. It subsequently exercised its security rights over the companies in the Oscatello Structure, and Glenalla, Thorson, Eliza and Oscatello (“the BVI Companies”) were placed into liquidation in the BVI. On 22 April 2010 the joint liquidators of these companies wrote to the Trustees, demanding the payment of sums said to be due by them as trustees of the TDT.

The Guernsey 1 Litigation

In March 2010 the Trustees issued proceedings in the Royal Court of Guernsey seeking:

1. (i) A determination of whether they had incurred liability to the BVI Companies and, if so, on what terms; and
2. (ii) Declarations against the BVI Companies that:

1. 1. a. Pursuant to article 32(1)(a) of the TJL the Trustees had no personal liability in respect of any moneys said to be due and that any claims of the BVI Companies extended only to the trust property of the TDT; and
   2. b. They were liable as trustees only, so the BVI Companies could enforce obligations against them only to the extent that they held assets of the TDT.

The Trustees later amended their application to claim an indemnity against the assets of the TDT and to join R&H as a fifth defendant.

The BVI Companies defended these proceedings and counterclaimed to seek a declaration that moneys were due to Glenalla, Thorson and Oscatello under the loan agreements and for either judgments against the Trustees to pay the sums due, or alternatively for an account of all sums due to them.

On the day of trial, the BVI Companies amended their pleadings to introduce an alternative counterclaim that the Trustees were liable to Oscatello in restitution for a payment of £39.4 million made by Oscatello to Kaupthing to discharge a liability owed by the Trustees to Kaupthing (“the Restitution Claim”). They also sought an additional declaration that Glenalla, Thorson and Oscatello were entitled to have the sums they claimed paid out of the assets of the TDT.

R&H criticised the Trustees for their mishandling of the Somerfield Litigation. They also alleged that the Trustees had a conflict of interests when entering into the settlement agreement in 2010, and the disadvantageous nature of the settlement showed that they preferred their own interests.

The Trustees applied to strike out these claims (and alternatively for summary judgment) on the basis that:

(i) They were an abuse of process: the majority of the claims relating to the TDT’s investments could and should have been raised in the Guernsey 1 proceedings; and

(ii) There were no reasonable grounds for bringing the other claims relating to the TDT investments or the claims relating to the Somerfield Litigation

Following the decisions in the Royal Court and the Guernsey Court of Appeal, the principal issues for the Privy Council to determine in these appeals were:

1. (1) Whether by article 32 of the Trusts (Jersey) Law 1984 (“the TJL”), the liability of the Trustees, as former trustees of the TDT, was limited to the trust assets.
2. (2) Whether the Trustees were entitled to an indemnity from the trust fund pursuant to article 26 of the TJL.
3. (3) Whether there should be a retrial, either because:
   1. (a) The court was wrong to refuse to grant the interlocutory relief sought by R&H;
   2. (b) The original trial was unfair; or
   3. (c) The judgment ought to have been justified by a proportionality analysis under Art. 8(2) of the ECHR, on the basis that the judgment might lead to a claim for possession against Robert Tchenguiz’s family home.
4. (4) Whether the Court of Appeal was wrong to dismiss Oscatello’s claim in restitution against the Trustees.
5. (5) Whether article 32 of the TJL can apply to costs orders made in favour of the BVI companies.
6. (6) Whether the costs order made against R&H for the interlocutory applications should be be set aside or varied.
7. (7) Whether the Court of Appeal was wrong to give summary judgment on/strike out R&H’s claims in the Guernsey 3 litigation.

Held:

1. 1) (Lord Mance and Lord Briggs dissenting) The effect of article 32(1)(a) of the TJL was to introduce a legal distinction between a trustee’s personal and fiduciary capacities. A creditor had no right of recourse to a trustee’s personal estate if that creditor had known that it was transacting with a trustee. Before article 32 was enacted the trustee could incur liabilities in only one capacity, namely his personal one. The effect of the article is to create two capacities in which liabilities could arise.
2. 2) This did not change the rule that a creditor can access the trust assets only by way of the trustee’s right of indemnity and subject to the limits on that right imposed by the trust deed or the general law. The BVI companies would therefore only be able to recover by way of subrogation to such rights of indemnity as the former trustees had against the trust assets.
3. 3) The liability of trustees of a Jersey trust would be limited in accordance with article 32(1)(a) of the TJL, which prevailed over the proper law of the transaction which created the liability. This was for three reasons:
   (a)(Lord Mance and Lord Briggs dissenting) As a general rule, the common law will recognize and give effect to recognised limitations of liability which arise by reason of the particular status or capacity in which a party assumes an obligation. Such a rule does not only relate to entities which have a separate legal personality, but also to partnerships, LPs, associations of persons without legal personality, and Jersey or Guernsey trusts.
   (b)(Lord Mance dissenting) Section 65(1) of the Trusts (Guernsey) Law 2007 provided that, in relation to the governance of foreign trusts, the proper law of the trust determined the nature and extent of the trustees’ liabilities to third parties, which such liabilities arose from the governance of the trust.
   (c)(Lord Mance dissenting) The substantial symmetry between the default positions in jurisdictions like Guernsey, Jersey and states within the USA – that trustees expose their personal assets to liability for personal transactions, and their trust assets to liability for trust transactions – is a real basis for treating the proper law of the relevant trust as the applicable law in preference to the proper law of the relevant contract. This is not merely for insulating trust assets from exposure to personal transactions but also, by analogy, for insulating personal assets from exposure to trust transactions.
4. 4) (Lord Mance dissenting) Where a trustee of a Jersey trust had reasonably incurred a liability within the meaning of article 26(2) of the TJL, such protection would not be removed by reason of a claim that the trustee had thereafter been unreasonable in failing to discharge or mitigate that liability (save in cases of wilful default or gross negligence). The Trustees had acted reasonably when originally assuming the liabilities in question, and as the continued existence of the liabilities thereafter had been not attributable to gross negligence by them, they were entitled to claim an indemnity under section 26(2).
5. 5) There were no grounds for a retrial. Despite the delay in issuing judgment, the trial had been fair, as had been the dismissal of the interlocutory applications. The fact that there may be potential recourse in the future to the family home of Robert Tchenguiz was no basis on which to found a proportionality analysis under Art. 8(2) of the ECHR. The future course and outcome of any enforcement proceedings remain unknown and as a result the human rights challenge was entirely without merit.
6. 6) The claim for restitution failed as there was no unjust factor. The payment by Oscatello of the Trustees’ liability to Kaupthing was just one element of an overall package of mutual obligations, which left no place for a claim in unjust enrichment to arise. The Court of Appeal had therefore correctly quashed the restitution award.
7. 7) Article 32(1)(a) of the TJL cannot apply to costs orders in Guernsey proceedings, as Article 53 of the TJL establishes a separate regime for dealing with costs. The appeal by the BVI Companies against the costs judgment of 19 April 2016 should be allowed to the extent that neither article 32 of the TJL nor section 42 of the Trusts (Guernsey) Law 2007 (“the TGL”) applies to limit the liability of the Trustees and R&H for the orders for costs.
8. 8) There was no basis to set aside or vary the costs order made against R&H in respect of the interlocutory applications.
9. 9) The appeals in the Guernsey 3 Litigation also failed. Nothing suggested that the Royal Court and Court of Appeal were wrong to take the view that R&H’s criticisms of the Trustees’ handling of the Somerfield Litigation were doomed to fail. Further, the other matters raised were sufficiently related to the matters in the Guernsey 1 litigation that, absent any persuasive reason why these new claims had not been made out in the Guernsey 1 Litigation, it would be an abuse of process to bring them in separate proceedings.

Dissenting: Lord Mance agreed with the Board’s judgment, save on two points relating to the treatment of Articles 26 and 32 of the TJL. In respect of Article 26, he held that there should be no distinction between a liability unreasonably incurred from the outset and a liability reasonably incurred at the outset but later unreasonably continued. As to Article 32, he disagreed with all three strands of the Board’s reasoning and would have held that any liability which I&B had arising out of their conduct as trustees should be enforceable against their personal assets. The suggestion that Article 32(1)(a) gave the trustee a separate status or capacity was a radical and unprincipled innovation. Further, the Board’s analysis of section 65 of the TGL involved a radical alteration of the ordinary common law principles relating to characterisation. Finally, Article 32(1)(a) was no basis for giving the law governing the trust priority over the proper law of the contract. Where a trustee wishes to avoid execution against their personal assets at common law, they can contract expressly to that effect.

Dissenting: Lord Briggs agreed with the Board’s judgment, save the first of the three strands by which it held that Jersey trust law was the applicable law for the purpose of determining the contractual liabilities of the Trustees. He was not persuaded that this case provided sufficient basis for recognising, for the first time, the common law principle that a trust should be treated as a ‘quasi-entity’ and therefore its trustee’s liabilities could be limited by virtue of their office.

JUDGMENT LORD HODGE: (with whom Lord Sumption and Lord Carnwath agree) [1] This advice, to which each member of the panel of the Board has contributed, is the unanimous view of the Board on all matters except those on which members of the Board have produced separate judgments. On those matters it is the majority …

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