Jersey: Seven Lessons On Insolvency For Incoming Trustees From The Z Trusts Litigation

Last Updated: 22 August 2019
Article by Robert Dobbyn and Nigel Sanders

Many readers will have heard about the Z Trust litigation in Jersey, which has implications for trustees in the event that the trusts that they work with become insolvent. The detailed judgments on the case are an intimidating read, but this brief note aims to provide some practical guidance on the implications of the findings for anyone considering taking on the trusteeship of an existing trust.

1. Before you agree to take on the trusteeship...

Carry out as much due diligence as you can on the possibility of a significant claim being made by an existing creditor of the former trustee. In the Z Trust litigation, the former trustee faced a claim so large that it would wipe out the value of the trust. Where this liability has been reasonably incurred, and so the former trustee will be claiming payment under its indemnity from you, be aware that the former trustee's indemnity will have a higher priority than your own indemnity from the trust assets. In other words, a former trustee may, thanks to the judgment of the Court of Appeal, "scoop the pot", leaving nothing left for a new trustee's own liabilities.

2. If you are worried about future insolvency...

If the due diligence you carry out reveals circumstances that might lead to a situation where, as a new trustee, you may not be able to meet the debts as they fall due (for example, if the trust assets are highly leveraged), investigate the feasibility of taking security over trust assets for your fees and other liabilities as part of the take-on discussions. 

3. When negotiating the "DORA"...

Consider including a clause in the relevant deed or instrument of appointment, retirement and indemnity, whereby the former trustee agrees that its ability to claim under the indemnity you are giving it will rank equally, rather than in priority, to your own indemnity and unsecured creditors. This will be a matter of negotiation in each case, but on the face of it seems a fair position.

4. Reduce your own financial exposure...

It's good practice in any event, so keep your fees paid up as much as possible. By doing so, you minimise damage to your own balance sheet in the event that a former trustee suddenly presents you with a large indemnity claim that tips the trust into insolvency, leaving no other assets remaining for your fees.

5. When incurring your own liabilities...

Always make sure your creditors know you are acting as trustee, and that any liabilities you incur, eg bank borrowing, are reasonably incurred (ie you are acting in good faith, with a view to the interests of the beneficiaries, etc). By doing so, you protect yourself because your liability to those creditors should not then exceed whatever is available in the trust to pay those liabilities. So even if a former trustee does "scoop the pot", the financial shortfall is then borne by your creditors rather than you personally.

6. Keep an eye on the money...

Monitor the financial position during the life of the trust. When insolvency beckons, you shift from considering the interests of the beneficiaries to the creditors. Working out exactly the point in time when this happens is by no means easy, but consider factors such as when the debts fall due, whether you can buy more time by restructuring the debts, seeking additional cash inflow or selling assets.

7. If in doubt, go to court...

If you think the trust is entering the "zone of insolvency" and there is a risk that you may not be able to discharge trust liabilities on a cashflow basis, seek an order from the court giving directions as to how to administer the trust in that period and if necessary imposing a process for winding up the trust (which will likely be the equivalent of a liquidation procedure with claims of creditors being assessed and assets realised). An important further benefit of seeking the assistance of the Court is that an order can be applied for protecting the payment of your fees going forwards. Such fees, assuming reasonably incurred, will then have priority over other creditors in the event that the trust has to be wound up.

The implications of the judgments for incoming trustees are significant, and should prompt a review and update of procedures undertaken when considering taking on the trusteeship of an existing trust. The seven points above set out some of the issues for consideration.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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