Malta: The Commercial Trust

Overview of Trust Law in Malta

In 2004 the Trusts and Trustees Act (Cap. 331 of the Laws of Malta) was revamped and as a result it opened up a new niche of activity for commercial law practitioners. 

Prior to the Trust and Trustees Act, Maltese residents could not set up a trust governed by Maltese law. Foreign trusts were however recognised in Malta under the Recognition of Trusts Act 1994 (Cap. 374 of the Laws of Malta) through which Malta ratified the Hague Convention on the Law applicable to Trusts and their Recognition (The Hague Convention 1985).

The Maltese Trust was inspired by the common law trust but modified substantially to fit the Maltese civilian system. It is mainly for this reason that trusts have become part and parcel of the Civil Code (Cap. 16 of the Laws of Malta). This integration was also complemented by the codification of a new set of fiduciary obligations that constitute the basis at civil law of the trustee relationship. 

Maltese law describes the trust in Article 3(1) of the Trusts and Trustees Act as follows:

“A trust exists where a person (called a trustee) holds, as owner or has vested in him property under an obligation to deal with that property for the benefit of persons (called the beneficiaries), whether or not yet ascertained or in existence, which is not for the benefit only of the trustee, or for a charitable purpose, or for both such benefit and purpose aforesaid.”

The law adopts a very straightforward approach in that it does not recognise the distinction between legal and beneficial ownership, and provides that the holding of trust property by a trustee is in the nature of an ownership right. This functional approach to the concept of trust avoids a lot of debate as to whether there are really two kinds of ownership, thus bringing clarity into what is often considered to be a dubious area when analysing trusts in civil law jurisdictions.

The Commercial Trust

The Trust and Trustees Act identifies a number of commercial situations within which the use of trusts would attract more favourable treatment. The act defines a commercial transaction through a list which is extended to include any transaction which is connected or ancillary to one or more of the said transactions. This list is not exhaustive and may be extended by means of subsidiary legislation. This is in line with the legislator’s efforts to react quickly to the swift changes and developments which characterise the commercial world. When such transactions include the appointment of a trustee to hold property under trusts in relation to such transactions, the trust is to operate solely in accordance with its terms. Thus such trusts escape the restrictions and safeguards imposed by the law since these are purely commercial transactions and as such, they require flexibility so as to operate efficiently. Such transactions broadly cover the following.

(a) Securities offerings, whether to the public or for private placement, portfolio management and custody of investment instruments: in such a case, a trustee would be holding assets for the benefit of other persons through a trust rather than a mandate or a deposit, thus offering more advantages and security to the beneficiaries.

(b) The securitisation of assets: the importance and practical use of a trust in such transactions is best appreciated when compared to the traditional pattern of bank intermediate financing of credit card receivables, which at the end of the day are assets consisting of debtors’ promises to pay credit card debts. Through a trust device, units in the trust would be sold to the various lenders, who will no longer rank as ordinary creditors but unit holders in the trust and consequently beneficial owners of a distinct pool of assets. Such an arrangement is also important when the financing would involve the pledging of complex assets and where there are a number of lenders.

(c) The grant of real or personal security interests including hypothecs, mortgages, privileges, pledges and guarantees: the benefits of registering the latter in the name of the trustee are quite wide, both in terms of the initial registration as well as upon eventual enforcement. Furthermore, such a transaction offers flexibility with regard to the ranking of creditors. If the traditional modes of security are utilised, the ranking of creditors cannot be changed as this is deemed to be a matter of public policy. Hence all the rules of privileges and hypothecs would apply. Through a trust arrangement however the security is given to the trustee but the ranking is agreed on in the trust instrument. It may then be agreed to rank the beneficiaries pari passu, or alternatively in a particular order or ratio.  Furthermore, one avoids multiple powers of attorney, which can be quite cumbersome especially if the lenders or creditors are located in different jurisdictions. Such a transaction does not have severe tax or duty on documents implications since it falls under one of the exemptions of the Income Tax Act (Cap. 123 of the Laws of Malta).

(d) Collective investment schemes: these are usually carried out through the vehicle of the unit trust where each investor acquires units (or proportionate shares of the total value of the investment pool) and the entire investment fund is held on trust for the investors as beneficiaries by a trustee, while the investment decisions are made by a separate fund manager who will also occupy a fiduciary position. Hence such an arrangement makes use of trust law principles whilst at the same time attracting a high influence of regulation. In fact, a unit trust is one of the schemes recognised and licensable under the Investment Services Act (Cap. 370 of the Laws of Malta). The use of unit trusts in collective investment schemes has a number of advantages over the vehicles of SICAVs (open-ended collective investment schemes), private limited companies, limited partnerships or the contractual form. For instance, in a unit trust the unit holders can sell their units to the manager at a price directly corresponding to the underlying value of the investments in the trust.

(e) Employee benefit or retirement schemes or arrangements: once again here, one finds a professional trustee managing constantly shifting assets for the benefit of a multitude of varying beneficiaries. Employee trusts are sometimes referred to as ESOPs (Employee Share Ownership Trusts). In these, the company sets up a trust fund and the trustees acquire such shares, which are subsequently distributed to an approved profit-sharing scheme for appointment to individual employees without ranking as their income as prerequisites obtained by reason of their employment nexus. ESOPs may take a multitude of forms, including the granting of share options to employees, profit-sharing and save as you earn plans. The plan that is used often depends on how benefits under the plan are taxed in the hands of the employee, as well as what tax benefits are available to the employer and/or the employee in respect to their contributions to the plan.

Employee pension and retirement schemes can take a number of different forms. However, such schemes would very often establish a body of trustees who hold the funds on trust in order to provide the benefits provided to members on retirement. The trustees can invest the pension fund money in purchasing shares in the company, lending money to the company, or purchasing premises for leasing to the company. Alternatively, the trustees could hand over the assets and future contributions to an insurance company that would carry on the investment, which means that the trustees would be investing in a single asset in the form of an insurance policy. Trust arrangements for occupational pension schemes offer a number of intrinsic advantages such as flexibility and inexpensiveness.

(f) Syndicated loan agreements and other multi-creditor banking facilities: the advantage of vesting security in the trustees rather than the individual creditors is evident since the administration and realisation of the security is made much easier. Furthermore, having one security holder, rather than many, avoids variations in the application of laws as would arise from the security to be registered in the name of the individual lenders of different nationalities. Also, through a trust arrangement different creditors may be easily replaced since there is no need to assign interests in security and to comply with formalities such as registration of assignments of beneficial interest and the like. Hence, debt novation does not occur through this arrangement since the new beneficiary’s interest would be the same as the interest of the previous beneficiary and consequently the rights of priority remain unaffected. A further advantage which draws upon the trustee’s inherent fiduciary office is that the trustee will act even-handedly vis-à-vis all the bondholders, and not allow itself to be forced to take action by a small group of bondholders, which may be detrimental to the bondholders as a whole.

(g) Insurance policies and the payment of proceeds thereunder: the most popular and most utilised form of insurance trusts is, without any doubt, the life insurance trust. While most insurance policies designate a specific beneficiary, one can establish a life insurance trust that becomes the beneficiary of the policy. Under this arrangement, money is transferred to the trustee who acquires a life insurance policy on one’s life. The trustee would hence be the owner and beneficiary of the policy. At the settlor’s death, the trustee collects the insurance proceeds and either manages them for the descendants of the deceased or other trust beneficiaries or distributes them as the settlor would have directed in the trust instrument.

(h) Timeshare and multi-property structures: the advantages of vesting variable assets in a trustee for the benefit of multiple beneficiaries have already been discussed above and these also apply to this type of commercial transaction. Typically in timeshare operations the trustee would be the owner of the immovable property and the beneficiaries would be the owners of the rights under the timeshare arrangement. The beneficiaries would in most instances form part of an association or a club and their interest in the trust would be represented by a certificate.

A Reputable Alternative

One of the great attractions of the Maltese trust for the transaction planner designing a business deal is the convenience of being able to absorb into the ground rules for the business deal, those fundamental and well-articulated principles of fiduciary law that protect trust beneficiaries of all sorts. These attractions have made the Maltese trust a reputable alternative to other devices, such as contract and incorporation, whenever the relationship to be established is too delicate or too novel.