Shân Warnock-Smith and Andrew De La Rosa examine recent court pronouncements relating to international trust structures and trust litigation.
2014 was something of a bumper year in terms of pronouncements from on high about issues that are central to international trust structures and trust litigation. For example, the basic question of who or what is a ‘trustee’ properly so-called was canvassed in the UK Supreme Court decision in Williams v Central Bank of Nigeria; what is, or is not, an exclusive jurisdiction provision in the trust context was the subject of consideration by the Privy Council in Crociani v Crociani. We do not think that either of these decisions necessarily resolves every fundamental issue raised in them for all time but our primary point for consideration in this article relates to another key area that has remained largely untouched in recent authority and especially at the appellate level – the efficacy of the anti-forced heirship (AFH) and anti-foreign law (AFL) statutory regimes in place in the Cayman Islands and other established international trust jurisdictions.
The relative lack of reported cases concerning such laws as respects claims grounded on foreign (a) forced heirship or (b) community property rights reflects their substantial deterrent effect; a claim attacking a trust in its ‘home’ jurisdiction on such grounds in the teeth of such laws is usually reckoned to face a substantial uphill battle. The option of proceeding in a jurisdiction where trust assets are located and/or where the trustee can be found and there is no such legislative protection in force is often considered the more attractive course.
This deterrent effect, coupled with the incentive for jurisdictions wishing to attract substantial trust administration business to demonstrate that they offer a full ‘suite’ of modern trust law provisions, probably accounts for the fact that that a large number of emerging as well as established international financial centres include AFH and AFL provisions in their trust laws. A non-exhaustive list of such jurisdictions follows:
Bahamas: Trusts (Choice of Governing Law) (Amendment) Act 1996, s.10;
Barbados: International Trust Act (Ch 245) ss.16-18;
Bermuda: Trusts (Special Provisions) Amendment Act 2004, s.11(2);
British Virgin Islands: Trustee (Amendment) Act, 2003, s.83A(19);
Cayman Islands: Trusts Law (2011 Revision), ss.90-93;
Cyprus: International Trusts Law 1992, as amended by the International Trusts Law 2012, s.3(4);
Dubai International Finance Centre: DIFC Trust Law 2005, ss.14 - 17
Guernsey: Trusts (Guernsey) Law 2007, s.14;
Isle of Man: Trust Act 1995, s.5(b)(ii);
Jersey: Trusts (Jersey) Law 1984, Art 9;
Mauritius: Trusts Act 2001, Art 11(5);
Qatar Financial Centre: Trust Regulations 2007, Arts 12-14;
Singapore; Trustees Act (Cap. 337), s90.
(Hong Kong it should be noted has no AFH/AFL legislation of this kind despite incorporating many other modern trust law innovations in force in Singapore and other jurisdictions.)
These jurisdictions are not of course completely uniform as respects the scope of the protection they offer. In broad terms they may be thought to fall into three basic categories: (1) where the law is still based largely on the original Cayman Islands Trusts (Foreign Element) Law 1987 (as amended in 1995) model (2) where that model has recently been adapted essentially in response to the impact of English Family Division matrimonial finance orders, in particular in Jersey and Guernsey, and (3) where the starting point – in particular as respects the law governing a settlor’s legal capacity to create a trust – was materially different from that model, such as Cyprus and Singapore.
The last issue noted – the legal ability of a settlor to create a valid trust and particular one comprising assets located in a jurisdiction or jurisdictions where the trust concept is not recognised - is assuming greater practical significance as individuals from emerging economies in Asia, Eastern Europe, Latin America and the Middle East who have accumulated substantial wealth over recent times consider succession planning options.
The Cayman Islands model AFH and AFL legislation did not attempt to validate every trust of such assets established by a foreign settlor who opted for the application of Cayman Islands law. Provisions now contained in section 90 of the Trusts Law (2011 Revision) begin by stating that “all questions arising in respect of a trust that is for the time being governed by [Cayman Islands law] or in regard to any disposition of property on the trusts thereof . . . are to be determined according to the laws of the Islands, without reference to the laws of any other jurisdictions with which the trust or disposition may be connected.” However, the first proviso to that section states that it “does not validate any disposition of property which is neither owned by the settlor nor the subject of a power in that behalf vested in the settlor, nor does this section affect the recognition of foreign laws in determining whether the settlor is the owner of such property or the holder of such a power.” Section 10 (2)(a) of the Bermuda Trusts (Special Provisions) Act 1989 (as amended) is in substantially the same terms.
At first sight it may be thought to be obvious that a trust purportedly created by a settlor who did not in fact own the property sought to be settled should not be validated by AFH/AFL legislation. But this invites potentially complicated arguments about the meaning of ownership as a matter of foreign law and whether the putative settlor had a power of disposition over the property even if he/she was an owner or co-owner of it under that law.
For reasons summarised below we see this problem as different from that considered in the most recent appellate decision that may be thought to relate to this area, that of the English Court of Appeal in Akers v Samba Financial Group, which might be thought indirectly to support the perception of AFH/AFL legislation as a bulwark against claims based on foreign property and heirship rights.
Where might future challenges to offshore trust structures on the grounds of such rights emerge? As a starting point one can survey the geographical spread of forced heirship regimes, many of which either incorporate ‘clawback’ provisions that may impinge on lifetime dispositions into trusts or other Western law-based fiduciary structures or do not recognise a distinction between legal and equitable ownership. Aside from purely legal questions, local customs and the heirs’ expectations or sense of entitlement may themselves give rise to disputes.
The graphic set out below attempts to categorise the principal forced heirship systems (we have not attempted to categorise every jurisdiction and those shown in white have not been allocated by us into any category as yet):
It will be immediately apparent that outside the English common law-based jurisdictions and across vast areas of the emerging economies forced heirship is the norm. The prevalence of the Islamic Shari’a system from the Middle East through much of Southeast Asia and the European Civil Law system in South America are both particularly notable. Although the categories of forced heirs and the scope of ‘clawback’ rights have been significantly curtailed in major Western European jurisdictions, the impact of forced heirship in other Civil Law countries and in countries where the Shari’a rules are applied remains very strong.
Forced heirship regimes are most often but not invariably associated with some form of community property as the basis of matrimonial property rights. Community of property between spouses necessarily involves some degree of restraint or control of the rights of individual spouses to dispose of property owned in common, which clearly may have an impact on the ability of one spouse to transfer assets acquired during (and sometimes before) the marriage into a trust or other structure.
The graphic copied below (in its original form produced by a French notarial institute) attempts to show the global distribution of community property regimes categorised by the basic criterion of when the spousal rights attach to their property:
In fact the global picture is considerably more complicated than this graphic suggests. In particular, rules as to what law governs the property rights of spouses when they move from their original matrimonial domicile and exactly what rights they have as regards dispositions of property owned in common vary to such an extent that any attempt to colour-code different systems is bound to over-simplify the position. What we have added to the above however is a category (presently consisting only of the PRC. and Peru) where universal community of property is the default regime and there are significant obstacles to (a) contracting out of it and (b) a disposition of any substantial property by one spouse without the express consent of the other. The potential implications for prospective settlors from mainland China who are married to a Chinese national and whose wealth has been accumulated over recent years are obvious.
In future there are bound to be foreign law challenges to trusts established in the major international centres that have AFH/AFL legislation by family members of settlors from the wide range of forced heirship and community property jurisdictions described above. We think it should not be assumed that such legislation is bulletproof and the time is at hand to re-consider how far they do shield against claims based on foreign inheritance and property rights, especially community property rights.
Akers v Samba Financial Group raised the question of the impact of foreign property law on the creation of a trust in the context of the application in England of the Hague Convention on the Law Applicable to Trusts and their Recognition. As noted above, we see this as a different question from that which can arise under the terms of AFH/AFL legislation that does not validate dispositions into trust where the settlor neither owned the property nor had a power of disposition over it. Nonetheless, as Akers has been seen as essentially a trust-friendly or supportive decision in the context of dispositions of assets in non-common law jurisdictions we think it right to note it here.
Akers is part of the well-known Al-Sanea litigation and concerned Mr Al-Sanea’s (a) declaration of himself as trustee of certain Saudi Arabian company shares for his Cayman Islands family investment company and (b) his later purported transfer of such shares, shortly before the investment company’s liquidation, to a Saudi Arabian bank in partial discharge of his indebtedness to it. The liquidator of the investment company sought relief declaring that transfer void. Saudi Arabian law does not recognise any distinction between legal and equitable ownership of shares or the common law trust concept and if that law applied to determine the ownership of the shares the declaration of trust would not be valid.
The argument on appeal turned on whether the Convention as incorporated in English law operated to require recognition of the trust and concentrated on the exclusion contained in Art. 4, which provides that the Convention does not apply to “acts by virtue of which assets are transferred to the trustee.” This is what has often been referred to by textbook writes as the ‘rocket launcher’ question, ie, the distinction between the law which applies to the transfer of assets to the trust as opposed to the law which governs the trust itself.
The Court of Appeal determined that Art. 4 only applies to the question whether it is possible under local law (in this case Saudi Arabia) for the settlor to alienate the property at all and not to the question whether it is possible under that law validly to create a trust of the property. It left open the question of the impact of Art. 15, which provides that the Convention does not prevent the application of mandatory rules of local law, including those relating to the transfer of title to property, the “personal and proprietary effects of marriage” and “succession rights . . . especially the indefeasible rights of spouses and other relatives.” In jurisdictions where the Convention is part of local law (including Bermuda but not the Cayman Islands), the latter two exceptions are of no small moment where forced heirship and community property rights are drawn in question.
A different result on the Art 4 question would have had serious implications for the validity of common law trusts of assets in non-common law jurisdictions. Nonetheless we anticipate that there will be challenges to such structures on the basis of foreign property, inheritance and matrimonial property rules as the geographical range of potentially relevant laws expands.
Shan Warnock-Smith QC is a barrister who provides advisory and litigation services to professional clients in the wealth structuring field. From her bases in London and Cayman, Shan has an international practice, which takes her around the globe to advise and litigate.
Andrew De La Rosa
Andrew De La Rosa has a recognised expertise in cases involving the application of equitable principles and remedies in international disputes, in particular where fiduciary relationships in trust, succession, partnership, corporate governance and investment management spheres are involved. He practices from Cayman and London and has a long-term connection with the Arabian Gulf jurisdictions.