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By Albert H. Oosterhoff
1. Introduction
The right of trustees to be indemnified for expenses properly incurred, that is, expenses that are reasonable, is a topic that crops up regularly. I have written papers and articles on the topic,[1] and so have others.[2] The issue arose again in a recent Privy Council case, Equity Trust (Jersey) Ltd v Halabi and ITG Ltd v Fort Trustees Ltd,[3] two unconnected cases heard together on appeal, respectively from the Court of Appeal of Jersey and the Court of Appeal of Guernsey. I shall refer to the Equity Trust cases as the ‘Jersey Appeal’ and the ITG case as the ‘Guernsey Appeal’. However, both cases are governed by Jersey law.
The case is very lengthy – it runs to 333 paragraphs – but it is well worth reading because the Board gives a fulsome[4] account of the trustee’s right, and because it addresses a matter not previously considered, namely the right of a former trustee to be indemnified for its expenses when the trust is insolvent in the sense that the trustees’ claims exceed the amount of the trust fund.
In order to ensure that this blog does not become unnecessarily long, I have avoided the citation and discussion of cases relied on by the judges. However, there are copious references in the judgments to authorities and the reader will be able to find them by reference to the paragraph numbers that I have included.
2. Facts
For the purpose of this blog it is not necessary to consider the very complex facts of the two cases in detail. The following will suffice to understand the reasons of the Board.
With respect to the Jersey Appeal, Equity Trust (‘ETJL’) was the original sole trustee of two trusts until it retired in 2006. It was entitled to demand security for existing, future, and contingent liabilities and entered into an agreement with the successor trustee for that purpose. The successor trustee was later replaced by another, and it was replaced by yet another in due course. ETJL was sued by the liquidators of a company under the structure of the trust, and under a settlement it became liable for £16.5 million. Ultimately, in these proceedings ETJL sought to recover that amount, which it paid to the liquidators as well as £2.4 million for the costs of the proceedings. The matter was dealt with first by the Royal Court and then, on appeal by the Jersey Court of Appeal, It held in 2019: (1) a trustee has a single right of indemnity that covers all properly incurred liabilities of the trustee; and (2) as between successive trustees, a former trustee’s right of indemnity and lien ranks ahead of a successor’s right on a first in time basis.
With respect to the Guernsey Appeal, Investec Trust (Guernsey) Ltd (‘ITG’) and Bayeux Trustees Ltd (‘Bayeux) were the original trustees of a discretionary trust (together ‘I&B’). They were later removed and replaced by another trustee, which was later in turn replaced. I&B became liable to companies incorporated in the British Virgin Islands (‘BVI companies’). In 2010 the liquidators of those companies demanded repayment from I&B for the amount due to them. In subsequent proceedings I&B asserted a lien over all the assets of the trust that were in their possession when they were replaced and the right to retain trust assets. Again, the matter was dealt with first by the Royal Court and then by the Guernsey Court of Appeal. It held, inter alia, (1) the claims of a former trustee and its trust creditors take priority over those of a successor trustee; and (2) the claims of a trustee or former trustee in exercise of its right of indemnity against trust assets take priority over unpaid creditors of the trustee claiming by way of subrogation to the trustee’s right of indemnity. Further, the claim for unpaid remuneration also ranks ahead of the claims of the creditors. On the appeal there were no outstanding creditors, so that issue became irrelevant. I&B pursued the right of indemnity in respect of their very substantial costs in earlier proceedings and their unpaid remuneration.
The successor trustees and others in both cases appealed to the Board with leave.
Also relevant on the appeals were the provisions of article 32 of the TLJ as amended in 2006. It provides:
32. Trustee’s liability to third parties
(1) Where a trustee is a party to any transaction or matter affecting the trust –
(a) if the other party knows that the trustee is acting as trustee, any claim by the other party shall be against the trustee as trustee and shall extend only to the trust property;
(b) if the other party does not know that the trustee is acting as trustee, any claim by the other party may be made against the trustee personally (though without prejudice to his or her personal liability, the trustee shall have a right of recourse to the trust property by way of indemnity).
(2) Paragraph (1) shall not affect any liability the trustee may have for breach of trust.
In earlier proceedings, referred to as Investec 1,[5] the Board held (in paragraph 61) that article 32(1)(a) has the effect of abrogating the rule of English law that the liability is enforceable against the trustee personally in the case of liabilities to parties who know that the trustee is acting as trustee. Moreover, a creditor does not have a right in rem against the trust assets but can access trust assets only by way of the trustee’s right of indemnity.
At para 59 of Investic 1, Lord Hodge listed some well-known principles of English trust law that are relevant to this case. It is tempting to repeat them here because they state very basic principles of trust law and thus they should be required reading for all trust students and those who practice in this area. However, that would make this blog even longer that it is. In any event, they are discussed again in the reasons of the several judges, and they are summarized in the judgment of Lord Richards and Sir Nicholas Patten at para 53.
3. The Judgments
3.1 Lord Reed
Lord Reed gives a short introductory judgment at the outset. In it he lists the issues that arise and gives a brief summary of the various judgments. Considering the length of the judgments this is very helpful.
With the answers given by the Board added in bold, the issues are:
1. Does the right of indemnity confer on the trustee a proprietary interest in the trust assets? Yes.
2. If so, does the proprietary interest of a trustee survive the transfer of trust assets to a successor trustee? Yes.
3. If so, does a former trustee’s proprietary interest take priority over the equivalent interests of the successor trustees? Majority: No.
4. Does a trustee’s indemnity extend to the costs of proving its claim against the trust if the trust is ‘insolvent’, in the sense that the trustees’ claims to indemnity exceed the value of the trust fund? Yes.
Lord Richards and Sir Nicholas Patten wrote the main opinion (the ‘Joint Opinion’). Lord Stephens agrees with this judgment. So do all the other judges, except on the third issue. Lord Richards and Sir Nicholas take the view that the trustees right to indemnity is determined by the chronological order in which they were appointed. The judgment of the majority on this issue is the judgment of Lord Briggs. It favours the pari passu ranking of trustees’ claims to be indemnified out of the trust fund. Lady Rose and Lord Reed agree with it, as does Lady Arden, although her reasons are not entirely consistent with those of Lord Briggs.
3.2 Lord Richards and Sir Nicholas Patten
After summarizing the history of the matter and the decisions in the lower courts and listing the issues, the Joint Opinion first discusses the trustee’s right of indemnity in English law (paras 56ff). They are:
(1) The right of indemnity has two aspects, a right of reimbursement and a right of exoneration. The right entitles a trustee: (a) to be reimbursed for any liabilities property incurred in the execution of the trust and that it has paid from its own resources; and (b) to pay or seek payment of the liabilities from the trust assets without first paying them itself.
(2) The right arises because the trustee is personally liable for all debts and obligations incurred by it in the course of acting as a trustee. A trust is essentially the obligations enforceable in equity against the trustee. On the application of the persons to whom the obligations are owed, typically the beneficiaries, equity will enforce those obligations against the trustee and third parties who have acquired legal title to trust assets (other than a third party who is a bona fide purchaser for value of the legal estate without notice of the trustee’s equitable obligations).
(3) Therefore, creditors can enforce liabilities incurred by a trustee acting as such personally and they may execute the judgments against the trustee’s personal assets. Creditors cannot execute their judgments against the trust assets. However, creditors have a right of recourse to trust assets by way of subrogation to any unexercised right of the trustee to exoneration from the trust assets.
(4) It is inaccurate to speak of an ‘insolvent trust’, since a trust is not a legal person and all liabilities incurred by the trustee are the personal liabilities of the trustee. Only the trustee can become insolvent whether of its trust liabilities or its personal liabilities. Hence, it is also inaccurate to speak of ‘trust creditors’.
(5) The right of indemnity arises by operation of law, for it is a right conferred by equity on all trustees.
(6) The right of indemnity does not impose any personal liability on any person, whether a beneficiary or successor trustee. The right of indemnity is a right to be paid out of trust assets.
(7) The right of indemnity is not lost when the trustee ceases to be a trustee. It remains enforceable by the former trustee or its estate.
(8) The right of indemnity is for the gross amount of trust liabilities the trustee has incurred less any amounts for which it is accountable to the trust.
(9) The right ‘trust creditors’ to the trustee’s right by way of subrogation extends only as far as the trustee’s claim. Thus, if the claim does not exist because the amounts the trustee owes to the trust exceed that amount of its claim, the creditors have no right of subrogation.
(10) Each trustee enjoys its own right of indemnity.
(11) Although prevention of unjust enrichment is a necessary consequence of the indemnity, the principal purpose of the right of indemnity is to ensure that the trustee is not required to bear liabilities that were not incurred for its own benefit. Thus, it serves to protect the trustee.
Issue 1. Does the right of indemnity confer on the trustee a proprietary interest in the trust assets?
The Joint Opinion first emphasizes the distinction between a common law lien and an equitable lien. A common law lien is possessory and is lost when the lienholder gives up possession. An equitable lien, such as conferred by the right of indemnity, does not depend on possession. Rather, it entitles the lienholder to claim the property over which the lien exists in discharge of the amount due to it. Since the lien is enforceable in equity, the lien gives the lienholder a proprietary interest in the property. (Para 72, followed by case authority.) This means that the lien is not just a right to retain trust assets, for the lien is not possessory (para 93).
The Joint Opinion notes that English courts have not explicitly said that the equitable right of indemnity confers a proprietary interest on the trustee, but since the lien is enforceable by a court of equity, that leads perforce to the conclusion that it confers a proprietary interest in the trustee (para 94). The Joint Opinion goes on to note that the Australian courts have consistently held that the proprietary interest arises (para 95) and then it examines the Australian jurisprudence on this point in great detail.
Issue 2, Does the proprietary interest of a trustee survive the transfer of trust assets to a replacement trustee?
The Joint Opinion notes first that this is not an issue that has ever been considered by an English court. However, it goes on to note that since, in equity, the right confers a proprietary interest in the trust property in favour of the trustee, it would be surprising that it ceases to exist when the trustee is replaced, and the property is vested in its successor. It is an essential feature of an equitable interest that it survives a transfer of the legal title, and it must do so since the right of indemnity continues. The Joint Opinion then refers again to Australian jurisprudence. It notes that it establishes that a trustee’s right of indemnity generates an equitable proprietary interest. But one Australian case clarifies that idea. It is often said that the trustee has an equitable charge of lien over the trust property, but the case goes on to say: ‘It is not, however, a charge or lien comparable to a synallagmatic security interest over property of another. It arises endogenously as an incident of the office of trustee in respect of the trust assets’.[6] This confirms what the Joint Opinion concluded under the first issue. Thus, in a sense the trustee’s lien confers a sui generis right. the Joint Opinion acknowledges that the decisions of the High Court do not address the question whether the interest survives when the trustee is replaced, and trust property is transferred to a successor. But neither is it inconsistent with the survival of the proprietary interest (para 142). Moreover, judgments in lower courts do state that it does survive (paras 145ff). Further, leading textbooks take the same view (para 165).
Issue 3. Priority as between the proprietary interests of successive trustees.
As noted above, it is on this issue that the majority disagree with the Joint Opinion.
The Joint Opinion notes that this is not an issue that has been decided before. It takes the position that, as a general rule, the priority of equitable interests is determined by the order of their creation (para 176). In other words those first in time have priority. The Joint Opinion refers to a number of authorities in support of this position. The successor trustee appellants in particular opposed this approach but the Joint Opinion rejects their submissions. In paragraph 191 the Joint Opinion refers back to the earlier discussion about the protections given to outgoing trustees with respect to their right to indemnity. Then it goes on and says, ‘The provision of such protection is inconsistent with the rights of indemnity of successive trustees for properly incurred liabilities ranking pari passu. If those rights rank pari passu, it is difficult to identify any principled reason for providing protection to outgoing trustees’.
The Joint Opinion then goes on in paragraph 214 to consider whether the first in time principle is inconsistent with Jersey customary law or the provisions of the TJL. It concludes first that no inconsistency arises with respect to this principle. It also concludes (in paragraph 217) that the continued existence of a lien in favour of a trustee is not inconsistent with article 34(2) of the TJL (now article 43A since 2018). Article 34(2) states that a trustee who resigns, retires, or is removed may require to be provided with reasonable security for liabilities before surrendering the trust property. The appellants argued that Article 34(2) would be rendered otiose if the trustee’s proprietary interest were held to survive the transfer of trust property to a new trustee. But the Joint Opinion, having earlier rejected this submission as regards the rights of trustees under English law concludes that the same reasons serve to reject the appellants’ submission on this point. It held further that there is no inconsistency between the contractual indemnity under the agreement ETJL entered into with the successor trustee and its equitable proprietary interest. There is no basis for raising an implied waiver by ETJL of its rights. Accordingly, the Joint Opinion held that the principles of English law discussed earlier ‘are fully applicable to trusts governed by Jersey law and are not inconsistent with, or modified by, Jersey customary law or legislation’ (para 232).
Issue 4. The recoverable costs issue.
The Joint Opinion concludes that the decision of the Jersey Court of Appeal in 2019 holding that ETJL is entitled to recover its costs of proving its claim, is correct. It is well-established that a trustee is entitled to recover such recovery costs. Moreover, there is no basis for suggesting that this right does not survive after the trustee is replaced, since a former trustee’s right of indemnity survives its replacement.
3.3 Lord Briggs
Lord Briggs agreed with the Joint Opinion that, as between equitable proprietary interests, the general rule is that the first in time prevails. However, he disagrees with the Joint Opinion that the general rule applies also to the right of indemnity. In his view, ‘there are sufficiently powerful reasons, of justice, equity, fairness and common sense for preferring a pari passu rule of priority … to the first in time default rule’ (para 239).
His Lordship notes that the lien works both by way of exoneration and indemnity. While a trustee is in office the lien works mostly by exoneration, but it may also work by indemnity if the trustee has personally paid for an expense. After the trustee retires, both ways in which the lien works may come into play (paras 241-243). Regardless, the lien serves two purposes. The first is that, as against the beneficiaries, trustees have priority over beneficiaries to be paid for reasonable expenses. The second is that the lien ensures that trustees can obtain financing for the better operation of the trust. However, it is striking that none of the authorities suggest that a purpose of the lien is to give one trustee priority over another when the trust is inadequate to pay all. There is therefore a marked contrast between the trustee’s lien for indemnity and other equitable proprietary interests that confer security on one party. Such interests confer priority over earlier equitable interests (paras 245-246). They are security for payment, whereas the trustee’s lien is not security for payment but a means of payment (para 249). Therefore the trustee’s lien ought to be assigned a carefully considered priority rule of its own (para 250).
His Lordship takes the view that the liens of successive trustees are equal, but that it is not appropriate to say that they are in any way in competition with each other (para 254). He disagrees with the Joint Opinion’s view that a trust has no relevant institutional or enduring quality of its own. His Lordship makes the following significant observation in this regard (para 256):
While a trust does not, even in Jersey, have a separate legal personality of its own, it is in my view relevantly to be regarded as a form of continuing institution or scheme under which a fluctuating body of assets (the fund) is administered by fiduciaries who may change over time, for the benefit of beneficiaries who may likewise change, subject to a set of rules contained in the trust deed and the general law, which may also change, by amendment of the trust deed, by judicial variation, by legislation or even by the ‘export’ of the trust into a different legal jurisdiction. Despite all these potential changes, the trust itself has an enduring character which is not dependent upon separate legal personality, any more than it is a partnership or unincorporated association.
This observation is central to his Lordship’s view that ‘the insufficiency of the fund to meet all the trustees’ lien-based claims in full is a common misfortune for which a pari passu sharing of the residue is the fairest, or least worst, general rule’ (para 257). Hence, his Lordship concludes that there is nothing in the typical nature of a rolling succession to suggest that a first in time rule would work better equity than a pari passu rule (para 259). However, he recognizes that exceptional circumstances may occasionally arise in which the pari passu rule might work inequity, so that the court might have depart from it (para 269).
3.4 Lady Arden
Lady Arden disagrees with the Joint Opinion only on issue 3 – whether a former trustee’s proprietary interest takes priority over the interest of successor trustees. In her view, ‘it is consistent with the principles of equity to hold that the first-in-time maxim does not apply to successive trustees’ proprietary interests arising because of their right of indemnity in relation to an identical trust’ and that ‘it is inconsistent with equitable principle that the former trustee should have priority in that situation’, since the trustees’ priority is against the beneficiaries, not against each other (para 279).
Her Ladyship reviews the nature of a trust, the nature of the trustee’s lien for exoneration or reimbursement, and the reasons for the right of indemnity as discussed in the Joint Opinion. She agrees that the right of indemnity means that a trustee has an equitable interest in the trust fund that has priority over the beneficiaries. However, the right of indemnity does not give one trustee priority over another (para 288).
Lady Arden also agrees with Lord Briggs’s view that when the fund is insufficient to pay all the trustees’ lien-based claims in full the court should not give priority on a first-in-time basis, but on a pari passu basis. However, she disagrees with Lord Brigg’s view that the ‘common misfortune’ doctrine supports a pari passu distribution. In her opinion there was never any priority to begin with, except as regards beneficiaries (para 312). In her view, a pari passu distribution is simply the fairest mode of distribution in equity (para 315).
Thus, Lady Arden would allow the appeals (para 317).
In an Appendix her Ladyship discusses recent reforms in Jersey trust law and believes that they support her conclusion that trust liabilities do not rank in priority under a first-in-time rule. She quoted from Lord Hodge’s judgment in Investec 1.[7] As noted above,[8] in paragraph 61 of his judgment in that case Lord Hodge opines that the effect of article 32(1) of the TJL as amended abrogates the rule of English law that looks no further than the legal entity that has assumed liability, that is, the trustee. Section 32(1) draws a distinction between a trustee’s personal and fiduciary capacities and says in effect that the trustee does not incur liabilities personally but as trustee. The consequence is that creditors have no access to the trustee’s personal estate. However, in paragraph 62 Lord Hodson notes that article 32(1) has not changed the rule that a creditor can reach trust assets only through subrogation to the trustee’s right of indemnity. Thus, section 32(1) has not gone as far as developments in the United States which personify a trust by giving creditors a direct action against the trust while relieving the trustee of personal liability.[9]
In paragraph 330 of her judgment Lady Arden agrees with the Joint Opinion (in paragraph 58) that in English law a trust is not an institution or a legal entity, separate from the trustee. But in her view the situation is now different in Jersey. She says, ‘However, in relation to the enforcement of trust-related liabilities owed to third parties, in my judgment, where article 32(a) applies, it appears that a Jersey trust is treated as a separate legal entity and can now, for instance, where that is so, properly be described as insolvent’.[10] If this is the correct view, the JTL has indeed made a significant change in trust law.
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[1] See, e.g., Albert H. Oosterhoff, ‘Indemnity of Estate Trustees as Applied in Recent Cases’ (2013), 41 Adv Q 123.
[2] See, e.g., Joel Nitikman, ‘The Trustee’s Lien and the Law of Insolvency: The Twain Meet in the Australian High Court’ 39 ETPJ 28’, and ‘The Trustee’s Right to Indemnity and Section 159 of the Income Tax Act: Liening the Wrong Way?’ (2018) 24 Trusts & Trustees 682.
[3] [2022] UKPC 36.
[4] I am using this word in its original meaning of ‘abundant’.
[5] Investec Trust (Guernsey) Ltd v Glenalla Properties Ltd [2019] AC 271 (Investec 1’)
[6] Re Amerind Pty Ltd (in liq), Carter Holt Harvey Woodproducts Australia Pty Ltd v The Commonwealth of Australia, [2019] HCA 20, 268 CLR 524, para 80 (majority judgment of Bell, Gageler, and Nettle JJ, with whom Gordon J agreed). It is interesting that Bryan A Garner in his Garner’s Dictionary of Legal Usage, sub voce synallagmatic contract, objects to the use of the adjective synallagmatic since it is a civil law term. He argues that instead of ‘synallagmatic contract’ we should use the term ‘bilateral contract’ instead in Anglo-American law. The Oxford English Dictionary defines synallagmatic as ‘Of a contract, treaty, etc.: imposing mutual obligations, reciprocally binding’. The adverb endogenously, also used in the quotation means, ‘having an internal use or origin’.
[7] Footnote 5, supra.
[8] In the text at footnote 5, supra.
[9] See American Law Institute, Restatement of the Law of Trusts, 3rd (2012), vol 4, Chapter 21, referred to by Lord Hodson.
[10] Emphasis in the original.
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