Trustees Who Deal With Lenders And Other Third Parties

BACKGROUND: THE POSITION UNDER ENGLISH TRUST LAW

Restricted from entering into liabilities

As a consequence of one of the basic features of English trust law (ie that a trust is not a separate legal entity), a trust cannot as such enter into liabilities, with the result that the primary remedy of anyone dealing with a trustee is against such trustee. This has traditionally made the trust an unattractive vehicle for commercial transactions, which seriously inhibits legitimate commercial dealings by trustees.

Limited value of right of subrogation

Because the primary remedy of the party to whom a liability is owed is against the trustee personally, the courts have only allowed that party recourse to the trust fund by way of subrogation to the trustee's right of reimbursement (so that the third party stands in the shoes of the trustee). However such a right of subrogation may be of no value in a variety of possible circumstances. It will be of no value, for example, if the trust is declared invalid. Nor will it be of any value if the trustees do not have the power to incur such liability (or if they do have the power but have not complied with their fiduciary duties or the internal procedures laid down by the trust). Similarly it may be of no value if the trustees have committed a previous breach of trust or if any of the trustees purporting to create the liability has not been validly appointed (or if the retirement of a previous trustee was ineffective). Additional difficulties of enforcement may arise if the trustee who incurred the liability has died, has retired or has been removed.

Limited comfort of legal opinions

Banks and other third parties who deal with trustees have often relied on legal opinions on the trust's validity and the third parties' ability to enforce their rights against the trust fund, but such opinions have increasingly included so many assumptions that the comfort of banks and other third parties has been correspondingly diluted.

Personal risk to trustees

Moreover trustees, even if acting properly, have been at personal risk if the assets of the trust fund are insufficient to meet the liability. Whilst trustees have been able to limit their liability to the assets of the trust for the time being, they have only been able to do this if they have included an express provision in the contract to that effect: it has not been sufficient for them merely to state that they are acting "as trustees".

Restricted commercial dealings

It will be apparent from the above that the existing position under English law has been most unsatisfactory. Not only has it placed serious difficulties in the way of trustees, but it has also, because of those difficulties, seriously inhibited legitimate commercial dealings by them.

RECENT AMENDMENTS TO THE BVI'S TRUSTEE ACT

Dealings between trustees and third parties

With a view to making BVI trusts significantly more attractive in the commercial context, a number of sections which relate to dealings between trustees and third parties have been inserted into the Trustee Act. These provisions have been inserted into that Act by the Trustee (Amendment) Act, 2003, which became law on 1 March 2004. The provisions in question are based on proposals which were made by the English Trust Law Committee, but with a number of modifications.

Sections 97, 101 and 102

Some of the new sections of the Trustee Act (namely sections 97, 101 and 102) only apply if there is, in the trust instrument, an express statement to the effect that the relevant sections apply to the trust.

Sections 95 and 96

As a result of sections 95 and 96 of the Act, banks and other third parties dealing with trustees will be able to have recourse to the trust fund (and other protection) where, when entering into transactions, they have made reasonable enquiry that the trustee has the express power to enter into such transactions and has complied with any express requirements (such as requirements for consent) contained in the trust instrument.

Section 97

If (and only if) there is a provision in the trust instrument to the effect that section 97 of the Trustee Act applies, the trustee of a trust will not be personally liable under any contract which he enters into with another if he has disclosed (or the other party was aware) that he was contracting as trustee (unless the contract provides otherwise); furthermore a claim based (inter alia) on such a contract may be satisfied out of the trust fund.

Section 98

On the other hand, if the trust has not opted into the provisions of section 97 of the Trustee Act (and if the trust instrument does not provide otherwise), the new section 98 of the Trustee Act specifies that where a trustee enters into a contract, having disclosed his fiduciary capacity, he will be personally liable under the contract to the third party only to the extent of the value of the trust fund when the payment falls due (including the amount of any distributions made after the contract was entered into).

Section 99

The new section 99 of the Act (which is based on the wording of a proposed new US statutory provision) provides that a trustee will only be liable for torts committed in the course of administering the trust if he is personally at fault.

Section 101

The new section 101 of the Act, which only applies where the trust "opts in" to this provision, specifies that, where a person who lends money to trustees requests the trustee to do so, the trustee may restrict his future powers of investment and distribution (and the powers of appointment and removal of trustees) in order to protect that person. The purpose of this new provision is to address the legitimate concerns of those lending money to trustees to the effect that their rights might be diluted as a result of the manner in which the trust is administered after the liability has been incurred.

Section 102

A further "opt in" provision, which enables trustees to create various forms of charges over trust assets in favour of creditors, has also been included in the new section 102 of the Trustee Act.

Governing law

It is important to note that it will often be the case that contractual liabilities incurred by trustees of BVI trusts will be in favour of persons resident in foreign jurisdictions. This being the case, with the aim of ensuring that foreign law does not override the relevant new provisions of the BVI Trustee Act, the third party shouldconsider protecting its position further by stipulating that all questions pertaining to the contract, or at least all relevant questions, will be governed by BVI law.

It is considered that these new provisions of the Trustee Act now make BVI trusts significantly more attractive in the commercial context.

This memorandum is intended as a general introduction to trusts in the BVI. It is not intended to be comprehensive in its scope and we recommend that clients seek legal advice on any particular matters.

Memoranda on other aspects of BVI law have been prepared by Walkers and are available on request or on our website at www.walkersglobal.com.

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.