Families and Firewalls—New Trusts Case Law in the Cayman Islands
Article by Robert Lindley and Bernadette Carey From Conyers Dill & Pearman
Private Client analysis: Robert Lindley, counsel & head of private client and trust department for both the Cayman Islands’ and British Virgin Islands’ offices of Conyers Dill & Pearman , and Bernadette Carey, counsel in the litigation and private client departments of Conyers Dill & Pearman in the Cayman Islands, discuss new case law that confirms the operation of the ‘firewall’ provisions of the 2011 Trusts Law in relation to foreign matrimonial proceedings.
Original news
In the Matter of the A Trust (unreported, 1 December 2016)
What is the background to the case?
The case arises out of divorce proceedings that are on foot between Mr A and Ms N in the English High Court. In the English proceedings, Ms N seeks a variation of the settlement deed establishing the ‘A Family STAR trust’—a Cayman Islands STAR trust which is governed by Cayman Islands law—and has the Cayman Islands courts as the forum for its administration.
The trust’s main asset is shares in HHL, which is a Cayman Islands company. HHL owns shares in other companies in the structure, some of which hold legal title to very valuable property assets located in the UK. When establishing the trust, Mr A had excluded both himself and Ms N as beneficiaries of the trust, and the variation sought by Ms N in the UK proceedings is to set aside her exclusion so that she may benefit from the trust.
The matter came before the Grand Court of the Cayman Islands by virtue of an application by the trustee of the trust, who seeks directions pursuant to section 48 of the Trusts Law as to the extent to which the trustee should become involved in the English proceedings.
What legal issues does it involve?
The main legal issues were whether the trustee was required to submit to the jurisdiction of the English courts and participate in the English proceedings and, related to that, whether the trustee should disclose certain confidential information concerning the trust to the parties to the English proceedings. The trustee had decided to do neither, on the basis that Ms N’s claim to vary the trust using provisions in a foreign statue was essentially a third party claim against the trust, and the trustee had a duty to protect and preserve the trust from such a claim.
Because of the seriousness of the decision, however, the trustee sought the guidance of the Grand Court. In giving such guidance, the Grand Court was required to consider the application and effect of ‘firewall’ legislation at sections 90–93 of the Trusts Law and whether it would apply in the present case to prevent enforcement of a judgment of the English court.
To what extent is the judgment helpful in clarifying the law in this area?
Making a decision to refuse to submit to the jurisdiction of a foreign court is a very big step to take, especially for a party with fiduciary duties such as a trustee. For trustees of Cayman Islands trusts, the judgment therefore serves as confirmation that the firewall legislation in the Trusts Law is robust and operates to shield or protect trusts established in the Cayman Islands from foreign laws or judgments.
The judgment points out that if the trustee was to submit to the jurisdiction of a foreign court, it could potentially create a situation where there is a conflict between the trustee’s duty to observe the terms of the trust and its obligation to comply with the terms of the order of the foreign court. It reminds trustees that they must always act in the best interests of the beneficiaries, and the firewall legislation assists in meeting this objective by providing that Cayman Islands trusts can only be varied in accordance with the laws of the Cayman Islands.
To what extent is it significant that the case concerned a STAR trust?
This is significant in relation to the question of whether the trustee was required to provide Ms N with confidential information about the trust. Part VIII of the Trusts Law, which sets out the STAR law, modifies the general provisions regarding the provision of information and documentation to the beneficiaries of a trust. It operates to the effect that beneficiaries of a STAR trust have no standing to enforce the trust at all, with such rights vested only in the Enforcer. This means that anyone seeking information from the trustee of a STAR trust is essentially a stranger, and they would have no automatic entitlement to such information. The status of the trust as a STAR trust therefore made it even harder for Ms N, who was an excluded beneficiary in any event, to successfully obtain further information in respect of the trust.
Are there circumstances where the trustee should submit to the jurisdiction of a foreign court?
Yes. In some circumstances, the actions being requested of the trustee via foreign proceedings may be within the powers of the trustee, and the exercise of those powers may well be in the best interests of the beneficiaries. Submitting to the jurisdiction of the foreign court would not, therefore, be a matter of concern to either the trustee or the beneficiaries. In other cases, the presence of assets within the foreign jurisdiction may warrant participation by the trustee. However, the circumstances of each case and the likely consequences of submitting to the jurisdiction of the foreign court, both shortterm and long-term, should be carefully considered by the trustee before taking any action at all.
What are the practical lessons for advisers?
Bearing in mind the specific elements of local legislation mentioned above, advisers to trustees of Cayman Islands trusts should always take care to closely consider the rights (if any) of the parties seeking to attack the trust, the nature of the orders sought in the foreign proceedings, and the impact of the trustee submitting to the jurisdiction of the foreign court. Where there is a concern that to do the latter would not be in the best interests of the beneficiaries of the trust, it will be appropriate to decline to take part in the foreign proceedings. Where there is any doubt as to the appropriateness of the trustee’s decision in this regard, advisers should not hesitate to recommend that the trustee seek the guidance of the Grand Court, which welcomes the opportunity to give directions regarding contentious matters such as these.
Interviewed by Duncan Wood.
This article was first published on Lexis®PSL Private Client on 30 March 2017.
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.
