07 February 2019

The Cayman Courts: Respected and robust

With its widely respected judiciary and reputation for robust judgments, the Grand Court of the Cayman Islands continues to ensure that the jurisdiction is at the forefront of the development of modern trusts and estates law. The Court has recently released a number of important and interesting decisions regarding the operation of Cayman Islands statutes and common law as they pertain to the operation of trusts and the powers and duties of trustees in this jurisdiction.

Firewalls, fiduciaries and families

The so-called ‘firewall provisions’ of Cayman’s Trusts Law (2018) Revision (the Trusts Law) are an important component of Cayman legislation and give protections to trustees and beneficiaries alike. One of the ways in which these provisions operate is that, if foreign matrimonial proceedings seek to encroach on the administration of a Cayman trust, the trustee of that trust is protected in many respects.

An example of this can be seen in the recent case of In the Matter of the A Trust, where a Cayman STAR trust was the subject of proceedings in the Court commenced by the trustee of the trust. The settlor had executed various letters of wishes, which set out who should and should not benefit from the trust and how the assets of the trust should be applied. The settlor and his wife, N, both of whom were excluded from the trust, subsequently became involved in divorce proceedings before the England and Wales High Court (the English High Court).

The trustee determined that it was not in the best interests of the beneficiaries of the trust to submit to the jurisdiction of the English High Court or to disclose confidential information about the trust to the parties to the English proceedings. Its concern was that, in doing so, it would confer on the English High Court an enforceable power to act to the detriment of the beneficiaries of the trust. However, recognising that it was an important step for a professional trustee to refuse to submit to the jurisdiction of a foreign court, the trustee applied to the Court for directions pursuant to S.48 of the Trusts Law, which provides that a trustee who acts on the opinion, advice or direction given by the Court will be deemed to have discharged its duty as trustee in respect of the subject matter of the application.

The Court confirmed that it was the trustee’s duty to protect and preserve the trust from the claims in the English proceedings and pursuant to Cayman’s firewall legislation, which confirms that a Cayman trust can only be varied in accordance with Cayman law and only by the Cayman Court: any order made by the English High Court against the trustee would therefore not be enforceable against the trustee, the beneficiaries of the trust or the trust fund.

Trustee paralysis

In the judgment arising from In the Matter of Various Trusts, the Honourable Justice Mangatal considered an application made jointly by the beneficiaries of various trusts governed by Cayman law (collectively, the Plaintiffs) for orders substituting a new trustee in the place of the original trustee of those trusts. The original trustee of each of the trusts (the Existing Trustee) was a company incorporated outside Cayman. The trust’s assets were located in a number of countries, including the US.

At the time the application was made, the Existing Trustee was facing allegations by the US government that some of the assets in the trust were in fact traceable to a conspiracy. All of the allegations were strenuously contested by the Plaintiffs, who feared impairment to, or permanent loss of, the assets if the Existing Trustee did not actively engage in the US Proceedings. The Existing Trustee had informed the Plaintiffs that it considered itself to be effectively paralysed from performing its functions as trustee, or from resigning as trustee, due to the risk that, if it were to take any such steps, it would be exposed to civil or criminal liability for any action it decided to take.

The Plaintiffs sought orders that an alternative Cayman trustee (the Substitute Trustee) be installed as the replacement for the Existing Trustee. The Court’s sole focus was to consider whether, in light of the Existing Trustee refusing to authorise the taking of any steps or to resign, it was expedient to appoint a new trustee with the assistance of the Court. In this case, the Court found that its assistance was required to protect the welfare of the beneficiaries and to prevent or circumvent omissions that would endanger the trust property. The Court also found that the Substitute Trustee was fit to act and willing to take steps to protect the assets and to protect the interests of the beneficiaries, and had given Undertakings that it would not take any action that would impair the in rem jurisdiction of the US District Court for the Central District of California, (CDCA) in the US proceedings or cause there to be any change in the ownership of the assets. Orders for substitution were therefore duly made, and the Existing Trustee was replaced by the Substitute Trustee in respect of all trusts of which the Plaintiffs were ultimate beneficiaries. Paralysis on the part of a trustee, whatever its cause, can therefore be resolved with the assistance of the Court, particularly where real and credible threats against trust assets are on the brink of being realised.

Receiverships and trust assets

In another recent case, the Court was asked to consider an application to appoint a receiver by way of equitable execution over future distributions from a Cayman discretionary trust. In the matter of Y v R, a Cayman discretionary trust was the target of enforcement proceedings in the Court in reliance on a US$2 million award issued by a foreign arbitral tribunal. A judgment was entered by the Court in the same terms as the award, and the plaintiff then issued a summons seeking, among other things, an order from the Court for the appointment of receivers by way of equitable execution to receive all distributions to or for the benefit of the defendant from the trust.

The plaintiff submitted that the Court had jurisdiction to appoint a receiver over future distributions from a discretionary trust in circumstances where it was likely that the trustee would apply its discretion in favour of the judgment debtor. However, Justice Mangatal held that to grant the relief sought in the summons would amount to a ‘radical, impermissible extension of the law’ as it stands in Cayman. The judge confirmed the longstanding position with respect to discretionary trusts: that is, a beneficiary holds neither a legal nor a beneficial interest in the trust assets, but merely a right to require the trustee from time to time to consider whether to apply the whole or some part of the trust fund for their benefit. In those circumstances, there was no available asset that could be viewed as the beneficiary’s asset in equity, and as such there was nothing over which to appoint a receiver.

Future judgments

These recent and varied decisions concerning a range of issues that regularly arise in the trusts and estates arena have contributed greatly to the extensive jurisprudence already developed by the Court in the Cayman Islands - both through its interpretation of key provisions of the Trusts Law and application of well-established common-law principles, and more important judgments are expected in the coming year.

 

An original version of this article was first published in the 5th annual Cayman Finance magazine, January 2019.

© Carey Olsen 2019.