23 January 2012

Carey Olsen delivers an insolvency master class to trust practitioners

More than 90 trust and insolvency practitioners received a master class in various insolvency scenarios relating to Guernsey trusts at a breakfast seminar run by Carey Olsen.

Presenting the seminar were head of litigation John Greenfield, litigation partner Karen Le Cras and Michael McAuley, Of Counsel, who between them outlined three topics: insolvent trusts, insolvent trustees and breach of trust.

Speaking on insolvent trusts, Advocate Greenfield explained that, in the current financial climate, cases involving insolvent trusts were becoming more frequent, a pattern which follows other international trust jurisdictions. He urged trustees to be adequately prepared and to take particular note of whether a trust structure ultimately holds sufficient assets to cover its potential liabilities.

“It is crucial for trustees to understand their rights and duties. There is no clear insolvency legislation in Guernsey that refers specifically to trusts as there is in the case of a company,” Advocate Greenfield said.

“The key areas that a trustee must bear in mind are: remaining neutral in any hostile dispute (particularly between warring beneficiaries), keeping a clear paper trail of the decisions made regarding the trust so that, even if the decision is contested, the rationale is clear; and, in cases that are particularly contentious, seeking the court’s blessing (or directions) in order to gain protection for the decision that has been made in the event that it is contested at a later stage. A trustee’s duty of care is to act in the interests of the beneficiaries and this should be in the forefront of their minds in such instances”.

Advocate Le Cras spoke about insolvent trustees, addressing the types of situation that might lead to a trustee becoming insolvent, what happens when a trustee becomes insolvent and is the extent to which creditors might seek to enforce their rights against trust assets in such circumstances.

She said: “Surprisingly, unless expressly required to do so by the trust instrument, there is no requirement, as a matter of trusts law, that an insolvent trustee must resign. However, in practice, that will be resulting effect of a trustee’s insolvency, as this will lead to the loss of the trustee’s fiduciary licence”.

Michael McAuley spoke on the topic of breach of trust by a trustee which is particularly relevant to trust practitioners in the case of insolvency if the breach of trust duty has caused the trust to become insolvent. He compared Guernsey’s trust legislation with that of other jurisdictions, such as Scotland, that defined the term breach and the consequences of a breach more decisively.

He said: “Guernsey should consider revisiting some of the more conceptual aspects of its legislation such as terms like ‘gross negligence’ in order to remain competitive in the future.” He also encouraged a reconsideration of the law of mistake. In the ordinary course beneficiaries should not suffer the consequences of a trustee’s mistake. The courts should be given the necessary legislative armour to remedy mistaken decisions particularly those based on incorrect professional advice.”