Created Date:
30 January 2014

High-profile Guernsey trust court case sets important precedent on trustee liability

Carey Olsen has acted for the winning parties in a decision issued by Guernsey's Royal Court in a landmark trust case involving Robert Tchenguiz and one of the offshore trust structures in which his assets are held.

Carey Olsen represented Grant Thornton's Stephen Akers and Mark McDonald, who had been appointed as joint liquidators of some of the companies involved in the Tchenguiz structure and who are now judgment creditors for over £183 million.

The hearing took place in June 2012 before Lieutenant Bailiff Sir John Chadwick QC and is of fundamental importance to the international trust industry, providing clarity on the rights of trustees to an indemnity from trust assets and the rights of creditors dealing with trusts.

At the heart of the case was a dispute over enforcement of loans entered into by former trustees of a trust who had, on their removal, exercised a lien over the trust assets.  The former trustees argued that they were only liable to the extent of the trust assets. The new trustee disputed this on the basis that the former trustees had been negligent or grossly incompetent.  The new trustee argued that the former trustees were personally liable for the loans and should not, therefore, be allowed to pay the loans out of the trust assets.

The court heard evidence about the Tchenguiz family including father Victor Tchenguiz and his three children: Robert, Vincent and Lisa.   The Tchenguiz family had amassed a significant fortune over many years, derived mostly from property development and financial engineering.  The family members have been the subject of much media interest and are known for living a flamboyant lifestyle.  They own a number of well-known properties in London and are resident non-domiciliaries there.  Much of the family's wealth was held in the Tchenguiz Family Trust (the "TFT").  

The proceedings before the Royal Court stemmed from the separation of Robert’s wealth out of the TFT in August 2007 and into the Tchenguiz Discretionary Trust (the "TDT").   The TDT is governed by Jersey law but was administered by trustees based in Guernsey, Investec Trust (Guernsey) Limited and Bayeux Trustees Limited ("Investec").  Robert Tchenguiz appointed himself as protector in June 2010 and was also the main beneficiary of the TDT.

Although the TDT started life with relatively modest assets, these were very quickly dwarfed by the heavily-geared investment portfolio operated by the TDT on the advice of its investment adviser, R20, whose directors included Robert Tchenguiz and Tim Smalley.  Significant sums were borrowed from a variety of institutions to buy investments, with the TDT pursuing highly-speculative investment strategies. At its height, the total borrowings in the entire TDT structure amounted to approximately £4 billion.  The TDT also held interests in many companies, including four registered in the British Virgin Islands: Glenalla Properties Limited, Eliza Limited, Thorson Investments Limited and Oscatello Investments Limited (the "BVI Companies").  

During 2006 and 2007 a number of loans and overdraft facilities were entered into between Kaupthing (the Icelandic bank), the TDT and the BVI Companies.  Through 2007 to 2008 the TDT borrowed heavily from the BVI Companies, to the tune of approximately £183 million.  These borrowings were used to finance a heavily-geared investment portfolio, with Investec moving the funds around the TDT as required for the various investments.  The portfolio included investments in many well-known names such as Sainsbury's, Mitchells & Butlers and properties around Farnborough Airport. 

In late 2007/2008, the TDT became increasingly dependent on third party funding to stay afloat, with Kaupthing providing millions of pounds in overdraft facilities to ensure the survival of the TDT.  By 2008, Kaupthing had increased its lending to the TDT structure to £600 million.  However, even with this level of support, the TDT experienced an irreversible downward spiral due to the increasing number of margin calls on investments held by the TDT on R20's advice.   In early October 2008 Kaupthing collapsed, resulting in the termination of any further credit facilities to the TDT and the sale of various underlying assets at a substantial loss.   In turn, this led to the appointment of Grant Thornton partners Stephen Akers and Mark McDonald, initially as receivers and subsequently as liquidators of the BVI Companies (the "Liquidators").

On their appointment, the Liquidators demanded repayment from Investec of the funds which the BVI Companies had lent the TDT.

In Spring 2010 Investec brought proceedings in the Royal Court regarding the loans.  However, in July 2010 Investec was removed from office as trustee of the TDT by Mr Tchenguiz and Rawlinson & Hunter in Geneva ("R&H") appointed in their stead.   Investec rejected the Liquidators' claims for repayment and, following R&H's appointment, exercised a lien as trustees over the TDT assets.   R&H intervened in the proceedings arguing that Investec had acted in breach of trust for creating the loans and then failing to extinguish them.  They also argued that Investec was personally liable for the BVI Companies’ debts, so that the TDT's assets should not be used to satisfy the Liquidators' claims.

Carey Olsen was appointed to act for the Liquidators.  The team included Carey Olsen head of litigation John Greenfield supported by of Counsel Elaine Gray, senior associate Natasha Kapp and associate Tabreez Ahmed.

Carey Olsen succeeded in persuading the Royal Court of Guernsey that the money claimed by the BVI Companies was owed and should be repaid personally by Investec from the assets of the TDT.  As a result, the BVI Companies are now judgment creditors of Investec and of the TDT and are therefore able to take action against the TDT's assets to satisfy the debt.  Unfortunately, the TDT's assets are believed to be worth a mere £30 million so that it is not yet clear whether or not there will be enough cash to repay the liability to the BVI Companies.

The court's decision focussed on whether or not Jersey law should apply to the Liquidators' claims.  As the TDT was governed by Jersey law, was the "proper law" Jersey law or, as Investec was based in Guernsey, Guernsey law, or, if different, the law which governed the loan agreements?

The court analysed the loan transactions and decided that Jersey law was not the proper law of the loan agreements.  As a result, Investec could not rely on the Jersey statutory limitation which can apply where a trustee enters into a contract with a third party on the express basis that they are acting as trustee.  Further, Investec could not rely on the Guernsey statutory protection to limit their liability in respect of claims under contracts with third parties because the trust was a 'foreign' trust (in other words, it was not governed by Guernsey law).   The court therefore found that Investec was not able to rely on the statutory limitation of liability and was found personally liable on the BVI Companies' claim to payment under the loans. Both Investec and R&H have lodged appeals against this decision. In the interim, the Court has made an order subrogating the Liquidators to Investec's rights in relation to the trust fund and has appointed receivers to manage the trust fund pending final determination of the appeals.  These orders are believed to be the first of their kind in the offshore world.

Advocate Greenfield said: “The court's reasoning in relation to the statutory limitations of trustees' liability will be of significant interest to the international trust community.  Trustees should ensure that contracts which they enter into contain wording limiting the extent to which the trustee is personally liable, especially where they administer trusts which are not governed by the law of their home jurisdiction."

Advocate Greenfield continued: "The Guernsey court’s judgment sets an important precedent on trustee liability which will colour the trust law in the Channel Islands, other common law offshore jurisdictions and, indeed, English trust law."