Trustee’s Lien decided by Privy Council: Equity Trust (Jersey) Ltd v Halabi
Overview
This briefing considers the Privy Council judgement in two appeals (ETJL v Halabi; ITGL v Fort Trustees [2022] UKPC 36) regarding the nature and scope of trustee’s rights to recover from or be indemnified out of trust assets in respect of liabilities and other expenditure properly incurred in respect of the trust by the trustee.
Facts
The litigation concerns a Jersey discretionary trust, (the ‘Z II’ Trust). The Z II Trust was considered ‘insolvent’, as its liabilities (incurred by a number of successive trustees) far exceeded its assets.
Equity Trust (Jersey) Ltd (‘Equity’) retired as trustee in 2008. In late 2015, Equity was sued and paid a settlement of £18m. Equity sought to assert its indemnity from the funds of the Trust held by the successor trustee. Equity’s argued was that the debt was first in time and took priority over all claims of other creditors of the Z II Trust.
Initially the Royal Court in Jersey held that all the debts should rank pari passu and as a result Equity was not entitled to priority. The Jersey Court of Appeal overturned the Royal Court, and held that Equity’s lien was first in time and accordingly took priority over the other creditors.
Recovery by Trustees out of assets in the case of an “insolvent” trust
Unusually, a seven-member panel was convened because the Privy Council reconsidered part of its decision in Investec Trust (Guernsey) Ltd v Glenalla Properties Ltd [2019] AC 271. Both appeals concerned Jersey law, as well as having significance throughout the common law world. It relates to circumstances where the trust fund is ‘insolvent’, where the trust assets are insufficient to meet the amounts due under the trustee’s right of indemnity.
There were four principal issues:
Does the right of indemnity confer on the trustee a proprietary interest in the trust assets? Answer: yes. On this issue the verdict was unanimous.
If so, does the proprietary interest of a trustee survive the transfer of the trust assets to a successor trustee? Answer: yes. On this issue the verdict was unanimous.
If so, does a former trustee’s proprietary interest in the trust assets take priority over the equivalent interests of successor trustees? Answer: The Board was split 4:3. The majority view, expressed by Lord Briggs (whom Lord Reed and Lady Rose agreed with) and Lady Arden was that trustees’ claims rank pari passu. A strong minority view led by Lord Richards and Sir Nicholas Patten, with whom Lord Stephens agreed, was that trustees’ claims rank according to the chronological order in which they were appointed, consistently with the usual ‘first in time’ rule applicable to equitable proprietary interests.
Does a trustee’s indemnity extend to the costs of proving its claim against the trust if the trust is ‘insolvent’, in the sense that trustees’ claims to indemnity exceed the value of the trust fund? Answer: yes, On this issue the verdict was unanimous.
Position of Third Party secured creditors
A remaining issue concerns the position of external secured creditors to a trust and how their claims rank in priority as against the trustee’s lien. Trustees (present and former) count as secured creditors but their liens rank equally vis-à-vis one another and there is no ‘first in time’ rule. Unsecured creditors of the trust will rank pari passu (subrogated to the lien of the trustee with whom they contracted and alongside the other creditors of that trustee).
It seems (although it is not clear) that external secured creditors still benefit from a first in time priority vis-à-vis other later secured creditors and as against the trustee from whom they were granted their security.
Conclusion
Trustees when they retire should be aware of this key judgement and mindful that the indemnity they hold only entitles them to equal rights against liabilities incurred in the future and owed to future trustees.
Amati Law’s experts in trust disputes and contentious matters regularly advises trustees and lay clients on trust issues.
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