The facts of the case

The factual background is set out succinctly by the Court of Appeal (Sir Michael Birt, the former Bailiff of Jersey, now also a Justice of Appeal of the Cayman Islands, John Martin QC, also a Cayman Justice of Appeal, and David Perry QC).

Rusnano Capital AG (in liquidation) was a subsidiary of a Russian state-owned entity. The group invested in nanotechnology. A Mr Pavel Erochkine was one of its employees. He worked on a transaction where an investment was made in a company called Pro Bono Bio plc (PBB). The shares in PBB were to be held through a trust called the RN Pharma Trust. The trustee was a BVI company called Molard International (ptc) Ltd and the appointor and enforcer of the trust was another BVI entity called Pullborough International Corp. Mr Erochkine beneficially owned both BVI companies.

There was a dispute between Mr Erochkine and Rusnano Capital about the background to the creation of the trust and whether there had been an intention that Mr Erokchine should benefit from the success of the investment in PBB through the mechanism of the trust by being added subsequently as a beneficiary.

The trust instrument itself contained powers to add or exclude beneficiaries; nobody had exercised these powers. At all relevant times there was only one beneficiary, Rusnano Capital.

The liquidator of Rusnano Capital wrote to the trustee calling for the determination of the trust and invoking section 53 Trusts (Guernsey) Law 2007 which states: "Without prejudice to the powers of the Royal Court under subsection (4), and notwithstanding the terms of the trust, where all the beneficiaries are in existence and have been ascertained, and none is a minor or a person under legal disability, they may require the trustees to terminate the trust and distribute the trust property among them."

The construction of s53(3) and the right to terminate

The preliminary issue arose as to whether the power to appoint meant that the beneficiary class had not been ascertained and therefore the s53(3) right to terminate did not arise.

The Deputy Bailiff found in favour of Rusnano Capital, holding that, contrary to the generally accepted effect of the rule in Saunders v Vautier and notwithstanding the fact that the Guernsey provision was the enactment of an equivalent principle, the object of a mere power was not a beneficiary within the meaning of the Law of 2007. Rusnano Capital was the only beneficiary and could therefore require the trust to be terminated.

He held that: "What matters...is how to give effect to the statutory regime that operates in Guernsey, using the definitions found in the 2007 Law itself and giving the other words their meanings through applying usual principles of statutory interpretation."

He went on to find that the definition of a beneficiary in the Law of 2007 did not extend to the object of a power to appoint. In doing so, the Deputy Bailiff applied the same distinction drawn in the Jersey case In re Exeter Settlement JLR 169.

The Court of Appeal

The Court of Appeal upheld the Deputy Bailiff's judgment. It accepted that the construction of s53(3) meant that Guernsey law may not be to the same effect as the rule in Saunders v Vautier (the court not finding it necessary to determine the issue under English law). It followed that, as a matter of Guernsey law, the agreement of the object of a power of appointment was not required by s53(3). The court noted that English trust law had in certain respects been modified by statute both in Jersey and Guernsey.

Section 53(4) - a twist

However, there was a twist. Both parties appeared to have overlooked the significance of s53(4) when arguing about s53(3). It was only in the Notice of Appeal that the possible effect of subsection (4) was raised for the first time by the appellants.

Section 53(4) says that: "The Royal Court, on the application of any person mentioned in section 69(2), may (a) direct the trustees to distribute, or not to distribute, the trust property, or (b) make such other order in respect of the termination of the trust and the distribution of the trust property as it thinks fit."

Section 69(2) includes a trustee, settlor, beneficiary or "...with the leave of the Royal Court, any other person."

It followed that, although the appeal failed in respect of the construction of s53(3), it succeeded in its reliance on s53(4).

The court found that the Royal Court could make an order under subsection (4) notwithstanding satisfaction of the requirements of subsection (3). It enabled the Royal Court, amongst other matters, to make an order directing the trustees not to distribute the trust property and to make such other order in respect of the termination of the trust as it thought fit. The court therefore upheld the Deputy Bailiff's construction of s53(3) but remitted the case to him to consider the exercise of his discretion under s53(4).

The court gave examples of the way in which s53(3) might operate.

"A discretionary trust where the beneficiaries were described as 'the children and remoter issue of the settlor' would not be affected because, until there was no possibility of any remoter issue being born in the future, all the beneficiaries would not be 'in existence' as required by section 53(3). However, a discretionary trust whose beneficiaries were described as 'my wife X and my children A, B and C' could be brought to an end by A, B, C and X resolving to do so even if there was an intention to exercise a power to add grandchildren of spouses of A, B or C as beneficiaries at a later stage."

The Red Cross trust argument

An interesting feature of the case was the Court of Appeal's rejection of an argument based upon the effect on so-called "Red Cross trusts." Here we are describing a trust which begins life with only a single beneficiary, a charitable institution, where there is no real intention of benefiting that charity. The argument was along the lines that such an institution could instantly seek the termination of the trust and scoop the pot.

The Court of Appeal was unmoved, saying: "We are not necessarily too discouraged at the possible effect on such trusts. We question whether they are as common nowadays as perhaps they once were and whether they are to be encouraged in an international finance centre such as Guernsey, with a high reputation for upholding international standards."

The court pointed out that beneficiaries could be added before a charity sought termination and again there was the possibility of an application under s53(4).

Costs

The later costs judgment criticised both parties for not appreciating the significance of s53(4). The appellants lost on the principal issue (the construction of s53(3)) which had taken up most of the written and oral submissions. A deduction was made of 20% to allow for the appellant's success in respect of the s53(4) issue. The respondents were therefore awarded 80% of their costs.

Although Rusnano Capital asked for costs on the indemnity basis, the court only awarded them on the recoverable basis. The appellant's conduct (at least in the appeal where the s53(4) point had been taken) had not been unreasonable. Costs below had been reserved to the Deputy Bailiff and remained to be fixed.

The Court of Appeal refused to allow the appellants to reimburse themselves from the trust fund, either for their own costs in connection with the litigation or for the costs awarded against them.

In reality, the contest was between Rusnano Capital and Mr Erochkine. Mr Erochkine ought to have been joined to the Royal Court proceedings, with the trustee and Pullborough remaining neutral. The appellants had fought Mr Erochkine's battle for him. If the appellants were to be allowed to reimburse themselves, the consequence would be that, despite being successful, Rusnano Capital would effectively have paid the losing party's costs in relation to the section 53(3) argument.

Modification by statute

The court made important observations about the nature of Guernsey trust law and its relation to English trust law along with comments about statutory interpretation. In particular, it cited the cases of Spread Trustee Co Ltd v Hutcheson (2002) GCA 299 and 2 AC 194 and Investec Trust (Guernsey) Ltd v Glenalla Properties Ltd GLR 97 in support of the proposition that the question for the court was "...whether any rule of English law has been modified by a Guernsey statute..." concluding in the present case that: "for the reasons which we have given, we are satisfied that it has."

The specificity of Guernsey trust law

The case is therefore important for its emphasis on the fact that, although Guernsey trust law may owe a great deal to English trust law, it cannot be assumed that it is to the same effect. Guernsey trust law has its own specificity. In practice, it will doubtless be rare that all beneficiaries will be in existence and ascertained and a potentially deserving, would-be beneficiary omitted, without a trustee having an opportunity first to appoint such. In any event, however, s53(4) provides a lifeline.

* Gordon Dawes can be reached on +44 1481 723 466; Matt Guthrie can be reached on +44 1481 731 424