TRUSTS: sham/"donner et retenir ne vaut"/"piercing the veil"/infringement of public policy/remedial constructive trust

In the matter of the Esteem Settlement (Abacus (C.I.) Limited as trustee): Grupo Torras S.A. and Culmer -v- Al Sabah and Four Others 2003 JLR 188

Introduction
These proceedings follow a judgment in the English courts in favour of Grupo Torras SA ("Grupo Torras") in the amount of US$800 million relating to fraud committed against Grupo Torras by Sheikh Fahad Mohammed Al Sabah ("Sheikh Fahad") and others between May 1988 and October 1990. The judgment has been registered in Jersey and is enforceable here.
This set of proceedings is the third set brought by Grupo Torras in Jersey in an attempt to enforce the judgment against Abacus (CI) Limited ("Abacus") as trustee of a trust established by Sheikh Fahad, known as the Esteem Settlement (the "Settlement").
This judgment is important in that it provides detailed analysis of the doctrines of "sham" and "donner et retenir ne vaut" under Jersey law.
The court also considered three other more controversial attempts to attack the Settlement by "piercing the veil", declaring it invalid by reason of infringement of public policy and imposing a remedial constructive trust. While the law has not been left completely clear on these three issues, it has been developed.
There is also useful discussion regarding the extent to which a settlor can be involved in the decision making process without having control over the trust, a factor which might lead to the trust being invalid on a number of counts.
Background
Grupo Torras is a Spanish company wholly owned by the Kuwait Investment Office ("KIO"). The KIO is the London branch of the Kuwait Investment Authority ("KIA"). The KIA is responsible for managing and investing Kuwait's oil revenues. Sheikh Fahad was the chairman of Grupo Torras and the KIO.
Between May 1988 and October 1990 Sheikh Fahad and others defrauded Grupo Torras of approximately US$430 million.
Sheikh Fahad established a number of "offshore" entities in different jurisdictions between 1981 and 1994. This article is only concerned with the Settlement and its wholly owned company, Esteem Limited (the "Company").
References to the "Trusts Law" are to the Trusts (Jersey) Law 1984.
The Jersey proceedings so far
The first round of proceedings was an application by Abacus for directions as to whether it should exercise its discretionary powers under the Settlement to distribute assets to Sheikh Fahad by way of payment to Grupo Torras as his judgment creditor. The court directed that Abacus should not make the proposed distribution, broadly speaking because such a distribution would not be for the benefit of Sheikh Fahad. That decision was subsequently upheld by the Court of Appeal.
The second round of proceedings related to certain transfers into the Settlement and consisted of three different claims to have those transfers set aside. These claims succeeded with the result that the only assets remaining within the Settlement were the "clean assets" contributed by Sheikh Fahad out of his own funds for legitimate tax and inheritance planning reasons before the fraud started.
The causes of action in these proceedings
The plaintiffs were seeking to recover the remaining clean assets from the Settlement and the action was brought under five headings:
1. the "sham" claim - the Settlement was a sham with the result that the assets of the Settlement were held by Abacus on bare trust for Sheikh Fahad;
2. the "donner et retenir ne vaut" claim - the Settlement infringed the Jersey law maxim "donner et retenir ne vaut" with the same end result as with sham;
3. the "piercing the veil" claim - the Settlement and/or the Company should be "looked through" or "pierced" and the assets treated as Sheikh Fahad's enabling Grupo Torras to enforce its judgment against those assets;
4. the "infringement of public policy" claim - the Settlement infringed public policy and was thus invalid with the result that the assets belonged to Sheikh Fahad, again enabling Grupo Torras to enforce its judgment against those assets; and
5. the "remedial constructive trust" claim - the assets of the Settlement should be made the subject of a remedial constructive trust in favour of Grupo Torras.
It is worth noting that the first two causes of action alleged that the Settlement was never validly constituted and thus never existed as a genuine discretionary trust whereas the three other claims accepted that it was validly constituted but proposed that it should now be declared invalid.
The sham claim
Reference was made to the classic definition of sham found in Snook v London & West Riding Investments Limited (1967) 2QB 786 in which it was stated that, for there to be a sham, all the parties to the acts or documents "…must have a common intention that the acts or documents are not to create the legal rights and obligations which they give the appearance of creating."
Despite this seemingly clear guidance, there was substantial disagreement in this case as to whether a sham could be unilateral (as regards the intention) or whether it had to be bilateral. The court ruled that, for a trust to have been a sham, both the settlor and the trustee must have had the necessary "shamming" intention, and both must have intended that the true arrangement be otherwise than set out in the trust deed; intention on behalf of the settlor alone was not enough. This approach follows from the importance placed by the court on the ability to treat as valid a legal document which has been freely entered into by persons of sound mind.
With regard to intention, the court ruled that there must be an intention to mislead, whether or not that might be held also to constitute dishonesty. Therefore, it would be necessary in this case to show either that Abacus intended the assets to be held on different terms from those set out in the trust instrument, or that Abacus was reckless and went along with Sheikh Fahad's intention to that effect, not knowing or caring what it signed.
There was also some interesting comment to the effect that while a settlement might be valid at the time of creation, a subsequent addition of assets may separately be a sham.
This is a useful decision which will make it more difficult for someone to allege against trustees that a trust was a sham even if that was clearly the intention of the settlor. However, it also underlines the importance of drafting the trust deed correctly to ensure that it reflects the understanding of all the parties at the time of the creation of the trust.
The "donner et retenir ne vaut" claim
This maxim, roughly translated, means that a gift into trust will not be effective if the settlor retains the power to deal freely with the trust assets. For the maxim to be breached, the power must be retained at the time of making the gift rather than reacquired at some later stage. If the trustee intends to hold the assets merely on bare trust (or as nominee) for the settlor, thus not fettering the settlor's power over the assets, the maxim will be breached.
The court drew a distinction between the present position and the position in Rahman v Chase Bank (CI) Trust Co Limited 1991 JLR 103 where the drafting of the trust deed itself lead to the maxim being breached. As it was clear in this case that Abacus had never intended to act merely as nominee, the maxim had not been breached. (Interestingly, the court said that the decision in Rahman was unclear on the issue of whether or not "de facto" control by the settlor was adequate to breach the maxim in the absence of an express bare trust arrangement.)
What is clear from this decision is that the arrangements as a whole must make it clear that the trustee will have, and will be able to exercise, discretion over the trust assets. If this is not clear then (notwithstanding the inclusion of Article 8A in the Trusts Law) the maxim may be breached and the trust may be invalid.
The "piercing the veil" claim
This claim was controversial as the doctrine of piercing the veil (of incorporation) is one that has developed in relation to companies only. Essentially it means that the court decides to treat the rights or liabilities of a company as the rights or liabilities of those behind it. In this case the plaintiffs wanted to pierce the veil of the Settlement and/or the Company.
This can happen, at least in the case of a company, where:
(a) the assets of the company are under the control of the controlling party; and
(b) there has been impropriety (or "misuse") in relation to the use of the assets in the company.
Aside from the fundamental differences in structure and legal status between trusts and companies, the court was particularly concerned that if it was to apply the concept to a trust this could lead to substantial injustice to the beneficiaries. The court was keen to point out that, unlike a company where the ultimate economic interest might lie with the controlling shareholder, in a trust the
assets are held for the beneficiaries of the trust (which may or may not include the settlor) and it is the duty of the court to enforce the obligations of the trustees towards those beneficiaries.
It was accepted by the plaintiffs that there had never been a case where a court had pierced the veil of a trust. The court concluded, after having applied general principles and having had particular regard to the provisions of Article 10 of the Trusts Law, that there was no such remedy available in relation to trusts under Jersey law.
As regards piercing the veil of the Company, if this were possible (which was by no means clear) it would achieve nothing for the plaintiffs as the assets of the Company would be treated as the assets of the shareholder, ie Abacus as trustee of the Settlement. This point was taken no further.
Having reached the above decisions, the court nevertheless proceeded to consider what level of control was required to pierce the veil. In the context of companies, the court ruled that the control of a controlling shareholder is required and felt that the phrase "substantial or effective control" was not appropriate, particularly if it suggested a reduced level of control.
If, contrary to what the court had decided, it was possible to pierce the veil of a trust, the court considered that it would be necessary to show that the trustees had abdicated their fiduciary responsibilities and allowed the settlor to retain control of the trust. The meaning of control in this context is discussed in more detail later in this article.
The public policy claim
The plaintiffs claimed that the Settlement was invalid in accordance with Article 10(2) (b) (ii) of the Trusts Law as it was "…contrary to public policy…". But, significantly, they accepted that it was not contrary to public policy at the time it was established.
Thus the plaintiffs had to argue that an initially valid trust could subsequently become invalid because it had become contrary to public policy. There were no supporting cases on the point. The court stated that it thought it would be highly exceptional for a trust that was initially not invalid (on public policy grounds) subsequently to become invalid. However, the court felt that this might be the case in a situation where the whole express purpose of the trust became contrary to public policy.
No such highly exceptional situation was found to exist in this case. As a result of the earlier proceedings, the Settlement now contained only "clean assets" and the court did not accept that an initially valid settlement with clean assets could subsequently be declared invalid on public policy grounds because a controlling settlor later formed a dishonest intention that those assets should continue to be held on trust and not paid out to the settlor for the benefit of his creditors.
The remedial constructive trust claim
A remedial constructive trust is "…one which is imposed by the court as a remedy in circumstances where, before the order of the court, no trust of any kind existed", Fortex Group Ltd v MacIntosh (1998) 3 NZLR 171. The plaintiffs argued that such a trust should be imposed because Sheikh Fahad had misused the Settlement and had retained "substantial or effective control" of the trust assets. While courts in Australia, New Zealand and Canada have recognised this principle, albeit with differing juridical bases, this has not happened in England or Jersey and the concept remains controversial.
The court referred to the importance placed by Jersey customary law on title and proprietary rights and was not convinced that it would be appropriate to have jurisdiction to vary such rights in the manner proposed. However, the court did not make a decision as to whether the principle does apply in Jersey, since it was satisfied that there was no basis upon which to apply such a trust in this case.
Noting the different foundations for the principle in other jurisdictions, the court considered that, if it were to apply in Jersey, it should be based upon unjust enrichment (as in Canada), rather than unconscionability (as in Australia), since this is a clearer test requiring enrichment of the defendant, at the expense of the plaintiff and the absence of any juristic reason for the enrichment.
Proceeding to consider both juridical bases, the court focused on the interests of the beneficiaries and ruled that the Settlement was not unjustly enriched at the expense of Grupo Torras by the retention of the clean assets and that it would not be unconscionable for the trustee and beneficiaries to retain these assets which were lawfully put into the Settlement.
Did Sheikh Fahad have control of the Settlement?
As mentioned above, there was much discussion regarding the extent to which a settlor can be involved in the decision making process without having control over the trust. In this context, much consideration was given as to the extent to which Abacus had complied with its fiduciary responsibilities.
The steps to be taken by trustees in order to comply with their fiduciary responsibilities are relatively clear. Trustees must both appreciate that they have a discretion and apply their minds to the exercise of that discretion. They must then exercise their discretion in good faith, meaning that they are prepared either to approve or deny any request put to them. If trustees discharge their duties in this manner, a settlor will not be in a position of control, no matter how many times the trustees might in fact have approved the settlor's requests.
The court referred to the comments of Lord Blackburn in the Privy Council decision in Letterstedt v Broers (1884) 9 AC 371 when he said, "It must always be borne in mind that trustees exist for the benefit of those to whom the creator of the trust has given the trust estate."
Thus, as long as the trustees have discharged their fiduciary duties and, in particular, concluded that a particular action will be in the interests of one or more of the beneficiaries, it does not matter if they have never refused a settlor's request. Indeed, in a harmonious family context where the settlor establishes a trust for the benefit of family members, one would expect the majority of the settlor's wishes (assuming they are reasonable) to be complied with, since the settlor and the trustees would both be focusing on the interests of the beneficiaries.
Conclusions
The first two claims (sham and donner et retenir ne vaut) were perhaps the strongest claims made by the plaintiffs. In each case the court accepted that the causes of action were well established under Jersey law but ruled that they were not applicable in this case.
As regards piercing the veil of a trust, it seems clear that this is not a remedy that is available to attack a trust. While a contrary decision might have seemed attractive from the point of view of creditors, it would have been a concerning decision for trustees and beneficiaries.
As regards infringement of public policy, the court's approach to the facts in this case is clear but it will be interesting to see whether the court will ever find that a trust has become invalid as a result of its whole express purpose changing to one that is contrary to public policy.
As regards the imposition of a remedial constructive trust, it seems that this is probably not currently available as a remedy under Jersey law. However, it is likely that there will be further discussion of the doctrine in the future, particularly if the concept is developed in other jurisdictions.
As regards control, notwithstanding that in many instances Sheikh Fahad had had substantial input into decisions that were taken in relation to trust assets, the court found that he was not in control of the Settlement.
A strong message to be taken from the judgment as a whole is that the court recognises the public interest in being able to place reliance on apparently valid documents and is reluctant to set aside trusts themselves, or gifts made into trusts, without the existence of very clear rules enabling or requiring them to do so.
This note is intended to provide a brief summary of the judgment named. It is not intended to be comprehensive nor to provide legal advice and should not be acted or relied upon as so doing. Professional advice appropriate to the specific situation should always be obtained. If further information or specific advice is required, please liaise with your usual Bedell Group contact.
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