The recent case of FS Capital Limited Ors v Alan Adams Ors EWCA Civ 53 sends a clear message to beneficiaries of trusts – you have recourse when trustees act improperly.
This judgment, concerning Jersey trusts, considers whether a disposal of trust assets constitutes a breach of trust due to an improper purpose.
Understanding the High Court Judgment in Adams v FS Capital
The initial case in the High Court involved a complex series of transactions related to three Jersey trusts (the 2011 Trust, the 2012 Trust, and the 2014 Trust).
These trusts were part of Employer-Financed Retirement Benefit Schemes (EFRBS), which were utilised to facilitate loan schemes. Participants in these schemes received remuneration from their employer via loans, structured to avoid income tax.
Many of these loans were later affected by the Loan Charge, a tax levied on outstanding loan balances.
FS Capital Limited (“FS Capital”) purchased loan assets from these trusts. The book value of the loan assets was initially £410 million, later reduced to £279 million. The basic consideration was paid, with deferred contingent consideration capped at £1,176,033.93, allegedly the sum owed to the Trusts’ creditors.
The Respondent Beneficiaries in the FS Capital Appeal numbered around 700 individuals.
The High Court Judgment
The key findings following the judgment of Mr Justice Edwin Johnson in the first instance are as follows.
Improper Purpose
The High Court considered the actions of the decision makers surrounding the disposal of the Loan Assets, focusing on the subjective purposes of the disposal.
The court determined that the structuring the disposal of loan assets to ensure no surplus remained for the beneficiaries was inconsistent with the proper exercise of a trustee’s power of sale.
The court emphasised that the circumstances at the time of the disposal did not justify disregarding or excluding the beneficiaries’ interests. This was in contravention of Grand View Private Trust Co Ltd v Wong UKPC 47.
The court found the trustee determined the consideration based solely on the sums owed to creditors, which improperly allowed creditor rights to take priority over those of the beneficiaries. Evidence showed an attempt to retrospectively justify this structure, aligning the consideration with debts to the Second Defendant and Hatstone Jersey.
In relation to the valuation of the Loan Assets, the judge rejected that the Defendant could apply a ‘next to zero’ valuation of the loan assets. The inclusion of a cap in the sale agreements indicated an awareness of the potential for higher value, contradicting the claim that the assets were worthless. This showed the cap was intended to limit the deferred consideration to what had been calculated as due to the Second Defendant and Hatstone Jersey and was intended to guard against the possibility of the Loan Assets turning out to have a higher value.
The court therefore determined that the disposal was made for an improper purpose.
Bona Fide Purchaser
A central aspect of the case was whether FS Capital could claim protection as a bona fide purchaser for value without notice. The court rejected this claim, finding that FS Capital had actual notice of the breach of trust and specifically Mr Reid and Mr Emblin (who collaborated with Mr O’Shea of the Second Defendant in designing the disposal) were aware of key facts.
Void or Voidable
Significantly, the High Court declared the disposal void in equity. This means the disposal was deemed invalid from its start. The High Court considered the Court of Appeal case of Cloutte v Storey in relation to this point.
Liability for Breach of Trust
The Second Defendant was found to have committed a breach of trust by reason of the fact the disposal was made for an improper purpose (Paragraph 401)
The Court of Appeal Judgment
The appeals in this case concern several complex issues related to Jersey trust law.
The first is whether the judge was incorrect in determining that, to be considered as having actual notice per Article 55 of the Trusts (Jersey) Law 1984, it was enough to have actual knowledge of the facts that made the Disposal improper, rather than also knowing that those facts constituted a breach of Jersey law.
The second point, related to the first, is whether the judge was wrong to decide that FS Capital had not met its burden to prove it did not have actual notice of the Disposal and whether the judge should have used the burden of proof to make that determination.
The third issue is whether a transaction that arises from a fiduciary power being used for an improper purpose is void or voidable under Jersey law. This includes whether Jersey law is the same as English law on this point, or whether it only considers English law when making its decision.
The final issue in the FS Capital Appeal is whether the judge should have decided that the Disposal was voidable and, if so, whether he should have declined to set it aside.
The Court of Appeal upheld the High Court’s decision in FS Capital v Adams.
Fiduciary Duty
The Court of Appeal explicitly reinforced the fundamental fiduciary duty of trustees. Trustees must act solely in the best interests of the beneficiaries.
In this case, the Court of Appeal found that the power of sale was exercised to terminate the Trusts, benefit FS Capital, benefit Pinotage and Hatstone Jersey and ensure no surplus for the Beneficiaries. This indicates a conflict of interest and a failure to prioritise the beneficiaries’ interests
Further to this, the court noted that the value of the Loan Assets was unknown but could be substantial, and the purpose of the Disposal was to pay creditors without leaving any surplus for the Beneficiaries, effectively excluding them. This was deemed unjustifiable because there was a possibility of substantial value in the Loan Assets
Additionally, the Court of Appeal highlighted that the breach of trust was constituted by the Disposal and the whole purpose of putting Pinotage PTC in place as new trustee was to allow the sale of the Loan Assets, on terms which excluded the interests of the Beneficiaries, to proceed to completion. The court confirmed that a trustee cannot resign to enable a breach of trust by a successor.
The Court of Appeal highlighted the following extract from Bird Charitable Trust [2008] JRC 013, which states that the Donee:
“…must act with good faith and sincerity, and with an entire and single view to the real purpose and object of the power and not for the purpose of accomplishing or carrying into effect any bye or sinister object (sinister in the sense of being beyond the purpose and intent of the power).”
Knowledge of the Breach
A point of contention was the extent of knowledge required for FS Capital to be fixed with actual notice of a breach of trust.
Specifically, the question was whether FS Capital needed to know that the improper purpose of the disposal constituted a breach of Jersey law. FS Capital argued that the judge erred in determining that actual knowledge of the facts constituting the impropriety of the Disposal was enough to be fixed with actual notice and contended that they needed to know the impropriety was also a breach of Jersey law.
The court equated actual notice with actual knowledge of the breach of trust or wilfully avoiding such knowledge. It was also accepted that actual knowledge arises where the defendant appreciates that the transaction in question is probably improper or there has probably been a breach of trust.
The Court of Appeal referenced Sinclair Investments (UK) Ltd v Versailles Trade Finance Ltd [2011] EWCA Civ 347 [2012] Ch 453 in relation to whether and, if so, when it is appropriate to impute the legal consequences of facts to a party who is aware of the relevant facts. The judge noted that such knowledge is not automatically imputed.
The Court decided that FS Capital could not claim to have no knowledge of the breach of trust because Mr Emblin and Mr Reid (whose knowledge was attributed to FS Capital) collaborated in designing the Disposal that resulted in it being made for an improper purpose.
The judge emphasised that FS Capital had the burden of proving it did not have actual notice of the breach of trust. Following the hearing, the court concluded that FS Capital failed to discharge the burden of demonstrating that it had no actual notice that the Disposal was made in breach of trust.
Burden of Proof
The Court of Appeal supported the High Court’s allocation of the burden of proof.
To use the bona fide purchaser for value without notice defence, FS Capital had to prove they gave valuable consideration and had no notice of the breach of trust. The court stated it was FS Capital’s responsibility to demonstrate that they did not have actual notice of the breach of trust.
The judge found that FS Capital had not provided sufficient evidence to demonstrate that they were unaware the facts constituted a breach of trust. FS Capital did not present their evidence to suggest that they were unaware that the facts of the Disposal amounted to a breach of trust as a matter of Jersey law.
Instead, the court found that FS Capital collaborated in designing the Disposal, particularly the components that resulted in it being made for an improper purpose. The court also noted that Mr Emblin and Mr Reid knew the deferred consideration was capped despite knowing the trust assets could have substantial value. Despite looking for ways to justify the design of the Disposal, the court determined that Mr Emblin and Mr Reid were not satisfied it was legitimate to disregard the interests of the beneficiaries.
Ultimately, the judge concluded that FS Capital failed to discharge the burden of demonstrating that it had no actual notice that the Disposal was made in breach of trust. Further, there was no evidence that the Appellants sought legal advice, or if they did, that they followed it. There was also no evidence to suggest that the protagonists believed that what they were doing was in accordance with Jersey law, or that they did not believe that it was contrary to that law.
The Court of Appeal emphasised that claiming a lack of knowledge of impropriety requires pleading and proving relevant facts. FS Capital’s failure to adequately demonstrate their lack of knowledge about the breach of trust led to the rejection of their appeal.
Jersey and English Law
The Court of Appeal confirmed the close relationship between Jersey and English trust law. Jersey trust law generally follows English law unless there are conflicts with Jersey customary law or statutes.
Implications for Beneficiaries and Trustees
FS Capital v Adams has significant implications for beneficiaries and trustees of Jersey trusts, as well as those in similar jurisdictions:
Key Takeaways for Beneficiaries
- Trustees have a fiduciary duty to act solely in your best interests.
- Disposals of trust assets, especially those that appear to benefit parties other than the beneficiaries, will be closely scrutinised for improper purposes.
- If trustees act improperly, you have legal recourse to challenge their actions and seek remedies, including setting aside the disposal and recovering assets.
Advice for Trustees
- Your primary duty is to the Beneficiaries. All decisions must be made with their best interests in mind.
- Seek Independent Advice when making significant decisions, especially those involving potential conflicts of interest.
- Document Everything – Maintain thorough and accurate records of all decisions and the reasons behind them.
What to Do If You Suspect a Breach of Trust
If you are a beneficiary of a trust and believe that the trustees have acted improperly, it is essential to take prompt action to protect your interests.
- Gather Information: Collect all relevant documents relating to the trust, including the trust deed, financial statements, and communications with the trustees.
- Seek Legal Advice: Consult with a qualified lawyer experienced in Jersey trust law. Elysium Law has a team of experienced professionals who can assess your situation, advise you on your options and represent you.
- Consider a Formal Challenge: Based on the evidence, we can advise on the best course of action, whether that is:
- Demanding an accounting from the trustees; or
- Seeking an injunction to prevent further improper actions; or
- Applying to the court to have the disposal set aside and the assets returned to the trust; or
- Pursuing claims against the trustees for breach of trust.
Conclusion
The FS Capital v Adams case provides a strong precedent for beneficiaries of Jersey trusts who believe their rights have been violated. This case will also be of particular interest to similar jurisdictions that adopt similar principles.
The Court of Appeal’s decision underscores the importance of trustees’ fiduciary duties and the courts’ willingness to intervene when those duties are breached. Don’t stand by while trustees act improperly. By understanding your rights and taking proactive steps, you can fight to protect your interests and ensure the trust is managed as intended.
If you have been affected by a similar matter and are the subject of threats to call in loans, contact Elysium Law for a free, confidential consultation.
