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In what circumstances should a Trustee refuse to recognise the appointment of new Trustees?

This question was explored in the very recent case of WTHK Limited and Valentin NZ Limited -v- UBS Trustees (Jsy)Ltd [2016] JRC 099.  This case is unique in terms of its fact specific nature, however it still provides a useful insight into the view that Jersey courts might take if a Trustee refused to recognise the appointment of new Trustees.

The Commissioner, sitting alone, was considering an application by the Representors for a declaration that: (i) They had been validly appointed as additional trustees of four trusts, in circumstances where the existing professional Trustee was refusing to recognise their appointment and (ii) If the appointment was indeed valid, whether as a majority, the Representors were validly empowered to issue certain instructions to agents of the trustees in connection with assets of the trusts and also to terminate the trustees’ contractual arrangements with those agents if necessary.

Pursuant to the trust deeds, every decision, resolution or exercise of a power or discretion by the trustees will be validly made if it is made by a majority of the trustees. This also applied to the execution of a decision.

The factual background is relatively complex, however in so far as it is relevant to this commentary,  a summary is as follows. Criminal investigations had taken place in Milan concerning the actions of the settlor and others, whereby it was suggested that the shares in a company called Ilva and other companies were sold at below market value to companies under the control, inter alia, of the settlor, with the proceeds of the re-sale of those shares being settled on the terms of the Trust in question.  The trust assets were therefore frozen. No charges had, at the time of this court case, been brought. If however, a prosecution and conviction follows in the future, it may result in the assets being confiscated. If on the other hand no prosecution follows or if there is an acquittal, the freezing order would have to be lifted.

Completely separately, in Taranto, charges were brought against the settlor and other senior executives of the company called Ilva, in respect of alleged environmental offences. Ilva owned one of the largest steelworks in Europe. The Italian authorities passed legislation in January 2015, which provides that the trust assets must be applied to purchase bonds  Ilva to be used to remedy the alleged environmental deficiencies. Ilva is actually now bankrupt and therefore the bonds are likely to be worthless in reality.

The beneficiaries and the protectors of the trust wished to ensure that the trust assets were not remitted to Italy. They wanted instead to maintain the status quo, which was that the trust assets were in Switzerland subject to a freezing order, hence one of the reasons why the Representors had been appointed as the new Trustees, in circumstances where they would form a majority for decision making purposes.

The Commissioner appeared to be sympathetic to the position of the Representors and agreed with an observation previously made in connection with this case that the effect of the legislation, on the face of it at least, appeared to be a breach of the European Convention on Human Rights.

The existing Trustee was UBS Trustees (“UBS”). UBS had a suspicion that the assets of the Trusts may be the proceeds of crime, based on the factual background and criminal investigations and therefore the UBS Trustees were not willing to act on any instructions given by the Representors to transfer assets into the control of all three Trustees because that would have enabled them to have been dealt with thereafter by a majority and therefore without the consent of the JFCU. (The JFCU had by then specifically declined to consent to UBS Trustees doing any act which would facilitate the movement of transfer of control of the assets from the UBS Trustees and therefore in effect, the JFCU supported the position of UBS). The concern was that any consent on the part of UBS might amount to an offence under the Proceeds of Crime (Jersey) Law 1999.

UBS had also raised the issue that it had insufficient information as to the suitability of the Representers to act as Co-Trustees. Following receipt of further information in the affidavits in support of the Representors however, UBS agreed that the Representors were suitable, at least in principal. The Commissioner made it clear that he agreed with this assessment. WTHK Limited is a company that provides trustee corporate and fiduciary services “across the globe”. The Commissioner also agreed that in the circumstances, it had been reasonable for UBS to make enquiries as to the suitability of the Representors.

The second aspect of the application was this question: whether the fact of issuing the Revocation Instruction or terminating the fiduciary agreements would constitute an offence under the 1999 law (assuming always that the assets transpired to be the proceeds of criminal conduct). The offences concerned would have been under Article 29 and 30 of the Proceeds of Crime (Jersey) Law 1999.

The Court received conflicting submissions as to whether the issuing of the Revocation instructions of terminating the fiduciary agreements would amount to an offence under Article 30 (1) and (3). The Prosecution argued that it would but a particular difficulty for any prosecution in this type of case is that it is arguable that all the relevant acts by the Representors took place outside Jersey. If that were found to be so, there would be no jurisdiction to try any offence in Jersey. The lawyer for the Representors argued that no offence would be committed.

The Court did not make a finding because in the judgement of the Commissioner it would be wholly inappropriate for the court to make a determination. This was because the court was operating as a civil court in what would be a criminal case. It was also considering the issue of future conduct, although there was a suggestion that it in fact covered past conduct as well, because the Representors had already given their instructions. The danger with this Court granting a declaration that the Representors are validity empowered to issue the instructions, is that that may well carry with it the implication that this is lawful conduct when in fact it had not been decided upon by a criminal court. For that reason, the Commissioner agreed to issue a declaration which was more limited in effect.

The Commissioner declared the appointment of the Representors as valid. He also declared that under Jersey law and the terms of the Trusts, the Trustees are permitted to act by a majority decision, including in relation to the nominees and or agents. Lastly, he declared that the implementation of any decision whether by all or a majority is a matter subject to the terms of and law applicable to any relevant contract and any other applicable law.

As as aside, the Commissioner expressed a view that ordinary conduct (and genuine settlement) by the Trustees or others, of litigation to determine the rights and liabilities of the parties in relation to the proceeds of crime does not constitute an offence under Article 30 or any other money laundering provision and it is therefore open to the Representors and/or UBS to participate in litigation in Jersey.

The Commissioner also expressed a view that entering the names of the current Trustees on the memorandum, in accordance with Clause 15(7) could not amount to an offence under Article 30 either. He considered that the JFCU had therefore exceeded its power by informing UBS Trustees that it did not consent to them doing this.

If you wish to discuss any aspect of this further, please do call Rebecca Morley-Kirk on 630530.

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