Equity Trust v Halabi (Privy Council)

This case was heard, in respect of two Jersey Law Trusts, in the Privy Council on appeal from both the Jersey & Guernsey Courts of Appeal.

The retiring trustee (RT) sought to rely on the indemnity in the Deed of Retirement and Appointment (DORA) in respect of its claim from the trust fund in relation to its significant liability. The question at stake was whether RT's claim should rank in priority to other creditors and subsequent trustees. If all the liabilities were justified, then the trust would be "insolvent". RT argued that as their indemnity was the first in time, they should recover the whole of the trust fund (which was in any case insufficient to cover its liability). If they had no such priority, then RT would recover significantly less than the full value of the trust fund, and be more substantially out of pocket in view of other trustees and creditors' claims.

This issue had not been decided before anywhere in the world.

Decisions

The Jersey Royal Court said that RT had no priority and that all claims were to be on a pari passu (ie rateable) basis. The Jersey Court of Appeal reversed this saying that a former trustee's right of indemnity and lien ranks in priority to later claims. The Privy Council took the case on the priority issue and the status of a lien under Jersey law. It reversed the Jersey Court of Appeal's decision and decided that:

1. The lien conferred by the right of indemnity is not a form of security (so no priority);
2. The trustee has a proprietary interest in the trust assets;
3. The lien gives a trustee priority over the interests of beneficiaries;
4. Trustees' claims were to be dealt with on a pari passu basis – not first in time;
5. The trustees' indemnity covers costs of proving a claim.

Consequences

This decision has some potentially dramatic consequences for retired trustees, existing trustees and future trustees. Even though most trusts will not be "insolvent", it will affect the taking on of liabilities by trustees, and their approach on taking on a trusteeship and retirement of a trustee. Some of the consequences are:

1. DORAs will be much more complex to negotiate, as retiring trustees will want to try to secure priority in respect of their indemnity. But why would a successor trustee agree to that?
2. Retiring trustees may now want to take a charge and/or possession/retention/ringfenced amount over trust assets on retirement. Some trust laws allow that; some do not; it may have to be specifically provided in the trust deed.
3. Incoming trustees will be much more vigilant over inspecting trust accounts and understanding potential liabilities.
4. New trustees will have one eye on their ultimate retirement or removal and will not want to give any priority to the then retiring trustees.
5. A trustee potentially the subject of future removal may need to secure their position when taking on the trusteeship.
6. Chains of indemnities may become more common once again.
7. Trustees will be reluctant to take on any third party liabilities, as creditors will want absolute security ahead of any past or present trustee's indemnity.
8. Trust liquidity will be an increasingly focussed issue.
9. Incoming trustees will want third party commercial or lending liabilities paid off or terminated before taking on the trusteeship (but taking into account existing trustee indemnities).
10. Third party contracts should be novated to the incoming trustee.
11. Incoming trustees may find that outgoing trustees seek to prevent them incurring liabilities to preserve the outgoing trustee's indemnity & lien.
12. Trustees still have to be mindful of their obligations to beneficiaries!

Thus all trustees will need to take these issues into account in the future. It is likely that, as this is a Privy Council decision, it will have relevance to all trust jurisdictions around the world.