01 July 2010 Issue 7 Raymond Davern

Recent developments

A survey of recent developments in the British Virgin Islands and the Cayman Islands.

Financial Services Division of the Grand Court

Cayman’s Financial Services Division (FSD) came into being on 1 November 2009 to deal with the ever-increasing volume of financial services cases. In trusts and estates matters, certain cases must now be brought in the FSD, including:

(i) administration actions or applications under the Trusts Law (as revised) (TL), except those relating to local estates with assets under KYD1 million; and

(ii) actions against a trustee or protector or an executor or administrator for breach of trust or breach of fiduciary duty, except those relating to trusts or estates with assets under KYD1 million.

The emphasis is on providing more efficient case-management. A fee of KYD5,000 is payable upfront and, thereafter, there are no further filing fees. All parties attend a case-management conference with the judge to set out a time-table and that judge sees the case through from start to finish. Three new specialist judges have been appointed bringing the total in the FSD to six.

HSBC International Trust Limited v Registrar of Trusts, Earl of Dalkeith and the Attorney General and MEP v Rothschild Trust Cayman Limited

Two recent cases in Cayman were concerned with variations of trust under Section 63 TL, the first of their kind in Cayman. Section 63 permits the Court to authorise dealings with trust property where it is expedient to do so, but no power for that purpose has been vested in the trustees by the trust instrument.

In the HSBC case, the trustee applied to vary the terms of the trust to include a power to appoint trustees in the United Kingdom. Foster Ag J agreed that the variation was intended for the better administration of the trust and granted the power.

In MEP, Smellie CJ considered the Court’s jurisdiction to expand a trustee’s powers in greater depth. The trustees of a family trust had applied for an order empowering them to partition the trust fund into three equal shares and to appropriate one such share to each of three sub-funds nominated in the names of the three daughters of the primary beneficiary. Each share would continue to be held on the original trusts contained in the trust instrument but the existence of separate funds would allow the trustees to address the different tax circumstances, investment goals and practical needs of the different branches of the family. There was no power in the trust instrument that would allow the trustee to partition the trust fund.

The Chief Justice examined the extent of the Court’s inherent jurisdiction and that conferred by Section 72 TL – the latter being the power for the Court to approve variations on behalf of certain categories of beneficiary. He concluded that neither could be invoked in this case. The inherent power relied on the pre-existence of an emergency event or the seeking of approval for a compromise of issues, neither of which were present. He considered that exploring and seeking consent by and on behalf of remote beneficiaries for the purposes of Section 72 would be impractical and undesirable. However, on the basis that the predominant purpose for partition was to allow for more efficacious administration of the trust, and that it was not intended that there would be any alteration to the beneficial entitlements, he accepted that the Court had jurisdiction under Section 63 and granted the power to the trustee.

Re Mrs D – no more lucid intervals?

In this case the guardians of Mrs D, who was mentally incapacitated, were seeking directions under Cayman’s Mental Health Law (as revised) (MHL) as to whether they could enter into an indemnity that would bind Mrs D and her estate. The decision is important as it formulates the approach to be taken by the Court in determining how to deal with the property and affairs of individuals suffering incapacity.

Under Section 13 MHL, where the Court has appointed a guardian over a person, it may ‘with respect to the property and affairs of such person, do or secure the doing of all such things as appear desirable for the maintenance or benefit of such person, of his family, of those for whom he might be expected to provide if he were not mentally disordered and for otherwise administering his affairs…’ 

Smellie CJ noted that the Cayman statute was almost identical to that which had been in force in England prior to the wide changes made by the Mental Capacity Act 2005. In applying the pre-2005 legislation, the English court had sought to determine what the patient themselves would have done by supposing a hypothetical ‘lucid interval’ during which the patient regained a sound state of mind for sufficient time to review the matters in hand and communicate their wishes before lapsing back into incapacity; the court would then give directions informed by these wishes. The 2005 English legislation replaced this approach with a structured decision-making process taking into account all relevant circumstances, only one of which was the patient’s wishes.

The Chief Justice rejected what he described as the ‘mental gymnastics of the counter-factual lucid interval’ finding that Section 13 MHL was ‘entirely accommodating instead of an approach such as that which is now applied by the courts, in England, since the Mental Capacity Act 2005…’ He held that this modern approach should be adopted in Cayman even without express statutory authority and, having weighed up all relevant considerations, directed Mrs D’s guardians to execute the indemnity.

TMSF v Merrill Lynch Bank and Trust Company (Cayman) Limited

This case involved two Cayman trusts settled in 1999 by the defendant, a Turkish citizen, over which he had reserved powers of revocation. The Appellant, TMSF, was a Turkish government entity responsible for protecting the interests of investors. In proceedings in Turkey, TMSF had been awarded judgment against the Defendant for USD30 million, reflecting the value of the assets in the Cayman trusts plus interest and costs. The defendant was subsequently made bankrupt.

TMSF issued proceedings in Cayman seeking to have receivers appointed over the defendant’s powers to revoke the trusts by way of equitable execution. At first instance, Smellie CJ agreed to appoint receivers over future distributions made to the defendant and, were he ever to revoke the trusts, the property would pass to the receivers. However, the Chief Justice refused to appoint receivers over the powers of revocation on the basis that they did not constitute ‘property’.

The decision was upheld on appeal albeit on slightly different reasoning. The Court of Appeal chose to concentrate on policy issues, rather than go into an examination of whether the power could be regarded as property. Drawing an analogy with the law of bankruptcy, where specific legislation had been required to make a general power of appointment available to a trustee in bankruptcy, they concluded that legislation would also be required to allow equitable execution over a power of revocation and that it would not be open to the court to take such a step. Importantly, in both instances, the trusts were found to be valid and duly constituted notwithstanding the reservation of the power to revoke. Commercial Division of the Eastern Caribbean Supreme Court (ECSC), BVI.

The ECSC consists of a Court of Appeal and High Court for six states and three Overseas Territories, including the BVI. Pursuant to a memorandum of understanding that took effect on 1 April 2009, the BVI government undertook with the ECSC to fund and provide in Road Town, Tortola a modern, professionally equipped Commercial Court with the aim of providing a premier, commercial law and cross-border litigation service in the BVI. A leading Chancery silk was appointed to fill the post of commercial court judge and for the last year the Hon Edward Bannister J has been hearing cases assigned to the Division. Under rules of court, these will include all claims or applications ‘arising out of the transaction of trade and commerce and includes any claim relating to … the law of trusts’ where the claim or the subject matter to which it relates is at least USD500,000 (with a discretion to admit claims not meeting the monetary requirement).

As the BVI continues to mature as a trusts and private client jurisdiction – a process that began with innovative, legislative reforms of the Trustee Act in 1993 and 2003 (introducing VISTA trusts) and that was followed by the introduction in 2007 of a facilitative Private Trust Company regime – the establishment of a specialist court with commercial and Chancery expertise is a significant and welcome development that bodes well for the principled and efficient resolution of the trust litigation that is likely to be generated in a jurisdiction where a very considerable volume of trusts and private client work has been undertaken over the last 15 years.


Raymond Davern