In the Matter of the Representation of A Limited and in the Matter of the F Foundation and in…

In the Matter of the Representation of A Limited and in the Matter of the F Foundation and in the Matter of Articles 43-46 of the Foundations (Jersey) Law 2009 [2013] JRC 075

Introduction

This case concerned an application for directions by the qualified member of F Foundation’s Council. It is the first case in which the Royal Court has been asked to consider its supervisory powers under the Foundations (Jersey) Law 2009 (the Foundations law). The judgment includes an overview of Jersey foundations and the basic and salient points of the Foundations Law.

The powers of the Guernsey Royal Court to give directions under the Foundations (Guernsey) Law 2012 came into force this year and are similar to those under the Foundations Law in Jersey. This judgment is therefore likely to be of guidance to parties seeking similar directions before that Court, albeit the Guernsey Royal Court will not be bound by the decision of its near neighbour.

The decision will also be of wider interest to practitioners and parties elsewhere as it appears to be the first of any common law jurisdiction, where the Courts have analogous powers to those contained in the Foundations Law.  It should be noted that foundations established in other jurisdictions should be considered on their own merits as they may give rise to different rights and duties.

The facts

The founders of the F Foundation were two BVI registered companies, originally owned by the first respondents B and G. The Council had three members, comprising A Limited as the qualified member and two lawyers (D and E) from a Cyprus law firm (I), which also acted for B. The guardian was another BVI company, C Limited (the second respondent), which is beneficially owned by B and administered by the administrative arm of I, J Limited.

The object stipulated by the F Foundation’s charter was that the assets of the foundation were to be administered and applied for the benefit of the beneficiaries. B is now the sole beneficiary.

The F Foundation owned a Cyprus company (K Limited) which owned a number of BVI and Cypriot companies, which together owned substantial assets in Russia and Eastern Europe (the Assets). The Assets had previously belonged to another company L Limited.

A Limited sought directions in relation to proceedings brought by N Limited in Jersey against B, the F foundation, L Limited and K Limited. N Limited is a Cyprus company owned by a Russian bank (P).  In May 2010 N Limited had obtained a judgment from a Russian court against B for a sum of approximately US$ 44 million. N Limited brought proceedings in Jersey to enforce the Russian judgment against the assets of the F Foundation.

N Limited’s alleged that the whole corporate structure of the F Foundation "was established as a façade to disguise [B's] beneficial ownership and control of the companies and underlying assets within the structure". N Limited also pleaded that pursuant to a Pauline action under Jersey Law, a material purpose of the chain of transfers by which K Limited had come to hold the assets was to prejudice P and N Limited (as its assignee) such that the Royal Court should order K Limited and the F Foundation to transfer those assets to N Limited in satisfaction of B’s liability to it.

A Limited sought to secure the F Foundations’s compliance with Court orders for disclosure of documentation and information relating to the underlying assets. Neither the council members nor M (a director of K Limited) were able to provide the information. This led to a finding in March 2012 that the F Foundation was in contempt of Court.

A Limited instructed lawyers at its own cost and gave notice to its fellow council members of its intention to apply to the Court for a direction that going forward the F Foundation adopt a neutral stance in the Jersey proceedings.

The Judgment

The Court summarised the position of the F Foundation:

• The F Foundation held the underlying assets through a company in circumstances in which they were donated to it and neither it nor its council members have detailed knowledge of the background to their donation or, therefore, as to the merits of N Limited’s claim.
• N Limited’s claim did not appear to include any allegations of personal wrongdoing against the F Foundation, its council members or the guardian.
• Despite the substantial value of the underlying assets, the F Foundation had no liquid funds to finance an active defence in the Jersey proceedings.
• B was a co-defendant to the claim and was (better) able to raise any proper defences.
• It was not, therefore, necessary in order for the relevant issues to be fully aired and argued at trial, for the F Foundation to participate in the proceedings other than to be neutral and to comply with court orders, in relation in particular to discovery, as necessary.

In the light of the above the Court had to consider whether A Limited had properly invoked the Court’s jurisdiction to give directions in accordance with Article 43-46.

The Court has jurisdiction to give a direction if it is satisfied that the direction will assist the foundation to administer its assets or carry out its objectives, or the direction is one which “it is otherwise desirable for the Court to give”.

The Court held that its jurisdiction had been properly invoked for the following reasons:

1. Articles 43-46 of the Foundations Law are intended to give the Court a supervisory jurisdiction. This is important and to a significant extent sui generis, there being no equivalent in company law and while analogies drawn with trust law principles were important they were not exact.
2. It was nothing like the Court’s well established Beddoe jurisdiction, whose function was to predetermine the question of recoverability of the costs of proceedings from the trust fund by way of an indemnity to the trustee, since there is no issue as to a foundation’s entitlement to spend its own funds as it sees fit. The foundation is the beneficial owner of all its assets, so no question arises as to a right of indemnification from its own funds.
3. Article 46 was more like the Court’s jurisdiction in relation to trusts to bless (or not) momentous decisions the trustee wishes to take where the trustee surrenders discretion to the Court.
4. The draftsman of the Foundations Law was likely to have had this in mind when drafting the provisions, given the express provision within Article 47 for the appointment by the Court of a person to represent any unborn persons or other persons unable to act on his or her own behalf.
5. The legislature suggests strongly that applications to the Court concerning important administrative and governance issues should be readily available.
6. Council members do not owe duties to beneficiaries, but do owe fiduciary duties and duties of care and skill to their foundation, in respect of which they may be sued by the foundation for breach.
7. While the position of council members might be analogous to that of directors of companies, the court held that it may be more challenging in some senses than that of a director of a trading company. Because council members may not have the same level of knowledge of the background to donations to the foundation and the merits of any claim against the foundation (as was the case here).

The Court concluded that the proposed change in the stance of the F Foundation to neutral was a momentous decision. It would be made late in the proceedings in respect of a claim which extended to the entirety of the substantial assets of the foundation. Accordingly, the Court held that such a decision justified invoking the Court’s jurisdiction to give a direction and fell within the statutory framework. In summary it was appropriate to give A Limited the assistance and protection of the Court it sought.

The Court determined that this was best achieved by directing A Limited to use its reasonable endeavours as a council member to procure that the F Foundation adopt a neutral role in the Jersey proceedings, complying with any orders the trial court may make in the course of those proceedings. If the guardian and the other council members did not cooperate with A Limited, then at least A Limited would be protected by the direction given to it.

Conclusion

The judgment provides helpful clarification of the general principles which apply to Jersey foundations and clear guidance on the approach the Court will take to the exercise of its supervisory powers.

In recognising that foundations draw on an inheritance from both company law and trust law, this judgment suggests that the nature of a foundation may be more analogous to a company than it is to a trust. However, the council members of a foundation may invoke the benefit of the wide-ranging jurisdiction of the Court to give directions and to bless momentous decisions.

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