When trusts law and insolvency collide

When trusts law and insolvency collide

Please note this briefing does not take into account the new insolvency legislation changes from January 2020 and is in the process of being re-written.

This article first appeared in STEP journal.

The Joint Administrators of Ceona Crewing Limited (Company) made an application in September 2015 pursuant to section 379(3) of the Companies (Guernsey) Law, 2008 (Companies Law) to the Royal Court for declaratory relief and directions in relation to whether the monies in a segregated account were held on trust under Guernsey law for employees of the Company.  The Application was split into three parts (i) the declaration of trust; (ii) directions for distribution of the assets; and (iii) an order for the Joint Administrators’ costs.  For the purposes of this article we will focus only on the first limb of the application, the declaration of trust.  The matter involved an interesting interaction between principles of trust and insolvency law.

The Company was part of a group which provided solutions in the international subsea construction sector, principally serving the oil and gas industry.  It was placed into administration in September 2015 with individuals from Ernst & Young appointed as the Joint Administrators.

Shortly after their appointment, the Joint Administrators discovered that the Company had operated a segregated account (Account) in order to deal with the tax liability of employees working in foreign countries.  A notional tax amount was deducted from each employee’s salary, held in the Account and then used to settle any tax liability in the country in which the employee was working.  If there was no tax liability in the host country or the amount of tax actually paid was less than the notional amount then the employee would receive an annual rebate.  The Joint Administrators thoroughly investigated the history of the Account and discovered that it had never been used for any purpose other than holding the employees’ withheld tax.  The Joint Administrators, therefore, considered that the money in the Account may be held on trust for the employees and should not form part of the insolvent estate.

The main focus of the Application was section 14 the Trusts (Guernsey) Law, 2007 (Trusts Law).  Section 14 permits the Royal Court to determine all questions arising in relation to a Guernsey trust including questions as to the existence and extent of any functions of the trust, the validity and effect of the trust and the distribution of the trust property.  There is no provision in section 14 setting out who may initiate such an application for determination and so it was submitted that the Company and/or the Joint Administrators (as statutory agents to the Company under section 379(4) of the Companies Law) had standing to apply to the Court for such determination.  In addition, on the basis that the Company purported to be trustee/settlor, it had standing under section 69 of the Trusts Law to apply to the Court for a declaration as to the validity or enforceability of the trust.  The application was made ex parte in common with many applications of this nature and thus the Joint Administrators were required to lay before the Court all relevant facts, materials and submissions, whether helpful or not.

In the event, the Application did not proceed as smoothly as it might have as the Royal Court was somewhat reluctant to deal with the matter ex parte.  Deputy Bailiff McMahon was very keen to hear from the employees and all known creditors of the Company to ensure that they were content that the money held in the account would not form part of the administration.  Arguably, a constructive trust would arise by operation of law notwithstanding any claims that a creditor may believe he might have over the assets held.  Therefore, if it could be demonstrated that the Company held the money in the Account for the benefit of the employees and for a specific purpose then it would be unconscionable to do otherwise than to declare that the Account contained trust property which should be distributed to the employees.  All of the evidence regarding the operation of the Account and the purpose for which it was set up pointed to a constructive trust.

Nonetheless, the Joint Administrators managed to provide evidence of the employees’ and creditors’ support and obtained the declaration of trust.  This was, however, a useful lesson that in insolvency matters the Court may be reluctant to apply pure trusts law out of concern regarding the potential reaction of creditors.  In this case, all creditors and employees were of the opinion that the monies held in the account constituted trust property and so the declaration was eventually made.  It would have been interesting, however, to see how the Court would have dealt with this if a creditor had attempted to assert some claim over the monies we may receive.  A written judgment may be produced in the future which could shed some light on this point.  All of the evidence pointed toward a declaration of trust and it was not strictly necessary to consult the creditors but would the Court have been happy to make the declaration in the face of a creditor’s objection?

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This client briefing has been prepared for clients and professional associates of Ogier. The information and expressions of opinion which it contains are not intended to be a comprehensive study or to provide legal advice and should not be treated as a substitute for specific advice concerning individual situations.

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