Z Trusts update

Who pays the former trustee's costs of proving its claim in relation to the assets of an insolvent trust?

On 10 September 2018, the Royal Court handed down a costs judgment addressing the question of whether our client, Equity Trust Jersey Limited (ETJL), the former trustee of the Z Trust III, could claim its costs for proving its claim of £90,000 against the assets of the Z Trust III Trust, which is insolvent.

By way of background, on 23 May 2017, the Royal Court approved the discharge of ETJL's claim against the Z Trust III under its indemnity and equitable lien in the sum of approximately £90,000. ETJL had costs in excess of £220,000 in the recovery of that sum, mainly as a result of it being required to take an active part in the representation in the Z Trust III proceedings. ETJL had been directed by the court to represent themselves in those proceedings.

ETJL sought recovery of its legal costs incurred in proving its claim to £90,000 in relation to the Z Trust III. ETJL argued that a former trustee's right of indemnity and equitable lien gives it the right to recover expenses reasonably incurred in making good its claim under that indemnity and equitable lien. Consequently provided the costs have been reasonably incurred ETJL should be entitled to recover the costs it incurred on an indemnity basis from the available trust assets. ETJL submitted that the fact that a trust is insolvent should not change this fundamental trust law principle.

In his judgment, Commissioner Clyde-Smith did not accept ETJL's submissions, although he did refer to them as being "powerful", and he held that ETJL could not recover its costs in proving its claim from the assets of the Z Trust III.

In reaching his decision, the Commissioner relied upon Jersey Désaste (insolvency) law which states that a creditor has to bear the costs of proving the debt unless the court decides otherwise. This was a departure from the position that the Commissioner had taken earlier in these insolvent trust proceedings. In 2015, when the parties were seeking to agree an insolvency regime by which to deal with these trusts, the Commissioner refused to apply a regime based on the Désaste law, stating "insolvent" trusts were of a different character and not governed by Désaste.

ETJL has leave to appeal the decision and their appeal will be heard by the Court of Appeal later this month together with their appeal on the substantive priority issue further details of which can be found in

our previous article

.

If you have any queries regarding this judgment please contact Emma Jordan or Kate Silbermann.