The trustees of a Jersey based discretionary trust (Tchenguiz Discretionary Trust) entered into loan agreements with companies based in the British Virgin Islands ("BVI"). During the recession, the BVI companies went into liquidation and the liquidator sought to recover the debts under the loans from the former trustees. The trustees in turn sought an indemnity from the trust's assets. The Privy Council was asked to consider whether the former trustees were personally liable for the loans, and if not, whether the BVI companies could instead enforce the benefit of the loans against the trust assets directly.
The Privy Council held that the former trustees could rely upon Article 32(1)(a) of the Trusts (Jersey) Law 1984 ("TJL") to avoid any personal liability. This provision states that in transactions between a trustee and a third party, in any matter relating to the trust and provided that the third party knows the trustee is acting as a trustee, the third party's claim is restricted to the trust assets in the trustee's hands at the time the claim is made. Any further personal liability of the trustee is excluded by way of Article 32.
The Privy Council also considered Article 26(2) of the TJL under which a trustee is entitled to procure debts properly incurred as trustee to be paid out of the trust estate (or, if paid in the first instance from their own pocket, to be indemnified out of the trust estate). Looking at Article 26 the Privy Council concluded that when assessing whether a debt/liability has been properly incurred, consideration should be given of the facts known at the time the liability arose. The Council rejected the idea that an indemnity originally reasonably incurred (but thereafter unreasonably allowed to continue) may forfeit the trustee's indemnity conferred by Article 26(2) (except in situations of the trustee's wilful default or gross negligence).
The Privy Council also reaffirmed the common law position that:
The case confirms that where you have a Jersey law governed trust, the trustees can use Article 32(1)(a) TJL to exclude personal liability on claims brought against them by creditors in respect of loans made to a trust. In such circumstances, a creditor has no direct access to the trust assets to enforce his debt.
The creditor's recourse against the trust assets may be vulnerable because their ability to gain access to the trust fund is limited to the extent that the trustee (to whose right the creditor is subrogated) has a right of indemnity from the trust. Therefore if, for example, a trustee is liable to account to the trust for an unconnected breach of trust in a sum substantial enough to defeat his right of indemnity, the trust creditor's ability to enforce against trust assets by way of the remedy of subrogation is also defeated.
Tatiana Akhmedova was awarded ancillary relief in the sum of c.£453m against her former husband, Farkhad Akhmedov in 2016. Various Panama and Liechtenstein corporate entities associated with him were made jointly and severally liable for complying with the Order. However in an attempt to evade enforcement, Mr Akhmedov took the following steps:-
Mrs Akhmedova successfully applied to the English Court for various orders to assist enforcement of her ancillary relief award. In the judgment it was held that in circumstances where a person deliberately frustrates enforcement of a legal right against them by interposing a company to defeat an enforcement action (the "evasion principle") the Court may pierce the corporate veil. In cases where the "evasion principle" applies to foreign incorporated companies the appropriate law is usually the law of the country in which the action is brought as the Judge concluded that to do otherwise would "be to do the international fraudster's job for him" by allowing enforcement to be undermined by the interposing company simply registering in a jurisdiction that does not recognise the concept of piercing the corporate veil.