Case update from the Cayman Islands

Can a receiver be appointed over a discretionary interest?

In the case of Y v R, the Grand Court of the Cayman Islands (Mangatal J) recently considered the question of whether a receiver could be appointed over a discretionary interest under a Cayman Islands law trust.

Background

In a dispute over unpaid legal fees the creditor asked the Grand Court to appoint receivers over the debtor's interest in an irrevocable Cayman Islands discretionary trust (the "trust") by way of equitable execution. The debtor had been the only beneficiary to ever receive distributions from the trust and those distributions represented the majority of his income. The key issue was whether his interest in the trust assets was such that it made them susceptible to enforcement.

Outcome

It was not disputed that the Grand Court has the same power as the English High Court to appoint receivers where a debtor owns a beneficial interest in a bare trust. However a precondition for the appointment of a receiver is that the subject matter is in existence and within the reach of the order, so that the order can bite. This means that the Court's jurisdiction does not extend to situations where the debtor does not yet own the beneficial interest, even where they may be expected to in the future.

In this case the debtor had no other means of financial support and a substantial liability in the form of the judgement debt, and the creditor argued that his interest in the trust would almost certainly crystallise at some point in the near future at which point he would own the beneficial interest and the assets would be accessible.

However, the debtor successfully argued that the trust assets were not presently legally or beneficially owned and that it would be unjust and speculative to appoint receivers in case such assets were to exist at some point in the future. The court agreed and held that the debtor's status as a discretionary beneficiary of the trust did not amount to a legal or equitable interest in the trust assets. On the contrary, his only right as a beneficiary of a discretionary trust was to require the trustees to consider from time to time whether or not to apply the whole or some part of the trust fund for his benefit. While ordinarily this is an interest that equity will protect, in the absence of a sham trust or fraud, it stops short of being a proprietary interest in the assets held by the trustees.

On the facts of the case the debtor also had not retained a power of revocation or similar general power that could have been regarded as tantamount to ownership thereby rendering the assets accessible to equitable execution.

Conclusion

While previous case law has indicated that the Court is prepared to develop its jurisdiction incrementally on established equitable principles, this is not limitless or unfettered. The Court was of the opinion that in this case appointing receivers would amount to a radical and impermissible extension of the law.