Z Trust Litigation: Royal Court applies pari passu approach in precedent setting judgment

Advocate Emma Jordan and Taylor Wessing represented the former trustees in an application to enforce their indemnity against an insolvent trust as part of the Z Trust litigation.

On 3 July 2018 the Royal Court of Jersey handed down the judgment in the litigation in which it ruled that both current and former trustee's claims under their respective indemnities and equitable liens to the assets of an insolvent trust rank pari passu.

The decision has significant adverse implications for former trustees who wish to recover assets from an insolvent trust to meet the costs of a third party claim against them. As a result it brings the value of a former trustee's indemnity and equitable lien into question.

In this case the former trustee had an £18 million liability in the form of a legal claim by a third party which it incurred after it transferred the trust’s assets. However rather than being able to rely on its indemnity and claim all the remaining trust assets (which have an estimated value of £6 million) to partially meet this liability, the Royal Court determined that former trustee's claim to the assets ranks pari passu with the current trustee (and any unsecured creditors who claim through the current trustee). Consequently the former trustee is only likely to recover £333,000 from the trust assets. This is despite the fact that the current trustee is protected from personal liability to any creditors who may try and claim through it by operation of its right of exoneration under Article 32(1)(a) of the Trusts Law.

This judgment means that former trustees face the prospect of their indemnities and equitable liens being worthless should the assets of the trust be diminished to the point of insolvency. Given that a third party could bring a claim against a former trustee up to 10 years after the event under Jersey law, this leaves former trustees vulnerable in personal liability for third party claims for a significant amount of time, and with no control over the administration of the trust in the meantime.

The former trustee has leave to appeal the judgment.