The Court of Appeal considers the limits of the bona fide purchaser defence, whether a transaction can be void (as opposed to voidable) and trustee liability for a successor’s breach of trust.

In the recent case of FS Capital Ltd & Ors v Adams & Ors, the Court of Appeal upheld the High Court’s decision that the sale of assets from three Jersey trusts to a private company was carried out in breach of trust and was void in equity. It ordered a reinstatement of the trusts by both the (former) trustee and the purchaser of the assets. Partner Emma Holland and solicitor on secondment Lisa-Marie Marc examine the decision.

Understanding the High Court judgment in Adams v FS Capital

This case concerns employer-financed retirement benefit schemes (EFRBS) established for employees and contractors. These schemes structured the remuneration received as loans, the rights of repayment to which were settled into Jersey trusts to avoid income tax. These rights constituted the “Loan Assets”.

The introduction of the Loan Charge in the Finance (no.2) Act 2017 imposed a retrospective 45% income tax on relevant loan payments made since 1999, creating significant liabilities.

The trustee, a Swiss trust company called Pinotage Trustees Sarl (“Pinotage”), explored various options but decided to sell the Loan Assets to a private company called FS Capital Limited (“FS Capital”), which was incorporated by associates of Pinotage for this purpose. Pinotage retired in favour of Pinotage PTC, a British Virgin Islands entity controlled by the same individual (who was also behind the entity appointed as protector, PNG Services Limited), which then sold the Loan Assets to FS Capital for a nominal sum with a deferred consideration capped at around £1.2m. This amount was the sum allegedly owed to the trust’s creditors (Pinotage and a Jersey law firm at which the director of the trustee was a partner) and significantly below the book value of the Loan Assets (around £410m, although subsequently reduced to around £279m). This arrangement effectively deprived the beneficiaries who were to benefit from the schemes.

Using the test set out in Grand View v Wong [2022] UKPC 47, the High Court held that the trustee had disregarded the interests of the beneficiaries and did not accept the argument that such approach was appropriate in view of the trusts being cash-flow insolvent. Accordingly, it found that the transaction had been entered into for an improper purpose and that it amounted to a breach of trust. It was further decided that the transaction was void in equity and that Pinotage (the previous trustee) facilitated the breach of trust. This was appealed by Pinotage and FS Capital (the “Appellants”).

Key lessons for professional trustees

The Court of Appeal addressed three significant issues:

1. Limits of the bona fide purchaser defence

FS Capital sought to rely on the ‘bona fide purchaser defence’ (which protects an innocent purchaser for value acting in good faith) on the basis that, although they had knowledge of the facts (ie the mechanism of the transaction), they did not know this would constitute a breach under Jersey trust law.

In assessing whether FS Capital was able to rely on the defence, the court found that there could be no distinction between knowledge of the facts and knowledge of the law in this case. Based on Sinclair Investments (UK) Ltd v Versailles Trade Finance Ltd [2011] EWCA Civ 347 [2012] Ch 453, the court found that FS Capital had actual knowledge that the legal consequences of the transaction would probably amount to impropriety.

Further, the company could not have satisfied itself that it was legitimate to disregard the interests of the beneficiaries in these circumstances. Therefore, FS Capital could not rely on the bona fide purchaser defence. This was consolidated by the fact that it had not initially raised this defence in the evidence provided and because the individuals involved were accountants and lawyers, one of whom was qualified in England and Wales, the BVI and Jersey.

Lord Justice Males noted that Pinotage and FS Capital had structured the deal to ensure the beneficiaries “got nothing” while securing a “huge commercial opportunity” for themselves (ie by disposing of the Loan Assets at the value of the outstanding debts even though they were aware the value of the assets was significant).

2. Can a transaction be void (as opposed to voidable) under Jersey law?

The Appellants argued that the High Court had been wrong in accepting that a Jersey court would follow the English decision of Cloutte v Storey [1911] 1 Ch 18, which found that the exercise of a fiduciary power for an improper purpose is void in equity. Counsel pointed out that this question had not been settled in Jersey yet (although it was mentioned in BNP Paribas v Crociani [2018] JCA 136) and should, therefore, not be applied here.

However, the Court of Appeal noted that Jersey courts will consider English trust law unless it is contrary to the Trusts (Jersey) Law 1984, other statute or the customary law. Therefore, the court confirmed that the transaction could be and was void, as opposed to voidable under Jersey law.

3. Trustee liability for a successor’s breach of trust

Pinotage contended in a second appeal that it should not be liable for the breach of trust Pinotage PTC was found by the High Court to have caused on the basis that Pinotage’s retirement was not the direct cause of the breach of trust. However, the Court of Appeal agreed with the High Court’s finding that one of the purposes of Pinotage’s retirement was to enable the transaction and, thus, the breach of trust.

The Court of Appeal applied the principle set out in Head v Gould [1898] 2 Ch 25 that, for a retiring trustee to be liable for a breach of trust committed by its successor, it must be proved that the breach of trust was not merely the outcome of or rendered easy by the retirement of the former trustee, but was in fact contemplated when the retirement took place. Pinotage was found to have been contemplating the breach of trust at the time of its retirement, and the appeal was therefore dismissed.

Conclusion

This case serves as a stark warning to professional trustees, emphasising the following:

• The bona fide purchaser defence will not protect those who turn a blind eye to improper transactions, particularly if they are professionals.
• Unless otherwise decided, Jersey law recognises that trust transactions exercised for an improper purpose can be void, not just merely voidable.
• A retiring trustee may be held accountable for a successor’s breach if it facilitates or foresees the wrongdoing.