Jersey Unreported Judgments

Trusts. re: confirmation of an arrêt.

[2021]JRC009

Royal Court

(Samedi)

19 January 2021

Before     :

J. A. Clyde-Smith OBE., Commissioner, and Jurats Crill and Averty.

 

Advocate K. M. Purkis for the Plaintiff.

Advocate P. G. Nicholls for the Interveners.

judgment

the commissioner:

1.        The Plaintiff ("Kea") seeks confirmation of an arrêt over, inter alia, the rights of the First Defendant ("Mr Watson") as a discretionary beneficiary of three Jersey trusts. 

2.        By way of background, at the suit of Kea, Mr Watson is an adjudicated fraudster in and contemnor of the Courts of England and Wales.  Kea has the benefit of an English judgment including a declaration of entitlement to equitable compensation in a maximum sum of approximately £43.5 million and interim payment orders of £25,259,986.49, together with £3,837,356.57 in costs.  This is supported by post-judgment asset disclosure orders and notification undertakings relating to dealings with his world-wide assets (howsoever held) in excess of £100,000.  On 11^th September 2019, Kea registered the interim payment order together with the order for costs in Jersey under the Judgments (Reciprocal Enforcement) (Jersey) Law 1960.

3.        The affidavits of Mr Toby Graham, a partner of Farrer & Co., Kea's English Solicitors, show that despite considerable efforts at enforcement, a significant proportion of the Jersey judgment debt remains outstanding, and he deposes that there is a strong basis for saying that Mr Watson is engaged in an unlawful conspiracy with the Second Defendant ("Mr Gibson"), his "right hand man", to defeat his creditors, in particular Kea.  

4.        This application, if successful, may provide Kea with a shortcut to what would otherwise be expensive causes of action available to it in Jersey against the trusts, namely a proprietary claim and fact-intensive claims that at least some of the corporate assets within the trusts are in fact held on resulting trusts for Mr Watson. 

The Trusts

5.        The Kowhai Trust was established by declaration on 30^th January, 2012 and it is governed by Jersey law.  The trustee is the first party cited, VG Trustee Limited ("VG") and the protector is Mr Gibson.   The beneficiaries are:

(i)       Mr Watson;

(ii)      The children and remoter issue of any beneficiaries.  Mr Watson has three children (the Interveners) represented by Advocate Nicholls, as their guardian ad litem;

(iii)     Any person appointed by the protector;

(iv)     Any person appointed by the trustee.

6.        The trust period is 100 years, or such earlier date as the trustee may appoint, and there are wide discretionary powers of appointment of income and capital, exercisable during the trust period, to or for the benefit of any one or more of the beneficiaries. 

7.        In default of and subject to the exercise of such powers, at the expiration of the trust period, the trustee shall hold the trust fund upon trust for the beneficiaries in such proportions as the trustee shall determine, and in default, in equal shares absolutely.  Subject to this, the trust fund shall be held for such charitable purposes as the trustee shall determine. 

8.        There is then an overriding power of appointment on such new or other trusts, powers and provisions governed by the law of any part of the world for the benefit of the beneficiaries as the trustee may determine. 

9.        The Glacier Trust was declared on 15^th April, 2013 and is governed by Jersey law. VG is trustee and Mr Gibson protector.  It is in the same terms as the Kowhai Trust, save that the beneficiaries are defined as being:

(i)       Mr Watson;

(ii)      The children and more remote issue of Mr Watson, whether now in existence or born at any time during the trust period;

(iii)     The Jersey Blind Society;

(iv)     Any person appointed by the trustee.

10.      The Libra Trust was declared on 26^th November, 2015 and is governed by Jersey law.  VG is the trustee and Mr Gibson Protector.  The beneficiaries are defined as being:

(i)       Mr Watson;

(ii)      The issue and remoter issue of Mr Watson; and

(iii)     The Jersey Blind Society

11.      The trust period is the maximum permitted under Jersey law, and there are similar wide powers of appointment of income and capital during the trust period to or for the benefit of any one or more beneficiaries and similar default provisions.  Again, there is an overriding power of appointment. 

12.      Thus, in respect of all three trusts (which will refer to collectively as "the trusts"), Mr Watson is an object of the discretionary powers over income and capital vested in the trustee and of the overriding power of appointment.  He also has an interest in the default trusts, what is in fact a fixed proportionate share of the assets in default of the exercise of discretion by the trustee, an interest which is not calculable at the present time. 

13.      Kea accepts that Mr Watson's interests under the trusts is as a discretionary beneficiary, with the hope of benefit and that he has no right or entitlement to any part of the trust property.  Kea's case is that his rights as a discretionary beneficiary constitute movable property which under Jersey law can be distrained upon, in this case, by way of an arrêt. 

14.      An arrêt was granted over Mr Watson's rights as a discretionary beneficiary, and over certain loans, on an interim basis on the 18^th March 2020 pursuant to an Order of Justice under which a number of conservatory and ancillary orders were made.

15.      VG and Mr Gibson take a neutral stance on the matter and did not attend the hearing. 

The law on arrêts

16.      There is no dispute as to the jurisdiction of the Court to grant both an arrêt simpliciter and an arrêt entre mains which was considered recently by the Royal Court in F G Hemisphere v Gecamines [2010] JRC 195 and by the Court of Appeal in F G Hemisphere v Gecamines [2011] JCA 141.  A useful summary is contained in Offshore Civil Procedure by Richard Holden, within paragraphs JA11.3.3 and 11.4.2.  By way of brief summary:

(i)       An arrêt is a customary law remedy for the satisfaction of a debt by appropriating the debtor's movable property.  An arrêt may be made against the debtor, and his or her property directly, or against a third party, over property owed to the debtor (arrêt entre mains). 

(ii)      The effect of the arrêt is to charge the thing arrested and create a proprietary security interest in it in favour of the arresting creditor (F G Hemisphere v Gecamines [2011] JCA 141 at paragraph 156).

(iii)     The flexibility of the arrêt continues after its confirmation in respect of the precise benefit it confers on the arresting creditor in execution of his or her charge as recently illustrated in the case of Re Interactive Telesurfaces Group [2013] JRC 009, where the Court was prepared to transfer shares arrested on the arresting creditor's undertaking to value the company's sole asset and repay any sum realised in excess of the judgment debt granting the distraint.

(iv)     An arrêt may be effected against future property where such property is capable of precise identification and declaration as to its existence on oath (F G Hemisphere v Gecamines [2011] JCA at paragraphs 175-176).

Kea's case

17.      We would summarise Advocate Purkis's contentions as follows:

(i)       The term "beneficiary" under English law is ambiguous in that in the narrow sense it denotes the person who is entitled to trust property, whether that entitlement is vested or contingent, defeasible or indefeasible.  The objects of a discretionary power are not beneficiaries in that narrow sense (see Massively Discretionary Trusts by Lionel Smith, 2017, Current Legal Problems).

(ii)      The position under Jersey law is clear.  Article 1(1) of the Trusts (Jersey) Law 1984 ("the Trusts Law") defines the word "beneficiary" in this way:

" "Beneficiary" means a person entitled to benefit under a trust or in whose favour a discretion to distribute property held on trust may be exercised."

There is no question, therefore, that a discretionary beneficiary is a beneficiary for the purposes of the Trusts Law.

(iii)     Article 1(1) goes on to define what is meant by the interests of a beneficiary:

         ""interest of a beneficiary" means the beneficiar's interest under a trust and references to the beneficiary's interest have a corresponding meaning"

(iv)     Article 10(10) of the Trusts Law provides:

"The interest of a beneficiary shall constitute movable property".

It is trite law that movable property is defined negatively in Jersey law as being all property that is not immovable property - see Matthews and Nicolle, The Jersey Law of Property paragraphs 2.1 - 2.3 and Dessain and Wilkins Jersey Insolvency and Asset Tracing 5th edition, where the glossary accepts that "new economy assets" are capable of being characterised as movable property. Advocate Purkis noted that Article 10(10) did not permit the component elements in a beneficiary's bundle of rights to attract differential classification.

(v)      Article 10(11) then provides:

"Subject to the terms of the trust, a beneficiary may sell, pledge, charge, transfer or otherwise deal with his or her interest in any manner."

To the extent that the definition of "beneficiary" includes discretionary objects, this, she contended, represents a departure from the position under English law that objects of discretionary trusts and powers cannot transmit or assign to third parties their rights to due consideration by the trustee - see Schmidt v Rosewood Trust Limited [2003] UKPC 26 at paragraph 40.  This point of difference under the laws of England and Jersey was important to her argument and underlies the assertion in Lewin on Trusts (20^th edition) at 27-090 that the interests of an English discretionary beneficiary do not vest in an English trustee in bankruptcy.

(vi)     Where the interests of the beneficiary under a trust is connected to trust property, the draftsman of the Trusts Law uses language to make that clear - see, for example, Article 9(1)(g).  The interests of the beneficiary under a trust as defined, is not therefore restricted to any interest in trust property, but extends to the bundle of rights that a discretionary object has under a trust.

(vii)    The remedy of arrêt was available for all kinds of movable property.  The arguments that arrêts entre mains were only available for limited kinds of debt was abandoned at first instance in F G Hemisphere v Gecamines to judicial approbation (paragraph 145) and on appeal, and in another context, the Court of Appeal saw no reason in principle to distinguish between goods or a liquidated sum in ordering surrender (paragraph 155).  Any argument now that this particular kind of movable property is not subject to the remedy does not have a basis in authority.  In any case, in the context of its treatment of the nature of the trustee's estate, Article 54(4) of the Trusts Law expressly contemplates the trustee's own creditors, in the context of distraint, having in principle a "right or claim" against "inter alia" any beneficial interest that a trustee might have in the trust of which he is trustee.  There is nothing in Article 54(4) to say that such beneficial interest cannot be fixed. 

(viii)   Critically, Advocate Purkis did not contend that an arrêt would or could operate of itself to give Kea any better interest under the trust than Mr Watson now has.  Specifically, she did not contend that Kea would obtain, without more, an interest in the trust assets.  There was therefore no question, she said, of the other beneficiaries being put in a worse position than they now are, by being deprived of rights. 

(ix)    In Re the Realisable Property of R Tantular [2014] (2) JLR 25 the Court had to consider whether a saisie judiciaire would be apt to catch trust assets held under a discretionary trust where the affected person is a beneficiary of that trust.  As apparent in the judgment, the making of the saisie under Article 16 of the Proceeds of Crime (Jersey) Law 1999 has the effect of vesting in the Viscount all "realisable property" of the respondent, and Article 2 defines "realisable property" as including (at Article 2(1)(c), as amended) "any property to which the defendant is beneficially entitled".  Uncontroversially, the Court held with reference to case and textbook authority at paragraph 26 that it was "clear and abundantly well-established law that a beneficiary of a discretionary trust has no 'entitlement' to any of the trust property" and, at paragraph 30, that such beneficial entitlement would only arise when and to the extent that the trustees exercised their discretion in his favour.  Accordingly, the trust assets were not 'realisable property" within the ambit of the statutory definition.  At paragraph 31 the Court continued:

"[Counsel] argued that because 'contingent property' was included in the definition of property, this covered the position of a discretionary beneficiary because his interest was contingent upon the exercise of the trustee's discretion in his favour.  He further argued that art. 10(10) of the Trusts (Jersey) Law 1984 declared the interest of a beneficiary of a trust to be movable property.  But, even if a discretionary beneficiary's interest can be described as 'contingent property', it is only that interest which could conceivably be so described, not the underlying property of the trust.  Thus, all that could be made the subject of a saisie judiciaire would be a discretionary beneficiary's interest under the trust, which would mean his right to be considered for appointment by the trustee.  That is completely different from the suggestion that he is beneficially entitled to all or any part of the trust property."

It is notable that the Court accepted the notion of a saisie judiciaire over the discretionary interest itself, as distinct from the trust assets.  This is the equivalent to what Advocate Purkis  was contending for in the present case.

(x)     In Crociani v Crociani [2017] JRC 146 at paragraph 690, the Royal Court held that BNP Paribas should not receive credit against its liability to make compensation for breach of trust by impounding under Article 46 of the Trusts Law the discretionary interest of Camilla, who acquiesced in that breach, and dealt with the matter by ordering reconstitution but subject to a direction that Camilla should not benefit from the reconstituted trust.  The Court of Appeal upheld that finding on the basis that Camilla's expectation of benefit could not be guaranteed (Crociani v Crociani [2018] JCA 136A at paragraph 25), though the ultimate result for BNP was otherwise, for other reasons.  Advocate Purkis submitted, however, that those findings were distinguishable and specific to the question of, in effect, being asked to account for a discretionary interest as if it were vested.

(xi)    The act of making the arrêt confirmée would have the effect of authorising both the possession of the arrested property to pass and the process of realisation, as is apparent in a simple case. The question of whether an arrêt over trust interests is in any case a proportionate remedy can be dealt with on a case-by-case basis because the remedy is discretionary.  Factors bearing on the discretion would include the factual context and the extent of the debt.  Commonly, movables distrained upon are liquidated, but Royal Court Rule 11/3 provides expressly that they may also "be applied towards the satisfaction of the judgment debt and costs".  Kea was seeking an application of the trust interests - not the trust assets - towards such satisfaction.  Advocate Purkis argued that Kea was in effect to be subrogated to those interests for so long as and to the extent that its debt remained unpaid.  The elements of the interests she focused upon in this context were the right to due consideration, the right to due administration and the right to give a good discharge. Generally, the Court has wider flexible powers to give effect to its own judgments, and in the instant case, Advocate Purkis invoked the creativity and flexibility that the Court demonstrated in the novel context of the Re Z Trusts cases, those cases fashioning principles relating to so-called "trust insolvency" (see In re Z Trusts [2015] JRC 214).

(xii)   The Security Interests (Jersey) Law 2012 does not apply directly, governing as it does security over intangible movables given by agreement.  Nonetheless Advocate Purkis submitted that the scope of Article 43(2) dealing with how enforcement may occur in a case where it does apply sets some parameters for what Kea might expect:

"(2)     A secured party may exercise the power of enforcement in respect of a security interest by doing any of the following in relation to the collateral that is subject to such security interest, or in relation to any proceeds of that collateral -

(a)       appropriating the collateral or proceeds;

(b)       selling the collateral or proceeds;

(c)       taking any of the following ancillary actions:-

(i)         taking control or possession of the collateral or proceeds,

(ii)        exercising any rights of the grantor in relation to the collateral or proceeds,

(iii)       instructing any person who has an obligation in relation to the collateral or proceeds to carry out the obligation for the benefit of the secured party;

(d)       ...

(3)       The secured party may do more than one of the things set out in paragraph (2) to the extent that those things are not in conflict."

There is no reason in principle for a party secured by arrêt to be in any worse position than a party secured by a security interest agreement.  What Kea is therefore asking for is relief equivalent to that in Article 43(2)(c)(i), (ii) and (iii), whilst being mindful that there should be no fraud on the dispositive powers.  In the words of Article 43(2)(c)(ii) and (iii), it wishes to "...[exercise Mr Watson's] rights in relation" to the trusts to ask for a distribution to satisfy (in the first instance) an agreed minimum figure outstanding on the judgment debt, and to "[instruct VG] who has an obligation in relation to" the trusts (i.e. to consider such requests), "to carry out the obligation for [its] ... benefit".  In turn that means VG will be obliged to consider that request on the footing that Kea is, and for the time being Mr Watson is not, a beneficiary, even if he remains so for the purpose of enabling the payment to be made.   The trustee can assume that not only will paying this debt be to Mr Watson's benefit as it makes him financially better off, but that Mr Watson himself should be taken to consider it betters his position, as discussed in The Esteem Settlement [2001] JLR 7 at paragraph 45.  It can also take into account all of the background facts.  The Interveners can, and no doubt will, make their views known at that stage as they would do in the normal course.  

(xiii)  Here there exists an analogy with the operation of an assignment for value of future benefits arising under discretionary trusts after the exercise of trust discretions: see Lewin on Trusts, (20^th ed.) 26-011, which illustrates the concern to avoid fraud on the power and provides that:

"Another example where no fraud on the power would be involved [in paying the assignee from the trust] would be where the assignment for value consists of a charge on the discretionary interest of a beneficiary to secure debts due from the beneficiary to the assignee, and the trustees' purpose in exercising or operating the power or trust in favour of the beneficiary is to benefit the beneficiary by providing funds to relieve the beneficiary from the burden of debts which he otherwise could and would have to meet from some other source."

(xiv)   Advocate Purkis acknowledged that it will take some time to ascertain exactly what sum from the Jersey judgment must be taken to have been satisfied by the other recoveries being undertaken by Kea in England, but she accepted that Kea cannot claim double recovery, and must assume an obligation to cooperate with the trustee in demonstrating the extant element of the debt.  Whilst it was unlikely that Kea would find itself holding assets as a result of its enforcement efforts that were in excess of the sums outstanding on the Jersey judgment, it recognised that there is no entitlement to a windfall so that any excess realisations would need to be returned, and furthermore, there would be an obligation on Kea, if selling, to use its best endeavours to achieve the market price for any asset being realised. 

(xv)    If the arrêt is confirmed, Advocate Purkis contended that Kea would have the standing of a beneficiary entitled to make an application under Article 51(2) of the Trusts Law.  Leaving aside the continuation of conservatory and ancillary relief granted under the Order of Justice, Kea would, in the first instance, seek the following in respect of the trusts:

(a)       annual trust accounts from 1^st January, 2015;

(b)       the most recent management accounts or up to date accounting records;

(c)       a detailed asset and liability statement, giving current values; and

(d)       all instruments made pursuant to the terms of the trusts with constitutional effect. 

18.      Advocate Purkis described the confirmation of the arrêt as the first stage in the process.  The second stage, as to how Mr Watson's rights as a discretionary beneficiary would be utilised, placed the Court in uncharted territory in which new law would need to be created, but she said it was not necessary at this first stage for the Court to consider how the trustee would deal with Kea as assignor of those rights. 

Interveners' case

19.      We would summarise the contentions of Advocate Nicholls in this way:

(i)       Advocate Purkis had been unable to provide any authority from any common law jurisdiction in support of the proposition that the rights of a discretionary beneficiary could be distrained upon.

(ii)      Article 1 of the Trusts Law was prefaced by the words "In this law, unless the context otherwise requires ....".  The position under Jersey law, prior to the introduction of the Trusts Law, would have reflected English law to the effect that the interests of a discretionary object were not assignable, and the Trusts Law, not being a codification, was to be construed on that basis.

(iii)     The definition of "Property" in Article 1 of the Trusts Law was as follows:

""Property" means property of any description wherever situated, and, in relation to rights and interests includes those rights and interests whether vested, contingent, defeasible or future."

That definition, he said, did not extend to rights of a discretionary beneficiary to be considered for benefit.

(iv)     The suggestion that the rights of a discretionary beneficiary might vest in a trustee in bankruptcy was, in his view, baffling.  What, he asked, would a trustee in bankruptcy do with such rights?  They would have no commercial value even if the objection that such rights are not assignable could be overcome.  It could never be a proper exercise of the trustee's discretion to exercise the power in favour of the trustee in bankruptcy, still less in favour of his assignee.

(v)      Kea was arguing that confirmation of the arrêt would entitle it to be treated as if it, rather than Mr Watson, had been the object of the discretionary power, but it was confused as to whether the trustee should be considering Mr Watson's interests or those of Kea in deciding whether or not to exercise the power.  It could not seriously be argued that the discretionary power was conferred on the trustee to enable it to benefit Kea, and it would be a fraud on the power to exercise it for that purpose.  At the same time, if a payment to Mr Watson's creditors were genuinely for Mr Watson's benefit, the trustee already has the power to make the payment, and the arrêt would add nothing.

(vi)     In essence the Trusts Law, and in particular Article 10, was to be construed on the basis that the rights of a discretionary beneficiary were not transmissible, although he did not elaborate on how that was to be done.  He said Kea was seeking rights which have no value and are incapable of giving it any interest or benefit at all. 

Decision

20.      The issue in this case is whether the rights of a discretionary beneficiary are transmissible either individually or collectively and whether by assignment or, as in this case, by distraint, so that they can be exercised by a third party, in this case a creditor, independently of the discretionary beneficiary.

21.      In her submissions, Advocate Purkis focused on three rights of a discretionary beneficiary, namely the right to due consideration, the right to due administration and the right to give a good discharge.  It was not clear whether it was intended that the arrêt would be confirmed in relation only to these three rights, or whether it was intended that it should be confirmed over all of the rights of Mr Watson as a discretionary beneficiary.  We assume that the latter was intended. 

22.      The rights of a discretionary beneficiary were described in Lewin at paragraph 1-061 in this way:

"A discretionary interest includes a right to be considered for the exercise of the trustees' discretion, a right to compel the due administration of the trust, a prima facie right to obtain information and accounts from the trustees, and a right to bring a claim for breach of trust, including a right to compel a third-party recipient of trust assets to restore them to the trustees.  It has been suggested that an object of a discretionary trust may have a legitimate expectation of being consulted before a regular payment is stopped, or at least given the opportunity to persuade the trustees to continue the payments."

23.      There is no reference here to a right to give a good discharge. Whether it is appropriate to characterise the ability of a discretionary beneficiary to give a good discharge as a right, we can understand why Advocate Purkis makes reference it as an assignable right, as it foreshadows the difficulty in the trustee getting a good discharge on distributions made directly or indirectly for the benefit of Kea.

24.      The article "Equitable Property" by R C Nolan LQR 2006 122 (Apr) 232-265 considered and analysed equitable property rights under trusts under English law, an article referred to with approval by Lord Mance in paragraph 15 of his judgment in the case of Akers v Samba Financial Group Limited [2017] UKSC 6, a case concerned with a bare trust of shares in Saudi Arabian banks.  Much of the article is concerned with what is meant when a beneficial interest under a trust can be described as "proprietary":

"In short, a beneficiary's core proprietary rights under a trust consist in the beneficiary's primary, negative, right to exclude non-beneficiaries from the enjoyment of trust assets.  Infringement of this primary right will generate secondary rights by which a beneficiary may also prevent (or at least restrict) access to assets by non-beneficiaries.  By contrast, a beneficiary's positive claims to access benefits from trust assts, which will exist in conjunction with his negative, exclusionary rights, may or may not themselves be regarded as proprietary by reason of their utility rather than their enforceability."

25.      Nolan describes a benefit under a trust as a package of constituent elements functionally complementing each other, and he says this in the context of a discretionary interest:

"So, for example, the content of a "discretionary interest" under a trust will depend, like all other interests, on the terms establishing it: "discretionary interest" is not a term of art in drafting settlements.  Even well understood concepts such as life interests, and terms defined in statute such as 'protected life interests', are only starting points in any attempt to ascertain beneficial entitlements under a trust: they are always subject to modification by other terms of the trust, express or (where appropriate) implied.  If any interest is to be measured against a definition, that definition must also be properly understood in its context.  Taxing statutes are, by definition, concerned with claiming money for the state, commonly by reference to a benefit held or received.  Consequently, where a tax is levied by reference to the benefits of holding 'property', or by reference to receipts from 'property', then the notion of 'property' is generally, and entirely understandably, taken to involve positive claims of access to some benefit of definable extent, unless the meaning of the word is deliberately extended.  Only when both interest and definition are properly understood can the two be related, so as to answer the question whether or not the interest is 'property' or 'proprietary' for the purposes of that definition.  It is therefore perfectly consistent to hold that a discretionary beneficiary's rights under a trust do not constitute an 'interest' or a 'proprietary interest' where those words specifically connote a right to positive benefit, whilst at the same time maintaining those rights are 'proprietary' in the general, negative, exclusionary sense."

26.      The issue of whether the interests of a beneficiary under a trust can be described as "proprietary" does not arise under Jersey law, as it is governed by Article 10(10) which mandates that the "interest of a beneficiary shall constitute movable property."  Article 10(11) then goes on to say that:

"...a beneficiary may sell, pledge, charge, transfer or otherwise deal with his or her interest in any manner."

We acknowledge, therefore, the argument that the rights of a beneficiary under Jersey law constitute movable property that on the face of it is transmissible. However, Article 10(11) is prefaced by the words "Subject to the terms of the trust ...".

27.      The starting point, therefore, is to consider the terms of the trusts and the intrinsic nature of the rights with which we are concerned.  Under the trust deeds the trustee is given wide fiduciary discretionary powers to distribute income and capital and an overriding discretionary power of appointment of new and other trusts, all of which have to be exercised for the benefit of any one or more of the beneficiaries as defined.  Whilst the class of beneficiaries can be expanded by the power of addition or reduced by the power of exclusion, the discretionary powers of the trustee can only be exercised for the benefit of any one or more of that class as constituted from time to time. To do otherwise would be a fraud on the power. 

28.      A beneficiary can disclaim his or her interest either under the terms of the trust deeds or under Article 10A of the Trusts Law, but a beneficiary does not have the power under the trust deeds to extend the beneficial class to third parties by purported assignment or transmission of his or her rights as a discretionary beneficiary.  Even if he or she purported to do so, any exercise by the trustee of a discretionary power in favour of that third party would be tainted as a fraud on the power.

29.      It is trite law that a power can only be exercised for the purpose for which it was created.  The general principle is set out in this passage from Lewin at paragraph 30-066:

"30-066           The donee of a beneficial power may exercise it as he pleases; he may, if he wishes, use it for his own benefit. That is what makes it a beneficial power. The donee of a power of any other power must not misuse it. Where the power is a limited but non fiduciary power, he is under no obligation to exercise it or to consider doing so, but if he does exercise it he must do so for a proper purpose. Where the power is a fiduciary power the donee is under an obligation at least to consider exercising it, but he too, if he does exercise it, must do so for a proper purpose.

'...[T]he donee, the appointor under the power, shall, at the time of the exercise of that power, and for any purpose for which it is used, act with good faith and sincerity, and with an entire and single view to the real purpose and object of the power, and not for the purpose of accomplishing or carrying into effect any bye or sinister object (I mean sinister in the sense of its being beyond the purpose and intent of the power) which he may desire to effect in the exercise of the power'.

Those considerations are embodied in the doctrine of fraud on a power.  The doctrine applies to all but beneficial powers.

30-067             The term 'fraud' in this context does not necessarily denote any conduct on the part of the donee amounting to fraud in the common-law meaning of the term or any conduct which could be properly termed dishonest or immoral.  It merely means that the power has been exercised for a purpose, or with an intention, beyond the scope of or not justified by the instrument creating the power.  Such an exercise is void.

30-068             The constraints imposed by the doctrine of fraud on a power are distinct from those imposed by the terms of the trust instrument, express or implied, which identify its scope.  The latter are a matter of construction of the trust instrument.  The former are a matter of the donee's purpose and may require an investigation into the facts."

An intention, therefore, to benefit a non-object is sufficient to invoke the doctrine. See also Crociani v Crociani at paragraphs 339 and 340.

30.      The bundle of complementary rights of a discretionary beneficiary of the trusts are rights which of necessity attach to the person of the discretionary beneficiary in that capacity and by their nature are not separable from that person for so long as he or she has that capacity. In a sense it is akin to the two sides of a coin.  On one side of the coin is the trustee with the discretionary powers to benefit the discretionary beneficiary.  On the other side of the coin is the discretionary beneficiary who can benefit from the exercise of such powers and who necessarily has the rights commensurate to that status.  These are not rights which can exist and be exercisable independently of the discretionary beneficiary. They are not transmissible. 

31.      The purported transmission of these rights to Kea by way of distraint is intended by Kea, as acknowledged by Advocate Purkis, to have the effect of constituting it either as a beneficiary or a quasi-beneficiary (whatever that means) of the trusts for the purpose and object of enabling payment of Mr Watson's debt to be made to it. The terms of the trust deeds do not permit non-objects to become or be considered beneficiaries or quasi beneficiaries in this way and for this purpose. 

32.      Advocate Purkis mooted, in the alternative, the possibility of Kea being added as a beneficiary by the trustee, and then being removed after payment has been made.  She acknowledged that such an approach would need to be considered further, but we can see insurmountable problems in the trustee, if it was so minded (and there is no indication that it is so minded) exercising a power of addition and removal for that ulterior purpose.  There has been no surrender of discretion by the trustee and so the Court has no power to direct the exercise of such powers. 

33.      Another possibility she canvassed was for the interests of Kea to be deemed a relevant factor for the trustee to take into account when considering whether to make a payment directly or indirectly in reduction of the judgment debt, but having regard to the terms of the trusts it is difficult to see how the interests of Kea could ever be a relevant factor for the trustee to take into account.   

34.      As previously mentioned, Lewin addressed the application of the doctrine of fraud on the power to an assignment by a beneficiary of property to which the beneficiary may become entitled in the future upon the exercise or operation of a power or discretionary trust, exercisable or operative in favour, or for the benefit of the beneficiary. Quoting from paragraph 26-011 more fully:

"Can the assignment have an effect on the validity of the exercise of the power or operation of the discretionary trust concerned in favour or for the benefit of the beneficiary who has made the assignment? In our view, the answer to this question is yes, if the effect of the exercise of the power would be to benefit the assignee and not the beneficiary (or any other member of the class of objects of the power or trust) and that was the trustees' purpose in exercising or operating the power or trust in that way, since the exercise of the power would be tainted as a fraud on the power.  In such a case, the assignment will fail, not because the assignment is invalid, but because the exercise or operation of the power or trust is void by reason of the fraud on the power and so creates no interest upon which the assignment can operate.  But there will  be no fraud on the power if the exercise of the power can be justified as being for the benefit of the beneficiary (or another object of the power or trust), despite the assignment.  That may be so, for instance, if the assignment for value is to the trustees of another trust which is primarily for the benefit of the beneficiary making the assignment, or to a company which at the time of the exercise of the power or operation of the trust is substantially beneficially owned by that beneficiary.  Another example where no fraud on the power would be involved would be where the assignment for value consists of a charge on the discretionary interest of a beneficiary to secure debts due from the beneficiary to the assignee, and the trustees' purpose in exercising or operating the power or trust in favour of the beneficiary is to benefit the beneficiary by providing funds to relieve the beneficiary from the burden of debts which he otherwise could and would have to meet from some other source."

35.      Under English law the assignment of the rights of a discretionary beneficiary would of itself be invalid as per Schmidt v Rosewood Trust Limited (we were not referred to the history of that restriction under English law), but even where the assignment is valid, if the trustee's purpose is to benefit a non-object then the exercise of the power would be tainted as a fraud on the power.  It would, of course, be open to the trustee to discharge Mr Watson's debt to Kea, assuming it was able to do so, as being for his benefit.  In Re Esteem Settlement the trustee, having surrendered its discretion to the Court, applied for an order that all or most of the trust funds be distributed to the plaintiff creditor, in reduction of the first defendant beneficiary's debt to it: 

"46.    .... In re Price, the position was rather different. Section 12 of the Lunacy Regulation Act 1862 enabled the court to order payments for the maintenance or benefit of a lunatic in certain circumstances.  In that case, the lunatic was confined in Broadmoor and there appeared to be no reasonable prospect of his ever being released.  The lunatic owed a number of debts which exceeded his assets.  His mother sought an order from the court that all of his assets, together with some of her own, should be used to pay off the debts completely.  It was argued that such a payment would be for his benefit as it would result in the discharge of all his debts and would mean that if he came out of the asylum he would be free of debt.  The Court of Appeal upheld the decision of Fry, L.J. at first instance to the effect that, on the basis that there was no reasonable prospect of his being released, there would be no benefit to him.  The only persons who would in reality benefit would be his creditors.  The payment could not therefore be made.

47       In our judgment, that decision is strongly against one of the trustee's submissions, namely that a mere reduction in debt is of itself a benefit because it means that, in strictly financial terms, the debtor is better off than before as he owes less money.  On any view, a payment of only part of a debt must be less beneficial than payment of all of the debt. Yet, if the trustee's argument were right, the payment in Price would have been held to have been for the benefit of the debtor because it would have cleared all his debts.  His strict financial position would have been much better.  In our judgment, Price makes it clear that one is looking to more than mere bookkeeping in considering whether there is a benefit to a person in financial terms.  One must stand back and consider whether his position after the payment would be better from a realistic and commonsense point of view.

48       Taking account of the authorities referred to above and other useful extracts cited by counsel (In re Cameron Dcd. (3) ([1999] Ch. At 415 and Inglewood (Lord) v Inland Rev. Cmmrs. (10))[1983] 1 WLR at 372), we agree that the word 'benefit' is to be construed widely and goes beyond mere financial benefit.  It encompasses all sorts of ways in which a beneficiary's position can be made better.  Nevertheless, it is not open-ended.  There is an objective test, namely, that the way in which the trustee proposes to deal with the capital can fairly be regarded as being for the benefit of the beneficiary.  There is also a subjective test, in that the trustee must genuinely believe that the appointment of capital will in fact be for the benefit of the beneficiary.  A court is of course bound by exactly the same principles when, as here, the trustee has surrendered its discretion to the court.  Most importantly, the question of benefit is to be considered in a realistic and commonsense manner rather than in theoretical or academic way.

In this case, there is no proposal from the trustee to discharge Mr Watson's indebtedness to Kea and no surrender of discretion. 

36.      The rights of a discretionary beneficiary with which we are concerned include the right:

(i)       To due consideration;

(ii)      To compel the due administration of the trusts;

(iii)     To obtain information and accounts from the trustee (all the trusts having extensive provisions against disclosure);

(iv)     To bring claims for breach of trust;

(v)      To compel third party recipients of trust assets to restore them to the trustee.

37.      Although more relevant to the exercise of the Court's discretion, what possible utility could there be in non-objects having any of these rights which they can never exercise in a way that benefits them?  These rights only have utility if exercised by a person who does have an interest in the trust in that their exercise will benefit that person either through a distribution in his or her favour or the trust estate.  As Advocate Nicholls said how could such rights vest in the Viscount on a bankruptcy?  What would the Viscount do with such rights which are in no sense cashable?  It could never be a proper exercise of the trustee's powers to exercise them in favour of the Viscount or her assignee. 

38.      Quite apart from utility, permitting such rights to be assigned to a non-object, assuming they are transmissible, would give it locus to involve itself in the internal affairs of the trusts as Kea has indicated it wishes to do, namely by asking for extensive disclosure of what would otherwise be confidential information.  To have a non-object operating within the domestic confines of these trusts in this way, at some cost no doubt to the trust estate, and over an open ended time period (Kea wishes to be in this position for so long as the judgment debt is unsatisfied) would be inimical to the good administration of the trusts in the interests of the beneficiaries. 

39.      In essence, Kea, by distraining on Mr Watson's rights as a discretionary beneficiary, wishes to be subrogated for him in the hope that it can benefit from the trust funds of the trusts in his place as if it were a beneficiary.  Fundamentally, that is not permissible under the terms of the trust deeds as Kea is not a beneficiary and no power can be exercised in its favour.  Even if Mr Watson's rights were somehow assigned to Kea by way of distraint, it cannot ask to be considered for the exercise of the trustee's discretion in its favour as it is not a beneficiary.  The most that it could do is ask the trustee to consider exercising its powers in favour of Mr Watson by discharging his debt to Kea, but the trustee is in a position to do that in any event if it is in the interests of Mr Watson to do so and his views on the benefit to him of such a distribution would be a relevant factor for the trustee to take into account.  It was held in Re Esteem Settlement at paragraph 40 that whilst a trustee can exercise a power of advancement in favour of a beneficiary against the express wishes of that beneficiary, the cases where that is done will be very few.  

40.      In conclusion, we accept that Mr Watson's interests under the trusts constitute movable property pursuant to Article 10(10) of the Trusts Law, but it is not property that is assignable or in any way transmissible under the terms of the trust deeds, to which Article 10(11) is subject, or by its inherent nature.  We will not, therefore, confirm the arrêt over his interests. 

Loans

41.      Kea seeks confirmation of an arrêt entre mains over five Jersey law loans made by Mr Watson as lender to VG as trustee and to the Fourth Defendant, Chanin Holdings Limited.  There is no issue in relation to this part of Kea's application and confirmation of the arrêt entre mains is not contested. 

42.      We will, as requested, direct VG, as trustee of the trusts, and Chanin, to provide written confirmation of the repayment dates and the amounts actually outstanding on each of the loans in accordance with the trust and company accounting records assessed at the time of the interim order (see F G Hemisphere v Gecamines at paragraph 148(ii) and paragraph 149) and for an acknowledgement in writing in open court by VG and Chanin (who must attend the hearing when this judgment is handed down) that they will henceforth hold each of these loans in the sums thus disclosed for the benefit of Kea, so that it can recover the same without the intervention of the Viscount. 

Conservatory measures

43.      As requested by Kea, and in the light of the background to this matter, we will grant a stay of 56 days before lifting the conservatory measures imposed by the Court in order for Kea to bring, if it sees fit, proprietary, resulting trust or other claims to the assets of the trusts. 

Authorities

Judgments (Reciprocal Enforcement) (Jersey) Law 1960

F G Hemisphere v Gecamines [2010] JRC 195

F G Hemisphere v Gecamines [2011] JCA 141.

Re Interactive Telesurfaces Group [2013] JRC 009

Trusts (Jersey) Law 1984

Schmidt v Rosewood Trust Limited [2003] UKPC 26

Lewin on Trusts (20^th edition)

Re the Realisable Property of R Tantular [2014] (2) JLR 25

Proceeds of Crime (Jersey) Law 1999

Crociani v Crociani [2017] JRC 146

Crociani v Crociani [2018] JCA 136A

Representation of the Z Trusts [2015] JRC 214

The Security Interests (Jersey) Law 2012

The Esteem Settlement [2001] JLR 7

Akers v Samba Financial Group Limited [2017] UKSC 6