INSOL International: Standard Case Management Directions for an Insolvent Trust

INSOL International Association of Restructuring, Insolvency & Bankruptcy Professionals is a world-wide federation of national associations for accountants and lawyers who specialise in turnaround and insolvency. The Board of Directors of INSOL has approved a set of model standard case management directions for an insolvent trust (“CMDs”), as proposed by the INSOL Technical Research Committee (the “Technical Committee”).

These CMDs are now being provided to a number of jurisdictions in the hope that they will be incorporated into civil procedure rules by Court issued Practice Directions, or adopted via legislative change.

The concept behind these CMDs was to create a flexible model form of directions for insolvent trustees when they initially come before the Court, encompassing any special directions necessary due to the nature of a trust. It is now suggested for use in multiple jurisdictions, and is being provided to key stakeholders, with the intention of working to standardise insolvency templates around the world and make insolvency procedures more universal and efficient.

The Technical Committee has been developing these CMDs since 2015, and has provided them to academics and professionals in various jurisdictions for comment and revision prior to approval. The Technical Committee welcomes any comments aimed at further improving and developing these CMDs.

Insolvent Trusts

A trust is not a separate legal personality so cannot itself become insolvent. This term is used as a shorthand reference to circumstances where a trustee has insufficient trust assets to meet the liabilities it has assumed in its capacity as a trustee.

These draft CMDs are proposed for use where that situation arises.

In these circumstances, it is necessary for the trustee to “wind up” the trust so as to realise and apply any assets towards payment of liabilities owed to third party creditors.

Right of Subrogation

Parties may be dealing with the trustee either in its own right (in which case they will have claims against the trustee in that personal capacity), or as the trustee of a trust. In the latter case, creditors would still take action against the trustee, but will need to rely on the principle of subrogation in order to enforce against the trust assets.

The principle of subrogation applies where one person, in this case the creditor, is put in the place of another, here the trustee, so that it can enforce the latter’s rights. In this context, the right which the creditor will wish to rely on to satisfy its debt, is the trustee’s right of indemnity from trust assets. This is of particular relevance in the context of trading trusts, as the corporate trustee of a trading trust may have very few or no assets of their own that are not held on trust.

As Lewin on Trusts (19th Edition) particularises at [21-018] to [21-055], the right of subrogation:

  • prevents the beneficiaries from avoiding liabilities which properly fall on the trust fund;
  • entitles the creditors to enforce their liabilities against trust property to the extent that the trustee would be so entitled; the creditors have no right of subrogation unless the trustee is entitled to an indemnity from the trust assets. The trustee’s right of indemnity may arise in the trust deed and/or by relevant applicable legislation as is the case in many established common law jurisdictions such as England & Wales, and widely recognised trusts jurisdiction such as Jersey and Guernsey;
  • in cases where the liability of the trustee is limited to the trust fund, or part of the trust fund, will be limited to the trust fund or part of the trust fund to which the trustee’s indemnity applies;
  • in cases where the trustee itself is insolvent, entitles creditors to enforce an unsecured claim against the trust property where it would not be possible to enforce the claim against the trustee personally due to the trustee’s insolvency; and
  • where a trustee has a right of indemnity in relation to a debt incurred by the trustee which carries interest, the creditor, in proceedings against the trust fund upon default by the trustee, would be entitled to recover that interest along with the initial debt.

Directions

In the event that the trustee is either insolvent or entitled to rely on an indemnity to the assets of the trust fund (whether by agreement or by statute), and there is a shortfall in the assets of the trust, the question arises as to what steps a trustee can take to wind up the trust so as to realise and apply the assets towards payment of liabilities owed to third party creditors.

Some, including the learned authors of Lewin on Trusts, suggest that, in these circumstances, the most appropriate step would be for the trustee to seek directions from the court. These CMDs attempt to provide a mechanism for so doing, and to address the further practicalities involved in the winding up of a trust.

Lewin suggests directions might need to be sought in respect of:

  • the order of priority for payment of liabilities, and whether the priority should be by reference to when the liability occurred or the amount of the liability;
  • whether the trustee is entitled to have recourse to the trust fund for the purpose of meeting any liabilities that are unlimited;
  • whether the trustee is entitled to pay ordinary administration costs out of the trust fund;
  • whether the trustee is entitled to remuneration and if so what;
  • whether any litigation is to be embarked on; and
  • whether the answers to any of the above, changes with effect from the date upon the trust estate can be said to have become insolvent.

A similar approach was taken in the decision of the Jersey Royal Court, in the estate case of Re Hickman [2009] JRC 040. In that case, an executor applied for directions in respect of the procedure for dealing with the insolvent estate of a deceased person. The directions provided for the following provisions:

  • publication of a notice requiring creditors to submit claims;
  • forfeiture for claims not submitted by a certain time;
  • how to deal with preferential claims;
  • inspection of claims by creditors with an opportunity to file opposing evidence;
  • the admission or rejection of creditors’ claims by the executor;
  • an appeal procedure for rejected claims; and
  • for payment of the executors fee out of the insolvent estate.

The Jersey Royal Court subsequently stated in the Representation of the Z Trusts 2015 (2) JLR 175 that in the case of an insolvent trust, it did not consider that a regime of the kind adopted in Re Hickman should always be followed, but rather that the court should be flexible in its approach, having regard always to the best interests of the creditors as a body, and taking into account the nature, number and type of creditor claims.

The court will also need to consider who is best placed to implement that regime, whether the trustee alone (assuming the role of “liquidating trustee” under the supervision of the court), the trustee with assistance of an insolvency practitioner appointed to liquidate the trust assets (who could handle the creditor claims adjudication process as a result of any perceived conflict on the part of the trustee against whom the claims are brought), or an independent insolvency practitioner appointed by the court (reducing the trustee to a bare trustee, similar to the court’s ability (rarely used) to appoint a receiver of a trust). In the Z Trusts cases, the court decided to follow the first option, to leave the trustees to conduct the winding up of the trusts under the supervision of the court, rather than appointing an insolvency practitioner, principally in the interest of costs, and indicated that this would ordinarily be the case.

Scope of CMDs

These CMDs are intended to apply to the following scenarios:

  • typical complex trust structures in common law jurisdictions such as Australia, Hong Kong and Singapore, recognised trusts jurisdictions such as Jersey and Guernsey, and jurisdictions such as the British Virgin Islands, Cayman Islands and Bermuda, to name a few;
  • instances in such jurisdictions where a trustee is entitled to rely on a cap of indemnity;
  • insolvent trusts with jurisdictional challenges, for example, where creditors reside in different parts of the world; and
  • where parties to the insolvent trust are subject to the UNCITRAL Model Law, trans-globally.

Some jurisdictions have statutory protections that limit the liability of the trustee to the value of the trust property. That is the case in Guernsey and Jersey for example. These CMDs aim to answer the questions that arise in such cases where the liability of a trustee is qualified.

These CMDs are a new idea in themselves, however there have been other attempts to create models, templates or best practice guides in the global insolvency and restructuring field, such as the Judicial Insolvency Network (“JIN”) Guidelines. It is hoped that CMDs will have a similar standardising effect.

The Hon. Mr. Justice Jonathan Harris, who sits as a judge in the Court of First Instance, Companies Court of Hong Kong, had a key role in developing the JIN Guidelines and it is therefore hoped that the Hong Kong legal and insolvency community will be willing to embrace these CMDs.

In October 2016, judges from 10 different jurisdictions met in Singapore for the inaugural Judicial Insolvency Network Conference.  Judges from key jurisdictions for international insolvency matters participated: Australia (Federal and New South Wales), British Virgin Islands, Canada (Ontario), the Cayman Islands, England & Wales, Hong Kong SAR (as observer), Singapore, and the USA (Delaware and the SDNY).

High on the agenda of the esteemed conference participants was the preparation of draft Guidelines to provide practical assistance for Judges and insolvency practitioners alike in dealing with difficult issues which cross-border insolvencies and restructurings commonly face.

This publication reported in an interview with Justice Harris in May 2017 that he considered the JIN Guidelines to have been drafted “with the aim of improving the efficiency and effectiveness of cross-border proceedings relating to insolvency or adjustment of debt opened in more than one jurisdiction (parallel proceedings) by enhancing coordination and cooperation amongst courts under whose supervision such proceedings are being conducted”.

The Hong Kong Lawyer in May reported Mr. Justice Harris as considering that it was likely that Hong Kong would adopt the JIN Guidelines, and in June 2017 they were adopted. It is therefore hoped that these CMDs will be afforded similar consideration.

The implementation of these CMDs would doubtless assist to cement Hong Kong’s position as a regional insolvency hub because it would make it a jurisdiction at the forefront of industry best practices.

High-Level Objectives

These CMDs attempt to address the issues that arise for creditors when trusts, settlors or beneficiaries become insolvent.

CMDs

These CMDs have been drafted to allow a practitioner to adopt and amend them as necessary in the particular circumstances. They are intended to provide a practical flexible roadmap allowing for amendments which may need to be considered in the context of each case and with reference to specific trust deeds and relevant legislation.

You can access these CMDs here: http://harneysoffshorelitigation.com/model-directions-insolvent-trust/.

Jurisdictions: 

Partner, Harneys

Ian Mann is head of Harneys’ Offshore Litigation and Restructuring Department in Hong Kong and is a leading offshore litigator, senior tactician and thought leader.

Mr. Man specialises in restructuring, insolvency, shareholders’ disputes and contentious trusts and has extensive experience in cross-border and conflict of laws dilemmas. He has been involved in every major recent restructuring involving offshore entities in the region and some of Asia’s highest value contentious estate litigation. A barrister by training, Mr. Man is an experienced advocate and regularly appears on behalf of elite families, usually being retained long-term for strategic offshore litigation advice.

Mr. Man is consistently ranked as top tier in his field by Chambers and Legal 500 and was recognised as one of the world’s leading asset recovery, restructuring & insolvency and private client lawyers by Who’s Who Legal 2016. He is one of only five offshore lawyers ranked as outstanding in both the 2016 and 2017 ALB Offshore Client Choice Lists.

Associate, Harneys

Lucy Hickmet is a member of the firm’s Litigation and Restructuring Department in Hong Kong, having joined the firm in 2013.

She has experience in general commercial litigation and practises in the areas of litigation relating to shareholder disputes, unfair prejudice claims and insolvency and restructuring; she has a particular focus on contentious trusts.

She is a contributor to Bermuda Commercial Law, the authoritative guide to Bermuda’s commercial laws.