The ruling by the Royal Court in the Esteem case strengthens the rights of trust beneficiaries to protect their ‘clean’ assets from creditors, even if they are suspected of fraud.Judgment has been delivered after a three-month hearing, although the legal action itself started in the 1990s.The Esteem Settlement was one of two trusts set up at Abacus in Jersey by Sheikh Fahad Mohammed al Sabah in 1981.
The beneficiaries were the Sheikh himself, his wife and son.He was a diplomat at the Kuwaiti Embassy in London and president of the Kuwait Investment office but between 1988 and 1990 he and others defrauded a subsidiary of the office out of $430 million US dollars.The subsidiary – Grupo Torras – launched an action against Sheikh Fahad in the UK civil courts and won judgment for $800m.
The Sheikh had by then, however, retired to the Bahamas where he had been declared bankrupt.The Jersey case involved the several million pounds still left in the Jersey trusts.
Grupo Torras argued that they should be allowed access to the funds even though some of the money had been placed in them before the fraud and was therefore ‘clean’.
Grupo Torras claimed that the trusts should be declared invalid because they were contrary to public policy, that if he was honest he would use the funds to repay his debts and that it was unfair that the Sheikh was using the trusts to fund his Caribbean lifestyle.But the Royal Court disagreed, accepting that the funds were ‘clean’ and were contributed to the trust before the Sheikh’s fraud.
The court ruled that despite the fact that the trusts were partly ‘tainted’ because of the Sheikh’s behaviour, his creditors had no right to the funds.A central argument to the case concerned who had control of the trusts – the Sheikh or Abacus.
Grupo Torras argued it was suspicious that whatever the Sheikh asked for, Abacus acceded to, which they argued showed that contrary to trust law he had control.
But the court accepted the argument on behalf of his wife and children that there was nothing wrong with the trustees granting the wishes of a beneficiary, as long as they had reached their own independent conclusion that it was in their interest.
This was more so when the beneficiaries were a small, close-knit family as in this case.Advocate Nuno Santos Costa, who represented the Sheikh’s wife and children, said the judgment was important for the trust industry.
‘This case was an intrepid attempt to take the law of trusts where it has not gone before,’ he said.’Ultimately it was unsuccessful because the assets in the trust were untainted by fraud and public policy does not require that a trustee in bankruptcy or a creditor should be able to access clean trust funds even if a beneficiary is hopelessly insolvent and his actions morally reprehensible.’And Advocate Julian Clyde-Smith, who acted for Abacus, said the judgment gave a clear ruling to the industry.’Trusts form an important part of Jersey’s financial and commercial life.
This judgment will be of great interest to all jurisdictions that recognise trusts and can only enhance the reputation and standing of Jersey,’ he said.