Cayman court rejects request to appoint receivers over a discretionary trust interest

The Grand Court of the Cayman Islands has held that a discretionary interest under a Cayman Islands law trust is not an asset over which a receiver can be appointed for the purposes of enforcing an arbitral award (Y v R – Mangatal J, 9 January 2018).

Background

The case concerned the attempted enforcement by the Plaintiff (who were the Defendant’s former lawyers) of a US arbitral award obtained against the Defendant for unpaid legal fees totaling US$1,987,219.51, pursuant to Section 5 of the Foreign Arbitral Awards Enforcement Law.

The Defendant was a beneficiary of an irrevocable discretionary Cayman Islands trust which held a number of his late father’s assets (the “Trust“). The Plaintiff sought the appointment of receivers by way of equitable execution, to receive all distributions paid to or for the benefit of the Defendant from the Trust; or in the alternative, garnishment of such distributions. The Defendant had been the only beneficiary ever to receive distributions from the Trust and these distributions represented the vast majority of the Defendant’s income.

Judgment

Mangatal J accepted that the jurisdiction of the Grand Court was the same with respect to the appointment of receivers as that enjoyed by the English High Court pursuant to Section 37(1) of the Senior Courts Act 1981. The question to be decided was whether this jurisdiction provided for a receiver to be appointed over the Defendant’s interest under the Trust.

The Plaintiff sought to rely on the decision of Masri v Consolidated Contractors International (UK) Ltd (No 2) [2009] Q.B. 450, where the Court of Appeal of England and Wales reviewed the jurisdiction of the High Court to appoint receivers. After analysing the relevant authorities the Court of Appeal held that the High Court had jurisdiction to appoint a receiver by way of equitable execution in respect of future receipts due to a judgment debtor from a defined asset. The Court of Appeal also held that the jurisdiction of the Court could be incrementally developed to apply established principles to novel situations as they arose.

The Plaintiff also made reference to the Privy Council’s decision (on appeal from the Grand Court of the Cayman Islands) of TMSF v Merrill Lynch Bank and Trust Company (Cayman) Ltd [2012] 1 W.L.R. 1721 where Masri  was applied. In TMSF the Privy Council had held that the Grand Court had jurisdiction to appoint a receiver by way of equitable execution in respect of a power to revoke a revocable discretionary trust, which was vested in the settlor/judgment debtor.

The Plaintiff sought to rely on the fact that the Defendant had been the only beneficiary to benefit from the Trust. It submitted that it was fanciful to think that the trustee would not attempt to distribute funds to the Defendant in the future; at which point the funds could be held by the trustee either as bare trustee or agent for the Defendant and therefore susceptible to execution.

The Defendant however argued that the discretionary nature of the trust was crucial; his interest in the Trust assets had not yet crystalised. The Defendant asserted that a proprietary interest was required and relied on the judgment of Lewison LJ in JSC Mezhdunarodniy Promyshelenniy Bank v Pugachev [2015] EWCA Civ 139 where he held that:

A beneficiary under a discretionary trust has a right to be considered as a potential recipient of benefit by the trustees. That is an interest which equity will protect. The trustees must apply some objective criterion in deciding whether or not to exercise their discretion in favour of a particular beneficiary; so that each beneficiary has more than a mere hope. But that right is not a proprietary interest in the assets held by the trustees, although it can be described as an interest of sorts: Gartside v Inland Revenue …. “

The Defendant further submitted that only if the trust were deemed to be a sham, or the trustee was found to acquiesce to any request of the beneficiary, could the assets held pursuant to a discretionary trust be regarded as the legal and beneficial assets of an individual. The Court agreed.

The Court held that the appointment of a receiver by way of equitable execution in these circumstances would amount to “a radical, impermissible extension of the law.” While the Court acknowledged its power to incrementally develop relief in this area as set out in Masri, it was clear that this power was not limitless and unfettered. The Court further dismissed the Plaintiff’s argument in relation to TMSF, holding that the Privy Council in that case did not dispense with the requirement for a proprietary interest. In that case the reserved power of revocation was held to be “tantamount to ownership” and no such power was found to exist on the facts of this case.

Given that no proprietary interest could be found on the facts, the Court held that there was no asset in equity which could be viewed as belonging to the Defendant, over which a receiver could be appointed.

Comment

This case demonstrates that while the Court is willing to develop its jurisdiction to grant equitable relief, this will be done incrementally and in accordance with established equitable principles. Whilst the Court acknowledged a desire to ensure compliance by parties with judgments made against them, this was not deemed to be sufficient cause for such “a radical, impermissible extension of the law.”

Richard Norridge
Richard Norridge
Partner
Email | Profile
+44 (0)20 7466 2686
Joanna Caen
Joanna Caen
Partner
Email | Profile
+852 2101 4167
Gareth Keillor
Gareth Keillor
Of Counsel
Email | Profile
+44 (0)20 7466 2350

Leave a Comment

Filed under Trust disputes

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.