1 STEP Presentation - 21 May 2020 (Thursday) Guernsey Judgments - - PowerPoint PPT Presentation

Simon Davies (Partner) Bryan de Verneuil-Smith (Managing Associate) STEP Presentation - 21 May 2020 (Thursday)

Should we be concerned by the Guernsey Court of Appeal’s decision in Rusnano?

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STEP Presentation (21 May 2020)

Guernsey Judgments

Case Case Reference Court Rusnano Capital AG (in liquidation) v Molard International (PTC) Limited and Pullborough International Corp [2019] GRC 011 Royal Court of Guernsey Molard International (PTC) Limited and Pullborough International Corp v Rusnano Capital AG (in liquidation) [2019] GCA 077 Court of Appeal of Guernsey Molard International (PTC) Limited and Pullborough International Corp v Rusnano Capital AG (in liquidation) [2020] GCA 003 Court of Appeal of Guernsey

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STEP Presentation (21 May 2020)

Outline

1. Saunders v Vautier principle and its application under Guernsey law 2. Case facts and the Rusnano judgments 3. Relevance to other jurisdictions 4. Final comments

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STEP Presentation (21 May 2020)

Principle of Saunders v Vautier

“The principle of Saunders v Vautier has no application unless all the persons who have, or may come to have, an interest in the trust property (or the part of the trust property sought to be transferred) are of full age and capacity and all consent. A requisite consent from a beneficiary may be given either by his joining in an agreed termination of the trust with the other beneficiaries or by giving an irrevocable unilateral direction to the trustees”

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STEP Presentation (21 May 2020)

Principle of Saunders v Vautier

“The principle of Saunders v Vautier is not a rule of construction but depends on the proposition that the beneficiaries are collectively the beneficial proprietors of the

• fund. It may therefore be invoked even though it will defeat the

known intentions of the settlor or testator. In many jurisdictions, therefore, a different rule is adopted and beneficiaries are not entitled to call for trust property if to do so would defeat a "material purpose" of the settlor. Moreover, it seems that the beneficiaries, or a beneficiary, may effectively contract not to exercise the right to call for the trust property.”

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STEP Presentation (21 May 2020)

Section 53(3) of Trusts (Guernsey) Law, 2007

“Without prejudice to the powers of the Royal Court under section 53(4), and notwithstanding the terms of the trust, where all the beneficiaries are in existence and have been ascertained, and none is a minor or a person under legal disability, they may require the trustees to terminate the trust and distribute the trust property among them.”

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Parties

STEP Presentation (21 May 2020)

Entity Jurisdiction Role(s) Note RN Pharma Trust Guernsey Trust Pro Bono Bio PLC England and Wales Trust Assets Shares forming majority of the trust assets

• f the Trust

Molard International (PTC) Limited BVI Trustee Pullborough International Corp BVI Appointor and Enforcer Rusnano Capital AG Switzerland Beneficiary

Ultimately owned by JSC Rusnano, a Russian state owned entity The only existing Beneficiary

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Parties

STEP Presentation (21 May 2020)

Person / Entity Relationship Note Mr Pavel Erochkine Employee of the JSC Rusnano group Sole director of Molard (from May 2018) Beneficial owner of Molard and Pullborough

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Timeline

STEP Presentation (21 May 2020)

Date Description Note 25 July 2014 The Trust Deed was executed Trust asset being £10 initially 11 September 2014 PBB shares were issued and allotted to Molard (as Trustee) 6 March 2018 The liquidator of Rusnano wrote to Molard (as Trustee) and Pullborough (as Appointor and Enforcer) indicating the exercise of gathering in the assets of Rusnano 14 March 2018 Rusnano (in liquidation) applies to the Royal Court for an order to terminate the Trust and distribute trust assets

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Interpretation.

• 80. (1) In this Law, unless the context otherwise requires –

….. "beneficiary" means a person entitled to benefit under a trust or in whose favour a power to distribute trust property may be exercised

Section 80 (1) of Trusts (Guernsey) Law 2007

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STEP Presentation (21 May 2020)

Terms of Trust Instrument

STEP Presentation (21 May 2020) Reference

Description Note 1.1.2

those persons described in Schedule 4 or any person or class added by instrument pursuant to the provisions of the instrument save to the extent that any such person becomes an Excluded Person and “Beneficiary” has a corresponding meaning

Rusnano is the only party listed under Schedule 4 3

Until and subject to and in default of any payment or appointment under Clause 5.1 the Trustees shall hold the Trust Fund and the income thereof during the Trust Period as follows:

3.1.1

at any time when there are no Beneficiaries to pay or apply the whole or such part (if any) of the Trust Fund and the income thereof in or towards the fulfilment of the Purpose at such times and in such manner as the Trustees may in their discretion think fit

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Terms of Trust Instrument

STEP Presentation (21 May 2020) Reference

Description Note 7

Power of the Appointor to add as beneficiaries such

• ne or more persons or class of persons as the

Appointor shall in its absolute discretion determine

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Power of the Appointor to exclude beneficiaries

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• 1. Beneficiaries other than Rusnano
• 2. Pullborough’s power to add beneficiaries

Key Issues

STEP Presentation (21 May 2020) 13

“A person who is a possible object of a power to add beneficiaries is not in fact a beneficiary unless or until that power is exercised in his favour”

Re Exeter Settlement

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“In our judgment, one must return to first principles. A beneficiary of a discretionary trust is a person in whose favour a discretion to distribute income or capital of a trust may be exercised. Trustees may only exercise their power to distribute income or capital in favour of a person who is a

• beneficiary. It is the beneficiaries who are the object of the discretionary trust.

They must be sufficiently certain to satisfy the requirements as to certainty of

• bjects.”

The Rusnano Judgment

STEP Presentation (21 May 2020) 15

“A power to add beneficiaries is something completely different. It means what is says. A person who is a possible object of a power to add beneficiaries is not in fact a beneficiary unless and until the power is exercised in his favour and he is added as a beneficiary. Until that moment, the trustees may not apply income or capital for his benefit and he does not have any of the rights attached to being a beneficiary of the trust. The sole right that he has is as a possible object of the power to add beneficiaries.”

The Rusnano Judgment

STEP Presentation (21 May 2020) 16

• 1. Rusnano was not a beneficiary of the Trust within the meaning of the Law
• 2. Not all of the beneficiaries of the Trust were in existence and had been

ascertained within the meaning of Section 53(3)

• 3. In the alternative, the Royal Court had not considered Section 53(4)

Grounds of Appeal

STEP Presentation (21 May 2020) 17

• 1. Direct reflection of the English Saunders v Vautier principle
• 2. Incorrect construction of section 53(3) Trusts (Guernsey) Law, 2007
• 3. Floodgate argument and the “Red Cross Trusts”
• 4. Section 53(4) Discretion

Appellants’ Arguments

STEP Presentation (21 May 2020) 18

• 1. Correct construction of section 53(3) Trusts (Guernsey) Law, 2007
• 2. Distinction between a beneficiary and an object of a power to add

beneficiaries

• 3. Too late for Section 53(4) Discretion

Rusnano’s Arguments

STEP Presentation (21 May 2020) 19

• 1. The Appellants argued that the Royal Court had failed to consider

exercising its discretion

• 2. Rusnano said it was too late raise this point

Section 53 (4)

STEP Presentation (21 May 2020) 20

Section 53 … (4) The Royal Court, on the application of any person mentioned in section 69(2), may – (a) direct the trustees to distribute, or not to distribute, the trust property, or (b) make such other order in respect of the termination of the trust and the distribution of the trust property as it thinks fit.

Section 53(4) of Trusts (Guernsey) Law, 2007

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STEP Presentation (21 May 2020)

• Common form of discretionary trust in offshore jurisdictions
• With default beneficiary or beneficiaries
• Greater flexibility and confidentiality
• Theoretical risk of beneficiaries of Red Cross Trusts terminating trust

Red Cross Trusts

STEP Presentation (21 May 2020) 22

Solutions to Floodgate Argument

STEP Presentation (21 May 2020)

1.

Appoint additional beneficiaries: “this can be easily addressed by the trustee exercising the power of addition at this stage so as to add further beneficiaries before the charity makes any such demand for termination.“

2.

Insert “Remoter Issue” wording: "there can be no question of the beneficiaries being able to utilise section 53(3) as long as there is any possibility of future issue being born.“

3.

Section 53(4) Discretion

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Unresolved Issues

STEP Presentation (21 May 2020)

1.

Section 53(4) Discretion

2.

Intention of Trust and potential benefit to Mr Erochkine

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The Rusnano Judgment

STEP Presentation (21 May 2020)

1.

Section 53(4) Argument and award of costs

2.

No reimbursements to Molard and Pullborough of appeal costs

3.

Rusnano given leave to join Mr Erochkine as a party for the limited purpose of applying for a non-party costs order against him

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• Sole beneficiary and the right to terminate discretionary trust
• Distinction between a beneficiary and an object of a power to add

beneficiaries

• Definition of “beneficiary” under section 80(1) Trusts (Guernsey) Law,

2007

• Interpretation of “all the beneficiaries”

Key Points

STEP Presentation (21 May 2020) 26

“Subject to the terms of the trust and to any order of the Royal Court, where… (c) there is no beneficiary and no person who can become a beneficiary in accordance with the terms of the trust… the interest or property concerned shall be held by the trustees on trust for the settlor absolutely or, if he is dead, for his personal representative.” [underlining added]

Section 52(c) of Trusts (Guernsey) Law, 2007

STEP Presentation (21 May 2020) 27

"... Naturally, English trust law must be modified where it conflicts with established principles of Jersey customary law, and it has also been modified by Jersey statutes. These general remarks apply equally to the trust law of Guernsey."

Takeaway Points

STEP Presentation (21 May 2020) 28

"In summary, whilst the States have provided in subsection (3) that beneficiaries may require termination of the trust in circumstances where they would not necessarily be able to do so by application of the Rule under English law, the States have also provided an element of protection against the termination of trusts by conferring a discretion on the Royal Court under subsection (4) to refuse termination of the trust notwithstanding fulfilment of the requirements under subsection (3)."

Takeaway Points

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Adoption of Saunders v Vautier in other jurisdictions

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Section 43 of Trusts (Jersey) Law 1984

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STEP Presentation (21 May 2020)

Final Comments

1. Helpful clarification 2. Modification of the Saunders v Vautier principle 3. Solutions to floodgate argument 4. Potential impact of Rusnano in Jersey

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Speakers

STEP Presentation (21 May 2020)

Simon Davies

Partner T: +44 1481 737175 E: simon.davies@ogier.com

https://www.ogier.com/people/simon-davies

Bryan De Verneuil-Smith

Managing Associate T: +44 1481 752357 E: bryan.deverneuil-smith@ogier.com

https://www.ogier.com/people/bryan-de-verneuil-smith

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