Should we be concerned by the Guernsey Court of Appeal’s decision in Rusnano ? Simon Davies (Partner) Bryan de Verneuil-Smith (Managing Associate) 1 STEP Presentation - 21 May 2020 (Thursday)
Guernsey Judgments Case Case Reference Court Rusnano Capital AG (in liquidation) v Molard [2019] GRC 011 Royal Court of International (PTC) Limited and Pullborough Guernsey International Corp Molard International (PTC) Limited and Pullborough [2019] GCA 077 Court of Appeal of International Corp v Rusnano Capital AG (in Guernsey liquidation) Molard International (PTC) Limited and Pullborough [2020] GCA 003 Court of Appeal of International Corp v Rusnano Capital AG (in Guernsey liquidation) 2 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 3 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” 4 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.” 5 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.” 6 STEP Presentation (21 May 2020)
Parties Entity Jurisdiction Role(s) Note RN Pharma Trust Guernsey Trust Pro Bono Bio PLC England and Trust Assets Shares forming majority of the trust assets Wales of the Trust Molard International BVI Trustee (PTC) Limited Pullborough BVI Appointor International Corp and Enforcer Rusnano Capital AG Switzerland Beneficiary Ultimately owned by JSC Rusnano, a Russian state owned entity The only existing Beneficiary 7 STEP Presentation (21 May 2020)
Parties Person / Entity Relationship Note Mr Pavel Erochkine Employee of the Sole director of Molard (from May JSC Rusnano 2018) group Beneficial owner of Molard and Pullborough 8 STEP Presentation (21 May 2020)
Timeline Date Description Note 25 July The Trust Deed was executed Trust asset being 2014 £10 initially 11 PBB shares were issued and allotted to Molard (as September Trustee) 2014 6 March The liquidator of Rusnano wrote to Molard (as Trustee) 2018 and Pullborough (as Appointor and Enforcer) indicating the exercise of gathering in the assets of Rusnano 14 March Rusnano (in liquidation) applies to the Royal Court for 2018 an order to terminate the Trust and distribute trust assets 9 STEP Presentation (21 May 2020)
Section 80 (1) of Trusts (Guernsey) Law 2007 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 10 STEP Presentation (21 May 2020)
Terms of Trust Instrument Reference Description Note those persons described in Schedule 4 or any person or class 1.1.2 Rusnano is the only party listed added by instrument pursuant to the provisions of the instrument under Schedule 4 save to the extent that any such person becomes an Excluded Person and “Beneficiary” has a corresponding meaning Until and subject to and in default of any payment or 3 appointment under Clause 5.1 the Trustees shall hold the Trust Fund and the income thereof during the Trust Period as follows: at any time when there are no Beneficiaries to pay or apply the 3.1.1 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 11 STEP Presentation (21 May 2020)
Terms of Trust Instrument Reference Description Note Power of the Appointor to add as beneficiaries such 7 one or more persons or class of persons as the Appointor shall in its absolute discretion determine Power of the Appointor to exclude beneficiaries 8 12 STEP Presentation (21 May 2020)
Key Issues 1. Beneficiaries other than Rusnano 2. Pullborough’s power to add beneficiaries STEP Presentation (21 May 2020) 13
Re Exeter Settlement “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” STEP Presentation (21 May 2020) 14
The Rusnano Judgment “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 objects.” STEP Presentation (21 May 2020) 15
The Rusnano Judgment “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.” STEP Presentation (21 May 2020) 16
Grounds of Appeal 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) STEP Presentation (21 May 2020) 17
Appellants’ Arguments 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 STEP Presentation (21 May 2020) 18
Rusnano’s Arguments 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 STEP Presentation (21 May 2020) 19
Section 53 (4) 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 STEP Presentation (21 May 2020) 20
Section 53(4) of Trusts (Guernsey) Law, 2007 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. 21 STEP Presentation (21 May 2020)
Red Cross Trusts • 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 STEP Presentation (21 May 2020) 22
Solutions to Floodgate Argument Appoint additional beneficiaries: “this can be easily addressed by the 1. trustee exercising the power of addition at this stage so as to add further beneficiaries before the charity makes any such demand for termination.“ Insert “Remoter Issue” wording: "there can be no question of the 2. beneficiaries being able to utilise section 53(3) as long as there is any possibility of future issue being born.“ Section 53(4) Discretion 3. 23 STEP Presentation (21 May 2020)
Unresolved Issues Section 53(4) Discretion 1. Intention of Trust and potential benefit to Mr Erochkine 2. 24 STEP Presentation (21 May 2020)
The Rusnano Judgment Section 53(4) Argument and award of costs 1. No reimbursements to Molard and Pullborough of appeal costs 2. Rusnano given leave to join Mr Erochkine as a party for the limited 3. purpose of applying for a non-party costs order against him 25 STEP Presentation (21 May 2020)
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