Attack the trust

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Judgment creditors given power to access trust assets

The Privy Council has held that the courts can appoint a receiver over a power of revocation in a trust.  That power can then be used to access the trust assets and satisfy a judgment debt.  This genuinely groundbreaking decision gives judgment creditors a means of getting at assets which their debtors have tried to put beyond their reach.

What has happened?

In Tasarruf v Merrill Lynch (Cayman), the Privy Council overturned the Cayman Court of Appeal in finding that the Cayman courts have jurisdiction to appoint a receiver - by way of equitable jurisdiction - over a power of revocation in trusts.

The Privy Council stated that there was no doubt that the discretion of the Cayman Court should be exercised to make the appointment in this case, where there was no serious suggestion of any prejudice to a third party.

The decision, in which Berwin Leighton Paisner LLP acted for the successful appellant, is a major development in the law: prior to this decision it was considered that the appointment of receivers could only be made over property, not over a power.

What are the key points?

The Privy Council observed that an unfettered power of revocation is so close to the notion of property as to be indistinct.  It considered that a trust instrument containing a power of revocation is not, therefore, outside the control of the settlor such as to put it “beyond the reach” of the judgment creditor.

By reserving the ability to revoke the trust at a later date, the settlor has not fully alienated his property (since, once a trust is revoked all moneys remaining in the trust revert to the settlor).  Accordingly, the trust property ought to be available to a judgment creditor to satisfy a judgment debt, just as much as any other asset of the debtor might be available.

How will this affect me? 

A judgment debtor can no longer escape their liabilities by vesting assets in a trust containing an unfettered power of revocation.  Although it is unusual to establish a trust with such a power in this jurisdiction, powers of revocation are quite common in trusts established in common law jurisdictions such as the Caymans (as in this case), Jersey, and Singapore.

This decision provides a new route by which a judgment creditor can seek to recover assets that their debtor has attempted to put beyond their reach.

BLP Perspective

This decision constitutes a powerful weapon for creditors who are seeking to enforce judgment debts in common law jurisdictions. It also acts as a warning to those settlors who may previously have considered the power to revoke as a route to evade their creditors, whilst still retaining the right to recall the property.

One word of warning: the Privy Council made it clear that this was not a case where other beneficiaries of the trusts would be prejudiced by enforcement against the settlor.  It remains to be seen how the competing interests of other beneficiaries and judgment creditors will be resolved.

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