The following 2 write-ups are kindly contributed by the speakers Robert Foote, Partner -Walkers (Singapore) LLP, Richard Norridge - Head of Asia Private Wealth Practice, Herbert Smith Freehills further to a seminar on "Pitfalls of Family Trusts and Family Investment Holding Company/ Family Business Companies" conducted for STEP Singapore on 1 October 2014 (12-2pm) and chaired by Chee Fang Theng, Director of Pan Asia Law LLC.
Shareholder Disputes in Family BVI Investment Companies
In our experience and as a matter of BVI law whenever there are family shareholder disputes involving BVI holdings companies there is almost invariably a threat to issue a statutory unfair prejudice claim pursuant to section 184I of the BVI Business Companies Act or a threat to apply to appoint a liquidator of the company on what is known as the just and equitable ground pursuant to section 162 of the Insolvency Act 2003. Often those threats turn into Court proceedings.
The statutory unfair prejudice claim in the BVI is similar to the statutory unfair prejudice claims found in the Cayman Islands, Hong Kong, Singapore and the United Kingdom statutes. In essence, the statute provides that where a member of a company considers that the affairs of the company have been, are being or are likely to be conducted in a manner that is, or any act or acts of the company have been, or are, likely to be oppressive, unfairly discriminatory, or unfairly prejudicial to him or her it in that capacity, he or she may apply to the Court for an order. There is established case law authority that says that the words "affairs of the company" are extremely wide and should be construed liberally. Further, there is no need to show a course of conduct or even one continuing at the date the claim is made; an isolated or past act or omission of the company is sufficient. The reference in the statute to "prejudice" is usually a reference to financial prejudice but it does not have to be and a disregard of the rights of a member, without financial consequences, may be sufficient. The ways in which a shareholder's interest may be prejudiced are almost unlimited.
If the Court finds reason to make an order on the facts and is satisfied that it is just and equitable to make an order, it can make any order that it thinks fit including an order requiring the company or any other person to pay compensation to the aggrieved shareholder, an order regulating the company's affairs, an order appointing a receiver or liquidator of the company or an order requiring the company or any other person to acquire the aggrieved shareholder's shares. A share purchase order is the usual order.
It is difficult for a shareholder to persuade the Court to appoint a liquidator of a BVI company on the just and equitable ground because the Insolvency Act 2003 provides that the Court should not make such an order if the shareholder applicant has an alternative remedy that he or she is not reasonably pursuing. A statutory unfair prejudice claim would be an alternative remedy as would an offer by the remaining shareholders to buy the aggrieved shareholder's shares at a fair value to be determined by an independent valuation expert without a discount for the fact that the aggrieved shareholder holds a minority stake in the company.
The Courts have often said that the categories of cases where the Court will appoint a liquidator on the just and equitable ground are not closed. The typical grounds for the appointment of a liquidator are where (a) the purpose for which the company was formed has failed; (ii) where there is deadlock in the management of the company; (iii) where there is a justifiable lack of confidence in the management of the company due to a want of probity on the part of the directors; (iv) where there has been exclusion from management in a family run company (or quasi-partnership company); and (v) where the majority are exercising their powers outside what was in the contemplation of the parties when the company was established as, for example, contemplated by the memorandum and articles of association and/or any shareholders' agreement.
Contributed by: Robert Foote - Partner, Walkers (Singapore) Limited Liability Partnership
Potential Pitfalls Of Family Trusts
As a London QC once commented to me: "If trusts are such a good idea, why are there so many trust litigators?" Picking up on the increasing number of high profile disputes, on 1 October 2014, I gave a talk to STEP Singapore members on family trust disputes, their common causes and ways of resolving them. Disputes come in many shapes and sizes, but they can be family disputes where trustees are simply caught in the middle, disputes directly against trustees or challenges to the trust fund brought by third parties. Common examples of this last type of dispute arise in the context of fraud, challenges to the trust's validity or divorce. In the divorce context, disputes often focus on whether trust assets are "matrimonial assets" to be divided between separating spouses.
Some disputes arise because of gaps in trust deeds. Although the deeds may be voluminous, this does not mean that they cover the most pertinent issues. Trust deeds sometimes lack critical detail. For example, what happens if the protector or the person with the power to replace the trustee loses mental capacity? Whilst most modern trust deeds are more detailed, disputes often arise in relation to older deeds which have not been updated to deal with such issues. Capacity issues are particularly prominent as average life expectancies increase. Disputes also arise where trustees allegedly abuse their powers. Therefore, it is vital that trustees (and other players such as protectors) are aware of their rights and obligations. Parties with powers under trust deeds should not be too quick to rely to exculpation clauses. For instance, a trustee with notice may be required to investigate suspicious conduct in the trust's corporate group affairs despite the existence of a Bartlett clause. Other ways of avoiding trust disputes include drafting "no contest" clauses into trust deeds. The uncertainty around the enforceability of these clauses is sometimes enough to make a beneficiary think twice before seeking to bring a challenge. A very large number of trust disputes can be traced back to circumstances where a beneficiary is concerned that it is not being provided with relevant information and suspicions form. Effective communication is a key factor in avoiding disputes.
Contributed by: Richard Norridge - Head of Asia Private Wealth Practice, Herbert Smith Freehills
"Eschewing Neutrality – Trustees’ Duties when faced with Adverse Claims to Trust Assets" (1 September 2014, 12.00pm – 2.00pm, Level 3, Intellioffices, 146 Robinson Road)
The following write-up is kindly contributed by Paul Tracey - Consultant, Grosvenor Law, further to his seminar for STEP Singapore on 1 September 2014 chaired by Annette Sui, Managing Director and Head of Private Wealth Solutions, Southeast Asia, HSBC Private Bank.
An attack on a trust, by way of a claim asserting a superior proprietary right to trust assets than that enjoyed by a trustee or a trust beneficiaries, necessarily presents a problem for the relevant trustee.
A claimant may, for example, claim that he or she had a legal or beneficial proprietary interest in the trust property preceding in time the creation of the legal and equitable rights that constitute the trust and then seek to assert a right to follow his or her earlier, alleged proprietary interest into the trust property.
A claimant may also claim that he or she has a claim against the settlor and that, contrary to the trust purported effect, the settlor retains or now has a proprietary interest in the trust property susceptible to charge or seizure in the enforcement of any judgment following the relevant claim against the settlor.
A claim challenging a trust existence or disputing the legal or beneficial ownership of the property on the trust are to be distinguished from litigation arising out of the execution or interpretation of a valid trust or other litigation against or by third parties by or against the trustee qua trustee e.g. breach of contract or duty of care claims.
When a claimant seeks to impeach a trust or assert adverse title to a trust's legal title; it would seem a fundamental aspect justifying this conclusion or principle is that, so long as the trustee remains neutral and complies with any court order, he or she will get his or her (necessarily limited) costs.
However, answering the question of whether a trustee should itself take a stand against a claim to trust assets in challenge to the trust on which such assets are held by a trustee simply by asking what will protect best the trustee's fundamental duty to the beneficiaries to discharge the express trusts which he or she has voluntarily accepted and to take little or no account of what a trust's beneficiaries are properly entitled to expect of their trustee.
A trustee does, of course, have a right to seek the court's directions as to whether to defend a claim or not and directions as to what he or she should do as to his or her potential liability. Absent such directions, a trustee may be liable for distributions made in the face of the claim against the trust and, if the trustee chooses to defend the claim and loses, obviously also for the claimant's costs in pursuing the claim. So, it may be trite to say that the earlier such an application is made, the better but no less true for that.
It is not arguable that the proposition that a trustee is obliged to be neutral when faced with a hostile challenge to the trust's existence has not been overwhelmingly accepted as correct in the onshore common law world. This is, however, not necessarily the case in at least two offshore jurisdictions: see In the matter of Poyiadis, In the matter of Hall.,2 Barclays Private Bank & Trust (Cayman) Ltd v McLaughlin & ors,3 and Bridge Trust Company Ltd & Anor v Attorney General & ors.4
However, as a practical matter, a trustee will always want to respond pragmatically and quickly to any claim to a trust's assets by considering the strength of such claim and making a Beddoe application. The risk of not seeking Beddoe authorisation (or the Court's authorisation of your proposed actions as trustee in some form) is not to be contemplated.
One final point to consider is that the Royal Court of Jersey in In the matter of the PW Trust and in the matter of the Representation of BNP Paribas Jersey Trust Corporation Limited has given guidance for trustees on notice of a claim to trust assets but where litigation has not been commenced. The Royal Court there held that, unless the claimant commenced proceedings within a particular time, the trustee shall be entitled to administer the trust free and clear of all any claims which [the claimant] might or purport to have to the assets of the trust (save as a beneficiary of the trust)?.
Contributed by: Paul Tracey - Consultant, Grosvenor Law