Intention and sham: Heinrichs & Ors v Pantrust International SA & Ors [2018] JRC081A

This article was first published on ePrivateclient.

An essential requirement for the creation of an express trust is the intention of the owner of the property to transfer that property to a trustee. Where such intention does not exist, but there has been an attempt to mislead or deceive third parties that it does, this may amount to a sham in certain circumstances.

Where a sham exists, the trust will be invalid. The recent decision of the Jersey Court in Heinrichs & Ors v Pantrust International SA & Ors [2018] JRC081A provides important guidance on the identification and scope of sham.

The case formed part of long running trust litigation before the Royal Court in Jersey which was commenced by beneficiaries and the current Jersey trustee, GB Trustees Limited (GBT), of the Brazilian Trust, a discretionary Jersey law governed trust. The litigation was commenced against Pantrust International SA (Pantrust), a Panamanian trust company, and Richard Wigley and James Wigley (Wigleys), all of whom purported to act, at various points between 2007 and 2016, as trustees of the Brazilian Trust.

The litigation centred on allegations of serious malpractice on the part of Pantrust and the Wigleys, going back many years, by which they argued millions of dollars had been unlawfully extracted from the Brazilian Trust through such devices as secret interest turns, false loans and other illicit transfers. In 2016, the Jersey Court appointed GBT as trustee in place of Pantrust and the Wigleys.

The procedural issues arising in the litigation against Pantrust and the Wigleys were complex, complexity heightened by the existence of two settlement instruments concerning the Brazilian Trust. The first instrument was executed in December 1977 with Barclaytrust International Limited (Barclaytrust) as the first trustee (1977 Instrument).

It was subject to the proper law of Jersey and was in standard discretionary form. In 1984, Barclaytrust resigned in favour of La Hougue Boete Société Fiduciaire avec responsabilité limitée (La Hougue) and a second instrument was purportedly created, also called the Brazilian Trust, apparently declared by La Hougue in November 1984 (1984 Instrument). Again, the instrument was stated to be subject to the proper law of Jersey and on very similar terms.

The judgment in Heinrichs & Ors v Pantrust International SA & Ors [2018] JRC081A concerned an application by two of the beneficiaries, one of whom was also the economic settlor, for declarations that the 1977 Instrument was valid under Jersey law and that GBT should administer the Brazilian Trust on the basis of the 1977 Instrument and to ignore the 1984 Instrument. The beneficiaries wished to rely upon such a declaration for the purposes of proceedings taking place against Pantrust and the Wigleys before the Ontario courts.

The Court held that the presumption was that a document establishing a trust (such as the 1977 Instrument) meant what it expressed itself to be on its face and the Court should not lightly find a trust to be sham. Referencing National Westminster Bank plc v Jones [2001] BCLC 98 per Neuberger J at 59:

“…. There is a very strong presumption indeed that parties intend to be bound by the provisions of agreements into which they enter, and, even more, intend the agreements they enter to take effect” and “there is a very strong and natural presumption against holding a provision or a document a sham.”

The Court went onto confirm that the leading statement of Jersey law on what is necessary to prove a trust to be a sham is Mackinnon v Regent Trust Company Limited & Ors [2005] JLR 198, where at 14 the following was stated:

“In Re Esteem Settlement [2003] JLR 188, at paras. 42-60, the Deputy Bailiff had occasion to consider what were the necessary ingredients for a claim that trust deeds were shams. He held that it must be shown that both settlor and trustee had a common intention that the true position should be otherwise than as set out in the trust deed which they both executed. I agree. The Deputy Bailiff went on, in that passage, to consider whether an intention of both settlor and trustee to mislead third parties or the court, by giving the appearance of creating between the parties legal rights and obligations different from the actual rights and obligations (if any) which the parties intend to create, is a necessary ingredient for such a claim. He held that this is a necessary ingredient. Again, I agree. He so held in reliance on the relevant English authorities, as did the Bailiff on this case; and in my judgment, this branch of the law, having been most fully developed in England and Wales (and also in Australia) it is entirely appropriate that Jersey law should take full account of English law in this regard.”

Crucially, the Court confirmed that a valid trust did not become a sham because the trustee subsequently departed from the terms of the trust and administered it in a particular way. It relied upon the English decision of Shalson v Russo [2003] EWHC 1637 per Rimer J at 189 where it was said:

“When a settlor creates a settlement he purports to divest himself of assets in favour of the trustee, and the trustee accepts them on the basis of the trusts of the settlement. The settlor may have an unspoken intention that the assets are in fact to be treated as his own and that the trustee will accede to his every request on demand. But unless that intention is from the outset shared by the trustee (or later becomes so shared), I fail to see how the settlement can be regarded as a sham. Once the assets are vested in the trustee, they will be held on the declared trusts, and he is entitled to regard them as so held and to ignore any demands from the settlor as to how to deal with them. I cannot understand on what basis a third party could claim, merely by reference to the unilateral intentions of the settlor, that the settlement was a sham and that the assets in fact remained the settlor’s property.”

The Court also referenced the following passage of the English decision of A v A [2007] EWHC 99 (Fam) per Munby J at 42-43:

“it seems to me that as a matter of principle a trust which is not initially a sham cannot subsequently become a sham… Once a trust has been properly constituted, typically by the vesting of the trust property in the trustee(s) and by the execution of the deed setting out the trusts upon which the trust property is to be held by the trustee(s), the property cannot lose its character as trust property save in accordance with the terms of the trust itself, for example, by being paid to or applied for the benefit of a beneficiary in accordance with the terms of the trust deed. Any other application of the trust property is simply and necessarily a breach of trust: nothing less and nothing more."

The Court, applying these principles to the Brazilian Trust established by the 1977 Instrument, held that the presumption was that the Brazilian Trust was properly constituted in December 1977, between the named settlor and Barclaytrust and that assets were subsequently properly vested in it.

The Court confirmed that it had seen no evidence to rebut that presumption. Once properly constituted and vested with property, the trust could not subsequently become a sham (as per Munby J in A v A). The Court held that the Brazilian Trust established by the 1977 Instrument should therefore be administered by GBT on the basis that it was properly constituted in 1977 and, to the extent that it had trust assets, was presumed to be valid.

The Court considered that it was not in a position to declare the Brazilian Trust established by the 1984 Instrument to be invalid given the dearth of evidence as to what assets, if any, were purported to be vested in it, or indeed about its administration generally. Nevertheless, in the circumstances, the Court was prepared to grant directions to GBT to take no steps as trustee of the 1984 Brazilian Trust unless and until directed by the Court to do so.

The Jersey Court's approval of English trusts law principles confirming that that the presumption was that a document establishing a trust meant what it expressed itself to be on its face and that a valid trust does not become a sham because the trustee subsequently departs from the terms of the trust, provides important clarification in the ascertainment of sham.