Recent trust cases in the Cayman Islands

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This article is due to be published later this year in Trusts & Trustees.

The Cayman Islands Grand Court has seen a number of trust cases in 2023; we discuss some of the more significant ones in this article. 

In Re G Trust (No 1), the trustee sought a Beddoe order in relation to a proposed application for rectification of a deed of addition. The deed had effected a transfer from a Hong Kong trust to a Cayman law trust (the G Trust). The problem arose due to the different interpretations of words such as 'spouse' and 'children' under Hong Kong law and Cayman Islands law which, it seems, may have inadvertently changed the class of beneficiaries.

It is a timely reminder of the need to ensure that transfers to trusts with a different governing law (or changes to the governing law of a trust) do not make unintended amendments to the terms of the trust.

The Grand Court also considered the public policy in favour of the Cayman courts resolving disputes involving bespoke Cayman entities (such as STAR Trusts) or other unique questions of Cayman Islands law (such as the reserved powers legislation).¹

In a second hearing, Re G Trust (No 2), the Grand Court considered whether there is a general requirement for the contrary position to be argued when seeking rectification and, where the trust is a STAR trust, whether there is any basis for assuming that beneficiaries would be the appropriate parties to advance those arguments.

In Frabran v Daventree, the Grand Court considered whether or not a proprietary injunction over the Cayman-based assets of two trusts should continue in the context of ongoing and long-standing litigation in various jurisdictions, which included a dispute as to whether the plaintiffs were beneficiaries of the trusts.

Re K concerned an application by a trustee for directions where there was uncertainty as to the beneficial ownership of the assets and it was not possible to serve the two most likely beneficial owners due to credible concerns about their personal safety. This was complicated by suspicions that the trust assets were the proceeds of crime. This required a consideration of the exceptions to the open justice principle under the Bill of Rights and the need to ensure that any relevant public interests were addressed. 

Re Settlements dated 9 May 2013 saw the Grand Court hear the first case on the new statutory Hastings-Bass jurisdiction.² It provides useful guidance as to how the Court is likely to approach it and it is clear that there are now substantive differences between the law in the Cayman Islands and that in England and Wales³.

Finally, in Re HEC International Ltd, the Grand Court considered the principles to be applied in determining whether a Quistclose⁴ trust had been established, in the context of the liquidation of a Cayman company.

1: In the Matter of the G Trust (No 1)⁵

This judgment concerns an application to the Cayman Islands Grand Court for the rectification of a trust instrument in the context of ongoing proceedings in Hong Kong (the HK Trustee Proceedings).

The HK Trustee Proceedings concern the validity of the transfer of certain shares, which constitute the majority of the G Trust's assets, to the trustee of the G Trust (the Trustee) by the trustee of the HK Trust.

The Trustee sought leave to apply to the Cayman Islands Grand Court to rectify a Deed of Addition (the Deed) based on evidence that discrepancies which existed between the beneficiary classes of the G Trust and the HK Trust were not intended when the Deed was executed. The Trustee's and Settlor's evidence is that it was intended that the beneficiaries of both the HK Trust and the G Trust should be the same.

The Trustee sought a Beddoe order permitting it to fund the application out of a disputed portion of Trust assets. The enforcer and one group of beneficiaries (the A Beneficiaries) supported the Trustee's position and the other beneficiaries (the B Beneficiaries) opposed it.

Kawaley J was tasked with considering:

• whether the proposed rectification summons should be issued now, or only when it became clear that the apparent discrepancy between the beneficiary classes had become a live issue in the HK Trustee Proceedings; and
• whether the costs of determining the rectification summons would be modest or substantial (and so going to the question as to whether costs would be disproportionate).

These issues were nuanced because, among other things:

• a Beddoe order was sought from disputed assets and a pre-emptive costs order was sought by the B Beneficiaries (if they were appointed to argue in opposition); and
• the proposed application was in part non-contentious administration of the Trust and in part ancillary to the hostile proceedings to which the Beddoe order related.

Governing principles

Ongoing administration of disputed trust assets

It was uncontested that in a dispute about the ownership of a trust fund, a trustee is entitled to continue to administer the disputed fund in an appropriately proportionate manner⁶.

Kawaley J held that rectifying a trust instrument was generally the sort of application that a trustee would make as part of the administration of a trust and that it could be agreed that an application funded by disputed assets is in the best interests of the true beneficial owners of the trust, whoever the owners turn out to be. If the matter were to be viewed solely as a trust administration matter, the Court would have to be satisfied that the proposed application would be in the best interests of the trust, whatever the outcome of the foreign hostile litigation may be.

The Applicants' counsel initially accepted that the Applicants could not solely rely on this ground. As counsel for the B Beneficiaries submitted, there was no genuine urgency in trust administration terms for the identity of the beneficial class to be clarified before the HK Trustee Proceedings concluded.

Public policy considerations

The Applicants relied heavily on the public policy principle that the Cayman Court should determine questions relating to the validity of trusts which involve the construction of sui generis questions of Cayman Islands statutory law. Kawaley J held that, where a trustee seeks relief which overlaps with relief which may be granted by a foreign court in pending proceedings, the Cayman Court may decline jurisdiction on forum grounds where the foreign court is fully seised of the relevant issue and the trustee has taken too long before seeking advice from the Cayman Court.

Kawaley J held that there is a distinction to be made between (1) disputes involving generic trust law matters, and (2) disputes relating to distinctive questions concerning bespoke trust vehicles like STAR trusts and/or novel questions of uniquely Cayman trust law. The public policy weighing in favour of the Cayman Court as the appropriate forum will generally be stronger in the latter category.

Kawaley J held that the present case did not appear to be a case where the fact that the trust instrument contained a Cayman Islands forum for administration clause was dispositive. The position might have been different if the Trustee were seeking to determine a matter relating to the internal administration of a trust where there was no external controversy about ownership of the trust assets.

Rectification actions: who has a right to be heard?

The proposed rectification summons sought to invoke the Court's equitable jurisdiction to rectify a document. That jurisdiction is essentially the same as the jurisdiction vested in the High Court of England and Wales. Kawaley J considered the well-settled principles as set out by Rose J (as she then was) in RBC Trustees (CI) Limited v Stubbs [2017] EWHC 180 (Ch):

'…while equity has power to rectify a written instrument so that it accords with the true intention of its maker, as a discretionary remedy rectification is to be treated with caution. …

39. First,… the claimant's case should be established by clear evidence of the true intention to which effect has not been given in the instrument. Such proof is on the civil standard of balance of probability. But as the alleged true intention of necessity contradicts the written instrument which is ordinarily regarded as the only manifestation of the party's intent, there must be convincing proof to counteract the evidence of a different intention represented by the document itself.

40. Secondly, there must be a flaw in the written document such that it does not give effect to the parties'/donor's agreement/intention, as opposed to the parties/donor merely being mistaken as to the consequences of what they have agreed/intended. For example, it is not sufficient merely that the document fails to achieve the desired fiscal objective.

41. Thirdly, the specific intention of the parties/donor must be shown; it is not sufficient to show that the parties did not intend what was recorded; they also have to show what they did intend, with some degree of precision.

42. Fourthly, there must be an issue capable of being contested between the parties notwithstanding that all relevant parties' consent to the rectification of the document.' [Emphasis added]. 

Kawaley J held that even if the Settlor and the Trustee agreed, it was assumed that the Court would want to have adversarial argument if the rectification summons were to be issued.

Findings

Should the rectification issue be determined now or postponed for future determination?

Kawaley J found that there was clearly a serious issue to be tried in relation to the proposed rectification summons and that it appeared to be the sort of mistake that would ordinarily warrant prompt attention in the interests of the due administration of any trust.

It was common ground that the issue of whether the beneficiaries of the G Trust were different to those of the HK Trust was not a live issue in the HK Trustee Proceedings. The argument centred on the extent to which it was likely to become a live issue. In assessing this question, Kawaley J took into account the following factors:

• the legal policy considerations arising from section 90 of the Trusts Act which make it desirable for the Cayman Court to adjudicate novel questions of Cayman Islands law relating to the exclusion of foreign law;
• the fact that postponing determination of the issue until the issue becomes a live one before the foreign court, or is shown not to arise at all, increases the likelihood that the foreign court would become the more appropriate forum if the issue were to be postponed to a future date; and
• the fact that pursuing rectification when it was unclear precisely how such application would impact on the HK Trustee Proceedings is a step the Trustee could credibly pursue consistent with a position of neutrality in relation to those proceedings.

Kawaley J held that, subject to considering the issue of costs, the evidence about the likelihood of the beneficial class issue arising, combined with the three factors above, and a justifiable preliminary view that there was a serious issue to be tried on the case for rectification, justified granting the relief sought by the rectification Beddoe summons.

Would costs be disproportionate?

Kawaley J found that there would be a cost saving achieved by having the Cayman Court determine the central legal questions without any need for expert evidence on Cayman Islands law. The 'worst case' estimate contended for by the B Beneficiaries would not be disproportionate having regard to the best estimates of the value of the disputed assets.

Conclusion

Kawaley J granted an order directing that the Applicants were at liberty to issue the rectification summons and held that his provisional view was that directions should be included for the B Beneficiaries to be nominated to oppose the application for declaratory relief and rectification, if required, with the protection of a pre-emptive costs order.

However, this last question, as to who should be permitted to advance any counter-arguments in relation to the rectification proceedings, was the subject of the next hearing in this case, to which we now turn.

2: In the matter of the G Trust (No 2)⁷

This application follows Kawaley J's decision of 11 December 2023 as set out above, in which Kawaley J gave directions in relation to the Trustee's rectification summons (the Rectification Summons).

Subsequent to this decision, supplementary submissions were filed by the Applicants, the enforcer, the A Beneficiaries and the B Beneficiaries, to displace Kawaley J's provisional views as to:

• the need for adversarial argument;
• the identity of parties permitted to advance any counter-arguments; and
• the appropriateness of a pre-emptive costs order.

The need for a counter position to be advanced in rectification proceedings

Kawaley J agreed with counsel for the Applicants that there was no general requirement for contrary argument when seeking rectification under Cayman Islands law (unlike in England and Wales). Rectification can be granted even if there is no issue in dispute between the parties. As such, Kawaley J determined that his provisional assumption (set out in the 11 December 2023 Ruling) was not justified. This followed the previous decision of the Grand Court in Re Golden Trust⁸.

The appropriate party to advance a counter position in relation to a STAR Trust

Kawaley J considered sections 100–102 of the Trusts Act which sets out the rights of an enforcer of a STAR trust and importantly that only enforcers have standing to enforce a special trust (not beneficiaries, unless they are also enforcers). Kawaley J also considered Order 85, rule 3(2) of the Grand Court Rules which provides that persons beneficially interested in an estate or trust need not be joined but may be joined as parties, and sub-rule 3(3), which states that: 'For the purposes of this rule, a beneficiary of a special trust [ie a STAR trust] who is not also an enforcer, shall not be treated as having a beneficial interest under the trust'.

Considering these provisions, Kawaley J accepted the submission that the voice of a beneficiary in relation to a STAR Trust is 'far more muted' compared with the standard position in relation to an ordinary trust. As the enforcer's counsel submitted, one well known rationale for establishing a STAR Trust is to 'prevent hostile "beneficiary" litigation'⁹.

Kawaley J determined that as the G Trust was a STAR Trust, the enforcer was responsible for enforcing the Trust under the special statutory regime. In these circumstances, there was no proper basis for assuming that the B Beneficiaries, by virtue of their status as beneficiaries, would be appropriate parties to advance counter arguments in the context of the Rectification Summons.

The appropriate forum for the determination of case management issues relating to the Rectification Summons

Kawaley J held that he was provisionally inclined to accept the invitation of counsel for the B Beneficiaries to prospectively assign the task of presenting counter arguments at the expense of the Trust on the assumption that it was clear that:

• counter arguments would be required as a necessary part of the application; and
• the B Beneficiaries were appropriate parties to advance such arguments.

As each of those assumptions had been displaced, Kawaley J held there was no discernible basis on which the Beddoe Court could properly usurp the jurisdiction of the Rectification Court to determine all case management issues arising in relation to the Rectification Summons.

Such issues would include whether counter arguments were required at all, who should advance them and what costs order should be made.

3: Frabran Holdings Limited v Daventree Trustees Limited¹⁰

In the context of an international trust dispute, Parker J considered whether a Cayman proprietary injunction should be continued or discharged.

The applications before the Grand Court concerned the Cayman-based assets of two trusts (collectively, the Trusts). These assets had been protected for the last 18 years and at the time of the application were protected by proprietary injunctive relief granted on 3 March 2005.

The parties had been involved in complex and protracted litigation for the last 20 years in various jurisdictions, principally in Cyprus, the Czech Republic, and latterly in the Cayman Islands (and prospectively in the Bahamas). A critical issue between the parties was whether the Plaintiffs were beneficiaries of the Trusts. The litigation showed no signs of resolution.

Parker J decided that the injunction should be continued. He also dismissed an application by Daventree Trustees Limited (DTL), as trustee of the Trusts, seeking a stay of proceedings for enforcement of a Cypriot judgment, pending determination by the Cyprus Court of a stay application of the judgment in Cyprus.

Standing

The Court held that the general position is that a beneficiary of a trust has the right to make the trustee account for the trust property as a whole (Armitage v Nurse [1998] Ch 241, 261G). The size (or smallness) of a beneficiary's interest will not deprive the beneficiary of this remedy (Dance v Goldingham (1872-73) LR 8 Ch App 902).

Jurisdiction

The Court noted its statutory jurisdiction to grant interim relief by way of injunction under the Grand Court Act (2015 Revision) sections 11(1)(a) and 18, in conjunction with GCR O.29, r.1 and r.2.

The Court also noted its inherent jurisdiction to supervise, and where appropriate intervene in, the administration of trusts. The purpose of a proprietary injunction was to protect and preserve trust property which the plaintiff beneficiary claims is theirs. The Court's inherent jurisdiction applies regardless of the proper law of the trust, provided that the Court can establish in personam jurisdiction over the trustee.

In determining whether to grant an injunction to safeguard trust property, the Court will apply American Cyanamid¹¹ principles (adapted to the circumstances where the Court's inherent supervisory jurisdiction is engaged). The plaintiff beneficiary would have to show:

• a prima facie case the property is theirs;
• a serious issue to be tried that the trust property is in danger pending the hearing of the claim;
• that damages would not be an adequate remedy;
• that the balance of convenience favours the grant of an injunction; and
• that it is just and convenient to order an injunction.

Determination on Cayman Proprietary Injunction

The key question for the Court was whether the circumstances in this case justified invoking its supervisory jurisdiction to restrain DTL from dealing with the trust assets.

The Court was satisfied that there was a serious issue to be tried as to whether the trust assets in Cayman were in jeopardy. It was also satisfied that the plaintiffs were arguably entitled to those assets as beneficiaries when the Trusts were created and remained so.

The Court also held that it was clear that in all the circumstances damages would not be an adequate remedy, and that the balance of convenience favoured the grant of an injunction.

The Court determined that the Cayman proprietary injunction should be continued in relation to both Trusts.

4: In the matter of the K Trust¹²

A trustee (the Trustee) was appointed by order of the Court dated 6 April 2021 to address two primary concerns, namely that the beneficial ownership of the trust assets (in circumstances where it was not possible to communicate with the two main potential owners); and suspicions that the trust assets were the proceeds of crime.

The Cayman Islands Grand Court gave directions for the Trustee to continue to administer the trust assets for an initial review period, without making any distributions. In May 2023, the Trustee applied ex parte for further directions.

The position remained that it was not possible to notify or serve the two most likely beneficial owners for credible personal safety reasons; and the legality of the sources of wealth of the settlor and the origins of the trust assets appeared even more doubtful than before.

Source of funds issue and open justice principle

The Court acknowledged that the present proceedings were anonymised and heard in private despite the fact that public interest considerations beyond the internal administration of the Trust and the private lives of the beneficiaries were engaged.

The Trustee's application as regards the beneficial ownership issue meant that these were 'proceedings instituted in any court for the determination of the existence or extent of any civil right or obligation', which should prima facie be held in public under section 6(9) of the Bill of Rights. The Court was however empowered to seal the file and sit in private because 'publicity would prejudice the interests of justice' under section 7(10)(a) of the Bill of Rights.

This necessary incursion on the open justice principle imposed an additional burden on the Court to ensure that any relevant public interests were addressed, so far as possible.

The Court held that where a private law hearing takes place on an ex parte basis and public interest considerations are manifestly apparent, the Court must be astute to ensure that the appropriate public authority is given an opportunity to make an informed decision about whether or not to intervene in the private proceedings.

The Court concluded that there was an arguable case based on the evidence before it for the Director of Public Prosecutions (the DPP) to be granted a civil recovery order pursuant to section 80(1) of the Proceeds of Crime Act (2020 Revision) (the PCA).

The Court also held that the public interest in ensuring the efficacy of the PCA regulatory regime appeared to be stronger in circumstances where a further review period of indefinite duration was under consideration for the administration of the K Trust.

In these circumstances, the Court directed that the DPP be served with this Judgment and the related papers to consider whether or not an application for such an order should be made, taking into account the beneficial ownership and related notice and/or service issues considered below.

Beneficial ownership issue

The Trustee was unsure whether the trust assets were beneficially owned by the beneficiaries; or beneficially owned by the Government of Ruritania.

The Court accepted that giving notice of the proceedings to the potential claimants would put the safety of one or more of the beneficiaries at risk. The Court confirmed that the Trustee's proposed precautionary 'wait and see' approach designed to preserve the trust assets until their ownership could be safely adjudicated was a sensible one. But for the source of funds considerations addressed above, the Court would have unconditionally granted the directions sought by the Trustee in this regard. In the event that the DPP applies for a civil recovery order, the Court would have to consider the notice and service issues afresh through the lens of the statutory framework governing the relevant application.

Order

The Court ordered that:

• pending further order of the court, the trust assets continue to be held and administered by the Trustee for the benefit of whoever may be beneficially entitled to the assets of the K Trust;
• no disposition to any beneficiary of the trust shall be made by the Trustee pending further order of the Court;
• the Trustee shall return to the Court for further directions to determine the source of the assets settled into the K Trust and the true owner of the assets of the K Trust upon the following events having occurred:

(1) the Trustee forming the opinion that disclosure of the existence of the K Trust to Ruritania is no longer a threat to the safety of the beneficiaries; or

(2) if the beneficiaries are alive, that they confirm to the Trustee that they have no objection to Ruritania being notified of the existence of the K Trust.

The Court imposed two conditions in respect of the order:

• that the Trustee serve a copy of the judgment and the papers filed in these proceedings on the DPP; and
• that the DPP does not within six months of the date of service of the judgment commence civil recovery proceedings in respect of the K Trust under Part IV of the PCA.

5: In the matter of Settlements made by Declarations of Trust dates 9 May 2013¹³

The Trustee brought an urgent application to set aside transfers made to three different trusts (the Trusts), under section 64A of the Trusts Act. The application was supported by all the beneficiaries. This appears to be the first judgment that considers section 64A, which is the Court's statutory Hastings-Bass jurisdiction.

The function of section 64A is to confer a statutory power on the court to set aside the flawed exercise of a fiduciary power. The pivotal conditions for the court exercising the jurisdiction are, in broad terms, that a fiduciary power was exercised in a way which would not have occurred had the true position been known.

In the present case, neither the settlors nor the initial trustees obtained professional tax advice from the settlors' domicile about the tax implications of settling the Trusts. It had been assumed that the settlements in question would preserve rather than diminish the family fortune. It transpired that the transfers had triggered substantial potential tax liabilities and had appropriate tax advice been taken at the relevant time, the relevant settlements would not have been made.

Kawaley J accepted that the starting point for the exercise of the new statutory jurisdiction was the statutory provisions themselves and that in the absence of any directly relevant case law, consideration must be given to the evolution of the Hastings-Bass rule and the legislative intent underpinning section 64A. Hastings-Bass case law pre-dating the UK Supreme Court decision in Pitt v Holt [2013] UKSC 26, and the introduction of the requirement of a breach of fiduciary duty, is likely to be of potential assistance in applying the new statutory jurisdiction under section 64A.

Kawaley J concluded that:

• the statutory regime enables the court to grant relief on a basis which cuts through the barriers which were erected around the traditionally flexible Hastings-Bass principle by the decision in Pitt v Holt. Under section 64A, there is no need to establish a breach of fiduciary duty;
• the court is still required to find facts which would have amounted to the improper exercise of a fiduciary power (either relevant matters were ignored, or irrelevant matters were taken into account). In many cases this may be practically indistinguishable from having to establish a breach of the fiduciary duty of due deliberation;
• in practical terms, the statutory jurisdiction will be a more liberally available one. Because the purpose of the enactment was clearly to sidestep a perceived narrowing of a previously more flexible jurisdiction, section 64A can be construed as intending to facilitate a flexible approach to setting aside the flawed exercise of fiduciary powers. The courts will generally be obliged, subject to appropriate limitations based on the facts of each case, to give effect to this important legislative purpose;
• according to the obiter findings of the UK Supreme Court in Pitt v Holt, if the impugned transaction is set aside, it is merely voidable. Under section 64A, the flawed exercise of the fiduciary power is explicitly void. In this respect, the statutory regime more explicitly introduces a material difference to the non-statutory legal position.

Kawaley J noted an important qualification to the analysis and application of the statutory regime in this decision, which focussed on the scenario where the applicant for relief is a trustee. Kawaley J held that different considerations might apply if the applicant is not a trustee, especially if they are not even a beneficiary, enforcer, holder of the power or the Attorney General, but are invoking the catch-all standing category of '…any other person' under section 64A(5)(d) of the Trusts Act.

On the facts of the present case, it was clear that the statutory requirements for setting aside the impugned exercises of the fiduciary powers in question were met and Kawaley J granted the Trustee's application for declarations that the relevant transfers of assets were void under the provisions of section 64A.

Comment

One notable feature is the case is that the section 64A jurisdiction was held to apply to transfers by individual settlors (who were not fiduciaries) to establish the trust. As far as the authors are aware, this is the first time the Hastings-Bass jurisdiction has been applied in these circumstances, as opposed to mistake on the part of the settlors¹⁴.

It is not explicit from the judgment what fiduciary powers were being exercised by the initial trustees, but it is presumably their power to accept the assets on the terms of the trust, the clear implication being that they had a duty to consider the tax consequences of doing so. That is consistent with existing trust law principles:

"In all ordinary circumstances an acceptance of additional property will benefit the beneficiaries, though the tax consequences…as well as the nature of the property concerned, must always be carefully considered beforehand."¹⁵

This is likely to provide a more flexible alternative to mistake for setting aside settlements of property on trust, and it will be interesting to see how it is developed in future decisions of the courts, both in the Cayman Islands and elsewhere. 

6: In the matter of HEC International Ltd (in Official Liquidation)¹⁶

In this judgment Doyle J considered a standalone issue in the context of an appeal by Shang Peng Gao Ke Inc SEZC (SPGK) against a rejection of a proof of debt in the liquidation of HEC International Ltd (the Company). SPGK sought an order that the rejection of its proof of debt be set aside and that its claim be reinstated and admitted to proof in the sum of US$25,800,000.

The standalone issue was whether or not SPGK's claim should be determined as part of the appeal or alternatively whether SPGK should be given permission, pursuant to section 97 of the Companies Act, to pursue its claim in separate proceedings with liberty to apply to have such proceedings cojoined with and to be heard together with the appeal. In determining the standalone issue, Doyle J considered the existence of a Quistclose trust.

Background

SPGK asserted that a sum of money, beneficially owned by SPGK, was transferred to the Company, for the specific purpose of discharging a liability owed to the Company's affiliates. SPGK submits that the liability was subsequently discharged from another source of funds and that the Company was now obliged to return the money to SPGK as it was not used for the purpose for which it was transferred, alleging the existence of a Quistclose trust.

The Company's official liquidator objected to the existence of a Quistclose trust, asserting inter alia that:

• there was no contemporaneous evidence which showed the terms and/or basis on which the payments were made and were to be returned to SPGK;
• the only inference that could be drawn from the entries in respect of the payments was that the funds were at the Company's free disposal;
• the funds were not segregated, but rather comingled with pre-existing funds in the Company's bank account;
• it was clear that the sole director of the Company, who was also the controlling mind of SPGK, did not consider that the funds were held on trust for SPGK;
• SPGK was unable to identify the alleged beneficiary of the funds, as the claim was articulated as on behalf of SPGK and SPGK Singapore on an 'and/or' basis; and
• there was no evidence of any intention to create a trust which was fatal to the existence of a Quistclose trust.

Determination

Doyle J held that it was somewhat academic whether the Court should allow a claim to proceed 'in the course of the winding up' or grant leave for separate substantive proceedings as the court must first be satisfied, at the very least, that there was an arguable claim.

Doyle J considered the principles laid out by Briggs J in Bellis v Challinor [2015] EWCA Civ 59, in which he referred to Barclays Bank v Quistclose Investments Ltd [1970] AC 567 and the authoritative analysis of Lord Millett in Twinsectra v Yardley [2002] 2 AC 164, that in determining whether or not a Quistclose trust exists, the court must consider the following.

• Whether the payer and recipient intended that the money passing between them was to be at the free disposal of the recipient.
• The mere fact that the payer paid the money to the recipient for the recipient to use in a particular way is not in itself enough. This could give rise to personal obligations but would not of itself necessarily create fiduciary obligations or a trust.
• It must be clear from the express terms of the transaction properly construed, or objectively ascertained from the circumstances, that the mutual intention of the payer and recipient (and the essence of their bargain) is that the funds transferred should not be part of the general assets of the recipient but should be used exclusively to effect particular identified payments, so that if the money cannot be so used then it is to be returned to the payer.
• The mechanism by which this is achieved is a trust giving rise to fiduciary obligations on the part of the recipient which a court of equity will enforce.
• It is a resulting trust in favour of the payer with a mandate granted to the recipient to apply the money paid for the purpose stated, with the key feature being that the recipient is precluded from misapplying the money paid to them. If the stated purpose cannot be achieved then the mandate ceases to be effective, the recipient simply holds the money paid on resulting trust for the payer, and the recipient must repay it.
• The subjective intentions of payer and recipient as to the creation of a trust are irrelevant. If the properly construed terms upon which, or the objectively ascertainable circumstances in which, the payer and recipient enter into an arrangement have the effect of creating a trust, then it is not necessary to establish that either party intended to create a trust. It is sufficient that they intended to enter into the relevant arrangement.
• The particular purpose must be specified in terms which enable a court to say whether a given application of the money does or does not fall within its terms.
• The specified purpose is fulfilled by and at the time of the application of the money.

Doyle J emphasised that proper account needs to be taken of the structure of the arrangements and the contractual mechanisms involved. Payments are routinely made in advance for particular goods and services but do not constitute trust monies in the recipient's hands.

It is therefore necessary to establish not merely that the money transferred was not at the free disposal of the payee but that, objectively examined, the contractual or other arrangements properly construed were intended to provide for the preservation of the payer's rights and the control of the use of money through the medium of a trust.

Doyle J found the evidence on a Quistclose trust to be 'manifestly incredible', with no supporting evidence for the factual assertions made:

• The monies were not paid into a segregated account. As determined by Lady Arden in Prickly Bay Waterside Ltd v British American Insurance Company Ltd [2022] 1 WLR 2087, segregation is not always required, but the absence of a provision for segregation is a powerful factor indicating that there is no Quistclose trust.
• The evidence indicated that the money was at the free disposal of the Company.
• The manner in which the alleged proprietary claim was advanced seemed to have been 'something of an afterthought'.
• The documentation provided in support of the claim was 'woefully inadequate', contradictory and inconsistent with the position that SPGK unconvincingly put forward.

Having considered all the evidence and argument, Doyle J remained unconvinced that there was a genuinely arguable claim. Doyle J held that the proprietary claim was hopeless and refused to grant leave for a claim that had no reasonable prospect of success, either under section 97 of the Companies Act or as part of the appeal proceedings.

Doyle J made a costs order against SPGK on the standard basis.

Conclusions

As we have seen, the Cayman Islands Grand Court continues to see a number of cases dealing with a wide variety of issues in relation to trusts. They demonstrate the breadth of knowledge and experience of the Cayman judiciary and the Court's ability to deal with novel legal issues and a willingness to assist trustees by providing practical directions in difficult circumstances.

This article will also feature in Trusts & Trustees.

1 Trusts Act (2021 Revision) (the Trusts Act), ss 13-15, as was the case in an earlier decision, Re a Settlement [2021] (2) CILR 259, at [23]-[25].

2 Trusts Act, section 64A. 

3 As decided in Pitt v Holt [2013] UKSC 26.

4 Named after Barclays Bank v Quistclose Investments Ltd [1970] AC 567.

5 Unreported, 11 December 2023, FSD 270 of 2023 (IKJ).

6 Re A Settlement [2021] (2) CILR 259, at [11].

7 Unreported, 1 February 2024, FSD 270 of 2023 (IKJ).

8 [2012] (2) CILR 355 at [37]-[40].

9 There is a discussion of some of the uses of STAR trust in Duckworth, Star trusts, Trusts & Trustees, Vol. 19, No. 2, March 2013, pp. 215–229, at 221-223 (under the heading 'Reasons for using STAR').

10 Unreported, 17 January 2024, FSD 112 of 2023 (RPJ); FSD 280 of 2022 (RPJ); FSD 204 of 2022 (RPJ).

11 American Cyanamid v Ethicon Ltd [1975] AC 396.

12 Unreported, 9 October 2023, FSD 136 OF 2023 (IKJ).

13 Unreported, 28 September 2023, FSD 228 of 2023, also known as Maples Trustee Services (Cayman) Limited v AB and others.

14 See Lewin on Trusts (20th edn) at 5.071 et seq (Voluntary settlements).

15 Lewin on Trusts (20th edn) at 26-021, (1).

16 Unreported, 20 July 2023, FSD 318 of 2021.