Alan Adams & Ors v FS Capital Limited & Ors

The court held that the October 2019 transfers (the "Disposal") of loan receivables held in three Jersey employer-financed retirement benefit scheme trusts (the Loan Assets) were effected for an improper purpose and therefore constituted a breach of the trustees' fiduciary powers. The exercise of the power of sale was aimed at paying the trustees' and advisers' claims and terminating the trusts while leaving no realistic prospect of a surplus for beneficiaries; the judge found that that purpose was dominant.

Applying Jersey law (principally the Trusts (Jersey) Law 1984 and relevant principles derived from English authority), the judge concluded that the purchaser (the First Defendant) could not rely on protection as a bona fide purchaser for value without notice because its agents knew the factual matrix that demonstrated the dominant improper purpose. The disposal was therefore void in equity so far as the beneficial interests were affected; the First Defendant's counterclaim for recovery of the underlying loans was dismissed.

Subsidiary findings included (i) that the Loan Assets in the 2014 trust became vested in the Second Defendant by deed of retirement and appointment and were, for practical purposes, transferred to the First Defendant by a subsequent Deed of Confirmation; (ii) the Second Defendant breached duties in retiring and in its role in the 2014 dealings; and (iii) questions of restitution, counter-restitution and reconstituting trusteeship require further directions.

Background and parties. The action concerned sale transactions by which loan receivables (Loan Assets) held for the benefit of many participants in three Jersey EFRBS trusts were sold to an SPV (the First Defendant). The claimants are beneficiaries of the trusts. The defendants were the purchaser, a Swiss trust company (the Second Defendant) and a protector company (the Third Defendant). Relief sought included declarations that the transfers were void for improper purpose/fraud on a power, orders setting aside the transfers, account, reconstitution of the trusts and equitable compensation if reconstitution were impracticable.

Procedural posture. First instance trial in the Chancery Division (Property, Trusts and Probate List) over multiple hearing days; judgment reserved and handed down 3 July 2023.

Issues decided.

• Whether the Disposal was effected for an improper purpose (fraud on a power).
• Whether the First Defendant was a bona fide purchaser for value without notice of any breach of trust.
• Whether a Disposal affected by improper purpose is void or voidable.
• Whether the Second Defendant (the trustee) was personally liable for equitable compensation for facilitating the Disposal.
• Ancillary questions: effectiveness of assignments in relation to the 2014 trust (appointment, ratification and the Deed of Confirmation), insolvency/creditor-interest issues for trustees, and practical consequences (restitution, reconstitution, appointment of a new trustee).

Court's reasoning (concise). The judge analysed Jersey law (the 1984 Law) and relevant authorities (including recent Privy Council and Supreme Court guidance about fiduciary powers and treatment of creditors when insolvency risks arise). Evidence and contemporaneous documentation showed the Disposal structure and capped deferred consideration were designed to pay trustee and adviser claims and leave no surplus for beneficiaries; the exclusion of beneficiary interests was a primary purpose. The judge held (i) that in the circumstances a disposal intentionally designed to exclude beneficiaries was not a proper purpose of the trustees' power to sell; (ii) that the First Defendant had actual notice in equity (through its agents) of the factual circumstances demonstrating the improper purpose and so could not rely on the statutory protection requiring absence of actual notice; (iii) that the beneficial transfers were void in equity (following the court's analysis of the authorities dealing with fraud on a power and the consequences for legal and equitable title); and (iv) that the Second Defendant breached its duties in retiring and by its role in implementing or ratifying the Disposal.

Relief and practical consequences. The judge declared that the claimants' challenge to the Disposal succeeds and dismissed the purchaser's counterclaim. Questions concerning practical orders for reconstitution of the trusts, appointment of a trustee, and any equitable compensation (if reconstitution is impossible) were left for further hearing/directions; the judge observed practical problems (no ready successor trustee, payment streams and assignments to third parties) and signalled the need for further argument about appropriate consequential relief (including counter-restitution issues) rather than deciding those matters on the trial record.

Note: the judgment records contemporaneous disclosure and metadata issues and factual findings on witness credibility; it follows Jersey law as explained by expert advocates.

The claim succeeds. The court held that the Disposal was effected for an improper purpose and in breach of trust and that the First Defendant had actual notice of the facts constituting that improper purpose, so it could not rely on protection as a bona fide purchaser for value without notice. The transfers were treated as void in equity so far as the beneficial interests were affected. The Counterclaim was dismissed. The judge granted declarations and left consequential remedies (reconstitution, appointment of trustee and any equitable compensation or restitution) for further direction, noting practical difficulties to be addressed.