Alan Adams & Ors v FS Capital Limited & Ors

The exercise of a fiduciary power of sale is invalid where its dominant purpose is to exclude beneficiaries from any possible surplus, unless the circumstances show that the beneficiaries have no remaining economic interest. Cash-flow insolvency does not, by itself, permit trustees to disregard beneficiaries. Where trust assets may have substantial but uncertain value, creditors’ interests must be balanced against the beneficiaries’ residual interests. A purchaser dealing with a Jersey trustee is protected under the Trusts (Jersey) Law 1984 only if it lacks actual notice of the breach of trust. Actual notice includes actual knowledge, wilful blindness and wilful or reckless failure to make reasonable inquiries. An improper exercise of an equitable power is void, so far as it purports to transfer the beneficial interest.

About 700 beneficiaries challenged the sale of loan assets held in three Jersey trusts to FS Capital Limited. They alleged that the sale was made for an improper purpose, in breach of trust, and should be treated as void or set aside. FS Capital relied on the bona fide purchaser for value without notice defence and counterclaimed for repayment of the loans.

The court also determined whether the assets of the 2014 trust had been effectively transferred through the relevant retirement and appointment deed, sale and purchase agreements, ratification and deed of confirmation. The central issues were whether the sale was for a proper purpose, whether FS Capital had actual notice of any breach, and whether the beneficial interest had passed to it.

1. 2014 Trust. The 2018 retirement, appointment and indemnity deed vested the loan assets in the Second Defendant. The sale and purchase agreements were contracts for assignment, rather than completed assignments. The deed of confirmation was nevertheless effective to assign the 2014 Trust loan assets to FS Capital.
2. Improper purpose. The sale power was fiduciary and was exercised within its express scope, but for an improper purpose. Its dominant purpose was to terminate the trusts, pay the trustee and Hatstone Jersey, enable FS Capital to obtain the loan assets free of the trusts, and ensure that no surplus remained for beneficiaries. The purpose was not authorised where the trusts were cash-flow insolvent but held illiquid assets of uncertain and potentially substantial value.
3. Insolvency. Applying the approach in Sequana, creditors’ interests primarily mattered, but beneficiaries’ residual interests could not simply be disregarded. Only where it was inevitable that beneficiaries had no economic interest could their interests be excluded entirely.
4. Notice. Article 55(1) qualified Articles 33 and 54(3), so FS Capital needed to show absence of actual notice. Actual notice included the first three Baden categories. The knowledge and state of mind of Mr Emblin and Mr Reid were attributable to FS Capital. Their knowledge of the structure and purpose of the transaction meant that FS Capital failed to establish absence of actual notice.
5. Effect. Following Cloutte v Storey, which the court considered applicable under Jersey law, the disposal was void in equity so far as it purported to transfer the beneficial interest. FS Capital could not enforce the loan debts. The counterclaim was dismissed.
6. The Second Defendant was liable for breach of trust. In relation to the 2011 and 2012 trusts, its retirement facilitated the contemplated disposal. In relation to the 2014 trust, it directly effected the disposal through the deed of confirmation. Any consequential compensation issues were reserved.

First instance judgment. No appellate history was stated in the judgment.