FS Capital Limited & Ors v Alan Adams & Ors

For Jersey trusts, English trust law supplies the background unless displaced by Jersey statute or customary law. A fiduciary power exercised within its scope for an improper purpose is an abuse of power and, absent a contrary Jersey rule, is void in equity. A purchaser relying on the bona fide purchaser defence must prove every element, including absence of actual notice. Actual notice may arise where the purchaser knows the facts making a transaction probably improper and, in the circumstances, must appreciate their legal significance. A retiring trustee remains responsible for a successor’s breach where the precise breach was within its contemplation when it retired. Legitimate regulatory reasons for retirement do not remove that duty.

Three Jersey trusts held loan assets generated by employee-financed loan schemes. After the Loan Charge made those schemes unviable, Pinotage Trustees SARL was replaced as trustee by Pinotage (PTC) Limited. The loan assets were then transferred to FS Capital Limited for consideration capped by sums due to trust creditors.

The beneficiaries challenged the transactions. Mr Justice Johnson held that the disposal was for an improper purpose, void in equity, and that FS Capital could not rely on the bona fide purchaser defence. He also held that Pinotage retired to facilitate a breach of trust: EWHC 1649 (Ch). The appeals concerned actual notice under the Trusts (Jersey) Law 1984, whether the disposal was void or voidable, the discretionary relief issue, and the liability of a retiring trustee.

1. Both appeals dismissed. Lady Justice Asplin gave the leading judgment. Lord Justice Coulson agreed. Lord Justice Males agreed and added comments.
2. FS Capital bore the burden of pleading and proving every element of the bona fide purchaser defence, including valuable consideration and absence of notice. The strict burden remained throughout. The evidential burden was only practical shorthand and did not alter that rule. Under Article 55 of the Trusts (Jersey) Law 1984, the relevant notice included actual knowledge, wilful blindness and wilful and reckless failure to inquire. The judge was entitled to find that FS Capital knew the material facts, collaborated in designing the disposal, and could not establish that it lacked notice of the breach.
3. The presumption that foreign law resembles English law did not apply to the void-or-voidable issue. Evidence of Jersey law had been adduced and the experts agreed that the issue was unsettled. Jersey trust law nevertheless follows English trust law unless displaced by Jersey statute or customary law. The proper-purpose rule concerns abuse of a power within its scope, rather than an act exceeding the power. The Court of Appeal followed Cloutte v Storey, which remained binding English authority for the proposition that an improper exercise of a fiduciary power is void in equity. Jersey law therefore reached the same result.
4. The judge’s conclusion that Pinotage retired to facilitate the disposal was open to him. Under Head v Gould, a retiring trustee remains liable where it contemplated the very breach later committed. Regulatory concerns could explain the retirement but did not remove the duty to safeguard the trust fund.
5. The question whether relief should have been refused if the disposal had been voidable did not arise. In any event, the beneficiaries were not seeking to benefit from the failed tax scheme, and the absence of a replacement trustee would be unlikely by itself to justify refusing relief.

• Court of Appeal (Civil Division) — Both appeals dismissed. The High Court’s declarations and consequential orders stood.
• High Court (Chancery Division) — Mr Justice Johnson held that the disposal was effected for an improper purpose, was void in equity, and that FS Capital held the loan assets subject to the beneficiaries’ equitable interests. He also found that Pinotage retired to facilitate a breach of trust: EWHC 1649 (Ch).