September 18, 2020

Cayman Islands rule changes will potentially create more business opportunities.

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The past year has been eventful one for trusts and estates practitioners, with uncertain economic conditions and numerous legislative developments. The Cayman Islands saw several rule changes that will affect trust and company structures and potentially create more business opportunities.

A considerable number of tax information exchange agreements were signed by offshore jurisdictions during 2011, illustrating a continued commitment to international standards, and more are likely to follow during 2012. Another trend has been the emergence of foundations.

The primary trusts legislation in Cayman was recently consolidated to include the new Section 27A regarding trust accounts, which can be found in the Trusts Law (2011 revision). Cayman has more than 25 tax information exchange agreements, including six new agreements in 2011 (with Argentina, Guernsey, India, Japan, New Zealand and South Africa). The indications are that Cayman will continue to expand its network of tax information exchange agreements for the foreseeable future.

During 2012, the Cayman Islands government will consider the introduction of foundations legislation in order to meet the increasing demand for foundations globally.

Cayman saw a couple of interesting decisions in 2011. The most groundbreaking is likely to be TMSF v Merrill Lynch Bank and Trust Company (Cayman) Ltd, which went to the Privy Council on appeal. The case explored the delegation and nature of reserved powers in relation to two Cayman Islands trusts.

The settlor was declared bankrupt as a result of a foreign judgment debt arising from certain fraudulent activities while the settlor was a director of various companies connected to an insolvent Turkish bank. The court of first instance and the Cayman Islands Court of Appeal rejected the argument asserted by the settlor’s trustee in bankruptcy that a power of revocation was akin to a property right, such that it could be delegated to the trustee in bankruptcy to exercise the power to revoke the trusts, thus bringing them within the settlor’s estate. The conclusion was that powers are not akin to property as a matter of common law, and unless and until legislation addresses the point directly, it will remain so in the Cayman Islands.

However, the Privy Council took a different and unexpected view when it determined that, in the interests of justice, the incremental expansion of the concept of equitable execution was warranted in this case, and there was no absolute distinction between powers and property. Thus, the trustee in bankruptcy ultimately prevailed. While the Privy Council’s decision may seem unorthodox on strict legal principles, the facts of the case were so extreme that they probably swayed the judges to stretch these relatively settled legal concepts in the quest for justice. The main lesson here for settlors (and their advisers) is to avoid reserving unqualified powers of revocation (and amendment or appointment, for that matter) where it is possible that a settlor’s creditors may seek to bankrupt a settlor.

The next decision holds lessons for fiduciaries generally and should be borne in mind by trustees and executors alike. In Weavering Macro Fixed Income Ltd (In Liquidation) v Peterson the directors of a corporate investment fund had failed to apply their minds to the activities of the company and were essentially puppets of the investment manager. They took orders from the investment manager and rubberstamped any documents put before them for more than six years while offering no form of effective supervisory role. The fund collapsed and the directors were found personally liable for neglect. The lesson is that the duties of a fiduciary are onerous and require independent thought and careful consideration.

For further information on this topic please contact Carlos de Serpa Pimentel at Appleby email ([email protected]).

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