Foreign trust assets and liquidations—when beneficiaries’ rights might vanish (Akers v Samba Financial Group)

Daniel Smith, counsel, and Kavan Bakhda, associate, at Latham & Watkins examine the Supreme Court’s judgment in Akers v Samba Financial Group in relation to the effect of section 127 of the Insolvency Act 1986 (IA 1986) and the lex situs on transfers of trust property.

Original news

Akers and others v Samba Financial Group [2017] UKSC 6, [2017] All ER (D) 06 (Feb)

The Supreme Court allowed an appeal by the appellant Saudi Arabian bank and held that a trustee’s transfer to it of shares he was alleged to have been holding on trust for the fourth respondent, a Cayman Islands company in liquidation, had not been a disposition within the meaning of IA 1986, s 127. Therefore, the claim by the fourth respondent and its liquidators that the transfer was void had no prospect of success.

How did the issue arise?

The issue arose out of the long-running multi-billion fallout concerning the Al-Gosaibi family, Maan Al Sanea and the Saad Group of companies. In 2009 the Grand Court of the Cayman Islands ordered Saad Investments Company Limited (SICL) to be wound up. Mr Al Sanea, a Saudi Arabian national, held shares in certain Saudi Arabian companies which SICL and the liquidators alleged he held for SICL on Cayman Islands trusts, and which they alleged Samba Financial Group (Samba), a Saudi Arabian bank, received from Mr Al Sanea during the winding up. Accordingly, they claimed in the English court against Samba pursuant to IA 1986, s 127, which provides that ‘…[in] a winding up by the court, any disposition of the company’s property […] made after the commencement of the winding up is, unless the court otherwise orders, void’.

Can you summarise the previous decisions in the lower courts?

Samba applied to the English court to stay the claim on grounds of forum non conveniens, that it was more appropriate for the Saudi Arabian court to hear the dispute. The Chancellor found that the alleged trusts were governed by Saudi Arabian law under Article 7 of the Hague Convention on the Law Applicable to Trusts and on their Recognition (the Convention, enacted in the UK by the Recognition of Trusts Act 1987), and that even under trusts governed by Cayman Islands law transfers of property were a matter for the lex situs (Saudi Arabian law) under Article 15(d) of the Convention. The Chancellor also found that, applying Saudi Arabian law, SICL would have no property in the trust assets. This meant the claims would fail because there was no ‘property’ to void under IA 1986, s 127, so he ordered a stay.

The Court of Appeal overturned the Chancellor’s decision on the basis that the trusts were arguably governed by Cayman Islands law. The Court of Appeal rejected Samba’s argument that, as well as Article 15(d), Article 4 of the Convention also prevented Cayman Islands law from applying to the proprietary effects of a trust, which was an issue for the lex situs (also Saudi Arabian law) as recognised in Macmillan Inc v Bishopsgate Investment Trust (No 3) [1996] 1 WLR 387, [1996] 1 All ER 585, The Court of Appeal also held that a determination on Article 15(d) required cross-examination of experts on Saudi Arabian law during a trial.

What were the main legal arguments which the Supreme Court considered?

The arguments concerned the effect of Articles 4 and 15 of the Hague Convention, and whether they meant that the proprietary effect of a trust was always a matter for the lex situs. The Supreme Court also considered whether IA 1986, s 127 applied at all to dispositions by the trustee of a company in liquidation.

What did the Supreme Court decide?

The Supreme Court allowed Samba’s appeal, declaring that for the purposes of IA 1986, s 127, ‘…there was no disposition of any rights of [SICL] in relation to [the shares] by virtue of their transfer to Samba’. The Supreme Court found it unnecessary to decide whether SICL had a proprietary interest in the trust assets. However, it did note that a third party taking valid ownership pursuant to the lex situs might defeat any interests of a beneficiary of a trust.

Why didn’t IA 1986, s 127 cover the present situation?

The Supreme Court held that there was no relevant ‘disposition’ when the trustee transfers a trust asset to a third party in breach of trust, even if that transfer might result in the company’s interest being extinguished. This is because the trustee is disposing of the legal title to the asset, which is not an interest the company, as beneficiary, ever had.

Does the inapplicability of IA 1986, s 127 affect in personam claims against the trustee?

The personal rights a beneficiary has against a trustee under the governing law of a trust are unaffected. A beneficiary might still claim against the trustee for breach of trust or breach of fiduciary duty, eg to restore trust assets to the trust or to claim damages.

What is the relevance of the lex situs to foreign trust assets?

The trust assets here were shares sited in Saudi Arabia, a jurisdiction which does not recognise common law trusts. The Supreme Court did not resolve whether SICL’s interest constituted ‘property’ under IA 1986, s 127. However, it confirmed that, following Macmillan, third parties might take trust assets free of a beneficiary’s interest by acquiring valid legal title under the lex situs. In common law jurisdictions this could be done by acquiring bona fide for value and without notice of the trust, but the position may be different elsewhere, ie other transfers to a third party might defeat a beneficiary.

It is therefore vital to consider what the lex situs is, the test for which will depend on the type of assets held on trust (eg land, shares, moveables, choses in action, security interests). It is also worth noting that the lex situs test is the rule used by the English court, whereas other courts may adopt different rules to determine which law to apply.

What are the practical implications for insolvency practitioners involved in cross-border cases?

IA 1986, s 127 gives significant protection to creditors by voiding dispositions by officers of the company, even as against those dealing in good faith with a company. Insolvency practitioners should be aware that if a company being wound up is a trust beneficiary, IA 1986, s 127 will not protect against dealings by its trustee.

What are the likely next steps?

It is possible that SICL and the liquidators will seek alternative grounds to bring a claim against Samba. The Supreme Court granted the parties time to make submissions seeking permission to do so.

Interviewed by Mervet Kägu

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

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