Equity Trust (Jersey) Ltd v Halabi (in his capacity as Executor of the Estate of the late Madam Intisar Nouri) (Jersey) [2022] UKPC 36

“57. … The international appeal of Jersey trusts is to a significant extent dependent on the certainty which it derives from the English case law. Naturally, English trust law must be modified where it conflicts with established principles of Jersey customary law, and it has also been modified by Jersey statutes. These general remarks apply equally to the trust law of Guernsey. 58. The TJL is the principal indigenous source of Jersey trust law. It is not a complete code of the law of trusts. But it gives statutory effect to some principles already well established in England and significantly modifies other principles. English trust law therefore serves as the background against which the provisions of the TJL fall to be construed.”

“(i) A trust is not a legal person. Its assets are vested in trustees, who are the only entities capable of assuming legal rights and liabilities in relation to the trust. In particular, they are not agents for the beneficiaries, since their duty is to act independently. (ii) English law does not look further than the legal person (natural or corporate) having the relevant rights and liabilities... (iii) The legal personality of a trustee is unitary. Although a trustee has duties specific to his status as such, when it comes to the consequences English law does not distinguish between his personal and his fiduciary capacity. It follows that the trustee assumes those liabilities personally and without limit, thus engaging not only the trust assets but his personal estate... (iv) This liability may be limited by contract, but the mere fact of contracting expressly as trustee is not enough to limit it... There must be words negativing the personal liability which is an ordinary incident of trusteeship... (v) A trustee is entitled to procure debts properly incurred as trustee to be paid out of the trust estate or, if he pays it in the first instance from his own pocket, to be indemnified out of the trust estate... To secure his right of indemnity, the trustee has an equitable lien on the trust assets...Because an equitable lien does not depend on possession, it normally survives after he has ceased to be a trustee. (vi) A creditor has no direct access to the trust assets to enforce his debt. His action is against the trustee, who is the only person whose liability is engaged and the only one capable of being sued. A judgment against the trustee, even for a liability incurred for the benefit of the trust, cannot be enforced directly against trust assets, which the trustee does not beneficially own. The creditor's recourse against the trust assets is only by way of subrogation to the trustee's right of indemnity. (vii) Because the creditor's recourse to the assets is derived from the trustee's right of indemnity, it is vulnerable. It is exercisable only to the extent that that right exists. It may be defeated if there are insufficient trust assets to satisfy his debt, or if the trustee's right of indemnity is defeated, for example because the debt was unreasonably or improperly incurred and the indemnity does not extend to such debts, or because the trust deed excludes it on account of the trustee's wilful default or gross negligence. More generally a breach of trust by the trustee, even in relation to a matter unconnected with the incurring of the relevant liability, will, to the extent that it creates a liability to account on the part of the trustee, stand in the way of the enforcement of the indemnity. As has frequently been observed, this can be hard on the creditor, who will usually have no knowledge of the state of account between the trustee and the beneficiaries. But the creditor can in principle protect his position, for example by taking a fixed charge over the trust assets, or, as in the present case, by stipulating for a personal guarantee from the principal beneficiary. It appears to the Board that all of these principles must be regarded as having been part of the law of Jersey before the enactment of the TJL or its statutory predecessors.”

“It is in the nature of the office of a trustee, whether expressed in the instrument or not, that the trust property shall reimburse him all the charges and expenses incurred in the execution of the trust. That is implied in every such deed.”

“A trustee is prohibited by law from making any profit for himself out of the trust estate, a rule which is enforced with great stringency; it is only just that, on the other hand, he should be legally protected against all liabilities properly incurred by him in the administration of the trust estate.”

“Barker v St Quinton (1844) 12 M&W 441 shows, better than any other, that the equitable lien operates by way of security or charge. Parke B said at p 451: ‘The lien which an attorney is said to have on a judgment (which is, perhaps, an incorrect expression) is merely a claim to the equitable interference of the court to have that judgment held as security for his debt.’” ‘The lien which an attorney is said to have on a judgment (which is, perhaps, an incorrect expression) is merely a claim to the equitable interference of the court to have that judgment held as security for his debt.’”

“was the trustee of the mine, including the fixtures, the plant and machinery; he is the owner of this property at law, and when called upon to account in equity, he is entitled to deduct, out of the trust property in him, all that is necessary for the purpose of repaying him the sums he has properly paid, and of indemnifying him against such sums as he is liable to pay in discharge of his trust; and, in my opinion, this liability to repay and indemnify him is the first charge on the property.”

“His right of indemnity gives him a right of charge or lien upon the trust estate, he has a right to come at any time and say, ‘I claim to have my right of indemnity ... out of the trust estate, and that gives me the right in equity to have a charge against the estate, and to have the charge enforced by the process of the Court of Equity.’”

“While there can be no right of a creditor created in the course of the trading to treat as goods of the trustee goods which form part of the trust estate, still it is equally clear that the trustee has a right and interest in those goods, because he has a right to an indemnity in the nature of a lien over those goods. It necessarily follows, as it seems to me, that the trustee has a right to prevent any person from carrying away those goods, and to say to everybody, including the cestuis que trust, ‘I am entitled to an indemnity out of those goods, and have, therefore, a pecuniary interest in them’. Of course, when the accounts come to be made up, if it should appear that nothing is due to the trustee on the trading, there is nothing in respect of which he needs to be indemnified, and his lien over the goods is gone; but until the accounts are made up he is entitled to a lien over all the assets of the estate. A lien … has always been held to be sufficient title as against the world to hold the goods until that lien is satisfied, or is proved not to exist.”

“A trustee has for his protection a right to have costs and expenses properly incurred by him in the administration of the trust paid out of the trust property, and the amount of such costs and expenses constitutes a first charge upon that property. A Court of Equity will never take trust property out of the hands of a trustee without seeing that such costs and expenses are reimbursed to him, and that he is relieved from personal liability in respect of them; and when the legal title to trust property is vested in the trustee, he has a right to resort to that property, without the assistance of the Court, for the purpose of indemnity against liabilities properly incurred by him in the administration of the trust.”

“13. We do not understand the general principles concerning the bankruptcy of a trading trustee to be in dispute. It is common ground that a trustee who in discharge of this trust enters into business transactions is personally liable for any debts that are incurred in the course of those transactions: Vacuum Oil Co Pty Ltd v Wiltshire [1945] HCA 37; (1945) 72 CLR 319. However, he is entitled to be indemnified against those liabilities from the trust assets held by him and for the purpose of enforcing the indemnity the trustee possesses a charge or right of lien over those assets: Vacuum Oil Co Pty Ltd v Wiltshire. The charge is not capable of differential application to certain only of such assets. It applies to the whole range of trust assets in the trustee’s possession except for those assets, if any, which under the terms of the trust deed the trustee is not authorised to use for the purposes of carrying on the business: Dowse v Gorton [1891] AC 190. [Emphasis added] 14. In such a case there are then two classes of persons having a beneficial interest in the trust assets: first, the cestuis que trust, those for whose benefit the business was being carried on; and secondly, the trustee in respect of his right to be indemnified out of the trust assets against personal liabilities incurred in the performance of the trust. The latter interest will be preferred to the former, so that the cestuis que trust are not entitled to call for a distribution of trust assets which are subject to a charge in favour of the trustee until the charge has been satisfied: Vacuum Oil Pty Ltd v Wiltshire. 15. The creditors of the trustee have limited rights with respect to the trust assets. The assets may not be taken in execution (Savage v Union Bank of Australia Ltd [1906] HCA 37; (1906) 3 CLR 1170, at p 1186; In re Morgan: Pillgrem v Pillgrem (1881) 18 Ch D 93) but in the event of the trustee’s bankruptcy the creditors will be subrogated to the beneficial interest enjoyed by the trustee: Vacuum Oil Pty Ltd v Wiltshire; Ex parte Garland [1804] ER 336; (1804) 10 Ves Jun 110, 120; [1804] ER 336; (32 ER 786, 789). 16. These principles lead naturally to the conclusion that the beneficial interests which, by subrogation, the creditors whose claims arise from the carrying on of the business have in the assets held by a bankrupt trustee form part of the property of the bankrupt divisible amongst his creditors: Savage v Union Bank of Australia (1906) 3 CLR at p 1188; Jennings v Mather [1901] 1 QB 108, at p 116; Governors of St Thomas’s Hospital v Richardson [1910] 1 KB 271. The definitions of both ‘property’ and ‘property of the bankrupt’ in section 5 of the Bankruptcy Act are apt to include such a beneficial interest.”

“Property which is an asset of a trading estate carried on by a trustee is properly described as trust property: Dowse v Gorton [1891] AC 190; Jennings v Mather [1901] 1 QB, at p 111. However, as we have already indicated, that does not mean that the cestuis que trust are necessarily entitled to call for the delivery of the property. If the trustee has incurred liabilities in the performance of the trust then he is entitled to be indemnified against those liabilities out of the trust property and for that purpose he is entitled to retain possession of the property as against the beneficiaries. The trustee’s interest in the trust property amounts to a proprietary interest, and is sufficient to render the bald description of the property as ‘trust property’ inadequate. It is no longer property held solely in the interests of the beneficiaries of the trust and the trustee’s interest in that property will pass to the trustee in bankruptcy for the benefit of the creditors of the trust trading operation should the trustee become bankrupt.” (Emphasis added)

“We take the view that the passing to the trustee in bankruptcy of the trustee’s beneficial interest in the trust estate, even if that is all that passes, is sufficient to attract the operation of section 122 of the Bankruptcy Act. Once it is recognized that a trustee may enjoy a right of indemnity over trust property in respect of liabilities incurred by him in the administration of the trust, it follows that the creditors of a trust business may have resort to the assets of the trust to the extent of the liabilities incurred by the trustee.”

“47. … In aid of that right to reimbursement or exoneration for liabilities properly incurred in the administration of the trust, the trustee cannot be compelled to surrender the trust property to the beneficiaries until the claim has been satisfied. In that sense, the entitlement to reimbursement or exoneration confers a priority in the further administration of the trust. Accordingly, in an administration action, if it appears probable that the trust fund will be insufficient for the full recoupment of the trustee, the trustee is entitled to the insertion in the order for administration of a direction that there be payment in the appropriate order of priority. 48. Until the right to reimbursement or exoneration has been satisfied, ‘it is impossible to say what the trust fund is’. The entitlement of the beneficiaries in respect of the assets held by the trustee which constitutes the ‘property’ to which the beneficiaries are entitled in equity is to be distinguished from the assets themselves. The entitlement of the beneficiaries is confined to so much of those assets as is available after the liabilities in question have been discharged or provision has been made for them. To the extent that the assets held by the trustee are subject to their application to reimburse or exonerate the trustee, they are not ‘trust assets’ or ‘trust property’ in the sense that they are held solely upon trusts imposing fiduciary duties which bind the trustee in favour of the beneficiaries.”

“… A court of equity may authorise the sale of assets held by the trustee so as to satisfy the right to reimbursement or exoneration. In that sense, there is an equitable charge over the ‘trust assets’ which may be enforced in the same way as any other equitable charge. However, the enforcement of the charge is an exercise of the prior rights conferred upon the trustee as a necessary incident of the office of trustee. It is not a security interest or right which has been created, whether consensually or by operation of law, over the interests of the beneficiaries so as to encumber them in the sense required by section 66(1) of the Act.”

“The trustee’s right of exoneration confers a proprietary interest in the trust fund which takes priority over competing interests of beneficiaries. The right of exoneration and the trustee’s proprietary interest in the trust fund are inextricably linked; the trustee’s interest in the fund rises and falls as debts are incurred on behalf of the trust, and satisfied out of the fund, and, of course, the right of exoneration is the basis for the existence of the trustee’s fluctuating proprietary interest in the trust fund.”

“Although the right of indemnity undoubtedly confers a right to retain possession of the trust property, it is also a proprietary right equivalent to (and ranking ahead of) the interest of the beneficiaries. As such it is probably not dependent on the retention of possession. In any event, in the present case the respondent retains the legal ownership of the properties and can thus exercise a lien in the strict sense.”

“In my opinion, a trustee’s right of indemnity out of trust property survives the trustee’s loss of office … According to the evidence before Northrop J it so happened that the legal estate in a piece of land subject to the trust, of which the respondent had been trustee when the debt alleged by the appellant was incurred, was still at the hearing of the petition in the respondent …”

“36. The next issue to address is whether the removal of Rothmore Farms as trustee, so that it relinquished its possession of the assets of the trust, resulted in that lien or charge being lost. In my judgment, it did not. It would be a strange result if that equitable interest were capable of being lost by a transaction such as the first transaction. The persons controlling Rothmore Farms and the main beneficiaries under the trust were the Cooper Family. Mrs Cooper alone under the trust deed had power to change trustees. The transfer of assets in many cases (as in this case) could be effected by a notional change in possession or by book entries. The ease with which that equitable interest could thus be lost if the respondents are correct tends to suggest that the proposition urged by the respondents should be carefully scrutinised. 37. Authority also indicates that the equitable interest of the trustee in trust assets, to the extent of the trustee’s right of indemnity against the trust assets, is not lost by a change of trustee or by giving up of possession of the trust assets by that former trustee.” [The judge then referred to Jennings v Mather and to Re Suco Gold Pty Ltd (in liq) (1982) 33 SASR 99, a decision of the Full Court of the Supreme Court of South Australia, quoting King CJ at p 109: ‘The trustee’s lien is an equitable lien which confers on him a charge over the trust property, whether in his possession or not, for the purpose of protecting and enforcing the right of indemnity.’]”

“… by force of cl 13 of the Trust Deed, the appellant has a lien on the trust assets for all liabilities, costs and expenses properly incurred by it in administration of the Trust. Further, even without that express provision, the appellant has rights of recoupment or exoneration in respect of all obligations incurred by it in that administration. These rights were supported by a lien over the whole of the trust assets which amounted to a proprietary interest therein (Chief Commissioner of Stamp Duties (NSW) v Buckle (1998) 192 CLR 226 at 245-246, paras 47-49; [1998] HCA 4) and they survived the appellant’s loss of office as trustee (Dimeos v Dikeados Nominees Pty Ltd (1996) 68 FCR 39; Glazier Holdings Pty Ltd (in liq) v Australian Men’s Health Pty Ltd (in liq) [2006] NSWSC 1240).”

“15. In the present case, therefore, the former trustee continues to enjoy a beneficial interest in the trust property commensurate with its right of indemnity out of that property. Although the trustee’s right to resort to trust property is sometimes described as a lien, it is not essential for the enjoyment and effectuation of the right that possession of the trust property be retained. The right entails, as I have said, a beneficial interest in the property. It is not in the nature of a possessory security. 16. Where there is a change of trustee, the former trustee’s interest remains enforceable against the trust property … 18. It is thus clear that, even though the trust assets have passed out of the former trustee’s possession, the vindication of that person’s beneficial interest remains available by way of an appropriately constituted claim against the new trustee. There need therefore be no concern on the part of the court about recognising immediately the right of the new trustee to have the trust property vested in it.”

“The former trustee’s equitable lien is not a right of possession. It is a security which survives the transfer of trust property to a new trustee. Further, it can be enforced against trust property in the hands of the new trustee. The new trustee receives the trust property subject to the former trustee’s equitable lien.”

“After such a transfer, the original trustee’s preferred beneficial interest continues to subsist in the trust property in the new trustee’s hands”

“Both before and after the alienation, execution at law was not open to trust creditors but they were entitled to assert Agusta’s preferred beneficial interest and thereby obtain equitable execution through the sale of trust property by a receiver appointed by the court. The fact that Agusta’s preferred beneficial interest and the creditors’ rights of subrogation in relation to it subsisted in the trust assets after they became vested in the new trustee meant that it was not incumbent upon Agusta to obtain from Riva any particular undertaking to protect those creditors.”

“The trustee’s lien is an equitable lien which confers on him a charge over the trust property, whether in his possession or not, for the purpose of protecting and enforcing the right of indemnity. It also confers on the trustee a right to possession of the trust property for the purpose of protecting and enforcing the right of indemnity, Jennings v Mather [1902] 1 KB 2. The right of possession of the trustee, until his right of indemnity is exercised, is superior to those of a new trustee or the cestuis que trust.” (Emphasis added)

“A former trustee may assert its claim for indemnity against the continuing trustee, and in that respect may assert the right of the new trustee to indemnity by bringing an action against him.”

“A court of equity will assist the trustee to realise trust assets to satisfy the trustee’s right of indemnity, in priority to the beneficiaries’ interests, and thus it is said that the trustee has an equitable charge or lien over the trust assets.”

“In English law the order of priority between two competing interests in the same property depends primarily on whether they are legal or merely equitable interests. Where both interests are equitable - or both legal, for that matter - the basic rule is that the two interests rank in the order of their creation. In the case of equitable interests the order of priority may be reversed in special circumstances, but ‘where the equities are equal, the first in time prevails’. The absence of notice of the earlier interest by the party who acquired the later interest is irrelevant, even if he gave value.”

“a very convenient rule, and I have nothing to say against it unless there is evidence either of an agreement to the contrary or of circumstances from which a contrary intention must be presumed, and then of course that which is a mere presumption of law gives way to those other considerations.”

“(1) Subject to para (2), when a trustee resigns, retires or is removed, he or she shall duly surrender trust property in his or her possession or under his or her control. (2) A trustee who resigns, retires or is removed may require to be provided with reasonable security for liabilities whether existing, future, contingent or otherwise before surrendering trust property.”

“A person who ceases to be a trustee under this Article shall concur in executing all documents necessary for the vesting of the trust property in the new or continuing trustees.”

“it is said that the trustee has an equitable charge or lien over the trust assets. It is not, however, a charge or lien comparable to a synallagmatic security interest over property of another. It arises endogenously as an incident of the office of trustee in respect of the trust assets”

“The rule in Clayton's case is to allocate the payments upon an account. Some rule had to be adopted, and though any presumption of intent was a fiction, priority in time was the most natural basis of allocation. It has no relevancy whatever to a case like this. Here two people are jointly interested in a fund held for them by a common trustee. There is no reason in law or justice why his depredations upon the fund should not be borne equally between them. To throw all the loss upon one, through the mere chance of his being earlier in time, is irrational and arbitrary, and is equally a fiction as the rule in Clayton's case, supra. When the law adopts a fiction, it is, or at least it should be, for some purpose of justice. To adopt it here is to apportion a common misfortune through a test which has no relation whatever to the justice of the case.”

“The right of the trustee to reach into the trust assets is not a personal right devoid of connection with the purposes and working of the trust; it inheres in, and arises out of, the trust relationship that exists for a purpose – to pay the creditors and thus to exonerate the trustee. It is without doubt a right of the trustee (and in that sense personal), but one that is constrained in its content by its purpose – the payment of trust creditors.”

“Parliament must have intended that when exercising its discretion the court should have due regard to the property rights of those concerned. But Parliament must also have intended that the court should have regard to all the other circumstances, such as the consequences which the grant or refusal of leave would have, the financial position of the company, the period for which the administration order is expected to remain in force, the end result sought to be achieved, and the prospects of that result being achieved.”

“Here equity could neglect the old rules- it could say, and did say, that an equal or proportional distribution among all the creditors was the fairest mode of distribution. It had come by certain property which could be called equitable assets as opposed to legal assets; it could say that these equitable assets should be distributed without regard to the legal rank of debts, it could even forbid the executor to give himself an advantage by retaining his own debt out of these equitable assets.”