The nature of trust assets: home and away
The Supreme Court has considered the scope of the avoidance provisions in section 127 of the Insolvency Act 1986 and confirmed that insolvency officeholders have a limited ability to void disposals of a company’s assets that are held on trust. The court also highlighted the potential dangers inherent in holding trust assets located in jurisdictions that do not recognise common law trusts.
The Supreme Court has considered the scope of the avoidance provisions in section 127 of the Insolvency Act 1986 (section 127) and confirmed that insolvency officeholders have a limited ability to void disposals of a company's assets that are held on trust (Akers (and others) v Samba Financial Group  UKSC 6). The court also highlighted the potential dangers inherent in holding trust assets located in jurisdictions that do not recognise common law trusts.
The decision will be of interest to insolvency practitioners, both in the UK and in jurisdictions with avoidance provisions similar to section 127, and those dealing with them in relation to trust assets located anywhere in the world (see box "Section 127"). It will also be relevant to anyone dealing with trust assets situated in non-common law jurisdictions.
The claim arose from the long-running fallout from the multi-billion dollar dispute between the Al-Gosaibi family, Mr Maan Al Sanea, a Saudi Arabian national, and the Saad Group of companies. Liquidators of Saad Investments Company Limited (Saad Investments), a Cayman Islands company, alleged that as a result of six transactions between 2002 and 2008, Mr Maan Al Sanea held certain shares in Saudi Arabian companies for Saad Investments under common law trusts governed by Cayman Islands law.
The liquidators and Saad Investments alleged that Samba Financial Group (Samba), a Saudi Arabian bank, received some of those shares at a time when Saad Investments was being wound up. Accordingly, the liquidators brought proceedings against Samba alleging that the transfer was void under section 127 on the basis that the shares were Saad Investments's property at the date of the transfer.
The High Court granted a stay and held that Saudi Arabian law was the governing law of the trusts, and in any case applied because under English conflict of laws rules, being the law of the forum, the law of the location of the shares applied to issues concerning transfer of title to property. On appeal, the Court of Appeal considered that without a full evidential hearing it was unable to decide whether Saudi Arabian law was the governing law or whether it applied anyway, and it granted the liquidators' appeal and lifted the stay (www.practicallaw.com/2-597-2454). Samba appealed.
Supreme Court ruling
The court allowed the appeal and held that, for the purposes of section 127, there had been no disposition of any rights of Saad Investments in relation to the shares by virtue of their transfer to Samba.
No void disposition of property. The court held that, while section 127 may protect a company's disposition of its beneficial interest, it does not apply where a trustee holds an asset on trust for the company, and the trustee transfers it to a third party in breach of trust. The trustee is merely disposing of the legal title to the assets, and this is not an interest which the beneficiary ever had. Accordingly, it is not a disposition under section 127, even if the transfer might result in the beneficiary's interests being extinguished.
In reaching this conclusion, the court held that where an asset is held on trust, the legal title remains capable of being transferred to a third party, although this may be in breach of trust. But the trust rights remain, including the right to have the legal title held and applied in accordance with the terms of the trust. However, although trust rights remain enforceable against the trustee, they are inherently limited as regards third parties; for example, by the common law rule protecting bona fide purchasers for value.
Lex situs of foreign trust assets. Lex situs is the principle, applicable to many asset types, that title is determined by the law of the place where the object is situated at the time of the event conferring title (Macmillan Inc v Bishopsgate Investment Trust (No 3) ( 1 WLR 387). It was common ground that the law of Saudi Arabia, where the shares were located, does not recognise the institution of a trust, or the division between legal and equitable proprietary interests. Samba had argued that, following Macmillan, the ownership of the shares should be determined by the lex situs and so Saad Investments had no proprietary interest in the shares, even if the trust were governed by Cayman Islands law, which does recognise trusts.
The court held that, in view of the conclusions reached in relation to section 127, it was doubtful whether it mattered that Saad Investments's rights were properly described as proprietary. However, where there was an intention to create trusts governed by common law, even in respect of assets in Saudi Arabia, trusts may be created, and the court would give effect to them to the greatest extent possible.
As regards third parties, the court applied Macmillan and held that where, under the lex situs of the trust property, the effect of a transfer of the property by the trustee to a third party is to override any equitable interest that a beneficiary may have, that effect should be recognised as giving the recipient of the property a defence to any claim by the beneficiary. Under English law, purchasers for value acting in good faith take free of a beneficiary's interest. However, in other jurisdictions, a transfer to a third party might override beneficiaries' rights in different circumstances, potentially disregarding any equitable interest.
In Akers, the dispute related to shares located in Saudi Arabia. However, the test to determine location will be different for different classes of assets, such as movable property and choses in action, and the test will not necessarily depend on the governing law of the relevant trust instrument. Accordingly, anyone dealing with trust assets situated in non-common law jurisdictions should consider carefully whether they may be less protected from a transfer to a third party.
Although the decision has significant international aspects, the analysis of section 127 applies in purely domestic situations or situations involving a common law jurisdiction. However, the decision may be of assistance in determining the scope of similar avoidance provisions in other jurisdictions. As a result, insolvency practitioners should be aware that if a company being wound up is a beneficiary of assets held on trust, section 127 will only protect against purported dispositions of the beneficial interest itself, for example, by officers of the company; it will be of no assistance in relation to dealings by the trustee.
Oliver Browne is a partner, and Daniel Smith is counsel, at Latham & Watkins.
Section 127 of the Insolvency Act 1986 provides that, in a winding up by the court, any disposition of the company's property made after the start of the winding up is void, unless the court otherwise orders.
It is a powerful tool in an insolvency officeholder's armoury to protect creditors, often operating harshly against those parties that deal in good faith with a company.