Jersey Courts first consideration of Foundations
29 May 2013
A recent case that came before the Royal Court of Jersey was the first case of its kind in any common law jurisdiction where Foundation Laws have been introduced; the judgement is therefore a significant development in the law relating to the administration of Jersey Foundations. The case concerned an application by a creditor to enforce a judgement obtained in a Russian court against the Founder of the Foundation by commencing proceedings in Jersey against the Founder, the Foundation, and related companies. The creditor alleged that the complex structure owned by the Foundation was a sham intended to disguise the Founder’s ownership and control of the underlying assets, so that the judgement could be enforced against the Foundation’s assets. The creditor also claimed that the structure prejudiced its claim to the extent that the transfer of the assets to the creditor in satisfaction of the Founder’s liability was justified.
As the Foundation had no funds to retain its own lawyers in Jersey to defend the proceedings, the Qualified Member of the Foundation’s Council (i.e. the entity registered under the Financial Services (Jersey) Law 1998 to conduct trust company business in Jersey) had sought legal advice at its own cost. That advice was that the Foundation should maintain a neutral stance in the proceedings, complying with any orders a trial court may make in those proceedings but not participating in the defence. The Qualified Member then sought directions from the Royal Court to confirm this advice.
Under the Foundations (Jersey) Law 2009, the Court has power to give a direction if it is satisfied that a direction will assist a Foundation to administer its assets or carry out its objectives or if it is otherwise desirable for the Court to give a direction. The Court therefore had to consider whether this was an instance in which the Court’s supervisory powers could be properly invoked.
Conclusions of the Royal Court
The Court concluded that any decision by the Foundation on the stance it should take in the Jersey proceedings against the Foundation was of great importance, since the claim extended to all of its assets. The decision was therefore of sufficient importance to justify requesting directions from the Court and the Qualified Member had acted responsibly in making the application. A direction from the Court that the Foundation should adopt a neutral role in the proceedings would offer protection to the Qualified Member against any claims from the Foundation for breach of duty in adopting that role. The Court therefore directed the Qualified Member to take a neutral stance in the proceedings.
In coming to its decision, the Court analysed the provisions of the Foundations Law relating to its supervisory powers. It concluded that there was no equivalent to these provisions in company law, under which the directors must take responsibility for conducting the affairs of a company, although the position of the council members is similar to that of company directors, in that they owe fiduciary duties and duties of care to the Foundation. The Court also concluded that there were analogies with the trust law principle that the Court has jurisdiction to advise on the interpretation of the trust deed when trustees wish to take decisions or surrender their discretion, although the analogies were not exact. The Court therefore held that the legislature must have intended that council members of Foundations could bring important administrative and governance issues before the Court and that the Court should have wide-ranging jurisdiction to give directions and confirm decisions taken by the council members.
Impact of the ruling
This case has clarified the approach that the Court will take in exercising its supervisory jurisdiction and power to give directions in respect of Foundations under the Jersey law. While the Guernsey Foundations Law has express provisions on the Royal Court of Guernsey’s jurisdiction in such circumstances, the Jersey case confirms the nature of these provisions is the same in both islands.
BKS are happy to discuss issues relating to Foundations with our clients and, for general information on Foundations, please refer to the appropriate section on our website: http://www.bksfamilyoffice.com/services/foundations
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