ABOUT THE AUTHOR: Russell Clark TEP is an Advocate
for Carey Olsen in St Peter Port, Guernsey
The States of Deliberation, Guernsey’s parliament, voted
unanimously for introducing foundations into Guernsey law in
December 2006. After an extensive period of research and
consultation, the Commerce and Employment Department presented a
report to the States in March with a view to passing legislation
later in the summer. Guernsey has been an international centre of
trust administration for more than 50 years. Why is it now
proposing to introduce foundations legislation? Has it missed the
boat? What will the law look like?
To set the scene, it is necessary to describe the key features
of a foundation by reference to what is already known to the trust
practitioner. While it is tempting to compare a new juridical
concept with what is already familiar, to describe a foundation by
comparison with trusts or companies could get lost in translation.
Such comparisons are inevitable but a foundation is not a company
or a trust. These are three different legal institutions that have
evolved differently to do different things in different
environments.
Unlike a trust, a foundation has separate legal personality
independent from the founder. Assets are ‘dedicated’ to the
foundation by the founder to fulfil its purpose, and it is managed
by a committee or council. With legal personality and a management
board, a foundation can be compared to a company. In other aspects
it can be compared to a trust, as assets are held for the benefit
of others or for a specific purpose. Like a trust, if there are
beneficiaries, they have certain defined rights. Trusts and
foundations can be used for similar purposes: both can be used in
estate planning, both can be used for philanthropy.
One way trusts and foundations are similar is the consequence of
their establishment. In the common-law tradition, establishing a
trust takes trust assets out of the estate of the settlor. In the
civil-law tradition, every individual has an indivisible
‘patrimoine’ (inheritance) representing that person’s
‘economic value’ as it ebbs and flows during their lifetime. On
their death, the patrimoine is transferred intact to the
person’s heirs. A purported assignment of part of a person’s
patrimoine does not release the person’s heirs from the
debts and liabilities assigned, nor does it prevent the automatic
transfer of the patrimoine to the heirs on death.
Foundations, however, can split the patrimoine so the
dedicated assets are applied towards the purpose of the foundation
rather than the heirs.
Although the foundation, in all its various forms and guises,
has been known to civil lawyers for centuries it was not really
until 1926, with the introduction in Liechtenstein of the Law
of Persons and Companies, that the foundation became part of
the armoury of the private client advisor. The Liechtenstein law
was clearly intended, at least in part, to provide a trust-type
solution that civil lawyers and clients could work with. There is
some irony that Guernsey, an established trust jurisdiction, is
introducing a juridical institution that is a civil-law response to
the trust. This is because the trust relies upon the recognition of
different property rights in the same property. This is an
equitable concept that many legal systems simply do not have and
for some it can make the trust difficult to fathom or simply
unfathomable.
Business opportunities
Many of the emerging economies that Guernsey practitioners have
identified as providing the Island with business opportunities are
civil-law jurisdictions where foundations are more commonly
understood. The international appetite for foundations is hearty.
There are more than 200,000 foundations in the Netherlands alone.
There is also foundations legislation in other civil-law countries,
including Austria, Germany (where there are both charitable
foundations (the stiftung) and private foundations (the
treuhand)), Switzerland, Belgium, Italy, France (for
public purposes), Norway and Japan.
Foundations established in other jurisdictions have been
administered in Guernsey for many years but, ultimately, if
something goes wrong, it is necessary to have recourse to the
courts of the country in which the foundations are established, and
for some advisors this presents an unacceptable risk. Over time an
appreciable number of international private client advisors have
explained to Guernsey practitioners that they had clients who would
prefer a foundation, as opposed to a trust, to achieve the client’s
particular objectives. However, they did not wish to establish
foundations in the international finance centres (IFCs) that then
provided foundations. Their reasons were varied but it was
recognised that there was a demand for foundations that could be
established and administered in a tax-neutral jurisdiction where
there were tried and tested administrators, professionals and
courts and which had a reputation for being well regulated,
transparent and cooperative.
There has been circumspection before proceeding with this
project. In the same way that those who are unfamiliar with trusts
regard the concept with suspicion, those who were unfamiliar with
foundations had similar concerns. That the institution itself
seemed to be indelibly associated with IFCs with which Guernsey
would not want to be associated was initially a concern from a
reputational perspective. However, it was recognised that criticism
of those jurisdictions was not the result of the foundation as an
institution itself but of a broader failure in those jurisdictions
to meet international standards on regulation and tax information
exchange, combined, usually, with strict banking secrecy laws.
‘Guernsey has not created a form of “corporate trust”
but a recognisable foundation’
The Guernsey legislation has been crafted to ensure that there
is appropriate oversight of Guernsey foundations, which will only
be formed once registered in Guernsey. In some civil-law
jurisdictions, it is not obligatory to register private
foundations. The formation of Guernsey foundations will be
restricted to licensed fiduciaries, which are all regulated by the
Guernsey Financial Services Commission. This will ensure compliance
with anti-money laundering and combating of financial terrorism
obligations, as well as regulatory oversight of the administrators
of foundations. A Guernsey foundation will have to maintain a
registered office in Guernsey at which the constitution of the
foundation and its accounting records will be maintained. Also,
there will always be personnel in Guernsey supervised by the
Guernsey Financial Services Commission, which shall have access to
the other records of the foundation.
Guernsey solution
One reason for the time taken in producing the legislation has
been the research done by the Commerce and Employment Department
and the legislative draftsman. The academic and professional
criticism of the legislation in other IFCs has been carefully
considered. As a result, the proposed legislation will not be
similar to that in other IFCs. The draftsman has been at pains not
to create a form of ‘corporate trust’ but to establish what will
be, recognisably, a foundation from the perspective of the
civil-law practitioner. The Guernsey solution will offer an
alternative not only to the regimes established in less reputable
IFCs, but also to those established in well-regulated
jurisdictions.
The law will be drafted in three parts: the substantive law
itself and two schedules. This was done deliberately to reflect the
civil-law tradition of having a short law (the Swiss legislation on
foundations is only nine articles of its Civil Code), then
clarification coming in the form of regulations. The first schedule
will deal with administrative matters, such as the establishment of
the register and registrar. The second will address migration and
termination of foundations, and will include new provisions to deal
with insolvency. The migration provisions are included as it is
understood there are a number of existing foundations that would
wish to relocate their administration to Guernsey (provided that
they can meet the due diligence threshold that will be expected of
them in Guernsey).
The founder will be able to act as councillor or guardian (but
not at the same time) and beneficiary, but, consistent with the
approach taken on the Continent (but not in other IFCs), the
founder can only reserve to themselves limited powers qua founder
and only, if a natural person, for a limited time (a period of
between 30 and 50 years is anticipated) to ensure that the
foundation is clearly independent of the founder.
The councillors will owe their duties to the foundation itself
in the same way that a director of a company owes their fiduciary
duties to that company. It is clearly proper that the councillors
must be accountable for their actions. To ensure this, the Guernsey
law will distinguish between enfranchised beneficiaries (who are
entitled to see the constitution of the foundation and its records
and accounts – but not the sort of material that a trustee can
properly deny to a beneficiary – and to make certain court
applications) and disenfranchised beneficiaries (who are not
entitled to any information). Guernsey law will also recognise the
role of guardian – a necessity whenever there are disenfranchised
beneficiaries. The guardian will have a duty to enforce the
constitution and the purpose of the foundation.
While foundations are not trusts, and the building blocks of the
two institutions are fundamentally different, at their core they
both involve professionals administering assets put into their care
by others for a specific purpose, or to provide for others and do
so with care, skill and integrity. This is something that Guernsey
has done for decades. The introduction of foundations is simply the
next part of that story.