The view from here

  • Author : Carlos de Serpa Pimentel
  • Date : March 2013
ABOUT THE AUTHOR: Carlos de Serpa Pimentel TEP is a Partner and Group Head of the Private Client and Trusts Practice at Appleby
Cayman Islands

There were no notable changes to the primary trusts legislation1 of the Cayman Islands in 2012. In addition, no notable trust cases were reported in 2012, although the courts were busy hearing several major trials and at least one significant judgment is expected to be delivered in early 2013. The cases under review have all been dealt with in the Financial Services Division of the Grand Court, which is the division of the Grand Court established in 2009 to deal with complex and high-value commercial and trust litigation matters.

The Cayman Islands has entered a significant number of tax information agreements (TIEAs), with more than 30 in force to date. In 2012 the Cayman Islands continued to show commitment to this process by entering TIEAs with Italy, Qatar and the Czech Republic. The Cayman Islands remains committed to expanding its network of TIEAs in 2013 and beyond.

In May 2012 STEP Cayman Islands hosted the annual STEP Caribbean Conference. Approximately 325 delegates attended the conference, which was hosted at the Ritz- Carlton Hotel. Timothy Ridley, former Chair of the Cayman Islands Monetary Authority, presented the keynote speech on the future of the wealth structuring industry. Ridley discussed the profile of clients of the future, noting that they would be driven by the fundamental shift of wealth creation from the West to emerging markets such as Brazil, Russia, India and China. Ridley speculated that pressure on Western governments to raise taxes could force wealthy families to flee to low-tax jurisdictions.

The speakers explored a wide range of issues of importance to the trust industry, including international tax cooperation, planning issues and solutions for family-owned private companies, wealth structuring in Russia and eastern Europe, attacks on foreign trusts in the US courts, due diligence and know your client issues, wealth structuring for African clients, trust litigation, wealth structuring in Asia, the implementation of the Foreign Account Tax Compliance Act (FATCA) and its impact on the trust industry and on offshore jurisdictions generally, trustee investment, rectifying trustee mistakes, revocable trusts, reporting obligations for fiduciaries, regulation of trust companies, guidelines on trust administration, emerging global wealth hotspots, letters of wishes, and settlor incapacity.

The Cayman Islands government has now set up a FATCA task force to evaluate the suitability of proposed government-to-government reporting arrangements with the US in the form of the Model 1 IGA Agreement entered by countries such as the UK, or the Model 2 IGA Agreement recently entered by Switzerland. The task force also acknowledges that the local financial services industry is making the necessary preparations for managing FATCA, and both private industry (including STEP Cayman Islands) and representatives of the Cayman Islands government are currently considering which reporting model to adopt.

On the legislative front, the Arbitration Law 2012 came into force on 2 July 2012 and applies to arbitration commenced after that date. It now brings the Cayman Islands arbitration legislation in line with the current UN Commission on International Trade Law model law. The Arbitration Law is expressly founded on three fundamental principles that are a hallmark of modern arbitration systems:

1a fair resolution of disputes by an impartial tribunal without undue delay or expense2maximum party autonomy, subject only to safeguards in the public interest; and3limited judicial intervention.

The Arbitration Law provides that a domestic arbitral award may, with the leave of the court, be enforced in the same manner as a judgment or order of the court. Where leave of the court is given, judgment may be entered in terms of the award. It can then be subject to enforcement proceedings like any other court judgment or order.

“All domestic and foreign awards will now be enforceable in the Cayman Islands”

The Cayman Islands has been a party to the New York Arbitration Convention since 1981 and the Foreign Arbitral Awards Enforcement Law gives domestic effect to the New York Convention. As a consequence, a foreign arbitral award made in the territory of a state that is a party to the New York Convention will be recognised and enforced by the Cayman Islands court on production of the original arbitration agreement and award or certified copies (subject to limited grounds of defence discussed below).

The Arbitration Law provides that an arbitral award, irrespective of the country in which it was made, may be recognised as binding and shall be enforced by the Cayman Islands court as long as it satisfies the criteria set out in the New York Convention. This means that all domestic and foreign awards will now be enforceable in the Cayman Islands, subject to the leave of the court.

The implementation of the Arbitration Law creates an opportunity for settlors of Cayman Islands trusts to include arbitration provisions in their trust instruments that would compel arbitration if and when a trust dispute or other question requiring a determination arises. This should reduce the costs of resolving trust disputes, which are traditionally dealt with in the courts, as the Arbitration Law now provides a modern framework to Cayman Islands arbitration proceedings. The inclusion of arbitration provisions in the trust instrument may also provide a more conducive forum for the resolution of trust disputes, which should ultimately result in more efficient and cost- effective handling of trust disputes.

British Virgin Islands

There were no substantive changes to the primary trusts legislation2 of the BVI in 2012.

One unreported judgment3 of the Commercial Division of the High Court was delivered by Bannister J on 21 December 2012, which confirmed the general principle that where the court is being asked to determine who among a pool of competing replacement trustees is the best candidate, the court will be drawn to the candidate who is best able to display that it is most competent, fit and proper, and the most likely to act in the best interests of the beneficiaries as a whole. Such considerations will generally override the wishes of the beneficiaries, even where the beneficiaries’ preference is for a trustee who may fall short of such requirements but may have other perceived advantages.4

A second unreported judgment5 was delivered by Bannister J on 17 May of 2012, in which a former trustee, CITCO Trustees (BVI) Ltd sought to strike out a breach of trust claim brought by the current trustee (Appleby Corporate Services (BVI) Ltd) alleging that CITCO had failed to adequately monitor the trust’s investment portfolio and failed to take any action to halt the portfolio’s decline in value over an extended period. It was further alleged that CITCO failed to inform the beneficiaries of the poor performance of the investment manager, which, it was asserted, resulted in a substantial drop in the value of the trust fund. CITCO argued that the claimant would have to prove that the loss arose from CITCO’s ‘wilful fraud or wrongdoing’,6 and there was little prospect of success, and even if the claim was successful, CITCO would be entitled to reimburse itself from the trust fund based on indemnity provisions in the trust deed, so any advantage to the trust would be self-cancelling.

The Court, however, determined that the relevant trustee indemnity to be considered was the one contained in the deed of retirement and appointment (which was narrower in scope than that contained in the trust deed) whereby CITCO retired as trustee and Appleby Corporate Services (BVI) Ltd was appointed as successor trustee. Bannister J ultimately dismissed CITCO’s strike-out claim and the case is set to continue. The case highlights an ongoing problem of oversight of trust investments, but was also interesting because it highlighted that contractual indemnities can (and often do) override the indemnity provisions contained in a trust instrument, which is a cautionary tale for any outgoing trustee that they should ensure any contractual indemnities sought on retirement should be equal to any indemnity provisions provided for in the trust instrument.

Some amendments were implemented to the BVI Business Companies Act in November 2012 that imposed obligations on directors of BVI companies and partners of BVI limited partnerships to retain records and certain documents, which must be sufficient to explain transactions entered into by the company or limited partnership and to enable the financial position of the company or limited partnership to be determined with reasonable accuracy. Trustees should be aware of these changes where they are shareholders of a BVI company or where trustees are also partners in a BVI limited partnership.

The territory holds 22 tax information exchange agreements (TIEAs), the most recent being signed in June 2011 with the Czech Republic. BVI remains committed to expanding its network of TIEAs and is likely to sign more in the future.

The Trusts Law (2011 Revision), the Banks and Trust Companies Law (2009 Revision) and associated regulations form the primary trusts legislation in the Cayman Islands
The primary trusts legislation in the British Virgin Islands consists of the Trustee Act 1961, the Virgin Islands Special Trusts Act 2003, and the Banks and Trust Companies Act 1990 (as amended)
HSBC International Trustee Ltd v Jetfield (PTC) Inc and others
Such as familiarity with the family or their affairs generally.
Appleby Corporate Services (BVI) Ltd (as Trustee of the Clef Trust) v CITCO Trustees (BVI) Ltd
As provided in the indemnity clause in the trust deed


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