Trust Disputes and the BVI Trustee (Amendment) Act, 2021

In the Trustee (Amendment) Act 2021 (the “Amendment Act”) the BVI legislature has made a number of changes to the BVI Trustee Act (the “Act”) that may affect trust disputes arising in Asia and elsewhere once the Amendment Act comes into force fully.

The key changes are (1) amendments to Section 83A of the Act broadening the “firewall” provisions, protecting trusts from the potential effects of foreign laws and judgments; (2) a wholly revised Section 86 of the Act on the reservation of powers to a settlor (or others); (3) a new Section 58B on the variation of trusts; and (4) a new Section 59A on the availability of Hastings-Bass relief.

Trust “busting”

Attacks on trusts typically come from one of three sources:

(1)  a spouse or family court in the course of divorce proceedings against a settlor or beneficiary;

(2)  the creditors of a settlor or a beneficiary; or

(3)  the trustee in bankruptcy of a settlor or beneficiary.

The challenge is likely to assert that no valid trust has been established, or that, notwithstanding the establishment of a valid trust, the transfer of property to the trustee ought to be set aside, or that the settlor or beneficiary ought to direct the trustee to transfer property out of the trust.

Firewall provisions

Section 83A of the Act serves as a firewall provision to exclude the effect of foreign law or judgments on BVI trusts.  The section was applied in relation to a foreign judgment by the BVI Court of Appeal in Lucita Angeleve Walton et al. v. Leonard George De La Haye¹.  The Amendment Act broadens the provision, such that it is more likely to provide a defence to claims based on foreign law or judgments. For example, whilst Section 83A currently restricts claims arising out of a personal relationship with the settlor, the amended Section 83A will also restrict claims arising from personal relationships with beneficiaries.  This effectively means that interests held by beneficiaries may be protected from attack on the basis of a foreign law or judgment arising in an heirship or divorce context.

Reservation of Powers

Business owners often find it difficult to transfer to a foreign offshore jurisdiction that they have never set foot in, ownership and management of a business that they have spent decades building.  A solution commonly adopted by settlors is to retain a degree of control by reserving powers under the trust.

Most offshore jurisdictions have introduced specific provisions to enable reservation of a wide range of powers by settlors. In BVI, such provisions can be found in section 86 of the Act. Under the Amendment Act, the new section 86 sets out exhaustively the powers that may be reserved by settlors. These include a power of revocation, a power of amendment, a power of appointment, to make distributions and a power to give binding directions to the trustee in respect of investments. The new section 86 will retrospectively apply to all existing BVI trusts whenever they were established.

Whilst the legislative provision, as a matter of BVI law, would prevent the trusts from being invalidated on the basis of a degree of settlor control, it would be unlikely to prevent a foreign Court from ordering the return of assets to that jurisdiction where the settlor has the power to do so, as one means of a foreign court effectively reversing a disposal of assets to a trust.  Retaining control may therefore be disadvantageous to a settlor if the settlor’s creditors, or divorcing spouse, can obtain orders requiring the settlor to return the assets.

Varying the terms of a trust

Section 58B of the Act has been amended to empower the BVI Court, on application by an eligible applicant as specified in the section, to vary the terms of a trust (including a foreign trust that changes its governing law to BVI law) without the consent of adult beneficiaries, where such variation is “expedient in the circumstances then existing, whether or not the terms of the order may adversely affect any person or purpose” and where the terms of the trust explicitly allow the application of section 58B.  This would enable the BVI Court to remedy any deficiencies that may exist in a trust.

Setting aside mistakes made by trustees

A new section 59A has been added to the Act to give statutory effect to what is known as the ‘rule in Hastings-Bass’.  This will give the BVI Court a broad jurisdiction to set aside flawed decisions made by trustees.  Such decisions typically involve distributions which inadvertently attract a tax liability.

The scope of the rule in Hastings-Bass was re-defined by the Supreme Court in Futter v HMRC and Pitt v HMRC [2013] UKSC 26, where it was held that the court may only intervene where the trustees’ actions were such as to amount to a breach of trust.  Hence, following that decision it was no longer possible for trustees to seek assistance from the court to set aside an act made in reliance upon professional advice which later proved to be incorrect, unless they also acted beyond the scope of their powers.

The new section 59A effectively restores the Hasting-Bass rule as applied prior to Futter and Pitt. Any fiduciary (i.e. a trustee, protector, or investments decision maker) or a beneficiary make seek assistance from the BVI Court under the new section 59A and the Court may set aside a mistake that took place before the new section came into force.

[1] BVIHCVAP 2014/004, 14 August 2015, unreported