Akers and Ors v Samba Financial Group

A Court of Appeal decision in England, Akers & Ors v Samba Financial Group [2014] EWCA Civ 1516 (14 December 2014), is the most recent episode to reach the courts in the long-running saga involving Saudi Arabian national Maan Al-Sanea and Cayman Islands company Saad Investments Co Limited (SICL).

Until recently, this case was perhaps of greatest professional interest to commercial litigators and insolvency practitioners, involving as it does allegations of systematic fraud, dissipation of vast sums of money and the creation of a staggering amount of debt.

However, due in no small part to the Court of Appeal decision, it has now piqued the interest of those of us who are interested in international trusts law and cross-border planning, particularly those of us who are practicing in jurisdictions, like the Cayman Islands, which have ‘firewall’ provisions in their trusts law.

SICL, it is said, was established to hold Al-Sanea’s family investments and apparently owed some US$2.815 billion when its winding up began. In the English proceedings, the liquidators of SICL challenged the validity of a disposition made by Al-Sanea to a Saudi Arabian bank, Samba Financial Group (SFG), of certain shares in a number of Saudi banks including SFG, in order to discharge his personal liabilities to SFG.

This disposition of shares  took place only days before the winding-up order was made in the Cayman Islands in relation to SICL and which, if valid, the liquidators argued, would deprive SICL’s creditors of approximately $318 million. 

The liquidators alleged that the transfer was void because the shares were already impressed with prior trusts in favor of SICL at the time of the purported transfer to SFG; the prior trusts arising as a consequence of six separate transactions which took place long before the winding up order.

The liquidators argued that those trusts were most likely to be governed by Cayman Islands law.

SFG, on the other hand, argued that the six transactions potentially giving rise to the trusts were governed by Saudi or Bahraini law. They argued that as neither of those laws will enforce foreign laws or recognize the division of legal and beneficial ownership in the shares, the trusts were void.

The issues as to governing law were determined by the Court of Appeal largely on the grounds of the Hague Convention on the Law Applicable to Trusts and for the purposes of this article, I will focus on the arguments in relation to Articles 4 and 15. 

Article 4 provides that “the Convention does not apply to preliminary issues relating to the validity of wills or of other acts by virtue of which assets are transferred to a trustee.”

SFG argued that even if Cayman Islands law did apply, Article 4 would apply to what happens before the trust is established; accordingly the Convention would not apply to a transfer of shares into trust, but the law of the lex situs, namely Saudi law, should apply.

The Court of Appeal acknowledged that there were some preliminary issues to which the Convention would not apply. Those preliminary issues were described by some commentators, perhaps rather unfortunately in view of world events, as the “rocket launching” issues.

Essentially the Court of Appeal agreed with Lord Hodge’s reasoning in the Scottish case of Joint Administrators of Rangers Football Club plc, [2012] SLT 599 in which Lord Hodge concluded, referring to the Convention: “It does not have the effect of making the law chosen by the settlor the governing law of the steps needed to create the trust. Were it otherwise, the results would be startling as the settlor would be able to alienate property which he could not dispose of under the lex situs.”

The Court of Appeal referred to the learning of Professor Jonathan Harris who put it this way: It is a question of whether a settlor has capacity to dispose of the assets, which is governed by the law of the situs, not whether he has capacity to dispose of them on trust, which is governed by the law of the trust.

As the Court of Appeal held, it would make no sense to hold that a trust could be created by a person who owned inalienable property. Once it can be alienated according to the laws of the lex situs, that law cannot govern the trust or its validity or effects, those questions would be for the governing law once determined by the Convention – in this instance, by Cayman Islands’ law.1

What, if anything does this have to do with the Cayman Islands’ firewall legislation? A great deal has been written about the Cayman Islands’ firewall legislation over the years, stemming in part from the fact that the jurisdiction was the first international financial centre to pass legislation of this nature.

Passed into law in 1987, it was designed to insulate Cayman Islands trusts from attacks by forced heirs and those claiming against the trust by reason of a personal relationship with the settlor.

Firewall legislation does seem to divide opinion. Only a few weeks ago, I attended a conference where one of the delegates seemed to suggest in a question to the chairs of the conference that the offshore jurisdictions had been acting cynically in passing legislation of this nature, effectively allowing settlors of Cayman law trusts to sidestep inheritance laws in their home jurisdictions. Needless to say, this is not a view that I share.

The rather less controversial view is that this legislation was passed by growing international financial centers like the Cayman Islands to protect the sovereignty of their courts and their inherent supervisory jurisdiction over the administration of trusts subject to the laws of their country.

What, in summary, does our firewall legislation say? Section 90 of the Trusts Law stipulates that if a trust is expressed to be governed by Cayman Islands law and has a jurisdiction clause in favor of the Cayman Islands’ court, all questions arising in relation to that trust will be determined in accordance with the laws of the Islands without reference to the law of any other jurisdiction with which the trust may be connected.

Section 90 is stated to relate to, amongst other things, questions about the capacity of the settlor, any aspect of the validity or construction or administration of the trust including the powers, obligations, liabilities and rights of trustees, their appointment and removal, and the existence and extent of powers in the trust.

There are a number of exceptions. Section 90 will not operate to validate a disposition of property which the settlor does not own, nor will it validate any testamentary trust or disposition which is invalid according to the laws of the testator’s domicile.

Subject to the same conditions as are set out in Section 90, Section 91 provides, amongst other things, that no Cayman law trust will be void, voidable, liable to be set aside or defective in any fashion, nor is the trustee, any beneficiary or any other person to be subjected to any liability or deprived of any right, because the trust avoids or defeats rights, claims or interests conferred by foreign law upon any person by reason of a personal relationship with the settlor, for example, by marriage.

Section 93 of the Trusts Law consolidates this point: if a foreign judgment is inconsistent with Section 91, that judgment will not be recognized or enforced by the Cayman Islands’ court. 

This means that as long as a settlor is entitled to settle the assets on trust, that is, those assets are not subject to claims from creditors or from a spouse who might claim the assets are jointly held, the Cayman Islands court will not set a Cayman Islands trust aside or declare it to be void or defective. 

Broadly, this should mean that a Cayman Islands trust should be protected from attack by either disgruntled spouses or forced heirs.

As for what this means in the Al-Sanea litigation, we will have to wait for the next round of the litigation in England and perhaps in the Cayman Islands. SFG argued that Article 15 of the Convention preserved the operation of mandatory rules in the lex situs in relation to the disposition of assets, a submission with which the Court of Appeal agreed.

This would mean for example that if there are formal rules for the disposition of real property in place in the lex situs, those rules have to be complied with. 

The Court of Appeal held however that Article 15(c) of the Convention would not “prevent the application of provisions of the law designated by the conflicts rules of the forum … relating in particular to the following matters … succession rights, testate and intestate, especially the indefeasible shares of spouses and relatives …”

Thus, the Court of Appeal found that the governing law of a trust could not override the non-derogable rights of a wife, presumably in relation to community property, or a child’s right to an inheritance, presumably under forced heirship or the equivalent.

The Court of Appeal did not however specifically address that question in relation to the operation of Cayman Islands law and specifically its firewall legislation, which may, at least in relation to forced heirship, have the effect of doing just that. 

ENDNOTES: 

1 See the judgment at paragraphs 55 to 57.

 

Akers--Ors-v-Samba

Maan Al-Sanea
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Morven McMillan

Morven is a partner based in Maples and Calder's Cayman Islands office, where she is head of the Cayman Islands Trusts group. Her expertise includes contentious and non-contentious international trusts and private client work.

 

Morven McMillan
Partner
Maples and Calder
Cayman Islands

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