An Overview Of Trust Law And Trustee Services In The British Virgin Islands

BACKGROUND

The general principles of the trust laws of the British Virgin Islands (the "BVI") are derived from those of English trust law. The principles of English common law and equity apply, as supplemented by BVI statute. The Original Trustee Act was based on the English Trustee Act 1925 and Variation of Trusts Act 1958 but has now been updated by the Trustee (Amendment) Acts, 1993 and 2003. Other significant statutes relating to trusts and trustee services in the British Virgin Islands are the Virgin Islands Special Trusts Act, 2003 ("VISTA") the Banks and Trust Companies Act, 1990 and the Financial Services (Exemptions) Regulations, 2007.

Trusts in the BVI may be established by persons in any part of the world with property or investments in any part of the world. Trusts may be discretionary or fixed interest in nature or indeed any other type of trust recognised under English common law. Income from the corpus of the trust may be accumulated for the entire length of the period of the trust and the Trustee Act now enables beneficiary trusts to have a fixed perpetuity period of up to 100 years as an alternative to the old common law period of lives in being plus 21 years.

VIRGIN ISLANDS SPECIAL TRUSTS ACT, 2003

Difficulties which arise from English trust law where trust assets comprise shares

The trust has always been regarded as one of the best "succession vehicles", but its use to cater for the succession of shares in companies was historically been impeded by a rule of English trust law (the "prudent man of business rule") which was designed to help preserve the value of trust investments. This rule traditionally made the trust an unattractive vehicle to hold assets which settlors intend trustees to retain. Another aspect of the rule effectively required trustees to monitor and intervene in the affairs of underlying companies (as the English decisions Re: Lucking's Will Trusts and Bartlett v Barclays Bank Trust Co Ltd made clear); this also created difficulties both from the settlor's standpoint and from that of the trustee.

The Virgin Islands Special Trusts Act enables special BVI trusts, which are known as VISTA trusts, to be created which circumvent these difficulties.

Disengaging trustee from management responsibility

The Act enables a shareholder to establish a trust of his company that disengages the trustee from management responsibility and permits the company and its business to be retained as long as the directors think fit. This is achieved in general terms by:

1. authorising the entire removal of the trustee's monitoring and intervention obligations (except to the extent that the settlor otherwise requires);
2. permitting the settlor to confer on the trustee a role more suited to a trustee's abilities, namely a duty to intervene to resolve specific problems;
3. allowing trust instruments to lay down rules for the appointment and removal of directors (so reducing the trustee's ability to intervene in management by appointing directors of its own choice);
4. giving both beneficiaries and directors the right to apply to the court if trustees fail to comply with the requirements for non-intervention or the requirements for director appointment and removal; and
5. prohibiting the sale of shares without directors' approval.

Features of VISTA

Some features of VISTA are as follows:

1. VISTA does not apply to BVI trusts generally: it only applies where there is a provision in the trust instrument directing the Act to apply.
2. Where VISTA applies, designated shares will be held on "trust to retain" and the trustee's duty to retain the shares as part of the trust fund will have precedence over any duty to preserve or enhance their value. The trustee is not therefore liable for the consequences of holding (rather than disposing of) the shares.
3. The Act specifies that, subject to any contrary provisions in the trust instrument, unless the trustee is acting on an "intervention call" (as defined in the Act), the trustee may not exercise its voting or other powers so as to interfere in the management or conduct of any business of the company; the management or conduct of the company's business will be left to those appropriate to deal with it, namely its directors, whose fiduciary duties to the company will remain intact, except to the extent that the trustee/shareholder will be refrained qua trustee from exercising some of the powers of a shareholder.
4. The statute also provides that the trust instrument may include "office of director rules" specifying how the trustee must exercise its voting powers in relation to appointment, removal and remuneration of directors, and the trustee will generally be required to follow these rules. Except in compliance with these rules, the trustee must generally take no steps to procure the appointment or removal of the company's directors.
5. The Act further provides that the trust instrument may specify that the trustee may intervene in the affairs of the company in specified circumstances, ie when required to do so by an "intervention call" by a beneficiary, an object of a discretionary power of appointment, a parent or guardian of either of them, the Attorney General (in relation to charitable trusts), the enforcer (in relation to purpose trusts) or other specified persons.
6. The Act specifies that (unless the trust instrument provides otherwise) the trustee is permitted to dispose of designated shares in the management or administration of the trust fund, but can only do so with the consent of the directors of the company (and that of such persons as are specified in the trust instrument).
7. VISTA contains provisions enabling beneficiaries, directors and others to apply to the court for enforcement of the terms of the Act and, on the application of a specified person, the court is empowered to authorise the trustees to sell designated shares where retaining them is no longer compatible with the wishes of the settlor.
8. The Act is confined to shares in BVI companies, but shares in non-BVI companies (and other assets) will invariably be held by a BVI company to which VISTA applies and those assets will then (effectively) be held subject to a VISTA trust.
9. The trustee of a VISTA trust must be a company which holds a licence to undertake trust business under the Banks and Trust Companies Act, 1990.

Typical uses of VISTA trusts

VISTA trusts are typically set up in the following circumstances:

1. When the settlor wishes to retain control, since matters will, when appropriate, generally be structured so that settlor–control is retained at the director (company) level.
2. When the settlor intends the shares which he wishes to settle on trust and/or the underlying assets of the company to be retained.
3. When trustee involvement in an underlying company's affairs is undesirable or inappropriate.
4. Where charitable or non-charitable purpose trusts are needed for securitisations and off-balance sheet transactions or to hold shares in private trust companies.
5. Where the underlying assets of the trust are to comprise of speculative investments or investments which involve a degree of risk which would otherwise be regarded as inappropriate for the trustees of a non-VISTA trust.

NON-CHARITABLE PURPOSE TRUSTS

In common with the other leading offshore jurisdictions the BVI has legislation enabling the creation of noncharitable purpose trusts ("purpose trusts") and a great deal of use is made of this legislation, particularly in the commercial context (in order to take advantage of one of the features of such a trust which is that there is no beneficial owner of the trust's assets). Examples of the commercial use of purpose trusts include taking transactions off balance sheet, isolating assets in financial deals, separating voting from economic control and providing ownership structures for private trust companies.

Conditions

Section 84A of the Trustee Act permits purpose trusts to be created if the following conditions are satisfied:

1. the trust's purposes must be specific, reasonable and possible;
2. the purposes must not be immoral, contrary to public policy or unlawful;
3. at least one trustee of the trust must fall within the statutory definition of a "designated person" (and this would normally involve the appointment of a licensed British Virgin Islands trust company as the sole trustee or one of the trustees of the trust);
4. the trust instrument must appoint a person as enforcer of the trust and must provide for the appointment of another enforcer on any occasion on which there is no enforcer (or no enforcer able and willing to act); and
5. the enforcer appointed by the trust instrument must either be a party to the trust instrument or give his consent in writing (addressed to the trustee who is a designated person) to act as enforcer of the trust.

Purpose can be for the benefit of particular persons

The requirement which appeared in the BVI's earlier purpose trust legislation to the effect that a purpose trust must not be for the benefit of "particular persons" or of "some aggregate of persons" was repealed in relation to trusts set up after February 2004, with the result that (as with Cayman Islands STAR trusts) the purpose of a trust which is set up under section 84A of the Trustee Act can be to benefit to one or more individuals or companies.

Perpetual purpose trusts permitted

BVI purpose trusts are exempt from the rule against perpetual trusts, with the result that a perpetual purpose trusts are capable of being set up. However, trust instruments have been given the option of specifying a terminating date or event, of providing for the disposition of trust assets on the trust's termination and of providing that (before the trust's termination as a purpose trust) the trustees will owe no duty to any persons entitled on such termination.

TRUSTEES WHO DEAL WITH LENDERS AND OTHER THIRD PARTIES

Background: difficulties which arise under English law

As a consequence of one of the basic features of English trust law (ie that a trust is not a separate legal entity), a trust cannot as such enter into liabilities, with the result that the primary remedy of anyone dealing with a trustee is against such trustee. This has traditionally made the trust an unattractive vehicle for commercial transactions, which seriously inhibits legitimate commercial dealings by trustees.

Because the primary remedy of the party to whom a liability is owed is against the trustee personally, the courts have only allowed that party recourse to the trust fund by way of subrogation to the trustee's right of reimbursement (so that the third party stands in the shoes of the trustee). However such a right of subrogation may be of no value in a variety of possible circumstances. It will be of no value, for example, if the trust is declared invalid. Nor will it be of any value if the trustees do not have the power to incur such liability (or if they do have the power but have not complied with their fiduciary duties or the internal procedures laid down by the trust). Similarly it may be of no value if the trustees have committed a previous breach of trust or if any of the trustees purporting to create the liability has not been validly appointed (or if the retirement of a previous trustee was ineffective). Additional difficulties of enforcement may arise if the trustee who incurred the liability has died, has retired or has been removed.

Banks and other third parties who deal with trustees have often relied on legal opinions on the trust's validity and the third parties' ability to enforce their rights against the trust fund, but such opinions have increasingly included so many assumptions that the comfort of banks and other third parties has been correspondingly diluted.

Moreover trustees, even if acting properly, have been at personal risk if the assets of the trust fund are insufficient to meet the liability. Whilst trustees have been able to limit their liability to the assets of the trust for the time being, they have only been able to do this if they have included an express provision in the contract to that effect: it has not been sufficient for them merely to state that they are acting "as trustees".

It will be apparent from the above that the existing position under English law has been most unsatisfactory. Not only has it placed serious difficulties in the way of trustees, but it has also, because of those difficulties, seriously inhibited legitimate commercial dealings by them.

Changes to the Trustee Act

With a view to making BVI trusts significantly more attractive in the commercial context, a number of new provisions which facilitate dealings between trustees and third parties are included in the Trustee Act. The provisions in question are based on proposals which were made by the English Trust Law Committee, but with a number of modifications, and make BVI trusts highly desirable in the commercial context.

Section 95 and 96 – recourse permitted where reasonable enquiry made

As a result of sections 95 and 96 of the Trustee Act, banks and other third parties dealing with trustees will be able to have recourse to the trust fund (and other protection) where, when entering into transactions, they have made reasonable enquiry that the trustee has the express power to enter into such transactions and has complied with any express requirements (such as requirements for consent) contained in the trust instrument.

Section 97 – exoneration where disclosure of fiduciary capacity

If (and only if) there is a provision in the trust instrument to the effect that section 97 of the Trustee Act applies, the trustee of a trust will not be personally liable under any contract which he enters into with another if he has disclosed (or the other party was aware) that he was contracting as trustee (unless the contract provides otherwise); furthermore a claim based (inter alia) on such a contract may be satisfied out of the trust fund.

Section 98 – limitation of liability

On the other hand, if the trust has not opted into the provisions of section 97 of the Trustee Act (and if the trust instrument does not provide otherwise), the new section 98 of the Trustee Act specifies that where a trustee enters into a contract, having disclosed his fiduciary capacity, he will be personally liable under the contract to the third party only to the extent of the value of the trust fund when the payment falls due (including the amount of any distributions made after the contract was entered into).

Section 101 – restricting future exercise of powers of investment and distribution

The new section 101 of the Act, which only applies where the trust "opts in" to this provision, specifies that, where a person who lends money to trustees requests the trustee to do so, the trustee may restrict his future powers of investment and distribution (and the powers of appointment and removal of trustees) in order to protect that person. The purpose of this new provision is to address the legitimate concerns of those lending money to trustees to the effect that their rights might be diluted as a result of the manner in which the trust is administered after the liability has been incurred.

BVI CONFLICT OF LAWS PROVISIONS RELATING TO TRUSTS

Since trusts governed by the laws of the BVI usually have significant legal links with the laws of one or more other jurisdictions, it is essential for the BVI to have adequate rules for resolving "choice of law" questions relating to trusts. Although the majority of the provisions of the English Recognition of Trusts Act 1987 (incorporating as it does most of the provisions of the Hague Trusts Convention) have been extended to the Territory, so ensuring a certain amount of certainty in relation to many of the relevant conflict of law rules relating to trusts, specified matters are expressly excluded from that Act, meaning that it is vital for these rules to be reinforced by additional statutory provisions.

The BVI's Trustee Act now contains detailed and well-thought conflict of laws rules relating to trusts which were drafted with the assistance of Professor Jonathan Harris of Birmingham University in the UK with the intention of setting up a regime which is likely to command a substantial degree of international recognition. These include comprehensive rules dealing with matters which are excluded from the Hague Trusts Convention which have therefore been drawn up with the objective of reflecting current common law trends. Whilst it cannot be guaranteed that these rules will necessarily correspond exactly with case law as it eventually develops in other common law jurisdictions, they are rules which are likely to command a certain degree of academic support. For that reason these rules should be seen by the courts of other jurisdictions as a legitimate and rational approach.

These conflict of laws rules apply to trusts generally, rather than merely to those which are governed by BVI law.

Forced hiership claims

The Trustee Act also contains robust, comprehensive and carefully crafted provisions protecting BVI trusts (and dispositions to their trustees) against "forced heirship" claims. These provisions, which have been modelled largely on the equivalent laws of the Cayman Islands, (but subject to a number of refinements and modifications to reflect the Territory's other laws), also prevent foreign judgments based on such forced heirship claims from being recognised or enforced in the Territory.

In relation to trusts, it is now believed that the BVI not only has in force an anti-forced heirship regime which is as robust as that of any other offshore trust jurisdiction, but probably also has some of the most refined and comprehensive conflict of laws rules in the world.

TRUSTEE AND RELATED SERVICES

According to statistics produced by the Financial Services Commission there are presently over 200 trust companies in the BVI, nearly 100 of which currently hold unrestricted trust licences allowing them to provide complete trustee services from within the BVI. Trust companies operating from within the Islands must conform to strict government regulations and maintain a minimum required capital and are supervised by the Financial Services Commission in accordance with internationally accepted supervision standards. There are also a substantial number of other well established and qualified service providers such as lawyers, accountants and investment advisors operating in the BVI which cater to the trust industry.

Private trust companies

The Financial Services (Exemptions) Regulations, 2007 (the "Regulations") enable unlicensed private trust companies ("PTCs") to be established in the BVI if the company is not remunerated for the provision of its trustee services, does not solicit business from members of the public and satisfies a number of other conditions which are not too onerous to comply with.

PTCs enjoy the benefit of limited liability and perpetual existence which are usually the features of corporate vehicles and have the following further advantages:

1. The principal advantage of a PTC is that, like the BVI's VISTA legislation, the establishment of a PTC generally enables settlors or settlors' family members or their appointees to exercise a significant degree of control over trustees' decisions by being directors of PTCs; this enables them to respond quickly to issues which arise and to make decisions on the basis of their own personal knowledge and changing circumstances.
2. The corporate structure is readily understood by non-professionals, especially those from non-trust jurisdictions and can be easily integrated into a family office or commercial structure.
3. Confidentiality is preserved and this is an issue which is of increasing importance to those from jurisdictions where concerns over financial privacy are driven by issues of personal safety.
4. A PTC enables the trustee's charges to be kept in check.
5. PTCs are often set up in circumstances in which the underlying assets of a trust are to comprise of speculative investments or investments which involve a degree of risk which might be regarded as unacceptable to a risk–averse professional trustee.

Why the BVI is increasingly selected as a jurisdiction to use to incorporate private trust companies

It is in the experience of Walkers' BVI Trust Group that the BVI is increasingly selected as one of the leading jurisdictions to use to incorporate PTCs for the following reasons:

1. Provided the company is not being remunerated for the provision of its trusteeship and the other conditions set out in the Regulations are met, no licence is needed and a BVI company can now be incorporated very quickly, especially following the introduction by the BVI Companies Registry of its "VIRRGIN" system which provides for the electronic filing of documents.
2. It is not necessary to have a local director or authorised representative (or indeed a director with relevant qualifications or experience).
3. There are no capitalisation requirements for exempt PTCs.
4. The company need not establish a physical presence in the BVI.
5. The costs of setting up and running the company are extremely competitive: the Government's fee will generally only be an additional $400.00 on incorporation and annually thereafter.
6. There is no need to list particular trusts in the company's memorandum.
7. Only the PTC's memorandum and articles of association, which are likely in most cases to be fairly standard documents revealing little more than the name of the company, will be filed publicly and (except in cases of abuse) there is no need to supply the regulatory authorities with copies of the trust documentation or to disclose the identity of the settlor or beneficiaries of the trust; the company's registered agent must instead be provided with copies of the relevant documents.
8. With over 800,000 companies on its register, the BVI is regarded as the world's leading offshore financial centre for international business companies.

CONCLUSION

The BVI is renown for its state of the art legislation relating to trusts and trustee services which has been developed in close partnership with the private sector to ensure that it keeps pace with the modern demands on trusts. It is perceived as innovative and flexible and continues to attract positive attention from the international financial community.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.