In part 2 of this article, Chris McKenzie of O’Neal Webster, who chaired the STEP committee the proposals of which led to the enactment of VISTA, answers some further questions which are from time to time raised in relation to the legislation.
Are VISTA trusts exempt from the rule against perpetuities?
No. There is no provision equivalent to that in Cayman’s STAR trust legislation exempting VISTA trusts from the rule against perpetuities and the rule therefore applies to VISTA trusts to the same extent that it ordinarily applies. Thus VISTA beneficiary trusts established after 14 May 2013 can have fixed perpetuity periods of up to 360 years. However VISTA trusts can of course be established, and indeed often are established, as charitable or non-charitable purpose trusts. VISTA purpose trusts are often for instance created to hold shares in PTCs, to keep assets off balance sheet and as a vehicle to hold management shares in mutual funds. Less commonly VISTA purpose trusts are set up to remove the rights of enforcement which certain beneficiaries would otherwise have and/or in circumstances in which settlors wish to set up perpetual trusts to benefit family members. If a VISTA trust is set up as a charitable or non-charitable purpose trust, rather than a beneficiary trust, it can be set up as a perpetual trust.
Would VISTA trusts be recognised (as trusts) by courts outside the BVI?
When the VISTA trust legislation was in the process of being drafted (in the late 1990s and early 2000s), extremely careful consideration was given to the question of whether the partial removal of the trustee’s duty of care under a VISTA trust might in some way be incompatible with the trust concept. This issue was treated even more seriously than it would be today because, at the time at which the suggested legislative provisions (which were eventually to be incorporated in the statute) were being formulated, a rather heated debate which became known as the ‘STAR wars’ was taking place in relation to the legitimacy of Cayman’s STAR trust regime and we were very anxious indeed to ensure, to the best of our abilities, that VISTA trusts would not be subject to corresponding controversy. Accordingly a great deal of attention was given to this issue. Against this backdrop, the clear conclusion was reached that any suggestion to the effect that the provisions of the draft legislation which had been drawn up might be somehow incompatible with the trust concept would be completely ill-founded. Although there is insufficient space here to set out the main reasons for this conclusion in any detail, these are summarised below.[1]
In summary, we are confident that there is no rational basis for withholding recognition of VISTA trusts for the reasons listed below.
(1) In terms of the history of the trust, today’s preoccupation with the trustee’s duty of care is of relatively recent origin and essentially evolved as recently as the twentieth century. The trustees of early trusts were ‘mere stakeholders, little more than nominees, with no serious powers or responsibility of management’[2]. VISTA trusts arguably therefore have much more in common with early trusts than do non-VISTA trusts.
(2) The English Court of Appeal, in the seminal case of Armitage v Nurse, has confirmed that the duty of care is not a core requirement for a trust. In that case Millett LJ (as he then was) said: ‘I accept that there is an irreducible core of obligations owed by the trustees to the beneficiaries and enforceable by them which is fundamental to the concept of a trust. If the beneficiaries have no rights enforceable against the trustees there are no trusts. But I do not accept the further submission that these core obligations include the duties of skill and care, prudence and diligence. The duty of the trustee to perform the trusts honestly and in good faith for the benefit of the beneficiaries is the minimum necessary to give substance to the trusts, but in my opinion it is sufficient.’ [Emphasis added.]
(3) A distinction clearly needs to be made between, on the one hand, an exclusion of duty arising from a clause in the trust deed and, on the other, an exclusion of duty which arises from statute. In the case of an exclusion arising from a clause in a trust deed, there is an argument[3] that if trustees actually have a power, by virtue of their shareholders’ rights, to intervene in the affairs of a company they may be in breach of the core trust duty of good faith if they fail to take action to prevent loss, especially loss arising from known or impending dishonest or reckless conduct by directors. In the case of exclusion arising from statute this argument falls away, because the premise on which it is based (that the trustees are entitled to intervene by virtue of their shareholders rights) has been removed by statute.
(4) The trustee’s duty of care will of course invariably operate with full vigour in relation to rights attaching to the shares other than voting rights. Thus their duties in relation to dividends when received, and distributions on a winding up, their duties not to divest themselves of title to the trust assets (i.e. the shares) and not to retain any benefit from the holding of the shares (other than that expressly permitted by the trust instrument) remain intact. There is, furthermore, nothing in VISTA that affects in any way the duties of the directors of the company as a matter of company law. If the directors are dishonest, they will naturally also remain subject to the sanctions of criminal law. The trustees will similarly be liable for any dishonesty on their part.
(5) Importantly, furthermore, the trustee of a VISTA trust will continue to have all its dispositive (and ancillary) powers and duties under the trust.
(6) Of course even under non-VISTA law trustees are often in practice unable to intervene in the business of a company in which they have invested e.g. because the trust shares are a small minority interest in a quoted company, or are ‘non’-voting. The non-intervention provisions of VISTA could be said, therefore, to do no more than extend (with certain qualifications) an existing state of affairs.
(7) VISTA plainly does not give rise to any question of sham because a VISTA trust is precisely what it purports to be. Nor is a VISTA trust in any sense illusory – as, for example, a US ‘living will’ trust may be regarded in English terms because, on a proper analysis, the whole beneficial interest is retained by the settlor during his or her lifetime. Under VISTA the interests of the beneficiaries other than the settlor are real and immediate, and, in the case of a discretionary trust, the trustee’s fiduciary powers of disposition are unaffected.
(8) Moreover any argument that a VISTA trust is a nomineeship disregards the distinction between, on the one hand, the assets of the company and, on the other hand, the shares in the company. While it is true that the directors have control of the company’s assets (subject to the constraints imposed by the trust instrument, by company law and by the company’s memorandum and articles), the shares are at all times (apart from the voting rights) held equitably for all the beneficiaries. If the trustee misapplied the shares (e.g. depositing the certificates as security for a loan to itself) it would be accountable to the beneficiaries of the trust for any resulting loss (and, in contradistinction to a nomineeship, the trust would be enforceable by all its beneficiaries).
(9) It is abundantly clear that the VISTA trust system helps fill a serious legal void. Today’s world has urgently needed a satisfactory succession mechanism for small companies – one that (a) offers a smooth and inexpensive transition on a death and (b) addresses the need for effective management of the company as well as the expectations of relatives. And a mechanism cannot be satisfactory if, of its nature, it involves inhibiting the entrepreneurial spirit that created the company’s wealth in the first place. There are accordingly extremely good reasons of policy why VISTA trusts should be upheld.
(10) Doctrinal arguments against VISTA based on the novelty of its provisions would be impossible to maintain. Trust law is notable in having little in the way of an agreed theoretical basis. As Professor Geraint Thomas points out[4] ‘a trust is a human construct’ and there is ‘no Platonic form of ‘trust’’ which has specified characteristics and no other characteristics. The concept has developed through case law and legislation to meet society’s changing needs. There is nothing exceptional about a new approach which is tailored to meet the requirements of particular social or other circumstances or to cater for particular types of assets (in the case of VISTA, shares in companies). In England, for example, both the Settled Land Act 1925 and the Trusts of Land and Appointment of Trustees Act 1996 are cases in point. In the United States, by way of further example, the generally benevolent approach of the courts to another special category of trusts, namely those that reserve substantial powers to the settlor, is explained in part, it is said, by appreciation of the fact that they satisfy economic and social needs.
(11) The courts of jurisdictions (such as England Wales, Hong Kong and Switzerland) which have adopted the relevant provisions of the (Hague) Convention on the Law Applicable Trusts and Their Recognition will, it is considered, be bound to recognise VISTA trusts as a result of the provisions of the Convention.
(12) Significant comparisons can be made between VISTA and the 1925 Settled Land Act regime in England and Wales (albeit that the latter was tailored to a different social structure and is now being phased out). Under the settled land regime the rȏle of the trustee of the settlement was highly circumscribed and the management of the land was vested primarily in the tenant for life, who was capable of being exonerated totally from any obligations in relation to the condition of the land.
There is therefore no good reason for judges in other trust jurisdictions to have any difficulty with the concept of a VISTA trust.
Of course recognition in other jurisdictions should seldom, in any event, be an issue since at least one trustee of a VISTA trust will invariably be a BVI company, the trust will be governed by BVI law and the only assets which can be held (directly) subject to the provisions of VISTA will be shares in BVI companies, the situs of which will generally be in the BVI.[5]
For further information or any queries, please contact Christopher McKenzie (cmckenzie@onealwebster.com).
[1]These reasons are set out in greater detail in the article entitled VISTA Trusts which John Glasson and I wrote which was published in the STEP TQR (in vol 4, issue 2 2006 at pages 10-19) and which also appears in the third edition of The International Trust (ed.David Hayton).
[2] Professor John Langbein of Yale University.
[3] Albeit one to which there are powerful counter-arguments since the argument takes no account of the distinction, which has long been recognised by the courts, between preserving assets and preserving their value.
[4] In his chapter on Purpose Trusts in International Trust Laws (Jordans, loose leaf) at paragraph B4. 26/37.
[5] As a result of section 245 of the BVI International Business Companies Act, 2004.