The offshore trust is the quintessential “asset protection” device in the sense that it has been used successfully for centuries as a way of preserving and planning estates.
The efficacy of Cayman Islands trusts, and their increasing popularity, owes a great deal to the approach to resolving disputes affecting Cayman Islands trusts, as reflected in the legislative framework and the judicial approach.
The Caymanian approach is underpinned by the notion that it is sensible and appropriate to aim to achieve a compromise between, on the one hand, the rights of an individual to protect his assets from future and unknown creditors and, on the other, the rights of legitimate creditors to pursue their claims. This requires the legislators and the judiciary to achieve a fine balance between these competing imperatives. The objectives of international crime fighting and anti-money laundering initiatives also have to be taken into account.
The decisions of the Cayman Islands Grand Court and Court of Appeal demonstrate that a large part of the reason for the jurisdiction’s success has been the ability to achieve this balance.
Legislative equilibrium has been achieved in the interplay between the foreign element provisions of the Trusts Law on the one hand, and the creditor protection provisions in the fraudulent dispositions and bankruptcy legislation on the other. Section 90 of the Cayman Islands Trusts Law (2001 Revision) provides that all questions affecting a Cayman Islands trust are to be determined according to Cayman Islands law. Section 91 provides that foreign law in relation to the validity of the trust or rights, claims or interests arising by virtue of a personal relationship with the settlor, or by way of heirship rights, will not invalidate a Cayman law trust.
The Fraudulent Dispositions Law 1989 provides that every disposition of property made with an intent to defraud and at an undervalue shall be voidable, within 6 years of the disposition, at the instance of a creditor thereby prejudiced. Under the Bankruptcy Law (1997 Revision), if the settlor of a trust commits an act of bankruptcy within the Cayman Islands, he may be made bankrupt within 6 months and transactions at an undervalue can be set aside by the trustee in bankruptcy if they occurred within a prior period of 2 or 10 years.
There has been a consistent message from the Cayman courts that the judicial attitude is in tandem with the legislative intent. Two clear examples of this emerged in the early nineties. In Re Lemos, the court limited disclosure of documents to a beneficiary who was at the time asserting a challenge to the validity of the Cayman trust in Greece under the forced heirship rules. In Re Ojjeh, the court made a declaration approving the Trustee’s past decisions to restrict disclosure of commercially sensitive information concerning the large network of immensely valuable companies held in the trust. The court also authorised the Trustee to intervene in proceedings in France concerning the guardianship of a minor beneficiary.
With renewed interest in the use of offshore trusts, the Cayman Islands courts are likely to continue to grapple with difficult questions concerning the balance which the legislation seeks to achieve.