Offshore Trust and Companies Administration July 2011

Suggested answers and examiner’s comments Important notice When reading these suggested answers, please note that the answers are intended as an indication of what is required rather than a definitive “right” answer. In many cases, there are several possible answers/approaches to a question. Please be aware also that the length of the suggested answers given here may be somewhat exaggerated compared with what might be achieved in the reality of an unseen, time-constrained examination. Examiner’s general comments 

A highly commendable pass rate of 85% was achieved for this examination.



Many candidates achieved good marks although the average mark obtained was slightly lower compared to the previous session.

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Page 1 of 16

Section A Answer all parts of Question 1. Select only one of the options A, B, C or D for each part. 1.

(i)

(ii)

A protector in trust administration is required to act on behalf of: A.

The settlor.

B.

The beneficiaries.

C.

The settlor and the beneficiaries.

D.

All the beneficiaries and maybe the trustee.

A director of a private limited company has acted in a way that conflicts with the interest of the company. The director has failed to uphold his:

(iii)

(iv)

(v)

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A.

Role of managing the company.

B.

Common law duties.

C.

Fiduciary duties.

D.

Duty of care to the company.

The concept of a trust arose from the English system of: A.

Common law.

B.

Equity.

C.

Judicial precedent.

D.

Parliamentary legislation.

A Mareva Injunction is: A.

Used to stop someone carrying out a financial transaction.

B.

Used to stop someone destroying property or documents.

C.

A remedy to freeze a person’s assets.

D.

An application to Court to avoid the possibility of a possible breach of trust.

A limited life company (‘LLC’) continues to exist: A.

As long as a named person is alive.

B.

Until a specified asset is purchased by the company.

C.

For a set period of time.

D.

Until a specified asset is unmarketable. Page 2 of 16

(vi)

What is the most important instance of agency by operation of law? By: A.

Necessity.

B.

Estoppel.

C.

The indoor management rule.

D.

Ratification.

(vii) John has agreed to look after some personal property, which will be bequeathed to him under his mother’s will. However, this arrangement was made orally and is only known to John and his mother. The agreement is for John to look after the property for his daughter. This type of trust is known as a: A.

Protective trust.

B.

Bare trust.

C.

Simple trust.

D.

Secret trust.

(viii) How can the life tenant of an interest in possession trust obtain his distributions if all the funds are held in the underlying company of the trust?

(ix)

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A.

From the share premium account of the company.

B.

From a repayment of redeemable preference shares.

C.

By way of a dividend declared by the company.

D.

By an interest-free loan from the company.

Which of the following statements is correct as regards ultra vires in most offshore jurisdictions? If set aside: A.

The authority must be included in the company’s memorandum and articles of association.

B.

The authority must be approved by the shareholders of the company.

C.

There must be a resolution prepared by the company.

D.

Persons who deal with the company in good faith may rely on the power of directors to bind the company.

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(x)

From the standpoint of a trustee, which of the following could be both an advantage and disadvantage of a discretionary trust? A.

The settlor can appoint a protector.

B.

The trustees can vary the beneficiaries’ share of the assets.

C.

The beneficiaries have no saleable rights.

D.

The trust is usually non-exhaustive. (Total: 10 marks)

Suggested answers (i)

D

All the beneficiaries and maybe the trustee. Note to candidates: Although „D‟ is the most accurate answer in the list, option „B‟ is also a correct response and proved to be so for the majority of candidates. As a result, and in the interest of fairness, it was decided to award marks for either answer.

(ii)

C

Fiduciary duties.

(iii)

B

Equity

(iv)

C

A remedy to freeze a person‟s assets.

(v)

A

As long as a named person is alive.

(vi)

A

Necessity.

(vii) D

Secret trust.

(viii) C

By way of a dividend declared by the company.

(ix)

D

Persons who deal with the company in good faith may rely on the power of directors to bind the company.

(x)

A

The settlor can appoint a protector.

Examiner’s comments Section A was generally well answered. However, no candidate scored full marks.

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Section B Answer all ten questions.

2.

Explain how dummy settlors are used in trust administration. (4 marks) Suggested answer During the 1970s and 1980s, it was often the practice to attempt to disguise the identity of the real settlor. This dummy settlor was usually a friend, relative or maybe a lawyer or accountant of the real settlor. It was the dummy settlor‟s name and details that would appear on the trust deed as the “original settlor” who established the trust. The only requirement was that the dummy settlor provided the initial trust fund (e.g. GBP 100.00), thus perfecting the requirement of certainty of subject matter. The trust deed would state that other assets would be transferred to the trustee at a later date. In this way, the true settlor could add whatever assets he chose, without disclosing his identity. It could be possible for the true settlor to be appointed as the protector in these instances that a dummy settlor was used. The illusion of the dummy settlor also allowed the real settlor to be recommended in a Letter of Wishes from the dummy settlor to whom the trustee could seek advice about the management and administration of the trust assets. Examiner’s comments This question was generally well answered, with many candidates obtaining full marks.

3.

Identify four rights of an ordinary shareholder of a private company. (4 marks) Suggested answer Any four of the following:         

To receive the annual accounts of the company. To attend and vote at shareholders meetings. To speak at shareholders meetings. To appoint and remove directors. To sell or transfer their shares. To receive a dividend if one is being paid. To receive surplus profits on the winding up of a company. To be involved in the winding up of a company. To appoint a liquidator for the company.

Examiner’s comments This question was generally very well answered, with most candidates obtaining full marks. © ICSA, 2011

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4.

Describe a director’s duty of care to a company. (4 marks) Suggested answer      

Directors have a common-law duty of care to show reasonable competence. The standard of care of a director was established in Re City Equitable Fire Insurance Company Limited (1925). A director is expected to show a degree of skill which may reasonably be expected from a person of his knowledge and experience. The standard of care set is personal to the person (director appointed). A director is required to attend board meetings when is able to do so. A NED is entitled to leave the routine conduct of the business in the hands of the board of directors.

Examiner’s comments This question was generally poorly answered with some candidates unable to describe any director‟s duty of care, and listed statutory and fiduciary duties instead.

5.

Describe the difficulties that may arise in determining the proper law of a trust. Explain the method most offshore jurisdictions follow in order to avoid the necessity of going to Court to determine the proper law of a trust. (4 marks) Suggested answer Difficulties may arise if there are (say) two trustees that reside in different jurisdictions and there is no mention of the proper law in the trust deed – which trust law is followed? Difficulties may also arise (if again) there is no mention of the proper law in the trust deed and (say) the settlor is resident in the UK, the trustees are resident in Jersey and the settlor requests that some trust assets are transferred to a bank account in the Isle of Man – again which trust law is followed? In both of the aforementioned examples, it may be difficult to determine the proper law of the trust, and this is an aspect of Private International Law known as Conflict of Laws that requires legal advice. To avoid the necessity of having to go through the exercise of determining which proper law is the closest connection with the trust, most jurisdictions now allow the settlor to choose the proper law of the trust, and for this to be expressly stated in the trust deed. Examiner’s comments Although many candidates passed this question, less than a third of candidates obtained full marks. Some candidates stated that the trustee would go to Court to determine the proper law of the trust. This clearly was not the correct answer bearing in mind the wording of the question.

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6.

Ignoring taxation considerations, give eight characteristics of an offshore financial centre. (4 marks) Suggested answer Any eight of the following: 

Jurisdictions that have financial institutions engaged primarily in business with nonresidents.



Financial systems with external assets and liabilities out of proportion to domestic financial intermediation designed to finance domestic economies.



Centres which provide some or all of the following opportunities: (i) (ii)

Moderate or light financial regulation. Banking secrecy and anonymity.



Normally well regulated by a Financial Services Commission (e.g. The Jersey Financial Services Commission).



The local regulator is normally more transparent and is required to introduce anti-money laundering laws and/or codes of practices.



Normally has substantial banking, accounting and legal expertise.



Normally has a stable, economic and political climate.



Normally has flexible control and supervision.



Normally has a well-trained and competent staff working in the financial industry.



Normally attracts high-level financial experts.



Normally has confidentiality of ownership of companies and minimal reporting requirements.



Normally have no exchange control restrictions.



Normally has a lack of local government intervention.

Examiner’s comments This question was well answered, with most candidates scoring good marks.

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7.

Discuss the ‘objects’ of a trust. (4 marks) Suggested answer The objects of a trust are the beneficiaries of the trust who may receive benefit from the assets of the trust. There must be certainty as to who will benefit from the trust. The objects must be ascertainable and certain (Re Endacott 1959). If there are no objects and/or there is uncertainty, the trust may fail and the assets may remain for the benefit of the settlor. If the objects will never exist, the trust will be void. However, if there are no objects when the trust is established or the identity of the beneficiaries is not certain (as in the case of a class of beneficiaries) but they will be known by the trustee in due course, the trust may be voidable. The objects can include the settlor(s), his or her spouse, the children of the settlor(s), a class of beneficiaries (e.g. daughters), named individuals, a corporate body, a charitable purpose, another trust, the trustees, the protector etc. Examiner’s comments This question was generally well answered, with most candidates obtaining full marks. However, some candidates did not realise that the objects of the trust are the beneficiaries of the trust.

8.

Describe the circumstances in which a client may acquire a new domicile of choice. (4 marks) Suggested answer The individual must be physically present in the jurisdiction he wishes to choose as his new chosen domicile. The individual must intend to reside there permanently or for an unlimited time. Physical presence or intention to change his chosen domicile alone will not suffice. If a client is changing his domicile of choice from country A to country B permanently, he must:         

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Retain accommodation in his country B. Relinquish or dispose of any property in country A. Arrange a foreign will. Make arrangements to have a grave plot in country B. Ensure he retains or arranges business interests abroad. Dispose of business interests in country A. Ensure that his children are educated in country B and not in country A. Arrange membership of clubs in country B. Dispose of membership of clubs in country A.

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Examiner’s comments This question was generally well answered, with most candidates obtaining good marks. However, some candidates were unable to provide sufficient examples of how to acquire a new domicile. 9.

Explain how some offshore jurisdictions protect assets held in trust against forced heirship claims. (4 marks) Suggested answer Many offshore centres for example Bermuda, Cayman Islands and Guernsey, have introduced legislation to give protection to assets held within trusts established in the jurisdiction against forced heirship claims. The protection available would not, however, extend automatically to assets held in a jurisdiction where the forced heirship rules would be applied. In these jurisdictions, the laws applicable in the jurisdiction where the assets are situated (known as the lex situs) would be applied. Lifetime transfers of assets will not normally avoid forced heirship claims in that any gifts made may be clawed back to meet claims of the heirs. Legislation will normally provide that any trust valid in accordance with local trust laws will provide protection for assets deposited with the trust, and no transfers into the trust will be set aside. Examiner’s comments A small number of candidates obtained full marks for this question. Some candidates focused their answers on how forced heirship could affect the trust and its assets, and were unable to provide explanations on how some jurisdictions protect assets against any such claims.

10.

Describe two difficulties which may arise if directors accept instructions from beneficial owners on how to manage the company. State two actions or protections the directors could take to minimise these difficulties. (4 marks) Suggested answer Any two of the following difficulties: The directors:    

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could be held personally liable for their actions. are permitted to act only in accordance with the Company Law of the jurisdiction of the company. are permitted to act only in accordance with the Articles of Association of the company. are permitted to act only in the general interest of the company.

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Any two of the following actions or protections: The directors must:   

make it clear that decisions are made by the directors and not by the beneficial owner. ensure that these decisions are properly recorded by the completion of minutes. ensure that it is the directors alone who have exercised (and are exercising) the management and control of the company.

Examiner’s comments This question was generally well answered, with most candidates obtaining good marks. However, some candidates were unable to provide two difficulties and two types of protection.

11.

Describe and discuss the equitable obligations of a trustee. (4 marks) Suggested answer Trustees are under an equitable obligation, often described as a fiduciary duty, to deal with the trust property for the persons, purposes or objects defined by the settlor or testator. If they were not under any duty to do anything whatever, there would not be a trust. This equitable obligation imposes on the trustees potential personal liabilities to the beneficiaries, liabilities which can be both penal and extremely stringent. No trust can exist without one or more beneficiaries (or cestuis que trust) for whose benefit the property is held. The trustees may also be some or all of the beneficiaries (most co-owners of land hold the land in question as trustees on trust for themselves), but a sole trustee cannot also be the sole beneficiary. In such an event, there would simply be no trust. The precise nature of the interest of a beneficiary in the trust property has always been difficult to define. It is a right in equity which will ensure the trustees meet their obligation under the trust. The legal title to trust property rests with the trustees. The beneficiaries are said to have an equitable interest. Examiner’s comments This question was generally poorly answered. Some candidates were unable either to discuss sufficiently the equitable obligation of a trustee or to provide any answer at all.

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Section C Answer two questions only. 12.

There have been instances in the past of attacks on the integrity of a trust over its administration, alleging that it is a ‘sham’. (a)

Identify the principles that should be adopted by a trustee to avoid such potential future attacks. (13 marks)

Suggested answer To avoid the possibility of a trust being considered a sham, it is important that the following principles should be adopted on the formation of the trust and implemented during the administration: 

The settlor must relinquish powers of management and control over the assets completely.



Ensure that the settlor is aware exactly what a trust is and the part he/she can play in the administration of the trust assets.



The settlor must refrain from any actions that may be considered as instruction or exercising controls over the trustees or the trust assets only to make requests.



In particular, the letter of wishes or any other correspondence from the settlor should be written in such a way as not to run the risk of being construed as a direction to the trustees.



The trustees must demonstrate by their actions that they accept, and are bound by, the terms of the trust deed.



It is central to the existence of a trust that trustees can show at all times that they have guided themselves by adherence to the trust deed and trust law, and acted independently of the settlor.



The trustees must take full control of the trust assets and must be seen to be exercising their discretionary powers independent of the settlor.



Written records of all decisions made by the trustee should be made and placed in the records of the trust. It is important that the decisions are recorded, but not the reasons for arriving at the decisions.



It is vital that the decision-making process of trustees should be robust enough to withstand any challenge.



The decisions of the trustee must be commercially reasonable and prudent, and any distributions must be made after due consideration of the relevant facts and circumstances at the time.



A protector if appointed should at most be given limited and clearly defined powers, particularly if the protector is the settlor or someone who is his „alter ego‟, i.e. effectively does as the settlor instructs.

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

Settlors should be discouraged from referring to the trust as „my trust‟.

(b)

Discuss how a settlor may retain some control and involvement over the management of the trust to avoid possible claims of a ‘sham’ trust. (12 marks)

Suggested answer (i)

Appointment as co-trustee Although there is no restriction on a settlor acting as a co-trustee, it is not advisable because co-trustees have equal powers and responsibilities in relation to the control of the trust which could have serious taxation implications. Furthermore, any action for dispute or claim against the trust or trust property could be brought in the country of residence of the settlor co-trustee. It is preferable to ensure that all trustees are resident in an offshore jurisdiction, and that the proper law applicable to the trust is that of the jurisdiction.

(ii)

Appointed as trust protector Once again, there is no restriction on a settlor acting in the capacity of a trust protector providing the protector‟s powers do not extend to any which may be considered as providing the power of management and control of the trust or trust property. Any power given to the protector to remove the trustee and appoint new trustees would be particularly problematic because it would be seen to provide the protector with ultimate control of the trust and its management.

(iii)

Appointment as investment advisor A settlor will often wish to maintain some control over the investment management of the trust. The extent of the powers of management must not extend to control over the trust assets. The settlor can act as an advisor, but the ultimate decision and control must be exercised by the trustee. The trustee may agree the investment objectives and strategy to be adopted with the settlor, and these may be updated from time to time, but day-to-day management and control must remain with the trustee.

(iv)

Completing a letter of wishes In a letter of wishes, there will be the need to ensure that it always states that the trustees are not obliged to follow the settlor‟s wishes. The letter is provided for the guidance of the trustees, and as such can be useful to trustees. The letter can provide guidance to the trustees on various subjects and often sets out the settlor‟s wishes with regard to the distribution of the trust fund. It may also provide an opportunity for the settlor to outline the investment objectives and strategy for the trust assets. It is important that the trustees do not simply follow the wishes set out in the letter of wishes and treats them as instructions from the settlor. Power and control of the trust and the trust property must be, and seen to be, exercised by the trustee.

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Examiner’s comments This was the most popular question in Section C, attempted by most candidates. Many candidates were able to identify the principles that should be adopted by trustees to avoid potential attacks of „sham trusts‟ in part (a). However, some candidates focused their attention on the Rahman case in great detail which was not required. Part (b) was generally well answered but some candidates were unable to identify how settlors could retain some control over the management of trusts. 13.

(a)

Describe the main features and potential advantages of a protected cell company. (12 marks)

Suggested answer Guernsey was one of the first offshore centres to introduce protected cell companies (PCCs). These companies have protected assets held for one or more cells within the company‟s structure. Each cell has its own separate individual members with its own shares and dividend payments. The structure is designed to segregate the assets held in the separate cells in order to reduce risk. Company creditors who have a claim against one cell are not able to attach assets held in other cells. These companies are becoming particularly popular in the collective investment and captive insurance industries. Taking for example Guernsey PCC legislation (1997), we find as follows:        

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Existing companies (and not just newly-formed companies) may be divided into cells. A cell may have its own shares, share capital, and dividend. A PCC must include in its name, the expression „protected cell‟ or „PCC‟ or any cognate expression approved in writing by the Guernsey Financial Services Commission. Each cell must have its own distinct name or designation. Only investment schemes, insurers or other prescribed classes or descriptions may be PCCs. PCCs must inform those transacting with them of their status; and (where relevant) the cell on whose behalf the transaction is taking place. Failure to do so may render the directors personally liable. Cellular assets may, with Court consent, be transferred to other entities, provided that the creditors of the particular cell are not thereby prejudiced.

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(b)

An offshore trustee services provider should act in the best interest of trust beneficiaries. Explain in detail how this should be achieved. (13 marks)

Suggested answer Offshore trustee services providers (TSP) should:                

Conduct their business with integrity. Have a high level of expertise and adequate resources, including trained staff, to ensure that they are able to carry out their responsibilities in an efficient manner. Provide and offer continuity. Follow a code of practice issued by their local Financial Services Commission. Be licensed and regulated by their local Financial Services Commission and thus providing evidence of having adequate resources (financial, premises, systems and staffing) for the type of business undertaken. Know their clients and their clients‟ business, and comply with local laws and guidelines issued from time to time, on the prevention of money laundering. Invest, distribute or otherwise manage each trust‟s assets in accordance with the trust deed and applicable trust law. Manage the investment and custody of trust assets professionally and responsibly. Maintain confidentiality except where disclosure of information is required or permitted by an applicable law or authorised by the person(s) to whom the duty of confidentiality is owed. Provide promptly to clients information to which they are entitled about a trust. Ensure that the funds of different trusts are kept separately from each other and from the TSP‟s own funds. Agree a clear fee structure in advance of taking an appointment and charge fees in accordance with that, and in a fair and transparent manner. Avoid being involved in possible claims of sham trusts. Understand and discharge fiduciary and other duties. Avoid or deal properly with any conflict of interest between trusts, or between the TSP and the beneficiaries of the trust. Record, investigate and, as appropriate, act on any complaints received.

Examiner’s comments This was the least popular question attempted by candidates in Section C. However, it was the most successfully answered question in Section C. In part (a), most candidates were able to describe and include the potential advantages of a PCC. Part (b) was generally very well answered. Many candidates were able to identify how a trustee should act in the best interest of the beneficiaries.

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14.

You work in the compliance department of an offshore regulated services provider. Before your firm accepts the appointment as a new trustee and administrator of second-hand trust and company business, you need to obtain certain information and documentation to comply with your firm’s statutory and compliance procedures. Required Identify the information and documentation you need to obtain from: 

The existing service provider.



The existing trusts and companies. (25 marks)

Suggested answer Information required: 

Full name and registered office address of the existing services provider („the Provider‟).



Name and address of the Regulator of the Provider.



Full names of the directors and officers of the Provider.



Names and number of trusts and companies that are to be transferred to the new provider.



Reasons why the transfer of the trusts and companies are desired.



Details of the services to be provided by the new provider e.g. trustee, directors, officers, nominee shareholders, resident agents etc.



Names and address of any bankers appointed for the trusts and companies.



Names and addresses of any other third party service providers for the trusts and companies e.g. investment managers, tax advisors etc.



Full details of the status and value of the assets held by each trust and company.



Full details relating to the beneficiaries of the trusts.



Full details of any co-trustees and/or protectors of the trust.

Documentation from the Provider: 

Copy of their Memorandum and Articles of Association.



Copy of their Certificate of Incorporation and any Certificate of Name Change.



Copy of latest audited accounts.



Copy of Licence from the local Regulator (if unable to obtain the information on-line).



Copy of authorised signatory List.



References on the Provider.

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

References on the directors of the Provider.

Documentation relating to the trusts and companies that may be transferred: 

Copies of Memorandum and Articles of Associations of companies.



Copies of Certificates of Incorporation and any Certificate of Names Change.



Copies of Trust Deeds and other trust documentation for the trusts.



Latest set of accounts for all companies and trusts.



Copies of trust and company minutes.



Copies of all corporate registers of those companies.



Latest copies of Annual Returns (if applicable) for all companies.



Copies of documentation confirming ownership of assets, for example:   

Bank statements Investment portfolios Title Deeds

Examiner’s comments This question was attempted by most candidates. However, it was generally poorly answered. Many candidates were unable to provide the information and documentation required from the existing services provider, which was the focus of the question. No marks were awarded to some candidates who suggested that due diligence on the potential clients should be obtained from the existing services provider. This should be obtained from the clients by the new services provider.

The scenarios included here, except where expressly identified, are entirely fictional. Any resemblance of the information in the scenarios to real persons or organisations, actual or perceived, is purely coincidental.

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