Adaptive and responsive

 

Innovative new variation of trust provisions^[5]

Background

The British Virgin Islands (BVI) Trustee Act (the Trustee Act)^[6] has been amended to include some cutting‑edge reforms in relation to the ability of the BVI Court (the Court) to vary BVI trusts, including the dispositive provisions of such a trust, without the consent of beneficiaries. The appropriate safeguards are, however, included: the new provision will only apply if the settlor or trustees ‘opt in’ to the new statutory provision (whether on establishing a new trust or on changing the governing law of an existing trust to BVI law).

New power to vary

The Trustee (Amendment) Act, 2021 (the 2021 Act) confers upon the Court an additional power to vary BVI trusts. It does this by inserting a new section, s.58B, into the Trustee Act, which applies to two types of trust.^[7] First, it applies to trusts created after the date upon which the section came into force,^[8] but only if the trust instrument expressly so provides. Secondly, it applies to trusts created before or after the section came into force that were previously governed by the law of a jurisdiction other than the BVI where an election is made to opt in to the provisions of the section. In circumstances in which s.58B applies to a trust, the court has the power to change the terms of the trust in question, but only if it determines that this would be ‘expedient in the circumstances then existing’.^[9] Further, s.58B(5) sets out the factors to which the court must have regard when making the relevant determination, including the expectations of the settlor and changes in circumstances. Section 58B(6) sets out who may make an application to the Court under s.58B, with the relevant persons including trustees, beneficiaries and those authorised to make the relevant application under the terms of the trust. Section 58B(7) makes it clear that the Court’s powers are subject to any exclusions or restrictions in the terms of the trust, and s.58B(8) makes it clear that no order may be made that affects interests that have already ‘vested’.

The new s.58B of the Trustee Act makes the establishment of BVI trusts attractive in circumstances in which beneficiaries are, say for tax reasons, unable themselves to consent to any changes to the trust’s terms. It permits the Court to approve variations that would be in (or that would not be detrimental to) their interests. It would also permit variations in circumstances in which beneficiaries with remote interests might otherwise block certain variations that would plainly be in the interests of those who would be regarded as the trust’s principal beneficiaries. Particularly since there is no equivalent to this statutory provision in the laws of any other jurisdiction, s.58B will also mean that changing the governing law of a foreign trust to that of the BVI to take advantage of the new statutory provision might be beneficial in certain circumstances.

Comprehensive new reserved power legislation^[10]

When international trusts are established, settlors will inevitably require a certain level of comfort by ensuring that specified critical powers are reserved by themselves or are granted to others such as protectors. The BVI was the first jurisdiction to introduce legislative provisions expressly permitting such reservation or grant of powers and these legislative provisions were contained in (the now substituted version of) s.86 of the Trustee Act, which was inserted into the original Act by the Trustee (Amendment) Act, 1993. Since then, numerous offshore jurisdictions have introduced legislation in relation to reserved powers and, inevitably, given the passage of time, such legislation has tended to be somewhat more comprehensive and a little clearer than that contained in the original s.86.

The new version of s.86 of the Trustee Act, which has been in effect since 9 July 2021 and replaces the earlier version of the section, was drawn up after analysing the laws of other offshore jurisdictions with similar provisions and reflects many of the features of their legislation, omitting those of their ingredients that were regarded as potentially problematic.

The new section is largely based on the equivalent laws of other offshore jurisdictions along with additional changes intended to enhance its operation. It makes it clear that the reservation by the settlor to himself or herself (or the grant to any other person) of specified powers will not invalidate the trust or cause the trust property to be part of the estate of the settlor on death. The section applies to trusts whenever created.

Enhanced firewall provisions^[11]

Background

When s.83A of the Trustee Act came into effect in March 2004, the BVI was regarded as having extremely robust ‘firewall’ provisions; however, since then, a few desirable changes had been made to some of the equivalent provisions in other offshore jurisdictions’ laws in this context. These firewall provisions are aimed at protecting BVI trusts and their trustees against forced-heirship and matrimonial claims.

Technical fine‑tuning

The technical amendments that have been made to s.83A, which were formulated with the assistance of Professor Jonathan Harris KC TEP,^[12] are aimed at improving the territory’s firewall offering, which is considered critical in the context of the establishment of international trusts.

It is anticipated that the BVI’s enhanced firewall provisions will be found to be especially attractive to those who have concerns that family members would otherwise be able to make claims against trusts (on a divorce or following death) that are based on ‘personal relationships’ or ‘heirship rights’; these reforms should further assist in insulating BVI trusts against such claims.

Amendments to s.83A

Some additional definitions have been inserted into s.83A(1) so that words and expressions that are referred to in subsequent amendments to the section are appropriately defined. The 2021 Act also replaces the definition of ‘personal relationship’ with a more up‑to‑date definition so that the expression now extends to those related via step‑relationships and children born by artificial fertilisation and surrogacy (and so that it also includes relationships to beneficiaries). Section 83A(12) has been replaced by a new subsection largely based on the earlier subsection, but makes it clear that all questions arising in regard to a trust are to be determined in accordance with the laws of the territory, and that the capacity, powers, rights and obligations of all relevant persons, and not merely those of the trustee, will be determined by the governing law of the trust. Further, s.83A(13) has been amended to make this provision more watertight so that it:

• extends to the protection of ‘claims and interests’;
• subjects the capacity of trustees, beneficiaries, protectors, enforcers and others to BVI law; and
• covers rights conferred by ‘personal relationships’ to beneficiaries as well as those to settlors.

Section 83A(16) has been amended so that it also covers relationships to beneficiaries as well as those to settlors and s.83A(19) has been revised so that it covers foreign declaratory orders purporting to vary BVI trusts.

Re‑introduction of the ‘old rule in Hastings‑Bass’

A new section, s.59A, has been added to the Trustee Act to give the Court jurisdiction to set aside the flawed exercise of a fiduciary power, thereby giving statutory effect to what is colloquially known as the ‘old rule in Hastings‑Bass’.

Such an amendment is in line with recent changes to the laws of some other international financial centres, but unlike the view that appears to have been taken elsewhere, it was considered inadvisable to make any changes to the Court’s jurisdiction under the doctrine of mistake on the basis that this was felt to be appropriate.

Background: the Pitt and Futter cases

The background to these reforms in the BVI and elsewhere is essentially that, as a result of the UK Supreme Court’s (the UK Court’s) decisions in Pitt v Holt and Futter v Futter,^[13] it was no longer possible for a trustee to make an application to the court (in a jurisdiction in which the relevant principles of English and Welsh law apply)^[14] to set aside the exercise by it of a power in circumstances in which the trustee had relied on professional advice that later proved to be incorrect. Prior to that, trustees found it helpful to be able to make an application to set aside the exercise by it of a discretionary power in circumstances in which they were relying on advice, such as tax advice, that later proved to be incorrect. Following the Pitt and Futter decisions, it had only been possible for such an application to succeed if the trustee had acted in breach of fiduciary duty or breach of trust and that would seldom be the case if professional advice had been taken and where care had been taken in the selection of the advisor; the trustee will not be in breach of trust or duty simply as a consequence of the professional advice subsequently proving to be incorrect.

New s.59A of the Trustee Act

Section 59A of the Trustee Act has therefore reinstated matters so that the position which was generally considered to apply before the UK Court decisions now, for the most part, applies once more in the BVI. There is now certainty, whereas even prior to the Pitt and Futter decisions, the previous ambit of the ‘old rule in Hastings-Bass’ was by no means certain.

The new section provides that, if it is satisfied that specified conditions are met, the Court may, in whole or in part, and unconditionally or on such terms and subject to such conditions as the Court thinks fit, set aside the exercise of a power. The relevant conditions are:

• that, in the exercise of the power, the person who holds the power did not take into account one or more considerations of fact, law or both that were relevant to its exercise (or took into account one or more considerations that were irrelevant to its exercise); and
• but for that person’s failure to take into account one or more such relevant considerations (or as a result of their having taken into account one or more such irrelevant considerations), the person who held the power would not have exercised it at all or would have exercised it at a different time or in a different manner.

If and to the extent that the Court sets aside the exercise of the power under s.59A, its exercise is treated as never having occurred. Section 59A(4) makes it clear that no allegation of breach of trust or duty on anyone’s part need be made or substantiated.

Section 59A(5) identifies who may make an application to set aside the exercise of the power. Such persons include the power holder, the trustee, a beneficiary (or a discretionary object of a trust or power conferred by the trust), the Attorney General (in the case of charitable trusts), the enforcer (in the case of non‑charitable purpose trusts) and anyone granted leave to apply by the court.

Section 59A(10) makes it clear that the new section does not limit the Court’s jurisdiction under doctrine of mistake. In Pitt and Futter, the UK Court made it clear that there must be a causative mistake of fact or law that is integral to the very nature of the transaction and that has grave ramifications, in order for the transaction to be set aside under that doctrine. The Court must evaluate the facts, looking for the most basic type of mistake, one in which it would be unconscionable for the Court not to intervene.

Certainty and valuable tool for trustees now provided

The new s.59A of the Trustee Act provides much‑needed certainty and is expected to be of considerable potential use for trustees, beneficiaries and professional advisors who now have the comfort of knowing that if a power is exercised that turns out to have adverse consequences an application may be made to the Court to set it aside. Such a remedy is generally considered preferable to beneficiaries having to rely upon claims for breach of trust or fiduciary duty against trustees or on claims of negligence against advisors: such claims can be time‑consuming and expensive.

Trustees’ and power holders’ errors are now capable of being rectified simply and cost‑effectively without the risk that the trustee relationship be forever damaged.

Extended exemption from filing requirements

The Trustee (Amendment) Act, 1993 exempted most BVI trust deeds and supplementary trust deeds from registration under the provisions of the Registration and Records Act, but it had never been entirely clear whether this exemption only applied when the relevant trust was governed by BVI law. This issue was of relevance because the deeds in question are occasionally retained in the BVI^[15] when the relevant trusts are not actually governed by BVI law (e.g., where there are BVI companies involved in the relevant structures). The exemption has now been expressly extended to foreign trusts (to the extent that these were not already covered).

New record‑keeping requirements

The Trustee (Amendment) Act, 2015 inserted a new s.2A into the Trustee Act requiring trustees to maintain underlying documentation in the BVI relating to trusts for at least five years. A number of concerns had been raised about the precise ambit of that section and so s.2A has now been repealed and a comprehensive new s.92A has taken its place, making it clear what records must be kept in the BVI and by whom. The sanction for non‑compliance is a fine of up to USD5,000 or a term of imprisonment of up to six months.

The relevant record‑keeping obligations are imposed on the trustees of trusts (other than implied, constructive and bare trusts), regardless of whether the trusts are governed by BVI law, if such trustees are BVI companies or are individuals that are resident in the BVI (or satisfy other criteria such as administering trusts in or from within the BVI).

Amendments to ‘dealings with third parties’ provisions

With the objective of making BVI trusts significantly more attractive in the commercial context, a new Part X was added to the Trustee Act by the Trustee (Amendment) Act, 2003, which came into force on 1 March 2004. The provisions in question are unique, but were based on proposals that had been made by the highly regarded English Trust Law Committee, albeit with a number of modifications, and can make BVI trusts beneficial in the commercial context. They do this by addressing problems arising from the limitations on the right of subrogation as a matter of English trust law (and pursuant to the laws of those other jurisdictions in which the relevant principles of English law apply).

As a result of ss.95 and 96 of the Trustee Act, which came into force in March 2004, banks and other third parties dealing with trustees have been 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. However, because of a drafting oversight, s.95 of the Trustee Act omitted to specify that its protection would not apply if the third party had acted dishonestly when entering into the relevant transaction. This error has now been corrected.

Additional flexibility has also now been provided in that trustees of trusts created before March 2004 are now capable of taking advantage of the BVI’s statutory provisions facilitating dealings with third parties if they elect to do so. In making such an election, they will naturally be constrained by their fiduciary duties and will not be able to exercise such a power if such exercise were detrimental to the interests of the trust’s beneficiaries.

Statutory provisions relating to the retirement of trustees

Part IV of the Trustee Act, the territory’s statutory regime relating to the replacement of trustees, was overhauled in 1993 to remove outdated requirements based on the England and Wales Trustee Act 1925 to the effect that there had to be two individuals or a trust corporation in office in order to give a valid discharge to an outgoing trustee. These reforms made it a lot easier for licensed BVI trustees to act as sole trustees of BVI trusts and, although by no means all, the vast majority of BVI trusts have as their trustees a licensed BVI trust company acting as their sole trustee.

An argument had however been raised to the effect that s.40 of the Trustee Act (which provides for the retirement of a trustee without a new appointment) only applied if more than one co‑trustee remained in office following the retirement of one of the trustees in circumstances in which it was not being replaced. Although it was thought this argument would probably not have succeeded, s.40 has been amended to make it absolutely clear that there need only be one continuing trustee in office following the co‑trustee’s retirement.

New Probate (Resealing) Act

Background

The BVI’s earlier Probates (Resealing) Act (the Original Resealing Act), enacted in the 1930s, permitted a simplified procedure to be followed in circumstances in which grants of probate or letters of administration had been issued by the courts of certain other jurisdictions, i.e., by enabling such grants to be resealed by the Court so that the resealed grant has the same effect as if it had been granted by the Court itself.

The simplified procedure itself is set out in the BVI’s Eastern Caribbean Supreme Court (Non‑Contentious Probate and Administration of Estates) Rules 2017 (the Rules), which were made pursuant to both s.7 of the Resealing Act and s.17 of the UK Supreme Court Order 1967. The Rules provide, among other things, that significantly fewer documents than would be needed for the purposes of a fresh application for a grant of representation need to be filed with the Court and that only one newspaper advertisement need be taken out, thereby expediting the process.

The Resealing Act only applied to grants issued by courts of probate in ‘His Majesty’s dominions’. The term ‘His Majesty’s dominions’ was defined by the Original Resealing Act to include ‘any British protectorate or protected state and any territory in respect of which a mandate or trusteeship is being exercised by His Majesty’s Government in the United Kingdom or the Government of any part of His Majesty’s dominions’. The word ‘dominions’ was additionally defined by s.2 of the BVI Interpretation Act (as amended by the Interpretation (Amendment) Act, 2014) to include ‘all territories that belong to the Crown or are in the ownership of the Crown including Canada, Australia and New Zealand’.^[16]

The comprehensive new Probates (Resealing) Act, 2021 (the New Resealing Act) has now been enacted. This reform has been made since the provisions of the latter were quite limited and did not enable grants issued from the many other English common law jurisdictions that were not regarded as ‘belonging to the Crown’ to be resealed in the BVI. For instance, it was not previously possible to reseal in the BVI grants that had been issued by the authorities in India, Singapore, South Africa or, unless the grant was issued prior to 1 July 1997, Hong Kong. Nor, until the new reforms took effect, was it possible to reseal Crown Dependencies or US grants in the BVI.

Review by STEP BVI’s Trust and Succession Law Review Committee

The Trust and Succession Law Review Committee of STEP BVI considered the prevailing legislation in a number of jurisdictions and, in particular, that in the UK and those common law jurisdictions with which the BVI competes for the provision of financial services.

After careful consideration, the view (which is reflected in the amended legislation) was taken that the ability to reseal grants should be generally extended to jurisdictions to which the UK Colonial Probates Act 1892 applies and that there should be no requirement in the new BVI statute (equivalent to that in the UK statute) to the effect that reciprocity be required.

Additionally, grants issued by the Crown Dependencies, India and all the states of the US are now capable of being resealed in the territory. Significantly, given the number of BVI companies that have shareholders resident in Hong Kong, Hong Kong grants will now be capable of being resealed in the BVI regardless of when they were issued.

In general, the New Resealing Act, which came into force on 9 July 2021, permits grants issued from the authorities of 67 jurisdictions listed in the New Resealing Act to be resealed in the BVI.^[17],[18]

Conclusion

Re‑resealing

Now that the New Resealing Act has come into force, shareholders of BVI companies can take comfort from the fact that a simplified procedure may well apply to the transfer of their shares to their heirs when they pass away.^[19]

Reforms to the BVI’s private trust company offering

The Financial Services (Exemptions) Regulations, 2007 (as amended) (the 2007 Regulations) enable unlicensed private trust companies (PTCs) to be established in the BVI if the company satisfies a number of conditions that do not tend to be 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:

• The principal advantage of a PTC is that, like trusts to which the BVI Virgin Islands Special Trusts Act, 2003 applies,^[20] 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 that arise and to make decisions on the basis of their own personal knowledge and changing circumstances.
• 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.
• Confidentiality is preserved and this is an issue of increasing importance to those from jurisdictions where concerns over financial privacy are driven by issues of personal safety.
• A PTC enables the trustee’s charges to be kept in check.
• PTCs are often set up in circumstances in which the underlying assets of a trust are to comprise speculative investments or investments that involve a degree of risk, which might be regarded as unacceptable to the risk‑averse professional trustee.

Conditions with which a BVI PTC had to comply before the recent reforms

The conditions with which a BVI PTC must comply were, until the recent amendments to the 2007 Regulations, essentially, as follows:

• The company must be a BVI company (whether or not it was first incorporated in the BVI, so that companies that have been ‘continued’ in the BVI now also qualify). This would naturally mean, among other things, that the general requirements of the corporate and regulatory laws of the BVI must be satisfied.
• The company’s memorandum must state that it is a PTC.
• The company must be a limited company and its name must include the designation ‘(PTC)’ before its permitted ending.
• The company’s registered agent must hold a Class I trust licence under the BVI Banks and Trust Companies Act, 1990.
• The company must not solicit trust business from members of the public.
• The company must carry on no business other than that of being the trustee, protector or administrator of trusts (or managing or administering trusts).^[21]
• All the company’s trust business must be ‘unremunerated trust business’ and/or ‘related trust business’. These two ‘heads’ of the exemption are explained below.

Unremunerated trust business

Although the term ‘unremunerated trust business’ was defined widely to prevent potential abuse, in most cases, a company would have been regarded as carrying on as such business where no remuneration was paid to the company (or anyone associated with it) in respect of the provision by the company of its trustee services. However, it has always been permissible for payments to the company to cover its legitimate expenses (such as the government’s incorporation and renewal fees, the fees of otherwise unconnected professional advisors and the fees of the registered agent) since this will never, in general, be regarded as remuneration for these purposes. Additionally, the 2007 Regulations provided that ‘professional directors’, who were not otherwise associated with the company, could be remunerated.

Related trust business

A company will, on the other hand, be regarded as carrying on ‘related trust business’ where all the beneficiaries of the trust/s of which it is trustee are related (in the manner specified in para.3 of the 2007 Regulations) to its settlor.^[22] However, the trust’s beneficiaries may also include the settlor/s of the trust/s and/or charities.

BVI PTCs tend to be used for the following reasons:

• Provided all the conditions specified above have been satisfied, no licence is needed and a BVI company can be incorporated very quickly.
• It is not necessary to have a local director or authorised representative (or indeed a director with relevant qualifications or experience).
• There are no capitalisation requirements for exempt PTCs.
• The company need not establish a physical presence in the BVI.
• The costs of setting up and running the company tend to be affordable.^[23]
• There is no need to list particular trusts in the company’s memorandum.
• 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 and the identity of its registered agent, 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.

Review of the 2007 Regulations

A review of the practical issues that had come to light since the 2007 Regulations originally came into force 15 years ago was undertaken with a view to identifying issues where improvements were desirable and, as a result, the 2007 Regulations have now been amended to address two issues of potential uncertainty.

Abolition of the requirement that a PTC can only carry on ‘trust business’

As indicated above,^[24] prior to recent amendments, the 2007 Regulations provided that a PTC was prohibited from carrying on any business that was not trust business. It was considered that this restriction created an element of uncertainty in relation to what a PTC could and could not do. Although many took the view that a PTC would not, as a consequence, be prohibited from undertaking activities that are ancillary to acting as trustee, this was not explicitly stated in the 2007 Regulations, giving rise to potential uncertainty. The restriction has therefore been repealed in its entirety by the Financial Services (Exemptions) (Amendment) Regulations, 2021 (the 2021 Regulations), so that it is now quite clear that a PTC can undertake ancillary activities such as opening bank accounts (on its own account), purchasing trust property and acting as enforcer of a non‑charitable purpose trust and as a council member of a civil law foundation. However, it should be stressed that it does not follow from the removal of this prohibition that a BVI PTC will be able to carry out other regulated activities for which other forms of licence are needed or, indeed, any activities that are otherwise illegal.

Directors’ remuneration

As indicated in the above summary of the conditions that a PTC had to satisfy in order to qualify for the unremunerated trust business head of the exemption, it was a requirement for eligibility under that head of the exemption (but not under the related trust business head of the exemption) that not only must the PTC itself receive no remuneration in return for the provision by it of trustee services but also that its directors must also be unremunerated, unless they were acting in a professional capacity. The term ‘professional’ was not defined, giving rise to further uncertainty, and possibly an element of circularity to the extent that the view was taken that the test of whether a director would be regarded as acting in a professional capacity was if a charge for the relevant services was made.

The 2021 Regulations amended the 2007 Regulations so that it is no longer a requirement that a director of an otherwise unremunerated PTC cannot receive remuneration as a condition for eligibility for the unremunerated trust business head of the exemption. It does not, however, follow from this reform that directors who are regarded as being ‘associated’ with the PTC (within the meaning of the 2007 Regulations), such as those with a legal or beneficial interest in its shares or employees, will be able to receive direct or indirect remuneration without jeopardising the PTC’s eligibility under the unremunerated trust business head of the exemption.

Other reforms to BVI law

In addition to the above reforms, two new statutes, the Property (Miscellaneous Provisions) (Amendment) Act, 2021 (the Miscellaneous Provisions Amendment Act) and the Administration of Small Estates (Amendment) Act, 2021 (the Small Estates Amendment Act) have been enacted. These two statutes modernise BVI law in the trusts and estates arena.

The Property Act

The Miscellaneous Provisions Amendment Act, consistently with the spirit of the BVI Status of Children Act, 2014, abolishes (to the extent that it actually still exists) an ancient English rule of public policy that created impediments where dispositions in favour of those born out of wedlock were intended. The archaic English rule was one to the effect that provisions in trust instruments and wills that expressly provide for relatives born out of wedlock are void as being contrary to public policy.

The Administration Act

The Small Estates Amendment Act implements a long overdue increase in the qualifying value for the Administration of Small Estates Act. The latter sets out in it a very simple procedure for applying for a grant of probate or letters of administration in the BVI where the value of the estate is low. The threshold set out in the statute, which had not been amended since it came into force in colonial times, has been increased from USD240 to USD25,000, but, in the case of applications for letters of administration rather than those for probate, the statute will only now be applicable if the deceased died domiciled in the BVI. This should provide an incentive for non‑BVI domiciliaries to prepare wills.

These reforms, taken together, demonstrate that the BVI is in the forefront of those jurisdictions that keep their laws under constant review to ensure that the needs of their clients are met.