Improper‑Purpose Disposals of Jersey Trust Assets Are Void: BFP Without Notice Tightened; Insolvent-Trust Balancing Reaffirmed; “Retirement to Facilitate” Breach Engages Trustee Liability

Introduction

In FS Capital Ltd & Ors v Adams & Ors [2025] EWCA Civ 53, the Court of Appeal (Asplin, Coulson and Males LJJ) delivered a significant appellate judgment on the content of Jersey trust law as applied in English proceedings. The appeals arose from the wholesale disposal of an extensive portfolio of unsecured employment-related loans held in three Jersey EFRBS trusts (the 2011, 2012 and 2014 Trusts). The disposal was structured and implemented by a combination of trustee and purchaser entities ultimately controlled by a small group of sophisticated professionals. The central question was whether that disposal, deliberately designed to leave nothing for beneficiaries in order to terminate the trusts and pay selected creditors, was lawful under Jersey trust principles.

The Court upheld a first‑instance judgment (Johnson J) that: (i) the disposal was effected for an improper purpose and therefore constituted a breach of trust; (ii) the purchaser (FS Capital) failed the defence of bona fide purchaser for value without notice under Article 55 of the Trusts (Jersey) Law 1984; (iii) as a matter of Jersey law, a transaction resulting from the exercise of a fiduciary power for an improper purpose is void (not merely voidable) in equity so far as the beneficial interest is concerned; and (iv) the outgoing trustee (Pinotage) retired “to facilitate” the breach and was properly found liable on the Head v Gould principle.

Along the way, the Court clarified how Jersey trust law incorporates English principles: it reaffirmed the nuanced “insolvent trust” balancing approach (influenced by BTI v Sequana), confirmed the Baden categories for “actual notice” under Article 55, and explained the circumstances in which actual knowledge of facts that make a transaction probably improper will defeat a BFP defence even without proof that the purchaser knew the precise legal classification of the breach. The Court also declined to invoke the “presumption of similarity” to English law because expert evidence showed that the void/voidable point is unsettled in Jersey—but then concluded that Jersey would, and should, follow English authority on that issue.

Summary of the Judgment

• Improper purpose and breach: The sale power was exercised with the dominant purpose of excluding beneficiaries and confining consideration to capped creditor claims despite uncertainty about the assets’ value; that was an improper purpose under the Grand View/Eclairs test and a breach of trust.
• Bona fide purchaser (BFP) defence fails: FS Capital bore the burden of proving it was a BFP for value without notice under Article 55. The Court upheld findings that FS Capital (through its controllers) knew the facts making the disposal probably improper and could not be satisfied it was legitimate to disregard beneficiaries; actual notice was established within Baden (i)–(iii).
• Void, not voidable: As a matter of Jersey law, following English authority (Cloutte v Storey), an exercise of a fiduciary power for an improper purpose is void in equity so far as beneficial interests are concerned. Legal title may pass, but the beneficial interest does not; the purchaser holds as constructive trustee.
• Insolvent trusts: There is no absolute rule that insolvent or probably insolvent trusts must be administered only for creditors. Trustees must primarily consider creditors’ interests but still weigh beneficiaries’ residual interests if there is “light at the end of the tunnel”—a balancing approach influenced by Sequana.
• Retirement to facilitate breach: Pinotage’s retirement and appointment of a PTC successor (with the same decision-maker) was found to have contemplated and enabled the very breach committed. That engages liability under the Head v Gould principle.
• Remedies: The assignments to FS Capital were declared void in equity; FS Capital holds the loan assets as constructive trustee and must re-transfer them upon appointment of a new trustee, subject to applying for directions and preserving any equitable lien.

Analysis

Precedents Cited and How They Shaped the Decision

The Court’s analysis weaves Jersey law’s relationship with English equity into three strands: the proper purpose doctrine, notice for BFP, and the effect of an improper exercise of power.

1) Proper purpose doctrine:

• Grand View v Wong and Eclairs v JKX establish a two-stage inquiry: identify the objective purposes of the power, then ascertain the actual subjective purposes of the decision-maker; equity intervenes where the dominant purpose is improper.
• The Court applied this to find that the “cap” pegging consideration to creditor claims, coupled with a design to terminate the trusts and ensure no surplus to beneficiaries, revealed a dominant improper purpose. Despite cash-flow insolvency, the uncertain but potentially substantial value of the loan portfolio meant beneficiaries’ interests could not be excluded.

2) Insolvent trust duties:

• Z Trusts had been read by some as imposing an absolute creditors‑first duty once a trust is insolvent. The Court endorsed Johnson J’s more nuanced approach, informed by the Supreme Court’s reasoning in Sequana: in insolvency or probable insolvency, trustees should primarily consider creditors, but must undertake a balancing exercise considering whether the situation is irretrievable or there is “light at the end of the tunnel.”
• On the facts, because no one knew the loans’ true value and the assets could have been substantial, excluding beneficiaries fell outside proper purposes.

3) Notice and the BFP defence:

• Article 55 of the Trusts (Jersey) Law 1984 requires the purchaser to be “without actual notice” of breach. The Court accepted that “actual notice” in Jersey law encompasses Baden categories (i)–(iii): actual knowledge; wilfully shutting eyes; wilfully and recklessly failing to inquire.
• Sinclair Investments, Papadimitriou and Serious Fraud Office v Litigation Capital guided the Court’s approach to knowledge of facts vs knowledge of law. Once the purchaser knows key facts, it may be appropriate to attribute appreciation of legal implications—especially where the purchaser designs the transaction and cannot be satisfied of its legitimacy.
• The burden point is orthodox: the party asserting the BFP defence must plead and prove no notice. FS Capital had not pleaded or proved a good‑faith belief based on Jersey law that excluding beneficiaries was legitimate; it raised Z Trusts late, and the Court declined to decide on a presumption or an evidential lacuna. On the evidence, actual notice was established.

4) Void versus voidable:

• The Court declined to use the “presumption of similarity” because expert evidence showed that Jersey law on the void/voidable effect of an improper exercise is unsettled. It then undertook a substantive prediction of how a Jersey court would decide, given Jersey’s deliberate adoption of English trust principles (Investec; Re Esteem).
• English law: Cloutte v Storey (CA) treats an improper exercise of an equitable power as void in equity (beneficial interest does not pass), distinguishing cases where legal title passes under a power operating at law. Cloutte has been criticised (Pitt v Holt) but not overruled; nineteenth‑century authorities (Aleyn v Belchier, Daubeney v Cockburn, Marsden, Topham v Duke of Portland) broadly align with voidness.
• Jersey decisions have proceeded on the same basis (Vatcher v Paull (PC from Jersey), Bird Charitable Trust (Royal Court), Z Trusts; Crociani references), and nothing in Jersey statute or customary law points the other way. The Court therefore held that Jersey law would follow Cloutte: the improper‑purpose exercise is void in equity as regards beneficial interests.
• The Court recognised that in company law the analogous improper-purpose rule may render acts voidable (e.g., allotments: Tianrui), but stressed the distinct trust context and policy concerns, including proximity to excessive execution.

5) Retirement to facilitate a breach (Head v Gould):

• Head v Gould imposes liability on a retiring trustee if the very breach subsequently committed by the successor was within the retiree’s contemplation at the point of retirement—not merely a risk rendered easier by retirement, but the breach actually contemplated.
• On the facts, Pinotage’s retirement and appointment of a PTC with the same effective decision‑maker occurred to ensure the disposal proceeded notwithstanding regulatory concerns; the Court upheld the finding that the breach was contemplated and the retirement facilitated it.

Legal Reasoning: Key Points

• Purpose analysis anchored in Grand View/Eclairs: The judge identified the power’s objective purposes and then found, on compelling contemporaneous evidence (including the “cap”), that the dominant subjective purpose was to exclude beneficiaries. This was improper, especially given asset value uncertainty.
• Insolvency does not erase beneficiaries: Adopting Sequana’s balancing, the Court rejected a categorical “creditors only” approach once trusts are cash‑flow insolvent. Trustees must ask whether there is realistic prospect of surplus value; if so, beneficiaries cannot be written out.
• Actual notice, facts and law: By actively designing the transaction intending to eliminate beneficiaries’ interests, the purchaser’s principals knew the facts making the deal probably improper and could not be satisfied of its legitimacy. That crosses Baden (i) and (iii), consistent with Sinclair and Papadimitriou, without requiring proof they knew a legal label (“breach of trust”) in Jersey law. In any event, the Court held that, on these facts, they should be taken to know the law.
• Pleading and proof discipline: A party relying on BFP must plead and prove lack of notice. FS Capital neither pleaded nor proved that it believed, by reference to Jersey law, that excluding beneficiaries was legitimate. The Court refused to allow a late shift at closing.
• Voidness aligns with principle and policy: Treating improper‑purpose appointments as void in equity maintains coherence with excessive execution (void), prevents “back‑door” evasion via subjective purpose, and sustains certainty in trust administration. Jersey’s reliance on English trust orthodoxy favours this path.
• Retiring trustee’s duty to safeguard the fund: Even legitimate reasons to retire (e.g., regulatory) do not excuse a trustee from liability where it contemplates that its successor will commit a breach and the breach occurs. The correct course in such a scenario is to seek court directions, not to step aside and enable the breach.

Impact and Practical Consequences

This decision will reverberate across Jersey trust practice, purchaser due diligence, and offshore fiduciary risk management:

• For trustees of insolvent or stressed trusts:
  • Adopt a Sequana‑style balancing: primarily consider creditors but evidence valuation uncertainty; do not exclude beneficiaries if the assets may realise a surplus.
  • Obtain independent valuation and, where the transaction will effectively eliminate beneficiaries, seek court directions or blessing rather than rely on “insolvency” to justify exclusion.
  • Beware “caps” or pricing mechanics obviously designed to match internal creditor balances at the expense of beneficiaries; these are red flags of improper purpose.
• For prospective purchasers of trust assets (including SPVs):
  • BFP without notice is narrower than many assume. Active collaboration in structuring, awareness of facts showing probable impropriety, or failing to inquire can constitute actual notice.
  • Consider seeking a court‑blessed sale, insisting on transparent valuation processes and fairness protections for beneficiaries. Warranties/indemnities cannot insulate against constructive trusteeship if the transfer is void in equity.
  • Be alert to trustee replacements by affiliated PTCs, “mopping up” assignments to related entities, and documentation suggesting deliberate exclusion of beneficiaries.
• For retiring trustees:
  • Do not retire where you contemplate that your successor will implement a breach. If you foresee a breach, apply for directions; retirement will not absolve liability.
  • Document genuine reasons for retirement and ensure the successor is independent and will act properly.
• For litigators:
  • Plead foreign law positions early and adduce expert evidence; do not rely on the presumption of similarity where the foreign law is unsettled.
  • Against a BFP defence, focus on contemporaneous documents evidencing purpose and knowledge of probable impropriety; Baden (i)–(iii) suffices for “actual notice.”

The judgment also strengthens beneficiary protection against aggressive restructurings in the wake of tax‑policy shocks (here, the 2017 “Loan Charge”). The Court was unmoved by public‑policy arguments about tax avoidance: the schemes were already rendered ineffective; the issue was unlawful exclusion of beneficiaries, not enabling avoidance.

Complex Concepts Simplified

• Proper purpose rule: Even if a trustee’s act is within the literal scope of a power, equity invalidates it if the dominant purpose was improper (e.g., to benefit non‑objects, to eliminate beneficiaries improperly, or to serve ulterior ends).
• Fraud on a power: Historic label for improper‑purpose exercises of fiduciary powers. No actual deceit is needed; the vice is purposive misuse. The Court prefers “proper purpose rule” but the effect is the same.
• Excessive execution vs improper purpose:
  • Excessive execution: the act is beyond the power’s scope; it is void.
  • Improper purpose: within scope but for a wrong purpose; in trust law (per Cloutte), void in equity for beneficial interests.
• Bona fide purchaser for value without notice (BFP):
  • A defence that defeats prior equitable interests if the purchaser gave value and lacked notice of the breach.
  • Under Article 55, “actual notice” includes Baden categories (i)–(iii). Knowing facts that make the transaction probably improper—or deliberately failing to inquire—can amount to actual notice.
• Baden categories:
  • (i) Actual knowledge; (ii) Wilfully shutting one’s eyes; (iii) Wilfully and recklessly failing to inquire as an honest and reasonable person would.
• Insolvent trust balancing (Sequana influence):
  • Trustees should primarily consider creditors in insolvency or probable insolvency, but they must balance and not automatically extinguish beneficiaries’ interests where a surplus remains possible.
• Retirement to facilitate a breach (Head v Gould):
  • A retiring trustee remains liable if, at retirement, it contemplates the very breach later committed by its successor, and its retirement enables it. Regulatory or other reasons to retire do not absolve liability in such circumstances.
• Void vs voidable:
  • Void: treated as having no effect in equity; beneficial interests do not pass. Legal title may still pass and raise further issues (e.g., impact on innocent legal purchasers).
  • Voidable: valid unless and until set aside, often allowing the court to tailor relief. In this context, the Court held Jersey follows the English “void in equity” rule.
• Constructive trustee:
  • A person who holds property subject to equitable obligations because of their receipt or conduct (e.g., receiving trust assets under a void equitable disposition) must restore it to the proper trust custodian.
• Equitable lien:
  • A non‑possessory security right recognized by equity to protect a party’s expenditures or entitlements when specific property must be re‑transferred.

Notable Details from the Case

• The loan portfolio’s book value started at £410m and was later revised to £279m; the deferred consideration was capped at about £1.176m—set to match internal “creditor” balances—thereby eliminating any potential surplus for beneficiaries.
• FS Capital was created to acquire the assets; it sat within a group controlled by the same individuals who devised the structure. Pinotage resigned as trustee in favour of a PTC with the same decision‑maker to sidestep perceived regulation, yet kept administrating the sale.
• The Court found contemporaneous evidence showing recognition of a “huge commercial opportunity,” undercutting assertions that the loan assets were worth “next to zero.”
• The disposal involved 1,392 beneficiaries; around 700 were parties as respondents. The 2014 Trust was not directly in issue on appeal.

Open Questions and Cautions

• Article 54 vs 55 and constructive notice: A respondents’ notice invited the Court to decide whether constructive notice also defeats the BFP defence under Jersey law. The Court did not need to resolve this. The point remains open.
• The limits of “voidness”: Cloutte distinguishes between equitable and legal powers. If legal title passes to a bona fide purchaser of the legal estate without notice, equity may be unable to unwind the transfer. Practitioners should map where in the chain a legal estate has passed and who had notice.
• Potential Supreme Court reconsideration: While Cloutte has critics, it remains English law. Given Jersey’s alignment with English trust doctrine absent contrary statute or custom, any change may come only if the UK Supreme Court revisits Cloutte’s reasoning.

Practical Checklists

For trustees considering disposals in stress or insolvency:

• Obtain independent valuation evidence; record efforts to quantify potential surplus for beneficiaries.
• Document the decision-making process, showing genuine balancing of creditor and beneficiary interests.
• Avoid pricing mechanics designed to ensure “no surplus”; link price to fair value, not internal costs.
• Consider directions/blessing from the Royal Court of Jersey for contentious disposals.
• If contemplating retirement amidst a contentious transaction, seek directions; do not retire if you contemplate your successor will implement a breach.

For purchasers of trust assets:

• Undertake enhanced due diligence on purpose, structure, pricing and beneficiary treatment; require transparency on valuation.
• Beware trustee replacements by affiliates or PTCs, and “mopping up” assignments to related entities.
• Obtain court sanction where appropriate; ensure safeguards for beneficiaries are embedded.
• Do not assume that lack of detailed legal analysis will shield you from “actual notice” if the facts suggest probable impropriety.

Conclusion

FS Capital v Adams is a powerful reaffirmation of core equitable controls over fiduciary powers as applied in Jersey trust law. It makes four headline contributions:

• It confirms that where trustees use their powers for an improper purpose—here, to exclude beneficiaries and transfer value to a connected purchaser—the exercise is void in equity so far as beneficial interests are concerned, and the purchaser holds as constructive trustee.
• It tightens the BFP without notice defence in the Jersey context: actual notice encompasses knowledge of the facts which make the transaction probably improper, and on appropriate facts the court will attribute appreciation of the legal consequences; the defendant must plead and prove its lack of notice.
• It rejects an absolute “creditors only” rule for insolvent trusts, adopting a Sequana‑style balancing that can preserve beneficiaries’ residual interests where value remains plausible.
• It robustly applies Head v Gould: a trustee who retires contemplating that its successor will commit a breach—and thereby facilitates it—may be liable, even if it had legitimate reasons to retire.

Beyond technical doctrine, the Court’s “bigger picture” is unmistakable: equity will not allow fiduciaries to orchestrate structures that divert a “huge commercial opportunity” to themselves by eliminating beneficiaries behind the shield of insolvency rhetoric or corporate rearrangements. For trustees, protectors, purchasers and their advisers, the message is clear: purpose, process and fairness matter; if in doubt, go to court first, not after.