Summary of Court of Appeal Judgment (Anonymized)

Factual and Procedural Background

These consolidated appeals arose from a series of transactions (referred to collectively in the judgment as the "Disposal") by which Company A purchased substantial unsecured loan assets ("Loan Assets") from three Jersey trusts (Trust A (2011 Trust), Trust B (2012 Trust) and Trust C (2014 Trust)) that had been established to hold beneficial interests in loan receivables. The Loan Assets initially had a book value stated in the accounts of approximately £410 million, later reduced to £279 million. Company A paid a small up-front consideration and agreed deferred contingent consideration subject to a cap (the "Cap") at approximately £1.176 million, an amount equal to sums alleged to be due to certain trust creditors.

The trusts were employer-financed retirement benefit schemes (EFRBS) used to facilitate loan-based remuneration arrangements for participants. By reason of the "Loan Charge" legislation enacted in 2017 the schemes ceased to be viable, and the trustees confronted serious cash-flow problems.

Relevant trustee and corporate changes occurred in 2019. Company B (a professional trustee firm) was appointed trustee in each trust in January 2018. Subsequently a British Virgin Islands company (Company D) was (purportedly) appointed as trustee for Trusts A and B and the Loan Assets were transferred to Company D and then on 30 October 2019 sold or purportedly sold to Company A. Residual assignments were later made to Company E. After service of statutory demands by Company A in May 2020 several hundred beneficiaries issued proceedings, alleging that the Disposal was effected for an improper purpose and was therefore void in equity, that Company A had notice of the breach and could not rely on a bona fide purchaser defence, and that Company B had retired as trustee in order to facilitate the breach.

At first instance (Property, Trusts and Probate List (ChD)) Judge Johnson delivered a comprehensive judgment holding, among other things, that the Disposal was effected for an improper purpose, that it constituted a breach of the trusts and was void in equity as to beneficial interests, and that Company A was not a bona fide purchaser for value without notice but instead held the Loan Assets subject to equitable interests and as a constructive trustee. The orders required Company A to re-transfer the Loan Assets to any new trustee appointed to the trusts, subject to specified directions.

The appeals from that decision were heard by the Court of Appeal, comprising Judge Asplin, Judge Coulson and Judge Males. The Court of Appeal handed down a single judgment dismissing the appeals (i.e., upholding the first instance decision) for reasons summarized below.

Legal Issues Presented

1. Whether, under Jersey law, a purchaser is fixed with "actual notice" for the purposes of Article 55 of the Trusts (Jersey) Law 1984 only if they had actual knowledge of the facts constituting an impropriety, or whether actual knowledge must extend to knowledge that those facts amounted to a breach of trust as a matter of Jersey law.
2. Whether the judge erred in applying the evidential and legal burdens (in particular, whether Company A failed to discharge the burden of proving absence of actual notice) when resolving whether Company A had actual notice of the breach of trust.
3. Whether an exercise of a fiduciary power for an improper purpose (a "fraud on a power" / improper purpose) is void or merely voidable under Jersey law; and relatedly whether Jersey law follows the English authority Cloutte v Storey or departs from it.
4. Assuming the Disposal was voidable rather than void, whether the judge should have exercised his discretion to refuse to set aside the Disposal on practical or public policy grounds.
5. Whether Company B (the retiring trustee) retired as trustee to facilitate a breach of trust (the "retirement to facilitate" point) and, if so, what consequences flow from that finding (relevant to liability and costs).

Arguments of the Parties

Appellants' (Company A and related appellants) Arguments

• It was submitted that, as a matter of Jersey law, actual notice for Article 55 required knowledge not merely of the facts which made the transaction improper but also knowledge that those facts amounted to a breach of trust under Jersey law (i.e., knowledge of the probable legal consequence).
• Company A argued that the judge should not have resolved the knowledge point by reference to the burden of proof where evidence could have been elicited; the proper course was to make a specific factual finding (relying on contemporaneous emails) that Company A's decision-makers honestly and reasonably believed the trusts were insolvent and that the Disposal was lawful or permissible in order to prioritise creditors.
• On the void/voidable point, appellants contended that Jersey law was not settled on this issue and that English authority (notably criticism of Cloutte v Storey) meant a Jersey court could reach a different conclusion; at minimum the judge should not have assumed Cloutte would be followed.
• On discretion, had the Disposal been voidable only, appellants argued the court should have exercised discretion to refuse to set aside the Disposal (weighting practical difficulties and the beneficiaries' participation in tax-avoidance arrangements).
• On the retirement point, Company B (through its appellant) contended that its regulatory concerns legitimately motivated resignation and appointment of a new trustee and that the judge's conclusion that the retirement facilitated the breach was not supported by the evidence.

Respondents' (Beneficiaries) Arguments

• The beneficiaries (respondents) supported the first instance findings. They submitted that actual notice in the Jersey context includes knowledge of facts which make the transaction probably improper and that Company A's decision-makers had such knowledge.
• They argued that Company A bore the burden of proving the bona fide purchaser defence (including absence of notice), and that Company A had failed to plead or call necessary evidence that its decision-makers believed the transaction to be lawful under Jersey law.
• They submitted that English authority (including Cloutte) would be followed by Jersey courts and that a disposal in fraud of a power should be treated as void as to equitable title.
• On retirement by Company B, the respondents maintained the evidence showed the retirement and appointment of Company D were contemplated and designed to permit the Disposal to proceed, and therefore the retirement facilitated the breach.

Company B's (Retiring Trustee) Arguments

• Company B accepted that regulatory concerns motivated its resignation and submitted that the resignation was not intended to facilitate a breach of trust; the judge's findings to the contrary were not supported by the evidence.

Table of Precedents Cited

Court's Reasoning and Analysis

The Court of Appeal (Judge Asplin delivering the lead judgment, with Judges Coulson and Males concurring) set out its reasoning in a structured way, applying Jersey law as informed by English authority where appropriate. The key elements of the analysis were:

1. Choice of law and approach: The court accepted that Jersey substantive trust law applied to the matters in issue. It emphasised the established principle that Jersey trust law imports English trust law as the background unless displaced by Jersey statute or customary law; accordingly English cases and Privy Council decisions were relevant and admissible as guidance.
2. Assessment of the proper-purpose issue: Applying the two-step approach from Grand View (and Eclairs), the court first identified objectively what are the proper purposes of the power of sale in the trust instruments and then asked whether the power had been exercised for those purposes, by determining the subjective purpose(s) of the decision-maker(s). The judge below had found the principal actors (the key decision-makers) deliberately designed the Disposal so that the consideration was confined to sums calculated as due to creditors (the Cap), with the intention that no surplus would remain for beneficiaries and that the trusts would be terminated. The Court of Appeal endorsed the first instance finding that this effective exclusion of beneficiaries was a primary or dominant purpose and that, in the factual circumstances (trusts cash-flow insolvent but with Loan Assets of uncertain but possibly substantial value), such exclusion was not a proper purpose of the power of sale.
3. Insolvency context and balancing: The court accepted the judge's nuanced approach to insolvent trusts: while trustees in a situation of insolvency should primarily have regard to creditors, whether beneficiaries' residuary interests can be disregarded is fact-specific and requires a balancing exercise (following Sequana and related authority). Here the judge found the trusts were cash-flow insolvent but the Loan Assets were illiquid and might have substantial value; given that uncertainty it was not lawful to exclude beneficiaries entirely.
4. Knowledge / notice and the bona fide purchaser defence: Article 55 of the Trusts (Jersey) Law 1984 requires absence of actual notice of breach of trust for the bona fide purchaser defence. The judge below had held that actual notice in Jersey comprises the familiar Baden categories (i) actual knowledge, (ii) wilful blindness, or (iii) reckless failure to make inquiries. The crucial question was whether actual knowledge required only knowledge of the facts which made the Disposal improper, or also knowledge that, as a matter of Jersey law, those facts amounted to a breach of trust. The Court agreed with the first instance judge's conclusion that in the circumstances of this case, where Company A's principals collaborated in designing the Disposal and could not have been satisfied that it was legitimate to disregard beneficiaries' interests, it was appropriate to treat knowledge of the facts which constituted the impropriety as knowledge of its legal consequence; the judge therefore properly concluded Company A had failed to show it lacked actual notice and could not rely on the bona fide purchaser defence.
5. Burden of proof and evidential posture: The Court emphasised that the burden of proving the bona fide purchaser defence rests on the purchaser. Company A had pleaded that the trusts were insolvent and therefore administration in the creditors' interests was legitimate, but it had not adduced direct evidence that its decision-makers believed the Disposal was lawful under Jersey law. The Court therefore upheld the judge's conclusion that Company A had not discharged its burden. The Court explained the difference between pleading/proving a defence and the shifting evidentiary burden in trial management; it found the judge's approach was lawful and his findings were open on the evidence.
6. Void or voidable — treatment of exercise of fiduciary power for improper purpose: The Court reviewed the historical authorities (Aleyn v Belchier, Topham / Duke of Portland, In re Marsden, and Cloutte v Storey) and later commentary and authorities (including discussion in Pitt v Holt and more recent decisions). Although there are criticisms of Cloutte, the Court concluded that there was no convincing reason why Jersey courts would depart from the position that an exercise of a fiduciary power in fraud of the power is void in equity. The Jersey authorities that had considered the issue had tended to accept and apply the position (or at least not to reject it). The Court therefore concluded that the Disposal was void, in so far as it purported to transfer the beneficial interests.
7. Exercise of discretion (voidable hypothetical): The judge considered, as a hypothetical, whether he would have set aside the Disposal if it were merely voidable. He rejected the principal arguments for refusing relief (beneficiaries' failure to engage; beneficiaries having participated in tax-avoidance schemes; alleged impossibility of restitution) and said he would have reserved final decision until further argument had been heard about practicalities (notably the absence of any available trustee). The Court of Appeal noted that the practical difficulties would likely not be sufficient to prevent relief and that the matter could be managed (for example by appointment of a trustee by the Court).
8. Retirement to facilitate a breach (Head v Gould principle): The Court analysed historical authority and the Head v Gould principle: a retiring trustee may be liable for a successor's breach if the retiring trustee contemplated the very breach at the time of the retirement (even if the retiring trustee had legitimate reasons to retire). Applying that test, the judge found Company B had resigned in circumstances where the arrangement (including appointment of Company D) was intended to ensure the Disposal would proceed on terms excluding beneficiaries, and therefore the retirement facilitated the breach. The Court concluded the judge's findings on those facts were open on the evidence.

Holding and Implications

Final Disposition: APPEALS DISMISSED. The Court of Appeal dismissed both the appeal by Company A (and related appellants) and the appeal concerning Company B's role in retiring as trustee.

Key holdings and direct consequences

• The Disposal was effected for an improper purpose (that is, the effective exclusion of beneficiaries was a primary/dominant purpose) and therefore constituted a breach of the trusts.
• The Disposal was void in equity, so far as it purported to transfer the beneficial interests in the Loan Assets; legal title may have passed, but equitable title remained with the trusts.
• Company A was not a bona fide purchaser for value without actual notice under Article 55 of the Trusts (Jersey) Law 1984. On the facts Company A had actual notice of the impropriety (the knowledge of the facts was treated as knowledge of the legal consequences in the circumstances), and it failed to discharge the burden of proof for the defence.
• Company A was therefore to be treated as holding the Loan Assets subject to the beneficiaries' equitable interests (constructive trustee) and was ordered, upon appointment of a new trustee, to take steps to transfer the Loan Assets to that trustee subject to limited protections for any equitable lien or claimed proprietary interests.
• The judge's further findings included that Company B retired as trustee in circumstances that facilitated the breach; that finding was sustained on appeal and may affect Company B's personal liability and costs exposure.

Broader implications

The Court of Appeal concluded that, on the evidence before it, Jersey law would follow the longstanding English authority that an exercise of a fiduciary power in fraud of the power (improper purpose) is void in equity (as articulated in Cloutte v Storey and earlier cases). The Court therefore confirmed that Jersey courts will generally follow English trust law principles in this area unless contrary to Jersey statute or customary law. The decision reinforces that purchasers acquiring equitable interests should be cautious where the purchaser's principals have collaborative roles in the relevant transaction and where transaction structures indicate exclusion of beneficiaries.

The judgment also reiterates established allocation of burdens in equitable notice/bona fide purchaser defences: the purchaser bears the evidential and legal burden of proving entitlement to the defence (i.e., value given and absence of notice).

Practical effect on the parties

• The first instance orders were upheld: Company A must transfer the Loan Assets back to any new trustee appointed for the trusts (subject to the court's directions and any equitable lien claims).
• Beneficiaries retain their equitable interests in the Loan Assets; Company A holds the assets as constructive trustee.
• The findings regarding Company B's retirement expose it to potential personal liability in respect of losses occasioned by the breach of trust (subject to procedures determining quantum and costs), consistent with the Head v Gould principle.

The Court did not identify any novel legal rule for Jersey that departs from existing English authority on these points; rather it applied and confirmed the prevailing approach that Jersey trust law is closely aligned with English trust law on the issues considered.

Note on anonymization: All individuals and named corporate parties in the original judgment have been anonymized in this summary (e.g., Company A, Company B, Individual A, Individual B, Individual C, Judge [Last Name], Attorney [Last Name]) for the purposes of this neutral, structured overview. The content reflects only information explicitly contained in the provided judgment extracts and does not add or infer facts beyond that material.