Insolvency Of Trust Flashcards
(13 cards)
- Concept of “Insolvent Trust”
Q1. (Z II Trust)
Why is calling a trust “insolvent” technically a misnomer, as noted in Z II Trust?
A1. A trust is not a legal person, so it can’t be insolvent in a strict sense. The phrase is just a shorthand for when trust assets cannot meet all the trustee’s liabilities incurred in that fiduciary capacity.
Q2. (Z II Trust)
What test did the Royal Court adopt for deciding if a trust is “insolvent,” distinguishing it from winding up a deceased’s estate?
A2. The cash flow test. If the trustee cannot pay debts (in the trustee’s capacity) as they fall due from trust assets, the trust is treated as “insolvent.” In contrast, a deceased’s estate might use the balance sheet test.
Q3. (Z II Trust)
What does the court mean by an “insolvency shift” in a trust context?
A3. Once a trust is deemed insolvent, the trustee administers it primarily for creditors’ benefit, not the beneficiaries. Creditors gain priority, mirroring insolvent company analogies.
Q4. (Analogy to Company Insolvency)
When a trust fund is insufficient, why does the Royal Court emulate insolvency law principles?
A4. Because it must treat all creditors fairly and guard the trustee’s duties toward them as a class, much like a liquidator in a company insolvency handles competing creditor claims.
Q5. (Z III Trust)
Can the trustee remain in control of an insolvent trust, or must the court always appoint an insolvency practitioner?
A5. The court may let the existing trustee continue if that is best for creditors. Appointing a separate practitioner is only if it benefits creditors overall (to avoid needless extra costs or delay).
Q6. (Hickman-Type Regime)
What is a “Hickman-type regime,” and why might the court impose it for insolvent trusts?
A6. It’s a court-imposed process requiring advertisement for claims, submission/proof of debts, and final distribution. It ensures fairness among creditors when trust assets are insufficient.
Q7. (Rawlinson & Hunter v Chiddicks)
If multiple creditors’ claims exceed the trust’s assets, how does the trustee distribute those assets?
A7. Pro rata (pari passu). Each creditor gets a proportionate share based on their claim’s size, just like equal treatment in corporate insolvency.
Q8. (Equity Trust (Jersey) Ltd v Halabi; ITG Ltd v Fort Trustees Ltd)
When two or more successive trustees have liens on trust assets for indemnity, how does Halabi say their liens rank if assets are inadequate?
A8. All trustee liens rank equally (pari passu). The Privy Council rejected a “first in time” rule, preferring that all trustees share in any shortfall fairly.
Q9. (Policy Reasoning)
Why did the Privy Council reject “first in time” for successive trustees’ liens?
A9. They found it arbitrary (mere happenstance) and contrary to fairness. Trustees serve a common enterprise, so an earlier trustee shouldn’t get 100% while a later trustee gets nothing.
Q10. (Insolvency Shift)
Do beneficiaries retain any preferential claim if the trust is insolvent?
A10. No. Once the trust is insolvent, creditors trump beneficiaries. Beneficiary distributions must wait until all valid creditors’ claims are settled.
Q11. (Z III Trust)
What key features might a court-imposed regime have for winding up an insolvent trust?
A11. The regime may include:
Advertising for claims,
Each creditor submitting a proof of debt,
Trustee admitting or rejecting claims,
A final distribution and final accounts to the court.
Q12. (Continuing or Replacing Trustee)
Why might the Royal Court prefer to keep the current trustee managing the insolvent trust rather than appoint an external liquidator?
A12. To avoid extra fees and delays. If the trustee can handle creditor claims effectively, it spares the trust from additional costs while still ensuring fairness among creditors.
Q13. (Core Points)
Summarize the insolvency of the trust concept in Jersey.
A13. A trust is not a separate entity, but can become effectively “insolvent” when the trustee can’t pay liabilities with trust assets. The court prioritizes creditors over beneficiaries. It uses an insolvency-like approach, possibly imposing a winding-up regime, and ensures pari passu ranking among creditors, including successive trustees’ liens.
