Cayman Islands asset protection trusts
29 March 2021
With appropriate planning, and in appropriate circumstances, trusts in the Cayman Islands ("Cayman") provide protection from claims by, in particular, future creditors as Cayman trusts benefit from Cayman's Fraudulent Dispositions Act (1996 Revision) (the "FDA").
Fraudulent Dispositions Act
The effect of the FDA is only to render voidable (at the instance of a creditor prejudiced thereby) any disposition made with an intent to defraud and at an undervalue (subject to the six year limitation mentioned below). The test for setting aside such a disposition is two-fold: it must be with intent to defraud and also at an undervalue.
Intent to defraud and undervalue
"Undervalue" is defined as either no consideration or a consideration for the deposition significantly less than the value of the property being disposed.
"Intent to defraud" is defined as meaning "an intention of a transferor wilfully to defeat an obligation owed to a creditor".
"Obligation" is defined as meaning an obligation or liability (including a contingent liability) which existed on or before the date of the disposition and of which the transferor had notice. The question of whether actual notice is necessary has not yet been determined but it seems probable that constructive notice would be sufficient as the courts may be reluctant to assist a transferor to defeat his existing creditors where he knew, or ought to have known, of their existence.
"Creditor" is simply defined as being a person to whom an obligation is owed.
As a result, a disposition made at an undervalue (such as a disposition to trustees) is protected from claims by creditors unless they can show an intent wilfully to defraud creditors then existing. Even if such a claim succeeds, the disposition is only set aside to the extent necessary to satisfy the creditors prejudiced by the disposition. It should be noted that the FDA specifically provides that the burden of proof of the transferor's intent to defraud is placed clearly on the creditor seeking to set aside the disposition, although it may suffice to establish a general intent (this point is also yet to be determined by the courts).
Future creditors and the six year limitation for existing creditors
Moreover, the possibility of setting aside a disposition only applies to creditors who existed at the time of the transfer to trust and the FDA stipulates a limitation period of six years after the disposition which prevents any action being taken to set aside the disposition after that time. The corollary is that creditors whose claims arise after the transfer to trust have no such rights to seek to set aside.
Protection for trustees and beneficiaries acting in good faith
Even if the right to set aside arises, if the court is satisfied that a trustee has not acted in bad faith in receiving the property, the trustee will be able to retain sufficient funds to pay its entire costs incurred in defending the proceedings (not merely court taxed costs) and will also be entitled to retain its proper fees and costs incurred in administering the trust, as would any predecessor trustee who had similarly not acted in bad faith.
Likewise, any beneficiary who has received a distribution properly from the trust under the terms of the trust will be entitled to retain that distribution provided that he has not acted in bad faith.
Bankruptcy of Cayman connected settlor
Note that the FDA may not assist if the settlor has a connection with Cayman. The Bankruptcy Act (1997 Revision) (the "BA") permits a trustee in bankruptcy appointed under that statute to set aside a settlement (other than a marriage settlement or made in favour of a purchaser or incumbrancer in good faith and for valuable consideration) if the settlor becomes bankrupt within two years of the settlement, or within ten years unless the parties claiming under the settlement can show that the settlor was, at the time of the settlement, able to pay his debts without the aid of the property settled. However, the BA only applies to individuals personally present in, ordinarily resident or having a place of residence in Cayman, or carrying on business in Cayman, either personally or through an agent or manager, or through a partnership.
If you would like any further information, please get in touch with your usual Bedell Cristin contact or one of the contacts listed.