Knowledge

The developing law of "insolvent trusts" has moved from an abstract concept to one of immediate practical importance in Guernsey: it affects how distressed trust structures are administered, how creditors assess recovery, and how trustees protect themselves when the trust fund is insufficient to meet properly incurred liabilities. Much of the modern law stems from the long-running Z Trusts litigation, which generated decisions in Jersey, Guernsey, and ultimately the Privy Council. Those decisions have required courts to grapple with issues more commonly associated with insolvency law than trust law, including creditor rights, priorities and the administration of distressed trust structures.

The proposed amendments to the Trusts (Guernsey) Law, 2007 (approved by the States of Deliberation on 20 June 2026, with implementing legislation being prepared at the time of writing) are therefore not a peripheral development. They show that the legislature is willing to address the difficult questions this emerging case law has exposed, particularly where trust law and creditor protection intersect.

What do we mean by an "insolvent trust"?

Strictly speaking, there is no such thing as an insolvent trust. A trust is not a legal person and cannot incur liabilities in its own right. Liabilities are incurred by the trustee, which relies on its rights of indemnity and lien against the trust fund. When we refer to an "insolvent trust", we are describing a situation in which the trust fund is insufficient to meet liabilities properly incurred by the trustee.

That distinction lies at the heart of many of the difficulties in this area. Trust law has neither the separate legal personality nor the statutory insolvency framework that company law provides. As a result, courts have been required to adapt traditional trust law principles to insolvency-type problems.

That absence of a ready-made statutory regime explains why the recent case law matters: each decision has helped define how insolvency concepts can be made to work within the architecture of trust law.

The foundations of insolvent trust law

Many of the core principles governing insolvent trusts emerged from the Z Trusts litigation. In the Matter of the Z Trust [2015] JRC 214, the Jersey Royal Court adopted a cash-flow test for trust insolvency.

The court also recognised that insolvency changes the trustee's focus. Once a trust becomes insolvent, beneficiaries may effectively be regarded as "out of the money", requiring trustees instead to have regard to creditor interests and seek either creditor approval or court directions regarding the future administration of the trust.

Although this was a Jersey case, these points will be persuasive in Guernsey. The two jurisdictions share closely aligned trust law traditions, and Guernsey courts have already shown a willingness to engage with Jersey authority where it assists in resolving questions of offshore trust administration.

Trustee, receiver or insolvency practitioner?

That shift in focus raises a practical and interesting question for trustees, creditors and the court: who should administer an insolvent trust?

The attraction of an independent insolvency practitioner is obvious. Independence can promote transparency, creditor confidence and impartial decision making in circumstances where a trustee may have significant personal exposure through its indemnity rights. The difficulty is that trusts are not companies. There is no statutory office equivalent to a liquidator, nor any framework governing the powers, duties or remuneration of a trust insolvency practitioner.

The courts have, therefore, adopted a pragmatic and flexible approach. In the Guernsey Investec v Glenalla proceedings, which later culminated in the Privy Council decision in Investec Trust (Guernsey) Ltd and others v Fort Trustees Ltd and another [2022] UKPC 36, [2023] AC 877, the Royal Court appointed joint receivers to take possession of trust assets and identify liabilities properly payable from those assets. The Z Trusts litigation similarly involved court-supervised procedures tailored to the realities of an insolvent trust rather than a conventional liquidation process.

The lesson from these cases is that the choice is not simply between trustee administration and liquidation. Courts have shown a willingness to deploy bespoke solutions where circumstances require. For many structures, trustee administration under court supervision may remain the most efficient and economical option. Trustees already possess detailed knowledge of the assets, liabilities and history of the trust, and appointing a separate office-holder inevitably introduces additional cost.

Who pays?

The appointment of receivers or insolvency professionals raises a second practical question: who bears the cost, and where do those costs sit in the priority structure?

Where a trustee retains an insolvency practitioner as an adviser, the associated costs are likely to form part of the trustee's indemnity. The position is less clear where the court appoints an independent professional.

There are clear policy reasons for ensuring that court-appointed professionals are paid. Without confidence of recovery, suitably qualified practitioners will be reluctant to accept appointments in distressed trust situations. The unresolved issue is whether those fees should rank ahead of secured creditors, alongside trustees' indemnity claims, or elsewhere in the priority structure. That question matters because it may affect both the willingness of professionals to accept appointments and the commercial expectations of secured lenders and other creditors.

In practice, the competing possibilities can be stated shortly: the fees may be treated as an expense of the administration, as part of the trustee's indemnity machinery, or as a separate court-sanctioned cost with its own priority. Each approach has different consequences for secured creditors, former trustees and the professionals asked to administer the estate.

Priorities

If Z Trust focused on how an insolvent trust should be administered, Equity Trust (Jersey) Ltd v Halabi [2022] UKPC 36 ("Halabi") focused on what happens when there is not enough money to go around.

In Halabi, the Privy Council considered the competing claims of successive trustees. By a narrow 4-3 majority, the Board held that those claims rank pari passu, meaning that current and former trustees share rateably in the available trust fund rather than ranking according to the order in which they assumed office.

Whilst the majority favoured a pari passu approach, a significant minority preferred a first-in-time methodology. This might not necessarily be the last word on the point. Other jurisdictions remain free to adopt a first-in-time methodology should they conclude that trustee protection, creditor interests or commercial policy considerations justify a different approach.

In Halabi, the court was not required to consider how trustee indemnity rights interact with third-party secured creditors. That is where Guernsey's proposed amendment to section 44 of the Trusts (Guernsey) Law, 2007 comes in. The proposed amendment will make clear that secured creditors rank ahead of trustees' statutory liens unless the parties agree otherwise.

At one level, that outcome may appear unsurprising. A secured lender advances value against an express security interest, whereas a trustee's lien arises by operation of law to secure the trustee's right of indemnity. Equally, the point was not free from doubt. Earlier Jersey and Guernsey authorities had consistently emphasised the proprietary nature of trustees' indemnity rights and liens. While those decisions did not directly resolve the position of secured creditors, they left enough room for debate to make clarification understandable.

For trustees and creditors, the practical message is clear. Trustees administering distressed structures should seek early advice, preserve evidence of properly incurred liabilities, and consider whether court directions are needed. Creditors, particularly secured lenders, should review the terms and priority of their security against the possibility of competing indemnity and administration-cost claims.

Where next?

Significant questions remain concerning the role of insolvency practitioners, the treatment of their remuneration, and the extent to which different jurisdictions will adopt, refine or depart from the approaches emerging from the Z Trusts litigation and Halabi.

The recent authorities and proposed reforms do not provide all the answers. They do, however, mark an important stage in the development of insolvent trust law. Much remains to be worked out, both by courts and legislators. For trust litigators, trustees and secured creditors, this is no longer a niche theoretical issue, it is an area of practical risk, strategic opportunity and continuing legal development, and will be one of the more interesting areas of trust law to watch in the years ahead.