Cayman Islands’ Grand Court affirms that a beneficiary’s interest in a discretionary trust cannot be attached by a judgment creditor’s receiver

A case overview, by Melodi E. Ulku, Loberg Law, Calgary

The Cayman Islands’ Grand Court (the Cayman Court) decision in Y v. R (2018) confirms that a beneficiary of an ordinary discretionary trust has no legal or beneficial interest in the trust fund.

In this case a law firm (presumed US) became a judgment creditor of its former client.  That judgment debtor was a beneficiary of a discretionary trust settled by his late father. The trustees had settled its assets upon a Cayman Islands law governed discretionary trust (the Trust).  The Defendant had engaged the Plaintiff for legal services to secure additional income from his late father’s estate and from the Trust.  A dispute arose over the payment of legal fees.  The judgment was close to $2M and the creditor recovered about $92k only in enforcement proceedings within the state.

After obtaining the requisite recognition of the foreign judgment from the Cayman Court, the Plaintiff made application for the appointment of a receiver by way of equitable execution to receive all distributions from the Trust to or for the benefit of the judgment debtor, towards the satisfaction of the Plaintiff’s judgment against him.  We note for our Canadian readers that the Cayman Court has jurisdiction to appoint a receiver similar to that of Canadian superior courts: it is a discretionary remedy typically granted if it is just and convenient to do so.

The Plaintiff was able to establish the following facts: the Trust assets included liquid assets in a minimum amount well in excess of the judgment amount; for the past several years the trustees had exercised their discretion to make distributions to the Defendant in substantial amounts, representing the overwhelming majority of his income; since the Trust had been settled (before the Defendant had turned 2 years old) the trustee had never exercised its discretion to distribute trust assets to any beneficiary other than the judgment debtor; and there was no spendthrift clause in the Trust deed which would disqualify the judgment debtor from receiving distributions.  It appeared likely that the Defendant would continue to receive distributions given that he had very limited other means of financial support.

The Cayman Court denied the application on the basis that a beneficiary of an ordinary discretionary trust has no legal or beneficial interest in the trust fund. Since there are no available assets that can be viewed as “the judgment debtor’s assets in equity”, there can be no question of appointing a receiver over them.  Being that such a beneficiary’s only right is to be considered from time to time for a distribution, to grant the relief sought by the Plaintiff in this case “would amount to a radical, impermissible extension of the law”. 

In reaching its decision the Cayman Court considered the authorities of Masri v. Consolidated Contractors Intl. Co. (No.2)and TMSF v Merrill Lynch Bank & Trust Co. (Cayman) Ltd. The latter case was distinguished because there the settlor had retained a power of revocation, which provided a sufficient proprietary interest to allow the appointment of a receiver; in this case there was no such power.

In light of the S.C.C.’s recent decision about a “Henson trust” that I wrote a case comment about last month[1], the general principles of this Cayman Court case may have relevance in Canada.  Beneficiaries of an ordinary discretionary trust do not have proprietary rights in the trust assets unless there are terms in the trust deed vesting the beneficiary with additional powers or rights.  This is so regardless of whether the beneficiary is a disabled person and the subject trust is termed a ‘Henson trust’ or whether the beneficiary is any ordinary person under an ordinary discretionary trust.

Loberg Law practices in commercial and estates litigation.  The author Melodi E. Ulku is a lawyer with the firm while also a master’s student of Trusts Law at the University of London, and has in-depth level understanding of trusts law in Canada, the U.K. and offshore.

[1]See 28 January 2019 article titled “S.C.C. holds that a beneficiary’s interest under a “Henson trust” is not an “asset” in which the beneficiary has a beneficial interest.”

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