By Daniel Smith
In Akers (and others) v. Samba Financial Group  UKSC 6, the UK Supreme Court has confirmed the limited nature of British insolvency officer-holders’ ability to void dispositions of a company’s assets held on trust. The Supreme Court also highlighted the potential dangers inherent in holding on trust assets located in jurisdictions which do not recognise common law trusts.
The case related to the scope of the avoidance provisions in section 127 Insolvency Act 1986 (“s127”), and to conflict of laws rules in relation to trust-based claims against third parties, in particular the application of the lex situs rule as recognised in Macmillan Inc v. Bishopsgate Investment Trust (No 3)  1 WLR 387. The decision will be of relevance to (a) insolvency practitioners, both in the UK or in jurisdictions with avoidance provisions similar to s127, and those dealing with them in relation to trust assets located anywhere in the world; and (b) anyone dealing with trust assets which may under English law be situated in non-common law jurisdictions.
The claim arose from the long-running fallout from the multi-billion dollar dispute between the Al-Gosaibi family, Maan Al Sanea and the Saad Group of companies. Liquidators of Saad Investments Company Limited (“SICL”), a Cayman Islands company, alleged that Mr Maan Al Sanea, a Saudi Arabian national, held certain shares in Saudi Arabian companies for SICL under a trust governed by Cayman Islands law. The Liquidators and SICL alleged that Samba Financial Group (“Samba”), a Saudi Arabian bank, received some of those shares at a time when SICL was being wound up. Accordingly, they claimed from Samba alleging that the transfer was void pursuant to s127.
Lord Mance gave the leading judgment, with which Lords Neuberger, Sumption, Collins and Toulson agreed. Lords Neuberger, Sumption and Collins gave separate concurring judgments.
No void disposition of property
s127 provides that “In a winding up by the court, any disposition of the company’s property […] made after the commencement of the winding up is, unless the court otherwise orders, void”. It is a powerful tool in an insolvency officeholder’s armoury to protects creditors, often operating harshly against those dealing in good faith with a company.
However, although s127 may protect a company’s disposition of its beneficial interest, the Supreme Court held that it did not apply where a trustee holds an asset on trust for the company, and the trustee transfers it to a third party in breach of trust. The trustee is merely disposing of the legal title to the assets, and this is not an interest which the beneficiary ever had. Accordingly, it is not a “disposition” under s127 IA86, even if the transfer might result in the beneficiary’s interests being extinguished.
In reaching this conclusion, the Supreme Court held that “where an asset is held on trust, the legal title remains capable of transfer to a third party, although this undoubted disposition may be in breach of trust. But the trust rights, including the right to have the legal title held and applied in accordance with the terms of the trust, remain”. However, although trust rights remain enforceable as against the trustee, they are inherently limited as regards third parties, for example by the common law rule protecting bona fide purchasers for value.
Although the case has significant international aspects, this analysis applies in purely domestic situations, or situations involving common law jurisdiction. However, the case may of assistance in determining the scope of similar avoidance provisions in other jurisdictions. Accordingly, insolvency practitioners should be aware that if a company being wound up is a beneficiary of assets held on trust, s127 will only protect against purported dispositions of the beneficial interest itself, e.g. by officers of the company; it will be of no assistance in relation to dealings by the trustee.
Foreign trust assets: the relevance of the lex situs
The Supreme Court also considered the effect of the lex situs. It was common ground that the law of Saudi Arabia, where the shares in question were sited, does not recognise the institution of a trust, or the division between legal and equitable proprietary interests. Samba had argued that, following Macmillan, issues of ownership were matters for the lex situs and accordingly SICL enjoyed no proprietary interest in the shares at all, even if the trust were governed by Cayman Islands law, which does recognise trusts.
The Supreme Court held that, in view of the conclusions reached in relation to s127, it was doubtful whether it mattered that SICL’s rights were properly described as “proprietary”. However, where there was an intention to create trusts governed by common law, even in respect of assets in Saudi Arabia, trusts may be created, and the court would “give them their intended effect to the greatest extent possible”.
As regards third parties, the Supreme Court applied Macmillan, and held that any trust rights which a beneficiary enjoys would be subject to the effect of dispositions under the lex situs:
“where under the lex situs of the relevant trust property the effect of a transfer of the property by the trustee to a third party is to override any equitable interest which would otherwise subsist, that effect should be recognised as giving the transferee a defence to any claim by the beneficiary”.
Under English law, purchasers for value acting in good faith take free of a beneficiary’s interest. However, in other jurisdictions a transfer to a third party might override beneficiaries’ rights in different circumstances, potentially disregarding any equitable interest at all.
In Akers, the dispute related to shares, the situs of which was undoubtedly Saudi Arabia. However, the test to determine situs will be different for different classes of assets, for example movables and choses in action, and the test will not necessarily depend on the governing law of the relevant trust instrument. Accordingly, anyone dealing with trust assets situated in non-common law jurisdictions should consider carefully whether they may be less protected from a transfer to a third party.
Latham & Watkins acted for Samba in this case.