TMSF v Merrill Lynch

• Jurisdiction: Cayman Islands
• Judge: (Smellie, C.J.)
• Judgment Date: 26 June 2009
• Court: Grand Court (Cayman Islands)
• Date: 26 June 2009

Grand Court

(Smellie, C.J.)

TASARRUF MEVDUATI SIGORTA FONU

and

MERRILL LYNCH BANK AND TRUST COMPANY (CAYMAN) LIMITED and FIVE OTHERS

S. Moverley Smith, Q.C. and C.G. Russell for the plaintiff;

C.D. McKie and S.J. Alexander for the first to fifth defendants;

N. Meeson, Q.C., Ms. L.D. DaCosta and S.G. Leontsinis for the sixth defendant.

Cases cited:

(1) Abbot v. BurtonENR(1708), 11 Mod. 181; 88 E.R. 976, referred to.

(2) Bourne v. Colodense Ltd., [1985] ICR 291; [1985] IRLR 339, referred to.

(3) Brace, Re, Welsh v. Colt, [1891] 2 Ch. 671, considered.

(4) Clarkson v. Clarkson, [1994] BCC 921; [1996] BPIR 37, considered.

(5) Commr. of Stamp Duties v. Stephen, [1904] A.C. 137, considered.

(6) Gilchrist, Ex p., In re ArmstrongELR(1886), 17 Q.B.D. 521, considered.

(7) Holmes v. Millage, [1893] 1 Q.B. 551, considered.

(8) Masri v. Consolidated Contractors Intl. Co. SAL, [2009] Q.B. 450; [2009] 2 W.L.R. 621; [2008] 2 Lloyd”s Rep. 128; [2008] 1 C.L.C. 657; [2008] EWCA Civ 303, applied.

(9) Mathieson, In re, [1927] 1 Ch. 283, referred to.

(10) Melville v. Inland Rev. Commrs., [2002] 1 W.L.R. 407; [2001] S.T.C. 1271; [2001] EWCA Civ 1247, considered.

(11) Palmer v. NewellENR(1855), 20 Beav. 32; 52 E.R. 514, referred to.

(12) Thorpe v. Goodall(1811), 17 Ves. 388, 460; 34 E.R. 150, 178, referred to.

(13) Triffitt”s Settlement, In re, [1958] Ch. 852; [1958] 2 W.L.R. 927; [1958] 2 All E.R. 299, followed.

Legislation construed:

Trusts Law (2007 Revision), s.2:

‘“[P]roperty” includes real and personal property, and any estate, share and interest in any property, real or personal, and any debt, thing in action and other right or interest, whether in possession or not . . .’

Trusts-receivers-appointment-appointment of receivers not legitimate over power to revoke trust-‘power’ not to be treated as ‘property’ unless expressly authorized by statute-appointment not permissible as incremental refinement of equitable jurisdiction

The plaintiff, as a judgment creditor of the sixth defendant, sought the appointment of receivers by way of equitable execution over his power to revoke two Cayman trusts.

The plaintiff had obtained summary judgment in the Grand Court to recover a judgment debt previously obtained against the sixth defendant in Turkey. The sixth defendant was the settlor of two trusts, with the first defendant acting as trustee, and over which he had an absolute right of revocation. The plaintiff sought directions requiring the revocation of the trusts to allow receivers to take possession of its assets and to apply them in satisfaction of the judgment.

The plaintiff submitted that (a) the sixth defendant”s unfettered right of revocation was a power to be regarded as his property and thus could be the subject of receivership; (b) powers of revocation were choses in action and should be as such deemed to be property and therefore also able to be vested in receivers; and (c) the court should extend its equitable jurisdiction to grant this remedy because the plaintiff would not otherwise be able to recover its debt.

The sixth defendant submitted in reply, assisted by the arguments of the first defendant, that (a) in view of the established distinction between property and powers and the absence of any statutory provision equating them, his powers to revoke the trusts were not to be regarded as property; (b) a power of revocation, or any other power, was not to be regarded as a chose in action; (c) without statutory provision it would be too great an extension of the equitable jurisdiction to grant this remedy; and (d) in reality, the plaintiff was actually seeking an impermissible form of delegation of the defendant”s powers rather than to vest any of his property in receivers.

Held, dismissing the plaintiff”s application for the appointment of receivers:

(1) The jurisdiction of the court would not permit the appointment of receivers in these circumstances. The distinction between property and powers had been long established at common law and equating them would only be permissible if it was expressly authorized by statute. No express reference to powers appeared in the definition of ‘property’ in s.2 of the Trusts Law (2007 Revision). Nor would the construing of a power of revocation of a trust so as to treat it as property amount to a permissible incremental refinement of the equitable jurisdiction. The plaintiff”s application would involve the setting aside of established common law principles and challenging the fundamental trust concept. Such a broadening of the equitable jurisdiction should only be effected by way of legislation and therefore the application in its present form would be dismissed (paras. 50–51; paras. 61–65).

(2) The proposed mechanics for bringing about the revocation of the trusts were also not legitimate since the proposal requiring the defendant to delegate the power would be impossible to effect since the court did not have jurisdiction to vest the power in someone else, which could only be delegated with the consent of its holder (paras. 56–58).

(3) The court did, however, express its willingness to grant equitable relief by appointing receivers over any income or capital that might be appointed to the defendant in the future. Further, if the defendant were in the future to exercise his personal power of revocation, the assets which would result to him would also be amenable to receivership (paras. 64–65).

1 SMELLIE, C.J.: The plaintiff (‘TMSF’) applies as a judgment creditor of the sixth defendant (Mr. Demirel), seeking the appointment of receivers by way of equitable execution over specified ‘properties’ of Mr. Demirel in the Cayman Islands, together with related relief. The specified ‘properties,’ described also as legal choses in action, and which are the focus of the proposed receivership, are the absolute and unfettered right or power in Mr. Demirel to revoke two Cayman trusts.

2 TMSF seeks directions mandating the revocation of the trusts and orders to allow the receivers to take possession of the assets of the trusts (worth about US$27m.) and thus to apply them in partial satisfaction of its judgment for about US$30m.

Background

3 The judgment which TMSF seeks to enforce is one given by this court on May 22nd, 2008 on TMSF”s application for summary judgment and which, in turn, enables TMSF in this jurisdiction to recover a judgment debt for US$30m., earlier obtained against Mr. Demirel in Turkey. TMSF separately in this action also has a proprietary claim against most of the funds in the trusts. That claim has been postponed in favour of this attempt at recovery by way of equitable execution of its summary judgment. The proprietary claim is premised on the allegation that the trust funds represent in substantial amount (save for US$2.5m.) the proceeds of a fraud committed by Mr. Demirel in Turkey and upon which the Turkish judgment, and hence this judgment, are based. The allegations of fraud are still being contested by Mr. Demirel in Turkey although for present purposes the Turkish judgment (and the summary judgment which recognizes it) are to be regarded as final and conclusive, the appellate process in Turkey against the Turkish judgment having been exhausted.

4 The trusts in issue are the Dolphin and Mana trusts (‘the trusts’) of which the first defendant (‘MLBTC’) is the trustee. The settlor of both trusts is Mr. Demirel. The assets of the trusts are held through Cayman companies, the shares of which are held by MLBTC via a nominee company, Fairfield Nominees Ltd.

5 The ultimate aim of the receivership by way of equitable execution would be to take control of the trust companies and the funds (in the value of about US$27m.) which they own and to pay those funds over to TMSF. It is, however, common ground between the parties that the trusts are duly and validly constituted under Cayman law and there is, as yet, no proved basis for treating them as containing the proceeds of the alleged fraud.

6 The trust deeds by which the trusts were created are in identical terms. Paragraph 2 of Schedule IX in relation to each trust provides that the trust may be revoked, amended, varied or altered in any manner whatsoever from time to time by Mr. Demirel by deed delivered to MLBTC. Thus, Mr. Demirel has the absolute unfettered right to revoke the trusts, unrestrained by any fiduciary obligations and regardless of the interests of any beneficiaries.

7 TMSF”s primary argument is that this unfettered right of Mr. Demirel is a power which is to be regarded as property of Mr. Demirel, capable of being the subject of the appointment of a receivership. TMSF”s further argument is that the powers and rights of revocation are choses in action, being forms of option to determine the trusts and as such are deemed by the Interpretation Law to be property. Thus, they are capable of being vested in and exercised by Mr. Demirel”s receivers by way of equitable execution. It must be immediately acknowledged that in the circumstances presented here, the forms of relief sought, that is the treatment of powers of revocation (over duly and validly constituted trusts) as property and as amenable to being taken on receivership by way of equitable execution, would be unique and unprecedented.

8 Nonetheless, TMSF says that it is precisely because of the uniqueness of the circumstances, where TMSF-itself a lawfully-constituted judgment creditor-would not be able to recover its debt owed by Mr. Demirel by legal means, that it should be able to call upon this court to exercise its equitable jurisdiction to ensure that its judgment is not defeated.

9 While MLBTC as a trustee remains neutral, Mr. McKie on its behalf, sought to assist the court with legal arguments. Mr. Meeson, Q.C., on behalf of Mr. Demirel, adopts and supports those arguments. They are to the effect that Mr. Demirel”s powers of revocation of the trusts are not, in the absence...