Advanced Contractual Designs For Resilient Und Cost Effective Armament Procurement From View Of EU and European Armed Forces Trusts Of Family Businesses From Historical And Modern Perspectives Presented by: Prof. Dr. Televantos Date: 7 June 2024 Structure of Talk - 1. What is a trust? - 2. Historical perspective: Trusts of family businesses in English wills in 18th and 19th centuries. - 3. Modern perspectives: 'Trading Trusts' of family businesses What is a trust? - Trusts-a legal institution for the holding of property, distinct from company law or agency. - Historically, trusts evolved out of the division between courts of law and equity in England: courts of equity would order those with rights recognized by courts of law to exercise those rights, or refrain from exercising their rights, in particular ways. - Example: • A holds legal title to farmland. He declares a trust over the farmland in favor of B. Who has what rights?  A (Trustee): Has legal title. This includes the right to possess the farmland and will be registered as owner. If a trespasser enters the farmland, it is A (not B) who must bring the claim to eject the trespasser.  B as beneficiary of a trust is said to have equitable title to the farmland. This means that: o If A fails to properly administer the trust, then B will have a claim against A for breach of trust. o If A, without authority under the trust's terms, transfers the farmland to a third, B can bring an equitable proprietary claim' to recover the farmland from the third party, (who lacks a relevant defense). o The farmland is not available to A's creditors, despite his legal title to it, and if A becomes bankrupt the farmland will not form part of his bankrupt estate. Historical Testamentary Trading Trusts: Structure - 1. Business owner in his will appoints trustees to hold legal title to the trade assets for the benefit of the testamentary estate (e.g. Smith v Starkey (1825)). - 2. Business owner provides that the trustees, his widow, or a manager are to carry on the trade until eldest son reaches 21 years, (e.g. Stodhort v Ryle (1825)). - 3. Until the eldest son reaches 21 profits to be used to discharge pre-existing trade debts and provide for the family. (e.g. Caffrey v Darby (1801)). - 4. Upon reaching 21, son to have the option to purchase the trade assets from the trustees, typically on credit, (e.g. Wilkinson v Stafford (1789)) - 5. Purchase price was to be used to provide dowries for daughters and make provision for younger sons, (e.g. Humble v Bill (1703)) Historical Testamentary Trading Trusts: Advantages - 1. Control: The business owner was able to keep the business trading as a going concern after death, and even control how the business was run. - 2. Providing for family members: where a business was the family's major source of wealth, the business could be charged with payment of sums to maintain widow and other family members. - 3. Flexibility: Trustees could be given discretions to wind up or sell the business, e.g. if the family needed the money. or there was a market downturn, or if they thought that the children weren't fit to run the business. - 4. Protection from creditors: Allowed a form of early limited liability trading, before limited liability corporations were recognized by English law. Ex parte Garland (1804) - Henry Ballman owned a farm and mill. He created a trust of the business in his will. He appointed trustees to hold legal title to the business assets and appointed his wife as a manager to run the business, allowing her to take £600 from his other assets in running the business. - Henry Ballman died, and his widow rans the business until she was declared bankrupthaving used more than £2000 of estate assets to run the business. - The surviving trustee of the business argued that the creditors of the business should be allowed to be paid from Henry Ballman's remaining non-business assets. Because his testamentary estate had taken the profits of the business, it should be fully liable to its debts. Modern Trading Trusts: Structure - See Nuncio D'Angelo, Commercial Trusts (2014) Chapter 2 • 1. Business owners create a limited liability corporation to act as a trustee. • 2. The business assets are transferred to the corporation, which holds all the assets on discretionary trust for the family members. • 3. The terms of the trust allow the corporation to trade with the assets and incur liabilities for the purposes of the business. • 4. The corporate trustee has no other assets except for trust assets-and so holds no property for its own benefit. Modern Trading Trusts: Advantages - 1. Tax in some jurisdictions (see Evans, 'Why we use private trusts in Australia: the income tax dimension explained' [2019] Sydney Law Review). - 2. Fewer regulatory requirements: no need to register or file accounts. - 3. The trust structure protects business assets from creditors in cases of mismanagement. - Creditors of a trustee cannot claim trust assets, Medley v Martin (1673). - This principle applies even to business creditors, where a business is held on trust, Re Morgan (1881). - A trust has no legal personality and trust creditors' are simply creditors of the trustee, Re Johnson (1880). - However, a trustee who incurs a liability with authority under the terms of the trust acquires a right to be indemnified from the trust assets, Ex p Garland (1804). Modern Trading Trusts: Problems for Creditors - Trust creditors can claim trust assets by being 'subrogated' to a trustee's right of indemnity, so long as the liability was incurred with authority under the terms of the trust, see Ex p Garland (1804). Re Johnson (1880) - Trust creditors cannot claim trust assets where: • The liability was incurred without authority under the terms of the trust-even if it appeared to be authorized to the creditor. • The trustee has committed an unrelated breach of trust which is offset in the trust accounts against its indemnity - Lord Hodge in Investec v Glenalla Properties [2018] UKPC 7 at [59](iii) • Because the creditor's recourse to the assets is derived from the trustee's right of indemnity, it is vulnerable. It is exercisable only to the extent that that right exists. It may be defeated if there are insufficient trust assets to satisfy his debt, or if the trustee's right of indemnity is defeated, for example because the debt was unreasonably or improperly incurred and the indemnity does not extend to such debts, or because the trust deed excludes it on account of the trustee's willful default or gross negligence. • More generally a breach of trust by the trustee, even in relation to a matter unconnected with the incurring of the relevant liability, will, to the extent that it creates a liability to account on the part of the trustee, stand in the way of the enforcement of the indemnity. - Treatment on Insolvency • Trust assets do not vest in an insolvent trustee's estate: if a trading trustee becomes insolvent, do statutory insolvency distribution rules apply in respect of trust assets? • Lewin on Trusts (2023). Chapter 27-they do not, because trust assets do not vest in the trustee's insolvent estate. Trust assets should be distributed pari passu amongst trust creditors, without reference to any priority creditor claims conferred by the statutory insolvency regime. • Re Amerind (2019), a trustee's right to be indemnified is a beneficial interest in the trust assets, which does vest in its insolvent estate-and so statutory rules of distribution upon insolvency should apply. Summary of conclusions - Trusts can be used to hold business assets, allowing the business to be run for the benefit of family members and managed flexibly. - The trust structure can protect beneficiaries from creditors, especially in cases of mismanagement-thereby preserving the unity of business assets. This explains the use of trusts in businesses historically and today. - Is this a good thing? The trust means that creditors of a business might be unable to claim its assets. Trusts law shifts risk of mismanagement onto creditors over owners unlike general corporate law. - There are also very significant uncertainties about how statutory insolvency rules apply to trusts of businesses.