In September 2023, the corporate-trust fusion principle under Isle of Man law turns 21. It remains intact, untouched by the provisions of the Trusts and Trustees Act 2023 which is awaiting its appointed day orders.

The principle is one which trustees and directors ignore at their peril but is one which remains little regarded and even less understood.

The position of creditors in relation to assets owned by a company that is itself wholly owned by a trust is subject to the corporate-trust fusion principle established on 19 September 2002 in Re Poyiadjis 2001-03 MLR 316. The facts of the case (which was the subject of several judgments over four years, concluding in 2005) were immensely complex, but relevant for present purposes is that Roys Poyiadjis and his father set up in late December 2000 two trusts for the benefit of themselves and their family (the Atlas Trust and the Trident Trust). Each trust solely owned a company, incorporated in the British Virgin Islands (Olympus Capital Investments Inc and Oracle Capital Inc. respectively) and the directors of the companies were also trustees. Each company had a bank account in the Isle of Man, and neither company had any significant creditors.

In his judgment, the late Deemster Kerruish cited Macaura v Northern Assurs Co in which Lord Buckmaster stated ([1925] A.C. at 626-627):

“Turning now to his position as shareholder, this must be independent of the extent of his share interest. If he were entitled to insure holding all the shares in the company, each shareholder would be equally entitled, if the shares were all in separate hands. Now, no shareholder has any right to any item of property owned by the company, for he has no legal or equitable interest therein. He is entitled to a share in the profits while the company continues to carry on business and a share in the distribution of the surplus assets when the company is wound up.”

Deemster Kerruish concluded:

“Oracle and Olympus are each wholly owned by a trust, and there is no other shareholder. […] The trustees, who are also the directors of both companies, have the wherewithal to control each company totally. For example, without being required to give reasons, the relevant trust may require the company it controls to be wound up at any time. In those circumstances, having paid all creditors, which on the evidence to date are limited and not significant, the shareholder would then receive the balance of all moneys standing to the credit of the relevant bank account. Also, I have no doubt that the directors would be ever mindful in exercising their powers to manage the companies and their assets to ensure that they did not expose themselves to an allegation of breach of trust.

Whilst I accept that in law the bank accounts are corporate and not strictly trust assets, in the circumstances of this case, I find that the interposition of a limited company does not in any material way qualify the trustees’ interest in the relevant bank accounts. It does not make a difference to the duties and responsibilities of the trustees, including responsibilities to persons, who have or may have an interest in the trust assets, whether held directly by the trustees or through a company.

Further in the circumstances of this case, the directors, when exercising their powers … cannot divest themselves of the knowledge and information obtained in their capacities as trustees, and therefore must act at all times mindful of their duties and responsibilities to persons, who have or may have an interest in the trust assets.

I therefore consider that to treat the companies as bodies independent of the trustees qua trustees, and to treat the latter as shareholders, would be to ignore the reality of the situation. I further consider that, bearing in mind the terms of the order, and the circumstances which gave rise to it, the bank accounts ought to be considered not only as corporate assets, but also as trust assets.”

Room to manoeuvre for Directors of a company wholly owned by a trust is more constrained than perhaps they realise.

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Article “Corporate-Trust Fusion Principle” posted on 18 September 2023 | Written by Paul Beckett