Unprecedented times in an uncertain world
The world is, in the face of COVID-19, presently confronted by perhaps the greatest uncertainty in a modern world as we know it and, quite possibly, the greatest doubt of our generation. We are compelled to contend with an unprecedented sequence of serious compounded events (and their consequences) resulting from the global health pandemic. In this time, we witness the disruption of our routines of daily living, the apparent collapse of the world’s financial markets, the precarious interruption of critical global supply-chains and, importantly, either the serious adaptation or, in many instances, the outright restriction of access to the essential goods and services that society relies upon in a contemporary world for its proper function and survival.
Many countries have, for instance, imposed severe restrictions in pursuance of a constitutional state of emergency and in the exercise of sovereign power, to, inter alia, (i) restrict travel and control the movement of people (internationally and domestically) through the implementation of curfew measures and ‘stay in place’ orders; (ii) control the operation of non-essential business to the general public; (iii) reduce certain standards of care owed by certain professionals to stakeholders; and (iv) suspend the applicability and operation of specific rights, laws, regulations and other statutory provisions. These extraordinary measures, which are justified on the advice of public health officials, are designed to control the spread of COVID-19 and to preserve the structures and mechanisms of modern life, as developed by society over the course of many decades.
The Bahamas’ Emergency Powers (COVID 19) Regulations, 2020
In light of the persisting global threat of COVID-19 and the recent promulgation by the Government of The Bahamas of the Emergency Powers (COVID 19) Regulations, 2020 (“the Regulations”) and the implementation of a compendium of Emergency Powers (COVID 19) Orders (and various amendments thereto), The Bahamas remains in a constitutional state of emergency until at least 30 April 2020.
Flee clauses generally
In challenging times and in the midst of profound uncertainty, professional office-holders, including trustees and other advisors, seek certainty in the discharge of the duties owed to the wealth preservation, asset protection and trust structures that they manage and administer. Invariably, trustees owe fiduciary, statutory and often express contractual duties to, inter alia, act diligently and with reasonable care and skill to protect trust assets from depletion or diminution and to take steps to invest and reinvest trust assets. Accordingly, many trust instruments provide specific mechanisms for the automatic transition and/or transfer of (i) the administration and proper law of the trust from one jurisdiction to another; and (ii) trusteeship to an established or designated successor trustee, in certain circumstances and on the occurrence of certain specified events (“flee clauses”). Contemporary settlements generally provide for the trustee’s wider ability to transfer the administration of a trust to a new trustee, at any time by deed, without the occurrence of a designated event.
Historically, flee clauses were routinely incorporated into standard trust instruments and, to ensure their effectiveness, may be invoked automatically by design, upon the happening of certain events or in particular circumstances including, inter alia: the promulgation by Parliament of (i) a state of emergency; or (ii) any law, regulation or order which has the objective, purpose or effect of (a) interfering with the trust assets, (b) restricting the investment or distribution of the trust assets, (c) compulsorily converting the trust assets in a manner not permitted by the terms of the settlement, or (d) levying any tax or duty on the trust assets in excess of a specifically established rate (“triggering events”). Unsurprisingly, many trust instruments specify that the declaration of a state of emergency in the jurisdiction of the trust’s governing law or situs or the location of its trustee shall be among its triggering events.
A standard flee clause that may be incorporated into a trust instrument may include the following (or similar) terms:
At any time during the duration of the trust the occurrence of any of the following events or circumstances shall forthwith and without the necessity for the execution or filing of any paper or any further act terminate the tenure of the trustee so that the trustee shall thereupon ipso facto cease to be the trustee under this settlement and to act as such trustee under this settlement and to act as such trustee and shall be thereby divested of title to the principal and accumulated income of the trust fund and the title thereto shall forthwith and ipso facto vest in a designated successor or emergency trustee and immediately following the change of trusteeship the trust shall become subject to and governed by the laws of [the designated jurisdiction]….
The automacy of flee clauses can result in wide-ranging legal and practical implications and may, ultimately, have a serious (and, in some instances, unintended) effect on the settlement, including:
1. Automatic removal of Trustee – The flee clause may provide for the automatic divestment of the trustee of the title to the trust assets, the automatic provision of access to documents and information and to control over the management of the trust assets to a nominated successor or emergency trustee.
2. Automatic appointment of successor or emergency trustee – The flee clause may provide for the appointment of a successor or emergency trustee immediately on the occurrence of the triggering event without further action. In many instances, flee clauses may also provide for the substitution of the initially nominated successor or emergency trustee in favor of a further nominated individual or entity, who in the opinion of the initial successor or emergency trustee may be desirable for the purpose of effecting the coordinated transfer of the trusteeship to an ultimate nominated trustee.
3. Change of the governing law of the trust – In line with a transfer of trusteeship, the flee clause may also provide for the change of the governing law of the trust to the jurisdiction of the successor or emergency trustee, or such other jurisdiction, as may be desirable to the successor or emergency trustee in all the circumstances precipitating the effectuation of the flee clause.
4. Transfer of custody of the trust assets – The flee clause may provide that, following the transfer of trusteeship, the custody and control of the trust assets should be concurrently transferred in a manner that may also be designated by the flee clause itself or in an manner that may be desirable to the successor or emergency trustee in light of the circumstances. Relevant factors may include the nature of the trust assets and any potential tax liability.
As stated above, the terms of the trust instrument may itself purport to provide for the automatic effectuation of the flee clause and its express consequences without the necessity for further action. Practically, this mechanism may be desirable to prevent a third party taking countermeasures to delay or defeat the evacuation of the trust in the manner that is envisaged by the flee clause. However, each flee clause must be (i) carefully examined to comprehend its precise ambit and manner of application under the express provisions thereof and (ii) closely considered in the context of the instrument, as a whole, and any applicable legislative provision, which may govern or otherwise affect trust settlements within the jurisdiction of the situs.
Emergency Powers (COVID 19) (Amendment) (No. 2) Regulations, 2020
For instance, various provisions of Bahamian legislation have evolved rapidly in an attempt to keep pace with the often-unpredictable impact of COVID-19. These enactments included a statutory instrument designed to address the very real risk of the “flight” of certain historic Bahamian settlements in light of the proclamation of a state of emergency. On 19 March 2020, the Government of The Bahamas, under the hand of the Governor-General, amended the Regulations to insert the following deeming provision affecting trusts with a certain prescribed and ascertainable connection to The Bahamas (“the flee mitigation provision”):
Wherever there is a provision (a “flee clause”) in a trust instrument governed by Bahamian law to the effect that the trust in question shall, in the event of a proclamation of a state of emergency in The Bahamas, cease to have —
(a) Bahamian law as its governing law;
(b) The Bahamas as its forum and situs of administration; or
(c) as its trustee a trustee in The Bahamas,
such trust instrument shall be treated (despite any provision in the trust instrument that might be considered a contrary provision) as having from its date contained immediately thereafter the following provision —
“Provided always that the flee clause does not extend to the proclamation of a state of emergency as a result of a pandemic; and provided further that any actions carried out without taking account of such proviso shall be null and void from the outset.”
In an undoubtedly bold move, the government imposed the above flee mitigation provision, which has the general legal effect of “deeming” a “statutory fiction” into all (generally, historic) trust instruments governed or administered under Bahamian law (and which contain a flee clause) to wholly restrict the effect of any express triggering event on such a clause that may be predicated upon a proclamation of a state of emergency, as a result of a pandemic.
The practical effect of this statutory provision on the Bahamian trusts industry remains to be seen. However, in considering the ultimate practical effect on Bahamian trusts, their trustees and advisors should firstly, consider the express terms of the trust instrument after the insertion of the flee mitigation provision, as appropriate, and, secondly, bear in mind the intended purpose or object of the enactment, which is, undoubtedly to prevent the “flight” of trusts from the jurisdiction due to the uncertainty precipitated by the COVID-19 pandemic.
In the event of a dispute over the interpretation of a flee clause and the effect thereof as a result of a flee mitigation provision, in all the circumstances, a trustee is entitled to seek the Court’s opinion, advice or direction pursuant to section 77 of the Trustee Act, as amended, and, on such an application, the Court shall be “entitled and bound to ascertain for what purposes and between what persons” the flee mitigation provision is to be resorted to (Leitch v Emmott [1929] 2 KB 236).
Trustees should act prudently and take legal advice
In keeping with a trustee’s duties of prudence and reasonable care and skill, and its duty to seek professional advice on matters in which he is not competent, a trustee should routinely review the terms of the trust instrument(s), which govern the trust being administered to ensure that the terms are keeping pace with the modern realities of society and its objects. Moreover, in the present circumstances, trustees should always consider whether it is necessary to seek individual professional advice regarding the practical effects of the flee mitigation provision (or other provisions that may be implemented from time to time) on a specific trust settlement. An ill-informed judgment may have significant, costly and, in some instances, irreversible consequences.
Indeed, trustees should pursue as much protection as may be afforded, in uncertain times.
About the Author
Rhyan Elliott is an associate in the firm’s litigation practice group. He has practiced in various areas of civil and commercial litigation and arbitration, including contentious trusts. Rhyan is an active member of The Contentious Trusts Association (ConTrA) based in the United Kingdom.
The information contained in this article is provided for the general interest of our readers, but is not intended to constitute legal advice. Clients and the general public are encouraged to seek specific advice on matters of concern. This article can in no way serve as a substitute in such cases. Copyright ©2020 Higgs & Johnson. All rights reserved.
