The law relating to trusts - PowerPoint Presentation

1. The law relating to trustsintroductory lecturesOctober 2019Dr. Tonio Fenechtfenech@fff-legal.comwww.fff-legal.com

2. The evolution of the position in MaltaCivil law system, but with the benefit of over 150 years of British rule, juridically speakingMalta has therefore experienced dove-tailing common law and civil law concepts for over a hundred years, something that the EU was still trying to get right…until Brexit happened;The concept was adopted in steps between 1988 and 2004;After 2004 the concept of trust has become fully integrated into our domestic law;The trust can now be seen as falling within the general category of relationships where fiduciary obligations are owed, and has a particular statute regulating the relevant relationships;Latest amendments to the Trusts Statute were in 2017, but the civil code provisions of Fiduciary obligations were last amended in 2018www.fff-legal.com

3. Legislation in the 1980’s and 1990’sConcept adopted for limited purposes, and in a clearly ring-fenced manner by the Offshore Trusts Act 1988: completely offshoreVery closely and openly modelled on the Jersey Act 1984, to provide for certaintyAs experience started consolidating, the Recognition of Foreign Trusts Act 1994 allowed for the the local recognition of foreign trusts, while maintaining the onshore-offshore dividewww.fff-legal.com

4. The Trust (Amendment) Act 2004With the enactment of the Act XIII of 2004, a number of laws were amended, and the Civil Code was also fundamentally amended, in order to fully integrate the conceptThe legislator clearly concluded that the traditional view that the concept is completely alien to the Civil law was too simplistic, and ought to be discarded;In fact the equivalent of the English concept of trust can be found in the Early Roman Law concept of “fiducia” being an agreement “appended to a conveyance of property, involving a direction or trust as to what was to be done with it (Buckland).”Although recognized as a concept, it eventually disappeared by the time of the Justinian codification of Roman lawwww.fff-legal.com

5. A juridical relationship recognized in early Roman lawGanado: “The English concept of Trust is itself a derivation of the Roman Law concept of fiducia, being an agreement “appended to a conveyance of property, involving a direction or trust as to what was to be done with it (Buckland).”Institute recognized, but never listed as a nominate contract. Some considered it a “pactum”, which could only occur as an appendage to a conveyance, and need not be reduced to writingBy the time of Justinian, the concept seems to have disappeared, but its “subtle effects are very evident in the Civil Code to this very day.”www.fff-legal.com

6. The effect of codification“The unfortunate thing about the Codes is that because of their very brilliance and nature, being guidelines within a framework, they necessarily result in some subsequent rigidity in thought....if one is told how to do certain things to achieve certain ends then one follows the pattern. The risk is that one then assumes that anything outside the pattern is not possible.”The Code Napoleon, influenced by the French Revolution, sought to prohibit entails to destroy the illiquidity of land, and concentration of property in the hands of the nobility.Many civilian lawyers came to assume that ALL trusts are entails, and therefore contrary to public policywww.fff-legal.com

7. The modern law regulating trusts in MaltaTitle IIIA in Part II of Book Second of the Civil Code , entitled “Of Trusts & their effects” has 10 Articles: Art. 958L – 958U; Art. 958L(1): “Property under trusts shall be regulated by the special law on trusts and to the extent applicable, the rules of this Code relating to trusts.”Title XXIIIA of the Code is entitled “Of Trusts and Obligations” has 5 articles, dealing with the effect of trusts on marriage and annuities, as well as security trusts; The Trusts & Trustees Act (originally enacted as the Offshore Trusts Act in 1988 but substantially amended on various occasions since then), is Chapter 331 of the Laws of Malta.Obligations in general under the Civil Code now include “Fiduciary Obligations”, ie Art. 1124A to J. The most recent amendments here were in 2018, which has widened the legislative treatment from 2 to 10 Articles www.fff-legal.com

8. A. The wider context: Fiduciary Obligations under Maltese lawDr. Tonio Fenechtfenech@fff-legal.comwww.fff-legal.com

9. Fiduciary Obligations as a general platform for regulation of various relationshipsThe 2018 amendments to the provisions of fiduciary obligations seem to have the objective of completing the project started in 2004;In 2004, the objective seems to have been that of having trusts properly allocated to the general class of relationships that create fiduciary obligations;In 2018, more detailed provisions and stipulations were introduced for this general category, including specific remedies, but the approach remained clear: The Civil Code provisions were a general platform over which specific types of fiduciary obligation could be regulated through a specific title in the Code or more specialized legislation, such as the case of trusts. www.fff-legal.com

10. Providing context for applicabilityArt. 1124J In order to complete the project, some rules were required in order to ensure clarity as to which set of rules applied, and when.Therefore, of the 10 Articles which now regulate fiduciary obligations in general, it would seem important to start with the last Article, entitled “Applicability of the provisions of this Title” www.fff-legal.com

11. Art. 1124J “When a fiduciary relationship is governed by particular rules, whether because of the source and type of the obligations or because of any special law, such particular rules shall apply to the context and these provisions shall apply as necessary to support the interpretation of the said rules;”It shall be presumed that the provisions of the Title are consistent with particular rules, but the particular rules prevail where inconsistent;The provisions of the Title apply to all fiduciary obligations, even those existing before 2018, but there is no retrospective application where this denies or restricts vested rights or creates a new liability;www.fff-legal.com

12. Art. 1124J (cont) where a fiduciary obligation is vitiated (becoming unenforceable due to the “falsity of illegality of the cause”) by a breach or attempted breach of law by the parties or any one of them, either party can render this enforceable by complying with the relevant law thus rendering the cause legal;The court can in such cases give interim orders to ensure compliance or to prevent further abuse. www.fff-legal.com

13. How do Fiduciary Obligations come into existence?(Art.1124A)Fiduciary obligations arise in virtue of law, contract, quasi-contract, unilateral declarations including wills, trusts, assumption of office or behaviour whenever a person (the ''fiduciary‘’) –owes a duty to protect the interests of another person and it shall be presumed that such an obligation where a fiduciary acts in or occupies a position of trust is in favour of another person; orHas registered in his name, holds, exercises control or powers of disposition over property for the benefit of other persons, including when he is vested with ownership of such property for such purpose; orreceives information from another person subject to a duty of confidentiality and such person is aware or ought, in the circumstances, reasonably to have been aware, that the use of such information is intended to be restricted.A delegate of a fiduciary, is also deemed a fiduciary if he was aware, or should, from the circumstances, have been aware, of the fiduciary nature of the relationship. www.fff-legal.com

14. Fiduciary Obligations from behaviour - Art. 1124A(3)Fiduciary obligations arise from behaviour when a person –without being entitled, appropriates or makes use of property or information belonging to another, whether for his benefit or otherwise; orbeing a third party, acts, being aware, or where he reasonably ought to be aware from the circumstances, of the breach of fiduciary obligations by a fiduciary, and receives or otherwise acquires property or makes other gains from or through the acts of the fiduciarywww.fff-legal.com

15. General Duties of a fiduciaryGeneral duty to act with utmost good faith and honestly, in all caseswww.fff-legal.com

16. Other duties of a fiduciaryOther duties, alterable by instrument in writing or express provision of law:to exercise the diligence of a bonus pater familias in the performance of his fiduciary obligations;to avoid any conflict of interest or conflict of trust or fiduciary obligations;not to receive undisclosed or unauthorised profit from his position or functions nor permit any other person from doing so, nor enter into any transaction related to the property, directly or indirectly, unless authorized to do so by the instrument creating the fiduciary obligation or permitted by a person or authority empowered to approve such dealings;to act impartially when the fiduciary duties are owed to more than one person;to keep any property acquired or held as a fiduciary segregated from his personal property and that of other beneficiaries, and to affect a change in the registration of any relevant property, as may be required for such purpose;to maintain suitable records in writing of the interest of the person to whom fiduciary obligations are owed;to render account in relation to the property subject to fiduciary obligations;www.fff-legal.com

17. Duties of fiduciary (cont.)Other duties capable of alteration:to return on demand (or upon termination of the fiduciary obligation) any property held to the person lawfully entitled thereto or as instructed by him or as otherwise required by applicable law.To keep the affairs of the beneficiary confidentialTo carry out the designated purpose, where property has been entrusted to himConfidential information can be disclosed to the beneficiary in accordance with and subject to any restrictions contained in the written instrument, if any, giving rise to the fiduciary obligation. A declaration by a fiduciary that he is acting in such a capacity is not a breach of such duty.In addition to other remedies at law, the fiduciary must return any property together with any benefits derived, directly or indirectly, including property into which the original property will have been converted - Art. 1124A(5)&(6)www.fff-legal.com

18. Particular remedies1124A7-10 were all added in 2018A competent court may make an order or declaration in favour of beneficiary, including:Order the transfer, restitution or delivery of any property, or change in registration to another fiduciary;Terminate powers of disposition of property;Order the provision of adequate security;Establish a trust, including its terms;Rescind any transfer or other transaction or declaring the same null and void;Impose damages on the fiduciaryAbove powers available in any proceedings by any beneficiary or other person whom the court considers entitled under the relevant fiduciary obligation. Third party acquiring under onerous title shall not be prejudiced, provided he was not aware that he was dealing with a fiduciarywww.fff-legal.com

19. Implicit waiver (Art. 1124A(9))Fiduciary duties may, in particular cases, be considered implicitly waived in certain circumstances, such as:Method of engagement of fiduciary, in particular where he has multiple purposes, functions or offices or where he is granted contemporaneous entitlement;Scope, purposes and contexts of the fiduciary obligations imposed;Delivery of property to a beneficiary’s creditor by way of security or for a purpose which is distinct from that of the beneficiary;Manner of acceptance or assumption or undertaking of the fiduciary obligationWhere there is a waiver (implicit or express), the fiduciary may apply for directions from the competent court on how to act in the circumstancesThe court shall give due regard to the intentions of the person establishing or imposing the fiduciary obligations and to the interests of both the fiduciary and the beneficiarywww.fff-legal.com

20. Art. 1124B and its evolutionThe marginal note previously read “Ownership by a fiduciary”. The section was relatively short and provided for three basic principles:Where ownership of property is vested in the fiduciary, third parties may act in relation to such person as though he were the absolute owner thereof;Property held by fiduciary is not subject to claims or rights of action of his personal creditors, nor his spouse or heirs at law;Third parties in good faith can rely on declarations made by the fiduciary re his authority, and need not enquire about this, or obtain consent from the beneficiaries or anyone elsewww.fff-legal.com

21. Art. 1124B todayArt 1124B(1) & (2)Post 2018 amendments, the section is longer and more complicated;The marginal note now reads “dealings with third parties aware of fiduciary obligations”Where they are aware that fiduciary is vested with ownership, has registered in his name, holds, exercises control or powers of disposition over property as fiduciary, third parties in good faith can deal with the fiduciary as if he is absolute owner;A third party acquiring property under an onerous title is not affected by fiduciary obligations “to which the property is subject, unless otherwise agreed upon”;www.fff-legal.com

22. Acquisition by gratuitous titleArt. 1124B(2A)The situation is different where a third party acquires in terms of Art. 1124B(1) under gratuitous title, and: the fiduciary will have acted in breach of a fiduciary obligation; orThe third party acquired “to the detriment of a beneficiary”Here, he will be subject to the same fiduciary obligations, as from when he becomes aware or he reasonably ought to have become aware of the breach of fiduciary obligation The obligation is however limited to the extent of the breach or unauthorized gain, unless the Court provides otherwise pursuant to any of the remedies in Art. 1124Awww.fff-legal.com

23. Third party need not, but has a right, to make enquiriesArt.1124B(3) & (3A)TP in good faith is entitled to rely on fiduciary’s declaration regarding his authority, and need not:enquire into terms and conditi0ons of fiduciary’s authority, except where transaction is gratuitous;Obtain the consent of the beneficiary of the fiduciary obligationsTP is entitled to enquire about the purposes of the fiduciary obligation, including the obligation “of not exceeding the value raised by the transaction”, or otherwise relating to the property subject to the transaction or the applicability of the funds in question.www.fff-legal.com

24. Declarations by fiduciary Art. 1124B(4), (5)The following declarations by a fiduciary are not a breach of confidentiality:That his authority exists, the date the relevant instrument was executed and that the authority has not been revoked;That he is authorised to carry out the transactions being entered into;The identity and address of the fiduciary!But any certificate containing a statement which he knows or ought to know is false shall be guilty of an offence liable to punishment of imprisonment up to 2 years or a fine (multa)www.fff-legal.com

25. Personal liability, recourse & powersArt. 1124B(6)-(8)Where a TP has been informed, is aware or should reasonably be aware that a fiduciary is acting in such capacity, the fiduciary is not personally liable for the obligations entered into, other than those entered into in the exercise of his obligations.Where TP is unaware of the fiduciary obligations, the fiduciary is personally liable for the obligations entered into, subject to any terms stipulated or applicable law.Fiduciary has a right of recourse against the beneficiary where contemplated by law, by way of indemnity, unless he has acted in breach of his dutiesFiduciary is presumed to have all powers required to perform fiduciary obligations towards beneficiaries or purposeswww.fff-legal.com

26. Patrimony segregationArt. 1124CProperty held by a fiduciary (even in ownership), “shall constitute a distinct and separate patrimony, consisting of all relative rights and obligations with respect thereto”Fiduciary ownership is integral as far as third parties are concerned, but modified by the Code as well as any special laws that may be applicable, as far as the beneficiary (and/or purpose) is concerned. Where property is held but not in ownership, the provisions of this Code and any other special law governing the relationship shall apply in accordance with the terms established by the parties (but can be modified in terms of the law for the protection of the beneficiary or the “achievement of the obligation”www.fff-legal.com

27. Fiduciary ActionArt. 1124EAny beneficiary can enforce fiduciary obligations on the basis of the provisions of this Title;The demand may be made together with any other action available at law as part of a general action or by an additional application to the Court, at any time of the proceedings until the award of a final judgement by the competent court or the Court of Appeal;Action can be exercised by any person or body granted due authority in the instrument creating the obligation, where this is for a purpose, and in the absence of a beneficiary;Where undertaken by a public benefit organization, the AG can also utilize the remedy www.fff-legal.com

28. PrescriptionArt. 1124FNo prescription where action is brought:For fraud or dishonesty to which fiduciary was party, or had knowledge thereof;For recovery of property from the fiduciary where this has been converted to his use, or for benefits or gains received as a result of breach of duty;A fiduciary cannot acquire property as a result of time bar, even if in good faith;Any act of a fiduciary in bad faith is sufficient for an action not to be barred by prescriptionwww.fff-legal.com

29. Prescription (cont.)Art. 1124FOtherwise, an action by a beneficiary for breach of any other fiduciary obligation referred to in Art. 1124A(4) lapses after 5 years, from the date (whichever earlier):of delivery of a written account of fiduciary activity to the beneficiary;On which the beneficiary first had knowledge of the occurrence of the breach of fiduciary duty;If the written account is itself dishonest, then the latter date shall count with reference to such accountwww.fff-legal.com

30. Obligations of beneficiary towards fiduciaryArt. 1124HTo perform obligations agreed in writing, provided in the relevant instrument giving rise to fiduciary obligation, or as may arise at law;Pay remuneration and expenses to fiduciary as may be established under the relative instrument, or as may be reasonableFiduciary may reimburse himself or pay out of the property expenses properly incurred, and inform beneficiarywww.fff-legal.com

31. Obligations of beneficiary towards fiduciary (cont.)Art. 1124HBeneficiary must at all times act in good faith towards the fiduciarySubject to the terms of the instrument, and to the extent of the property (unless agreed otherwise), the beneficiary shall indemnify the fiduciary for any liabilities incurred, except to the extent fiduciary is guilty of negligence, willful misconduct or fraud.www.fff-legal.com

32. Retirement and replacementArt. 1124DLong and detailed provisions regulating this important aspect of holding property subject to fiduciary obligations.These are deemed beyond the scope of these lectures, but remain an important area that requires careful study www.fff-legal.com

33. B. Particular instances where Fiduciary Obligations are owedDr. Tonio Fenechtfenech@fff-legal.comwww.fff-legal.com

34. Rules on mandate within the context of fiduciary obligations (Art. 1871A)Mandate relationships in general now fall squarely within the ambit of fiduciary relationshipsA mandatory for an undisclosed beneficiary (a so-called “nominee”) also specifically regulatedArt. 127 of the Companies Act deals with company shares held in trust and nomineeshipwww.fff-legal.com

35. Some other fiduciary relationships other than trustDeposit: acceptance of custody of a thing gratuitiously to be returned on demand. Title does not pass, and depositary can force depositor to take thing back. Contract terminates on death of depositor;Fideicommissa: A transfers title of thing to B, subject to duty to pass it on to C when A dies. Clearly distinguishable from trust;Community of acquests: a form of reciprocal trust, produced ipso jure as a normal effect of marriage. In certain cases, however, creditors can access paraphernal assets when community of acquests is insufficientwww.fff-legal.com

36. Some fiduciary relationships other than trust (cont.)Inheritance with the benefit of inventory: an heir accepts estate without being liable for debts attaching to it (etc). Separation of estates, and heir can even retain rights if claim against estate, but heir can renounce to estate;Foundation: in some limited senses, this is a form of corporate trust, but settlor can have much more influence. New juridical entity, with administrators its officersDirectorship: the Companies Act is not specific about this (see Art. 136A generally), but it is generally held under English law that Directors owe fiduciary duties;www.fff-legal.com

37. Nominee shareholdingArt. 127 of the Companies Act:“Unless otherwise provided in its articles, a company formed and registered in Malta shall not recognise any nominee relationship or trust in respect of any security issued by it, and the company shall not recognise, even when having notice thereof, any interest or other right in such security, but shall only recognise the registered holder thereof.”The Article accepts situations where shares are held by a “trustee”, and provides some definitions:"beneficial owner" means the person beneficially entitled to the shares under a trust or a fiduciary agreement;"trustee" shall mean a person who may act as a trustee in accordance with the Trusts and Trustees Act and shall include any fiduciary holding shares on behalf of another person.www.fff-legal.com

38. The Mizzi CaseMizzi et vs Fenech et, decided on 29th September 2016, by Mr. Justice Joseph Zammit McKeon in the First Hall, Civil Court;This case was not appealed from, and should therefore be considered finaltfenech@fff-legal.com www.fff-legal.com

39. A key quote from the Mizzi case“dan l-artikolu ma hu xejn ghajr l-applikazzjoni generali tal-ligi illi fil-qadi tad-doveri tieghu, impjegat irid iqis l-interess tal-principal tieghu u jagixxi bid-diligenza kollha fil-qadi ta’ dmiru, u aktar ma hi gholja l-posizzjoni jew il-kariga, aktar jassumi piz l-obbligu ta’ fedelta’ lealta, onesta’ u buona fede fil-konfront tal-principal…” “Huma in-natura tal-kariga, ir-responsabilitajiet u poteri afdati…..li jiddeterminaw u jiddelineaw il-qies tal-fiducja riposta u mistennija” www.fff-legal.com

40. The wider relevance of the Mizzi CaseThe Mizzi case is not about the duties of trustees;It is a contractual scenario where a committee of professionals were given wide discretion to evaluate assets with a duty to come to an equitable conclusion between the parties;How is this relevant for trustees in a Maltese context?tfenech@fff-legal.com www.fff-legal.com

41. Background to the Mizzi caseTwo brothers owned a company between them;Incompatibility of characters and personalities led to a decision to split the business amicably;A valuation committee (VC) was formed to report on and decide how to split certain assets, including immovable assets within the business after valuationThe relevant Agreement mandated the VC to utilize specific valuation methodologies for different assets, but otherwise provided for valuations “in accordance with generally accepted valuation principles and concepts and in such manner as the Valuation Committee may at its sole discretion consider equitable in the circumstances”. The VC appointed architects, who established the value of two buildings (the Building Report) as part of their mandate;tfenech@fff-legal.com www.fff-legal.com

42. Background (2)In their final report, the VC gave a value which included a value of the Buildings, but also gave an option to each of the brothers to ignore the Building Report and to opt for a so-called “property disposal mechanism”, which in essence provided for the sale of the building concerned;One of the brothers opted for this, but the other eventually obtained a Court of Appeal judgment that the mechanism was in fact ultra vires in terms of the VC’s remit;A dispute arose as to whether the value without reference to the mechanism had become final, given certain alleged mistakes made by the architecttfenech@fff-legal.com www.fff-legal.com

43. Mizzi Case demandsThe brother who had opted for the disposal mechanism filed suit, requesting that the court :Declare the Building Report as defective;Order defendants to revise the Building Report;Alternatively appoint other architects for the same purpose;Declare that the VC has yet to reach an equitable valuation for the relevant building;Order the VC to revise the compensations payable under the AgreementOrder the VC to complete the division of assets of the Company tfenech@fff-legal.com www.fff-legal.com

44. Mizzi Case demands (2)The Court essentially considered the demands in two batches:Issues connected with the Building Report (the first three demands); AndThe duties, if any, of the VC in the light of the removal of the property disposal mechanism option (the last three demands)tfenech@fff-legal.com www.fff-legal.com

45. The findings of the court regarding Demands 1-3Given that the VC had to be driven by principles of equity, the Court felt it had to evaluate the Building Report, as equity will not be respected if it contains material mistakes and the VC continued to rely on it. The Court found no material defects in the report and rejected the first 3 demands; tfenech@fff-legal.com www.fff-legal.com

46. The findings of the court regarding demands 4 - 6 The court upheld 4th and 6th demands in the sense that the valuation already made by the VC was subject to possible review, now that the disposal mechanism was not available. The fact that a disposal mechanism was provided indicated that the VC had some doubt about the equitable nature of the theoretical exercise made by the architect alone.The VC can determine whether to adopt measures or make other verificationstfenech@fff-legal.com www.fff-legal.com

47. The findings of the court (Cont.) The court went out of its way to state that the judgment should not influence the VC, whose sole obligation is an equitable conclusion to their mandate;The judgment should not be interpreted as an indication that the rejection of the first 3 demands implies a requirement to rely on the architect report, or the VC’s own report tfenech@fff-legal.com www.fff-legal.com

48. Some points to ponder the judgment was given in the context of a clear contractual acceptance of fiduciary obligations by the VC members, as well as a wide discretion given in order to fulfil a duty to find an equitable conclusion to their mandate;Can similar duties be implied in respect of a fiduciary who is simply given discretionary powers without a specific reference to principles of equity and justice?tfenech@fff-legal.com www.fff-legal.com

49. The normal position in contracts: Art 993, Civil Code:“Contracts must be carried out in good faith, and shall be binding not only in regard to the matter therein expressed, but also in regard to any consequence which, by equity, custom, or law, is incidental to the obligation, according to its nature.” tfenech@fff-legal.com www.fff-legal.com

50. Good faith and equityPace vs Micallef, Ct. of Appeal, 15.12.2004, made reference to principles of equity in good faith, in order to attack a rigid interpretation of contractual duties;It stated that a certain element of equity together with practical and moral considerations were included in the concept of good faith. It characterized its own logic as reflecting the principle of Roman law, that “in omnibus quidem, maxime tamen in jure, aequitas spectanda sit (Dig. 50, 17, 90)“In English: “In all affairs, and principally in those which concern the administration of justice, the rules of equity ought to be followed.” tfenech@fff-legal.com www.fff-legal.com

51. The actual extract of the judgment in the Mizzi Case“Din il-Qorti tifhem li fil-kuncett tal bona fidi jidhol ukoll certu element ta’ ekwita kif ukoll ta’ sens prattiku u morali li jigi vjolat mhux biss meta konfrontat b’agir specifiku doluz biex jaghmel il-hsara, izda wkoll b’dak il-komportament li jkun ghal kollox sproporzjonat u li ma jkunx accettabbli skond in-normi stabiliti tas-socjeta u tal-logica guridika………omissis…….. Il hsieb ta’ din il-Qorti f’dan ir-rigward hu rifless fil-massima tad-dritt komuni li ghal sekli shah iddomina l-kontinent Ewropew: in omnibus quidem, maxime tamen in jure, aequitas spectanda sit (Dig. 50, 17, 90)"tfenech@fff-legal.com www.fff-legal.com

52. What about Utmost Good faith?The Court considered this to be applicable in all contractual relationships;What about contracts where principles of equity and fairness are imposed on the contracting party?How much more applicable would such principles be on fiduciaries who are given discretion and who owe duties of utmost good faith?tfenech@fff-legal.com www.fff-legal.com

53. Fiduciary ObligationsIt is submitted that, where fiduciary obligations are owed, the party must go beyond normal good faith. Thus the principles and behaviour set out in Art. 1124A must also be coloured by the Mizzi Case judgment, which can be seen as a re-affirmation of the judgment in Pace vs Micallef.Therefore principles of equity must be considered just as much as the reference to honesty and utmost good faith in Art, 1124A;tfenech@fff-legal.com www.fff-legal.com

54. An indicator of the future?As a result of judgments like Pace vs Micallef and the Mizzi Case, there could in my view be increasing pressure on fiduciaries going forward, in the sense that they must instill more than that “certain element of equity together with practical and moral considerations” which Pace vs Micallef associated with good faith.There will be that additional element imposed on Fiduciaries, possibly oriented around pro-activity, where they will be expected to really deal with situations in an active manner rather than merely administer in an honest manner.In such case, fiduciaries will be exonerated from such duties only where this is specifically excluded.tfenech@fff-legal.com www.fff-legal.com

55. Industry reactionHow would the industry in Malta react to such developments?Anglo-Saxon groups will possibly resist such developmentsWhat about the others?tfenech@fff-legal.com www.fff-legal.com

56. Fiduciary obligations in the UK: “single-minded loyalty”Bristol & West Building Society v Mothew (1998):“The distinguishing obligation is the obligation of loyalty. This core liability has several facets. A fiduciary must act in good faith; he must not make profit out of his trust; he must not place himself in a position where his duty and his interest may conflict; he may not act for his own benefit or the benefit of a third person without the informed consent of his principal”.www.fff-legal.com

57. Are fiduciary obligations prescriptive or proscriptive?The traditional and mainstream opinion in the UK: the duty is articulated on the basis of what a fiduciary must not do (proscriptive), and not on what he ought to do;However the courts sometimes express themselves in a more prescriptive manner:Item Software v Fassihi (2005)Sinclair Inv. v Versailles Trade Finance (2012)F&C Alternative Investments v Barthelemy (2012)www.fff-legal.com

58. C. Trusts as a form of fiduciary relationshipDr. Tonio Fenechtfenech@fff-legal.comwww.fff-legal.com

59. Trusts as a form of fiduciary relationshipArt 3 of the Trusts & Trustees Act:A trust exists where a person (called a trustee) holds, as owner or has vested in him property under an obligation to deal with that property for the benefit of persons (called the beneficiaries, whether or not yet ascertained or in existence, which is not for the benefit only of the trustee, or for a charitable purpose, or for both such benefit and purpose aforesaid.A mandate for an undisclosed principal pursuant to Art.1871A(2) could in some senses be covered, therefore intention (and documenting such intention) is important. This is also significant in the context of trusts where the settlor is himself the beneficiary, or bare trusts, which in most cases are really a form of mandatewww.fff-legal.com

60. Creation of a trust (Art. 7)A trust can come into existence in “any manner”Without prejudice to the foregoing, also: unilaterally or otherwise by oral declaration, or by an instrument in writing including a will, by operation of law or by a judicial decision:But where by oral arrangements of a fiduciary nature, the presumption is mandate, or deposit, unless there is evidence to create an oral trustA unilateral declaration of trust is a declaration in writing by a trustee stating that it is holding as trustee, containing all the terms of the trust, including information enabling identification of beneficiariesA unit trust must be created by written instrumentwww.fff-legal.com

61. Are “fiduciary obligations” new law?The amendment which introduced specific regulation of fiduciary obligations is of 2004;However, the principle has existed since time immemorial within the Civil lawAnthony Caruana & Sons Limited v. Caruana (Ct. Appeal, 28/2/2014)www.fff-legal.com

62. Anthony Caruana & Sons Limited v. Caruana (Ct. Appeal, 28/2/2014)“…dak l-Artikolu ma hu xejn hlief riproduzzjoni ta’ principju ta’ dritt applikabbli gia fid-dritt Ruman fejn kien meqjus bhala “a parasitic institution”….. mhux bhala kuntratt imma bhala li jimponi obbligi addizzjonali ghal dawk kuntrattwali fil-kaz ta’ certi kuntratti. Il-kuncett ta’ obbligazzjonijiet fiducjarja lanqas ma hu marbut necessarjament mal-kuncett ta’ trusts…u hu ta’ applikazzjoni generali f’kull kaz li dak li jkun ikun qed jagixxi f’interess ta’ haddiehor meta allura hu mistenni li jagixxi bid-debita attenzjoni u kura.”www.fff-legal.com

63. Equitable principles underlying general lawLaw of Contract (Art. 993): “Contracts must be carried out in good faith, and shall be binding not only in regard to the matter therein expressed, but also in regard to any consequence which, by equity, custom, or law, is incidental to the obligation, according to its nature.”Pace vs Micallef pro et noe (Ct. Appeal, 5.12.2004): “…fil-kuncett tal-bona fidi jidhol ukoll certu element ta’ ekwita kif ukoll ta’ sens prattiku u morali…“ The court endorsed the Latin maxim which translates to ”In all affairs, and principally in those that concern the administration of justice, the rules of equity ought to be followed”www.fff-legal.com

64. Is there a nexus with English law post 2004?The Civil Code is clearly “Civilian” in all senses, and the law of fiduciary obligations is also properly allocated to a civilian form of regulationThe particular fiduciary relationship known as a trust has, however, been regulated through a specialized law, Cap. 331, which was deliberately modelled around Jersey law, in order to remove doubt when Maltese trusts are examined within an international context;It is therefore the Anglo-Saxon notion of trust that was looked to, in terms of the legislative objective, when the concept was introduced;It was only later that the relationship was also given further support through specific regulation in the Civil Code, and a clear allocation of the relationships involved through the development of the law of fiduciary obligationsOne must therefore clearly understand the concept also as of Anglo-Saxon origin and orientation, and Anglo Saxon judicial authority remains of utmost importance, if one were to understand how the different offices involved in a trust should properly inter-act.www.fff-legal.com

65. D. The origins of the Trust conceptDr. Tonio Fenechtfenech@fff-legal.comwww.fff-legal.com

66. Context & perspective (1)Maitland: “If we were asked what is the greatest and most distinctive achievement performed by Englishmen in the field of jurisdprudence, I cannot think that we shall have any better answer to give than this, namely the development from century to century of the trust idea.”www.fff-legal.com

67. Context & perspective (2)Lapaulle (as quoted in Hayton):“....from settlement of the greatest of wars down to the simplest inheritance on death, from the most audacious Wall Street scheme down to the protection of grandchildren, the trust can see marching before it that motley procession of the whole of human endeavour: dreams of peace, commercial imperialism, attempts to strangle competition or to reach paradise, hatred or philantropy, love of one’s family or the desire to strip it of everything after one’s death, all those in the procession being dressed either in robes or in rags, and either crowned with a halo or walking with a grin. The trust is the guardian angel of the Anglo-Saxon, accompanying him everywhere, impassively, from the cradle to the grave.”www.fff-legal.com

68. “...lost in the mists of mediaeval England”The trust developed out of the exercise of the Chancellor of England’s jurisdiction to “soften the rigours” of the common lawAll land was owned by the crown;In the feudal hierarchy, the King granted “estates” in land to his supporters, who in turn granted types of tenure in parts of this land to their own supporters, etcThere were 3 common law estates:Estate for Life: dispose, manage and enjoy land for lifeEstate in fee tail: for as long as there are lineal descendantsEstate in fee simple: heirs (later a form of perpetual tenure)www.fff-legal.com

69. Equitable EstatesLegal action on land could only brought by a male, claiming a better right to possession of the land than some interloper;Knights going on the crusades would vest his estate in land in a friend to hold “to the use of” the knight , and until his return, his wife and children.....or the land was defenceless! However, if the friend did not retransfer, there was no remedy in the common law courtsThe knight could only petition the King to remedy the wrong, since in equity the friend should be forced to recognize the knights interest and retransferTypical situation also for someone who wanted to grant land to a monastic order with vows of poverty www.fff-legal.com

70. Development of Court of ChanceryThe King would refer petitions to the Chancellor, an ecclesiastic learned in law and qualified to advise others on matters of conscience and equity;The Chancellor sat in what became known as the Court of Chancery, where rules of equity started developing systematicallyLegal estates recognized but the legal estate owner was compelled to use his legal title for the beneficiaries who in equity should have benefited from the landEquitable estates thus could correspond to legal estates“to the use of” became known as “trust” after the Statute of Uses of 1535www.fff-legal.com

71. What is a trust?Do not think in terms of legal personality;The 2nd Schedule, Cap 16, excludes application of its provisions to trusts;It is a relationship created by the act of a person (the Settlor) who settles the property (by way of donation or otherwise) onto another person (the trustee), charging the latter to hold, manage and administer the same for the benefit of beneficiaries or for a charitable purpose;Assets are normally transferred to trustee in ownership, but the trustee accepts such assets subject to fiduciary obligationswww.fff-legal.com

72. Some definitionsScott:“it is a fiduciary relationship with respect to property, subjecting the person by whom the title to property is held to equitable duties to deal with the property for the benefit of another person, which arises as a result of a manifestation of an intention to create it.”www.fff-legal.com

73. Some definitions (2)Underhill & Hayton:“A trust is an equitable obligation binding a person (who is called a trustee) to deal with property over which he has control (which is called the trust property), for the benefit of persons (who are called beneficiaries [omissis]), of whom he himself may be one, and anyone of whom may enforce the obligation. Any act or neglect on the part of a trustee which is not authorised or excused by the terms of the trust instrument, or by law, is a breach of trust.”www.fff-legal.com

74. Some definitions (3)Keeton:“A trust....is the relationship which arises wherever a person called the trustee is compelled in equity to hold property, whether real or personal, and whether by real or equitable title, for the benefit of some persons (of whom he may be one and who are termed beneficiaries) or for some object permitted by law, in such a way that the real benefit of the property accrues, not to the trustee, but to the beneficiaries or other objects of the trust.”www.fff-legal.com

75. Some definitions (4)Lewin (description in Re Scott):“the word ‘trust’ refers to the duty or aggregate accumulation of obligations that rest upon a person described as trustee. The responsibilities are in relation to property held by him, or under his control. That property he will be compelled by a court in its equitable jurisdiction to administer in the manner lawfully prescribed in the trust instrument, or where there be no specific provision written or oral, or to the extent such provision is invalid or lacking, in accordance with equitable principles. As a consequence the administration will be in such a manner that the consequential benefits and advantages accrue, not to the trustee, but to the persons called cestuis que trust, or beneficiaries, if there be any; if not for some purpose which the law will recognize and enforce. A trustee may be a beneficiary, in which case advantages will accrue in his favour to the extent of his beneficial interest.” www.fff-legal.com

76. E. The Maltese TrustDr. Tonio Fenechtfenech@fff-legal.comwww.fff-legal.com

77. What is a trust? (T&T Act, Art. 3 ) 3(1): A trust exists where a person (called a trustee) holds, as owner or has vested in him property under an obligation to deal with that property for the benefit of persons (called the beneficiaries, whether or not yet ascertained or in existence, which is not for the benefit only of the trustee, or for a charitable purpose, or for both such benefit and purpose aforesaid.www.fff-legal.com

78. Art. 3 (cont.)3(3): trustee has “full power as well as the duty for which he is accountable, to administer, employ or dispose of the trust property in accordance with the terms of the trust and any special duties imposed on the trustee by any law applicable thereto, to sue and be sued in respect of the trust and otherwise to act in all matters concerning the trust”3(6): “Trusts create fiduciary obligations on the trustee in favour of the beneficiary of the trusts. The settlor of trusts shall have no rights in relation to trust property except as provided by this Act”www.fff-legal.com

79. Art. 3 definition is wideA mandate for an undisclosed principal pursuant to Art.1871A(2) could in some senses be covered, therefore intention (and documenting such intention) is important. This is also significant in the context of trusts where the settlor is himself the beneficiary, or bare trusts, which in most cases are really a form of mandatewww.fff-legal.com

80. The stakeholders in a trustThe manner in which influence over decisions is wielded will help determine the manner in which the structure will be judicially recognizedBenefial interest holders

81. The duties of the trustee (art.21)21(1): “Trustees shall……act with the prudence, diligence and attention of a bonus paterfamilias, act in utmost good faith and avoid any conflict of interest.”21(2): “Subject to the provisions of this Act, trustees shall carry out and administer the trust according to its terms…shall ensure that the trust property is vested in them or is under their control and shall, so far as reasonable and subject to the terms of the trust, safeguard the trust property from loss or damage ” (various provisos apply)www.fff-legal.com

82. Duties of the trustee (cont.)21(2)(b): “Trustees shall, when accepting their appointment, draw up in writing an inventory and shall declare that the inventory includes all the trust property and of which the incoming trustee is aware.”21(4): “Trustees shall keep accurate accounts and records of their trusteeship and shall, upon a request by any beneficiary, disclose such accounts and records to such beneficiary and shall, subject to the terms of the trust, provide a copy of such accounts within a reasonable time of a request”www.fff-legal.com

83. Duties (cont.)21(5): Trustees shall keep trust property distinct and separate from their own property as well as from any other property held by them under any other trust or title, and separately identifiable therefrom: Provided that trustees may, if expressly permitted by the terms of the trust, or in any case where the trust property consists of fungible things, place and keep trust property in a common pool of identical assets or in a clients’ or common account.25(1): A trustee may not delegate his powers unless permitted to do so by this Act, or by the terms of the trust, or by the court.www.fff-legal.com

84. Powers of the trustee (Art. 24)(1) Subject to the terms of the trust and to the provision of this Act, a trustee shall, in relation to the trust property, have all the powers of a natural person having the absolute title to such property. (2) A trustee shall exercise his powers in the interest of the beneficiaries and in accordance with the terms of the trust.www.fff-legal.com

85. Duties to disclose information29(1): “A trustee shall, so far as is reasonable and within a reasonable time of receiving a request in writing to that effect, provide full and accurate information as to the state and amount of the trust property, including the accounts of the trust, and subject to subarticle (2), the conduct of the trust administration to:The CourtSubject to the terms of the trust, the settlor;The protector of the trust;……..any beneficiary of the trust who is of full age and capacity……;”www.fff-legal.com

86. Information disclosure (cont.)29(2): “……….a trustee or any other person shall not be required to disclose to any person any document or information which – (a) discloses the trustee’s deliberations as to the manner in which a power or discretion was exercised, or a duty conferred or imposed by law or by the terms of the trust was performed; (b) discloses the reason for any particular exercise of such power or discretion or performance of duty or the material upon which such reason will be or might have been based; (c) relates to the exercise or proposed exercise of such power or discretion or the performance or proposed performance of such duty.”www.fff-legal.com

87. The Settlor: T&T ActArt. 2: “settlor” means the person who makes the trust and includes a person who provides trust property or makes a disposition on trust or to a trust;Settlor normally goes out of the picture following settlement of the trust, retaining influence only through issuance of letters of wishesHe can also appoint a protector, or reserve certain powers (latter is a 2014 amendment)www.fff-legal.com

88. Reservation of powers (Art. 14A)The reservation or grant by the settlor of any beneficial interest in the trust property or of any of the following powers shall not affect the validity of the trust, nor delay the trust taking effect: (a) any powers to appoint, add or remove any trustees, protectors or beneficiaries; (b) any powers to appoint an investment adviser or investment manager: Provided that the reservation of powers referred to in paragraphs (a) and (b) shall be without prejudice to other powers that can be reserved by the settlor in terms of the other provisions of the Act.

89. The Protector (Art. 24A)The terms of a trust may provide for the office of protector of the trust. Subject to the terms of the trust, the protector shall have the following powers: (a) to appoint a new or additional trustee; (b) to remove a trustee; (c) to require the trustee to obtain his consent before exercising a discretion. In the exercise of his office the protector shall not be deemed to be a trustee.www.fff-legal.com

90. The terms of the trust determined in a wide mannerT&T Act, Art. 2:“terms of a trust” means the written or oral terms of a trust, expressed or implied, and any other terms made applicable by the proper law;www.fff-legal.com

91. The Beneficiaries (Art. 9(1))“A beneficiary has an entitlement, called a beneficial interest, in or to the trust property, as the case may be. The beneficiary may enjoy the beneficial interest subject to the terms of the trust and the provisions of this Act and any other provisions of law applicable to trusts”www.fff-legal.com

92. Creation of a trust (Art. 7)A trust can come into existence in “any manner”Without prejudice to the above, some specific manners are: Unilateral declaration; Oral declaration;by an instrument in writing including a will, by operation of law by a judicial decision:www.fff-legal.com

93. Oral trusts, unilateral declarations and unit trustsWhere a trust is created by oral arrangements of a fiduciary nature, the presumption is mandate, or deposit, unless there is evidence to create an oral trust;A unilateral declaration of trust is a declaration in writing by a trustee stating that it is holding as trustee, containing all the terms of the trust, including information enabling identification of beneficiariesA unit trust must be created by written instrumentwww.fff-legal.com

94. Civil Code on transaction creating a trust: Art. 958A(2)(c)“the sole consideration for the validity of such transactions may be the imposition or assumption, the performance, or the termination, as the case may be, of legally enforceable obligations on or by a trustee in relation to such property”www.fff-legal.com

95. F. Of trusts and their effectsDr. Tonio Fenechtfenech@fff-legal.comwww.fff-legal.com

96. [in preparation]www.fff-legal.com

97. G. Classification and types of trustDr. Tonio Fenechtfenech@fff-legal.comwww.fff-legal.com

98. Classification and types of trustsClassifications are various, but normally one would look at different types of trusts from three separate view-points:Manner of creationFunction of trusteesReason for and Purpose of trustwww.fff-legal.com

99. Classification and types of trustsTwo points of Caution / Warnings:1. Words developed in the UK context should not be blindly adopted in Malta:English system developed from equity, but the volume of case law makes some commonality inevitable and desirable;Maltese law is developing largely through Statute, and influenced by contemporary domestic and other factors2. Misconception that trusts are an ‘off-the-shelf’ marketable product

100. A. Manner of CreationThe Maltese statutory approachArticle 7 provides that a trust may come into existence in any manner including:Unilaterally or otherwiseBy oral declaration By an instrument in writing including by a willBy operation of lawBy a judicial decisionBy conduct

101. A. Manner of Creationthe Anglo-Saxon approachAnglo-Saxon commentators have approach ed the question by identifying the following forms:Express trusts (both written as well as oral)Statutory trusts (implied or declared by law)Implied or resulting trustsConstructive trusts and tracingTrusts created by judicial decision

102. A. Manner of Creation: Express TrustsDeclared or set out by the donor (settlor or testator)Intention to set up the trust is clearly and openly expressedMust be created by following certain formalities to be validTypes of express trusts under Maltese law:Oral TrustsTrusts created by conductNotarial procedure trustsTestamentary trustsForeign trusts

103. A. Manner of Creation:Express Trusts (Oral)Oral TrustsS. 7 allows for creation by oral declarationException - Unit trustsThere must be evidence of intention to create having regard to S. 3(1)Otherwise Mandate or Deposit is imputedHague Convention limited to trusts evidenced in writing

104. A. Manner of Creation Express Trusts (Testamentary)Testamentary trustsThis topic could warrant a whole seminar in itselfUseful to prevent the property of a deceased person vesting absolutely in his adult children who would then be free to scatter the property as they wishCan preserve and generate family wealth in a tax-efficient manner

105. A. Manner of CreationConduct leading to fiduciary oblgs. by op. of lawIn the Civil Code (art. 1124A, 1124B), Fiduciary obligations (but not necessarily a trust) arise from behaviour only where a person: appropriates / uses property belonging to others without title, orreceives or otherwise acquires property, or makes other gains through a fiduciary, when he knows (or should know) fiduciary is acting in breach of his obligationsArt. 33 of the T&T Act deals with constructive trusts:a person who makes profit, gain or advantage from a breach of trust, is deemed a trustee thereof for the benefit of the trust or person concerned.....except where property is acquired under onerous title in good faith;He has a duty to deliver property to the beneficiary;

106. A. Manner of Creationother trusts by operation of lawArt.958A(4) of Civil Code: where a trustee is informed of a claim re legitim rights where trust property is to be sold, the trustee shall hold on trust a sum in money based on the net transfer value of property transferred for whoever has a legitimate right thereon until matter is determined or lapses.Resulting / implied trusts are not specifically provided for in Maltese law, but Art. 37(2)(b) of the T&T Act provides that the Court can inter alia make any declaration as to “the existence of any resulting or constructive trust”

107. A. Manner of CreationImplied or Resulting TrustsIn Anglo-Saxon thought, these arise from an unexpressed, but presumed intention of the settlorResulting – meaning ‘springing back’ ie: beneficial interest reverts back to the settlorNot subject to formal requirements present in express trustsEnglish authors give two general categories of implied or resulting trusts:settlor fails to deal with whole of beneficial interest; anda purchase made in another persons’ name

108. A. Manner of CreationImplied/resulting trusts distinguishedVarious instances where trustee is bound to hold “in trust for the settlor absolutely, or if he is dead, for his heirs”, eg:S.11(6) failure of trustsS.15(2) revocation of trustS.16(1) interest lapses, trust terminates or no beneficiariesS.958B(2)CC if/when trust property reduced to disposable portion (on succession), any excess is held in trust for settlor’s heirs or other persons entitled thereto

109. B. Function of TrusteesSimple Trusts in anglo-saxon systems.....Possibly no trust at all under Maltese lawTrustee as a mere repository of trust property – no active duties to performReferred to as a ‘passive’ or ‘bare’ trust, quite similar to a NomineeSole obligation to deliver trust property to beneficiary or to his order, on requestBeneficiaries are in most cases considered ‘absolute owners’

110. B. Function of TrusteesMaltese nominees and nomineeship in general, if created by written agreement, can be considered bare trustees, but it is the Civil Code which is more directly applicable as opposed to the T&T ActSuch situations are governed by title of Fiduciary Obligations in Civil Code (Ss. 1124A & B of the CC) as well as Mandate (S. 1871 - 1871A)

111. B. Function of TrusteesSpecial Trusts or true trustsHere, trustee is an active trustee, called upon by settlor to perform a particular task and must actively accomplish itFixed (interest) trust v Discretionary trustFixed trust – beneficiary has a current fixed entitlement to an ascertainable part of the ‘net’ income of the trust fundA full Discretionary trust would not normally give any fixed interests whatsoever – much left to the discretion of the trustees

112. B. Function of TrusteesDiscretionary and fixed interest trusts are recognised by Maltese law in Art.2 which def. a beneficiary as: “…a person entitled to benefit under a trust or in whose favour a discretion to distribute property held in trust may be exercised”

113. C. Reason for and Purpose of trustTrust relationships are formed for many reasons and purposes, and there is higher risk of wrongly considering such relationships as a ‘product’, when trusts become over-commoditized.Accumulation and maintenance trustsProtective trustsMatrimonial trustsCharitable trustsSecret trustsCommercial use trusts

114. C. Reason for and Purpose of trust 1. accumulation and maintenance trustsNormally used in settlements in favour of minor child benefiting on attaining certain age: typically, no benefits until such time but accumulation - accretion to capitalTrustees are usually given discretionary powers to distribute upon attaining majority or some other timeArt.26 of T&T Act clearly outlines such discretionary powers of the trustees in respect of accumulation, advancement or appropriation of such settled property, where the trust deed so specifies

115. C. Reason for and Purpose of trust 2. Protective TrustsOften referred to as “spendthrift trusts” as used to protect spendthrift beneficiaries and also avoid exploitationImportant protection against beneficiary’s creditors in the event of bankruptcyArts.9(7) & 9(14) allow flexibility in the use of such terms – but Art.13 specifically allows for restriction and exclusion from benefit, etc Art.13 also provides for the possibility of protection of beneficiary interest from beneficiary bankruptcy or garnishee orders issued against the trustee or termination without a court order, when interest is expressed to be for maintenance or as a pension

116. C. Reason for and Purpose of trust 3. Charitable trustsPrivate trust – benefits either one person or a defined number of personsCharitable (or Public) trust – benefits society as a whole or some considerable section of itBecause they are public in nature, Charitable trusts enjoy certain privileges not enjoyed by Private trusts

117. C. Reason for and Purpose of trustDetailed and wide definition of “charitable purpose”….“any charitable, benevolent or philanthropic purpose, and without prejudice to the generality of the aforesaid includes….”- advancement of education, sports, religion, health, social and community advancement, culture, environment etc…. ....but not promotion of a political party / candidate!

118. C. Reason for and Purpose of trust 4. Secret TrustsUsed in the UK to secure welfare of certain persons without much publicity – may be fully or half secretNo apparent provisions in Maltese law to prohibit trust arrangements where trustee is enjoined to confidentiality as to trust termsSupported by the Professional Secrecy Act as well as S.1124A of the CC on Fiduciary ObligationsHowever, S.29(5)&(6) indicate that secrecy is not possible indefinitely vis-à-vis beneficiaries unless by Court sanction

119. C. Reason for and Purpose of trustAlso trustee must (s. 29(1)), if requested “provide full and accurate information as to the state and amount of the trust property, including accounts of the trust” to various stakeholders in the trust, including the court and the protector. This duty is only extendable subject to the terms of the trust, in favour of the settlor, beneficiaries of full age (or lawful guardian)

120. C. Reason and Purpose of Trust5. Matrimonial regimesCivil Code Art. 2095ANot capable of creation by operation of lawProperty in community of acquests or community of residue may only be settled with the consent of both spousesThe Civil Code contains detailed rules in order to ensure proper balance of rights between spouseswww.fff-legal.com

121. C. Reason for and Purpose of trust 6. Trusts used in commercial transactions A Commercial trust refers to type of trust used in a commercial environment or transaction. “commercial transactions” is defined extensively:Securities offerings whether to the public or for private placement, portfolio management and custody of investment instrumentssecuritisation of assetsestablishing / holding of real / personal security interests (such as hypothecs, privileges and guarantees)collective investment schemesemployment benefit or retirement schemessyndicated loans / other banking facilitiesInsurance policies and payment of proceeds thereundertimeshare and multi-property structuresany other transaction prescribed by the Minister

122. C. Reason for and Purpose of trustKey features which make the commercial use of a trust attractive:Protection against insolvencyFlexibility of the provisions which can be inserted into the trust instrument thus allowing for tax planning potential

123. C. Reason for and Purpose of trust7. security interests & shipsSecurity trusts CC 2095EIn terms of S.84Z of the Merchant Shipping Act , a shipping organisation, as defined therein, may operate under a ‘shipping trust’

124. C. Reason for and Purpose of trust8. Employee trusts, Pension Funds and Professional Compensation FundsThese have become increasingly popular nowadays through setting up of profit-sharing schemes for employees and/or pension fundsNormally advantageous to both employer and employee in tax planning as well as effective risk management tool maximising employee fidelityPension funds, either contributory or non-contributory, are usually administered by trustees

125. C. Reason for and Purpose of trustEmployment benefit or retirement schemes or arrangements are afforded status of “commercial transactions”Professional Compensation Funds are also gaining in popularity and provide compensation in the event of losses or hardship incurred by members of a profession

126. C. Reason for and Purpose of trust9. Other typesA comprehensive list of types of trust would be impossibleIndeed, a settlor may tailor a trust for any purpose not against public policy, illegal or in contravention of certain fundamental tenets of trust lawWithin such limits, the purpose for which trusts may be used, it is up to the imagination of the professional advisors concerned

127. H. Trusteeship as a regulated activity and professionDr. Tonio Fenechtfenech@fff-legal.comwww.fff-legal.com

128. Is trusteeship a regulated activity?Art. 42 – 43AThe general rule is in Art 43(1):“...any person, resident or operating in Malta, or a corporate trustee, who receives property upon trusts or accepts to act as trustee or co-trustee of a trust and who –receives or is entitled to remuneration for so acting, ordoes so on a regular and habitual basis, orholds himself out to be a trusteeshall require authorization by the Authority irrespective of governing law, or whether the trust property is in Malta or otherwiseMFSA empowered to decide on doubtful sitations, and to issue ruleswww.fff-legal.com

129. Cumulative & ongoing Licence Conditions (body corporate)Art. 43(4) Objects include acting as trustee and carrying on activities ancillary or incidental thereto, and does not include activities not compatible therewith;Its actual activities are compatible and connected with the services of a trustee;At least 3 directors, all of whom must be approved persons;Minimum capital of €15,000, which must be maintained;Insurance cover proportionate to the nature and size of the trustee’s business operations;www.fff-legal.com

130. Cumulative & ongoing Licence Conditions (cont.)Art. 43(4) Adequate systems to maintain proper records of: (i) identity and residence of beneficiaries, (ii) dealings and actions in connection with trusts, (iii) compliance with applicable law; Any person having 10% or over of capital of licensee must be approved as “fit and proper”;Name should not be inconsistent with trust activity;If foreign, it must be incorporated in an approved jurisdiction;www.fff-legal.com

131. “Approved person”art. 2, 43(4)“ a person of good reputation possessing experience and qualifications in financial, fiduciary, accounting or legal services and approved by the Authority as being fit and proper to carry out the duties of a trustee”In exceptional circumstances, a person with experience but lacking qualifications can be approved;Bodies corporate: the majority of directors must satisfy all 3 tests: fit & proper, experience and qualificationswww.fff-legal.com

132. Licence conditions for Individual trusteesResident or operates in or from Malta;Is an approved person;Adequate systems to maintain proper records of (i) identity and residence of beneficiaries, (ii) dealings and actions in connection with trusts, (iii) compliance with applicable law;Minimum capital of €15,000;Insurance cover proportionate to the nature and size of business operationswww.fff-legal.com

133. Mandatories and Private Foundation administratorsart. 43(12)“Without prejudice to the nature of the legal relationship in any particular case”, the above persons require licence, irrespective of: extent of activity, whether remuneration is payable or not, or whether they hold themselves out or otherwise to the public as providing such serviceswww.fff-legal.com

134. Exempted operators (if trust activity is incidental and ancillary to main activity)Art. 43(6)licensees under the Banking Act;licensees under the Investment Services Act to hold clients’ assets;Licensee under the Insurance Business Act or enrolled in the Brokers’ list under the Ins. Brokers & other Intermediaries Act to hold clients’ assetsEquivalent to above in approved jurisdiction;Licensee under Financial Markets Act to operate a central securities depositarywww.fff-legal.com

135. Other exceptions (2)Approved trustee of a shipping trust or a shipping foundation as defined by art. 84z MSATrustee to retirement schemes registered under Special Funds (Reg) Act.www.fff-legal.com

136. Not applicable to following persons or trustees of trusts....created to hold security in relation to any financial transaction for the benefit of lenders or other creditorsOf movable property held as security for persons with determinable or conditional entitlementLiquidator, curator in bankruptcy or court appointed administratorAdvocate, notary, LP or CPA, only if trusteeship is necessary and incidental to his professional duties, and if he does not otherwise hold himself out as a trustee to the public;www.fff-legal.com

137. Not applicable to following persons or trustees of trusts (2)Unit trust which is a collective schemeCharitable trusts, provided there is no remuneration or holding out;Co-trustee when the other is authorized (or majority)Companies formed to hold trust property, provided wholly owned and controlled by authorized persons, and directors of which are also authorized;www.fff-legal.com

138. Not applicable to following persons or trustees of trusts (3)A party accepting property on trust in the context of or as ancillary to the performance of a contract (provided there is no remuneration or holding out);Person holding shares without special voting rights, and whose nominal value does not exceed €5;www.fff-legal.com

139. Unlicensed operators need a “Qualified Person”art. 43(9)Securities or interests in or issued by a Maltese legal entity (other than listed securities) or immovable propertyin Malta can be held on trust by a non-licensed person, but only if an authorized person (or a financial institution) is engaged to carry out the following compliance functions on an indefinite basis (and agreement notified to MFSA):Ensure due compliance with all fiscal, AML and other legal obligations, and shall notify MFSA of his resignation or termination of appointment or is hindered in performing his dutiesMust approve transactions, including assignment of beneficial interest of trustwww.fff-legal.com

140. No need for qualified personart. 43(11)Shares in a company without special voting rights and value not exceeding €5;Trustees appointed by a testamentary trust in respect of the initial 6 months from date of acceptance, unless a substantial transaction is to be madewww.fff-legal.com

141. Private trustees (art. 43A)Relatives to a certain degree or acquaintances for at least 10 years, do not need authorization, if they:Are not remunerated (except as permitted by MFSA Rules);Do not hold themselves out as trustees to the publicDo not habitually act as trustees, in any case to more than 5 settlors at one timeProvided:www.fff-legal.com

142. Private trustees (cont)Must be created by a notarial trust deed;If testamentary, an inventory by notarial deed within 6 months, annexing extract of will;Further property is settled by notarial deed;Records of meetings, exercises of discretion in appointing/removing beneficiary or other material events in writing and deposited with Notary (together with accounts, etc)www.fff-legal.com

143. Alternative private trusteesIn terms of Art. 43A(13), a settlor wishing to appoint as trustee a person other than a private trustee, but wishes Art. 43A to apply, must so inform the notary public;www.fff-legal.com

144. Depositary notary for private trusteesNotary publishing will that contains a testamentary trust or receiving a notarial trust deed inter vivos shall be the sole depositary of all relevant acts;A notary who is trustee cannot also be depositary notary, notary keeper or qualified person;Trustee must deliver all documents relative to the trust within 15 days of coming into existence;www.fff-legal.com

145. Confidentality of documents depositedTrust deed and all documentsfiled with depositary notary are confidential;Art. 68A of Notarial Profession & Archives Act also in the same sense;www.fff-legal.com

146. Family TrustsDefinition: “a trust created to hold property settled by the settlor for the present and future needs of family members or family dependants who are definite and can be ascertained”Rules yet to be issued by the MFSA may further define the relevant meanings of terms, etc.www.fff-legal.com

147. Family trusts (cont.)No license needed, but company must register with MFSA, if it is limited as follows:its object and activities are limited to acting as trustee in relation to a specific settlor or settlors and providing administrative services in respect of a specific family trust or trusts;it does not otherwise hold itself out as a trustee to the public;it does not habitually act as a trustee, in any case in relation to more than 5 settlors at a time;www.fff-legal.com

148. Role and duty of Auditorsart. 43CThe auditor of a trustee “shall have the duty to report immediately to the Authority any fact or decision” which:Is likely to lead to serious qualification or refusal of the auditor’s report on the accounts of such trustee;Is likely to constitute a material breach of the legal and regulatory requirements applicable to trustees;Gravely impairs the trustee’s ability to continue as a going concern;Relates to any other matter which may be prescribed (may relate to any interested person other than the trustee);www.fff-legal.com

149. Role and duty of Auditors (cont.)art. 43CThe duty to report includes any fact or decision regarding any person having close links with the trustee which the auditor may have become aware in his capacity as auditor of the trustee or of the person having such close liinkswww.fff-legal.com

150. Questions?Students are welcome to make contact if they have questions that haven’t been addressed during my lecture, copying the other students with such communicationDr. Tonio FenechFenech Farrugia Fiott LegalSwatar & Vallettatfenech@fff-legal.com+356 2549 6000www.fff-legal.comwww.fff-legal.com