Episode 22 − DIFC Court of Appeal issues landmark judgment for Private Client industry
In our twenty-second episode, David Russel QC, who acted on behalf of the Chief Legal Officer, and Yann Mrazek, Managing Partner M/HQ, discuss the key takeaways from the judgment for end-users.
Key takeaways
[YM] What differentiates a Foundation from a Trust?
[DR] A foundation is an independent legal entity derived from civil law jurisdictions, as opposed to a trust which is a common law concept. It also has no members or shareholders but is self-owned. The foundation’s founder endows assets to the foundation and owing to its separate legal status, will hold those in its own name and separately from the founder’s personal wealth. Those assets are then managed by the foundation’s Council in accordance with the foundation’s charter and by-laws (reflecting the intentions of the founder) in support of a cause or a purpose, or for the benefit of beneficiaries.A trust on the contrary, is not a legal entity but only a legal obligation or relationship between the settlor (the person who creates the trust), the trustee (the person in charge of the trust) and the beneficiary (the person who receives benefits from the trust). Legal ownership of the trust sits with the trustees and beneficial ownership with the beneficiaries.Both a Trust and Foundation can be established in the DIFC.
[YM] Can property in a DIFC trust include property located in a jurisdiction which does not recognize trusts?
[DR] Yes. The Court clarified that Art 34(1)(d) of the DIFC Trust Law imposes no restriction on the location of the property, nor is there any restriction by reference to whether the jurisdiction in which the property is located does or does not recognize trusts.
[YM] Can a DIFC Foundation hold property in trust under the DIFC Trust Law (other than property of the Foundation as defined in the Foundation Law)?
[DR] Yes. Not all property held by a Foundation is “property of a Foundation”, pursuant to Art 27 of the Foundations Law, and Art 10(3) of the DIFC Trust Law does not prohibit a Foundation from acting as a trustee.
For that purpose, it is important however that the DIFC Foundation clearly provides in its Charter that assets transferred to it to hold upon trust are not “property of the Foundation” and therefore not within the operation of Art 10(3) of the DIFC Foundations Law.
[YM] The reference in Art 10 of the Trust Law:
i. includes the common law of trusts and principles of equity as understood under the law of England and Wales;
ii. is limited to the common law of trusts and principles of equity as understood under the law of England and Wales?
[DR] The Former. The common law of trusts and principles of equity referred to in Art 10 of the Trust Law is the common law of trusts and principles of equity as determined by the Courts of the DIFC from time to time drawing upon the common law of England and Wales and other common law jurisdictions as they see fit. The Court has the authority to develop the common law of trusts and principles of equity in the same way that other common law courts might do on a case-by-case basis.
[YM] If one or more suitably qualified expert(s) in Shari’a law has or have been appointed as an advisory trustee or trustees pursuant to Art 57 of the Trust Law, the responsible trustee may rely and act upon the advice of the advisory trustee(s) in respect of any matter related to Shari’a compliance which is relevant to the administration of the trust or the exercise of any discretion vested in the responsible trustee?
[DR] In a nutshell, yes. The Court has however considered that the trustee is not bound to act or rely upon such advice and must at all times act in accordance with the Trust Law, the common law and principles of equity applicable to the trust. The trustee cannot act on advice which would take him outside the framework of the said applicable laws.
[YM] Does anything in the DIFC public policy precludes the establishment of a trust by a person who is not and has never been a Muslim notwithstanding that it may contain terms which would not, if the trust were established by a Muslim, be Shari’a compliant?
[DR] No, the public policy constraint is directed only to the question of the purpose of the trust. It does not go to the question of the establishment of a trust by a person who is not and has never been a Muslim.
[YM] On the transfer of property by a Muslim to a Trust or Foundation necessarily being made void in application of Art 361 of the UAE Law of Personal Status – which considers “void, every fraud to the provisions governing inheritance by way of sale, donation, testament or other dispositions.”
[DR] On this important point that arises from time to time in practice when advising Muslim clients on the establishment of DIFC trusts or foundations, the Court pointed out the fact that there is nothing in the DIFC Trust Law and Foundations Law inimical to Shari’a inheritance rules.
The Court further commented that:
- A DIFC trust and its terms and purposes cannot be contrary to “public policy in the DIFC”, but that said policy does not overlap with or reflect Shari’a law rules of inheritance.
- A DIFC Foundation’s objects must not be contrary to DIFC public policy, and said Law carefully distinguish between heirship rights in relation to the property of a living person and inheritance rights upon death.
[YM] On provisions of the Trust Law preventing a settlor of a trust from being a shareholder or a director of a company which is trustee of the trust?
Another important question, as it raises the issue whether or not private trustee companies are permitted under the Trust Law. These typically take the form of companies in which the settlor is either a director or shareholder or both.
The Court pointed out that there is no provision of the Trust Law preventing a settlor of a trust from being a shareholder or a director of a company which is the trustee of the trust.
Also worth pointing out:
- There is no restriction in the Trust Law as to who may be a trustee, although legal capacity is necessarily a requirement.
- the Foundations Law expressly permits the Founder of a Foundation to serve as a member of its council.
[YM] On whether, if a Muslim settlor expressly desires to establish a trust which is Shari’a compliant, but inadvertently includes in the trust instrument a provision which is not Shari’a compliant, the Court can:
(a) determine that the disposition shall have effect on terms which are Shari’a compliant?
(b) vary the terms of the trust so that they are Shari’a compliant?
[DR] The Court has power in appropriate circumstances to make such orders so as to give effect to the settlor’s true intentions. Where a settlor, wishing to make a disposition that is Shari’a compliant, or to create a trust that is Shari’a compliant makes a mistake, then there is nothing precluding the Court from avoiding the disposition or varying the trust as the case may be to give effect to the settlor’s true intentions.
[YM] On a person other than a national of the jurisdiction specified in the provision to have an interest in the Trust or Foundation property or derive any benefit under the Trust or Foundation:
[DR] The Court commented that a variety of ways exist allowing a non-national to assert an interest in the assets of a trust by reason of another DIFC Law or the common law without necessarily having to invoke a variation of the provision in order to assert that interest.
[YM] On whether a waqf that has been validly constituted according to the law of the place of its establishment can be recognized as a trust or foundation in the DIFC or be continued as a Foundation in the DIFC:
[DR] The Court commented that as a matter of general principle, it can be said that most waqfs will be capable of recognition as a trust. Similarly, many with legal personality may be able to be recognized as Foundations. However, those questions should be left to be determined on a case-by-case basis, given diversity of potential waqf – some, without legal personality, can be recognized as trusts; others, with legal personality, can be recognized as Foundations.
[YM] On a Foundation approved by another jurisdiction for continuance as a waqf continuing in that other jurisdiction from the DIFC
[DR] The Court commented that there is nothing in the relevant DIFC provisions which would lead to the conclusion that in no case could a Foundation, approved by another jurisdiction for continuance as a waqf, transfer to that other jurisdiction from the DIFC.
However, the diversity of waqf forms and of other laws would require an evaluative consideration on a case-by-case basis.