The relationship between the beneficiary and the nominal shareholder is that of a beneficiary and a trustee; a fiduciary relationship. The law applying is the Trusee Law 1955, Cap 193. Note that where Cypriot Law has not made legal provisions for certain issues, it has been held by the Cypriot courts that reliance may be placed on the Common Law (case law) and the law of equity(1).
Rights and duties of nominee shareholder
Rights
- Once appointed nominee (trustee), he may refuse to keep this position either expressly, or by implication by refraining from entering into his duties.
- A trustee who wishes to retire may obtain his discharge (without the need of replacement) as long as he obtains the consent of his co-trustees and from any person who is empowered to appoint trustees and there must remain either at least two trustees or a trust corporation(2).
- A trustee who has been held liable for breach of trust has the right to be indemnified by any beneficiary who has directly instigated the breach, to the extent to which he has benefited therefrom and has a right of contribution from his co-trustee (if any). When the trustee has acted reasonably and honestly, the court is empowered to relieve a trustee from personal liability.
- The trustee may have rights as a beneficiary(3).
Duties
- Administer the trust property prudently and
- Strict compliance with the terms of the trust
"A trustee must act exclusively in the interest of the trust and stand to gain nothing from work(4), unless there is special provision clause for remuneration. High standards of integrity and reasonable standards of business efficiency are expected from him. He is not to be in a position in which his personal interest contradict with those of the trust"(5)
- General rule: Trustees may not delegate their duties; Exception: right to employ a solicitor/ banker for transactions concerning the trust property. Charges are paid out from the trust estate(6).
Rights and duties of beneficiary
Rights
- Enjoyment of the interest in the trust property to which they are entitled under the terms of the trust.
- A beneficiary can also be a trustee.
- Where the trust is qualified as an international trust under the International Trusts Law(7), the beneficiary will have the right to trust information, by compelling disclosure of information relative to the accounts of the international trust under section 11.
Duties
- Conform to the Terms of the trust deed; Breach results in him being personally liable to the trustee.
Guarantee & protection of beneficiary’s rights
Guarantee
1) Trust deed as guarantee; A formal, legally binding document that outlines the terms of the trust agreement.
2) Documents: Share certificate and Instrument of transfer
Protection
Law security:
- The trustees must administer the trust property prudently and must comply strictly with all the terms of the trust deed.
- Actions performed by the trustee, which are in excess of his powers or contravene with the terms of the trust instrument (ultra vires actions) sets him personally liable for the full extent of the loss resulting from the breach of trust.
- Under the contract law, breach of trust enables the innocent party (the beneficiary) to claim the full extent of his loss resulting from such breach through a court action against the trustee. A court action is not advisable though, if the beneficiary has no financial/economic resources (has no money/property).
- The beneficiary may follow the trust property itself, or claim anything into which it has been converted (equitable right); In case of a mix fund (trustee’s money with beneficiary’s), if the money can be traced the beneficiary will have first charge on the traced assets as security for their claim. Tracing ends, when no traceable product of the fund is found, or is found in a bona fide purchaser for value without notice, or in someone whose defense is that of an innocent change of position.
- Civil proceeding in court may be followed by criminal proceedings against the trustee/s and the judge has discretion of making a court ruling of a financial penalty, or imprisonment.
Trust deed & special conditions as a way of protecting the beneficiary
Trust deed
- The trust deed is a legally binding document signed by both the trustee and the beneficiary; Breach allows the beneficiary to take court action.
- It outlines the terms of the trust agreement; Breach will hold the trustee personally liable.
Special conditions/clauses inserted in the trust deed:
- "The trustee shall be personally liable for breach of the trust deed"
With such a term the trustee is liable to remunerate the beneficiary for the loss derived from such breach. The beneficiary can also take the trustee to court to claim for his money.
- Usually in trusts, there is a clause inserted confirming that ‘the trustee’s property is atleast or is above the amount of the trust and in case of breach of the trustee’s obligations under the trust deed, the beneficiary will be able to be indemnified in the full extent of the loss resulting from such breach.’ It is possible to create a pledge on the assets of the nominee shareholder as a guarantee for this reason.
Proof may be needed to show of the trustee’s property after evaluation of his assets.
- As further protection, a 3rd party may provide a guarantee for the nominee. In such a case, the 3rd party must make an affidavit guaranteeing that the value of his assets is at least or above the amount of the trust.
- It includes conditions which empower the beneficiary to appoint a new trustee during his life.
As a result, if the beneficiary wishes to change or add another trustee in case he is not satisfied with the services of the current one he may do so.
(1) -
A Mouzouris and Another v
Xylophagou Plantations Ltd (1977) 1 CLR 287, at p 300.
(2) - see Trustee Law 1955, Cap 193, s.38.
(3) - see Trustee Law 1955, Cap 193, s.58 (but note that this section is problematic especially where professional trustees are involved).
(4) -
Keech v
Sanford 1726 (1558-1774) All ER 230: Unless permitted by law, by the terms of the trust, or with the express approval of the court a trustee should not profit directly or indirectly from his trusteeship.
(5) - Hanbury & Martin,
Modern Equity, 13
th ed., p 457.
(6) - see Trustee Law 1955, Cap 193, s.23.
(7) - Law 69 of 1992: In case of contradiction between the Cypriot Law & Common Law and the International Trust provisions, the latter will prevail.