“Declaration of trust” and contractual assignment: new court of appeal guidance for financial institutions

15 March 2007

Carolyn Greene


As a general rule, the beneficiary of a trust over the benefit of contractual rights is entitled to sue the other contracting party directly. However, the Court of Appeal has disapplied the general principle in circumstances where a declaration of trust is intended to have the same effect as a legal assignment of contractual rights, and such an assignment was prohibited under the terms of the original contract.

The case, Barbados Trust Co Ltd v Bank of Zambia, arose in the context of distressed debt trading. However, its analysis of the limits of the declaration of trust device makes it relevant to many commercial and corporate transactions in which the declaration of trust is a commonplace mechanism.

Case Name and Citation

Barbados Trust Co Ltd (Formerly CI Trustees (Asia Pacific) Ltd) v (1) Bank of Zambia (2) Bank of America NA [2007] EWCA Civ 148. Date of Court of Judgment, 27 February 2007

Introduction to the case

A borrower defaulted under the terms of a syndicated facility agreement. Each of the lending banks was restricted from assigning their rights under the facility unless (a) the assignment was to another bank or financial institution and (b) the borrower had consented to the assignment.

One member of the syndicate assigned its interest to another bank without the borrower’s prior written consent. A number of further assignments occurred, resulting in a final assignment to the appellant company. Neither the appellant nor the intervening assignees were banks or financial institutions.

To assist recovery by the appellant, the original bank assignee entered into a Declaration of Trust in favour of the appellant, whereby it agreed to hold its rights and benefits in respect of the borrower’s obligations on trust for the appellant.

Key Facts:

In July 1985, a number of banks and financial institutions agreed to make an import oil facility available to the Bank of Zambia (the “Borrower”) for the issue of letters of credit. Advances were made under the facility which resulted in the Borrower being required to repay sums totalling in the region of $810,000.

Article 12 of the Facility Agreement provided that each of the lenders could assign all or any part of their rights under the facility to a third party provided always that:

  1. the third party was itself a bank or a financial institution; and

  2. the prior written consent of the Borrower had been obtained (consent not to be unreasonably withheld and to be deemed given if the Borrower failed to reply to a request for consent within 15 days of the request).

On 2 December 1999, one of the original lenders, Masstock, wrote to the Borrower requesting permission to assign its interest in the Borrower’s obligations to the Second Defendant, Bank of America (“BoA”). The Borrower did not respond. The transaction was concluded on 10 December 1999 (namely within 15 days of the date of the request). It was subject to Emerging Markets Traders Association (“EMTA”) terms under which required consents are not a condition precedent to a valid trade.

Subsequently, and on 10 December 1999, BoA entered into a further purported assignment with GMO Emerging Country Debt LP (“GMO”). The Borrower had again failed to response to a request for consent. Two further purported assignments were entered into, culminating in an assignment to Barbados Trust Company (“BTC”).

None of GMO, the intervening assignees or BTC were banks/financial institutions. All parties involved accepted that the assignment by BoA to GMO, and all subsequent assignments were invalid, as having been entered into between parties who were not banks/financial institutions.

The Borrower defaulted under the terms of the Facility Agreement and BTC wished to recover the unpaid debt. In an attempt to vest in BTC the legal capacity to do so, in January 2004, BoA created a Declaration of Trust in favour of BTC over “all of its rights, title, interest and benefits (if any) as it may have in respect of Bank of Zambia’s obligations to it under the facility”. The intended purpose of the Declaration of Trust was to permit BTC to take action against the Borrower directly to recover the unpaid debt and thus circumvent the problem that the chain of assignments to BTC were contractually invalid.

On 30 January 2004, BTC began proceedings against the Borrower on the basis that it was entitled to sue the Borrower directly as a beneficiary under the Declaration of Trust.

High Court Decision

The Court was asked to consider whether:

  1. whether an assignment will be valid in circumstances where there has been non-compliance with a provision in the loan facility which prohibits assignment by the lender without the consent of the borrower; and

  2. an assignee of a debt can seek recovery of the debt as a beneficiary under a Declaration of Trust, in circumstances where the assignment itself was invalid;

At first instance, Langley J held that the assignment to BoA was valid. Taking into account the EMTA terms, the fact that the transaction was concluded within 15 days of the request to the Borrower for consent was not fatal to the transaction. The effect of deemed consent (arising on 17 December 1999) was to complete a valid assignment to BoA with retrospective effect.

However, with regard to the Declaration of Trust, Langley J found that it would be inequitable to allow BTC to sue as a beneficiary under a Declaration of Trust when to do so would allow it to circumvent the effect of the contractual restrictions on assignment (namely that assignment is only permitted as between banks/financial institutions). Thus, BTC could not sue to recover the unpaid debts.

Court of Appeal Decision

BTC appealed against the decision that it was not entitled to sue under the Declaration of Trust. The Borrower also appealed against the decision that the first assignment to BoA was valid, arguing that the 15 day period after which deemed consent arose had not expired at the time the assignment to BoA was concluded.

On the question of the validity of the initial assignment to BoA, the Court of Appeal reversed the decision at first instance and found that absent express consent and absent deemed consent arising 15 days after the date of a request for consent, the assignment to BoA was indeed invalid.

With regard to the Declaration of Trust, the Court of Appeal accepted that as a matter of law, in some instances, a failed assignment can take effect as a declaration of trust between the parties. However, on the present facts, it considered whether, as a matter of construction, the prohibition on assignment within the Facility Agreement extended to a prohibition on a Declaration of Trust. The Court upheld that Judge’s decision at first instance and found that where there is a contractual term prohibiting an assignment between two parties, that prohibition cannot be avoided by the use of a Declaration of Trust.

Commentary and Practical Implications

This decision is of relevance to all financial institutions trading in debt. Irrespective of its place in the chain of assignment, a party intending to take the benefit of an assignment should always have regard to the terms of the original agreement and must comply with any limitation or prohibitions on assignment which the agreement imposes. The Court’s analysis is pertinent in many transactional contexts too.