Tasarruf Mevduati Sigorta Fonu v Merrill Lynch Bank and Trust Company (Cayman) Ltd and Others

LORD COLLINS (delivering the opinion of the Board):

I Introduction

This appeal is about the jurisdiction of the court to appoint receivers by way of equitable execution, and in particular whether the Cayman Islands court should apply the decision of the Court of Appeal in England in Masri v Consolidated Contractors International (UK) Ltd (No. 2) [2008] EWCA Civ 303, [2009] QB 450 (" Masri (No 2)") so as to appoint receivers over a judgment debtor's power of revocation of trusts established by him in the Cayman Islands under Cayman law, the assets of which are exclusively in the Cayman Islands.

The appellant, Tasarruf Mevduati Sigorta Fonu ("TMSF"), was established by the Turkish State to restructure and administer failed banks whose banking licences have been revoked. As part of the restructuring and administration process, TMSF has acquired the assets of two Turkish banks, Bank Ekspres and Egebank. Under Turkish banking legislation, TMSF has authority to bring proceedings in its own name for the recovery of losses sustained by the banks.

Mr Demirel was the controller of a group of companies which owned Egebank. TMSF claimed that at the time of its demise Egebank had accumulated losses of over US$1.2 billion, that investigations subsequently revealed that some US$490 million had been misappropriated from Egebank by Mr Demirel, his family and associates, and approximately US$336 million had been misappropriated from other banks. On 20 November 2001 the Turkish courts gave judgment in personam against Mr Demirel in the sum of US$30 million in respect of a right of action of Bank Ekspres against Mr Demirel for damage caused by allegedly fraudulent loan transactions: see Tasarruf Mevduati Sigorta Fonu v Demirel [2006] EWHC 3354 (Ch), [2007] 2 All ER 815; affd [2007] EWCA Civ 799, [2007] 1 WLR 2508 (service out of the jurisdiction in claim in England to enforce the Turkish judgment).

TMSF learned that Mr Demirel had established two discretionary trusts in the Cayman Islands, with assets of some US$24 million. For practical purposes the beneficiaries are Mr Demirel and his wife. Mr Demirel has power of revocation of the trusts, with the consequence that he could re-vest in himself an amount which would satisfy a very large proportion of the judgment debt. TMSF seeks the appointment of a receiver by way of equitable execution with a view to reaching the power of revocation and thereby reaching the funds in the trusts.

The legal background to the dispute is that the power to appoint a receiver by way of equitable execution is contained in section 37(1) of the Senior Courts Act 1981 (formerly called the Supreme Court Act 1981), as applied in the Cayman Islands by section 11(1) of the Grand Court Law (2008 Revision). Under section 37(1) the court "may by order … grant an injunction or appoint a receiver in all cases in which it appears to the court to be just and convenient to do so." The appointment of a receiver by way of equitable execution is not "execution" in the ordinary legal sense of the word, but a form of equitable relief for cases in which execution in that sense is not available.

In Masri (No. 2) the Court of Appeal in England held that the jurisdiction to appoint a receiver by way of equitable execution permitted of gradual and incremental development, and in particular was not limited to choses in action which were presently available for legal execution. The appointment of a receiver was not limited to such property as might be taken in execution, but extends to whatever is considered in equity to be assets: Masri (No 2) at [151]; Kerr, Receivers (1 ^st ed 1869), p 87.

Mr Demirel resisted the appointment of the receiver broadly on these grounds: (1) a receiver by way of equitable execution could only be appointed over property; (2) a power of revocation was for this purpose in the same category as a general power of appointment; (3) it had been long been understood that (in the absence of legislative provision to the contrary) a power of appointment was not property; (4) the order could only be effective if the receiver were authorised to revoke the trusts on Mr Demirel's behalf and/or Mr Demirel were ordered to revoke them; (5) as a matter of law, the power to revoke was not delegable and the court had no jurisdiction to order the exercise of the power of revocation.

Both Smellie CJ and the Court of Appeal of the Cayman Islands refused TMSF the remedy it sought. The main question on this appeal by TMSF is whether the power of revocation of the trusts is sufficiently close to the notion of property to enable the equitable remedy of a receiver by way of equitable execution to be available to ensure that Mr Demirel has not put himself beyond the reach of the judgment creditor, and whether the appointment can be made effective by ordering Mr Demirel to transfer or delegate the power of revocation to the receivers (and, in default, ordering the transfer or delegation to be executed on his behalf).

II The Trusts and the Cayman proceedings

The Trusts

On 28 June 1999 Mr Demirel executed two deeds of trust, establishing two trusts, the Mana Trust and the Dolphin Trust ("the Trusts"). The trustee of the Trusts is the first respondent, Merrill Lynch Bank and Trust Company (Cayman) Limited ("Merrill Lynch"). The Trusts are Cayman Islands discretionary trusts, and it is common ground that the Trusts are valid and duly constituted as a matter of Cayman Islands law.

The discretionary objects of both Trusts are Mr Demirel, Ayse Nur Esenler, who is now the wife of Mr Demirel, and Mr Demirel's children and remoter issue now living or born afterwards. At present, Mr Demirel has no living children or remoter issue. The residuary beneficiary is charity.

The assets of the Trusts are shares in Cayman companies. The shares are held by Fairfield Nominees Ltd as nominee for Merrill Lynch. The company owned by the Dolphin Trust is the fifth respondent, Medro Ltd. The companies owned by the Mana Trust are the second, third and fourth respondents, Kaffee Ltd, Barla Finance Ltd and Cunur Cash Ltd. As of 31 October 2006 these companies held cash balances at Merrill Lynch amounting in aggregate to about US$24 million.

Mr Demirel reserved a power to revoke, amend, vary or alter the Trusts, in these terms:

"This Trust may be revoked, amended, varied or altered in any manner whatsoever from time to time and at any time by the Settlor by deed and delivered to the Trustees provided always that no such revocation, amendment, variation or alteration shall take effect until actual receipt of such instrument by the Trustees or with the written consent of the Trustees thereto if such revocation, amendment, variation or alteration would increase or extend the obligations, liabilities or responsibilities of the Trustees".

Cayman proceedings

On 1 December 2005 TMSF issued proceedings in Cayman against Merrill Lynch and the Trust Companies in cause no. 555 of 2005 (the proprietary claim). On 5 December 2005 TMSF obtained freezing orders from Levers J against the Trust Companies in that action in the sum of US$30 million, and on 5 January 2006 the freezing orders against the Trust Companies were renewed by Levers J.

On 23 February 2007 TMSF issued proceedings against Mr Demirel, in order to enforce the Turkish judgment in the Cayman Islands. TMSF obtained a freezing order from Levers J against Mr Demirel in the value of US$45 million.

On 30 March 2007 the proprietary claim was consolidated with the claim to enforce the Turkish judgment.

On 30 April 2007 Mr Demirel served a defence to the claim against him to enforce the Turkish judgment, and on 30 April 2008 summary judgment was given in favour of TMSF in the amount of US$30 million plus interest and costs.

On 22 August 2008 TMSF issued a summons seeking: the appointment of receivers by way of equitable execution over the power to revoke, amend, vary or alter the Trusts contained in the Trusts; and orders against Mr Demirel for the assignment to the receivers of the powers of revocation and/or their exercise, and upon the powers being vested in the receivers, authorisation to exercise the power to revoke the Trusts; following the exercise of the power, extending the appointment of the receivers over the share capital and the assets of the companies holding the money, and vesting in the receivers the share capital and the assets of those companies.

The application by TMSF was dismissed by Smellie CJ on 21 July 2009 and TMSF's subsequent appeal against that decision was dismissed on 9 September 2009 by the Court of Appeal of the Cayman Islands ("the Court of Appeal"), which gave leave to appeal to the Board.

Turkish bankruptcy

Meanwhile, on 31 December 2008 Mr Demirel had been declared bankrupt by the Turkish court.

III The judgments below and the appeal

Judgment of Smellie CJ

Smellie CJ's starting point was that the effect of Masri (No. 2) was that, although the jurisdiction to appoint a receiver was not limited to property which was available for legal execution, it was still necessary that it be in the nature of property. The distinction between a power and property was fundamental and longstanding: Ex Parte Gilchrist; Re Armstrong (1886) 17 QBD 521....