The New Trusts Law

Legislative Decree Law No. 23 of 2016 promulgating the Financial Trusts Law (Trusts Law) replaces the old law passed in 2006 governing the same. It serves as a centrepiece of the series of legal reforms introduced in the last few years to develop the country’s investment potential,  and promote Bahrain as a stable, flexible and competitive place to build and maintain wealth in the region, alongside the three updates to the Commercial Companies Law, and the establishment of the PCC Law and the Investment Limited Partnerships Law.

The new Trusts law, developed by the CBB, is a practical and refined piece of legislation.  Unlike the old law, it allows for the creation of all forms of trust structures, providing both individuals and organisations with a long-term holding vehicle for maintaining and securing assets.  This is particularly useful in the domestic market, where large and established family businesses may have previously looked overseas to create trusts to protect the transfer of wealth from one generation to the next.

Main features of the new Trusts law

As is the case with comparable legislation in other developed jurisdictions, the Trusts law allows for the creation of a trust by virtue of a trust instrument, which transfers ownership of assets such as property, rights, powers, and discretionary authorities to a trustee or trustees.  Such trustee must act in accordance with the powers and duties specified in the trust instrument, with a view to achieving the purpose of the trust and the interests of the beneficiary or beneficiaries.  Under the law, trusts may be utilised for a variety of charitable and non-charitable purposes, including being structured as pension trusts, securitisation trusts or investment vehicles.

A trust, when created, will only be valid if created under a notarised trust deed and signed by the settlor and trustee(s), as the case applies.  The deed must also specify the trust executor (who may be the same person as the settlor, but not the trustee) and, if applicable, the trust protector, who shall exercise the relevant functions allocated to it on the trust deed.

All trusts in Bahrain must be registered on the CBB’s trust register, however, such register may only be accessed through the issue of a court order or directly by concerned CBB employees, allowing for near complete confidentiality surrounding the trust.   A trust deed will be deemed invalid and will not be registered by the CBB where formal trust creation requirements have not been met, where there is no duration specified, where no licensed trustee has been appointed, or where the trust has violated public morality or the law.

Trustees have the widest scope of powers and obligations under the new Trusts Law and must act only for the benefit of the beneficiaries, for the purposes of the trust or in accordance with the settlor’s instruction or direction.  Importantly, they must ensure that trust property is kept separately from their own assets at all times, can be easily distinguished from the same, and must continue to perform their duties under the trust deed upon resignation for as long as no other trustee is available. Furthermore, where the trust is terminated before its expiry date or where the trustee is removed or resigns, the trustee must, within reasonable time, distribute all trust property to its beneficiaries and inform the CBB of the same.

Unless expressly exempted in the trust deed, any trustee who breaches the provisions of the new Trusts Law or their duties as a trustee will be held liable for:

  • Loss or diminution of the trust property as a result of the breach;
  • Any gain acquired by the trustee as a result of said breach; and
  • Profit lost by the trust if such a breach did not occur

In the event of an actual or potential breach, the courts may order several remedial measures, such as obliging the trustee to perform its duties, preventing the trustee from committing a breach of the trust, ordering the trustee to amend the breach by paying back or compensating for damages arising from the breach or ordering the trustee to be suspended from assuming trusteeship for a maximum of ten years. The court also retains the power to decrease or deny the trustee’s fees, invalidate acts made by the trustee, or order any other appropriate measures to be taken upon consideration of the individual circumstances of the breach.

A notable feature and benefit of the new Trusts Law is its formal recognition of trusts established and governed by the laws of other jurisdictions.   Parties to a trust agreement may effectively agree upon the law governing the trust and its ultimate dissolution, removing any risk of uncertainty for foreign investors who may otherwise be hesitant to set up a trust in Bahrain.  Article 56 of the Trusts law provides that the Bahraini Court may issue orders regarding the implementation, administration or enforcement of a foreign trust; the trustee’s powers; the trustee’s appointment, removal, remuneration or performance; the beneficiary; and the appointment or removal of the trust protector or executor.  It should be noted, however, that foreign law trusts shall not be recognised if they are inconsistent with Bahrain law provisions, irrespective of the applicable law stated in the trust deed.

The Trusts law presents a new opportunity for both local and overseas individuals and organizations to maintain and build upon their assets, in a secure, predictable and flexible legal environment. Since its introduction in late 2016 the CBB has, after having overseen the law’s implementation and having consulted industry leaders on their thoughts,  regarding the legislation, already made several adjustments to the terms of the law, ensuring that it remains flexible and effective for all the country’s investors.

(This article was published on Oxford Business Group The Report: Bahrain 2020 Edition)

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