BizBahrain November 2016

ASAR | Commercial Law Analysis
The
New Bahrain
Trust Law
by Simone Del Nevo
October has seen the enactment
of several important pieces of
legislation in Bahrain including Law
Decree 22 of 2016 on Protected-Cell
Companies and a new trust law issued
as Law Decree 23 of 2016 on Trust Funds,
the latter replacing the Financial Trust
Law of 2006. The New Trust Law was
published in the Bahrain Official Gazette
on 13 October and will come into effect
on 12 November 2016. It is a sophisticated
statute instituting a number of
substantive and procedural changes to
the Bahraini legal landscape in the field
of trusts. While there is no enough space
to provide an in-depth analysis of the
New Trust Law in this article, one of the
most important novelties of the New
Trust Law, in our opinion, is the formal
recognition, for the first time in Bahrain,
of trusts established under and governed
by the law of a foreign jurisdiction.
Trusts are special legal instruments
originating in common law legal systems
allowing for holdings (often real property
or business interests) to be separated
from a natural person or corporate
entity who initially owns those holdings
(the settler) in order to accomplish a
designated purpose to the benefit of
a designated person or persons (the
beneficiaries). Trusts are widely used
in wealth management and investment
structures to remove the hand of the
settlor from management of the holdings
and simultaneously remove the holdings
from the reach of creditors of the settlor.
As the nature of the benefits established
in each beneficiary may also be defined
(e.g. rights to dividends and profits, but
no right to title to the asset), this also
ensures the persistence of the trust
assets free from the hands of creditors
until such time as the trust is dissolved
and those assets are transferred to
designated beneficiaries of title to the
assets. The key difference between a trust
and a civil-law fiduciary agreement is
that the former, unlike the latter, vests the
beneficiary with designated rights over
the trust property effective vis-à-vis third
parties, thereby excluding the creditors
of the trustee from enforcing against the
trust property even though it is registered
in the trustee’s name. This makes a trust
an extremely powerful tool for ensuring
ring-fencing of assets. However, as
trusts are often deployed in cross-border
structures, the issue of recognition of
foreign domiciled trusts and the law
applied to it is of paramount importance.
At the international level, an attempt
to create a harmonized framework for
the recognition of foreign-law governed
trusts was initiated by introduction of the
Hague Convention on the Law Applicable
to Trusts and on their Recognition during
the nineteen-eighties. Unfortunately, this
attempt proved generally unsuccessful
in light of the limited number of ratifying
states (neither Bahrain nor any other
Arab country). Furthermore, within the
GCC and even the wider Arab level, the
treaties concerning judicial cooperation
and recognition of judgments do not
extend to recognition of trusts. Moreover,
the 2015 Bahrain statute concerning
conflict of laws in civil and commercial
matters with a foreign element has not
contained provisions concerning the law
to be applied in relation to foreign trusts.
The enacted New Trust Law fills this
gap with significant implications for
the investment market. The New Trust
Law introduces a general principle of
freedom of contract according to which
the parties are free to agree upon the
law governing the trust. The choice of
law can be either explicit or implicit,
though we would always recommend
using express language to clarify the
38 November 2016