Trusts are becoming more and more of an issue for family courts, especially with the ‘yardstick of equality’ guidelines rather than the needs-based guidelines, and anecdotally we hear from the family judiciary that they are spending more time on trust litigation.
1. What is a Trust?
It is an entity set up by a Settlor and managed by a Trustee for the benefit of a Beneficiary. It is set up by a settlor transferring title of an asset to a trustee, and the trust deed evidences the terms upon which the trustee holds that asset. Although the trustee must follow the duties imposed upon him by the law and terms of the trust, this is not a contract capable of enforcement by the Settlor. If there is a dispute, it is governed by the rules of equity and by the Chancery Division. So a beneficiary can ask the court to look at how the actions of the Trustee if there are concerns about how he is managing the Trust.
Since the Second World War, some trusts became a mechanism by which estate and other duties could be avoided. In the UK, the huge rise in the use of discretionary trusts has been matched largely by the increase in tax payable on death.
Definition:
- Must be intention of creating trust on part of settlor
- Certainty of subject
- Certainty of objects.
2. Who can set up a Trust?
Anyone, but tends to be the very wealthy.
The offshore trust is attractive to those resident in the UK, but who are not domiciled here. This simple device enables tax avoidance on foreign income and on capital gains in the UK. There is speculation that this rule has fuelled the property boom in London, as foreign domiciliary can live here on a permanent (undeclared) basis, whilst paying no tax although being resident here for tax purposes. This makes the UK one of the best places to be in the world for anyone wanting to avoid paying tax.
3. When is a Trust not a Trust?
When it is the nominee of the settlor, and in effect acts on his instructions, and is managed by him rather than the Trustee. These are known as ‘Bare’ or ‘Simple Trusts’; also ‘Nomineeship’, ‘Mandate’ or ‘Agency Arrangement’.
In order to vary, an application to court is necessary, and the court does not have jurisdiction to vary trust without consent of all beneficiaries. Saunders v Vautier (1841) 4 Beav 115.
Alterations to a trust
The offshore Court will not normally give effect to an alteration in a trust which the trustees themselves have no power to make. The Royal Court in Jersey in Mubarak (see below) noted that it enjoys no overriding power to change the terms of a trust. The Court’s jurisdiction over trusts is essentially supervisory and concerned to ensure that a trust is given effect, not its wholesale variation. The powers that the Court does possess to change a trust are strictly limited for example where it is seen to be in the interests of minor or unborn children to do so.
Mubarak does not refer to the tax position of the parties concerned, but it should be borne in mind that any change to a trust that varies its terms or can be seen as a resettlement can have significant tax consequences for the trust itself and for settlors and beneficiaries subject to UK taxation. This is particularly the case following the UK changes to the taxation of trusts in 2006, and this year’s changes to the taxation of UK resident non-domiciliaries.
3.3 Discretionary Trusts and Letters of Wishes
We hear about these most often and these have become more common over the last half century. This consists of beneficiaries having an interest and then the trustees utilising their discretion as to which of several beneficiaries will gain, whether through capital or income.
To assist the trustees in the exercise of their discretion, now more common for settlors to write ‘Letters of Wishes’. Trustees need not follow these, but they are absolutely confidential as between the settlor and the Trustee Re the Rabaiotti 1989 Settlement and other settlements [2000] 2 ITELR 763.
Charman v Charman is the most notable decision in this regard.
[2006] 2 FLR 422
[2007] 1 FLR 593
[2007] 1 FLR 1246
The parties had been married for almost 28 years, having met as teenagers; they were both at the time of trial 54 years old. There were two children, then aged 24 and 20. At the time of the marriage neither party had any capital assets. The wife had worked as a civil servant until late into her first pregnancy; the husband had begun as a junior clerk at Lloyds and thereafter enjoyed dramatic success in the insurance industry. The family lived together in England for about 25 years; thereafter the husband began to spend significant periods in Bermuda, where he was setting up a new global specialist insurance business. The wife resisted pressure to move to Bermuda, but eventually agreed to do so when the husband became non-resident in the UK for tax purposes. However, the husband then informed the wife that the marriage was at an end. At the hearing of the wife’s application for ancillary relief on divorce, the judge found that the parties’ assets amounted to £131m, including £68m in an off-shore discretionary trust created by the husband upon an expression of wish that during his lifetime he should be its primary beneficiary. There was a separate trust set up for the children, containing assets of at least £30m, which the judge did not treat as part of the assets to be divided. The wife conceded a special contribution by the husband in the generation of the fortune, and sought 45% of the matrimonial assets. The husband was offering the wife £20m. The judge awarded the wife £48m, 36.5% of the assets, basing his departure from equality both on special contribution by the husband, and on the greater risks inherent in the assets remaining with the husband. Under a further order, if the husband was required to make specified tax payments (estimated by the husband at £11m) the wife should contribute 36% of such payments (up to £3.5m). The husband appealed, on the basis that the judge had made insufficient allowance for the husband’s special contribution, in particular that the methodology employed by the judge had been flawed because the judge had begun with a hypotheses of equal division, and then factored the husband’s special contribution into the equation by way of discount, whereas he should have proceeded through s 25 of the Matrimonial Causes Act 1973, allowing for the husband’s special contribution within that exercise.
During the marriage the husband made a fortune in the insurance market in the City of London. He conceded that the assets which fell for division in the proceedings, ‘the relevant assets’, amount to £59m. But the wife contended that the relevant assets were £126m. The difference (£67m) represented the assets of a trust now situated in Bermuda, namely Dragon Holdings Trust, ‘Dragon’. The sole trustee of Dragon is Codan Trust Company Ltd, a Bermudian company linked to Conyers, Dill and Pearman, the well-known firm of solicitors in Bermuda. Mr Anderson, a partner in the firm, is a director of Codan.
Dragon is a discretionary trust in largely conventional terms which was created under the law of Jersey in 1987 and of which the husband was the settlor. He alone placed assets into it. Its beneficiaries are defined as the husband, the wife, their two children, any future child or remoter issue of the husband, charities and such other persons as the trustees might add. The trustees have power to distribute capital as well as income to any beneficiary. At the time of Dragon’s creation the husband wrote a letter of wishes to the trustee, then a Jersey trust company, in the following terms:
‘You may find it helpful to know my wishes regarding the exercise of your powers and discretions over the funds of the … Settlement. I realise of course that these wishes cannot be binding on you.
My real intentions in establishing the Settlement are to protect and conserve certain assets for the benefit of myself and my Family.
During my lifetime it is my wish that you consult me with regard to all matters relating to the investment or administration of the Fund and
Thereafter you should consult my wife in like manner. If my wife survives me, it is my wish that the fund should be administered primarily for her benefit and that she should have access to capital, if necessary. If both of us are dead, my children are to be treated as the primary beneficiaries and I hope you will consult my executors and their guardians. Should anything happen to the entire family, then the funds subject to the Settlement should follow my estate.
Insofar as is consistent with the terms of the Settlement I wish to have the fullest possible access to the capital and income of the Settlement including the possibility of investing the entire Fund in business ventures undertaken by me.
If circumstances should change in any way I will write you a further letter.’
Between 1992 and April 2003 a second Jersey Trust company acted as Dragon’s sole trustee. It has stated as follows:
‘… throughout the whole of our trusteeship of the Trust, we held the income of the Trust for [the husband] absolutely and regarded the Trust as an interest-in-possession trust. The capital and income were held in segregated accounts and accumulated income either distributed to [the husband] or left in the accumulated income account to be distributed to him at a later date.’
The husband stated that distributions to him out of the accumulated income account ceased in 1997. There has been no distribution to any other beneficiary at any time.
In April 2003, soon after he had ceased to be resident in the UK and had taken up residence in Bermuda, the husband exercised his power to change the trustee to Codan; and the proper law of the trust was changed to Bermuda. Weeks earlier he had had two meetings with Mr Clay. At the first meeting Mr Clay, according to his note, expressed concern at the central control of Dragon which the new Bermudian trustee might exercise; suggested that the husband should draft a fresh letter of wishes as soon as the change of trustee had taken place; questioned whether, in the event of the husband’s death, too much control would be in the hands of the new trustee; and advised the husband to consider whether to arrange further protection so as ‘to ensure that his wishes were actually carried out’. At the second meeting, Mr Clay, according to his note, suggested that, while the husband was non-resident in the UK, Dragon should or might be collapsed.
Following its appointment as trustee, Codan resolved to follow its predecessor by appointing Dragon’s income to the husband for life and thus, subject to any distribution to him, by adding it into the accumulated income account held for him absolutely. They formally resolved to regard Dragon ‘as an interest-in-possession trust’.
In May 2004 the husband sent a letter of wishes to Codan. In it he said:
‘During my lifetime, I would like you to treat me as the primary beneficiary, although I expect that you will consider the interests of the other immediate family beneficiaries as appropriate from time to time. I acknowledge that you have appointed the annual income to myself as a life interest disposition, as had the previous trustees.
After my death, and if they survive me, I would wish you to treat my children as primary equal beneficiaries per stirpes.
…
I may amend these wishes from time to time to take account of changing circumstances.’
In June 2004 the husband sent a written instruction to Codan in relation to the accumulated income held to his order. It was to the effect that, subject to one specific disbursement in order to defray costs associated with a company owned by him, the accumulated income then held for him, and, unless he were to instruct otherwise, all income to be appointed to him in the future, should be paid back into the trust.
4. English Court’s Jurisdiction
If the High Court in England assumes jurisdiction over the divorce, then it assumes jurisdiction also in relation to the variation of settlements under s24 (1) (c) Matrimonial Causes Act 1973.
Trust assets can be taken into account when determining appropriate orders whether or not marital/non-marital assets.
This is fine for a UK based trust, but where trust assets held by trust based offshore, then trustees may not need to submit to UK jurisdiction nor comply with any English orders.
UK is party to Hague Convention on Trusts, ratified by Recognition of Trusts Act 1987.
5. How does the English Court deal with Trusts?
5.1 Variation
Under MCA s 24(1) (c) the trust can be classified as an ante-nuptial or post-nuptial settlement and capable of variation under this provision.
Under MCA s 24(1) (d) a party’s interest therein may be reduced or even extinguished.
Mubarak v Mubarak [2001] 1 FLR 673
Mubarak v Mubarak [2001] 1 FLR 698
Mubarak v Mubarak [2003] 2 FLR 553
Mubarak v Mubarik [2004] 2 FLR 932
Mubarak v Mubarik (in the matter of the IMK Trust) 15th August 2008
The husband and the wife were both born and brought up in India. The husband was at trial 49 and the wife 48. In 1980 the husband moved to Kuwait and set up a jewellery business. The parties married in 1983 and the wife moved to join the husband in Kuwait. In 1986 the husband set up a further business manufacturing and trading in jewellery in Hong Kong and the family moved there. The husband’s business expanded and he opened shops in Paris and London. In 1994 the husband caused a holding company, Twenty First Century Holdings Limited (“TFCH”) to be incorporated in Bermuda. This owns, directly or indirectly, the shares in the relevant subsidiary companies. In August 1997 the parties moved with their family to live in London. Immediately before the move there was a corporate re-organisation in relation to TFCH. Prior to the re-organisation TFCH had an issued share capital of US$34,903,500 divided into 34,903,500 common shares of US$1 each. Of these, 34,344,522 had been issued to the husband and 558,978 to the wife. By resolution dated 5th August 1997 it was agreed that TFCH would re-purchase all of the above shares at par save for 11,000 held by the husband and 1,000 held by the wife. The purchase price remained unpaid with the result that TFCH owes US$34,333,522 to the husband and US$557,978 to the wife. By deed dated 2nd September 1997, the husband and the wife, as settlors, created the Trust. The trustee was The Craven Trust Company Limited (“the Trustee”). The Trust is a discretionary trust governed by the law of Jersey. The beneficiaries are described in the trust deed as the settlors, their children Salem, Noor and Osman together with any other children or remoter issue of the settlors born thereafter. A fourth child, Hamza was been born since the date of the Trust. Salem and Noor had attained the age of 18 whereas Osman and Hamza were minors. Under the terms of the Trust, the husband had the power to add and exclude beneficiaries, to appoint and remove the protector and to appoint new or additional trustees. The protector was the husband’s father and he had the power to remove any trustee. A number of the trustees’ powers can only be exercised with the prior written consent of the protector. On the same day as the Trust was created the husband transferred his 11,000 ordinary shares and the wife transferred her 1,000 ordinary shares in TFCH to the Trustee to hold upon the terms of the Trust. However, they did not transfer the debts owed by TFCH, which accordingly remained owed to each of them personally. The effective result of these transactions was that the value of TFCH (and its underlying assets) as at September 1997 was retained by the husband (and the wife to a limited extent) and only the benefit of any subsequent increase in value would accrue for the benefit of the Trust. In March 1998 the husband left the matrimonial home. By deed of exclusion dated 20th April 1998, the husband exercised the power given to him by Clause 10 of the Trust by irrevocably excluding the wife as a beneficiary and declaring her to be an Excluded Person for the purposes of the Trust.
Charalambous v Charalambous [2004] EWHC 742, [2004] 2 FLR 1093
Non-UK exclusive jurisdiction clause.
The parties’ financial affairs were in considerable confusion and bankruptcy petitions were issued against them. In those circumstances a Jersey settlement known as The Hickory Trust, set up by the husband’s mother before the birth of the second child of the marriage, was altered by a deed of appointment and removal under which both the husband and wife ceased to be beneficiaries. The marriage broke down and both parties petitioned for divorce. Ancillary relief proceedings followed in the Family Division to run concurrently with bankruptcy proceedings in the Chancery Division. The wife applied under s 24 of the Matrimonial Causes Act 1973 for variation of The Hickory Trust as a post-nuptial settlement. The husband challenged the court’s jurisdiction under s 24. He denied that The Hickory Trust was a nuptial settlement. Alternatively he relied on the provision of the settlement conferring exclusive jurisdiction on the Jersey court, and the provision of the Recognition of Trusts Act 1987 importing into English law the provisions of the Hague Convention of 1 July 1985 on the Law Applicable to Trusts and on their Recognition. The judge rejected the husband’s challenge and granted a declaration that the court had jurisdiction to vary The Hickory Trust under s 24(1) (c) of the Matrimonial Causes Act 1973. The husband sought leave to appeal. By a respondent’s notice the wife added, as an additional factor, that ‘as a matter of conflict of laws the petitioner’s application to vary The Hickory Trust should be determined by reference to the divorce law of England and Wales and not by reference to the Recognition of Trusts Act 1987’.
Held
(1) The submission made on behalf of the husband as to the exclusive jurisdiction of the Jersey court on the settlement was misconceived. Statutory powers to vary post-nuptial agreements only arose after divorce. The right to seek variation derived not from the settlement but from the matrimonial regime of the jurisdiction that dissolved the marriage.
(2) The endeavour of the husband to invoke the Recognition of Trusts Act 1987 was also unfounded. Article 6 of the Hague Convention of 1 July 1985 on the Law Applicable to Trusts and on their Recognition provides that ‘a trial shall be governed by the law chosen by the settlor’. Article 8 provides that ‘the law specified by Article 6 … shall govern the validity of the trust’. However, Art 15 provided liberation from Arts 6 and 8 and was not limited to the six specified categories therein. The language of subpara (b), moreover, was too imprecise to exclude the statutory power to vary post-nuptial settlements on the termination of the marriage.
(3) As regards the final issue in the appeal, based purely on English law, as to whether The Hickory Trust was a post-nuptial settlement within the terms of s 24 of the Matrimonial Causes Act 1973 at the relevant date, the question was whether the removal of the parties as beneficiaries erased the nuptial element and with it the court’s power to vary. The answer must depend on the facts of the case. In the present case the facts clearly indicated that the nuptial element of The Hickory Trust was not lost. The parties remained joint protectors and their children remained in the beneficial class.
‘Unborn’ and minor beneficiaries may be represented by the Official Solicitor to ensure their views are heard on a variation application. Rule 2.57 FPR 1991.
5.2 ‘Resource’
Can be treated as ‘resource’ available to settlor, cf Charman.
“Clients who fall into this category do need to be reminded by their advisers that their sophisticated offshore structures are nowadays very familiar to the judiciary who try them. They neither impress, intimidate, not fool anyone. The courts have lived with them for years.”
Per Coleridge J in J v V [2004] 1FLR 1042.
Browne v Browne [1989] 1 FLR 291
The parties were married in 1965. The husband had no substantial means whereas the wife was the daughter and granddaughter of women with substantial assets, most of them out of the country. They parted in 1983. In February 1986 the judge made an order for the wife to pay a lump sum of £175,000 to the husband and costs. On the wife failing to pay within the proper time two applications for committal were granted, both suspended on terms. The wife then made applications for leave to appeal and to extend time for appealing against the order of February 1986 and for leave to appeal and an extension of time for appealing against the suspended committal orders. By the time of the present hearing the capital sum of £175,000 had been paid. Nevertheless, the wife contended that the judge had been wrong, first, in finding that she exercised effective control over two trust funds, which had been set up outside the jurisdiction, and of which she was the beneficiary; and secondly, in making an order which would exert pressure upon discretionary trustees.
Held –
There was clear authority that the phrase ‘other financial resources’ in s. 25 of the Matrimonial Causes Act 1973 included assets held on discretionary trusts and it would be unrealistic to disregard such foreign assets.
With regard to the discretionary trusts in the present case, although it would be wrong for the court to make orders designed to put pressure on discretionary trustees, nevertheless the court must look at the reality of the situation. The evidence demonstrated that the trustees had acted throughout in accordance with the wife’s wishes and that she had immediate access to funds whenever she required them, and furthermore that the money due to be paid by the wife from the trusts was perfectly able to be paid and would be paid if the trustees were satisfied that she had to have the money. It followed that the judge had been right to hold that the wife had effective control over the trust funds and that in making the order he had made he had exerted no improper pressure upon the trustees.
Charman [2006] 2 FLR 422
The husband appealed against the judge’s treatment of the trust assets as financial resources of the husband, and thus fit for inclusion in the computation of the parties’ assets, because the trust was a dynastic trust intended for the benefit of future generations. The husband argued that the judge had failed to ask himself the necessary question, namely whether, if the husband were to request the trustee to advance himself the whole of the assets, the trustee would be likely to do so.
Held – dismissing the husband’s appeal –
(12) Before attributing all the trust assets to the husband, the judge had to have been satisfied that the trustees would have advanced those assets to the husband if he had asked them to do so. The judge had rightly asked himself the question whether the trust assets were a ‘resource’, ‘resources’ being the portmanteau word used in s 25(2) (a), and, although he had made no express finding that the trustees would be likely to advance all the capital of the trust to the husband upon request, by his references to authorities and to counsel’s arguments it was quite clear that he had effectively made such a finding. It was a perfectly adequate foundation for the aggregation of trust assets with a party’s personal assets for the purposes of s 25(2) that they should be likely to be advanced to the party in the event only of ‘need’, and on the husband’s own argument the order made created a need for capital out of the trust (see paras [48], [50], [51], [53]).
Mubarak
Speculating on future trust interests – C v C [2009] EWHC 1491
5.3 Declaration of ‘Sham’
“The word ‘sham’ is overrated overused and tends to be too freely applied in divorce proceedings. A trust itself is not a sham; it is the document which creates or purports to create a trust which might be a sham document because it was intended, quite deliberately, to give the appearance of creating different rights and obligations from that which the parties actually intended. It is ‘a cloak, a device or a mask’ – effectively an allegation of deceit on the part of the settler and trustees…”
International Trust and Divorce Litigation, Mark Harper et al.
This is where the petitioner states that from the outset the trust is a sham, and it is quite difficult to prove. Recent case law has made the task more difficult.
Minwalla v Minwalla [2005] 1 FLR 771
The husband and wife had been involved in a relationship for over 15 years, and married for almost 10 years. There were no children of the marriage, but the wife had two children, aged 10 and 5 at the time the relationship began, who had been provided for by the husband at all times. From an early stage the husband had paid the wife’s living expenses, and provided her with a home, acquired in the name of a Panamanian company, DM Investments SA (DM), which the husband had set up. The husband was an international businessman, with a number of property interests around the world, and the family enjoyed an extremely high standard of living. Payment for the family’s personal expenses was met through DM, whose structure was eventually revised so that it became a wholly owned asset of a Jersey trust. After the marriage broke down the husband informed the wife that he had ‘divested himself of all his assets’ and resigned from various income-generating posts. The wife applied for and obtained a worldwide freezing injunction, which covered a hotel in Karachi and apartments in London, New York and Karachi, as well as what the wife claimed were the husband’s interests in DM, and another Panamanian company, Midfield Management SA (MM), which had been involved in the purchase of the current family home. The husband’s affidavits and Form E did not set out a clear statement of his assets, but asserted that his liabilities exceeded what assets there were. Specifically the husband denied any interest in either of the companies, DM or MM, or in the Jersey trust. The wife undertook a very costly investigative process in order to gather information about the husband’s resources to put before the court. There was evidence that the husband had attempted not only to conceal his resources, but also to take steps to remove his assets from the jurisdiction. The husband had also instituted separate proceedings against the wife in Pakistan, and threatened to do so in a number of other forums, in relation to the worldwide freezing order. The court found that the husband had a fortune of, at a minimum, US$25m, and in all probability considerably more. The court also found that the husband had total control over both companies, and over the Jersey trust.
Held – awarding the wife £4,185,000, to include a contingent sum of £500,000 to cover actual and threatened litigation initiated by the husband in various jurisdictions –
(1) The husband’s stance in relation to the court, and to the wife’s claim, had been wilfully contemptuous of his obligation to make full, frank and clear disclosure in the proceedings. While the suppression of assets was not behaviour that of itself enhanced an award, the non-disclosing spouse was vulnerable to adverse inferences being drawn against him. In this case the court readily concluded that the husband had available to him ample resources with which to satisfy an award at or about the level sought by the wife (see para [45]).
(2) Where it appeared that an off-shore trust had been woven together to create a shroud designed to bury the husband’s resources from view, but the husband himself pierced that veil as and when it suited him, a court exercising the ancillary relief jurisdiction would strain to see through the smoke and would set the structure aside so as to treat the resources as wholly his. This was what the parties, trustees and directors
concerned should expect where fairness to both spouses depended so crucially on an accurate understanding of the realities of each party’s economy (see para [1]).
(3) The shelter provided by sophisticated off-shore arrangements was dependent upon there being properly constituted corporate and trust structures in place; and there being a level of competence and of formality in the production of minutes of board meetings, powers of attorney etc., with supporting evidence for the proposition that proper consideration had been given by the trustees to the exercise of their discretionary powers (see para [51]).
(4) The Jersey trust was a sham, in that the husband had never had the slightest intention of respecting even the formalities of the trust and corporate structures that had been set up at his direction. His purpose was only to set up a screen to shield his resources from other claims or unwelcome scrutiny and investigation. The trustees had been prepared to go along almost totally passively with the way in which the husband managed the trust. The assets of the trust, namely the shares in both companies, vested in the husband as their true and sole owner (see paras [57], [58], [60]).
(5) Letters of request addressed to the Jersey courts had been used during the case, which had proved an efficacious and comparatively inexpensive method of extracting necessary information concerning off-shore trusts where the settlor or beneficiary was unwilling to provide relevant information. It was important for English courts and lawyers to bear well in mind that such assistance as letters of request could provide must be sought in accordance with the formal requirements of the Hague Convention of 18 March 1970 on the Taking of Evidence Abroad in Civil or Commercial Matters, which required, in the case of Jersey, that they be sent to Her Majesty’s Attorney General for Jersey, not direct to residents of the island or to public authorities there (see paras [97], [98]).
CI Law Trustees v Minwalla [2005] JRC 099
‘The Fountain Trust’ case
“As a matter of generality, we would regard an assumption of jurisdiction by a foreign court to declare a Jersey trust a sham to be exorbitant and we would be reluctant to enforce any judgment based upon this assumption.”
‘We are quite satisfied that the husband did have the opportunity to participate fully in the proceedings before the English court and to raise any defences which he thought fit. He chose to absent himself from the proceedings after an interim order had been made but that was his choice and he must accept the consequences of that decision.’
In addition, the following must be noted:
You cannot allege a trust is a sham whilst simultaneously seeking disclosure of trust documents.
A v A and St George Trustees Ltd and others Interveners [2007] EWHC 99, Family Law April 2007
Ancillary relief proceedings followed the breakdown of a relationship of almost 20 years; it had been the second marriage for both parties. The matrimonial assets were worth £2,669,717. They included the husband’s 23% shareholding and the wife’s 22.98% shareholding in a family company which had been established many years ago by the husband’s father. Two separate discretionary trusts held 54% of the shares in that company, one created by the husband’s parents and the other by his brother in 1984. The beneficiaries under both trusts were the children and remoter issue of the husband’s parents; this class was not closed. Over the years there had been a number of different trustees of the trusts. Since 1996, the trustees of both trusts had been a trust company and two qualified accountants. The trustees were based in Jersey and responsible to the Jersey regulatory authorities but the trusts were governed by English law. The trustees intervened in the ancillary relief proceedings.
The wife alleged inter alia that the trusts were shams and as a consequence the husband should be treated as having a 77% shareholding in the family company and, in the alternative, that the shares held by the trusts should be treated as available to the husband.
Held – dividing the matrimonial assets so that the wife received fractionally over 50% –
| (1) | Even in the Family Division, a spouse who sought to extend an ancillary relief claim to assets which appeared to be in the hands of a third party had to identify, by reference to established principle, some proper basis for doing so. The court should adopt a robust, questioning and (where appropriate) sceptical approach to trust and company structures, but that did not mean that it could ride roughshod over established principles where third party interests were involved. The determination of a dispute as to ownership between a spouse and a third party was completely different from the familiar discretionary exercise between spouses and had to be approached on exactly the same legal basis as if it were being determined in the Chancery Division. |
| (2) | The two cases presented by the wife as alternatives in respect of the shares held by the trusts were in reality wholly inconsistent with each other and involved diametrically different assertions. The first proceeded on the basis that the trusts were shams, the second on the basis that the trusts were genuine. |
| (b) | As a matter of principle, a trust which was not initially a sham could not subsequently become a sham: Shalson v Russo [2003] EWHC 1637 (Ch), [2005] Ch 281, at para [190]. The only way in which a properly constituted trust which was not a sham ab initio could conceivably become a sham subsequently would be if the all the beneficiaries were, with the requisite intention, to join together for that purpose with the trustees: That possibility could not arise in this case, where not all the beneficiaries were as yet ascertained |
| (c) | A trust which was initially a sham could in principle subsequently lose that character. A new trustee could not become an unknowing party to an earlier sham. Once a new trustee became legal owner of trust property, provided he exercised his powers and fulfilled his duties in accordance with the terms of the trust instrument, the trust could not be regarded as a sham, no matter what might have passed before. |
| (d) | Accordingly, a trust could not as a matter of law be a sham if either the original trustees or the current trustees were not, because they lacked the requisite knowledge and intention, parties to the sham at the time of their appointment. |
A v A (No.2)
6. What are the English Court’s powers?
6.1 Joinder of Trustee
Sometimes the trustees are joined when the court is dealing with enforcement.
How do you join a trustee to the proceedings?
- The English court has power to order trustees to be joined under RSC Ord 15 r6(2) (b).
- An application to an English court to vary a trust is made on Form A in the usual way.
What documents should be served on the trustee?
Rule 2.59(3) FPR 1991 means that the trustees must be served with a copy of Form A and Form E. cf Minwalla
Does the trustee have to submit?
- Trustees may file sworn statement in response within 14 days of service.
- If they are within the jurisdiction, they must submit to the court.
- If they are offshore: seek permission and guidance in their local court.
- Generally inappropriate to argue against joinder (T v T(Joinder of Third Parties) [1996] 2 FLR 357)
What is the effect of joinder?
- Court has wider powers of disclosure but remember trustee’s duty of confidentiality.
Re H Trust 2006 JLR 280.
- Trustees are separately represented and their views heard and taken into account.
- Any order more readily enforceable against the trustees
6.2 Freezing Injunctions (s37 (2) MCA 1973)
Still known as ‘Mareva’ in Jersey and some other jurisdictions. Wide powers which enable a worldwide freezing order to be achieved which prevents dispositions by Respondent and, theoretically, at least, by a trustee. The requisite intention must be there on the part of that person, and the disposition must have been made or imminent.
Re The H Trust; X Trust Company Limited v. R W & Others [2006] 9 ITELR 133, Royal Court, Jersey
The H Trust was a discretionary trust whose beneficiaries include the settlor and his wife, the settlor’s children by his previous marriage and the settlor’s grandchildren. The value
of the trust fund was estimated at £2.6 million. The wife petitioned for divorce in England and obtained a freezing injunction in the Family Division against the husband’s assets.
The Royal Court also froze the trust assets. The trust was governed by English law. The trustee exercised its power to change the proper law of the Trust to Jersey law and to confer exclusive jurisdiction on the Jersey courts.
The wife then obtained a further order in the Family Division joining the trustee and obtaining an Order restraining the trustee from executing (if he had not already done so) a deed, changing the
proper law of the trust and from taking any step to remove the wife as a beneficiary. The trustee sought the Royal Court’s approval to the trustee not submitting to the English Court.
The Court granted the directions sought by the trustee and approved its refusal to submit to the jurisdiction of the English Court. The Deputy Bailiff stated that it would not usually be in the interests of the trust to submit to the jurisdiction of the foreign court dealing with a divorce petition where one or both of the parties were beneficiaries. It was more likely to be in the
interests of the trust to preserve the freedom of action of both the trustee and the Royal Court to act appropriately, taking account of a foreign court’s decision when known.
If a trustee submitted to the decision of a foreign court, it was likely to be enforceable in Jersey without any reconsideration of the merits.
In this case the Deputy Bailiff was anxious to preserve the freedom of action of both the Jersey trustees and the Royal Court itself. The Deputy Bailiff realised that if the trustee simply submitted to the jurisdiction of the English Family Division, then the opportunity for the Jersey Court to review the merits of the English Court’s decision from the point of view of the trust and the beneficiaries as a whole, would be lost.
6.3 Court’s powers on disclosure
- Inspection Appointments r 2.62 FPR 1991
Application on notice with sworn statement.
- Witness summons/Subpoena r 2.62(4)
- Letters of Request RSC Ord 39 r 1
Now recognised way of obtaining a ‘deposition’ or documents from third party who is not in the jurisdiction. Approved by Singer J in Jersey case Minwalla.
Application made on notice.
Issued to judicial authority in relevant jurisdiction.
Cf Charman [2006] 2 FLR 422
The husband appealed against two orders made in ancillary relief proceedings following an application by the wife for the issue of a letter of request to the Bermudian courts. Both orders were designed to elicit material about a discretionary trust established by the husband. The trust was originally situated in Jersey but the husband had procured its transfer to Bermuda, when he himself had relocated there. The beneficiaries of the trust were the husband, the wife, their children and the husband’s remoter issue. The husband was the only person who had put assets into the trust. Since its establishment it had been operated as an interest in possession settlement. The wife valued the trust assets at £67m. The central question was whether the trust was a financial resource of the husband for the purpose of s 25(2) (a) of the Matrimonial Causes Act 1973. The letter of request ordered by the judge was that the husband’s Bermudian solicitor, who was a director of the sole trustee, be asked to produce trust accounts, trust deeds, resolutions and letters of wishes, to state to what extent the trustee consulted with the husband about prospective policy decisions and the extent to which the trustee had discussed the possible collapsing of the trust and changing the husband’s letter of wishes, and to provide details of communications with the husband’s accountant, himself the subject of the second order. The accountant was ordered to produce documents relating to advice or discussions concerning the trust. The husband raised a number of objections to the orders, in particular that the application was a ‘fishing’ expedition and that the documents sought were conjectural only and therefore there production was not permitted by s 2(4)(a) of the Evidence (Proceedings in Other Jurisdictions) Act 1975.
Held – dismissing the appeal, save for a minor modification to the letter of request –
(1) The central question, whether the trust was a financial resource of the husband for the purpose of s 25(2)(a) of the 1973 Act, should be expressed in terms of whether the trustee would be likely to advance the capital immediately or in the foreseeable future rather than whether the husband had ‘effective control’ over the trust. Since a trustee would usually be acting entirely properly if, after careful consideration of all the relevant circumstances, it resolved in good faith to accede to a request by the settlor for the exercise of his power of advancement of capital, whether back to the settlor or to any other beneficiary (see paras [12], [13]).
(2) Insofar as they sought the production of documents, the orders for the letter of request and for the inspection appointment could not lawfully have been made if they represented a ‘fishing’ expedition. Insofar as the letter of request sought the taking of oral evidence, it would be preferable to conduct the initial appraisal by asking whether the intention was to obtain the solicitor’s evidence for use at trial and there was reason to believe that he had knowledge of matters relevant to issues at trial. Different principles did not apply in financial proceedings following divorce from those applied in other types of proceeding. Neither the application in respect of the solicitor, nor that in respect of the accountant constituted a ‘fishing’ expedition. The wife had made a particularised allegation regarding the advancement of capital and was seeking to elicit evidence in support of that allegation. The request was not part of a search for material that might enable the wife to raise an allegation (see paras [37], [38], [39]).
(3) In financial proceedings following divorce there was no need to limit the production of documents by a non-party to those documents whose existence could be proven. Whilst such a limitation might make sense in ordinary civil litigation, it could not be regarded as mandatory in a special type of proceeding where it would largely render ineffective the jurisdiction to secure the production of documents. A wife would seldom have the requisite knowledge to prove the existence of a document. This conclusion was reinforced by s 25 of the 1973 Act, which imposed a quasi-inquisitorial role on the courts to investigate issues in ancillary relief litigation and that duty could not be disabled by any fetter upon the court’s ability to extract relevant documents from a non-party not expressly mentioned by s 2(4) of the 1975 Act. Such an approach was also consistent with the Family Proceedings Rules 1991, r 2.51(B), which required the court to ensure that the parties were on an equal footing. One of the aims of the Rules was to encourage a ‘cards on the table’ approach (see paras [46], [47], [48], [72]).
(4) An inspection appointment could only be ordered in respect of a document inspection where it appeared necessary for the fair disposal of the application or for saving costs, and the same principle applied to a letter of request for the production of documents. The judge was correct to conclude that the production of documents was necessary (see para [50]).
(5) In financial proceedings following divorce where the court was asked to consider whether to order an inspection appointment, or to order the issue of a letter of request for the production of documents, it was obliged to exercise its power in a way that was proportionate to the sums involved, the importance of the case, the complexity of the issues and the financial position of each party. In view of the sums involved it was clearly appropriate to grant the order (see para [52]).
(6) The order was not be oppressive since both the solicitor and the accountant were professionals (see para [55]).
(7) The judge’s request that the solicitor be required to divulge communications between the accountant and the trustee was wider than the extent of the obligation to divulge communications between the husband and the trustee and was too wide. It was to be modified so that the two obligations ran parallel to one another (see para [56]).
(8) Whilst traditionally trustees were regarded as entitled to refuse to disclose to beneficiaries any document that bore on their reasons for taking a particular decision in the exercise of their discretion over trust income or capital, no such decision had been taken in the instant case beyond the appropriation of income to the husband. Accordingly, the general proposition against disclosure of the trust accounts did not apply. Furthermore, it was not true to say that a discretionary beneficiary did not have sufficient interest to be entitled to disclosure. The trustee would not be bound to succeed in persuading the Bermudian court, should it seek to do so, that the evidence ought not to be ordered to be given, such that it would be pointless to order that the letter of request be issued (see paras [64], [65], [66]).
- Enforceability of the English Court’s Orders
Where court has assumed jurisdiction over the case, then it may go on to make orders. If trustees do not submit, and assets outside jurisdiction, then difficult to enforce without going to where trust is based and litigating there.
7.1 Enforcement of an English order for disclosure
Re The Avalon Trust [2006] JRC 105a
The trustees of a discretionary trust established in Jersey sought directions of the Jersey Court in response to a request for disclosure of documents made by one of the beneficiaries who was involved in divorce proceedings, in England. In the course of the divorce proceedings the Family Division had ordered the beneficiary to produce certain documents relating to the trust. The beneficiary requested that the trustee provide:
1 Documents such as the trust accounts, the trust deed and any supplemental deed of appointment and details of any distributions.
2 Letters of wishes and any earlier drafts of letters of wishes.
3 Copies of all correspondence between the beneficiary and other beneficiaries from the trustee relating to the trust and any correspondence relating to investment strategies between the beneficiary, his brothers and sisters and other members of the family and the trustee.
The court held that the trustees should disclose the documents in the first two categories. It was in the interest of the beneficiary and the trust generally that the English Family Division should be made aware of the financial position of the trust and the extent to which the beneficiary had benefited from the trust in the past.
In respect of the category 2 documents, the court referred to Re the Rabaiotti 1989 Settlement and started from the position that letters of wishes were confidential between the settlor and the trustee and that there needed to be a very good reason why it would be appropriate to disclose the letter of wishes to a beneficiary. On the particular facts of this case there was a good reason to depart from the position that a letter of wishes is confidential because the beneficiary was already in possession of a draft letter of wishes. It was better for the Family Division to see the final version of the letter of wishes so that it did not draw assumptions that were incorrect on the basis of a draft letter of wishes.
In respect of the third category of documents, the court held that it was entirely reasonable for the trustee to provide the beneficiary with any correspondence between him and the trustee; it did not agree that the trustee should disclose copies of correspondence between it and other beneficiaries. This was because this went beyond what was required to give a full and fair picture of the trust assets to the English High Court.
7.2 Enforcement and Recognition of final English Ancillary Relief Orders
Enforcement may be achieved in one of a number of ways:
- Variation within the terms of the trust and its proper law
- An order for lump sum or property adjustment against the spouse which can be complied with only by trustees advancing capital or assets to that beneficiary spouse.
- ‘Judicious encouragement’
where the English court may have prevailed upon the trustees in the judgment to exercise their discretion in favour of the wife beneficiary. Orders can be made to this effect.
- Exercise of Discretion by the court
This is how court may find they can live with the decision of court of first instance.
- Using trust court as an ‘auxiliary’
The Court of Appeal in Charman v Charman (No 4) [2007] EWCA Civ 503, [2007] 1 FLR 1246 delivered by the President of the Family Division, Sir Mark Potter:
‘..The decision of the Royal Court of Jersey in In re Fountain Trust [2005] JLR 359, in which it observed … that an assumption of jurisdiction by a judge of the Family Division in England to declare a Jersey trust to be a “sham”, such as had there occurred, would generally be exorbitant. We agree with the Royal Court’s observation. M Boyle also draws our attention to the decision of the same court in In the matter of the B Trust, as yet unreported, [2006] JRC 185. There … an important suggestion was made, namely that, when a party applied to it for variation of an off-shore settlement, the English court should give serious consideration to declining to exercise its jurisdiction on the basis that, after conducting the substantive enquiry, it should instead invite the off-shore court, provided of course that the latter is invested with the appropriate jurisdiction, to act as an auxiliary to it in regard to any proposed variation. But the wife in the present case has been, relatively speaking, in a fortunate position. She cannot and does not allege that Dragon is a sham. She does not, and does not need to, apply for a variation of Dragon.’
- Bilateral treaties for mutual recognition and enforcement
- Conduct of the case by party or trustee
The H Trust has again been before the Royal Court very recently.
The English High Court subsequently made orders against the husband requiring him to pay a lump sum to the wife out of the trust. Certain properties in the UK owned by the H Trust were
also to be transferred to the wife. The Jersey trustee put forward a counter proposal which was less generous to the wife saying if it could not be agreed promptly, the trustee would seek directions from the Royal Court.
The wife rejected the proposal but the trustee did not apply to the Royal Court. The trustee decided to wait for the outcome of certain enfranchisement proceedings in the UK and in the
meantime not to make any significant distributions.
The wife then issued proceedings to bring the trustee before the Royal Court. The Royal Court severely criticised the trustee for taking sides and said there would have to be a good reason
for not to giving effect to the original English Court’s order.
Accordingly, the Royal Court ordered that the lump sum ordered by the Family Division be paid to the wife out of the trust and that the UK properties be transferred to her.
Re The A Trust; FM v. ASL Trustee Company
Limited (2006) 9 ITELR 127, Royal Court, Jersey
The husband and wife were involved in bitterly contested divorce proceedings in England.
The A Trust was a Jersey trust of which the husband, wife and their children were the
beneficiaries. In 2001, a deed of appointment had been executed so that the income became payable to the wife during her life, thereafter to the husband and thence on discretionary trust in favour of the children. The trust owned the property in London where both the wife and children lived.
The English Family Court varied the trust so as to extinguish the husband’s interest and also ordered the husband to transfer the benefit of a loan to the trust. The wife then applied
for recognition and enforcement of this order in Jersey.
Deputy Bailiff Birt held that this being a Jersey trust, the trustee was bound to hold the trust fund on the trusts set out in the trust deed, unless ordered to do otherwise by the Jersey Court. The trustee in this case had not submitted to the jurisdiction of the English Court and therefore it was a matter for the Jersey Court’s discretion whether to enforce the English Court’s order in the interests of justice and comity.
Here, the husband had refused to maintain his wife and children. The trust assets were the only substantial assets in the UK. Accordingly, the Court ordered those assets to be used exclusively to support the wife and children.
The trustee had not submitted to the jurisdiction of the English Court and therefore could not be said to have agreed in advance to be bound by its decision. The Jersey Court was free to decide whether to give effect to the order of the English Court. The conduct of the husband in deliberately not maintaining his wife and children clearly tipped the balance in favour of recognition and enforcement by the Jersey Court.
- ‘Comity’
Comity of Nations: “the courteous and friendly understanding by which each nation respects the laws and usages of each other, in so far as may be without prejudice to its own rights and interests.” (Shorter Oxford English Dictionary)
‘In our judgment no unfairness arises from holding, as a matter of comity, that in the particular circumstances of this case, the judgment should not be enforced against the trustee.’
Per Royal Court in Minwalla
Has caused much concern amongst trust practitioners for some time. Previous concerns voiced by trust practitioners were that the Jersey Courts may have been
too ready to enforce foreign judgments against assets held in Jersey proper law trusts, on
somewhat dubious “grounds” of comity. The essential concern was that in cases where
the trustee had not appeared and submitted to the foreign court, that the Jersey courts were
apparently still willing to enforce foreign judgments against a trust, even though the foreign
judgment was not between all the same parties (typically, the foreign judgment was
between two spouses, at least one of whom was a beneficiary of the trust).
8. Fight back by Jersey and other Trust Jurisdictions
8.1 Article 9 Trusts (Jersey) Law 1984
In 2006 a new Jersey Trusts Law included provisions similar to legislation already in force in, for instance, Bermuda and Cayman, and designed to limit the circumstances in which Jersey trusts could be attacked. The new law also sought to limit the circumstances in which the judgment of a foreign court could be enforced by the Jersey Court.
It replaced Article 9 of the TJL 1984.
Art 9 (1): questions to which Jersey law applies as to which ‘no rule of foreign law shall affect such question’.
Art 9 (4): no foreign judgment with respect to a trust shall be enforceable to the extent that it is inconsistent with this article irrespective of any applicable law relating to conflicts of law.
8.2 Mubarak
Has been proclaimed by practitioners as sounding warning to English family court about Royal Court’s willingness to enforce orders against trusts, and clarifying issues as to when variation and enforcement of trusts are permissible.
8.3 End of Comity?
‘It is essential for the court to bring to it a judicious mixture of worldly realism and of respect for the legal effects of trusts, the legal duties of trustees and, in the case of off-shore trusts, the jurisdictions of off-shore courts.’ Charman, No.4
9. Final points:
9.1 seek advice of lawyers in the jurisdiction of the proper law of the trust
9.2 Analyse the trust documents and instruments surrounding trust.
9.3 think about being able to attack the trust from its inception
9.4 check to see if that jurisdiction is a party to the Hague Convention on Trusts.
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