On 8th January 2015, two judgments of the Royal Court of Jersey were published (In the matter of the Representation of HSBC Trustee International Limited  JRC 167 and  JRC 254A). These give helpful guidance to trustees of Jersey law trusts, when undertaking the difficult task of considering how best to act in the interests of the beneficiaries as a whole, where matrimonial proceedings are taking place in a foreign court involving beneficiaries of the trust.
The trust was a conventional Jersey law discretionary trust established in 1995. The ascertained beneficiaries were the settlor husband, his wife, their adult daughter and any other living descendant of the settlor, of which there were none at the date of the hearing. The trustee was a BVI company with a branch in Jersey. The administration of the trust was carried out in Hong Kong by a sister company of the trustee.
The husband had built up a successful business operated through a large group of companies. The sole asset of the trust was an 84.6% shareholding in a Bermudan holding company which in turn owned 100% of a number of companies which formed a substantial trading group. There existed 21 companies of which 20 were incorporated in Hong Kong, Macau or the People’s Republic of China. Approximately 70% by value of the net assets of the underlying companies was owned by companies in Hong Kong.
The settlor and his wife were married in 1968. In 2009, divorce proceedings were begun in Hong Kong with a decree absolute being granted in 2010. Contested proceedings followed in Hong Kong for ancillary relief, with the wife seeking a substantial order by reference to the assets in the Trust. The High Court of Hong Kong made an order joining the trustee to those proceedings.
As will be familiar to trustees of Jersey law trusts, the first issue for the trustee to consider was whether it should submit to the jurisdiction of the foreign court.
Submission to the Jurisdiction
The trustee considered that it should so submit to the jurisdiction of the Hong Kong courts and applied to the Royal Court for approval of its decision.
The Court considered the case of In Re H Trust  JLR 280 in which it was stated:
“It follows that, in most circumstances, it is unlikely to be in the interests of a Jersey trust for the trustee to submit to the jurisdiction of an overseas court which is hearing divorce proceedings between a husband and a wife, one or both of whom may be beneficiaries under the trust. To do so would be to confer an enforceable power upon the overseas court to act to the detriment of the beneficiaries of a trust when the primary focus of that court is the interests of the two spouses before it. It is more likely to be in the interests of a Jersey trust and the beneficiaries thereunder to preserve the freedom of action of both the trustee and this court to act as appropriate following and taking full account of the decision of the overseas court. We have said that this is likely to be the case in most circumstances. In some cases, e.g. where all the trust assets are in England, it may well be in the interests of a trustee to appear before the English court in order to put forward its point of view because, by reason of the location of the assets, that court will be able to enforce its order without regard to the trustee or this court”.
In the present case, what the wife sought (namely a distribution of trust assets) was within the powers contained in the trust deed. The husband and wife were both beneficiaries and under the terms of the trust the trustee could give effect to an order without contravening the terms of the trust deed. The problem of what may happen if the overseas court made an “alteration” to the trust in the context of the divorce proceedings did not therefore arise (see for example Re IMK Family Trust  JLR 250).
The trustee’s advice from solicitors in Hong Kong concluded that even if the trustee did not submit and refused to comply with any order of the Hong Kong court varying the trust, the Hong Kong court would still have the necessary power to enforce its order against the trust’s underlying assets situated in Hong Kong. This constituted 70% of the net assets of the trust’s underlying companies.
The present case was clearly one of those envisaged in Re H Trust where the interests of the beneficiaries would be better served by the trustee appearing in the foreign court:
- The appearance of the trustee would ensure that it was able to put forward arguments and produce evidence such that the interests of the other beneficiaries of the trust were fully considered;
- If the trustee chose not to take part, the Hong Kong court could still enforce any order it made varying the trust, but without the beneficiaries’ interests having been put forward;
- The trust was administered in Hong Kong and therefore the key individuals could be subpoenaed to give information; and
- There was little risk of the trustee being put in an impossible position of conflict between its duty to obey an order of the Hong Kong court and its duty to adhere to the trust deed given that the wife was seeking an order that was within the powers of the trust deed.
The Royal Court ultimately blessed the trustee’s decision to submit to the jurisdiction of the Hong Kong court.
The Orders Made by the Hong Kong Courts
Two appeals followed a first instance decision. The judgment of the Court of Final Appeal of Hong Kong (the “Final Court”) was handed down on 17th July 2014. In summary, the Final Court held inter alia that:
- The entire trust fund should be regarded as a financial resource available to the husband; and
- The wife was entitled to 50% of the combined matrimonial assets of the parties, including the assets of the trust.
The order of the Final Court meant that the total award payable to the wife from the trust fund was expected to be approximately HK$770.5 million together with legal costs. The husband had already paid a total of HK$380 million to the wife. These payments had been funded by way of loans made by the trustee to the husband and these loans were in turn funded by way of dividends paid by the holding company to the trust.
Momentous Decisions for the Trustee
The husband requested the trustee to make a distribution to him of a sufficient sum to enable him to meet the balance of the award made by the Final Court and then to exercise its power under the trust deed to exclude the wife as a beneficiary of the trust.
The trustee decided to accede to the husband’s two requests and, in addition, to treat the loans of HK$380 million as distributions. In October 2014, it therefore applied to the Royal Court for its approval to the following decisions:
- The making of a distribution out of the trust to the husband for the purpose of enabling him to satisfy the order made by Final Court;
- To treat the loans made to the husband in the total sum of HK$385 million as distributions, with the net effect that the whole of the ancillary relief award made by the Final Court in favour of the wife will have been funded by way of distributions out of the trust; and
- Thereafter, to exercise its power under the trust deed to exclude the wife as a beneficiary.
The trustee sought the Court’s approval of its decisions on the basis that they were “momentous”. In such circumstances the Court’s role is well established as set out in Re S Settlement  JLR N 37. The Court must satisfy itself that the trustee’s decision has been formed in good faith, that the decision is one at which a reasonable trustee properly instructed could have arrived, and that the decision has not been vitiated by any actual or potential conflict of interest.
No issue arose in relation to the first or third requirements in Re S and the Court confined itself to whether the decisions of the trustee were decisions which a reasonable trustee could properly have arrived.
With the decisions to make the distribution of approximately HK$390.5 million together with costs and to treat the sum of HK$385 million already loaned as a distribution, the Court had no difficulty in finding them to be entirely reasonable. The husband owed the sum to the wife. The payment was in the interests of the husband in order to enable him to pay his debt; it was in the interests of the wife to enable her to receive the amount which the Final Court had ordered; and it was in the interests of the daughter in that it would bring to an end the litigation between her parents. The daughter would likely ultimately benefit from her mother’s estate. Finally, the sum payable amounted to half the trust fund as valued by the Hong Kong courts and therefore the remaining assets of the trust would be substantial.
The Proposed Exclusion of the Wife as a Beneficiary
The wife objected to her proposed exclusion on the following grounds:
- The trustee was making a distribution to the husband for his ‘benefit’ so as to enable him to pay his creditor under the judgment of the Final Court. It was not a payment out of the trust to the wife or for the wife’s benefit;
- The figures used by the Hong Kong courts were historical and had not been updated in light of business developments since then; and
- That she had an important role to play in supervising and holding the trustee to account (particularly on behalf of the daughter given that the trustee paid great attention to the views of the husband) even if she did not expect to receive any benefit herself.
As to the first objection, the Royal Court could not ignore the fact that the distribution was to be made to the husband in order that he could pay the money to the wife to comply with the order of the Final Court. Thus, although paid to the husband, it would end up in the wife’s pocket; she would be better off to the extent of HK$770.5 million and the trust will be worse off to that extent.
As to the second objection, as it was the intention of the trustee to exclude the wife, the Court saw no justification for the wife seeking up to date information with a view (in the event of it transpiring that the assets had increased) to seeking a further payment or to arguing that she should not be excluded because she might receive a further payment. She has received what the Final Court considered fair in circumstances.
As regards the wife’s final objection, the Court concluded that the trustee was a professional trustee and it saw no reason to think that it would not act properly and impartially as a trustee towards the daughter. The presence of the wife as a beneficiary was not necessary to protect the interests of the daughter.
Finally, the Royal Court gave consideration as to whether the decision to exclude the wife was one which a trustee could reasonably reach.
The Court noted that where a trustee proposes to exercise such a power, it is incumbent upon it to consider the position very carefully, to take into account the position of the person to be excluded and whether therefore it is a reasonable decision in the interests of the other beneficiaries
The Court in the present case had no hesitation in approving the decision: The wife had, in effect, received half the trust fund. She was aged 75 and would now have HK$770.5 million plus certain other assets giving her a total of HK$832.5 million in her own right. She had ample financial resources to last her for the rest of her life. Furthermore, the money had been paid to her as part of a divorce order intended to achieve a clean break. It was entirely reasonable in those circumstances that the trustee should conclude that the remaining assets of the trust should be held exclusively for the remaining beneficiaries of the trust. The Court also noted that the trustee was entitled to take into account that, following a divorce, relations between a former husband and a former wife may be difficult and the continued presence as a beneficiary of a spouse who had received a capital sum as a clean break was likely to make it more difficult for everyone to put the divorce proceedings behind them.
These two judgments of the Royal Court of Jersey give helpful guidance to trustees of Jersey trusts as to the considerations that need to be taken into account in the best interests of the beneficiaries as a whole when the assets of the trust in question may be considered a resource in foreign matrimonial proceedings.