1. Introduction
  • This has been a fertile area in the last 10 or so years, the problem being now (as it has always been) “…….how trusts should be treated in the division of assets following divorce. Trusts have always aroused controversy in this exercise. This is because assets held in trusts are not legally owned by either party. They are owned by third parties – the trustees” (per Mostyn J in BJ v MJ and others [2011] EWHC [email protected][1]).
  • To help place recent developments in context, it is useful to begin with an overview of the ways in which offshore trustees can become involved with domestic matrimonial proceedings. Taking the English Court as our example, there are essentially five scenarios, these being (1) where it is argued the trust is a “financial resource” available to a party to the marriage where the court is deciding on what award to make under section 25 of the UK Matrimonial Causes Act 1973 (“the 1973 Act”) (where Charmani remains the leading authority, but now should be considered in light of the recent Court of Appeal decision in Whaley v Whaley ii), (2) where it is argued the trust is an ante or post nuptial settlement capable of variation under section 24 of the 1973 Act, (where the cases of Ben Hashem v Ali Shayifiii and BJ v MJiv prove instructive), (3) where the trust is set aside as either a sham, (where the case of A v Av offers much by way of guidance), or is perhaps connected with (or owns) a company or other corporate vehicle, the “veil” of which is to be pierced (where Ben Hashem is again now considered a “seminal judgment”)vi or (4) is a disposition under section 37 of the 1973 Act created with the intention of defeating an order for ancillary relief, where Mubarak v Mubarik (No. 2)vii remains the leading case. In addition, (5), it is not uncommon, whether to support action later to be taken under (1) to (4) above, or simply to assist the domestic court, for the offshore trustee to be asked by a settlor, beneficiary, or even by formal court process,viii to provide information about the offshore trust. That is an area where BJ v MJ has done much to clarify the approach the offshore trustee should take.
  • In turn, these scenarios tend to invite further questions for the offshore trustee, notably (1) to what extent (if at all) should the trustee become actively involved in the domestic proceedings, and if it should become involved, why and to do what, and (2) to what extent can or should the trustee reasonably give effect to any order made by the domestic court having regard to the interests of the offshore trust’s beneficiaries as a whole, some or many of whom may have little if any direct association with the domestic proceedings. One key consideration for the trustee will be the likelihood of any domestic order being enforced in the offshore court, given the preference these days for offshore jurisdictions to try and protect trusts established there from attacks from overseas. Both Guernsey and Jersey have in place “firewall legislation”, Guernsey under section 14 of the Trusts (Guernsey) Law, 2007 (“TGL 2007”), and Jersey under Article 9 of the Trusts (Jersey) Law, 1984 (as amended) (“TJL”), both of which were primarily designed to resist against enforcement of order made in the Family Division. The adequacy of the protection afforded by these provisions (and notably Article 9, which is to be amended under the new draft Trusts (Jersey) Amendment Law, No. 5, after its disastrous reception in In Re. B Trust)ix will be an issue to be addressed in this session.
  • As a general rule, the trustee needs to think what is being sought in the domestic court, by whom, and what effect that will have on the trust and its beneficiaries. Is there for instance, a threat to the trust assets, in the sense that a proprietary claim is being asserted and if so which court can and will hear that claim? The offshore firewall legislation may offer protection against the enforcement of domestic order offshore. But if the domestic court is (by its own conflict rules) competentx to make a final determination of the matter without reference to the offshore court, the trustee will gain nothing (and may even be vulnerable to serious criticism)xi by holding back from participating in the domestic proceedings, as the domestic court will offer the one and only chance to participate. Equally, however, where a domestic order cannot be enforced without reference to the offshore court, the likely attitude of the offshore court will be crucial to the trustee’s evaluation of the situation (where the Jersey Royal Courtxii and Court of Appealxiii decisions in In re IMK Family Trust remain the leading ones), as will the interests of family harmonyxiv and any “judicial encouragement” given by the domestic court.
  • Relevance of the Hague Convention on the Law applicable to Trusts and on their Recognition – adopted in Guernsey on 28 April 1993 (and in Jersey on 1 March 1992).
    • recognition – Article 11
    • domestic mandatory rules dealing with the personal and property effects of marriage – Article 15
  1. Sham and Piercing the Veil
    • Attitude
      • J v V (Disclosure: Offshore Corporations) [2003] EWHC 3110 (Fam) @ para [130] Coleridge J said "....these sophisticated offshore structures are very familiar nowadays to the judiciary who have to try them. They neither impress, intimidate, nor fool anyone. The courts have lived with them for years"
      • Re W. (ex parte orders) [2000] 2FLR 927 @ 938, Munby J said "....the court will not allow itself to be bamboozled by husbands who put their property in the names of close relations in circumstances where, taking a realistic and fair view, it is apparent that the recipient is a bare trustee and where the answer to the real question - Whose property is it? - is that it remains the husband's property”, and "....the robustness with which the Family Division ought to deal in appropriate cases with husbands who seek to obfuscate or to hide or mask the reality behind shams, artificial devices and similar contrivances. Nor do I doubt for a moment the propriety and utility of treating as one and the same a husband or some corporate or trust structure which it is apparent is simply the alter ego or creature of the husband”.
      • BJ v MJ and others, Mostyn J considered many of the authorities to conclude analysis of them showed “……that the Family Division has always brought to these cases 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 offshore trusts, the jurisdictions of offshore courts’ (per Sir Mark Potter P in Charman v Charman (No. 4) [2007] EWCA Civ 503, [2007] 2 FCR 217, [2007] IFLR 1246, at para 57 ((CA))”.
      • “Cipher” or “Dear me trust”, which was, said Mostyn, “…….a purportedly “discretionary trust” set up by a spouse where the trustees (either because the settlement is a sham, or because they act in breach of trust, or because the trust is the husband’s alter ego) have historically been totally compliant to his wishes and where he has had unfettered access to the capital and income of the trust in a way indistinguishable to assets in his direct ownership……[so that]…..the assets are properly to be regarded as his, and the trustees to be seen as mere ciphers. Hence the court simply ignores the trust structure. An example of this phenomenon is Minwalla [2004] EWHC 2823 (Fam), [2005] IFLR 771, [2005] Fam Law 357”.
      • conduct of parties
    • Leniency
      • “…….relevant legal principles which have to be applied [in the Family Division] are precisely the same.... as in the other two Divisions. There is not one law of "sham" in the Chancery Division and another law of "sham" in the Family Division. There is only one law of "sham," to be applied equally in all three Divisions of the High Court, just as there is but one set of principles, again equally applicable in all three Divisions, determining whether or not it is appropriate to "pierce the corporate veil”, per Munby J in A v A and St Georges Trust [2007] EWHC [email protected][21].
      • third parties with real interests and creditors and directors
    • Ben Hashem and piercing the corporate veil
      • control necessary but not sufficient
      • impropriety must be present, and must be linked to the use of the company structure to avoid liability
      • a structure may be pierced even if it was formed without deceptive intent
    • Criticism of Ben HashemKremen v Agrestxv and Gowers v Gowersxvi
      • Mostyn J in Kremen: “It certainly came as some surprise to those who practised in ancillary relief cases to discover that a positive finding of impropriety or ‘mask’ or ‘façade’ or ‘sham’ or ‘creature’ or ‘public’ was needed before the corporate veil could be disregarded and a direct order made against the property made by the company. The understanding had been for years that where the company was wholly owned by one party, or where minority shareholdings could realistically be disregarded, then a direct order could be made against the underlying asset. After all, a strong Court of Appeal in Nicholas v Nicholas had said precisely that… Connell J made precisely such an order in Green v Green … and I have to say that I do not share Munby J’s ‘great difficulty’ with this decision. There is a strong practical reason why the cloak should be penetrable even absent a finding of wrongdoing”[2010] EWHC 2091 @ [44] and “Experience shows that a great many of what I might call single purpose vehicles are incorporated in off-shore havens. So a transfer of a single share in a BVI incorporated company would leave the claimant with the prospect of registering in Tortola the share transfer ordered by this court and then either taking steps to dividend out to her property and/or to take steps to wind out the company in the BVI. This may prove to be a tortuous and expensive process simply to get into her name what may have been the former matrimonial home in Surrey”([2010 EWHC [email protected][47]).
      • Gowers – Holman J: CDL actively traded and had 30% minor shareholders. It employed 80 people and had a hardworking nonshareholding director. Just because it lent money to the husband was insufficient to pierce the veil. There was no impropriety, but therefore no need to decide which of Munby or Mostyn was correct.
    • How should directors of company (or trustees who own company) whose veil is to be pierced react?
    • Can you pierce the veil of a trust?
      • No: claim is tantamount to one of sham, or else would (if successful) give effect to an abandonment of fiduciary duty (Esteem (2004) 6 ITELR 368 @ 421ff)
      • for sham, see A v A and St Georges Trustees Limited [2007] EWHC 99 @ [87] control claim “quite hopeless” and “should never have been brought” per Munby J.
      • foreign law trusts (e.g. Jersey) – see CI Law Trustees and Folio Trust Co. Ltd v Minwall & Os [2005] JRC [email protected][17]: 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 such an assumption”.
  2. Section 24(1)(c) and variation
    • NB: the provisions in sections 24(1) (c) and (d) of the 1973 Act conferring on the Court the power on or after granting a decree of divorce, annulment or judicial separation, to vary ”for the benefit of the parties to the marriage and of the children of the family or either of any of them” (or reduce, or eliminate any person's interest in) "ante" or "post-nuptial settlement………made on parties to the marriage”. So it is the court order itself which effects the variation, not the use of any other power subsequently to make the variation. Furthermore under section 24(2) the court may make an order under section 24(1)(c) even if there are no children to the marriage.
  • What are “ante” or “post-nuptial settlements”?
    • see eg. Brooks v Brooksxvii where Lord Nicholls said "[section 24(1) (c)] is concerned with a settlement "made on the parties to the marriage." So, broadly stated, the disposition must be one which makes some form of continuing provision for both or either of the parties to a marriage, with or without provision for their children”. Distinguish “immediate absolute interests in an item of property”.
    • “settlement” has a wide meaning in this context, not being limited to trusts – see e.g. Hill J in Prinsep v Prinsep [1929] [email protected] “Is it upon the husband in the character of husband or on the wife in the character of wife, or upon both in the character of husband and wife? If it is, it is a settlement on the parties within the meaning of the section. The particular form of it does not matter. It may be a settlement in the strictest sense of the term, it may be a covenant to pay by one spouse to the other, or by a third person to a spouse. What does matter is that it should provide for the financial benefit of one or other or both of the spouses as spouses and with reference to their married state”.
    • see N v N and F Trust [2005] EWHC 2908 where Coleridge J found that a property owned by a Bahamian company (owned in turn by a Jersey trust), which the Jersey trustee had made available to husband and wife as the matrimonial home, was subject to an ante-nuptial settlement which could be varied, even though it was agreed the Jersey trust itself was not a settlement that could be varied under section 24(1)(c).
    • Other issues:
      • trusts established where husband and wife are already married are more likely to be nuptial (K v K [2007] EWHC 3485)
      • provision for one party will suffice
      • if neither spouse is party, there can still be “settlement” of a power of disposal (eg as trustee) under a trust, if that power is granted to a spouse (see eg Compton v Compton [1960] 3WLR 476) – see also Charalambous, where spouses were removed, but remained protectors, and children were beneficiaries.
      • a trust (inextricably) linked to a nuptial settlement – see Mostyn J in BJ v MJ [2011] EWHC 2708 @ [60] “[No 2 Trust] is an integral, indeed key, component of the overall scheme. It is the left hand to the No. 1 Trust’s right hand. In Parrington v Parrington [1951] 2 All ER 916 Pearce J held that two separate but contemporaneous deeds by which a husband and wife divided up their hotel business between themselves was in substance one transaction which qualified as a nuptial settlement between spouses within the meaning of S.25 of the Matrimonial Causes Act 1950……”.
    • Ben Hashem
      • what property is subject to the “settlement”?
    • Charalambous v Charalambous
      • Relevance of Hague Convention (Article 15):
  1. Section 25, Charman and Whaley
  • What is the Charman test?
    • "But what does the word "resource" mean in this context? In my view, when property focused, that central question Is simply whether, If the husband were to request it to advance the whole (or part) of the capital of the trust to him, the trustee would be likely to do so. In other cases the question has been formulated in terms of whether the spouse has real and effective control over the trust. At times, I have myself formulated it in that way. But unless the situation is one in which there Is ground for doubting whether the trustee is properly discharging its duties or would be likely to do so, it seems to me on reflection that such a formulation is not entirely apposite." 
    • further clarification in Whaley v Whaley [2011] EWCA Civ. 617
    • adding in beneficiaries
    • protector consent
    • judicious encouragement
  1. Section 37(2) of the 1973 Act and Mubarak v Mubarik (No. 2) [2007] EWHC 220
    • One other provision of some note is section 37(2) of the 1973 Act, which gives the court power to grant injunctions preventing dispositions intended to defeat claims for financial relief, and set aside transactions already made with that intention. There is a defence in favour of persons acting in good faith and without notice of the transferor spouse's intention.
    • an exclusion of beneficiary is not a disposition for the purposes of section 37 
    • but (Charalambous) it is not a good idea either, as it will not “de-nuptialise” a nuptial settlement and may lead to inferences of control.
  2. Submission to the jurisdiction
    • The issue of submission (i.e. whether offshore trustee, or indeed directors of company/company itself, should submit) goes towards enforcement. RBS Coutts (Cayman) Ltd v W (2010) 14 ITELR 557 confirms an age old rule that to submit is to confer an enforceable power on the domestic court to act contrary to interests of the trust (company) where the domestic court’s primary focus is the interests of spouses before it, not the welfare of the trust/company (compare Re H. Trust [2006] JLR 280 in Jersey) therefore “…….in most circumstances, it is unlikely to be in the interests of a Jersey trust for the trustee to submit to the jurisdiction of [a domestic] court which is hearing divorce proceedings between husband and wife…….” (Birt DB (as he then was) in re H Trust [supra]@[15]). Exceptional cases will be where, eg. 
    • situs of property gives domestic court in rem jurisdiction (in re A & B Trusts [2007] JLR [email protected][14(iii)]
    • trust governed by English law with English resident beneficiaries (in re A & B [supra] @ [14(ii)])
    • “…….the best way of ensuring that………[the domestic court is made fully aware of all the circumstances]……is for the Trustees to appear through Counsel who is well versed in trust matters…..” (in re A & B [supra]@[14(i)) NB Mostyn J in BJ v MJ [supra]In this field the court is therefore engaged in a fact finding exercise as to whether the trustees will likely benefit their beneficiary if called on to do so. Of course, the court is not making a judgment about facts which have happened; it is making a judgment about the likelihood of the eventuation of future facts. It is undertaking the task specifically set for it by Parliament in s 25(2)(a) MCA 1973 of judging what resources the party in question “is likely to have in the foresseable future”. It will make its judgment on the available evidence, which will include evidence deriving from the trustees. If the trustees have refused to participate meaningfully or helpfully in the inquiry then neither they nor their beneficiary can complain if the court draws robust conclusions as to the likelihood of future benefit. In Whaley, as it happens, I conducted the pre-trail review and recorded in the preamble to the order a recital expressing the court’s expectation that the principal trustee, Mr Hess, attend in person to give oral evidence at the final hearing. Mr Hess did not do so, and Baron J found that “Mr Hess was/is prepared to do the husband’s bidding”. In her judgment at para 35 Black L J stated: “give evidence despite the fact that the order made by Mostyn J at the pre-trial review included in the preamble a recital of the court’s expectation that he attend in person to give oral evidence at the final hearing”.
    • doubtful even whether appearance as a witness amounts to submission at all (“I find it hard to see why participation by the trustees in a helpful or meaningful way in this court’s inquiry qua witness could be construed as submission to this jurisdiction”, Mostyn J, BJ v MJ [supra]@[21]
    • Best advice remains to seek directions prior to submission (see eg. Barclays Private Bank & Trust Limited v Hsu [2010] JRC [email protected][12]) not afterwards (in re A & B [supra] @ [34]-[35])
    • If you submit, submit effectively: in Minwalla, it was made clear that a trustee which submitted in neutral or passive fashion in domestic proceedings where the domestic judge set aside a Jersey law trust as a sham (hence authorizing payment away of assets) would face claims for breach of trust if proceeding instead in the Jersey court could have prevented that result. 
  3. Firewall legislation
  • In RBS Coutts (Cayman) Ltd v W (supra) it seems the Cayman Court stressed the importance of the Cayman firewall legislation vis a vis enforcement of foreign judgments. In Guernsey in Rothschild Trust Guernsey Limited v Pateras (unreported 3 May 2011) Collas DB (as he then was) said section 14 of Trusts (Guernsey) Law, 2007 would deal with all questions of validity, but matter remains largely untested.
  • Contrast Jersey, and Article 9 of the Trusts (Jersey) Law, 1984 (as amended)
    • In re. B Trust [2006] JLR 562: Jersey trustee had submitted to section 24(1)(c) proceedings, therefore, but for new Article 9, matter would have been uncontroversial. Husband opposed trustee’s application in Jersey to give effect to English order in favour of spouse because (1) trust would not have been post-nuptial under Jersey law, and English court was bound (given Article 9) to apply Jersey law in respect of any variation, and (2) Article 9 had dispensed with comity.. As to (1) "The application of Jersey law by this Court to issues relating to the variation of a trust and the appointment out of monies to a subtrust brings us to Article 9(4). Contrary to the submission of counsel for the husband we do not think that the application of English law by the English court to the question whether the B Trust was a postnuptial settlement renders the English order unenforceable. We reach that conclusion for the following reason. We find it to be altogether unsurprising that the English court should have applied English law in the exercise of a statutory jurisdiction conferred in matrimonial proceedings to vary the terms of a trust in order to do justice between the parties. Nothing in the law of Jersey could oust such a jurisdiction which is in conformity with the Hague Convention on the law applicable to trusts and on their application; and we take judicial notice of the fact that the Hague Convention has been extended to Jersey. This court is however not exercising a matrimonial jurisdiction under Article 27 of the Matrimonial Causes Law. We are not concerned with the question whether or not the B Trust is a post-nuptial settlement. We are not even being asked to vary the trusts of the B Trust. We are exercising a jurisdiction under Article 51 of the 1984 Law to give directions to a trustee which has sought the assistance of the court. We also have an inherent jurisdiction over trusts as a court applying principles of equite but we do not need to draw from that reservoir. It is immaterial that the English court applied English law in matrimonial proceedings before it in order to arrive at what it considered to be a just conclusion. Our function is different; it is to decide whether, and if so to what extent, to give effect to the conclusions at which the English court arrived. In doing so, and in exercising our jurisdiction to give directions under Article 51, we will naturally apply the law of Jersey. It is equally immaterial that the B trust may not be a post-nuptial settlement capable of variation under the Matrimonial Causes Law. We accordingly reject the first submission of counsel for the husband”. As to (2), comity was not dispensed with by the “side wind” of Article 9, thus judgment was “enforced”.
    • Mubarak (In re IMK Family Trust) in Jersey, [2008] JLR 250 (JRC) and [2008] JLR 430 (JCA): order of Holman J varying Jersey law trust under section 24(1)(c) to force husband to pay wife lump sum. Two bases for wife’s application to Jersey court were (1) comity (based around re. B Trust) and (2) variation under Saunders v Vautier/statutory jurisdiction (which succeeded and was upheld in the Appeal Court). Re B Trust did not support a comity argument, as it was clear what the court had in mind there, was not “enforcement, but directions under Article 51 to give “substantial effect” to English judgment. Distinction to be made between “alteration and “variation”. In summary (emphasis added)
    • (i) “By reason of Article 9(4) of the 1984 Law, this court cannot enforce a judgement of the Family Division varying or altering a Jersey trust under the 1973 Act even where the trustees have submitted to the jurisdiction of the Family Division……….
    • (ii) Where the variation ordered by the Family Division does not amount to an alteration (in the sense we have described above), this court may give directions under Article 51 of the 1984 Law which have the effect of achieving the objectives of the English judgement. Whether this court will do so in a particular case is a matter of discretion, having regard to the interests of the beneficiaries.
    • (iii) Where the variation ordered by the Family Division does amount to an alteration, there is no jurisdiction in this court to give directions under Article 51 which authorise or direct the trustees to act in a manner which is outside the powers conferred on them by the trust deed,” ([2008] JLR [email protected]).
  • Mrs Mubarak had been excluded as a beneficiary, so that a payment to her was ultra vires, and an “alteration”, and was prevented by Article 9(4) as being inconsistent with Article 9(1).
  • In summary (see Barclays Private Bank & Trust Limited v Hsu [supra]@[18]-[19]It is quite apparent from this line of authority that a key consideration is whether the Jersey trustee has submitted to the jurisdiction of the foreign court. If the Jersey trustee had made no submission to that jurisdiction, then the foreign Court Order would not be enforceable as such against the trustee without a fresh hearing on the merits. There is nothing very surprising about this. It would be stretching the doctrine of comity beyond breaking point to enforce against a party in Jersey a judgment of a foreign court whose jurisdiction had not been accepted.

“The second consideration however is that, although the foreign Court Order might not be enforceable as such, the Royal Court could nonetheless in its discretion give directions to the trustee which might achieve the same result as was intended by the judgment of the foreign court. This would not be a matter of direct enforcement of the foreign judgment. It would be an exercise of the Court’s discretion to give directions to a trustee as to the administration of the trust and the exercise of trustee powers. For that reason, a distinction has to be drawn between a direction to the trustee that he do something that neither the Trust Deed nor the Trust Law allows him to do, and a direction to the trustee which he is empowered to perform pursuant to the terms of the trust. It is clear the Royal Court cannot exercise a discretion under Article 51 of the Trust Law to order a trustee to do something the trustee does not have power to do”.