An issue which our team increasingly is asked to give advice on is the question of whether an offshore trust is susceptible to attack in English divorce proceedings.

An issue which our team increasingly is asked to give advice on is the question of whether an offshore trust is susceptible to attack in English divorce proceedings.

Pursuant to section 24 of the Matrimonial Causes Act 1973, a court may make an order “varying for the benefit of the parties to the marriage and of the children of the family or either of them any ante-nuptial or post-nuptial settlement (including such a settlement made by will or codicil) made on the parties to the marriage”. An English court may therefore vary the terms of a trust if it can be shown that the trust is an “ante-nuptial or post-nuptial settlement”.

The term ‘settlement’ has been given a broad meaning by the courts. It is defined as a disposition “which makes some form of continuing provision for both or either of the parties to a marriage, with or without provision for their children” (Brooks v Brooks [1995] 1 All ER 257). Consequently if one or both of the parties to the marriage and/or their children are named as a beneficiary of the trust, there is a strong likelihood that the English Family Court would consider the trust to be a settlement.

However for any settlement to be capable of variation by the courts it must also be considered to be ‘nuptial’. Case law has confirmed that a nuptial settlement will usually be one which makes some form of continuing provision for both or either of the parties to a marriage (Brooks v Brooks). The court also has “unfettered and, in theory, unlimited” discretion under the 1973 Act giving it very broad powers (Ben Hashern v Ali Shayif [2008] EWHC 2380). It should also be noted that a settlement can remain nuptial even after both husband and wife have been removed as beneficiaries (as in Charalambous v Charalambous [2004] EWCA Civ 1030, although it is worth noting that in this case both husband and wife did remain protectors of the trust and could be reinstated as beneficiaries.)

One further important point to note is it is possible for part of a settlement to be treated as nuptial. For instance in Ben Hashern v Ali Shayif, the Court found that the only nuptial aspect of the settlement was the licence that had been extended to the couple to permit them to occupy the family home.

The question of whether a trust has a nuptial element is fact specific. Some factors which a court may consider when determining whether a trust is nuptial or not include:

  • Whether one or more of the husband/wife/children are in the class of beneficiaries;
  • To what extent the parties to the divorce proceedings have received any distributions of capital or income;
  • Whether the family property is held as a trust asset;
  • Whether a letter of wishes exists which requests that the trustees take into account and comply with any requests from the settlor; and
  • Whether the assets in the trust can be said to derive from a source external to the marriage;

Divorce proceedings can therefore, in certain circumstances, prove to be a real threat to the trust. What therefore should an offshore trustee do when faced with English divorce proceedings involving a beneficiary under a trust?

One of the first, and most key, decisions for a trustee involved in divorce proceedings is whether or not to submit to the jurisdiction of the English Court.

In Jersey the issue of submitting to the jurisdiction is fairly settled. The Royal Court of Jersey’s decision in the matter of the H Trust [2006] JRC 057 held that “it is unlikely to be in the interests of a Jersey trust for the trustee to submit the jurisdiction of an overseas court” because it would interfere with protection afforded to Jersey trusts by the firewall provisions. As you will see from the case summary within this newsletter the Court in Guernsey has recently also considered this issue. Here, the Court stated that generally a trustee should seek directions from the local court as generally it will not be in their interests to submit to the English jurisdiction, albeit for very specific reasons in this particular case the Deputy Bailiff departed from the authority of the H Trust case and held that is was appropriate for the trustee to submit to the jurisdiction of the English High Court.

There may be a third option whereby the trustee provides evidence to the English Court without actually submitting to the jurisdiction. This option has emerged from Mr Justice Mostyn’s comments in the case of BJ v MJ (Financial Remedy Overseas) [2011] EWHC 2708 (Fam) whereby he stated that “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 a submission to the jurisdiction”. If a trustee does wish to participate in proceedings but without submitting to the jurisdiction they need to be very careful to ensure that their communications, statements and any appearance within the English proceedings is expressly stated to be made without submitting to the jurisdiction. We recommend that if a trustee wishes to explore this option they seek independent legal advice before taking any steps.

Generally when a trustee is considering whether or not to submit to the English jurisdiction, the trustee should consider:

  • what is being asked of them by the English Court;
  • the likely consequence of their failure to assist the English Court;
  • the potential impact on the whole class of beneficiaries.

If the trustees are unsure of which approach they should take it is recommended that the trustee applies to their local court for directions. Assuming the trustee then follows the directions of the local court, the trustee will be protected against any possible breach of trust claims and in respect of their costs.