The word remarkable was used a number of times in the AAZ v BBZ judgment, released last week, and will probably be echoed by the media for some time to come as the total value of W’s claim amounted to a staggering £453,576,152.
Trust structuring and wealth protection issues
However, notwithstanding an argument that the net marital wealth of just over £1 billion was held in a discretionary trust, this judgment should not send a ripple of fear through the professional trust services industry because the application of English law to the trust structure in question was eminently sensible, and in that sense, unremarkable.
When assessing H’s resources, the court includes assets in his beneficial ownership and those he is likely to receive from a third party (eg a trustee) if requested. As Mr Justice Haddon-Cave states: the question is not one of control of resources: it is one of access to them.
The trust structure in question, or rather the drafting/operation of it, is remarkable in the following respects:
- The trustee, C Ltd, is a Cyprus registered corporate trustee, of which H is the sole director
- H was connected to the 2013 trust as settlor, protector and principal beneficiary
- The trustee had an absolute discretion to pay out the principal beneficiary (H) to the exclusion of the discretionary beneficiaries
- The trust deed excluded the self-dealing rule and provided a blanket protection to the trustee
- The trust deed provided the protector (H) with an absolute power of veto over the exercise of all trustee discretion
- H confirmed that the trust does not produce accounts and that no letter of wishes existed
As Mr Justice Haddon-Cave remarked: “The way in which the trust is intended to operate is remarkable in its simplicity: i.e. by H, qua principal beneficiary, asking himself, qua sole director of C Ltd, for a distribution and then H, qua protector, asking himself whether or not such a distribution should be met. The trustees can ignore the needs of the other beneficiaries and benefit H by transferring the whole or any part of the capital to him. The trustees (in essence H) owe no duty of care and are free from the self-dealing rule: he can pay money to himself whenever he wishes.”
It is hardly surprising that the supposed assets of the trust were found to be financial resources of H in the divorce.
A further remarkable aspect of this case is the timing of the transfer into trust. The purported assignment of three offshore companies and a Moscow property into trust was dated 17 March 2015, a mere four days before H signed his witness statement in the divorce. H offered no evidence to rebut the presumption that the transfer was intended to defeat or impede W’s claim, and so the court made an order to set aside the transfer.
It should be noted that H did little to engage in the divorce proceedings and offered very little evidence to support his claims, but on the basis of the judgment, this structure, or rather the operation and drafting of it, can serve as a lesson in what to avoid.
The discussion as to choice of vehicle and jurisdiction for the protection of wealth can be investigated on another occasion because the case of AAZ v BBZ is a remarkable reminder of the basics:
- Outline a genuine, long term, cross-border strategy for the benefit of each of the client, spouse and future generation(s) – the right strategy can provide elements of control and flexibility but without diluting the protection. It will also serve as a succession plan, so the client can avoid duplication.
- Where possible tie in the strategy with pre/post nuptial agreements, applicable marital property regimes, asset ownership options (eg joint tenants/tenants in common).
- Plan early and not in contemplation of divorce; this can be particularly useful if parents have factored in protection for their children.
- Compliance, substance and integrity are pre-requisites for a strategy to achieve its objectives.
The judgment is also unremarkable in its application of two ‘remarkable’ divorce law principles:
- It is remarkably difficult to succeed in arguing that a party has made so special a financial contribution that they should receive more than half the marital assets; and
- Petitions citing adultery as the fact in support for the reason for the breakdown of the marriage need to be filed sooner rather than later.
Like the self-styled ‘genius’ husband in last month’s case of Work v Gray, H argued that his business acumen and commercial achievements were such that he should receive more than half the marital assets; the court was not persuaded – despite the marital assets totalling just over £1 billion.
In fact, in the past 12 years there have been just three reported cases in which special contribution has resulted in an unequal division of matrimonial assets. The most recent was Cooper Hohn v Hohn in 2014 where the husband successfully secured 64% of marital assets totalling US$1.5 billion. In the other two cases the ‘special contributors’ were awarded 55% and 60%, respectively.
H also sought to reduce the marital pot by commuting the marriage. Citing W’s alleged adultery in 1999, H asserted that the court should deem the marriage to have ended many years before he realised US$1.375 million from the sale of his Russian company shares in November 2012.
It is a matter of statute (section 2(1) of the Matrimonial Causes act 1973) that if a married couple continues to live together for more than six months (aggregated or continuous) after one spouse learns of the other’s adultery then a petition cannot be filed on the basis of that adultery.
It should be noted that this rather archaic provision can be circumvented by a petition based on unreasonable behaviour that includes ‘inappropriate’ if not ‘adulterous’ relationships. But in H’s case he omitted to petition until after W had done so – 13 years on from 1999.