The Court of Appeal has upheld a divorce settlement involving extraordinary wealth. Its ruling of 24 May 2007 proffers a cautionary reminder to the trust world that, in certain circumstances, trust funds may fall into the ‘pot’ of matrimonial assets to be divided on divorce. It sounds a warning also to divorcees who claim to have made a special contribution to the family's welfare, entitling them to a greater share of the family's wealth.
Mr and Mrs Charman's marriage lasted 28 years, during which the Husband pursued a highly successful career in the insurance industry. In High Court proceedings, the Judge found the parties' total assets amounted to £131 million. He awarded the Wife £48 million (36.5%) and the Husband £83 million (63.5%). The Husband received over 50% primarily because he had made a ‘special contribution’ by generating the parties' fortune through his skill and effort during the marriage. The Husband appealed, arguing (1) the Judge had erred by including, in his calculation of the parties' assets, sums held in an offshore discretionary trust; and (2) the Judge had made insufficient allowance for the Husband's ‘special contribution’.
Treatment of trusts on divorce
In an entrepreneurial context, the background to the Charman settlements is a familiar one. The Husband created the settlements in 1987, having recently bought a failing Lloyd's underwriting agency. This was operated through a company (Charman) of which he was chief executive. The Trustees used the initial cash settled to subscribe for shares in Charman (for which the Husband would otherwise have been entitled to subscribe), with 25% of his potential entitlement being placed in his own name, 25% in the JR Charman Children's Settlement and 50% in The Dragon Holdings Trust (Dragon). Over the next ten years, the Husband turned Charman into the largest and most profitable syndicate at Lloyd's, the shares being sold several times and re-invested in companies in which the Husband held executive positions. Ultimately the Husband established Axis, the global specialist insurance business, which was floated in 2003.
The JR Charman Children's Settlement: This was created for the benefit of the family's two sons and held assets worth at least £30 million at the time of the hearing. Neither party had a financial interest in the Settlement, neither of them proposed it should be included when computing their assets, and there was never any question of the Court including it.
Dragon: This was an offshore discretionary trust holding assets worth £68 million, a mixture of Axis shares and other investments. It represented 52% of the value of the parties' total combined assets. The original trustee was a trustee company in Jersey and the proper law that of Jersey. The beneficiaries were defined as the Husband, the Wife (who was named), their two sons, any future children and remoter issue of the Husband, such charities as the Trustees might identify and such other persons as the Trustees might add. In 2003 the Husband, who had by then moved to Bermuda, caused the Jersey Trustee to retire. A Bermudian corporate trustee was appointed in its place, the proper law being changed to that of Bermuda.
The fundamental issue before the Court was whether Dragon was ‘dynastic’, the Husband arguing that he always intended it to be a legacy for future generations of the family. Rather than seeking an order to vary the Settlement, the Wife relied on the argument that the assets of Dragon were a resource of her Husband's. She gave evidence that she had always understood that Dragon was a family trust, its assets were never beyond her Husband's control and, were he to need them, arrangements would be made accordingly.
The Court of Appeal rejected the Husband's claim that Dragon was dynastic, confirming the findings of the High Court. The following points were noted:
?? The husband wrote two letters of wishes, one in 1987 and one in 2004, the latter after the breakdown of the marriage but before divorce proceedings were issued. In the first letter, the Husband stated that he wished ‘to protect and conserve certain assets for the benefit of myself and my Family’. He went on to say: ‘it is my wish that you consult me with regard to all matters relating to the investment or administration of the Fund’ and ‘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’. In the second letter, he excised references to his Wife and wrote: ‘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.’
?? Between 1988 and 1998, the Trustee made four distributions of income from Dragon to the Husband for fiscal purposes. He had no need for any capital. There were no distributions to any other beneficiaries.
?? It was recognised that the wealth of Dragon had been built by its investment, in accordance with the Husband's requests.
?? The Husband had the power to replace the Trustee. Correspondence with his solicitor, written at the time Dragon was created, shows this was a protective measure, designed to give him greater control.
?? The Bermudian Trustee noted that its predecessor had held the income for the Husband and had informally regarded the Settlement as an interest in possession trust. The Bermudian Trustee passed a written resolution to do likewise.
?? Shortly after divorce proceedings began, the Husband made settlement proposals to the Wife, and attached to them a schedule of ‘matrimonial assets’, which included the assets of Dragon.
?? Evidence was adduced to show that the Husband's UK accountant suggested, in 2003, that Dragon might be 'collapsed' for fiscal reasons.
?? The Husband had conducted a ‘Herculean struggle’ to prevent the Bermudian Trustee from giving evidence in circumstances in which, had it been dynastic, it would likely have been able to produce evidence from its files to that effect.
?? Before attributing the assets of Dragon to the Husband, the Court had to be satisfied that the Trustee was likely to advance the assets to him on his request. It observed that in the majority of discretionary trusts, one would expect to find the trustees had not refused a settlor's request, as the settlor would be acting reasonably in the interests of himself and his family.
?? Even if the High Court had found that Dragon was dynastic, it was doubtful whether it would have declined to attribute its assets to the Husband. Whatever the Husband's historical intentions in relation to Dragon, it was likely that, in the changed circumstances of his need to discharge obligations following divorce, its Trustee would advance capital to him.
The Court was concerned that it should not send a message to the offshore world that trusts do not matter. It made clear that there was no suggestion Dragon was a ‘sham’. In the circumstances, though, it found it would have been ‘a shameful emasculation of the court's duty to be fair’ if the assets built up in Dragon had not been attributed to the Husband in the divorce proceedings. Settlors and trustees take note.
The Court of Appeal found that appropriate allowance had been made for the Husband's ‘special contributions’. It reviewed the process for determining a financial settlement, and clarified the effect of arguing a ‘special contribution’.
?? The ‘equal sharing principle’ applies on divorce. Property should be shared in equal proportions unless there is good reason to depart from equality. Assessment is always in two stages: (1) computation of the parties' assets and (2) distribution. The Court must consider the factors in the statutory checklist, and assess the division of assets with reference to need, compensation and sharing.
?? The principle of need requires consideration of the parties' financial needs, obligations and responsibilities; standard of living during the marriage; their ages; and any physical or mental disability of either of them.
?? The principle of compensation requires consideration of whether a party has suffered or is likely to suffer financial disadvantage as a result of entering into the marriage; decisions taken during the marriage for the family's benefit (e.g. sacrificing or not pursuing a career); and exit from the marriage (e.g. loss of possible pension rights).
?? The principle of sharing requires consideration of each party's contributions to the family's welfare, with reference to the duration of the marriage; and (rarely) a party's conduct if it would be inequitable to disregard it.
?? It may be difficult to compare the parties' different contributions (financial versus non-financial). There is a danger of discriminating against the homemaker. Only in exceptional circumstances is it appropriate to find that one party has made a ‘special contribution’ justifying a departure from equal sharing.
?? Where one party generates an extraordinary amount of wealth, it may be easy for them to claim, by virtue of its amount, an exceptional and individual quality deserving special treatment. Often, though, the party will need to demonstrate genius in business or some other field. Sometimes, it is immediately obvious that substantial wealth is a windfall, not the product of a special contribution.
?? The Court gave guidelines as to how far one should depart from equality in cases of special contribution. The percentages of asset division should be no nearer to equality than 55% – 45%, and are unlikely to be further from equality than 66.6% – 33.3%.
?? If applying the principles of need, compensation and sharing produces different and irreconcilable results, the outcome should be determined by the criterion of fairness. When ‘needs’ results in an award of property greater than that suggested by ‘sharing’, the former should prevail.When ‘needs’ results in an award less than that suggested by ‘sharing’, the latter should prevail.
It is perhaps worth sounding a note of caution at this point; in cases such as Charman v Charman the outcome is invariably closely linked to the particular facts. Nonetheless, the Court of Appeal has once again re-affirmed the importance of 'sharing fairly' assets accumulated during the marriage, however and wherever held. Their Lordships also acknowledged that the legislation introduced in the late 1960's was now rather 'long in the tooth' and that change may be needed to introduce greater certainty of outcome, possibly allowing for the enforceability of pre-nuptial agreements.