DISPOSALS, DISCRETION AND DECEPTION

Philip Moor and James Allport

Introduction

Increasingly, the English court is being faced with the situation where one of the spouses to a divorce suit is alleged to have an interest in an offshore trust. This paper considers the way in which the English court reacts to such situations in the hope that it may provide some guidance for those faced with the problem from the perspective of the trustee charged with the obligation to administer such trusts.

The jurisdiction of the English court

The English court has been given by Parliament very wide powers indeed to administer justice following the breakdown of marriage. There are two aspects to these powers. The first relates to the information gathering process necessary before a final determination of the claim. The second relates to the substantive orders that the Court may make following the conclusion of this investigative process.

The investigative process

Rule 2.63 of the Family Proceedings Rules 1991 ("FPR") provides that:-

"Any party to an application may by letter require any other party to give further information concerning any matter contained in any affidavit filed on behalf of the other party or any other relevant matter, or to furnish a list of documents or to allow inspection of any such document and may, in default of compliance by such other party, apply to the District Judge for directions."

In practice, the District Judges have been very quick to make wide ranging orders against spouses in an attempt to get a complete picture of the financial position.

Moreover, Rule 2.62(7) of the FPR goes further:-

"Any party may apply to the court for an order that any person do attend an appointment (a "production appointment") before the court and produce any documents to be specified or described in the order, the production of which appears to the court to be necessary for disposing fairly of the application for ancillary relief or for saving costs."

The effect of these provisions

It is a well established principle of English family law that both spouses have a duty to give full and frank disclosure of their financial position [1] . Even if the case settles, both parties must provide a statement of their financial position both as to capital and income (a Rule 2.61 Statement).

If either spouse fails to give full disclosure, the other spouse is entitled to apply to set the order aside although it will only be set aside if the omission was material.

Many spouses have, over the years, attempted to obstruct justice by not giving full disclosure. The judges have become somewhat cynical and are very ready to make detailed orders for the provision of documentary evidence to support a spouse’s contentions as to their financial position.

In this regard, it is not possible to escape the order for discovery simply by saying that some third party holds the documents. The court will order their production if they are in the custody, possession or power of the spouse [2] . Moreover, if the documents are still not produced, the court will issue Production Appointments against the third party as per Rule 2.62(7) above.

The substantive orders the Court may make

It has already been noted that the English court has very wide distributive powers once the investigative process has been completed. These powers are statutory and, primarily, to be found in the Matrimonial Causes Act 1973 ("the Act"). In particular, the court has power:

(a) to order periodical payments to the other spouse or children; [3]

(b) to secure such periodical payments; [4]

(d) to transfer to the other spouse or child such property as the first spouse is entitled in possession or reversion; [6]

(e) to settle property to which one spouse is entitled for the benefit of the other or a child of the family; [7]

(f) to vary any ante-nuptial or post-nuptial settlement (including such a settlement made by will or codicil) made on the parties to the marriage; [8]

(g) to extinguish or reduce the interest of either party under any such settlement; and [9]

(h) to order the sale of any property in which or in the proceeds of sale of which either or both of the parties to the marriage has or have a beneficial interest, either in possession or reversion. [10]

The criteria to be applied

In determining how to exercise the above powers, the court must consider the criteria set out in section 25 of the Act. Section 25 enjoins the court to consider all property and other financial resources of each of the parties which must include assets wherever situated. Whilst section 25(1) provides that it shall be the duty of the court to have regard to "all the circumstances of the case", first consideration has to be given to the "welfare while a minor of any child of the family who has not attained the age of eighteen".

Section 25(2) then sets out a number of matters to which the court shall have particular regard. Without wishing to repeat all the criteria, the important ones for the purposes of this article are:-

(a) the income, earning capacity, property and other financial resources which each of the parties to the marriage has or is likely to have in the foreseeable future...;

(b) the financial needs, obligations and responsibilities which each of the parties to the marriage has or is likely to have in the foreseeable future;

(d) the value to each of the parties to the marriage of any benefit which by reason of the dissolution of the marriage, that party will lose the chance of acquiring.

Jurisdiction in relation to overseas assets

The English court has held that it does have jurisdiction in relation to assets situated outside the jurisdiction of the English courts. As can be seen from the above, the Act enjoins the court to consider all property. The term "property and other financial resources" must include assets wherever situated.

In Hamlin v Hamlin, [11] the court held that there was jurisdiction to make a freezing injunction against foreign property. It is clear from the judgment that this is possible because the court also has jurisdiction to make a transfer of property order in relation to a foreign asset.

The judgment does, though, make it clear that the court should not do so if the order would be unenforceable. This does not present any difficulty if the respondent is present in the English jurisdiction as he is then susceptible to enforcement proceedings against him in personam if he fails to comply.

Moreover, even if he is not present, the court will assume that the foreign court will enforce the order in the absence of evidence that it will not do so [12] . An example of this occurring in practice is the case of H v M. [13]

The English attitude to discretionary trusts

The case of Howard [14] is a typical example of what the English courts regard as a bona fide discretionary trust. The husband applied to reduce the maintenance which he had been ordered to pay to his wife, he having been made bankrupt and having been seriously ill. Barnard J made an order which as Lord Greene MR found [15] left the husband with only £50.00 per annum to live on. The wife’s counsel told the Court of Appeal that the rationale for that order was the learned judge’s view that it would bring pressure on the trustees of the husband’s onshore ante-nuptial settlement to make him an allowance. The trustees had informed the husband that he would receive no income from it for a considerable time because they had allocated the income to the maintenance of his son, his medical expenses and his costs of the divorce proceedings.

It is, of course, rare for any trust to fulfill all the criteria that point, in the view of the judges, to a trust being genuinely discretionary. Nevertheless, the following are examples of the sort of aspects that lead the English court to view a trust as a Howard type trust rather than one in the Browne [16] mould:-

(a) the trust was set up by a previous generation;

(b) the trust and trustees are usually "on shore";

(d) capital would not be made available on demand;

(e) the purpose of the trust in terms of tax saving was to avoid inheritance type taxes; and

(f) in so far as income is distributed, it is done at the behest of the trustees rather than the settlor.

Howard v Howard shows an example of just such a trust. The court had no jurisdiction to make an order for maintenance that left a husband without sufficient to live on with a view to putting pressure on trustees to exercise their discretion in his favour. On the other hand, the court was entitled to take into account the income that the trustees had been making available to him to calculate the maintenance he could pay. He was not able to say that this income should be excluded simply because he had no right to receive it.

A Browne type trust

The English courts view the type of trust to be found in Browne v Browne [17] as being very different. The husband had no substantial assets. The wife had an interest in two trusts, one in Jersey and the other established in Switzerland but taking effect in Liechtenstein. At first instance, Wood J. found that every application by the wife to the trustee for funds during the marriage had been successful.

The sort of features that the English court looks for in determining whether or not a trust is a Browne type trust are as follows:-

(a) the trust was set up by one of the spouses rather than a previous generation;

(b) the trust and trustees are usually "off shore";

(d) capital would be made available on demand;

(e) the purpose of the trust in terms of tax saving was to avoid capital gains or income taxes; and

(f) in so far as the income is distributed, it is done at the behest of the settlor rather than the trustees.

Browne v Browne was just such a trust. Although it was, in fact, set up by a previous generation, it was quite clear from the history of dealings that the capital in the trust was the wife’s capital. In those circumstances, the English court would not accept that this was a genuine discretionary trust despite the fact that the trust deed said it was. The capital in the trust was therefore available as part of the wife’s resources to meet a combination of her reasonable needs and the lump sum that she had to make to her husband.

The ability to draw inferences

The worst mistake for spouses to make in a divorce situation is to argue that they have no control over the trustees and cannot make the vital documents available on discovery.

The English court has heard all this before. When it happens, it follows, as surely as night follows day, that the judge will believe that the spouse is deliberately concealing the truth and will draw adverse inferences against him or her. The spouse will be assumed to have the assets which he or she is alleged to have, and a financial order will be made on that basis. This can, of course, be unfair. It is therefore vital that the documents are before the English judge and that "technical" defences are not employed to restrict access to the information.

The sort of discovery usually sought

The other spouse will usually attempt to obtain:-

(a) the trust deed and all accompanying schedules;

(b) all letters of wishes;

(d) details of all capital and income distributions in so far as not apparent from the trust accounts; and

(e) the current value of the trust assets.

An English judge will take the view that all the above are relevant and discoverable because they are necessary to enable the judge to carry out a "section 25 exercise". Moreover, it would be rare for a wife in English proceedings to apply for mirror orders off-shore to obtain these documents if they are not voluntarily produced. She is usually far better off in asking for inferences to be drawn in such circumstances.

Information that helps the settlor

It may be that there are documents which assist the settlor. In particular, there are situations where:-

(a) other beneficiaries have benefited from the trust (eg relatives);

(b) the trustees have, for whatever reason, not done the settlor’s bidding;

(c) the settlor has been excluded as a beneficiary or potential beneficiary (perhaps to placate the English Inland Revenue).

One of the authors had a case in which there were documents that came into all three of the above categories. The difficulty was that there was also a letter of wishes that contradicted what the settlor had said in his affidavit in the English proceedings. The trustees had been joined as second respondents as a freezing injunction had been made against the trust assets which were situated in England.

There was no doubt that the trustees could not be selective in the disclosure they gave. If the helpful documents were to be produced, it followed that the unhelpful one had to be volunteered as well. It is, in fact, an open question as to whether or not trustees have a duty of full and frank disclosure when they have simply been joined as a party. However, the trustees wished to apply to set aside the freezing injunction. They were advised that they could not do so without providing full and frank disclosure of all matters. Moreover, if they were not to do so, their English solicitors would be placed in an impossible situation given the English solicitors’ duty to the court.

Trustees as parties

It is becoming more common for the English court to join the trustees as second respondents to the English proceedings. An example is to be found in T v T [18] . It was argued that it was unnecessary to do so and that it would needlessly increase costs. Wilson J was undeterred by such arguments:-

"Since 1971.... a duty [of inquiry] has been imposed on the court in [such] proceedings. I have to get to the bottom of the reality behind this trust" [19]

He went on to say that it was only by having the trustees as parties that the wife could be assured of "copper bottomed security" [20] .

The dilemma for trustees

It is realised that all the above places trustees in a very difficult position. On the one hand, they have a duty of confidentiality to their clients. Moreover, it is entirely accepted that the English court has no jurisdiction to demand disclosure from trustees in relation to offshore trusts in different jurisdictions without mirror orders being made in the foreign jurisdiction.

Whilst this provides an easy answer, as shown above, the English court is highly unlikely to accept it vis à vis the spouses. Such an approach is, therefore, not likely to be in the interests of the settlor. If, however, he or she cannot be persuaded of this fact, "on his or her own head be it".

Philip Moor is a barrister specialising in the financial consequences of marital breakdown. He practises from 1 Mitre Court Buildings, Temple, London, EC4.

James Allport is a barrister working in the matrimonial department of Withers, solicitors of 12 Gough Square, London, EC4.

Return to Contents

Footnotes - (Top)

[1] - Livesey v Jenkins [1985] AC 424

[2] - See B v B [1978] Fam 181

[3] - Section 23(1)(a) and (d)

[4] - Section 23(1)(b) and (e)

[5] -Section 23(1)(c) and (f)

[6] - Section 24(1)(a)

[7] - Section 24(1)(b)

[8] - Section 24(1)(c)

[9] - Section 24(1)(d)