Introduction

Although the favourable tax regime has made England an attractive place for wealthy non-domiciliaries to live, it has also become an extremely good venue for their poorer spouses to bring divorce proceedings.  Since the case of White[1] in October 2000 and subsequent decisions[2] London has become one of the most generous places for the less well off party to divorce and has regularly been described in the press as ‘the divorce capital of the world.’

Whereas before, the poorer spouse was limited to receiving sufficient money to satisfy their reasonable requirements, these recent cases have established the principle that property should be shared equally, unless there are good reasons to depart from this. At the same time, English courts also tend to be more generous in the level and duration for which spousal support will be payable.

Of particular importance is that, unlike in many countries, under English divorce law the ‘sharing’ principle applies to all property, which may include trust interests.  However, to the extent there is non-matrimonial property (for example property owned by one of the parties before the marriage or an interest in a trust established some time before marriage) these might be reasons for a departure from an equal division.

The English court’s approach, both in terms of generosity and its treatment of offshore discretionary trusts, was highlighted earlier this year in the well publicised case Charman², heard by the English Court of Appeal, and which has sent shockwaves through private wealth adviser circles   Not only did the court uphold the largest contested spousal award (of some £48 million), but it also affirmed the extremely robust approach English Family courts often take to assets held in offshore trusts by treating assets of £68 million held in a Bermuda trust as though they were the husband’s and available for division with his wife.

Charman

There were overall assets of £131m all of which had been built up during the course of a long marriage.  The assets included £68m held in a trust called the ‘Dragon Trust’, which were settled by the husband during the marriage.  He argued that the assets held in the trust should be left entirely out of account because they were deposited there by him as part of his long-term plan and intention to found a ‘dynastic trust’ for the benefit of as yet unborn members of the family (the children having already been provided for by their own trusts).

His arguments were not accepted, either by the first judge[3] or the Court of Appeal.  The facts were not persuasive:

• The original letter of wishes indicated that his intentions in establishing the trust were to protect and conserve certain assets for the benefit of him and his family and that, in so far as was consistent with the trust, he should have the fullest access to income and capital.

• He had the power to appoint and remove trustees.

• When the trustees were replaced and the proper law of the trust changed to Bermuda in 2002, the new trustees resolved to accumulate the trust income to Mr Charman for life.

• At the same time Mr Charman wrote a new Letter of Wishes saying that he wanted to be treated as the primary beneficiary during his life.

• In his initial assets schedule in the divorce proceedings, the trust assets were listed as his resource.

• The children had already been provided for in a separate £30m children’s settlement (and which was left entirely out of account).

The first judge found that the assets in the Dragon Trust were no more dynastic than any other part of the husband’s fortune and included all of the trust assets as part of the resources available for distribution.  Ultimately he awarded the wife £48m, which represented about 37% of the overall assets.  He justified a departure from an equal division by describing this as a case which fell into ‘a very small category where, wholly exceptionally, the wealth created is of extraordinary proportions from extraordinary talent and energy.’

But the judge went even further than this, demonstrating the very robust attitude of the English family courts, saying:

‘but even if I had been persuaded of the existence of this as a settled, even documented intention ( i.e. the creation of a dynastic trust) I am doubtful in the circumstances of this case whether, of itself, it would have been very influential in the result.

The test is whether the assets in the trust should be regarded by the court as a “resource”.  That is a very broad definition.  These assets are held in a discretionary trust in conventional form… the assets in the trust “could be available to him on demand without being his money…’

The judge then considered (obiter) whether it would have made a difference to the result if the evidence had supported that the trust had been created for dynastic purposes.

‘So even if the husband had got home on the facts, for the court simply to have ignored the assets would have been I consider, wrong and, in my experience, entirely novel.’

‘Can a spouse remove from consideration under s25, at the stroke of e.g. a letter of wishes, half the assets accumulated during a marriage without the consent of the other spouse?  At the end of a marriage of this length for a spouse to be excluded from benefit by such an informal arrangement even if consensual and created at the time when the marriage was sound would be grotesquely unfair.  He or she must be able to say, surely, in such circumstances ‘whatever may have been your/our intentions then, now that the marriage is over I have changed my mind and these assets must be on the table for consideration like all others.  I will decide following receipt of my portion what I want to do with them and whom I want to benefit now and in the future.’

Although the judge might have been going too far in this statement, it is nevertheless an indication of the degree to which an English court will seek to maximise assets available for division on divorce.  The husband appealed the decision to the English Court of Appeal, and although it was not necessary for the Court of Appeal to consider whether the judge’s obiter observations went too far, the husband lost on all counts.

But what remains to be seen is the extent to which Mr Charman will be willing to comply with the order, and if not, what will the attitude of the trustees be. To what extent can the order be enforced against the trustees (if at all)? Will the trustees consider they should assist Mr Charman in complying with the order? Will the trustees apply to the Bermudian court for directions in order to assist in such a decision and, if so, with the Bermudian court sanction such assistance?

What then are the powers of the English courts in relation to offshore trusts and what are the criteria on which they exercise those powers?

Trusts and Divorce

English divorce courts have extensive powers to make orders in relation to family property and a wide discretion to make whatever provision the judge considers fair and reasonable[4].  The court can make orders for a lump sum payment, property adjustment (including the power to vary certain kinds of settlement), for the sale of an asset, for periodical payments and pension sharing orders.

Frequently, in international cases, one of the spouses may not be aware that England has jurisdiction over their marriage/divorce.  The habitual residence of one or both of the parties in England is usually sufficient to mean that England will have jurisdiction.  This may be the case even if one or both of the spouses are also resident elsewhere[5].  Jurisdiction may also be based upon the domicile of either spouse.  

Central to the exercise of the court’s powers is its desire to do all it can to maximise the financial resources available to the parties and its requirement to have full and frank disclosure of what those resources are.

Trusts, which are vehicles for separating the ownership/management of property from its enjoyment, are set up for very good reasons, such as estate planning, avoidance of taxes and asset protection.  They have also been used as a way of trying to avoid, or at least mitigate, financial obligations to spouses.  As a result the attitude of English family law judges is often to regard them as a device for hiding or obscuring assets, and their approach tends to be broad brush and robust, often treating the assets as belonging to, or available to the settlor spouse.  This contrasts with Chancery judges, who will usually strain to uphold the integrity and legitimacy of a trust.

The English Court’s Powers

Equitable Interests

The court has wide powers to assign all or part of an ascertainable (or fixed) interest of a beneficiary in a trust.  But this is only applicable to ascertainable interests. Much more frequently is the situation where there is a discretionary trust – where, as a matter of trust law, a discretionary beneficiary does not have an identifiable interest in trust property.  This paper concentrates on discretionary trusts.

Variation

The court can vary ante-nuptial or post-nuptial settlements made on the parties to the marriage.  These terms are construed widely.  It has wide powers to reduce or extinguish a party’s interest in a trust, order the transfer of assets and/or deal with the spouse’s interest as it considers appropriate.

Judicious Encouragement

Although in many cases the court has no power to make orders against the trustees directly, the court may nevertheless make orders on the basis that the trust is a financial resource of one of the parties.  The court does not have the power to bind the trustees and so will make an order against the beneficiary in the knowledge that it cannot be satisfied without recourse to trust assets. The court assumes that the trustees will go to the aid of the beneficiary and that they are unlikely to stand by and allow the beneficiary to go to prison for contempt of court, or to face bankruptcy proceedings[6].

Sham

The court may find that a trust is a sham and accordingly make orders as though the trust assets belong directly to one of the divorcing parties.

Setting Aside

The court has statutory powers to set aside certain transfers of assets to trusts where the disposition is intended to defeat or diminish a spouse’s claims on divorce.

Variation of Ante-Nuptial and Post-Nuptial Settlements

The court’s powers in relation to a trust depend upon whether or not it is an ante-nuptial or post-nuptial settlement.

If it is an ante or post-nuptial settlement the English court has the power to vary it – i.e. it can make provision out of the trust.

If it is not such a settlement the court has no powers in relation to the trust or against the trustees (except in relation to the provision of information/documents relating to the trust) and may be limited to ‘judicious encouragement’ orders.

If it is an ante or post-nuptial settlement the English court can make an order[7]:

‘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…and…extinguishing or reducing the interest of either of the parties to the marriage under such settlement.’

It can order capital or income provision to be made out of the trust (including taking a matrimonial home out of a trust and transferring it outright to the other spouse, and appointing a spouse as a lifetime beneficiary).  It can also remove and appoint trustees and protectors.

There is no statutory definition of what constitutes an ante or post-nuptial settlement.  Broadly speaking, if a trust is made after a marriage and both of the spouses are beneficiaries, it will be considered a post-nuptial settlement[8].

There is an argument that any settlement made after a marriage is variable.  This is likely to be the case if both spouses are named as beneficiaries, although less certain where only one is named.   If the marriage is a matter which the settlor takes into account when making the settlement, then it will have the necessary nuptial element and will be variable[9].

If a trust is made prior to the marriage it is more difficult for there to be the necessary nuptial element.  The essential question is whether the settlement is made on the husband in the character of a husband, or upon the wife in the character of the wife[10].

Whereas a settlement might lose its nuptial character, this is a matter to be looked at in each individual case.  In Charalambous[11] the nuptial element was not lost merely by the husband removing himself and his wife as beneficiaries.  It was relevant that both parties had remained as protectors, with extensive powers over the trustees, and the husband had continued to benefit by loans from the trustees.

Can the English court vary an offshore trust?

Yes.  The English court has the power to make orders against foreign assets and therefore foreign trusts[12]. However, the court will not make an order against every foreign trust and it seems it will take into account the connection with England.  For instance, in E v E[13]  the English court varied a British Virgin Islands settlement administered in Switzerland, by ordering provision for the wife (£50,000 outright and £200,000 by way of life interest), and removing the trustees and the husband’s father as protector.  In this case the matrimonial home, which was held in the trust, was in England.

Likewise in the more recent case of Charalambous the English Court of Appeal held that it could vary a trust governed by Jersey law whose trustees were resident in Cyprus.  This was so, even though the trust deed provided for the settlement to be subject to the exclusive jurisdiction of the Jersey court.  The court rejected an argument under the Recognition of Trust Act 1987 and articles 6 and 8 of the Hague Convention on the law Applicable to Trusts and their Recognition.  The court held that the settlement could not oust or defeat the court’s statutory right to vary the settlement, which arose as a result of England being the jurisdiction dissolving the marriage.  It said that the terms in the trust could not extend beyond an election for the law of Jersey in determining any question as to the construction or the operation of the settlement.  The court considered it had the power to vary the settlement, even though the husband had arranged for him and his wife to have been removed as beneficiaries.  Again in this case the trust held English situated assets.

In C v C[14] the husband had settled shares in his UK business in a Cayman Islands Trust during the marriage.  The Cayman lawyers advised that the Cayman courts would not enforce any order of the English court varying the trust, especially as the trust stated that it was subject to Cayman law and the exclusive jurisdiction of the Cayman courts.  Nevertheless the English court did vary the trust, emphasising the relevance of the fact that the assets were in England:

‘there are adequate powers in this court to deal with the question of implementation of a variation of trust order if I deem it appropriate, and this is particularly so where the underlying assets are onshore, that is to say the shareholding is in an English company.’

I am not aware of any cases where the English court has varied an offshore trust where all the trust assets are offshore and where there has been a clause giving exclusive powers over the trust to the offshore jurisdiction.

There have, however, been a number of cases where foreign courts have refused to co-operate with the English courts.  Some offshore courts have said that, where the trust was administered abroad and held offshore assets, such a variation would ‘infringe the normal bounds of comity’[15].

For instance, in Rabaiotti the English court sought to join Jersey based trustees (administering, amongst others, BVI trusts) to the divorce proceedings.  The trustees sought directions from the Jersey court, which held that the trustees should not submit to the jurisdiction of the English courts, on the basis that it would not be in the best interests of the beneficiaries as a whole.

In earlier court proceedings in Charman[16] the Bermuda court refused to enforce an order of the English Court of Appeal in relation to information and documents sought, by way of Letters of Request, from the Bermudan trustees (a decision which the English judge subsequently described as ‘somewhat churlish’ and ‘parochial’).

Several jurisdictions (e.g. Bermuda, Bahamas, Cayman, BVI, Isle of Man, Jersey) have legislation to reserve the powers of the local courts to deal exclusively with matters relating to the trust where that is the proper law of the trust. Some go further, such as the Bahamas, which has legislation prohibiting a Bahamian court from enforcing a foreign divorce order.

There have been a number of recent cases, mostly involving Jersey, where the English courts have varied a foreign trust.  Each case has, as far as I am aware, involved assets in England[17].

 The reaction, in each case (and where the trustees have not submitted to the jurisdiction of the English court), has been for the Jersey courts to hold that it is not bound by the decisions of the English court and to protest at the exercise by the English court of a power which is properly exercisable only in Jersey.  Nevertheless, it has in these cases gone on to exercise its discretion to make parallel orders to give effect to the foreign judgment ‘in the interests of comity.’

Settlements that are Not Nuptial – Judicious Encouragement

The English court has no power to vary or make provision out of a trust if it is not an ante or post-nuptial settlement (unless it is a sham).  But, in appropriate circumstances, the court will regard the trust as a resource that is available to a spouse.  So if, for example, a spouse is a beneficiary of an offshore discretionary trust, and the trustees have looked favourably on requests by the spouse for income or capital, then the court is likely to treat the assets of that trust as available to the spouse and therefore to take them into account in deciding what orders should be made for the distribution of assets on divorce.

The basis of the English court treating the trust in this way is that it is required to consider inter alia the likely financial resources of the parties[18].  So where a spouse is a potential discretionary beneficiary, the court must consider the likelihood of the trustee making a payment to or for that spouse’s benefit.

Where it considers this is likely, an English court may order one spouse to pay the other sums that he is unable to pay out of his own resources, and could only pay with the assistance of trustees.

There have been occasions when spouses have been committed to prison as a result of their failure to pay, where the funds could have been obtained from trustees, but where the spouse has refused to do so[19].  The rationale is that, if trustees of a discretionary trust are faced with an order against one of the beneficiaries to pay a sum beyond his means, they may well form the view that it is in the best interests of the beneficiary (and the trusts as a whole) to make funds available, rather than allow him to breach a court order and risk bankruptcy or committal proceedings.

Previously, in considering the question whether the trust was a financial resource, the court had looked to see what the reality was and whether the spouse had real or ‘effective control’ over the trust[20] and whether there was immediate access to funds.  In an earlier hearing in Charman[21] (in relation to obtaining information from the trustee by Letter of Request) Wilson LJ said that the:

‘Central question is simply whether, if the husband were to request [the trustee] to advance the whole (or part) of the capital of the trust to him, the trustee would be likely to do so.’

This was the central plank of the second appeal in Charman – that the judge at first hearing had not asked himself this question and, (had he done so) could not properly have answered such a question affirmatively.  The Court of Appeal approved this test.

The court will be influenced by whether there have there been distributions of assets or income to the beneficiary spouse.  Has the pattern been regular?  Have they been made whenever requested by the beneficiary or have some requests been refused?

The court will take into account third party interests and will not put improper pressure on trustees to exercise their discretion if the interests of other beneficiaries would be appreciably damaged. In Thomas[22] the following guidelines were given:

a)       Where a husband can only raise further capital, or additional income, as the result of a decision made at the discretion of trustees, the court should not put improper pressure on the trustees to exercise that discretion for the benefit of the wife.

b)      The court should not, however, be “misled by appearances”; it should “look at the reality of the situation”.

c)       If, on the balance of probabilities the evidence shows that, if trustees exercise their discretion to release more capital or income to the husband, the interests of the trust or of other beneficiaries would not be appreciably damaged, the court can assume that a genuine request for the exercise of such discretion would probably be met by a favourable response.  In that situation if the court decides that it would be reasonable for a husband to seek to persuade trustees to release more capital or income to him, to enable him to make proper financial provision for his children and his former wife, the court would not in so deciding be putting improper pressure on the trustees.’

A court will look to see what the main purpose of the trust is – i.e. is it to benefit the settlor or to benefit children and future generations?   What evidence is there as to intention at the time the settlement was created (eg in the form of Letters of Wishes)?

When was the settlement created – was it created before the marriage, in which case it might be treated as a pre-acquired resource, or during the marriage (in which case a case for equal distribution may be stronger)?  If the latter, did the spouse give consent to the creation and terms of the trust (in spite of the obiter comments of Coleridge J in Charman, it is thought that this will still be a relevant consideration)?

A court may also consider as relevant whether a trust was set up by a previous generation.  This might not only be relevant in terms of the way in which trustees deal with requests for capital and income, but also to the extent that it is a pre-acquired or inherited resource, which should be a material factor in deciding what is an appropriate division of assets on divorce.

To re-cap, it is better for a settlement not to be ante or post-nuptial, and therefore not capable of variation.  From a matrimonial point of view, the less direct a spouse’s interest in a trust, the better.  If the trust and its assets are outside the UK, so much the better.  Where the spouse is also resident outside the UK, it can be very difficult to enforce orders against any assets held outside the UK – whether the settlement is nuptial or not.

There are two other situations where the English court may interfere with a trust (whether onshore or offshore). 

Sham

The first is where the trust is a sham, and in reality amounts to no more than a nomineeship for the settlor spouse. 

Broadly, it is necessary to establish that both the settlor and trustees intended from the beginning that the assets of the trust were to be treated as the settlor’s own, without regard to the trust deed or the powers and discretions of the trustees[23].  It is a difficult test to satisfy, and even if the trust was originally intended to be valid, later conduct by the trustees in allowing the settlor to treat trust assets as his own does not create a sham, but gives rise to a claim for breach of trust[24].  

One example of a case where the court has held a trust to be a sham is Minwalla.[25] The husband had asserted that he had no beneficial interest in a discretionary Jersey trust.  However, there were voluminous documents proclaiming the trust was his, and supported by the way in which he treated the trust assets ‘with utter disregard for any but his own wishes, decision-making and in short – total control’.

He had issued two conflicting Letters of Wishes at the time the trust was first established - the first stated that he was to be the principal beneficiary, with his wife to have one third of the fund on his death; the second identifying the principal beneficiaries as his children.

It was apparent that the trustee allowed Mr Minwalla to treat the bank accounts as his own, without any accounting, and was unable to give any explanation as to the two letters of wishes.  The court found that the husband ‘never had the slightest intention of respecting even the formalities of the trust and corporate structures that had been set up at this discretion.  His only purpose was to set up a screen to shield his resources from other claims or unwelcome scrutiny and investigation’.

The court held the trust was a sham and had no hesitation in setting the structure aside and treating the assets as his.

On enforcing the order in Jersey, the Jersey court objected strongly to the purported finding of sham by the English court in relation to a Jersey trust.  It regarded such a finding as an exorbitant exercise of jurisdiction (which observation was approved in Charman).  Although the Jersey court did enforce the judgement, it did so only because the trustees had submitted to the jurisdiction of the England, having said that they would abide by the decision of the English court.  The Jersey court made it clear that the result would have been very different if the trustees had not so submitted.

Although the situations in which a trust might be regarded as a sham in England are exceptional, where there is such a danger for an offshore trust, the trustees should not submit to the jurisdiction of England and should consider obtaining a declaration in the local court of the trust as to the bona fides or otherwise of the trust.

Setting Aside

The other situation in which an English court can set aside a transfer of assets into a trust, is where a disposition (including the settling of assets into trust) is made with the intention of defeating the other spouse’s financial claims on divorce[26].

There is a rebuttable presumption that there is the necessary intention where such a disposition is about to be made, or has been made 3 years before the financial application on divorce, and the effect is to defeat or reduce the other spouse’s claim.[27]

This is comparable to provisions in the Insolvency Act, enabling dispositions to defeat claims of creditors to be set aside. 

Recognition and Enforcement of Orders

Where an English order is made against a foreign trustee varying a trust (as opposed to orders for judicious encouragement which are directed against the beneficiary), the trustee will need to consider whether the English order is enforceable against him in his local jurisdiction.  This is not straight forward and in most cases it will be wise to obtain advice. However, there are two main comforts for the trustee:

·         Decisions of the English family court in relation to offshore trusts are likely to be declaratory only.  Generally, arrangements for reciprocal enforcement of foreign judgments do not include declaratory (as opposed to monetary) judgments[28].

·         Many offshore jurisdictions have introduced ‘fire wall’ legislation to the effect that foreign judgments affecting the validity of trusts shall not be enforced or recognised. In some jurisdictions this extends to judgments declaring the trust a sham (eg the Bahamas)[29], whereas in others it is designed to protect trusts from more limited validity challenges such as forced heirship and the law of the settlor’s domicile to recognise trusts (e.g. the Cayman Islands)[30].

However, it is still possible that if trustees simply choose to ignore the order of an English court, they could be the subject of enforcement proceedings when they bring themselves or their assets within the English court’s jurisdiction.  They may, therefore be reluctant to ignore entirely and English court order, particularly if they are frequent travellers to England (for instance, in the case of Channel Island trustees), and may wish to insulate themselves by seeking the direction of the local court as to whether they should comply.

Submitting to the Jurisdiction of the English Courts

A very important consideration, from the offshore trustee’s point of view, is to decide whether to take any part in the English proceedings.  For the English courts to vary a trust the trustees will have to be joined in to the English matrimonial proceedings, or further proceedings will need to be brought in their home jurisdiction to make the variation effective[31].

It is much more difficult to enforce an order against offshore trustees where they do not recognise and have not submitted to the jurisdiction of the English court and where they remain outside England.  If there are no trust assets in England and Wales the difficulty is even greater.  However, in taking part in the proceedings, in defending them, or even applying to set aside an order joining them to the proceedings, the trustees may be taken to have submitted to the English courts[32]. 

A spouse may try to persuade the English court to make orders directly against trustees by joining them as parties to the matrimonial proceedings, and the courts tend to accede to such applications.  It is possible to serve documents abroad without the leave of the court in matrimonial proceedings[33], although service can be set aside if the trustee can establish that no effective order can be made against him[34].

The leading case on joinder of trustees of is T v T[35].  The test is whether their presence before the court is necessary to ensure that all matters in the dispute may be effectively and completely determined.  In this case it was considered necessary to join the trustees because the owned land within the English court’s jurisdiction and it would have been difficult to have enforced orders against them if not joined.

But joinder is not automatic. In Charman, for instance, the trustees were not joined to the proceedings; indeed there was no application for joinder.  This was possibly because the trustees held no assets in England.

If no order against the foreign trustee can be effective, he can equally chose to ignore any order in England and wait to see whether there is an application in the local court to enforce the English order[36]

The critical question is whether there are trust assets in the jurisdiction of England and Wales - are there assets against which the English court can enforce its order?  If so, it is quite possible that the trustee will in any event wish to take part in the proceedings in order to put across the position of the trust (and in particular where there are third party beneficiaries or where the case to vary is weak, but might succeed without the trustee’s involvement).

But where there are no assets in England a trustee will usually be advised not to submit. If he does submit, it is far more likely that the local court will enforce an order of the English court.  In Re H Trust[37] the Jersey court approved a decision by trustees not to submit, saying that whereas it would often be prepared to give practical effect to an English order as a matter of comity, very different considerations would have applied if the trustee had not so submitted.  Where there is no such submission the Jersey court will look at the matter afresh from the point of view of all the beneficiaries’ interests (contrasting its assumption that the English family court will only look at the position between the spouses).

Equally, where the trustee has submitted, the local court may assume that the English court will have made its order with full regard to what the trustee had to say. Provided that it was clear that the trustee had the opportunity to raise all relevant defences, the Jersey court would enforce the order[38].  This also happened in Minwalla, where the Jersey court objected to the exercise of the English court’s powers in relation to a Jersey trust, but nevertheless gave effect to the English judgement that it was a sham because the trustees had submitted to the jurisdiction and on the basis of comity[39]. 

If there are questions as to whether a trustee should submit he should seek advice and if necessary the directions of the local court.  In English law, although there are authorities suggesting that trustees have a duty actively to defend a trust from attack[40] the general position is that the trustees should be neutral, and abide by any order that the court may make, and provide the court with any factual information that might help determine the claim[41]. However, this does not necessarily entail submitting to the jurisdiction.

Provision of Information

A party to divorce proceedings is required to provide on oath full and frank information on their trust interests, including under a discretionary trust, and estimating the value of the interest and when it is likely to be realisable.

Typically, the information and documents required will include

• The trust instrument and letters of wishes
• The assets and accounts of the trust
• The identity of the settlor, trustees and beneficiaries
• The operation of the trust and degree of involvement of the spouse in decisions of the trustees, such as in instigating distributions
• History of distributions made by the trustees
• The treatment of trust income
• Correspondence between the settlor and trustees to establish the rationale and purpose of the trust.

The trustees may be asked to provide the information and documents voluntarily, in which case they will need to consider whether, where both spouses are potential beneficiaries, it is in the interests of the beneficiaries as a whole to provide the disclosure requested[42].  Advice may well be required because, whereas it might be quite reasonable for a trustee to take the view that he should not provide information where a party is seeking to attack the trust, courts have also concluded that a trustee should provide the fullest information to both spouses, and thereby to the English court, so that any decision can be based upon all the facts[43].  Furthermore, without the fullest information, the English courts tend to take an even more robust approach in their treatment of offshore trusts, and can draw adverse inferences and may assume that the reason for uncooperation is to protect the settlor spouse (as the first judge did in Charman).  If only one of the spouses is a potential beneficiary it would be rare for a trustee to provide information to the other spouse voluntarily, as to do so might well amount to a breach of trust.

Where information is not provided the court can order trustees or other third parties to give disclosure.  However, orders are only enforceable against trustees in this jurisdiction.  Disclosure can therefore be ordered against foreign trustees who have submitted to this jurisdiction. 

Otherwise trust information may be obtained through Letters of Request[44].  

The procedure is that Letters of Request are issued from the English court.  The court will not, however, allow all information and requests which amount to “a fishing trip”, but only information that might be used as evidence at trial[45].  The trustee is then summoned before the court in the local jurisdiction to produce the documents and information requested and to be cross-examined.  The trustee can still apply for directions in the local court, as to whether, and if so the extent to which, the English Letter of Request should be complied with.  He should do so if it is not apparent whether he would be acting in the interests of the beneficiaries as a whole in so complying.  This happened in Charman, where the Bermuda court rejected an English Letter of Request (which the Husband had challenged unsuccessfully in the English Court of Appeal) on the grounds that it amounted to a fishing expedition.

The Extra-Territorial Implications of Charman

Charman has not really changed anything.  Even though the settlement was capable of variation under English law, there were no trust assets in the jurisdiction and the English court did not make orders against the trustees directly (and neither was it asked to).  It made orders against Mr Charman directly on the basis that the trust assets could and would be made available to him, at his request, and that it was reasonable to expect the trustees to go to his assistance in meeting such an order.  If the trustees do not do so, and to the extent her award remains unsatisfied, then Mrs Charman’s options are limited to bringing enforcement proceedings against Mr Charman directly in relation to his other assets (the success of which will depend upon where the assets are and the relevant reciprocal enforcement legislation), and also for committal and / or bankruptcy proceedings in England.

The trustee did not submit to the jurisdiction of the English court and was robust in its attitude to the disclosure of information (although the first judge was quite critical of this and the approach of the Bermudian court). If Mr Charman does not intend to satisfy the judgment and does not want the trustees to, it is unlikely that Mrs Charman will be able to get at the trust assets. If, on the other hand, Mr Charman requests the assistance of the trustees to satisfy the order, they will have to consider whether to do so will be in the interests of the beneficiaries as a whole, and may well wish to obtain directions from the Bermuda court. In such circumstances it would be interesting to see what the attitude of the court might be.  In jurisdictions where there is firewall legislation it is unlikely that such a payment would be approved.

Practical Steps to Mitigate Risks of Attack

There are a number of steps[46], some of which are highlighted by Charman, that could be considered in mitigating the risk of trust assets being attacked on divorce.  These include

• Avoid creating a trust at a time when a marriage is in difficulties.

• Ensure the class of beneficiaries is as wide as possible, extending beyond the spouse at risk of divorce and his/her immediate family.

• Consider excluding those at risk of divorce, with the possibility of adding him/ her at a later stage if appropriate.

• If exclusion is inappropriate, ensure that the beneficiary has no fixed interest and consider limiting the extent of the beneficiary’s potential interest in the trust (possibly by the creation of sub-trusts).

• Ensure that the trustees exercise independent control and consider appointing professional trustees who will take an arm’s length approach.

• Distributions to spouses who are divorcing, or where divorce seems likely, should be avoided.  It is helpful if requests for distributions from the divorcing spouse are sometimes turned down and distributions made to other beneficiaries.

•  Avoid holding trust assets in England and Wales, if possible.

• Think very carefully about what a Letter of Wishes contains, as it is likely to be disclosed in English proceedings.  Think also very carefully about communications with the beneficiary, such as correspondence and notes of meetings, which may also require to be disclosed.

• Avoid submission to the jurisdiction of the English courts where there are no trusts assets in England and Wales.

William Massey

Partner

23 November 2007