Contentious trusts update May 2014

20 May 2014

Wragge Lawrence Graham & Co's Contentious Trusts team provides an update on the latest legal news and developments in relation to trust disputes.

Case law update: Tchenguiz-Imerman v Imerman

This case arose out of the divorce proceedings between Mrs Tchenguiz-Imerman and Mr Imerman. During contested financial remedy proceedings, the wife applied to the English High Court for the disclosure of documents and information in relation to offshore discretionary trusts of which the husband's family were beneficiaries. Despite a request from the Royal Court of Jersey not to do so, the Family Division of the English High Court ordered disclosure of sensitive trust information due to its potential relevance and importance to the financial remedy proceedings.

Background

The wife was seeking a share of assets held within offshore discretionary trusts, which included assets generated during the marriage. Neither the husband nor the wife were beneficiaries of these trusts, but each of them could be added to the class of beneficiaries.

The High Court had to decide whether or not these trusts were nuptial settlements for the purposes of section 24 of the Matrimonial Causes Act 1973 and could therefore be varied by the court and whether the trust assets were financial resources available to the husband. One of the key questions was whether or not the trustee was likely immediately or in the foreseeable future to exercise its powers for the husband's benefit.

The trustee of these trusts, which was a Jersey-resident company, was joined as a party to the proceedings. The trustee took the decision not to submit to the High Court's jurisdiction and applied to the Royal Court of Jersey, in private, to approve its decision. As part of its application to the Royal Court, the trustee disclosed sensitive information to the Royal Court and the beneficiaries explaining the reasoning for its decision. The Royal Court approved the trustee's decision.

Joining of the beneficiaries

Given the refusal of the trustee to participate in the proceedings, the husband's three adult children, who were beneficiaries of these trusts, were joined to the proceedings. The High Court held that this would clearly assist with the investigation and resolution of the matters and issues in the case. It would place the court in a better position to deal with the case justly in accordance with the overriding objective and its obligations under the Matrimonial Causes Act 1973. After the trustee, the beneficiaries were in the next best position to assist the court in making its decision.

The Royal Court of Jersey's decision

The adult beneficiaries further applied to the Royal Court of Jersey for permission to disclose information about the trusts (save for privileged material) if ordered to do so by the High Court. The Royal Court unusually granted permission to make such disclosure, if the High Court made such an order, due to the "very unusual circumstances" of the case.

However, it did invite the High Court to carefully consider, in the interests of comity, whether it was necessary to order such disclosure. It emphasised the importance of trustees being able to apply to the Royal Court for directions in private, confident that what was put before the court would not be disclosed at a later date.

The High Court's decision

The High Court gave considerable weight to the Royal Court's concerns and emphasised its respect for the principle of comity and its continued development. It noted the particular importance of comity in cases involving offshore trusts, in which the High Court relies on the trusts' home courts to enforce its decisions. Nevertheless, it balanced this with the need to have as much information as possible and therefore ordered the beneficiaries to disclose all material, including sensitive material.

It held that in the absence of any evidence from the trustee, the Court would have to rely on assumptions and inferences about the likelihood of the trustee exercising its powers in favour of the husband. It is clearly preferable that the Court base its decision on direct evidence and very little evidence was available from other sources in respect of this issue. The disclosure of such information was considered necessary and proportionate to assist the Court in determining the issues raised in the proceedings.

Commentary

This is yet another example of the ongoing clash between the English family division of the High Court and the Jersey Royal Court. The family division have again laid down a marker. The court will seek to obtain as much evidence as possible about the internal thinking of the trustees in relation to their exercise of powers in favour of the relevant spouse. It appears that this will, in some circumstances, have primacy over the interests of comity and respect for the process of the Jersey Royal Court.

It remains to be seen how the Royal Court of Jersey and the courts of other offshore jurisdictions will react to ensure sensitive information is not disclosed in English proceedings. As noted by the Royal Court, this might involve heavily redacting information served on English resident beneficiaries or precluding material from being sent out of the jurisdiction.


A warning to trustees: contracts and personal liability

Case update: Investec Trust (Guernsey) Limited & Bayeux Trustees Limited v Glenalla Properties Limited and others [Civ 1462/2010]

In this Royal Court of Guernsey case, the court was asked to consider the circumstances in which trustees could be personally liable to repay loans obtained in their capacity as a trustee. The Court specifically highlighted the importance of using express wording in agreements to ensure that the trustee's liability is restricted to exactly what was intended.

Background

Investec Trust (Guernsey) Limited and Bayeux Trustees Limited (the Trustees) were the former trustees of TDT, a Jersey law trust (the Trust). While they were trustees of the Trust, the Trustees entered into deeds of novation in order to assume liabilities for loans owing to four BVI companies, which were owned by the Trust. These loans were not recorded in any formal written agreements. They were unsecured, interest free and repayable on demand. The loans were not intended to constitute corporate borrowing, but rather were intended as intergroup transfers.

The relevant issues arose when the BVI companies were put into liquidation and the companies' liquidators sought repayment of the loans from the Trustees.

The Jersey Law

Article 32 of the Trusts (Jersey) Law 1984 (the "Jersey Trusts Law") states that where a trustee is party to a transaction with a third party and the other party is aware that the trustee is acting as a trustee, any claim against the trustee is limited to the trust property only. If the third party is unaware that the trustee is acting as trustee, the claim can be made against the trustee personally. However the trustee, by way of indemnity, will have a right of recourse to the trust property (unless the trustee was acting in breach of trust).

The Royal Court's decision

The Trustees applied to the Royal Court of Guernsey for a declaration that they should not be personally liable and that any liability should be restricted to the value of the trust assets, as per Article 32 of the Jersey Trusts Law.

Despite the Trust being a Jersey law trust, the Court disagreed and decided that the law governing the loans was Guernsey law because:

  • the Trustees were Guernsey companies;
  • the Trust was administered from Guernsey;
  • and there was no evidence as to a written agreement indicating the proper law of the loans.

As the matter to be decided concerned the enforceability of the loan arrangements, Guernsey law applied. The court could not therefore apply the provisions of the Jersey Trusts Law.

In addition, the court could not apply section 42 of the Trusts (Guernsey) Law 2007, which affords similar protection to trustees as Article 32 of the Jersey Trusts Law, as it only applies to Guernsey trusts.

As a result, the Trustees could not rely on either the Jersey or Guernsey trust law provisions to limit their liability.

Consequently, the court had to consider the deeds of novation to reach a decision. The deeds did include an express statement that the Trustees were entering into the deeds of novation as Trustees of the Trust and that third parties were aware of this.

However, the wording did not expressly limit the liability of the Trustees to the value of the trust assets and the court therefore decided that the Trustees were personally liable. Unfortunately, simply stating the capacity in which the Trustees had entered the deeds was not sufficient.

Importantly, the court stated that if the loans had been documented and expressly worded to be governed by Jersey law, the protection of Article 32 would have been available and the Trustees would not have been personally liable.

This case underlines the importance of trustees clearly recording their legal obligations and expressly specifying the law governing the transaction in question. This is of particular importance for trust companies administering trusts with a different proper law from the jurisdiction in which the administration take place and ultimately, where most of the decisions are made.


Update on Tax Information Exchange Agreements in Jersey

The Taxation (Exchange of Information with Third Countries) (Amendment No. 7) (Jersey) Regulations 2013 came into force on 6 November 2013, and amends the Regulations governing the exchange of information relating to tax matters.

The following amendments are noteworthy and are likely to have a considerable impact on individuals and trust companies:

  • The Comptroller of Taxes (the Comptroller) is no longer required to provide the taxpayer with reasons for issuing the notice. This will naturally make challenging the notices more difficult.
  • A taxpayer or third party seeking to challenge the Comptroller's decision must now do so by way of judicial review. Any challenge must now be mounted within 14 days of receiving the notice (rather than the previous 21 day period).
  • Even if a challenge is mounted, the recipient of the notice is still required to provide a response and the information requested by the Comptroller within the specified deadline as set out in the notice, or within 15 days (not 30 days as under the previous Regulations) if a deadline is not expressly set out.
  • The Comptroller must not provide the information provided to it to the foreign competent authority until (1) the time period for commencing judicial review proceedings has elapsed; (2) an application for judicial review has been withdrawn or dismissed; or (3) it is ordered to do so by the Royal Court.
  • It is important to note that there is no longer a right to appeal to the Jersey Court of Appeal. Therefore, if an application for judicial review is not successful, the party may only appeal to the Privy Council, and then only if they are granted leave to do so.

These amendments were considered necessary in order to bring Jersey's regulations in line with those in other jurisdictions and to speed up the process of responding to requests, which it seems has been done by limiting the statutory scope of an appeal to the Royal Court.

It is interesting to note that following the coming into force of these amendments the French government has removed Jersey from the list of non-cooperative jurisdictions so it appears that the amendments have had the desired effect. It is clear that recipients of such notices will need to act quickly to consider the notice and provide a response in order to comply with the Regulations.


Case summary: AH v PH

Following on from the landmark decision in Radmacher v Granatino [2010] UKSC 42, the English courts again considered in AH v PH [2013] EWHC 3873 (Fam) the weight that should be given to a nuptial agreement when exercising its discretion under Section 25 of the Matrimonial Causes Act 1973 and the essential ingredients of such an agreement if it is to be binding on the parties.

The three-part test to be applied when determining the weight of a nuptial agreement, as devised by the Supreme Court in Radmacher, is:

"the Court should give effect to a nuptial agreement that is:

  1. freely entered into by each party
  2. with a full appreciation of its implications
  3. unless in the circumstances prevailing it would not be fair to hold the parties to their agreement."

Background

The parties were a Scandinavian couple ("H" and "W"), in their early thirties. W had moved to London on H's invitation, giving up her work to do so. Prior to their marriage, when W was pregnant with their first child, H and W entered into a Scandinavian marriage settlement intended to protect H's extensive inherited, settled wealth. It was common within H's family to enter into such an agreement and W received independent legal advice from a practitioner in her country of origin. The marriage lasted for four years before W issued divorce proceedings in the English courts.

Judgment

Mr Justice Moor, in applying Radmacher, found that the marriage settlement was not contractually binding between the parties. This was because W did not have a full appreciation of the implications of the settlement, particularly on any claims that she might have in divorce proceedings outside of Scandinavia.

Moor J noted that the marriage settlement, in comparison to that in Radmacher, was a very basic document that did not contain any of the following clauses:

  • a clause saying that it was in full and final settlement of all W's claims;
  • a severability clause;
  • a clause granting the Scandinavian Courts exclusive jurisdiction;
  • a clause dealing with W's maintenance; and
  • reference to the potential relevance of foreign law, or the need for advice in that regard.

However, Moor J was satisfied that after Radmacher the law remained that, even if non-binding, the very existence of the agreement would, in an appropriate case, be relevant. Here, the fact that the parties intended the marriage settlement to protect H's inherited wealth was one of the circumstances of the case.

Therefore, H's inherited capital was only to be used so far as to ensure that W had adequate housing and maintenance. Moor J stated that he would have come to the same conclusion in any case by reason of the short length of the marriage, the age of the parties and the origin of H's wealth.

Comment

Plainly any successful pre- or post- nuptial agreement should be drafted to ensure that it covers the above points. In particular, this judgment makes clear that if parties wish their agreement to be upheld by the English courts, they must intend it to apply wherever they might be divorced, and have a clause within the agreement to evidence this. Practitioners, in the role of independent legal advisor, must ensure that they appraise their client of all the implications of the agreement if there is a realistic prospect that the parties' marriage may end in divorce in another jurisdiction.

Of further interest, Moor J clarified here that in any case that does not involve the principle of sharing marital assets and is, instead, one based primarily on the needs of one party, it is sensible, proportionate and cost effective for the other party to run the so-called 'Millionaire's defence' - this allows for the party to disclose only a broad outline of his or her overall wealth, so long as he or she concedes that they have the ability to meet any reasonable order the court might make.

Law Commission recommendations

This case was decided prior to the publication at the end of February 2014 of the Law Commission's report on Matrimonial Property, Needs and Agreements. The report recommended legislating to introduce "qualifying nuptial agreements" (QNAs) which would be enforceable contracts, not subject to the scrutiny of the courts.

For such agreements to be QNAs, certain procedural safeguards would have to be met which, among other things, would include the need for disclosure of material information about the other party's financial situation and legal advice for both parties at the time the agreement was signed. It would also not be possible for one spouse to use a QNA to contract out of providing for the "financial needs" of the other or of any children.

Such legislation would not have been directly relevant in the circumstances of AH v PH, which related to a Scandinavian agreement on which the parties did not receive English legal advice. Nevertheless, until legislation is passed to introduce QNAs into the law of England and Wales, cases such as this will continue to be important in determining the circumstances and extent to which matrimonial agreements signed in this jurisdiction and others will be enforced by the courts.


Case summary: Michaela Walker & Ors v Paul Egerton-Vernon & Ors [2014] JRC 025

The Royal Court in Jersey ruled that a private trust company (PTC) seeking to bring claims for breach of trust against its predecessors could not benefit from the Jersey law doctrine of empêchement d'agir. This was because the PTC had not been incorporated at the time that the three year deadline for bringing claims under Article 57(3B) of the Trusts (Jersey) Law 1984 expired. The doctrine of empêchement stops time running on limitation periods in situations of practical impossibility.

The First to Third Plaintiffs were beneficiaries of a Jersey law discretionary trust bringing negligence claims of around £130 million against the First to Third Defendants, the former trustees, as well as breach of contract claims against the Fourth Defendant, the former trust administration services provider.

A Fourth Plaintiff, a newly-incorporated PTC appointed as successor trustee, was later permitted to join the proceedings but only to bring claims against the Fourth Defendant. It then applied to add claims against the First to Third Defendants, even though it was outside the three year prescription period. The court determined that that application should be treated as a joinder application and that the doctrine of empêchement did not apply in the circumstances.

The court accepted that it was arguable that the doctrine of empêchement could apply to claims for breach of trust (though whether it does apply is yet to be decided) but rejected the idea that empêchement could apply to "the office of trustee". The Fourth Plaintiff had not existed during the prescription period, therefore it could not have faced a practical impossibility in issuing proceedings.

Evidence presented to the court also demonstrated that it had not been practically impossible to bring proceedings before the deadline, as alternative remedies had been available: the dissatisfied beneficiaries, the First to Third Plaintiffs, could have applied to the court under Article 51 of the Trusts (Jersey) Law 1984 to replace the trustee.

Comment

While the decision relates to a Jersey law doctrine which may not even apply to claims for breach of trust, the principle that the doctrine could not apply to "the office of trustee" may have more general application in connection with limitation periods.

Certainly, it will be crucial for beneficiaries to ensure that they are aware of the applicable limitation periods for any claims they may have, and if the trustees are delaying taking forward such claims on their behalf, it may be necessary to act swiftly to replace them.


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