A Trustee's dilemma - involvement in divorce proceedings

In divorce proceedings, where one of the parties is a beneficiary of a trust, there has long been confusion about the extent to which trustees should be involved. Some recent cases have provided greater clarity, which are dealt with below.

A trust is relevant in divorce proceeding if it is a nuptial settlement or a financial resource to one of the parties. A nuptial settlement is defined in the case of Brooks v Brooks [1996] AC 375 as broadly one which makes "some form of continuing provision for both or either of the parties to a marriage with or without provision for their children". A nuptial settlement can be varied by the court to confer a benefit on the spouse. If not nuptial, the trust cannot be varied but the court has shown itself willing to exercise "judicious encouragement" by for example, making an order against the beneficiary so onerous that the trustees are bound to have to help. The trustees' dilemma is whether and to what extent they should be involved in the proceedings and resolution of the issues.

With the help of Mostyn J's judgement in DR v GR [2013] EWHC 1196 (Fam) and the guidance from the Royal Court of Jersey from the judgement in Representation of HSBC International Trustee Limited [2011] JRC 167 and [2014] JRC 254A, one can draw together some general guidelines about trustees' involvement in proceedings.

1) Adverse Inferences

If trustees are properly served with a copy of an application seeking to vary the trust by the applicant spouse, they risk adverse inferences being drawn as a result of their lack of engagement and the court may make an order against the trust assets within this jurisdiction in their absence. They do not need to be formally joined but will be expected to appear as witnesses and to make disclosure of all relevant facts and documents.

Mostyn J gives a stark warning to trustees who chose not to cooperate, "if trustees do not voluntarily participate as witnesses and give proper disclosure they cannot complain if robust findings are made about the realities of control and the likelihood of benefit".

Previously, trustees may have taken the view that avoiding formally joining would mean they could avoid enforcement orders. Mostyn J disagrees and says "if they have been served in accordance with the rules, and do nothing, then it is clear, beyond a shadow of a doubt that any variation order will be binding on them".

The same is true for a trust located offshore, but with assets in England and Wales. The fact that the trust is resident in Jersey for example, does not matter as the English court could enforce directly against the English assets. The Jersey trustees in these circumstances should involve themselves as if they were resident in England and Wales.

It does not matter if the assets are owned by a company underlying the trust. The English divorce court can look through the company to the trust and make orders in relation to the underlying assets.

2)The provisions in the Family Procedure Rules ("FPR")

It may be advised, depending on the circumstances of the case, for the trustees to seek formal joinder.

By intervening in this way the trustees' position is elevated from witness to party. The representatives of the opposing party will not be able to advance arguments without the trustees, in the presence of their own counsel, having the opportunity to rebut them. The trustees will be taking an active role in proceedings.

In this case, Mostyn J states that practitioners must comply with the provisions of the FPR when making applications for joinder. The FPR provides that the court may direct that the trustees be added to proceedings for a financial remedy if it is "desirable to add the new party so that the court can resolve all the matters in dispute in the proceedings" (9.26b(1)). This decision can be taken "on the court's own initiative or on the application of an existing party or a person or body who wishes to become a party" (9.26B 4).

An application for an order under this rule must be made "in accordance with the Part 18 procedure and, unless the court directs otherwise, must be supported by evidence setting out the proposed new party’s interest in or connection with the proceedings or, in the case of removal of a party, the reasons for removal" (9.26B 5). Having received an application for joinder, the court will then make a decision as to whether it is "desirable" in order to "resolve all matters in dispute". Accurate compliance with the provisions of the FPR is more likely to bring about the desired outcome.

3) Offshore Trustees

If the trustees are resident outside England and Wales and the assets are outside of this jurisdiction then the English courts will be unable to make a successful enforcement order. In these circumstances, the trustees must make their duties to all the beneficiaries their priority. If the assets are not at risk, then they should not submit themselves to the English jurisdiction. The ways in which trustees may be said to have submitted are not straightforward but broadly they will be held to have submitted if they involve themselves in any way with proceedings. This usually means any formal response to the English court orders will be seen as submission but appearing to challenge jurisdiction will not.

Summary

• If English trustees are served with a copy of an order under FPR 9.13(1), it is important that trustees involve themselves as the court will draw adverse inferences if they fail to do so.
• Jersey trustees with assets in England and Wales should take the same attitude to participation as trustees resident in England and Wales.
• Trustees should adhere strictly to FPR 9.26B if they wish to be joined.
• Jersey trustees with assets in parts of the world where the English courts do not have jurisdiction should not submit to the English courts.