Client Affairs

Court Direction - Disclosure of Trust Assets

Paul Stibbard Baker & McKenzie Partner 17 March 2006

Court Direction - Disclosure of Trust Assets

Divorce and wealth is growing in importance and wealth managers increasingly need to be up to speed with developments around the issues. Pau...

Divorce and wealth is growing in importance and wealth managers increasingly need to be up to speed with developments around the issues. Paul Stibbard, a partner at Baker & McKenzie, the international law firm, examines a case that will have widespread implications for how wealth is split in relation to trust assets. In Charman v Charman (UK Court of Appeal 20 December 2005) the Court upheld orders that firstly in respect of a letter of request to the Bermuda Court, a director of a Bermuda trust company should be examined, and should produce trust documents, and secondly that the husband’s accountant in England should be required to attend an inspection appointment in England, to produce specified documents in relation to the trust. Background The parties married in 1976. Neither of them then had significant resources. They lived in England until the husband took up residency in Bermuda in 2003 and separated from his wife. She remained resident in England. In June 2004 she issued a petition for divorce in the English Court. During the marriage, the husband made a fortune in the London insurance market. He argued that his relevant assets for division in a matrimonial proceedings amounted to £59million. The wife contended the value of his relevant matrimonial assets was £126million. The difference between the two figures represented the assets of a trust now situated in Bermuda, namely Dragon Holdings Trust (“Dragon”). The orders under appeal were both designed to elicit material concerning Dragon. The sole trustee of Dragon was Codan Trust Company Limited (“Codan”). AA was a director of Codan. The letter of request was for the Bermuda Court to cause AA to be orally examined and to produce documents concerning certain specified matters. There was also an order for inspection appointment for the husband’s accountant, Mr Clay to attend court in London to produce trust documentation. The husband created Dragon as a Jersey discretionary trust created in 1987. Its beneficiaries included the husband, the wife, their two children and any future children or remoter issue of the husband, charities and such other persons as the trustee may add. Between 1992 and 2003 another Jersey trust company acted as sole trustee. It stated that throughout its trusteeship, it held the income of the trust for the husband absolutely and regarded it as an interest in possession trust. The husband stated the distributions representing accumulated account ceased in 1997. There had been no distribution directly to any other beneficiary at any time. In April 2003, soon after he ceased residence in the UK and had taken residence up in Bermuda, the husband exercised his power to change the trustee to Codan, and the law of the trust to Bermuda. Following Codan’s appointment as trustee, it resolved to appoint the trust income to the husband for life. In May 2004 the husband sent a new letter of wishes to Codan indicating that he wished Codan to treat him as primary beneficiary, and after his death to treat his children as primary equal beneficiaries. The question arose as whether the trust was a financial resource of the husband for purposes of Section 25 of the Matrimonial Causes Act 1973. The central question was simply whether, if the husband were to request the trustee to advance the whole (or part) capital of the trust, the trustee would likely to do so. In other cases, the question had been formulated in terms based on whether the spouse had real or effective control of the trust. However, a trustee in proper control of the trust will usually be acting entirely properly if, after careful consideration of all relevant circumstances, he resolves, in good faith, to act upon a request by the settlor, to exercise his power to advance capital, whether back to the settlor or to any other beneficiary. Thus the decision in Browne v Browne(1989) IFLR291 was more appropriately expressed as whether the spouse had “immediate access to the funds” of the trust, rather than “effective control” over it. The qualification related to the word “immediate”. In principle, the question was surely whether the trustee would be likely to advance the capital immediately or in the foreseeable future. Letter of Request The letter of request ordered by the Judge in the High Court was that AA should be asked specified written questions annexed to the letter, and, where applicable, be required to produce documents specified in the annex. In summary, the request was for him to be required to: (a) produce trust accounts for the two most recent years; (b) produce any trust deeds, written resolutions and letters of wishes, other than identified documents of each class already disclosed by the husband; (c) state whether it was the practice of the trustee to consult with the husband and/or to be guided by him about the policy decisions, whether there had been investment, distribution or otherwise, and if so give full details and produce all relevant documents; (d) state whether the trustee and the husband had discussed the possible collapse of the trust or change in the expression of his letter of wishes, if so give full details and produce all relevant documents; and (e) state whether there had been any communications between Mr Clay and the trustee regarding the trusts, if so, give full details and produce all relevant documentation. The order for inspection appointment obliged Mr Clay to produce to the Court any documents containing evidence of any advice given to, discussions with, or communications from, the husband relating to the trust funds, or which bear upon the creation, or the possible ultimate dissolution of Dragon. Since such a person overseas could not be compelled, by subpoena, to attend the hearing, and to give oral evidence, the appropriate form of order was for the issue of a letter of request to require the person to answer written and/or oral questions. What Constitutes Fishing? In R v State of Norway’s Application (1987) 1QB 433, “the first Norway case”, the Court of Appeal set aside, by a majority, on the grounds of “fishing”, an order made pursuant to a Norwegian request for oral evidence to be taken from two London bankers alleged to have knowledge of the affairs of a deceased person relevant to an issue in the Norwegian Courts as to his estate’s liability to pay tax. The Court of Appeal stated that the issue of “fishing” arose in cases where what was sought was not evidence as such, but evidence which might lead to a line of enquiry, which would disclose evidence. It was the search for material in the hope of being able to raise allegations of fact, as opposed to the elicitation of evidence to support allegations of fact. It was best described as a roving enquiry, by the means of the examination and cross-examination of witnesses, which was not designed to establish by means of their evidence allegations of fact, which had been raised with adequate particulars, but to obtain information which might lead to obtaining evidence in general support of a party’s case. Thus, whilst questioning to establish whether X was the settler of the trust would be legitimate. If the answer was negative, a supplementary question as to who was the settlor, would be “fishing”. In the present case, the request to the Bermuda Court was both for the production of documents and for the taking of oral evidence. In light of the likely extent of AA’s personal, oral views with the husband, and the Court’s need to focus upon the willingness of the trustee to comply with the husband’s wishes, including his needs, the Court regarded the request for him to be required to give oral evidence as free standing. AA had knowledge of the husband's past dealings with the trustee. So also to a significant extent did Mr Clay. The request was not part of a search for material which might enable the wife to raise an allegation. Consequently, she was not fishing for the documents. Equally, the request for AA to give oral evidence also passed its initial test, at any rate in so far that this appeared to be a matter of discretion for the judge. The Court also looked at the defences of necessity, proportionality and oppression and the possible excessive width of the order under appeal. With respect of the issue of oppression, the Court cited as examples where a wife’s father was ordered to explain, with documentation, his testamentary towards her and where a spouse’s wealthy cohabitant was ordered to produce not only evidence as to the support provided by her (or him) to the spouse, but as to her (or his) overall resources. However, in this case, the Court considered the documentation and knowledge was relevant to the debate in Court as to the fair outcome of the financial dispute between settlor as a beneficiary and his wife also as a beneficiary. The Court also went on to comment that the trustee’s decisions ought to be made having regard to the best interests of the beneficiaries. In absence of this evidence from the trustee, the trial judge in England would have to draw inferences as to the likelihood that the husband had access to the trust fund. In the nature of things, inferences drawn might not be accurate. If they were not accurate, they would be likely to lead one or other of the husband and wife, both of whom were beneficiaries, being treated on a false basis by the English Court. In those circumstances, it seemed that it should be open to the trustee to regard it as being positively in the interests of the beneficiaries that it should provide the evidence sought. For these various reasons, the Court of Appeal dismissed the husband’s appeal and upheld, the original High Court judgments. Comment This case is yet a further reminder of the powers of the English Court to require third parties within its jurisdiction, such as the husband’s accountant, and third parties overseas, such as the director of the Bermuda trustee company to provide information pursuant to a letter of request. The information in the letter of request drills down not only in relation to the detail of the trust accounts, but also other material information, such as the consultations between the husband and the trustee in respect of wide ranging issues, including discussions relating to changes in the letter of wishes, and communications between the trustee and the husband’s UK accountant. Although the final decision as to the allocation of financial assets between the parties has yet to be decided by the High Court at the time of this decision, this case seems to provide further evidence that the creation of a post-nuptial settlement of after acquired wealth, where the settling spouse remains a beneficiary, will provide little or no protection against the claims for financial provision on the part of the more impecunious spouse.

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