High Court Orders Disclosure of Offshore Trusts in Divorce Proceedings

The High Court in Tchenquiz-Imerman v Imerman [2013] EWHC 3627, has held that disclosure orders made against beneficiaries of discretionary Jersey trusts were justified, proportionate and necessary to support ancillary relief proceedings brought by their step mother against their father.

This interesting case provides practitioners with an indication about the willingness of English Courts to cast light into the workings of offshore trusts in support of ancillary relief proceedings. It perhaps also indicates how willingly offshore jurisdictions will allow this to happen.

The financial remedy proceedings involved off-shore discretionary trusts of which the husband and wife had once been beneficiaries. The two key questions for the Court about the trusts were:

Whether they were nuptial settlements within the meaning of (s24 Matrimonial Causes Act 1973), and as such, subject to the court’s powers of variation; and
Whether the trusts’ assets were financial resources available to the husband (s25 Matrimonial Causes Act 1973).

In determining these issues, a critical question was whether the trustees were likely immediately or in the foreseeable future to exercise their powers to benefit the husband. Determination of this issue depends on the court’s assessment of the evidence adduced by the parties and the trustees. The less direct the evidence, the more the court is left to draw inferences and makes assumptions that may have less foundation in the reality of the situation.

Background to the Ancillary Relief Claim

The divorcing parties were married in 2001 and separated in 2008. They had one child. The husband had three children by a previous marriage. These children were adults at the time the wife started ancillary relief proceedings in 2009. The proceedings settled before the final hearing in 2013.

The husband’s admitted wealth was just over £7 million held in his own name and approximately £20 million held in nuptial settlements of which he was the principal beneficiary. The wife had assets in her own name worth just over £10 million. She was also a beneficiary of various family trusts, including one which held assets worth about £15 million.

In 2008 – about the time the divorcing parties separated – the husband’s father settled assets on several off-shore discretionary trusts which derived from previous settlements that had been distributed to him. At one point, the assets were said to be worth £360 million, but were then said to have reduced to £130 million. The trust assets also included very substantial funds generated during the course of the marriage and previously held in a discretionary trust settled by the husband before the marriage. The original beneficiaries included the husband and wife, but in 2005, the terms of the trust were amended to exclude the husband and wife as beneficiaries. The remaining beneficiaries included the husband’s three adult children from his first marriage.

The husband claimed the purpose of restructuring the trusts to exclude him as a beneficiary was for tax purposes. The wife claimed that even if this was the case, the husband was also attempting to distance himself from the wealth generated during the marriage. She argued that the husband could be restored as a beneficiary and the trusts’ resources made available to him.

Disclosure Orders Made Against The Adult Beneficiaries

The trustees, who were not resident in England and Wales, were joined as parties to the divorce proceedings. With the support of the adult beneficiaries, the trustees applied to the Royal Court of Jersey and the East Caribbean Supreme Court and obtained approval not to participate in the proceedings. It was said the trustees’ rationale for non-participation was that it would mean the decision of the English court would not be automatically enforceable against the trusts in Jersey and the BVI.

The trustee’s having dropped out, the adult beneficiaries then applied to be joined as parties to the English proceedings. As beneficiaries they had an interest in the proceedings and because they did not accept that the settlements were nuptial and should the wife obtain the order she sought, it would remove significant assets from the pool of assets held for their benefit. The interests of the beneficiaries and the wife were therefore in conflict.

Moylan J granted the beneficiaries’ application to be joined as parties to assist him to determine the nature of the trusts and whether the trusts’ assets were available to the husband. As a condition for doing so, the beneficiaries gave specific undertakings at the Financial Dispute Resolution hearing to use their best endeavours to obtain (and not to dispose of or destroy) documents and correspondence connected to the applications made by the trustees about the financial remedy proceedings in Jersey and the BVI.

The Offshore Courts’ Orders Permitting Disclosure By The Adult Beneficiaries

Complying with their undertakings, the adult beneficiaries applied to the East Caribbean Supreme Court and the Royal Court and obtained orders permitting them to disclose documents they had received for the purpose of the earlier trustees’ applications.

When considering the adult beneficiaries’ application, the Royal Court stated that:

It was common for trustees in Jersey to seek court directions about the administration of trusts under Article 51 of the Trusts (Jersey) Law 1984.
In the interests of justice, information and documents received by parties to such proceedings should be confidential, to enable the trustees to make full and frank disclosure without the risk of information being released to third parties.

Despite its reservations about preserving confidentiality, the Royal Court gave permission for information and documents to be disclosed by the adult beneficiaries if the English court made an order to that effect. Its decision was expressed to have been based on:

The very unusual circumstances of the case, specifically the unusual undertakings given by the adult beneficiaries; and
The fact that the material to be disclosed was not particularly sensitive.

However, the Royal Court invited the English court to consider very carefully whether it needed to make the disclosure orders against the beneficiaries. It cited the principle of comity and stated that if such orders were to be become routine, the Royal Court would have to consider amending its procedures, to:

Heavily redact any material served on English resident beneficiaries.
Preclude material from being sent out of the jurisdiction and limiting inspection to take place only within Jersey.

Explaining his decision to make the disclosure orders, Moylan J reviewed the principles in the cases of Charman v Charman [2005] EWCA Civ 1606, RK v RK (Financial Resources: Trust assets) [2011] EWHC 3910 (Fam) and Thomas v Thomas [1995] 2 FLR 668. Despite the Royal Court’s reservations, he held the disclosure orders were necessary and proportionate to assist the English court to determine the issues raised by the financial remedy proceedings:

It was important to understand how and why the trustees were likely to exercise their powers, to determine whether the trusts’ resources were likely to be available to the husband and thereby within the scope of a financial award in favour of the wife.
Any insight into the ‘internal thinking’ of the trustees was significantly preferable to none.
In the instant proceedings such evidence was unlikely to be forthcoming from any source other than the beneficiaries because the trustees refused to participate in the proceedings.
Without evidence, the court would be left to draw inferences and make assumptions.

Moylan J expressed his hope that co-operation between English and courts in off-shore jurisdictions would not undermine legitimate wealth protection, but would assist the interests of justice not only for spouses and civil partners but also for trusts and beneficiaries.

Final Thoughts

Tchenquiz-Imerman v Imerman illustrates what is often a practical difficulty in matrimonial proceedings of getting disclosure where there are off-shore trust structures involved. It shows that where, as here, the trustees refuse to participate, the English court is prepared to explore alternative routes to obtain the information it needs about the nature of a trust and the availability of the trust’s assets to the parties – even by going over the heads of the trustees to do so.

However, the case serves also as a warning shot that a disclosure order against a beneficiary who is a party to English proceedings may be of limited use in future cases involving Jersey trusts.

It was the Royal Court of Jersey that permitted the adult beneficiaries to provide disclosure in this case, and in doing so the Royal Court emphasised the very unusual circumstances citing that the beneficiaries had given undertakings to obtain material (about the English financial remedy proceedings) which was served in the course of local applications made by the trustees.

The Royal Court warned against similar applications in the future, stating that if they become routine, it will consider amending its procedures to redact material and limit inspection.