In The Matter of The IMK Family Trust  JRC136
One source of the steady flow of trust litigation coming before the Royal Court in recent years has been a series of attempts to enforce orders made in divorce proceedings by the Family Division of the English High Court in relation to Jersey law trusts which hold assets which fall to be dealt with as part of those proceedings. This was one such case which stemmed from protracted and acrimonious litigation between Iqbal Mubarik (the "Husband") and his former wife Aaliya Mubarak (the "Wife").
The Jersey law trust in question was a discretionary trust known as The IMK Family Trust (the "Trust") which had been established by the Husband and Wife as joint settlors in September 1997. The initial trustee of the Trust was and remained The Craven Trust Company Limited (the "Trustee") and the principal asset of the Trust was the issued share capital of a Bermudan holding company known as Twenty First Century Holdings Limited (the "Company"). The Company in turn held the various operating companies which made up the Husband's business interests, although it also had outstanding loans payable to both the Husband (in the sum of US$34,333,522) and to the Wife (in the sum of US$557,978). The original beneficiaries of the Trust included the Husband, the Wife and their children. After leaving the matrimonial home in March 1998, however, the Husband exercised his power under the terms of the Trust to execute a deed (the "Exclusion Deed") excluding the Wife as a beneficiary going forwards.
The Wife commenced divorce proceedings against the Husband in July 1998 and, in due course, obtained a decree nisi. The Husband was, as long ago as 10 December 1999, subsequently ordered to make a lump sum payment to the Wife in the sum of £4,875,000 (the "Original Order"). Despite numerous further judgements having been made against him in both the English High Court and the Court of Appeal, however, he had succeeded in evading his obligation to make that payment. Finally on 30 March 2007 the Wife went again to the English High Court, this time seeking, inter alia, an order (the "Trust Order") pursuant to the English Matrimonial Causes Act 1973 varying the terms of the Trust so as to require the Trustee to pay to the Wife an amount equal to the sums due to her by the Husband pursuant to the Original Order (together with missed interim payments, costs and interest).
As a result of the Husband's poor conduct in the divorce proceedings up to that point, in order to be allowed to contest the Wife's application for the Trust Order he was required first to write a letter to the Trustee irrevocably (i) accepting that he was bound by the terms of the Original Order; (ii) asking the Trustee to assist him in meeting his obligations under the Original Order; and (iii) accepting that he would be bound by the result of the Wife's application for the Trust Order and asking the Trustee to assist in giving effect to the Trust Order should it be granted. The Husband elected to contest the Wife's application for the Trust Order and, accordingly, he sent a letter to the Trustee in these terms in August 2006 (the "Husband's Letter").
Following a lengthy hearing in December 2006 the English High Court duly made the Trust Order. The Husband's attempts to appeal against the making of the Trust Order were unsuccessful and, therefore, this judgement arose out of an attempt by the Wife to have the Royal Court enforce the Trust Order.
The Wife argued that the Royal Court had the power to enforce the Trust Order on two separate grounds, specifically (i) on the ground of comity and (ii) on the basis that all of the beneficiaries of the Trust could be said to have consented to the variation contained in the Trust Order provided the Court both accepted that the Husband's Letter amounted to the Husband's consent to such variation and also used its power under Article 47 of the Trusts (Jersey) Law 1984 as amended (the "Trusts Law") to consent to the proposed variation on behalf of the minor and unascertained beneficiaries.
In respect of the Wife's first submission, the Court reviewed the various decisions which it had made in cases of this type both prior to and following the recent introduction of Article 9(4) of the Trusts Law which purports to limit the application of foreign law judgements in respect of Jersey law trusts. The key principles which emerged were:
- A distinction must be made between on the one hand a change in the terms or workings of a trust which the trustee would itself have power (under law or under the trust in question) to effect (described by the Court as a "variation") and, on the other, a change which the trustee itself would have no power to effect (described by the Court as an "alteration"). For example, ordering a trustee of a completely discretionary trust to treat itself as henceforth holding trust assets absolutely for one of the erstwhile discretionary beneficiaries would only be a variation, since that would be something which the trustee would have had the power to do in any event. Conversely, instructing the trustee of such a trust to henceforward hold the trust assets absolutely for an individual who was specifically excluded from benefit under that trust would be an alteration, since the trustee would otherwise have no power under law or under the terms of the trust to act in such a way.
- The Royal Court does not have the power (whether under statute or under its inherent jurisdiction) to order the alteration of a Jersey law trust.
- In any event, a judgement of the Family Division of the English High Court in respect of a Jersey trust which purports either to vary or to alter that trust under English law is not directly enforceable in Jersey as a result of the operation of Article 9(4) of the Trusts Law.
- This does not, however, necessarily mean that the objective of such an order of the English High Court cannot be facilitated by the Royal Court. Where such an order is an attempt to vary the Jersey trust (as opposed to an attempt to alter it) then the Royal Court may in its discretion use its powers under Article 51 of the Trusts Law to give directions to the trustee concerned to act in accordance with some or all of the High Court's order.
- In the current case, the Wife was no longer a beneficiary of the Trust - in fact, the effect of the Exclusion Deed was that she had become an excluded person under the Trust. It followed that what the Trust Order amounted to was an attempt to alter the Trust rather than to vary it and, as such, the Royal Court had no power to order the implementation (whether by direct enforcement or otherwise) of the Trust Order.
In considering the Wife's second submission, the Court re-affirmed the well-known principle derived from Saunders v Vautier to the effect that all of the beneficiaries of a trust may together consent to the alteration of a trust. Here, the adult beneficiaries of the Trust were the Husband and two of the children of the Husband and the Wife. Other beneficiaries were minor children or, as yet, unascertained. Both adult children had given their consent to the proposed alteration. It followed that there were two questions for the Court to consider. Firstly, should the Husband be treated also as having consented to the proposed alteration on the basis of the Husband's letter? Secondly, was this an appropriate case for the Court to exercise its power under Article 47 of the Trusts Law to consent to the proposed alteration on behalf of the minor and unascertained beneficiaries?
Despite the Husband's later attempt to repudiate the terms of the Husband's Letter the Court decided that he should be held to its terms. The key issue here was that he had chosen voluntarily to execute the Husband's Letter. The High Court had offered him a choice between executing the Husband's Letter and being permitted to participate in the hearing which resulted in the Trust Order being made, or not doing so and being excluded from that hearing. He had freely chosen the former and thus it could not be said that the High Court had forced him to execute the Husband's Letter. The Royal Court made it clear that, had the Husband's Letter been executed directly on the order of the High Court, it would have been unlikely to have given it any weight (c.f. a similar situation in the recently reported case of Re the Turino Consolidated Limited Retirement Trust  JRC100).
The Royal Court also concluded that this was an appropriate case to exercise its power under Article 47 of the Trusts Law to consent to the proposed alteration on behalf of the minor and unascertained beneficiaries despite (a) the practical difficulties that would be encountered in realising liquidity from the underlying Company and (b) the fact that, on the face of it, the majority of any liquidity realised from the Company and paid up to the Trust should then be paid on to the Husband in satisfaction of the debt owed to the Husband by the Company. To assist with these issues the Royal Court took the further unusual step (under the authority of its inherent supervisory jurisdiction) of appointing KPMG as receivers of the Trust with a view to their realising sufficient liquidity from the Trust's assets to discharge the sum due to the Wife as a result of the proposed variation. The Court further noted that it would then be for the Wife to take action in front of the Bermudan courts to obtain some kind of security over the debt owed by the Company to the Husband to ensure that sums realised could be paid to her instead of to the Husband.
This judgement goes a long way towards clarifying the status of foreign court orders which attempt to alter or to vary the terms of a Jersey trust. Essentially the Court has made it clear that such orders will not directly be enforced in Jersey, although where such an order amounts to a variation rather than to an alteration (as the Court used those terms) the Court will consider whether and to what extent to give effect to the objective of such an order using the powers conferred on it by Article 51 of the Trust Law.
To that extent, the judgement endorses the effectiveness of Article 9(4) of the Trusts Law in its attempt to protect the integrity of Jersey law trusts from direct interference by foreign courts. Professional trustees should note, however, that the degree of protection which this will give to assets held in Jersey trusts in practical terms will depend upon a number of other factors such as:
- whether or not there might be grounds in a particular case for the Court to hold that all of the beneficiaries of the trust in question have in fact consented to the variation or alteration which the foreign judgement seeks to impose;
- where the relevant trust assets are physically located in the foreign jurisdiction in question, it is likely that the foreign court will be able to force the trustee to deal with those assets in accordance with the terms of its order; and
- whether arguments on the implications of the Hague Convention on the Recognition of Trusts (which were not rehearsed in this case) might have an impact on the Court's decision.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.