Cayman Islands: Is It An Offshore Sham? A Balanced Perspective Is Welcomed

Last Updated: 25 January 2009
Article by Sophia Harris

'these sophisticated offshore structures are very familiar nowadays to the judiciary who have to try them. They neither impress, intimidate, nor fool anyone. The courts have lived with them for years.'

- Coleridge J in J v V 2003 EWHC 3110 (Fam), 2004 1 FLR 1042

It is interesting to note the air of adversity that has intensified over the past few months between the powers that be of the onshore jurisdictions, and those of the offshore jurisdictions, particularly in the face of collapse of the economic stability of certain onshore jurisdictions. For those offshore jurisdictions that feel they have been well regulated and well managed over many years and have worked hard to ensure their good standing in the global market, it would seem unfair and unfounded. Such offshore jurisdictions take the view that it would require instead, introspective soul searching of those onshore jurisdictions that have allowed overall poor management and poor judgment to possibly cause their own demise. Such a demise that has regretfully taken along with them, other jurisdictions whose markets are naturally well intertwined with theirs.

It would seem inconceivable that Iceland itself could or would ever be able to look to an offshore jurisdiction, to point the finger at, as having any direct or indirect relation to their demise, especially as the direct ties to the US market seem undeniable.

All aspects of the offshore jurisdiction appear vulnerable to the blame game. The above quote from Coleridge J in J v V 2004 1 FLR 1042, brought an interesting perspective as to how offshore jurisdictions and their products might be viewed in the eyes of the onshore Court. A slightly venomous remark, that may or may not be justified, but one that certainly appears to have been spawned in retaliation to offshore legislation that has been designed to effectively address the legitimate needs of individuals or corporations who are proactive in legally addressing their own long term fiscal goals. Often these goals are not set in reaction to an existing problem but to preempt any potential problem down the line, having due regard to the existing laws of the day. Some may call it being fiscally responsible, be it for commercial or for personal purposes, to ensure the mitigation of possible losses that might be incurred in the event of certain circumstances.

How does one address the unfortunate perception by some, that all that is offshore must be a sham?

The case of A v A 2007 EWHC 99 brings, it seems, a much needed balanced perspective, where there is a legitimate transaction established under well established trust principles and having due regard to the relevant legislation of the jurisdiction.

The case of A v A involved ancillary relief proceedings following the breakdown of a relationship of almost 20 years. The matrimonial assets at stake included the husband's 23% shareholding and the wife's 22.98% shareholding in a family company which had been established by the husband's father many years ago. Two separate discretionary trusts held 54% of the shares in that company, one trust created by the husband's parents and the other by his brother before the marriage. The beneficiaries of the trusts were the children and remoter issue of the husband and remoter issue of the husband's parents. Therefore the husband, his children, their children and his brother were included as beneficiaries and so the group of beneficiaries was not closed which was an important point in this case.

There had also been a number of different trustees of the trusts over the years. At the time that the matter had been heard by Munby J, the trustees were a Jersey trust company and two accountants, but the trust itself was then governed under English law, although it started off as an offshore trust.

The wife asserted that the trusts were shams and therefore the husband should be ultimately treated as the owner of the 77% shareholding in the family company and, in the alternative, that the shares held by the trusts should be treated as available to the husband in accordance with the principle in Thomas v Thomas [1995] 2 FLR 668. There were other allegations befitting of the War of the Roses that helped to allow the trial to drag on from its start in December 2005 to its end with a judgment only in 2007. But I will not get into those other allegations in this article.

It turned out not to be a useful exercise to present two opposing cases for the Judge to choose from in the event he was not satisfied with the first argument proposed. The Judge noted the two cases presented to court were inconsistent with each other, the first case proceeding on the basis that the trusts were shams and the second on the basis that they were not shams but that the assets should be made available to her by treating the assets as though they were currently available to the husband as in Thomas v Thomas.

This tactic, it would appear, backfired on the wife's lawyers, and assisted the judge in focusing on the real issues at hand rather than disregarding the merits of the legitimate trust merely because it was a trust or because it originated in an offshore jurisdiction.

The wife did however allege that 'the reason for placing the shares in trust was because [the husband] was in the process of divorcing from his first wife and wished to present himself as a minority shareholder in that dispute' and that 'in practice' the husband 'controlled those shares'. The husband, the wife asserted, 'set out to do everything in his power to defeat his first wife's claims against him, including the creation of the offshore trusts as an integral part of the campaign'. A conspiracy theory that no doubt Coleridge J, might willingly subscribe to based on some apparently extensive unsavoury experience of his.

The presiding judge took into account the approach adopted by the court when faced with a pre-ordained series of transactions or a composite transaction which includes an artificial step inserted for no commercial purpose. But in a sobering moment for the wife's attorneys, the judge stated: "The court cannot grant relief merely because the husband's arrangements appear to be artificial or even 'dodgy'."

In referring to an earlier judgment of his in Re W (Ex Parte Orders) [2000] 2 FLR 927, Munby J also stated that he agreed with the robust approach of Coleridge J where appropriate. But Munby J also went on to state, 'On the other hand, and as Nicholas v Nicholas [1984] FLR 285...demonstrates, the court does not –in my judgment cannot properly- adopt this robust approach where, for example property is held by a company in which, although the husband has a majority shareholding, the minority shareholdings are what Cumming-Bruce LJ at 287G called 'real interests" held by individuals who...are not nominees but business associates of the husband.'

Munby J made a number of useful observations based on well established case law that are well worth restating here. The judge stated: "The court should adopt a robust, questioning and (where appropriate) skeptical approach to trust and company structures, but that did not mean that it could ride roughshod over established principles where third party interests were involved."

The Judge in giving reasons for his decision, referred to the classic definition of a sham given by Diplock LJ in Snook v London and West Riding Investments Ltd [1967] 2 QB 786 at 802. That in order for there to be a sham, the acts or documents executed by the parties to the sham must be intended by them to give to third parties or to the court the appearance of creating between the parties, legal rights and obligations different from the actual legal rights and obligations (if any) which the parties intended to create. For acts or documents to be a sham, all parties thereto had to have a common intention that the acts or documents were not to create the legal rights and obligations which they gave the appearance of creating. The need for common intention applied not only to bilateral transactions but equally to transactions such as settlement of property or the creation of a trust. What was required was common intention, but reckless indifference would be taken to constitute the necessary intention: Minwalla v Minwalla and DM Investments SA, Midfield Management SA and CI Law Trustees [2004] EWHC 2823 (Fam).

A review of the more recent case of Hitch v Stone (Inspector of Taxes) [2001] EWCA Civ 63 [2001] STC 214 was also undertaken, and in which it was noted that:

'...It is of the essence of this type of sham transaction that the parties to a transaction intend to create one set of rights and obligations but do acts or enter into documents which they intend should give third parties in this case the Revenue, or the court, the appearance of creating different rights and obligations....

An inquiry as to whether an act or document is a sham requires careful analysis of the facts....first in the case of a document, the court is not restricted to examining the four corners of the document...

Second, as the passage from Snook makes clear, the test of intention is subjective. The parties must have intended to create different rights and obligations from those appearing from (say) the relevant document, and in addition they must have intended to give a false impression of those rights and obligations to third parties...

Third, the fact that the act or document is uncommercial, or even artificial, does not mean that it is a sham....

Fourth, the fact that parties subsequently depart from an agreement does not necessarily mean that they never intended the agreement to be effective and binding...

Fifth, the intention must be a common intention' (see Snook).

As a matter of principle, a trust which was not initially a sham could not subsequently become a sham: Shalson v Russo [2003} EWHC 1637 (Ch). The only way in which a properly constituted trust which was not a sham ab initio could conceivably become a sham subsequently would be if all the beneficiaries were, with the requisite intention, to join together for that purpose with the trustees: Saunders v Vautier In re Smith, Public Trustee v Aspinall. In this case the judge made the determination that could not have happened as all the beneficiaries were as yet ascertained.

The Judge also noted that, as in A v A, a trust could not as a matter of law, be a sham if either the original trustees or the current trustees were not parties to the sham at the time of their appointment. The evidence showed that the trustees had at all times acted in good faith as professional persons and had conscientiously performed their fiduciary duties.

It is useful to take note of the cautionary words of the Judge as he states:
"In deciding whether or not, and, if so, in what manner these principles operate in any particular case, the court will of course have regard to the particular context and to the particular factual matrix....

It is important to appreciate (and too often, I fear, is not appreciated at least in this division) that the relevant legal principles which have to be applied are precisely the same in this division as in the other two divisions. There is not one law of 'sham' in the Chancery Division and another law of 'sham' in the Family Division. There is only one law of 'sham', to be applied equally in all three Divisions of the High Court..."

As for the Thomas v Thomas argument put forward by the wife's attorneys there were a few more sobering observations; the Judge stated: 'a Thomas and Thomas application ...usually proceeds on the assumption that the trustees are conscientiously acting in that capacity and that they will exercise their fiduciary powers bona fide and in a lawful manner'.

All in all it was a good day for the courts, with the judgment of A v A bringing back to law a sense of much needed balance in these challenging times.

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.

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