In high-value divorce litigation, certain matrimonial assets held in offshore vehicles and structures are commonly unaccounted for. This is due to a widespread perception that such assets are out of reach to the victim spouse and that opaque beneficial ownership veils can't be pierced. However, a spouse and his or her professional advisers can, indeed, find remedies to address offshore elements, regardless of the site of the principal divorce litigation site onshore—London, New York, Hong Kong, Buenos Aires, or elsewhere.
Norwich Pharmacal Disclosure Orders
Assets transferred into an offshore structure are not irrecoverable. Although beneficial ownership of offshore companies is not publicly available in jurisdictions such as the BVI or Cayman Islands, one can obtain that information under certain circumstances. The primary means of accessing such information is to apply to court for a Norwich Pharmacal order.
In the BVI, under appropriate circumstances, the court will grant a Norwich Pharmacal order against the registered agent of a BVI company. The basis of the grant is that the registered agent (the entity which provides an official address and certain other mandatory services to a BVI company) has, or may have, innocently (or deliberately) facilitated the wrongdoing of another—here, a recalcitrant spouse.
The nature of "wrongdoing" is broadly defined in the BVI to include failing, or arguably failing, to provide a full and accurate asset disclosure in the divorce proceedings. The level of evidence required to demonstrate the wrongdoing must be more than a bald assertion, but does not need to reach the level of a court finding, i.e., a judge's ruling that wrongdoing has occurred. Further, the Norwich remedy is a flexible one; designed to do justice. As such, once the BVI court grants a Norwich order, the evidence obtained may be used in proceedings outside the BVI.
The Registered Agent's Role in Norwich Orders
The Norwich Pharmacal disclosure remedy is particularly valuable because registered agents, as regulated entities, are required to, and do, have objective information which identifies the underlying beneficial owner (UBO) of each entity he or she administers. In our collective experience, which is considerable, BVI registered agents almost always have accurate, objective, documentary evidence of the UBO's identity for the companies they serve. This information is therefore there, to be disclosed. This is also the case for registered agents operating in some of the smaller offshore jurisdictions, including Nevis and Belize.
Besides documentation demonstrating beneficial ownership, it is not uncommon for the registered agents file to include evidence which identifies previously unknown bank accounts or continued control of, and benefit from, assets which, ostensibly, have been placed into a trust.
In addition, certainly in the BVI, the court will grant ancillary orders to ensure that the disclosure order remains effective. These ancillary orders may include sealing and gagging injunctions to prevent the registered agent from tipping off his or her instructors—orders which may be backed up by the court's contempt powers.
Because BVI registered agents are regulated, they are inherently unlikely to disregard orders of the BVI court. In consequence, therefore, it is most unusual for a deliberate tipping off to occur when a Norwich order has been made which includes a gagging injunction. Similarly, the BVI court will regularly grant Norwich orders where the identity of the parties is anonymized in public documents. This precludes the ultimate target from being alerted to the Norwich order application on the court docket, which is public.
Conditions of a Norwich Order Upon an Applicant
Often, the court will impose conditions upon an applicant for a Norwich order. For example, if the initial application is made without notice to the registered agent, the applicant will be under a duty of full and frank disclosure to the court of all material facts which might influence the court as it exercises its discretion (or not) as to whether to grant the Norwich order. This obligation is a serious one.
Secondly, no blame will lie with the registered agent for having provided the services it has, generally. The applicant is expected to pay the respondent registered agent's reasonable costs in complying with the Norwich order, which includes the cost of obtaining legal advice on the order's terms. Typically, in the BVI, the respondent registered agent will incur legal costs of between US $5,000 and $10,000.
Most importantly, the evidence obtained following the grant of the Norwich order may only be used for the purpose for which the order was specifically made. If the applicant wants to use the information for another specific purpose, they must make further application for permission. This is a critical obligation placed upon the applicant. In particular, the information obtained from the order must not be used to cause general discomfort to the recalcitrant spouse, for example, by sharing with the media or onshore tax authorities. Succumbing to any such temptation can result in very serious consequences.
Despite the effort and expense required in obtaining a court ordered disclosure, proving ownership of offshore entities can be decisive in heavy divorce litigation.
Watertight protection? Not always so.
In most cases of accounting for and dividing matrimonial assets upon a divorce, beneficial ownership is decisive. For example, on first impression, an office building or company stock legally placed into the ownership of an offshore company or trust should not form part of a matrimonial estate. However, if the offshore company shares are beneficially owned by a recalcitrant spouse, those shares should be considered in the matrimonial assets.
However, when a spouse has placed assets in an offshore trust, so that those assets are no longer owned legally by either spouse, but (invariably) by a professional trustee in the relevant jurisdiction, the robust "firewall" legislation of many primary offshore jurisdictions, including the British Virgin Islands, will largely insulate trust assets against marital claims. But this protection is not always watertight.
Section 83A of the BVI's Trustee Act provides, among other things, that no BVI trust or disposition to a trustee is capable of being set aside on the basis that it avoids or defeats rights conferred upon any person by reason of a personal relationship (which is defined to include a marriage) to a settlor. However, it does not follow from s.83A that a claim against assets held in a BVI trust during the course of divorce litigation is impossible.
Recognition of a Foreign Trustee in Bankruptcy
In some jurisdictions, a final matrimonial judgment can result in the respondent's bankruptcy following default upon an outstanding matrimonial award. Bankruptcy trustees appointed in some countries over a defaulting respondent can be recognized as such in the BVI, with similar powers to those conferred in the their home jurisdiction. The relevant countries under Part XIX of the BVI Insolvency Act, 2003, are the UK, USA, Canada, Australia, New Zealand, Hong Kong, Jersey, Japan, and Finland. Again, in these circumstances, the bankruptcy trustee can seek to demonstrate that certain assets are, in fact, part of the bankrupt's estate, and therefore available for distribution to the bankrupt's creditors, chief of which may well be the victim spouse. A bankruptcy trustee from abroad will be entitled to take certain steps in the BVI, even without formal recognition.
Another means by which an outstanding matrimonial judgment obtained onshore might be enforced offshore is by applying to the BVI court for a charging order over shares in a BVI company. If the recalcitrant spouse holds shares in a BVI company, they are capable of being charged. The victim spouse may apply directly to the BVI court for an order for the sale of those shares, or, seek to have the sale effected by a receiver.
A charging order can be obtained even when the recalcitrant spouse is not the registered shareholder of the shares, but instead the shares are held by his or her nominee. Clearly, such an application would need to have the facts set out, as this remedy is draconian. And, if a BVI trust has been established, the firewall provisions in the BVI's Trustee Act may apply.
To aid the enforcement of an outstanding judgment, the victim party might be able to obtain relief via a worldwide freezing order, either in the context of a primary proceeding in the BVI or an ancillary proceeding in the BVI. In both England and the BVI, the courts will grant freezing order relief in aid of outstanding matrimonial judgments. Such orders can bind third parties who have been given notice of them within the issuing court's jurisdiction. Frequently, the orders include disclosure obligations, as well as provisions to freeze assets. But, again, section 83A of the Trustee Act may apply if a BVI trust has been established and assets ostensibly in trust are sought to be frozen.
Another type of claim that may be made in relation to offshore assets is one based on the English doctrine of "resulting trust." This claim does not necessarily involve any intention whatsoever to set up a trust on the part of the donor-spouse and there may be no trust deed or written references anywhere to any form of trust.
A resulting trust arises by operation of law where a purchaser directs that property which has been acquired from his or her resources be placed in the name of another person (such as a corporate entity). The property will be regarded as being held on resulting trust for the donor-spouse as the person who provided the purchase money. The presumption can be rebutted if the legal owner of the property can show that the intention was an outright transfer to him or her.
Shams, Bare, and Otherwise Invalid Trusts
In the case of offshore trusts which have been intentionally established, other typical lines of attack by a victim spouse can be based on sham, and/or that powers of such substance have been reserved to the settlor-spouse, so that they never parted with their beneficial ownership in the property. Then, the trust is illusory and can be treated by the onshore court as a "resource" in proceedings for financial relief on divorce. While the law in this area may or may not be somewhat unclear following the recent English High Court decision in Pugachev, it is clear that attacks based on shams and illusory trusts may be fruitful when attempting to unravel trust structures, especially if good evidence is available to support the allegation of sham.
Offshore trusts, like most onshore trusts, are not creatures of statute, and, as a consequence, the existence of a signed trust deed is not in itself conclusive proof that a trust actually exists on the terms set out in the trust deed. Under BVI law, as under English law, there are numerous grounds on which a trust can be set aside as invalid, many of which will not actually be apparent from the trust deed. These include failure to properly "constitute" the trust, for example, because the settlor has neglected to make the requisite declaration, or because the trust assets have not been transferred into the names of the trustee. Other grounds include duress; undue influence; fraud; mistake; misrepresentation; the law relating to fraudulent and voidable dispositions; incapacity; or the improper exercise of powers— to name but a few. We at O'Neal Webster have, on countless occasions, come across trusts which looked good on paper but could readily be set aside by those with an interest in doing so.
Orders in Relation to Settlors' or Beneficiaries' Powers
Another line of attack against a trust is that a power in the trust which is vested in someone else is "property." There is binding legal precedent from the Privy Council 1 that the non-fiduciary powers to revoke the trust can be such that, in equity, they amount to "ownership," "property," or "quasi-property." If powers of revocation, wide powers of appointment or amendment, or equivalent powers are conferred on the recalcitrant spouse, the victim spouse's lawyers will likely focus on them, as they provide a potential access route to rendering assets placed in a trust available for distribution in the context of a divorce.
A number of potential remedies are available offshore in aid of onshore matrimonial proceedings. The techniques developed for commercial transnational insolvency and asset recovery litigation may be readily applied in the context of high-value matrimonial litigation. The available remedies in the BVI may be further complemented by valuable discovery remedies in the United States under 28 USC §.1782. That statute provides for very effective compulsory disclosure of documents and information which can include money movements denominated in US dollars in aid of litigation outside the United States.
1. The highest Court of Appeal for the BVI, Cayman, and Nevis amongst others.
Originally published on June 2020
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.