The judgments in the Representation of HSBC International Trustee Limited  JRC 167 and  JRC 254A address important questions of (i) when trustees of Jersey trusts should submit to the jurisdiction of foreign courts in matrimonial proceedings involving beneficiaries of Jersey trusts, (ii) the circumstances in which a Jersey trustee might make a distribution of assets from a Jersey trust to enable a beneficiary to meet his or her obligations to a former spouse pursuant to an order of a foreign matrimonial court and (iii) the circumstances in which an express power in a Jersey trust instrument to remove or exclude a beneficiary may properly be exercised.
The husband ("H") is a successful businessman in Hong Kong. The Trust was established in 1995 as a conventional discretionary trust governed by the law of Jersey. The Trust's main asset is a holding of 84.63% of the shares in the Bermuda holding company (the "Company") of the corporate group assembled by H over many years. 70% of the underlying assets of the holding company and its subsidiaries are held in Hong Kong or the People's Republic of China (the "PRC").
The Trustee is a BVI company with a branch in Jersey, and had delegated the administration of the Trust to HSBC Trustee (Hong Kong) Limited, which carries out the administration of the Trust from Hong Kong. H is the protector of the Trust and also retained the power to appoint and remove trustees. The beneficiaries of the Trust are H, his wife ("W"), their surviving daughter and any other lineal descendants of H.
The marriage between H and W broke down and in 2009 divorce proceedings were commenced, resulting in the High Court of Hong Kong granting a decree absolute during 2010.W sought a substantial order for ancillary relief, by reference to assets of the Trust.
Submission to foreign divorce proceedings
On 25 July 2011, the Hong Kong Court granted W's application for the Trustee to be joined as a party to the Hong Kong divorce proceedings. W sought orders from the Hong Kong Courts to the effect that the whole of the assets of the Trust should be regarded as being part of the matrimonial estate, available for distribution between H and W, or alternatively, that the Hong Kong Court should attribute all of the Trust assets to H as a financial resource of H.
The Trustee sought directions from the Royal Court of Jersey as to whether or not it should submit to the jurisdiction of the Hong Kong courts.
The Royal Court recognised in its judgment dated 25 August 2011
that W was not seeking an order by which the terms of the Trust
would be altered or varied. On the contrary, the relief that she
was seeking (a division and a distribution of the Trust assets as
between H and W) was within the powers contained in the Trust deed.
H and W were both beneficiaries of the Trust and therefore the
Trustee could, in accordance with the terms of the Trust, give
effect to an order of the sort requested by W in the Hong Kong
divorce proceedings, without contravening (or indeed, varying) the
terms of the Trust.
The problem of what may happen if a foreign court purports to make an unauthorised alteration to the trust deed (for example, as occurred in Re IMK Family Trust  JLR 250) did not therefore arise.
In Re H Trust  JLR 280, the Royal Court of Jersey held that in most circumstances it is unlikely to be in the interests of a Jersey trust for the trustee to submit to the jurisdiction of an overseas court which is hearing divorce proceedings. The Royal Court said that "it is more likely to be in the interests of a Jersey trust and the beneficiaries thereunder to preserve the freedom of action of both the trustee and this court to act as appropriate following and taking full account of the decision of the overseas court".
In Re H Trust, the Royal Court recognised that in some cases, it may be in the interests of the trustee to appear before a foreign court to put forward its point of view, for example in circumstances where, by reason of the location of the trust assets, the foreign court would be able to enforce its order without regard to the trustee or the Royal Court.
The Royal Court reminded itself that as 70% of the Trust's underlying assets were held in Hong Kong or the PRC, the Trustee would not be able to prevent enforcement against such assets.
The Royal Court ruled that the Trustee's decision to submit to the jurisdiction of the Hong Kong courts was reasonable. The Royal Court held that on the face of it, in this case, the interests of the beneficiaries of the Trust were best served by the Trustee appearing in the foreign matrimonial court, to enable it to put forward arguments and produce evidence so that the interests of all of the beneficiaries of the Trust would be fully considered by the foreign matrimonial court.
Following a first instance decision and two subsequent appeals, the Hong Kong Court of Final Appeal held that the entire assets of the Trust should be regarded as being a financial resource available to H and thus part of the matrimonial estate of the couple. The Court of Final Appeal further held that there was no reason to depart from the "yardstick of equality" and that therefore W was entitled to 50% of the combined matrimonial assets, including the assets of the Trust. This resulted in a total award to her of approximately HK$832.5 million (of which approximately HK$770.5 million was to come from the Trust).
H had already paid approximately HK$380 million to W pursuant to an earlier order of the Hong Kong Court, funded by way of loans made by the Trustee to H from the Trust assets, which were in turn funded by dividends paid by the Company to the Trust. The Company subsequently declared a dividend in an amount sufficient to enable H to pay the remaining sum due to W pursuant to the order of the Court of Final Appeal, and following the payment of that dividend, H requested that the Trustee make a distribution to him accordingly.
The Trustee decided to accede to H's request, and sought the Royal Court's approval of its decision.
Decision of the Royal Court - distribution
In circumstances where a trustee seeks the Royal Court's approval in relation to a "momentous" decision, the Royal Court has previously defined its role in Re S Settlement  JLR 37. The Royal Court must satisfy itself that the trustee's decision has been formed in good faith, that the decision is one at which a reasonable trustee properly instructed could have arrived, and that the decision is not vitiated by any actual or potential conflict of interest.
The Royal Court found that the Trustee was acting in good faith, and that its decision was not vitiated by conflict of interest. It then considered whether the decision was a reasonable one.
It noted that it was not suggested that there were other assets from which the sum due from H to W could be paid, and found that it was a benefit to all parties that the proposed distribution and payment would bring to an end the long running litigation between H and W, thus allowing each to move on with their lives.
The Royal Court had regard to the interests of H and W's daughter, and found that the proposed distribution could be regarded as being in her interests also, in that the litigation between her parents would be brought to an end. The Royal Court also thought it reasonable for the Trustee to conclude that the daughter would ultimately benefit from her mother's estate.
The Royal Court also noted that whilst the total payment of approximately HK$770.5 million was substantial, the remaining assets of the Trust were equally substantial.
Applying the S Settlement principles, the Royal Court found the Trustee's decision to make a distribution to H, to enable him to meet his obligations to W, to be entirely reasonable.
Removal of W as beneficiary
At the same time as requesting a distribution from the Trust, H
requested the Trustee to exercise its power under the Trust deed to
declare that W would cease to be a beneficiary following the final
payment to her in accordance with the order of the Court of Final
Appeal. The Trustee decided to accede to this request by H also. In
an affidavit sworn on behalf of the Trustee, the following reason
was provided for the exercise of the Trustee's discretion in
"In light of the substantial sums which have been or will ultimately be paid to the wife out of the Trust, the trustee would regard it as being in the interests of the beneficiaries of the Trust as a whole for the wife to cease being a beneficiary and to be excluded from further benefitting from the Trust".
W opposed her removal as a beneficiary of the Trust, for the following reasons:
- the proposed distribution of HK$770.5 million should properly be regarded as being made to H for his benefit, and not for her benefit at all;
- the figures used by the Hong Kong Courts in arriving at the figure of approximately HK$770.5 million as representing 50% of the Trust assets were historical, and therefore potentially under-representative of the current value of the underlying group of companies making up the assets of the Trust; and
- W still had a role to play in the future in holding the Trustee to account (in particular on behalf of her daughter) even if she did not expect to receive any further benefit from the Trust herself, since she contended that in the divorce proceedings, the Trustee had adopted an "incorrect and unduly partisan approach" because it had effectively aligned itself with H's position in relation to protecting the Trust and its assets.
As to the first point above, the Royal Court declined to ignore the background to the distribution. The decision of the Court of Final Appeal was that the W should receive half of the value of the Trust assets, and the procedure proposed to be adopted was a way of giving effect to that decision. It was quite clear that the distribution, although initially paid to H, was ultimately for the benefit of W.
As to the second argument raised by W, the Royal Court declined to second guess the basis of the Hong Kong Courts' calculations, and did not find the Trustee's decision to refuse to provide further information to W about the performance of the Trust assets since the date of the decision of the Court of Final Appeal to be unreasonable in the circumstances.
As to the third argument, the Royal Court found that the Trustee is a professional trust company and it saw no reason to think it would not act properly and impartially as a trustee following W's removal from the class of beneficiaries.
The Royal Court did not agree that the Trustee had adopted an incorrect or unduly partisan approach in the divorce proceedings. Indeed, it appeared to have been accepted that the position taken by the Trustee at trial and on appeal was a neutral one, albeit that the Trustee had resisted W's contention that the whole of the Trust should be seen as a matrimonial asset available for distribution between H and W, or that the Hong Kong Court should attribute all the Trust assets to H as a resource.
The Royal Court had in its decision in 2011 specifically authorised the Trustee to participate in the Hong Kong divorce proceedings in order that it could put forward all arguments which could be put in favour of the beneficiaries of the Trust (other than H and W) in order to safeguard the interests of those beneficiaries, and it was entirely consistent with that duty that the Trustee should have put forward arguments which emphasised the interests of the daughter as the other principal beneficiary, and which therefore suggested that not all of the Trust assets should be regarded as a resource available to H.
The Royal Court said that it would expect that in many cases, where a trustee does intervene in divorce proceedings in order to protect the interests of the other beneficiaries of a trust, the trustee's arguments will in practice be more supportive of whichever spouse is seeking to argue that the trust assets are not a resource available to one or other of the spouses. Such an approach does not suggest that a trustee is behaving in an incorrect or unduly partisan manner; on the contrary it suggests that such a trustee is doing precisely what it should do, namely highlighting the interests of the beneficiaries other than the spouses.
Decision of the Royal Court - Removal
In considering whether the decision of the Trustee to exclude W was on balance a reasonable one, the Royal Court took the following factors into account.
- W would, in effect, receive half of the Trust fund, giving her a total of HK$832.5m. She would have ample financial resources to last her for the rest of her life and there was no need for her to remain as a beneficiary of the Trust on financial grounds.
- Furthermore, the money was to be paid to her as part of a divorce order intended to achieve a clean break. It was reasonable to take into account that, following a divorce, relations between former spouses may be difficult and the continued presence as a beneficiary of a spouse who has received a capital sum as a clean break is likely to make it more difficult for everyone to put the divorce proceedings behind them and to move forward with their lives.
- It was entirely reasonable in those circumstances that the Trustee should conclude that the remaining assets of the Trust should be held exclusively for the remaining beneficiaries of the Trust.
The Royal Court observed that the power to exclude was an "unusual" power, and that where a trustee was considering its exercise it should "consider the position very carefully". Having said that, the circumstances of this case were, the Royal Court said, "perhaps a classic example of where it may well be appropriate to exclude a beneficiary".
In all the circumstances, the Royal Court had "no hesitation in approving the decision of the Trustee to exclude the wife as a beneficiary as being an entirely reasonable decision".
These two Jersey judgments provide very useful guidance to the approach which should be taken by Jersey trustees (1) in circumstances where assets held in a Jersey law governed trust are considered to be marital property in foreign matrimonial proceedings and (2) in relation to a proposed exercise of the power to exclude a former spouse as a beneficiary under a trust.
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.