British Virgin Islands: Guiding You Through Sham Trusts

When is a sham not a sham?

At a time when trusts are coming increasingly under attack, it is quite common for the validity of a trust to be questioned on the basis that the instrument creating it is a sham document or fails to fulfil the requirements for the creation of a valid trust.

The validity of a trust may be challenged in many circumstances, for example, during a divorce, if you suspect a creditor is hiding assets or if you are a judgment debtor.

It is important to understand when a trust can be considered to be a sham and consequently be void. This guide sets out the defining characteristics of sham trusts and provides an overview of some of the issues. It does not provide definitive advice on the law. You are recommended to seek legal advice on your specific circumstances.


The term 'sham trust' is really a misnomer. In the sham cases it is not the trust that is a sham, but rather the document which purports to evidence the terms of the trust which may be found to have been a sham.

The 'Sham' test

The test for establishing if a transaction is actually a sham was set out in Snook v. London and West Riding Investment Ltd (1967) 2 QB 786, where Lord Diplock identified the elements in a sham transaction as:

"acts done or documents executed by the parties to the 'sham' which are 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 rights and obligations (if any) which the parties intend to create...for acts or documents to be a sham, with whatever legal consequences follow from this, all the parties thereto must have a common intention that the acts or documents are not to create the legal rights and obligations which they give the appearance of creating. No unexpressed intentions of a 'shammer' affect the rights of a party whom he deceived".

This definition was subsequently held to apply to ascertaining whether a trust was a sham, by the Court in Midland Bank plc v Wyatt [1995] 1 FLR 696.


It is clear that the key prerequisite for finding that a transaction is a sham is the parties' common intention (ie the settlor and the trustee/s), that the transaction does not create the rights and obligations that it appears to create.

Although Diplock LJ's statement of a sham in Snook requires a common intention of pretence by all parties to the allegedly sham transaction, there was some doubt as to its application in the trust context in Abacus (CI) Ltd and Grupo Torras SA v Sheikh Fahad Mohammed Al- Sabah 2003 6 ITELR 368 (the 'Esteem' case), in which Withers advised the beneficiaries. The Court dealt with various issues relating to intention in turn:

  • Acceptance of a trust by the trustees
    The Court observed that the fact that in some circumstances a trust will be validly constituted even where it is not accepted by the trustees, is not a sufficient basis for the conclusion that only the settlor's intention is relevant to the concept of a sham trust.
  • An essential element of a trust is the settlor's intention to divest himself of the trust property. If that is not present there is no trust
    The question of the intention of the donor / settlor should be ascertained objectively1. If a settlor enters into a trust document, then objectively he intends to create a trust. It does not matter if subjectively he did not intend to create a trust, as there is no good reason to concentrate on the settlor's subjective intention when he has deliberately misled other parties to the document.
  • An analogy with cases of unilateral mistake
    The Royal Court held that cases on mistake (such as Gibbon v Mitchell [1990] 3 All ER 338) are of no assistance in considering a sham trust because the rationale of allowing relief on the grounds of unilateral mistake is that equity acts on the conscience of the donees of property. It is wrong for volunteers to insist on keeping property once they know that the donor has made a mistake in giving it to them, but the situation is different where the donor has deliberately led the beneficiaries into thinking that he has conferred a benefit on them and has effectively lied to them and the trustees. The Court asked the question 'Why should equity come to the donor's assistance in those circumstances?'


The issue of control of the trust assets is important in considering whether or not there is evidence of a sham transaction. However, if the Court considers that at the outset the trust was not intended to be a sham, then the control that the trustee allows the settlor to exercise over trust assets subsequently could be said to be evidence for a claim of breach of trust rather than direct evidence of a sham trust. In the Esteem Case, the fact that the trust was established in 1981 pursuant to advice from respectable City solicitors, almost a decade before the fraudulent conduct of the settlor, was strong evidence in itself that the settlor did not establish the trust to put assets beyond the reach of those whom he later defrauded. Nonetheless, the Court gave some helpful comments on the general approach to trusts and how one might expect them to be administered.

The Court noted that:

  • Great trouble had been taken over the drafting of the trust deed (it had gone through various drafts and was settled by Leading Counsel and Jersey advocates) and so it was unlikely that the Jersey trustee – Abacus – intended to ignore the deed.
  • It was unlikely – although not impossible – that Abacus, as a professional trustee, intended to act otherwise than in accordance with the trust deed.
  • Abacus had not met with the settlor – Sheikh Fahad – during or after the establishment of the trust – all communications had been through his London solicitors, Stephenson Harwood.
  • No one sought assurances from Abacus that they would always comply with Sheikh Fahad's requests nor did Abacus offer any such assurances.
  • Abacus' trust files demonstrated that they had independently considered each request made by Sheikh Fahad and his son through his solicitors, Stephenson Harwood,
  • There was nothing in the subsequent conduct of Abacus that led the Court to doubt that at the time of execution of the trust deed Abacus intended to act as a proper trustee.

The judgment of the Royal Court in the Esteem case is the most comprehensive review of the law relating to sham trusts and the considerations that the court must apply when considering whether the administration of a trust is such that it should be set aside for the benefit of a creditor of the settlor. This decision has been followed by the English Courts, notably in Shalson v Russo (2003) 8 ITELR 435, Whaley v Whaley [2011] EWCA Civ 617 and Charman v Charman [2007] EWCA Civ 503, in which Withers acted for the husband.

What is not a sham

The following, whilst they may appear on first glance to be shams will not be considered to be so:

  • Entering into a transaction with an improper or illegal motive, as long as the trust documents indicate an intention to carry out the trust which has been created for an immoral/ illegal purpose; and
  • A failed attempt to create a trust.

Furthermore, there must be an intention to mislead or give a false impression. The question of whether or not that amounts to dishonesty is not relevant to the issue of sham.


The judgment in the Esteem case shows that even in cases where a trust has been administered "not always very cleverly", there will be no sham if the Court can find no evidence of an intention that the particular trust assets should remain in the beneficial ownership of the settlor. Furthermore the approach of the courts in these cases show that the prerequisite of a common "shamming" intention of all parties, as laid down in Snook, is necessary in order for the court to make a finding that a trust is a sham.

Whilst this makes finding that a trust is a sham difficult, as Withers has acted on some of the leading cases involving allegations of sham trusts (Esteem, Charman), we can offer you specialist advice if you know or suspect that a trust which holds assets which you are pursuing is a sham. If the evidence suggests that the trust is legitimate and not a sham, we will be able to offer you advice on alternative methods to achieve your goal.


1 Twinsectra v Yardley [2002] 2 All ER 377

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.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Practice Guides
by Mondaq Advice Centres
Relevancy Powered by MondaqAI
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions