Trustees' discretion and poor liquidity in tough times are not enough to dissuade a still robust implementation of Thomas v Thomas-style 'judicial encouragement'
The decision in M v W (Ancillary Relief) [2010], in which Charles Russell acted successfully for the wife, is an interesting example of the extent to which offshore trustees can be 'judicially encouraged' by the English Family courts to realise and distribute capital on divorce, including where there are relatively few liquid assets among the trust's property. The case also involved a post-marital/nuptial agreement which was a relatively minor feature in the decision. It should be noted that the decision in M v W was post-Macleod and pre-Radmacher.
Facts
The wife, at the time of the final hearing in early 2010, was aged 42 and the husband was aged 66. She was domiciled and resident in England. He was domiciled in New Zealand (he claimed) but habitually resident in England. The parties had one son, aged 4, born in 2005. The parties had married in April 2002 in New Zealand but had been in a relationship since 1994.
The nature and extent of the parties' pre-marital cohabitation and whether there was a 'seamless' transition to marriage was a matter of dispute between them. The parties had met in May 1994 when the wife moved into the husband's home as a lodger. By July 1994 the parties had started a relationship. It was the husband's case that they did not truly cohabit until after the marriage and, in saying so, he relied on a separation of three months in 2001 due to an argument caused by the fact that the wife wanted to marry and have children whereas the husband did not. He had previously been married and had two adult children from that relationship. The wife maintained that they had been living together since July 1994 and that their cohabitation moved in a seamless transition to marriage.
Throughout the above period the wife had no assets and very little income. Prior to the marriage she had worked in the wine trade for a period, earning c.£35,000 p.a. gross. The husband also had very few assets in his own name. However he was, already by 1994, the managing director of a travel company which he had founded years earlier ("the Company") and from which he enjoyed many valuable benefits in kind. With the early profits of his commercial success, the husband had contributed extensively to two offshore trusts which had been established by earlier generations of his family in Jersey ("the Trusts"). At one point in the mid-90s the husband had transferred c.98% of the Company's shares to the Trusts in equal shares. The other minor, c.2%, shareholding was left in the husband's sole name. The Trusts had been established by the husband's family but it was notable that from an early stage the majority of the Trusts' assets had come from the husband and his commercial success.
The wife issued a petition for divorce in May 2004. Subsequent negotiations between the parties and their legal representatives resulted in a reconciliation and the drafting of a 'post-marital deed' in August 2004 which sought to regulate the parties' lives going forwards. However it did not deal with what should happen in the event of separation/divorce. Agreements in the deed included:
- That the parties would not have children;
- Provision for or the husband to pay to the wife £100,000 to be invested in a buy to let flat to provide an income for her during the marriage and a sense of security;
- For the husband to pay to the wife further sums comprising £10,000 for a car and £5,000 towards a proposed wine business;
- For the husband to provide a monthly housekeeping 'allowance' for the wife and that the husband would meet certain outgoings.
The parties reconciled and the deed was executed and implemented in part, although the proposed buy to let property was never purchased. The husband provided the wife with her 'allowance' by way of monthly payments and, in November 2007, he paid a lump sum of £70,600 which he said was intended to cover the allowance in advance to December 2009. The husband unilaterally deducted £300 per month from the wife's allowance from June 2006 in relation, he said, to food and in view of the fact that he did not like what she cooked and that they practically each ran their own households in the matrimonial home. He did, however, pay an additional £15,000 per annum to cover the costs of a nanny once the parties' child was born.
It was also notable that the husband's salary (if not his BIKs) from the Company decreased significantly after 2004. The husband was earning c.£123,000 p.a. until 2003 when this was reduced to c.£40,000 p.a. The husband claimed this was the impact of recession and tough times in the travel market. The wife claimed that the Company was paying the husband much less than it could, and that it was a device by him to undermine any divorce claim which she might resurrect later.
The most important break from the prescriptions of the deed was in 2005 with the birth of the parties' son, which the husband said had not been planned.
The marriage broke down again in 2008 and the wife issued her second divorce petition in June 2008.
Asset structure by the time of the ancillary relief proceedings
Following the breakdown of the marriage, both parties continued to live at the former matrimonial home in Chelsea. The wife registered Notice of Matrimonial Home Rights on this at the Land Registry. The parties also had the use of a country retreat in Dorset and an estate in New Zealand but on the breakdown of the marriage the husband sought to exclude the wife from using these.
The Company owned the Chelsea and Dorset properties and they were enjoyed by the husband as benefits in kind to live in. The running of the Company was instead done from a rented office in central London. When asked why the Company, which was ostensibly in the travel business, owned these properties for residential use whilst having to rent its office premises, the husband replied that it was for property investment purposes and use as collateral. The Company itself was still owned by the Trusts. The other minor, c.2%, shareholding was still in the husband's sole name. The New Zealand estate was owned directly by the Trusts. All three properties and the Company had been acquired as a result of the husband's efforts prior to the marriage and transferred by him to the Trusts' ultimate ownership. The wife claimed that she had helped maintain all three properties, and the husband's efforts on behalf of the Company, in a non-financial way.
The New Zealand estate had an agreed value of £1,079,232, mortgage-free. The former matrimonial home in Chelsea had an agreed value of £2.925m. The country retreat in Dorset had an agreed value of £2.325m.
The parties disagreed on the value of the Company and submitted competing expert accountancy reports. It was clear that the Company's most important and valuable assets were the Chelsea and Dorset properties. The husband provided evidence (including a witness statement from the Company's financial director) to show that the Chelsea and Dorset properties formed part of the security held by Barclays Bank and other third parties in respect of the Company's trade debts and various bonds. The result, he said, was that the Trusts could extract no capital liquidity from the Company to fund any capital distribution for the wife on divorce. The husband's expert accountant agreed, and put capital liquidity in the company at £0 based on "prudent commercial considerations" in a recession. He did accept however that the company had a distributable pool of funds amounting to c.£2.2m. The wife's expert accountant put the company's capital liquidity at £4.2m and said that the Company could sell at least one of the Chelsea and Dorset properties. The two experts therefore differed considerably over the extent of the Company's need for security. They also differed over the influence wielded by the husband internally within the Company. It was submitted on behalf of the wife that the husband had control over both the company's board and the trustees of the two offshore trusts.
The assets held directly by the husband and wife themselves were still very limited by the time of the ancillary relief proceedings. The wife had c.£14,000 in cash, some modest chattels and a pension with a CETV value of c.£7,500. The husband summarised his net position to be £8,980, cash. Both said they would have negative wealth after legal costs of the final hearing were paid.
The wife had trained during the marriage as a Master of Wine, qualifying in 2004. She wanted to pursue her career through her own business, providing wine news and tastings. She had set up her own company in 2005. Although it was initially a success, it remained a start-up and owed her in excess of £28,000 by the time of the ancillary relief proceedings. In addition, she had cut her working hours because of her childcare responsibilities. The wife stated that she was keen to develop her business and devote time to it and, as such, instructed an employment expert to produce an employment report to show her future earning capacity. The expert concluded that her earning capacity was small, in the region of £20,000 to £30,000 p.a. gross. As referred to above, the husband's salary from the Company was not much more than this (c.£40,000 p.a. gross) by the time of the ancillary relief proceedings. Although the wife said that this was much less than the Company could and should pay him, it was clear that his earning capacity was limited in view of his age. He said he would soon be earning nothing and merely hoping to live off the BIKs to some more limited extent, perhaps as a caretaker for the properties.
The parties' cases
The husband said that the wife and son should be re-housed in central London for between £375,000 and £425,000 and that the Trusts could provide no more than that, whilst he would continue to enjoy the benefit of the three properties described above by virtue of his employment with the Company. He argued that this provision was over-generous in view of the post-marital deed which he said should be regarded as the magnetic factor in the case in view of the Privy Council decision of Macleod.
The wife produced a budget to decorate a new flat of c.£30,000 and stated that a capital sum of £1.1m was required to fund the purchase and incidental costs in Chelsea, where the parties' son was at school and where the wife claimed he was settled. It was argued on her behalf that the post-marital deed should be seen as merely part of the marital history but the court should not be constrained by it from exercising the full range of its discretionary powers as to the outcome of the wife's application. Leading Counsel on behalf of the wife also argued that the husband's claim as to the wife's housing need would result in the parties' child enjoying a vastly different standard of living with his father compared to his mother, and that the wife's expert accountancy evidence had shown that the Trusts could extract liquid cash from the Company to provide the wife and son with a better housing fund. The Trusts could also sell the New Zealand estate. Needs and liquidity were thus key, alongside the Trusts' willingness and ability to provide that liquidity. The wife argued that the trustees were likely to provide sufficient liquidity from the above sources if they were 'judicially encouraged' in line with the old authority of Thomas v Thomas [1995].
In terms of income, the husband's case was that the wife should be self-supporting and that he could not afford to pay anything anyway given that the Company had been forced to reduce his salary for good reason. On the basis of a needs-based budget analysis, the wife sought periodical payments of c.£37,000 p.a.
The position of the Trusts
The Trusts' trustees (St. George's Trustees, who were trustees of both the Trusts) essentially sat on the fence, stating that they would consider any agreement reached by the parties prior to the final hearing and take note of any decision made by the court. Pressed in correspondence before the final hearing, they said they would carefully consider a distribution in order to enable a settlement of the divorce proceedings provided that such settlement was achievable and would not cause irreparable harm to the assets of the Trusts, and provided that the other potential beneficiaries did not oppose it. The parties' solicitors then wrote a joint letter of request for a provisional indication of quantum from the Trusts. The reply stated that it would not be possible to realise any of the Trusts' assets in order to realise liquidity, an opinion which was said by the trustees to be based on their consultation with the board of the Company. The wife argued that this showed the extent to which the husband had influence over both the Trusts' trustees and the Company's board.
The history of the Trusts was complicated and they were arguably 'dynastic'. The first trust was set up in 1975 by the husband's first wife's godfather; the second was established by the husband's mother in 1977. The trusteeship of both had passed from a professional/family friend trustee to the husband's brother until 2004 and, since then, it had been with St. George's Trustees, a firm of professional trustees. Both settlors had written letters of wishes stating that the trustees should be guided by the husband in respect of investments and distribution.
The potential beneficiaries of the Trusts were the husband, his two adult children from his first marriage, his first wife, his brother and the brother's four children. The wife became a beneficiary on marriage (although in the case of one of the Trusts this was open to dispute on the drafting of the trust's deed) and the parties' son on his birth. By the time of the final hearing there had been only two distributions from the Trusts, one for the education of the husband's brother's son and the other for a similar 'Education Fund' in the region of £100,000 for the parties' son. This £100,000 had not been spent by the time of the ancillary relief proceedings and was, the husband claimed, held on sub-trust for the parties' son by his brother. He said that this demonstrated the sanctity of the trusts.
The husband likened himself to nothing more than a benevolent adviser of the Trusts. He pointed out that he had never received a distribution from them; he merely ultimately enjoyed some of their property as BIKs. Whilst it was accepted by the wife that the trustees had not been bound by the husband's preferences, she submitted that in reality they had been historically guided by him to a very large extent. She said that there was no evidence that the Trusts did anything other than buy the Company and the New Zealand estate from the husband at his request, and hold on to them in a way designed above all to suit and maintain his lifestyle. She pointed to the fact that the Company was renting its office premises and that there appeared to be no evidence that alternative investments or potential rates of return or income had been considered by the Company's other directors and the trustees.
Judgment
The final hearing took place before Macur J in April 2010. Following Thomas v Thomas and on the basis that the Trusts could and probably would liquidate the New Zealand estate, Macur J ordered the husband personally to pay the wife a lump sum of £800,000 by January 2011 and spousal periodical payments of £12,000 p.a. plus £7,500 p.a. child periodical payments for so long as the wife continued to live in the former matrimonial home (i.e. until the husband had received the lump sum of £800,000 from the Trusts/Company to pass on to the wife). Thereafter payments were to be made at an increased level of £20,000 p.a. for the wife plus £10,000 p.a. for the parties' child until he reached the age of 18 years or ceased tertiary education, whichever was the later. The spousal periodical payments order was for joint lives.
It was also ordered that the lump sum was to be paid to the wife outright rather than being held on sub-trust for the wife's benefit or for the wife's benefit for a limited period of time, such as their son's minority, in a Children Act 1989 Schedule 1-style arrangement.
The judge held that the school fees for the parties' son could continue to be met out of the sub-trust distribution made previously to the 'Education Fund'.
Precedent
This judgment was at the top end of the approach and bracket for a case of its kind, where a potential beneficiary of a trust and the trust's trustees are 'judicially encouraged' by an order directed solely against the potential beneficiary to pay a lump sum requiring liquidation of assets held by the trustees on the trust.
M v W is notable for its robust application of the Thomas v Thomas line of authorities. Earlier decisions had appeared to limit the extent to which the court should attempt to 'judicially encourage' independent trustees to make payments to potential beneficiaries so that the beneficiary can pay an ancillary relief order.
In Thomas v Thomas Glidewell LJ held (citing O'D v O'D [1976], B v B [1982] and Browne v Browne [1989]) that "the court should not put improper pressure on the trustees to exercise [their] discretion for the benefit of the wife" and that the court should look at the reality of the situation "if on the balance of probability the evidence shows that, if trustees exercised their discretion to release more capital or income to a husband, the interests of the trust or of other beneficiaries would not be appreciably damaged, the court can assume that a genuine request for the exercise of such discretion would probably be met by a favourable response". More recently, Munby J in A v A (St George Trustees Ltd, Interveners) [2007] said that "the court can encourage, it cannot compel" and that 'judicious encouragement' "must not cross the line into improper pressure".
Conclusion
From the assets involved in the case, this was clearly a large sum to have been awarded outright against the husband. Macur J held that it was entirely realistic to foresee the sale of the New Zealand property, owned directly as it was by the Trusts.
This case should make offshore trustees and UK-based beneficiaries, settlors and protectors, consider even more carefully how they administer their trusts and structure their assets. Trustees should seek specialist family law advice if only in an attempt to save on the legal costs which they will likely incur if they become involved in the matrimonial proceedings. In M v W the trustees were not joined as parties to the proceedings however they did require independent legal advice and became engaged in lengthy correspondence with the parties and their advisers, all of which correspondence was crucial evidence and analysed in detail. The costs of this alone were not insubstantial.
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