ASSET PROTECTION: NUPTIAL SETTLEMENTS AND CLAIMS AGAINST TRUSTS. Richard Wilson

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1 ASSET PROTECTION: NUPTIAL SETTLEMENTS AND CLAIMS AGAINST TRUSTS Richard Wilson 1. Introduction 1.1 Parties to litigation frequently encounter situations in which the opposing party claims to have no assets to satisfy a judgment due to that opposing party having previously settled his assets on trust. Asset protection of this type is relatively common and therefore challenging such structures has become an increasingly important aspect of litigation in recent years. 1.2 In this paper, I intend to provide an overview of some of the main ways in which such asset protection structures may be challenged, and some of the difficulties that may be encountered by a party seeking to do so. As a litigator, I make no apologies for focusing on the potential challenges to such structures as such an approach will hopefully assist in highlighting for wealth planning lawyers the potential vulnerability of proposed structures. 2. The Matrimonial Causes Act One of the contexts in which the issue of asset protection arises most frequently is that of financial provision on divorce. Under s.24 of the Matrimonial Causes Act 1973, the Court has wide powers to vary the terms of settlements which fall into the category of ante-nuptial or post-nuptial. 2.2 In recent years, the Courts have been keen to exercise this jurisdiction. In order to do so, they must be satisfied that the settlement is nuptial in nature. Essentially, a settlement will be nuptial in nature if it is made on one or both of the parties as a party to the marriage. 1

2 2.3 In other cases where they are unable to vary the terms of a trust (because it does not fall within the scope of their jurisdiction) they have been prepared to treat assets that have been settled as belonging to one of the parties to the marriage under s.25 MCA The Court will be prepared to do this in cases where it considers that the trustees will make assets available to the party to the marriage, either at the mere request of the party, or as a result of the order of the Court. The recent decision of the Court of Appeal in Whaley v. Whaley [2011] EWCA Civ 617 is a good example of such a case. In Whaley the husband was a beneficiary of certain offshore settlements. When assessing the provision that should be made for the wife on divorce, the judge at first instance took into account assets held in the offshore settlements and made an order which could not be satisfied without recourse to the trust assets. On appeal, it was argued that the judge had been wrong to treat the trust assets as being available to the husband and that the order went too far in that it exerted improper pressure on the trustees to exercise their discretion in favour of the husband, so as to ensure that he could satisfy the order. The Court of Appeal held that in view of the judge s finding of fact that were likely to do whatever the husband asked including making capital available to him she had had no choice but to treat the trust assets as his. The pressure being exerted by the order was not, in the Court of Appeal s view, undue. Whaley does not represent any major shift in principle, but it serves to demonstrate that the Courts are prepared to take a robust approach concerning offshore trusts and has caused a degree of consternation amongst trust professionals. 2.4 The adoption of such a robust stance in relation to trusts (particularly offshore trusts) by the English Court should come as no surprise, given certain judicial comments that have been made. For example, in J v V (Disclosure: Offshore Corporations) [2004] 1 FLR 1042) Coleridge J stated as follows: 2

3 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. 2.5 A more moderate note was struck by Singer J in SR v CR (Ancillary relief: family trusts) [2009] 2 FLR 1083 in which he said at paras 32-33: The court can, of course, only make an order with that effect [a lump sum order] if it anticipates that the requisite assistance [i.e. trustees making an advance to the paying party] will, in fact, be forthcoming when push comes to shove, notwithstanding what may be quite strenuous expressions of disinclination or indeed refusal on the part of the trustees/other shareholders to adopt a generous response. [33] The tension between the court and (in this case) the trustees can only be resolved ex post facto, and so a key component of the court's role is to determine on whatever evidence is available how the trustees are likely to exercise their discretion in the situation postulated by the award which the court has it in mind to make. That balance involves an exercise in both fact finding and prediction, and therefore necessarily a large element of uncertainty. 2.6 It should be noted that when taking the trust assets into account in this way, the Court does not have to be satisfied that the settlement is a sham (as to which see below). The Court may bring the trust assets into account on the basis that there is a likelihood that trust assets will be made available to a party to the marriage. In certain cases there may be factual circumstances which might give rise to a suspicion that the trust is a sham (for example, the trustees blindly following the instructions of a settlorbeneficiary) but it will inevitably be far more difficult to convince the Court that the settlement is a sham. 3. The Insolvency Act

4 3.1 The ability of the Court to affect the terms of trusts under the Matrimonial Causes Act 1973 is obviously limited to the context of matrimonial law. It is worth considering briefly some of the more general means of attacking a trust structure that are available under insolvency legislation. 3.2 Section 339 of the Insolvency Act 1986 enables transactions at an undervalue (such as a gift into a settlement) to be challenged in appropriate circumstances. It provides as follows: (1) Subject as follows in this section and sections 341 and 342, where an individual is adjudged bankrupt and he has at a relevant time (defined in section 341) entered into a transaction with any person at an undervalue, the trustee of the bankrupt's estate may apply to the court for an order under this section. (2) The court shall, on such an application, make such order as it thinks fit for restoring the position to what it would have been if that individual had not entered into that transaction. (3) For the purposes of this section and sections 341 and 342, an individual enters into a transaction with a person at an undervalue if (a) he makes a gift to that person or he otherwise enters into a transaction with that person on terms that provide for him to receive no consideration, (b) he enters into a transaction with that person in consideration of marriage [or the formation of a civil partnership], or (c) he enters into a transaction with that person for a consideration the value of which, in money or money's worth, is significantly less than the value, in money or money's worth, of the consideration provided by the individual. 4

5 3.3 Section 339 is of relatively limited assistance, due to the following: (a) a claim only arises where the transferor has been adjudged bankrupt; (b) a claim can only be brought by the trustee in bankruptcy; and (c) there is a time-limit of 5 years from the date of the transfer. 3.4 Of greater general assistance is s.423 Insolvency Act 1986: 423 Transactions defrauding creditors (1) This section relates to transactions entered into at an undervalue; and a person enters into such a transaction with another person if (a) he makes a gift to the other person or he otherwise enters into a transaction with the other on terms that provide for him to receive no consideration; (b) he enters into a transaction with the other in consideration of marriage [or the formation of a civil partnership]; or (c) he enters into a transaction with the other for a consideration the value of which, in money or money's worth, is significantly less than the value, in money or money's worth, of the consideration provided by himself. (2) Where a person has entered into such a transaction, the court may, if satisfied under the next subsection, make such order as it thinks fit for (a) restoring the position to what it would have been if the transaction had not been entered into, and (b) protecting the interests of persons who are victims of the transaction. (3) In the case of a person entering into such a transaction, an order shall only be made if the court is satisfied that it was entered into by him for the purpose (a) of putting assets beyond the reach of a person who is making, or may at some time make, a claim against him, or 5

6 (b) of otherwise prejudicing the interests of such a person in relation to the claim which he is making or may make. (4) In this section the court means the High Court or (a) if the person entering into the transaction is an individual, any other court which would have jurisdiction in relation to a bankruptcy petition relating to him; (b) if that person is a body capable of being wound up under Part IV or V of this Act, any other court having jurisdiction to wind it up. (5) In relation to a transaction at an undervalue, references here and below to a victim of the transaction are to a person who is, or is capable of being, prejudiced by it; and in the following two sections the person entering into the transaction is referred to as the debtor. 3.5 Section 423 allows a victim (i.e. a person prejudiced, or capable of being prejudiced by the transaction) to challenge it, and not merely a trustee in bankruptcy. Indeed, there is no need for the transferor to have been declared bankrupt or to be insolvent. There is no specific statutory time limit 1. It is, however, necessary to show that the transaction is one intended to defraud creditors. Whilst the intention is described as being to defraud creditors, it is clear from s.423(3) that it is unnecessary to demonstrate fraud in the conventional sense: it is necessarily only to show that there was an intention to put assets beyond the reach of creditors (current or future) or to prejudice the interests of a person who is making or may make a claim. This is extremely wide, as demonstrated by the case of Re Butterworth (1889) 2 Ch D 889 CA 2. 1 A claim under s.423 is, however, subject to the provisions of the Limitation Act It is unclear whether the relevant period is 6 or 12 years, see Hill v. Spread Trustees Limited [2007] 1 WLR The case relates to previous legislation which had a similar test. 6

7 3.6 The intention test is therefore a relatively low one in practice. Where a client has sought advice as to structuring in order to protect assets against creditors, the requisite intention is established. 3.7 Whilst I have referred to the English provisions, it should be noted that most of the principal common law jurisdictions have legislation to similar effect, often based on the English Bankruptcy Act The use of an offshore structure will therefore not provide any greater degree of protection in most cases, save possibly for the practical difficulty for the claimant in having to litigate in a foreign jurisdiction Sham Trusts 4.1 The foregoing challenges all presuppose the existence of a valid trust. However there are situations in which the form of asset protection adopted is the creation of a sham which appears to be a valid trust, but which in reality is an arrangement whereby trust property is held by nominees for the true owner, the settlor. The intention is to give the impression that the settlor has no beneficial interest in the assets, whereas the reality is very different. 4.2 In Snook v. London & West Riding Investments [1967] 2 QB 786, Diplock LJ stated that a sham : means 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 legal rights and obligations (if any) which the parties intend to create. 3 There are, however, certain jurisdictions that have adopted a policy of providing a greater degree of asset protection, e.g. the Cook Islands. 7

8 4.3 An obvious example in this context is where a party to a marriage ( H ) is involved in ancillary relief proceedings. During the course of the financial disclosure process, he produces a trust instrument which purports to show that years previously, he settled assets onto a trust for the benefit of third parties 4. As a result, he is able to argue in the ancillary relief proceedings that he is no longer beneficially entitled to the assets. In reality, however, he remains the beneficial owner and the whole arrangement is merely designed to conceal ownership from his wife ( W ) and the Court. 4.4 Clearly, in such a situation, W and her advisers will wish to seek to challenge the validity of the trust created by H, so that the property purportedly settled can be included in that available for division on divorce. 4.5 The first question for W and her advisers is that of what they need to show in order for the trust to be held to be a sham. In Snook v. London & West Riding Investments [1967] 2 QB 786 (a case concerning a an agreement for the sale of a car) the Court of Appeal stated the following: 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. 4.6 Thus, as a matter of general law, it is necessary to show that the parties to the document in question have a common intention that the real arrangement is not that reflected by the documents. It has been described by the Court of Appeal in Hitch v. Stone [2001] EWCA Civ 63 as being an intent to give a false impression. 4 It is, of course, assumed for these purposes that the trust is not one that is within s.24 of the MCA

9 4.7 It is important to distinguish between intention and motive in this context as impropriety of motive alone will not provide grounds for treating a transaction as a sham. (see: Miles v. Bull [1969] 1 QB 258). If in our example, H genuinely seeks to put assets beyond the reach of W and the Court, then the trust will not be a sham as his intention is to create a genuine trust so that he no longer has any interest in the assets. His motive for doing so may be improper but the trust is genuine In the context of a contract, the principle of common intention is easily applied: a document creating mutual rights and obligations cannot be held to do otherwise simply because only one of the parties says that he did not actually intend for the contract to take effect. The other party has given consideration and acquired rights under the contract. Only if both sides shared a common intention to deceive third parties will there be a sham. 4.9 The position is, however, more complicated in relation to a trust because of the potential involvement of a number of different parties: the settlor, the trustees, the beneficiaries and in the case of some trusts, the protectors. Do all of these various people need to share in the common intention in order for the trust to be a sham? 4.10 This is a question that has caused the Courts a degree of difficulty. The 17 th Edition of Lewin on Trusts expressed the view that it was unnecessary for the trustees to share the requisite intention: it was enough merely for the settlor to intend to deceive third parties. The decision in Midland Bank v. Wyatt [1996] BPIR 288 appears to provide some support for that proposition: in Wyatt husband and wife owned a property in joint names. They subsequently executed a declaration of trust giving the husband s beneficial interest to the wife and children. The Court accepted that the wife 5 In such a case there may well be other ways of recovering the property, for example, under s.423 of the Insolvency Act

10 did not have any intention to deceive third parties, but held that it was a sham in any event as the husband had had the requisite intention However, in Shalson v. Russo [2003] Ch 281, Rimer J stated the following (at [190]): When a settlor creates a settlement he purports to divest himself of assets in favour of the trustee, and the trustee accepts them on the basis of the trusts of the settlement. The settlor may have an unspoken intention that the assets are in fact to be treated as his own and that the trustee will accede to his every request on demand. But unless that intention is from the outset shared by the trustee (or later becomes so shared), I fail to see how the settlement can be regarded as a sham. Once the assets are vested in the trustee, they will be held on the declared trusts, and he is entitled to regard them as so held and to ignore any demands from the settlor as to how to deal with them. I cannot understand on what basis a third party could claim, merely by reference to the unilateral intentions of the settlor, that the settlement was a sham and that the assets in fact remained the settlor's property. One might as well say that an apparently outright gift made by a donor can subsequently be held to be a sham on the basis of some unspoken intention by the donor not to part with the property in it. But if the donee accepted the gift on the footing that it was a genuine gift, the donor's undeclared intentions cannot turn an ostensibly valid disposition of his property into no disposition at all. To set that sort of case up the donee must also be shown to be a party to the alleged sham. In my judgment, in the case of a settlement executed by a settlor and a trustee, it is insufficient in considering whether or not it is a sham to look merely at the intentions of the settlor. It is essential also to look at those of the trustee. 10

11 4.12 It is therefore necessary to demonstrate that the purported trustee shares the intention that the supposed trust property is not held on the terms of the trust instrument, but for the settlor. It has been suggested, however, in certain cases that where a trustee is reckless or ignorant as to the terms of the trust, that may be sufficient intention for the purposes of establishing a sham (see: Re Reynolds (2007) 10 ITELR 1064; A v. A [2007] 2 FLR 467) 6. This may provide a way of explaining the decision in Wyatt It is submitted that it makes perfect sense that there should be a requirement that in order for the trust to be a sham, the trustees have to intend not to give effect to the trusts as declared. When the trust property is transferred to them, they will ordinarily give effect to the trusts and will act in relation to the beneficiaries as they should according to the trust instrument. In such circumstances, the settlor cannot assert as against an innocent party (such as a trustee or beneficiary) that there is no trust on the basis of his own sham (see Re Yates (a Bankrupt) [2005] BPIR 476 at [219]- [220]) Whilst it is now clearly established that the trustees must also be a party to the sham, the same is not the case as regards the beneficiaries: they are volunteers whose consent or involvement in the transaction is unnecessary. However, in practice there will usually be some form of acquiescence by the supposed beneficiaries, as otherwise they might enforce the trusts, and neither the trustee nor settlor can rely on their sham to defeat such a claim. Therefore a successful sham will require there to be compliant beneficiaries involved. A protector is likely to be in a similar position to that of a beneficiary, although this might be tested where there is a professional remunerated protector. In practice, a sham trust will generally involve as few people as possible in order to avoid difficulties It is worth noting that the requisite intention to give a misleading impression must be show at the time of execution of the trust. If at the time 6 See also Minwalla v. Minwalla [2004] EWHC 2823 (Fam) 11

12 of creation of the trust, the settlor and the trustees intend to create a valid trust, they will create rights and obligations which cannot be reversed simply because they both change their minds 7. However, as will be seen below, if subsequent to the purported creation of the trust they act inconsistently with the trust, that is good evidence that the intention to create it was lacking at the outset Returning to the situation described at paragraph 4.3 above, the crucial question for W is how she can go about attacking the sham trust The foregoing discussion of the legal principles demonstrates that the most crucial thing is to demonstrate by reference to the evidence that H and the trustee both had the requisite intention to mislead. The standard of proof is, of course, the ordinary civil standard of the balance of probabilities but the Courts have held that where serious allegations of impropriety are made, such allegations are inherently improbable and therefore convincing evidence is required A challenger to a sham trust is always likely to encounter the practical difficulty that the parties to the sham will often keep matters between themselves and create little in the way of extrinsic evidence to demonstrate their true intention at the time of execution of the sham documents Firstly, because of the need to prove the intention of both settlor and trustees, it will invariably be easier to prove a sham in cases where there has been a unilateral declaration of trust by the settlor, as in such a case there is no other party who has had to share the intention to mislead. Even better from the challenger s perspective is a situation where the settlor has 7 The extract from Shalson v. Russo suggests that if the trustee changes his intention subsequently, that will be sufficient, but it is hard to see how this can be the case. If the trust has been established, the beneficiaries become the beneficial owners. A subsequent disregarding of the trusts so as to benefit the settlor may be a breach of trust, but it cannot undermine the existence of the trust itself. 12

13 prepared the declaration himself, without the benefit of legal advice, which might tend to suggest some form of genuine intention to create the trust In order to make her case, W will have to collect evidence which demonstrates that the trust is intended to be nothing more than a mere piece of paper designed to be waved by H to protect him from the Court. The strongest evidence available usually relates to the way in which the settlor and trustee have actually conducted the business of the trust. In cases where trusts have been challenged successfully as shams, there is usually a wholesale disregard of the terms of the written documents, with the parties actually acting in accordance with the real intention In Midland Bank v. Wyatt [1996] BPIR 288, Mr Wyatt declared a trust of his interest in his home for the benefit of his wife and children. Notwithstanding the declaration, he negotiated loans with the Bank on the basis of his providing security in the form of his interest in the property. The Court held that: In short, subsequent to the execution of the trust deed nothing had changed in Mr Wyatt's behaviour or attitude with regard to his dealings involving [the property]. I do not believe Mr Wyatt had any intention when he executed the trust deed of endowing his children with his interest in [the Property] which at the time was his only real asset. I consider the trust deed was executed by him, not to be acted upon but to be put in the safe for a rainy day 4.22 Similarly, in Minwalla v. Minwalla [2004] EWHC 2823 (Fam) the husband settled shares in a Panamanian company onto a Jersey trust. He gave two inconsistent letters of wishes to the trustees, one of which stated that he was the principal beneficiary, the other stating that his sons were to benefit. In addition, the Judge (in the Family Division) held that H has exercised total control over the affairs of the companies and their bank accounts and therefore never had the slightest intention of respecting even the formalities 13

14 of the trust and corporate structures that had been set up at his direction. His purpose was only to set up a screen to shield his resources from other claims or unwelcome scrutiny and investigation In Minwalla, the settlor was undone largely by his exertion of control over the trust assets. It should be emphasized that the settlor exerting control does not, of itself, indicate that the trust is a sham. In many jurisdictions, it is common for the settlor to retain numerous powers under the terms of the trust. The crucial point in Minwalla was that for the settlor to exercise such power was utterly inconsistent with the terms of the trust. Similarly, many offshore trusts will be set up in such a way as to be extremely flexible, allowing the addition and exclusion of beneficiaries and wide discretionary powers enabling the trustees to do whatever they wish. Very often, the exercises of the discretionary powers will follow relatively closely the terms of the settlor s letters of wishes. Again, this does not necessarily indicate that the trust structure is a sham provided the terms of the trust permit the trust to operate in this way Similarly, the conduct of the trustees as regards the beneficiaries will be relevant: if the trust is a discretionary trust and the trustees have never exercised their discretion (or have only ever done so in favour of the settlor) this may be of assistance. The absence of the indicia of the proper administration of the trust will not, of itself, prove that it is a sham, but will obviously be evidence that the trust property has been dealt with in a manner inconsistent with the terms of the trust instrument One of the practical issues that W will have to deal with is that of obtaining disclosure of the information she requires to mount her challenge. Disclosure from H should be obtained as part of the ordinary process. However where the trust is administered by offshore trustees, the ability to obtain enforcement of an order for disclosure of information will differ from jurisdiction to jurisdiction. 14

15 4.26 If H and/or the trustees obstruct the disclosure process, such conduct may enable W to argue that the Court should draw adverse inferences. 5. Offshore Trusts and Conflicts of Law 5.1 In many of the cases in which challenges are made to asset protection arrangements (whether by an argument of sham or through the relevant legislation) the trustees will be resident in an offshore jurisdiction and the purported trust will be expressed to be subject to the law of that jurisdiction. This can present a number of difficulties for the challenger. 5.2 The general difficulty faced by challengers is that whilst they may be able to obtain orders requiring trustees to carry out certain acts (for example, to give disclosure of information, or to make provision for a particular party) those orders are worthless if they cannot be enforced. Take, for example, a situation involving a non-uk resident trustee with no assets in the jurisdiction: unless the local court will enforce an order of the High Court, it is difficult to see how the trustee can be made to comply. 5.3 The enforcement of English orders has been an issue of great importance in many offshore jurisdictions in recent years, particularly as the Family Division of the High Court has been increasingly willing to make orders against affecting offshore trustees. 5.4 Many jurisdictions have reacted to the activism of the High Court by introducing legislation which restricts the ability to enforce foreign orders directly. The jurisdictions that have done this include the BVI, the Cayman Islands, Jersey, Guernsey and Bermuda. In general, it is necessary to apply to the local court for enforcement of the order in question. In many cases, the order will be enforced as a matter of judicial comity, but the requirement to satisfy the local court that it is appropriate for the order to be enforced is an additional hurdle for the challenger to overcome. 15

16 5.5 In a pre-legislation case, Re the Fountain Trust (2005) 9 ITELR 601 (which was the second installment of the Minwalla saga) the Jersey Court was required to consider the issue of enforcement of an English order declaring a Jersey trust to be a sham. Following the order of the Family Division obtained by Mrs Minwalla the trustees applied to the Royal Court in Jersey for directions as to whether they should comply with the English order which required them to transfer the assets to the wife. The Royal Court expressed its disapproval at the jurisdiction being exercised by the Family Division over a trust which had Jersey as its proper law and Jersey trustees describing it as exorbitant and stating an initial reluctance to enforce it. The Royal Court expressed its disapproval of the English Court applying English Law in determining whether the trust was a sham, holding that as the trust was expressed to be subject to Jersey Law and had Jersey trustees, the question of sham fell to be determined in accordance with Jersey Law. However, it decided to enforce the order because: (i) no unfairness arose by enforcing as the trustees had submitted to the jurisdiction; (ii) a foreign judgment would be enforced if the defendant had had the opportunity to raise all relevant defences; and (iii) it was not unfair or contrary to public policy to enforce the judgment which sought to do justice between a wife and her husband who had flouted his moral and legal obligations. 5.4 Submission to the jurisdiction of the English Court remains an important factor following the legislative restrictions on enforcement. In Re B Trust [2006] JLR 562 the trustee submitted to the jurisdiction of the High Court and the Jersey Court gave effect to an English order varying the terms of a trust by exercising its jurisdiction to require the trustee to use a power to vary the terms of the trust in accordance with the English order. 5.5 Submission to the jurisdiction is not, however, a prerequisite for enforcement: in Re H Trust [2009] JLR 569 there was no submission, but the Jersey Court decided to enforce the order as a matter of judicial comity. 16

17 5.6 Therefore, whilst not strictly determinative, the question of submission to the jurisdiction by trustees will often have an important effect on the subsequent issue of enforcement. Trustees of offshore settlements should always give careful thought to the question of whether it is in the best interests of their beneficiaries for them to submit to the jurisdiction, and in many cases will be well advised to seek the directions of the local court before submitting, particularly where (as is often the case in the matrimonial context) the interests of different beneficiaries in relation to the proceedings are opposed. 5.7 In the context of enforcement, an important distinction was drawn in Mubarak v. Mubarak [2008] JRC 136. In Mubarak it was sought to enforce an order of the English court varying the terms of a trust. The Jersey court doubted whether it could find jurisdiction to vary a trust simply because the English court had jurisdiction to do so, but held that if the trustees had a power under the trust instrument to vary its terms, the Court could (in exercise of its supervisory jurisdiction) order the trustees to exercise it. 5.6 Requests for information to trustees can also cause difficulties. Again, trustees may be faced with a tough decision when asked to provide information concerning the trust for use in matrimonial proceedings, particularly where H is a beneficiary and W is not. In Charman v. Charman [2006] 1 WLR 1053, the Court of Appeal upheld a letter to the court in Bermuda seeking information from Bermudian trustees of a settlement created by H. The Supreme Court of Bermuda declined to enforce the request. It should be noted that in Jennings v. Jennings [2010] WTLR 215, the Bermudian judge acknowledged that his decision in Charman had been wrong, and that he should have given effect to the letter of request. 5.7 It might be thought that a refusal to comply will be in the interests of the beneficiary of the trust. However, the failure to provide information may lead the English court to infer that the trust assets belong to the beneficiary and take them into account on divorce accordingly (as in Charman). 17

18 Information requests should therefore be considered carefully by trustees, and as with the question of submission to the jurisdiction, it may be prudent to seek the directions of the local courts before making a decision. 5.8 It should be noted that the issues of enforcement referred to above arise more commonly in the context of the English Court s matrimonial jurisdiction than in the context of attacks under s.423 of the Insolvency Act. One of the reasons for this is that the jurisdiction of the English courts under s.24 MCA 1973 is exhorbitant and has no equivalent in many offshore jurisdictions. In contrast, most offshore jurisdictions have equivalents to s.423 and are therefore prepared to enforce such orders without great difficulty. In addition, claims are often made under the local legislation so as to avoid the two-stage process of obtaining an English order and then seeking to enforce it. 6. Some conflicts issues relating to sham trusts 6.1 The choice of law issue is an interesting one (the authors of Dicey & Morris describes this area of law as beset with uncertainties ( ). Whilst one can see the obvious attraction of choosing the law governing the trust, basing the choice of law on that factor is somewhat circuitous given that one party is asserting that there is no trust at all. Where there is real property held in the trust, there must be a strong argument that the lex situs should apply to the question of sham, as the substantive question is the beneficial ownership of the trust asset. In practice, this question is not too important in most cases as the law on sham is similar (if not identical) in most common law jurisdictions, however depending on how the law develops, the position may change. 6.2 Similar questions arise concerning jurisdiction: where should W seek to assert that the trust is a sham? If the trust property consists of land, then clearly the jurisdiction where the land is situated will have jurisdiction. Otherwise, there are various factors to consider. The location of the trustees (and the ability to enforce against them) is one important issue. As 18

19 discussed above, there is no point litigating in England if there is no trust property here, and the trustee is in a jurisdiction which will be reluctant to enforce the order. 7. Community Property 7.1 Increasingly, foreign community property regimes have a significant impact on cases where trusts have been established. The application of a community property regimes does not affect the question of whether a trust established by a party to a marriage is a sham or not, but it may in certain circumstances deprive the party of the ability to divest himself of beneficial ownership of the trust property and therefore create the beneficial interests purportedly created. 7.2 Therefore when dealing with foreign clients, it is worth ascertaining whether any form of community property regime applies, as it may provide a useful alternative method of challenging the validity of trusts. 8. Conclusion 8.1 No matter how carefully asset protection structures are planned and implemented, there are many weapons available to a party seeking to challenge them. Where an offshore structure is involved, the challenger is likely to face greater difficulties in succeeding in actually obtaining redress, but ultimately many attacks on these structures have been successful, and there is no obvious reason why this should not continue to be the case. Richard Wilson, October