Guernsey

Trusts and divorce in the Jersey court


By Paul Buckle, Carey Olsen, Guernsey (16/01/2009)

In previous articles for this publication, I have commented upon the difficult question of whether a Channel Island court can or should give effect to an order made in foreign divorce proceedings so as to vary or even set aside a Channel Island trust. Readers may recall that while both Jersey and Guernsey have recently introduced legislation designed to prevent just that situation, in the first case in Jersey testing the effectiveness of the legislation, the court ignored it and enforced the foreign order on comity grounds (i.e. on grounds of mutual assistance between courts). That decision, In Re B Trust, understandably caused concern locally and generally for those with assets in Channel Islands trusts, as it appeared to undermine the purpose and effectiveness of the new legislation.

Mubarak

In a more recent case, Mubarak, the Jersey court had an opportunity to consider the point again when it was asked to give effect to an order made by the English matrimonial court in the long-standing and bitterly contested divorce proceedings between Aaliya Mubarak and Iqbal Mubarik who married in 1983. The couple owned a jewellery business which, in 1997, they settled on a Jersey law discretionary trust of which they, their children and remoter issue were beneficiaries. There were four children at the date of the hearing in Jersey, two of whom were minors. Under the trust, the husband could add and exclude beneficiaries, appoint and remove the protector (who was the husband's father) and appoint new trustees. The power to remove trustees was with the protector.

Following separation in March 1998 the husband excluded the wife as a beneficiary. In July 1998 the wife commenced divorce proceedings against the husband in the family division of the high court in England. In November 1999 the husband was ordered to pay a lump sum of almost £5 million, with periodical payments until payment of the lump sum. The husband resisted payment of the lump sum and the wife sought to enforce it by various means, including varying the Jersey trust to order the trustee to pay the balance owing. The Jersey trustee did not submit to the jurisdiction of the English courts at any time so the wife issued proceedings in Jersey seeking enforcement against the trustee on the following two alternative grounds:

  •   That the Jersey court could and should enforce the order on grounds of comity;
  •   That all the adult beneficiaries had agreed to the variation so the court could then approve it on behalf of the two minors and any unborns. It is important to note that in order to remain a party to the English proceedings the husband had (on being so directed) written a letter to the trustee in 2006 asking it to give effect to the English order.

The couple’s two adult children supported their mother’s application.

Comity

The wife failed on this ground on the following bases:  

  •   There were two sorts of ‘variation’, which applied to a Jersey trust: the first being where the court is doing something the trustee has no power to do (as an ‘alteration’); and the second where the court is doing something the trustee has the power to do (a variation in the strict sense).
  •   Under the new legislation in Jersey, the Jersey court could not enforce a judgment of a foreign court ordering the variation or alteration of a Jersey trust even where the trustee had submitted to the jurisdiction of that foreign court.
  •    The giving of directions by the Jersey court did not amount to the enforcement of a foreign judgment for the purposes of that new legislation.
  •   Hence, where the variation ordered by the foreign court does not amount to an alteration, the court may give directions which have the effect of achieving the objectives of the foreign order. Whether the court will do so in a particular case is a matter for its discretion having regard to the interests of the beneficiaries.
  •   Where the variation ordered by the foreign court does amount to an alteration, the local court has no jurisdiction to give directions which authorise or direct the trustees to act outside their powers.
  •   As the English order amounted to an alteration of the trust the Jersey court could neither enforce it nor direct the trustee to comply with it. 

Variation

The wife succeeded on this ground for the following reasons: 

  •   Under the so-called “rule in Saunders v Vautier”, (an English case thought to apply in Jersey) all of the beneficiaries could alter the terms of a trust.
  •   The husband had consented to a variation of the trust, by his letter in 2006 to the trustee, as had the two adult sons.
  •   It was in the best interests of the minor and unborn beneficiaries for the trust to be altered so that the English order could be complied with.

The court next considered how the variation ought to be put into effect. Here there was a problem, as the trust was illiquid, all the value being in the underlying company. The court applied the well-established rule that a trustee should not be expected to litigate on behalf of the beneficiaries (in this case by taking steps against the underlying companies to raise the required cash) at its own expense where the lack of cash at trust level had not arisen due to the trustee's breach. Instead it appointed a receiver to do that job. The main reason for the court doing this was that it was felt that the professional accountant appointed was in a far better position to deal with the complex multijurisdictional asset recovery exercise that would almost certainly be necessary to realise the funds from the structure underlying the trust. Another factor was that it was thought the husband had control of the companies within the underlying structure which would make the task more difficult, and which also justified there being a gagging order in place in order that the husband was not given any notice of the strategy that would be adopted to recover the assets. It is suggested, however, that the court’s jurisdiction to appoint a receiver is one which will be used very sparingly indeed, and only in exceptional cases like this one.

Comment

The Royal Court’s decision is to be welcomed. It confirms the effectiveness of the new legislation, thereby dispelling any lurking doubt that Jersey may be a ‘soft touch’ when it comes to the enforcement of foreign orders, and brings a great deal of clarity to the way in which the courts should deal with any application for directions brought where a trustee is involved with a divorce. Comity too now seems to have been ruled out as a means of enforcing a judgment, which was always thought to be the case.

The case of Mubarak has since been to appeal, and while a judgment is awaited, it is believed the Royal Court’s decision was upheld in full by the Appeal Court. Leave to appeal to the Privy Council has, however, been granted so we still do not have the final word on this. That said, it would be quite surprising if the Privy Council were to overturn the Appeal Court ruling.