Recent developments in the case law of onshore jurisdictions like England and Hong Kong have only highlighted for trustees the very difficult position they can find themselves in when a beneficiary or settlor is involved in a divorce.
Divorcing beneficiaries have long been problematic for on and offshore trustees but it is the so-called “big money” divorces exemplified by cases like the Poon1 divorce in Hong Kong and Charman2 in England that grab the headlines, publicized in the media rightly or wrongly, either as one spouse going to extraordinary lengths to avoid their financial obligations or where one of the spouses is making what seems to us lesser mortals to be outrageous financial demands.
So what would the position be in the Cayman Islands if a trustee here was pitched into the middle of a divorce involving beneficiaries? So far, there has only been one reported case here on trusts and divorce, the case of Re B Trust also involving a Hong Kong-based family. The settlor and his wife were divorcing; both were beneficiaries, along with their three children aged 19, 17 and 12, of a Cayman Islands STAR trust.
Not surprisingly perhaps bearing in mind the nature of a STAR trust, the trust in issue had a wide exclusive jurisdiction clause in favor of the Cayman Islands courts which was according to the judge, “emphatic” in its terms. This was not a discretionary trust. The fund was split into two; one part holding ‘controlled companies’ over which a ‘designated beneficiary’, in this case the wife, had investment control and the other, the ‘distribution fund’, over which the trustee had power to apply the income and capital for the benefit of the beneficiaries.
The asset holding structure was this: The trustee held all of the shares in a Cayman company which in turn held all the shares of another Cayman company plus an investment portfolio held in Singapore. Both the parent and subsidiary were “controlled companies.”
The subsidiary held all but one of the shares in a Hong Kong company which in turn held a residential property in Hong Kong which housed the wife and children and represented the greater share of the value of the underlying assets in the trust. The trustee held the other share in the Hong Kong company subject to the trusts of the distribution fund.
The wife applied to vary the trust so that 40 percent of the shares in the parent and Hong Kong companies were divided between husband and wife and the remaining 60 percent of each remain in the trust for the benefit of their children. The Hong Kong court ordered the trustee to be joined as a party.
The trustee did not submit to the jurisdiction but instead, the couple’s eldest child, who was also an enforcer of the trust, applied in Hong Kong to be joined to the variation application. The trustee, perhaps not surprisingly, made an application to court in the Cayman Islands for directions.
The court directed the trustee not to submit to the jurisdiction holding that the trustee’s primary duty is to administer the trust according to its terms unless otherwise ordered by the court in the Cayman Islands. Submitting to the jurisdiction would risk putting the trustee in a position where its duty to the beneficiaries would conflict with its duty to comply with an order of the overseas court. The overseas court order would be made primarily with the fair division of marital assets in mind, not the wider interests of the beneficiaries or beneficial class.
The judge held that Cayman’s “firewall” provisions reflect what he described as the “overarching rules” consistent with the inclusion of an express governing law and exclusive jurisdiction clause, that in those circumstances, a trust governed by the laws of the Cayman Islands can only be varied by a Cayman Islands court in accordance with Cayman Islands law.
Now, this case on its facts is regarded by many as providing the clearest possible guidance to Cayman Islands trustees who are caught in this conundrum, certainly as far as submitting to the jurisdiction of an overseas divorce court is concerned.
I would however exhort trustees to look at the particular facts of each individual case before forming a view. The court in Re B found that a trustee must “jealously guard” its independence. Although the court directed that the trustee should not submit to the jurisdiction and that it would not enforce any variation order that the Hong Kong court made against the trustee, it did also find that the trustee should not set its face forever against whatever order the matrimonial court may hand down at the end of the divorce. The judge cited with approval the “impeccable attitude” of the trustee in A v A v St George’s Trustees in considering the court’s order in light of what it thinks is the right decision for the beneficiaries as a whole.
The court here may therefore have been more supportive of a decision by the trustee to assist the husband meet a financial order, in the same way as the Jersey Royal Court in the most recent stage in the Poon divorce involving the trustees of the Otto Poon Family Trust.
The court there in an initial directions application3, endorsed the trustee’s decision to submit to the jurisdiction of the Hong Kong court and participate in the divorce proceedings there, finding that given the nature and location of the trust assets, it was in the best interests of the beneficiaries of the trust for the trustee to do so. Most of the trust assets were located in Hong Kong and for the most part, the trading companies lower down the structure were run from there, too. The trustee was therefore in a cleft stick – it could stay out of the divorce and refuse to comply with any order the court made – but it could not prevent enforcement against the trust assets located in Hong Kong. The trustee therefore decided that it was in the best interests of the beneficiaries for it to appear in the Hong Kong court to try to protect their interests and the Jersey Royal Court approved that course of action.
Subsequently, in a second application for directions4 after the divorce was concluded, the Jersey Royal Court blessed the trustee’s decision to assist the settlor in meeting the financial order made on his divorce. The court also blessed the trustee’s decision to exclude the wife as a beneficiary after receiving substantial payments from the trust.
The contrasting decisions of the Hong Kong and Jersey courts highlight one of the thorny issues which the trustee has to grapple with in this situation. The Hong Kong court criticized the trustee for the position it took in the divorce as appearing to be partisan in favor of the husband.
When a trustee tries to protect the trust assets for the beneficiaries, the trustee will inevitably find itself in an opposing position to the spouse who argues the trust assets should be a resource available on the division of marital wealth on divorce. The trustee’s position is not necessarily wrong or partisan but it could be perceived by the matrimonial court and the opposing spouse, as siding with the other spouse.
This is another example of the inherent tension between the family courts trying to achieve justice between two divorcing parties, and the trustee’s very different focus in trying to balance the wider interests of all of the beneficiaries. This should not, however, prevent the trustee from considering the position fully and seeking directions from its home court at the appropriate juncture. However, when a trustee tries to protect the trust assets for the benefit of the beneficiaries, who may or may not include both husband and wife but will nevertheless include other people, the trustee may find itself in a position opposing the spouse who argues that the trust should be varied or its assets should be a resource available on the division of marital wealth on divorce.
In summary, on divorce in England and in Hong Kong, it is clear from recent cases that both husband and wife will share the wealth generated during the marriage, even if some or most of it is held in trust. The matrimonial court will undertake an inquisitorial role into the couple’s finances and will calculate the division of their wealth from a starting point of equality5, subject to certain special circumstances which are outside the parameters of this article.
Trustees therefore have to take great care if they find themselves unwittingly pitched in to a divorce involving beneficiaries. They should consider carefully with their advisors the terms on which the trust was settled and by whom, who the beneficiaries are, the nature of the assets held in the trust and where they are located. All are factors to be taken into account before the trustee decides what steps to take next in the best interests of the beneficiaries.
- Kan Lai Kwan v Poon Lok to Otto, FACV 20 and 21/2013
-  1 WLR 1053
-  JRC 167
-  JRC 254A
- White v White  UKHL 54