Beware Third Party Trusts And The Limits Of “Judicial Encouragement”

Divorce & Matrimonial Finance

01 October 2019

The purpose of this article is to draw attention to 2 recently reported cases dealing with third party trusts. Both emphasise the position that the courts will take in relation to such trusts. In essence third parties cannot be compelled by the court to make lump sum orders.

In  Daga v Bangur [2018] EWFC 91 a case decided by Mr Justice Holman, the parties were married between 2007 and 2016.    Although both from India they met at University in the UK.   There was one child of the family aged 6 with special needs. At the time of separation, both parties had good careers.   The husband (H) was 36 years old and worked in the financial sector earning £130,000 pa net. The wife (W) was 34 years old and earned £40,000 pa net, working full-time in the advertising and media industry.  The parties did not own the matrimonial home, they having rented during the marriage, despite the fact that the W’s father had put assets worth around £1.4m in her name and she had some property in India. Furthermore, W on the instructions of her Father (who was very wealthy and was the majority shareholder in a valuable company in India), had set up two discretionary trusts in her name which controlled about £17.5m.  It was against these trusts that the husband sought a lump payment of £1.5 million to meet his needs.

W sought a dismissal of the husband’s claim, child maintenance at £1,800 pcm and nominal spousal maintenance until the child was 18 years old.   H pleaded his case on his needs to clear debts and buy a home saying that W could satisfy them from assets in her name or held in the trusts of which she was the named settlor.   The wife disagreed, arguing that the husband had not evidenced any need at all and could live comfortably from his own income.

The trust deeds provided that the beneficiaries were ‘family members of the settlor’ (W), including W.  The wife had signed a letter of wishes declaring herself as a nominee settlor and that the trustees should act on her father’s advice in relation to all matters concerning the trust, to the exclusion of all other persons, including herself.   W argued that she had never sought to draw on the trusts and was merely a dutiful daughter acting as a cipher for the father.  Her father made clear that while he would meet his grandson’s needs, he expected the wife to be financially independent and he would not now provide her with capital to buy a home in this country The parties had run up debts of nearly £650,000 on litigating over financial matters and £380,000 over their son.

Mr Justice Holman analysed each of the s.25(2) Matrimonial Causes Act 1973 factors and held that the husband’s arguments foundered.   He dismissed all capital claims by both spouses, and ordered periodical payments for the child of £1,200 per month.   He said the discretionary trust funds were not an available resource in reliance upon which any award could be made.   Referring to Thomas v Thomas [1995] 2 FLR 668 having established that the court can, in appropriate cases, make a lump sum or other financial remedy order in reliance upon funds in a trust, he said the court must not put undue pressure on third parties.  The court must also be satisfied that the trustees would be likely to respond to ‘ judicial encouragement’.   The evidence suggested that the trustees were highly unlikely to make funds available to the wife; it was therefore frankly fanciful for the court to treat her as having £20m available to her as the husband had argued. Additionally he held the husband had not demonstrated a need for any substantial capital payment. His only pressing need was to clear his debts, but they were entirely referable to the costs he had incurred in the proceedings. If the court were to order the wife to pay him a lump sum with which to pay off those debts, that would be tantamount to making an order for costs in his favour, which could not be justifiable.   Holman J rejected the husband’s argument that he could not provide a home of sufficient standard by himself, noting pointedly that the husband’s net income exceeded that of the Master of the Rolls, and still exceeded that of a Senior Circuit judge after his rent and child maintenance were deducted.   He pointed out that the parties had rented throughout the marriage. The husband could afford rental accommodation. Such housing was consistent with the standard of living during the marriage and comparable with the current housing situation of the wife and child.   In considering the wife’s future needs, the court could not ignore the fact that she and the son were discretionary beneficiaries under valuable trusts. If circumstances might arise such that the wife might need to seek substantive maintenance for herself from the husband, then at that point she should turn to the trusts (if not her father).

The second case I consider is Wodehouse v Wodehouse [2018] EWCA Civ 3009 .   Here the Court of Appeal discharged a lump sum order made against a third party trust. This was the second appeal from a financial remedy order made in 2016. The principle issue before the court was whether order the Deputy District Judge (“DDJ”) at first instance had jurisdiction to make the lump sum against a third party

The parties were in their 60s who had had a 19 years childless marriage.   The Husband (H) had been declared bankrupt on two separate occasions.  The parties were both in dire financial circumstances. The only real asset was the matrimonial home, which had been purchased in joint names and funded in full by the Husband’s family trust (the “Trust”).  The Trust when advancing the purchase moneys for the matrimonial home had done so in the expectation that their previous home would be sold and the Trust’s loan repaid.  Instead, the husband increased the mortgage to pay off his other debts. He then failed to pay the mortgage and that property was repossessed leaving a debt owed by both spouses of £97,000 (the “Mortgage debt”).

At trial, the DDJ ordered that the matrimonial home be sold and that the proceeds be divided equally, deducting from the Husband’s share repayment of historic loans made by the Wife as well as the Mortgage Debt.  Wife’s counsel settled the order.  The order for the Lump Sum was drafted to include a liability on the part of the Trust in respect of payment of the lump sum, in the event that the Husband failed to do so.   Both the Husband and the Trust protested to the wording, stating that it exceeded the terms of the Judgment. The DDJ disagreed, stating that the draft adequately reflected his intentions behind the order.

At the first appeal, the Circuit Judge is said to have appreciated the difficulties behind the Lump Sum Order but only allowed the appeal to the limited extent that the Husband should only be liable for half of the Mortgage Debt.

All parties accepted before the Court of Appeal that there was no evidence before the trial judge that would have allowed him to conclude that the assets held within the trust were financial resources available to the Husband to fund any lump sum order following Thomas v Thomas [1995] 2 FLR 668.   The Court of Appeal concluded that the way in which the Lump Sum Order came into being was procedurally unfair.   It was held that the court has no jurisdiction under the Matrimonial Causes Act 1973 to order lump sum payments against third parties.    The President added an observation that the error of law in this case provided evidence of the value of creating a specialist Financial Remedies Court.

These two cases reiterate the ratio in Thomas v Thomas.   In general the court cannot make orders against third parties.   They also provide further example of the limits of the argument based on ‘judicious encouragement’ of third parties to make provision from assets held in financial vehicles of this kind.

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