Family Asset Protection: Divorce, Finance and the Media
The Scottish approach to financial provision on divorce is set out in the Family Law (Scotland) Act 1985, a detailed statutory framework with the primary aim of achieving fairness. Significantly, the legislation provides a clear definition of what falls to be divided between the parties, distinguishing between assets that were or were not acquired during the marriage through the efforts of the parties. The result, therefore, is a legal system which offers, as a starting point, a level of protection that is not available to spouses or civil partners separating in certain other jurisdictions.
Nevertheless, the protections are not comprehensive, and for various reasons spouses or civil partners may wish to take additional steps to ensure that their assets are not vulnerable to a claim in the event of marital breakdown. Similarly, where wealth has accumulated over generations, there may be concerns about the impact of a divorce on the interests of not just the separating spouse but their wider family.
In those circumstances, people often turn to asset protection solutions such as trusts or nuptial agreements, in the hope of reducing their exposure in the event of a future separation. Broadly speaking these will be respected by the Scottish courts who recognise the freedom of individuals to contract as they see fit, but they will also take a critical view of such arrangements where there is a question of fairness.
1 . Divorce and trusts
Trusts have long been recognised in Scotland, governed by a succession of Acts over the course of the 1800s and consolidated in the Trusts (Scotland) Act 1921. They can offer flexibility and bespoke solutions for a variety of purposes including the protection of family wealth in the event of marital breakdown.
The regime governing divorce and financial provision in Scotland is contained within the Family Law (Scotland) Act 1985. The principles to be applied by the court in determining what orders for financial provision should be made (if any) are contained within section 9. The starting point is section 9(1)(a) which states that “the net value of the matrimonial property should be shared fairly between the parties to the marriage”, with the same principle applying to partnership property in the case of civil partnerships.
Matrimonial or partnership property is defined by section 10(4) as all property belonging to the parties or either of them at the date of separation and which was acquired before the marriage for use as a family home or during the marriage but before the date of separation. There are exceptions for assets received by way of gift or inheritance from third parties.
The treatment by Scottish courts of trusts and trust assets in the context of a divorce will depend on whether they fall within the definition of section 10(4) – i.e. do they belong to one of the parties as at the date of separation? This will invariably require a consideration of the construction of the trust, the nature of the party’s interest and the extent to which they have any control over what they receive from the trust.
In the case of a bare trust, for example, where the spouse/partner beneficiary has a defined interest, that will be clearly identifiable as property belonging to them. Discretionary trusts, on the other hand, where the distribution of capital or income is entirely within the control of the trustees, can reasonably be said not to fall within the definition of “property belonging to” the spouse/partner beneficiary.
In certain circumstances, however, the Scottish courts have been prepared to treat the assets of a discretionary trust as property belonging to the beneficiary in the context of an action for divorce. In the case of AB v. CD 2007 FamLR 53 the Lord Ordinary concluded that where the trust had been established by the husband for the purpose of protecting certain assets from creditors, and where there was evidence that the husband was directing the management of the trust assets and instructing payments from the trust, then the trust was simply being utilised by him as his “piggy bank”.
Where a spouse/partner has transferred property to a trust which might otherwise have constituted matrimonial property at the date of separation, this could be treated by the court as an avoidance transaction, the effect of which is to defeat a claim for financial provision or aliment. section 18 of the 1985 Act provides that the court may set aside or vary any transfer or transaction involving property effected by the other person not more than five years before the making of the claim. There is a time limit for the making of an application for an order under this section of one year from the date of disposal of the claim.
Section 18 also allows the court to interdict a person where such a transfer or transaction is anticipated. The use of interdict for these purposes is not limited to the spouse/beneficiary, and it is open to the party seeking such an order to join trustees as defenders (M v. M 2009 SLT 608 (OH); 2009 SLT 750 (IH)).
Although the capital value of a trust may be left out of account in the determination of matrimonial property and the appropriate division thereof between the parties, it remains open to the court to treat the income derived from a trust as a resource of the spouse/partner beneficiary for other purposes. These could include where the court is making an assessment of claims for spousal or child maintenance (known in Scotland as aliment), or simply when considering what resources are available from which an order for financial provision could be met.
1.1. Financial disclosure
Spouses/partners are expected to make full and frank disclosure of all of their assets for the purposes of identifying the matrimonial property available for division on divorce. This includes overseas assets and will include trust assets where they constitute property acquired during the marriage and belonging to one or both of the parties at the date of separation.
It is generally accepted in Scotland that beneficiaries have a right to certain information and that trustees of Scottish trusts, therefore, have a corresponding duty to provide that information. However, the law in this area is undeveloped in Scotland, with the main authority coming from Lord Clyde in Nouillan v. Nouillan’s Exrs 1991 SLT 270: “trustees [are] bound to give a beneficiary full information about their administration and let [them] see the vouchers as well as the accounts”. To the extent that such information is made available to a spouse/partner beneficiary and is in turn relevant to divorce proceedings, that information ought to be disclosed.
If there is a concern that certain assets have not been disclosed, the Scottish courts can be asked to order the disclosure of information through a Commission and Diligence procedure. Where the trustee of a trust in Scotland is considered to be a person in possession of the required information (known as a “haver”), they may be called upon to disclose any relevant documentation. If the trustee is of the view that the information is confidential, they may lodge the documents with the court in a sealed envelope. The court will then determine whether or not those documents should be disclosed in the context of the divorce proceedings.
If the trust assets, and therefore the trustee havers, are situated abroad, it may be necessary to proceed by way of letters of request, in terms of the 1970 Hague Convention on the Taking of Evidence Abroad in Civil or Commercial Matters. In those circumstances, however, the obligations of disclosure of a trustee of an offshore trust will be governed by the law pertaining to that trust, and advice should be taken in the relevant jurisdiction.
Trustees can be joined as defenders to divorce proceedings, and in certain circumstances the trustees may wish to become involved with a view to protecting the interests of the beneficiaries of the trust. By becoming a party to the action, however, the trustee will have certain disclosure obligations to the court, and they will require to balance these with their confidentiality obligations. In the case of an offshore trust, the trustees may simply refuse to submit to the jurisdiction of the Scottish court.
Where divorce proceedings have been filed in a foreign jurisdiction which is a signatory to the 1970 Hague Convention, and disclosure is required in relation to trust assets held in Scotland, letters of request may be received by the Court of Session with a view to obtaining evidence that is intended for judicial proceedings. The trustee will require to consider their position carefully, and may wish to take seek direction from the court as to how they should respond in light of their duty to the beneficiaries of the trust.
1.2. Financial orders
Section 8 of the 1985 Act sets out the various financial orders that can be sought in an action for divorce in Scotland. These include payment of a capital sum, property transfer, pension share and, in very specific circumstances, a limited form of maintenance known as periodical allowance. In making such an order, section 8(2) requires the court to have regard to certain principles as set out in section 9 of the Act and, importantly, the resources of the parties.
Resources are defined by the 1985 Act as “present and foreseeable resources”, and could therefore reasonably be said to include access to trust property, although there is a shortage of Scottish authority on the point. Where the court has determined that the spouse/partner beneficiary has an identifiable and accessible interest in trust property (such as in a bare trust) or where they are deemed to exercise significant control over the management of the trust assets (as in AB v. CD above), it seems likely that such a resource would fall within the court’s assessment. Similarly, where a beneficiary has a life interest which has always made, and will continue to make, regular income payments, it can legitimately be said to form part of the spouse/partner beneficiary’s resources.
Any financial order made by the court in an action of divorce must be complied with by the spouse/partner against whom it has been granted. Failure to do so can result in enforcement action being taken against the defaulting spouse/partner. Enforcement can take a number of forms, referred to collectively in Scotland as diligence, including bank arrestment, earnings arrestment, attachment of property or money and inhibition orders.
The rules for recognition and enforcement of a foreign judgment in Scotland vary according to the jurisdiction of the original judgment. Where a jurisdiction is not covered by a specific enactment, the foreign judgment must be enforced by raising an action for decree of conform in the Court of Session. Once a foreign judgment has been registered, it can be enforced in the same way as a domestic judgment.
Where decree has been granted but payment is not forthcoming, and enforcement action requires to be taken against assets held within a trust in respect of which the debtor is a beneficiary, arrestment will be the most appropriate form of diligence. This allows money or moveable property to be arrested in the hands of a third party, such as a trustee, who has an obligation to account to the debtor, such as a beneficiary. The effect is to freeze the property so that it cannot be transferred to the debtor without the consent of the creditor before the arrestment is resolved.
Where a beneficiary has an ascertainable entitlement to payment under the terms of the trust deed, and provided such payments are not alimentary in nature, the right is moveable and therefore arrestable. However, the right of the arrester is no greater than that of the debtor, and therefore where a trustee has the power to restrict or vary payment under a trust, they may exercise their power to defeat an arrestment (Chambers’ Trustees v. Smith (1878) 3 App. Cas. 795).
2 . Prenuptial and postnuptial agreements (PNAs)
The enforceability of PNAs in Scotland has yet to be fully tested before the courts. As a matter of course, however, the Scottish courts are reluctant to interfere with an agreement entered into between two adults of sound mind, and the widely held view is that a PNA will be upheld provided that it was fair and reasonable at the time it was entered into.
Foreign PNAs should be capable of enforcement in Scotland, and section 10(6) of the 1985 Act expressly provides that a court should have regard to the terms of any agreement between the parties when making its assessment of how matrimonial property should be divided.
2.1. Procedural requirements
The main challenge to the enforceability of a PNA is that it was not fair and reasonable at the time that it was entered into, and that is the basis on which a court will set aside an agreement, or part thereof, in terms of section 16 of the 1985 Act. The principles the court will consider are set out in the case of Gillon v. Gillon 1995 SLT 678, as follows:
- the agreement should be examined for both fairness and reasonableness;
- the court should examine the relevant circumstances leading up to and prevailing at the time of execution of the agreement, including the nature and quality of the legal advice given to either party;
- if there is evidence that advantage had been taken by one party of the other by reason of circumstances prevailing at the time of the negotiation, this might have a bearing on the court’s determination of the issue;
- the court should not be unduly ready to overturn agreements validly entered into; and
- the fact that an agreement results in an unequal division of assets is not sufficient on its own to give rise to any inference of unfairness or unreasonableness.
2.2. Spouse’s financial claims
The ordinary purpose of a PNA in Scotland is to ring-fence certain assets to protect them from a claim on separation or divorce. Specifically, PNAs can be utilised to extend the protections afforded by the relevant legislation to non-matrimonial property to any assets that are derived from such property during the marriage, and which would otherwise be treated as prima facie matrimonial property and therefore vulnerable to a claim on divorce.
It is also possible for PNAs to set out specific financial provision on divorce, in relation to both capital division and maintenance, although this is more unusual. The same requirements as set out above would apply, and provided each spouse/partner enters the agreement on an informed and voluntary basis, it is unlikely a court would interfere with the terms of such a PNA where it was fair and reasonable at the time it was entered into.
2.3. Children’s financial claims
Whilst there is nothing to prevent a PNA from making provision for child maintenance, it is worth noting that the Child Support Act 1991 makes clear that either parent of a qualifying child is entitled to apply to the Child Maintenance Service for a maintenance calculation which would override such provision. The only restriction on such an application being made with respect to a child is in circumstances where the parties have entered into a maintenance agreement which has been in force for less than one year. Whilst this is a useful provision in the context of Separation Agreements, its application will clearly be limited in the case of PNAs.
3 . The media and divorce/family law proceedings
Scottish courts have a long tradition of open justice and, other than in specific and limited circumstances, the media will be allowed to attend and report on court proceedings.
In general terms, where legal proceedings in Scotland are heard in public, they are capable of being reported provided such publication is contemporaneous and in good faith, failing which they are liable to be treated as being in contempt of court (Contempt of Court Act 1981). The court may, however, determine that it would be appropriate to postpone or restrict such publication, and there are specific statutory exclusions relating to family law and child cases.
Undefended and simplified divorce actions are dealt with in chambers, and therefore do not call in open court. The consequence is that such cases cannot be reported until decree of divorce has been granted, at which time the media would have access to the names of the parties and the date on which they were divorced.
The Judicial Proceedings (Regulation of Reports) Act 1926 provides that, in the case of actions of divorce or dissolution, the media may only publish:
- the names, addresses and occupations of the parties and witnesses;
- a concise statement of the orders sought and the defences;
- details of any legal issues arising and the view taken by the court; and
- the final judgment and any observations made by the judge.
Where proceedings involve a child aged 16 or under, the court may, in terms of Section 46 of the Children and Young Persons (Scotland) Act 1937, make an order that the child or children must not be capable of being identified by any newspaper report. This would normally mean that any subsequent judgment will be anonymised.
No such order is required in respect of a child concerned in exclusion order proceedings by virtue of section 44 of the Children Scotland Act 1995, and likewise section 182 of the Children’s Hearings (Scotland) Act 2011 makes provision for a child involved in a children’s hearing or other proceedings under the Act – in both cases, the relevant sections simply provide that any publication that could identify such a child is prohibited. Similarly, adoption and permanence proceedings are heard and determined in private in accordance with Section 109 of the Adoption and Children (Scotland) Act 2007, unless the court decides otherwise. Again, where a judgment is produced, this will ordinarily be anonymised so that the parties, and the child(ren), cannot be identified.
Unless specifically excluded by statute, members of the media may be permitted to attend proceedings that are closed to the public (Sloan v. B 1991 SC 412). They may utilise live text-based communications whilst within a courtroom, but they are nevertheless expected to adhere to the reporting restrictions noted above. Photography is not permitted within court buildings without prior judicial approval, and similarly electronic devices may not be used with the exception of solicitors who may use them for the purposes of proceedings only.
3.1. Reporting restrictions
Where the relevant reporting restrictions do not automatically apply by operation of statute (as set out above), parties may prevail upon the court’s general discretion in terms of the Contempt of Court Act 1981, section 11 of which empowers the court to prohibit publication of a name or a matter in connection with the proceedings. Any such order must, however, be sent to any interested person, which will include the press, and must be published on the Scottish Courts & Tribunals website. This may have the unintended consequence of drawing their attention to an action that might have otherwise proceeded unnoticed.
Where a judge exercises their discretion to impose reporting restrictions, they must first make an interim order which specifies why they are making the order. They must thereafter allow any interested person the opportunity to make representations before making a final determination on the matter. Once an order has been made, it remains open to any person ‘aggrieved’ by such an order to apply for its revocation or variation.
There is also scope for the relaxation of reporting restrictions in relation to children’s hearings and other proceedings under the Children’s Hearings (Scotland) Act 2011 where to do so would be in the interests of justice.