Guernsey

Divorce proceedings often entail complex negotiations over assets and it is common practice for assets held in trusts established in international jurisdictions to present significant challenges in divorce proceedings. Trustees are often required to balance the confidential nature of trusts with duties to disclose, duties to protect the interests of other beneficiaries, and a party’s rights to information.

Despite greater regulatory transparency and reporting, the inherently confidential nature of trusts and their assets presents a challenge for family practitioners. Without full disclosure from both parties, one of the primary difficulties is establishing the nature and extent of the assets held within a trust.

There is very little publicly available information, trust documents — including the trust instrument itself and financial statements and details of the key parties (such as settlor and beneficiaries) — are private and it will be at the discretion of the trustee to decide who gets to see or know what.

Very little information needs to be filed and any information that is, as things currently stand, is not publicly available.

Applications by parties under the Trusts Law

Whether a party to divorce proceedings can obtain information about trust assets depends upon their standing and connection to the trust. The Trusts Law provides that a trustee shall, at all reasonable times, at the written request of:

• any enforcer; or
• subject to the terms of the trust:
  • any beneficiary (including any charity named in the trust);
  • the settlor; or
  • any trust official (which could include a protector)

provide full and accurate information as to the state and amount of the trust property.

Under section 26 of the Trusts Law this statutory right of a beneficiary, settlor or trust official to request information can be disapplied by the terms of the trust and it is common practice for Guernsey law trust instruments to expressly exclude this duty to give information.

There is potential for a person not listed above to apply for an order of the Royal Court to obtain information, but the circumstances in which this is possible are fairly limited. In the case of BX v. T Limited [2024] GRC036, the Royal Court held it did have jurisdiction to order information be provided to non-beneficiaries but the applicant must show that the provision information is for the proper administration of the trust. Non-beneficiaries who were potentially liable for U.S. tax due to trust held companies and who could have been added as beneficiaries of the trust were not held to have passed the threshold whereby the trustee should be directed to provide the information.

Whilst the Trusts Law refers to “full and accurate information as to the state and amount of the trust property”, it does not prescribe any further what this may mean. Generally, it is considered that the following would be disclosable:

• trust instrument and supplemental instruments;
• accounts/financial statements of the trust; and
• potentially, documents relating to underlying companies.

The following documents would not normally be disclosable:

• documents detailing trustee deliberations (such as minutes/resolutions);
• letter of wishes; and
• internal trust correspondence.

The Royal Court would be expected to apply the principles set out in Schmidt v. Rosewood [2003] UKPC 26 (as was the case in BX v. T Limited).

Applications to make trustees a party to matrimonial proceedings

An alternative mechanism by which spouses have attempted to obtain trust information is by making the trustee a party to the matrimonial proceedings. In BX v. T Limited, the Royal Court was asked to consider the submission by a trustee to the jurisdiction of the High Court of England and Wales following an order of the High Court joining it as a respondent. The Royal Court held that:

• the trustee was correct to seek directions and sanction from the Royal Court prior to taking a step in the High Court matrimonial proceedings;
• had the trust in question been a “standard” family discretionary trust with a class of beneficiaries extending beyond the divorcing couple, it most likely would have concluded that it was best for the trustee not to submit to the jurisdiction and to apply to set aside the joinder order and so cease to be a party; but
• due to its more “mechanistic” role as trustee of a retirement benefit scheme (as opposed to a trustee of a discretionary trust), the circumstances were such that the arguments in favour of assisting, and being seen to assist, in the matrimonial proceedings tipped the balance in favour of it submitting to the jurisdiction.

Notably, whilst the Royal Court accepted that, by voluntarily submitting to the jurisdiction, the trustee would be bound by such disclosure directions as the court seized of the matrimonial proceedings may make, but left open the potential impact of section 14(4) of the Trusts Law on the enforcement of any order.

Commission rogatoire or letters of request

The Royal Court noted in BX v. T Limited that an alternative method of proceeding would have been for the High Court to issue a letter of request to the Royal Court.

A commission rogatoire, or letter of request, is the mechanism by which a foreign court may apply to the Royal Court for assistance. It is by that mechanism that evidence can be taken in Guernsey for use in foreign proceedings.

The Royal Court will need to be satisfied that the request is made pursuant to a request issued by a foreign court, that it is not too widely drawn, and that it does not offend local law. Letters of request usually relate to evidence being obtained in Guernsey, either by the production of documents or the taking of evidence in the Royal Court for onward transmission to the foreign court, however, the Royal Court does have broad discretion to deal with requests as it deems appropriate. Foreign lawyers may be admitted (for instance, for the purposes of examining witnesses) but restrictions may be imposed (including the requirement to have Guernsey-qualified advocates overseeing the case).

Whilst documentary evidence may be sought, the Royal Court will not enforce requests that amount to “fishing expeditions”, such as requiring a witness to state what evidence they may have. Witnesses are entitled to rely on privilege (where applicable as a matter of Guernsey and the foreign law). Guernsey procedure is applied to the letter of request process and it is then considered a matter for the foreign court as to admissibility.

However, it does not appear that a letter of request would give a requesting party carte blanche to obtain any documents they may wish for from trustees. In BX v. T Limited the Royal Court indicated it would have had regard to the reasoning set out in AD v. C Trust [2010] JRC 001 in which the Royal Court of Jersey refused a request from the Family Division of the High Court for the production of affidavits submitted by a trustee during in-camera proceedings under which the trustee was permitted to seek directions from the court. The court refused on the basis that it considered it “absolutely necessary that a trustee should be able to come to Court … to make a candid appraisal of its position and the problems to be addressed”. It therefore held this principle would be frustrated if trustees considered affidavits, and applications may be provided subsequently to parties hostile to the trust. Therefore, when considering letters of request to the Royal Court, practitioners would still need to consider any issues relating to the principles of trust confidentiality.

See Section 1.3, below.

Those seeking to enforce orders made in matrimonial proceedings in foreign jurisdictions against a Guernsey trustee are likely to come up against the firewall provisions.

A party seeking to enforce any potential order will want to consider following:

• direct enforcement against assets (such as property) in the jurisdiction of the foreign court;
• the exceptions to section 14 of the Trusts Law;
• whether the trust can be established as a sham or it can be otherwise shown that the settlor has control of the assets;
• whether the settlor and/or beneficiary has effective control of the assets of the trust (for instance, by the reservation of powers within the trust); and
• the use of any indirect “encouragement” orders against the settlor or beneficiary.

Any party seeking a financial provision order in foreign matrimonial proceedings that relates to a Guernsey trust would be well advised to consider in advance the above issues in order to maximise the likelihood of it being recognised, enforceable or otherwise effective. There have been a number of circumstances in which the foreign family court’s order has been rendered nugatory, for instance, by directing a purported transfer of beneficial ownership (which could not be enforced) as opposed to the creation of a debt (which could).

Direct enforcement against foreign-held assets

In practice, the firewall provisions and their effectiveness depends on the location of the trust asset and the trustee. Where the trustee and the trust assets are based in Guernsey, section 14 can be relied upon to provide a robust defence of foreign family court orders that are contrary to Guernsey law trust principles.

However, where the assets (particularly immovable property) are located in the jurisdiction of the foreign family court, the enforcement of that foreign court’s order against trust assets is likely to be followed. This is often a key consideration where a Guernsey trustee seeks directions from the Royal Court as to whether it should submit to the foreign family court’s jurisdiction. If the main or major asset of the trust (such as a substantial residential property) is located within the jurisdiction of the foreign family court, it is often considered in the best interests of the wider class of beneficiaries that the foreign family court be advised of all circumstances and the trustee have the opportunity to make representations relating to the trust and the expectations of the wider beneficial class.

Exceptions to section 14

Under section 14(2) there are a series of areas which are expressly carved out from the remit of section 14. These tend to focus in particular on the ability of the settlor to settle the trust property and include that section 14 will not:

• validate any disposition of property which is neither owned by the settlor nor the subject of a power of disposition vested in the settlor;
• affect the recognition of the law of any other jurisdiction in determining whether the settlor is the owner of any property or the holder of any such power;
• affect the recognition of the law of its place of incorporation in determining the capacity of a corporation; and
• affect the recognition of the law of any other jurisdiction prescribing the formalities for the disposition of property.

Section 14(2) also enables the trust instrument to limit or exclude the provisions of section 14, although this is not common practice. However, the terms of the disposition may also apply foreign law (for instance, by incorporation of a specific governing law clause). This is likely to be a more frequent occurrence than a specific disapplication. Therefore, where the terms of the disposition are determined to be governed by a foreign law, consideration to the potential mechanisms for enforcement under that governing law should also be given.

Sham trusts and other attacks

A party in family proceedings will seek to challenge the validity of a trust settled by their spouse, the reasoning being that if the trust is declared invalid the assets are held by the spouse and therefore become potentially relevant property for the purposes of any financial claim.

Asserting that a trust is a sham is one such way of attacking the validity of a trust. In order to succeed in showing that a trust is a sham trust, the applicant must demonstrate to the Royal Court that there is a common intention on the part of the trustees and settlor that, whilst the trust terms show the trustee having possession of trust property, the settlor remains the de facto legal owner. If that can be established, the trust is declared a sham and is void.

The requirement to show common intention is a high bar and often an applicant party finds itself unable to evidence this to meet the threshold.

In light of this threshold, when seeking to attack the validity of trusts, parties have also sought to argue that the settlor (or beneficiary) has de facto ownership of the trust assets.

The High Court of England and Wales has previously considered whether a settlor has divested themselves of the assets purportedly in trust. In the case of JSC Mezhdunarodniy Promyshlenniy Bank v. Pugachev and others [2016] EWHC 192 (Ch), Birss J relied upon the rights that had been reserved by Mr Pugachev when he settled the trust to determine that the trust deeds were not effective at divesting him of his beneficial interests (and so the assets were held in bare trust for Mr Pugachev).

The reasoning in Pugachev has not been tested before a Guernsey court, however, at section 15 of the Trusts Law it expressly states:

“A trust is not invalidated by the reservation or grant by the settlor (whether to the settlor or to any other person) of all or any of the following powers or interests…”

The Trusts Law goes on to identify a range of powers that fall within this, including: powers to revoke, vary or amend the terms of the trust; powers to advance, appoint, pay or apply the income or capital of the trust; investment manager-type powers; power to remove; power to give directions; power to change the law of the trust; and power to restrict the function of a trustee by requiring it only be exercised with permission.

It is therefore unlikely that a Guernsey court would find that, solely on the basis that powers have been reserved to the settlor, a trust is a sham or illusory without any further factual enquiry as to the effect. Indeed, commentary around the Pugachev application offshore suggests its reasoning would find little traction.

However, the more recent Privy Council case of Webb v. Webb [2020] UKPC 22 on appeal from the Cook Islands Court of Appeal considered the reservation of rights in a claim brought in the context of matrimonial proceedings

In deciding whether the trust was valid, the Privy Council considered that the question of validity could be approached in two ways, either:

• that the powers reserved to Mr Webb were so extensive that Mr Webb can be said never to have disposed of any of the property purportedly settled on or acquired by the trust, and in connection with that, the question of whether the trusts lacked the irreducible core of obligations owed by trustees to the beneficiaries and enforceable by them, which is fundamental to the concept of a trust; or
• that the powers reserved were so extensive that he can be regarded as having rights which were tantamount to ownership.

The Privy Council found that it made no difference to the outcome which of those analytical paths was taken. It considered that, taken in the round, “the bundle of rights which [Mr Webb] retained is indistinguishable from ownership” and that the Court of Appeal was “plainly entitled to find as it did that the trust deeds failed to record an effective alienation by Mr Webb of any of the trust property”.

The alienation of property is a fundamental tenet of trust law, without which a trust cannot be created. The cases relied on by the Privy Council to reach its determination are well known and regularly cited and relied on by the Royal Court, such as such as Armitage v. Nurse (re: irreducible core of trust obligations); Schmidt v. Rosewood (court’s supervisory powers over a trust); and McPhail v. Doulton (certainty of objects). The Privy Council’s decision in Webb v. Webb would indicate that, whilst the ability to reserve powers does not, of itself, automatically invalidate a trust, where the settlor has reserved so much they cannot truly be said to have parted with the property, the trust would be invalid from the outset and available to be considered as part of the relevant property for financial provision.

Indirect “encouragement” orders

Much of this chapter has inevitably focused on the issue of a trustee or the Royal Court “protecting” trust assets. However, it remains open for the foreign family court to make orders against beneficiaries of a trust knowing that they are unlikely to be able to satisfy it without recourse to the trust. At that point, the trustee will have to consider any request from a beneficiary for their interests and that of any wider beneficial class.

Where a trustee resolves to make a distribution to a beneficiary (such that the distribution becomes part of the beneficiary’s matrimonial estate), it would be very likely to seek a blessing of its decision from the Royal Court, which has shown itself to be sympathetic in those circumstances.

The Royal Court can give a PNA weight, in particular where:

• the PNA has been fairly negotiated between two parties who are both represented or have had the benefit of legal advice; and
• full disclosure of the parties’ financial position has been given by them (for instance, in a schedule annexed to the PNA).

Other factors that may assist the Royal Court in whether to give weight (or indeed what weight to give) to a PNA would include the parties’ circumstances at the time of entering into the PNA (for instance, age, maturity and emotional state).

The Royal Court is likely to give less weight to a PNA where there may have been some change in circumstances, for instance:

• the parties having children;
• a significant change in the respective finances; and/ or
• a significant length of time elapsing since the PNA was entered into.

See Section 2.1, above.

See Section 2.1, above.

See Section 3, above.