Family Law Hub

Joy Division: Capital Claims, Concealment, Costs and Cars

This article, by Nicola Rowlings, PSL at Mills & Reeve, reviews the recent decision in Joy v Joy-Morancho and Others (No. 3) [2015] EWHC 2507 (Fam). Given the desirability of finality in litigation, the case is a rare example of the Family Court adjourning a party's capital claims, as well as confirming the approach to the nuptialisation of trusts

  • Under the Matrimonial Causes Act 1973 (MCA 1973) the court has the power to make: 

    "an order varying for the benefit of the parties to the marriage and of the children of the family or either of them any ante-nuptial or post-nuptial settlement (including such a settlement made by will or codicil) made on the parties to the marriage." (s.24(1)(c))

    Varying a nuptial settlement can be an effective method of obtaining financial relief for a party. It sometimes works to the benefit of both parties by unlocking assets for a financial settlement that would otherwise be held in a trust and not directly available for the immediate benefit of either party. However, for a court to vary a trust it must be shown to be an ante-nuptial or post-nuptial settlement. 

    The Nuptial Element

    The term "settlement" in this context has been given a broad meaning. It is a disposition "which makes some form of continuing provision for both or either of the parties to a marriage, with or without provision for their children" (Brooks v Brooks). Most trust arrangements that benefit the parties constitute a settlement within the meaning of MCA 1973 s. 24(1)(c).

    To be capable of variation there must be a nuptial element to the settlement and the question of whether a trust has a nuptial element is fact-specific. The nuptial element may not be immediately clear or obvious, especially if the settlement was created before the parties' marriage. Indeed, a settlement may not necessarily be a nuptial settlement even if it benefits one or other spouse during the marriage. The courts have adopted a broad definition to give the statutory provisions the broadest effect possible. Brooks v Brooks remains the most authoritative guidance on nuptial settlements where Lord Nicholls stated it must be a disposition of assets that makes some form of continuing provision for both or either of the parties to a marriage, with or without provision for their children. Cases such as Charalambous v Charalambous, N v N and F Trust, BJ v MJ (Financial Remedy: Overseas Trusts), DR v GR (Financial Remedy: Variation of Overseas Trust), AB v CB (Financial Remedies: Variation of Trust) and Quan v Bray all demonstrate the creative and purposive approach of the court to MCA 1973 s.24(1)(c).  

    It goes without saying that only property in a nuptial settlement can be subject of an order so it is important to identify and correctly delineate the extent of the property that is subject to a pre-nuptial or post-nuptial settlement. For example, the settlement that has a nuptial character may be only a small part of a much larger trust structure that does not have a nuptial character. In other cases, the nuptial settlement may straddle several individual structures or arrangements.  

    The court's powers of variation are very broad. For example, in C v C (Variation of Post Nuptial Settlement: Company Shares), the wife was given 30% of the company shares held in a trust, free of the trust. In Mubarak v Mubarak, variation of a trust was used as a means of enforcing a lump sum award against a recalcitrant husband in long running litigation. However, the trust was based in Jersey and the Jersey Court declined to enforce the English order. Instead, it invoked its own jurisdiction to vary the trust in accordance with the consent of the adult beneficiaries of the trust. And in BJ v MJ (Financial Remedy: Overseas Trust), to achieve an equal division of assets, Mostyn J made a raft of orders varying the trust by removing the wife as a beneficiary, requiring a payment of £500,000 from the trust to her absolutely, and settling £750,000 on her within a new settlement to provide her with a new home.

    The Facts of Joy v Joy-Morancho

    The husband (H) was 56 and the wife (W) 48. They had met in 2001 when H was living in the Grenadines. Their relationship had been on-off up until 2003; they subsequently married in 2006. They had three children (now aged between 9 and 4) and separated in 2011. 

    The family had substantial wealth that derived from H's lucrative commercial airline leasing business. He established a discretionary New Huerto Trust (NHT) in the British Virgin Islands (BVI) in December 2002. Its trustee (TB) was a professional adviser H had known for many years. NHT owned shares in an offshore company, LCAL, which was the vehicle for H's business. In 2013, H estimated the value of NHT's assets at £70 million, subject to £21 million of contingent liabilities in borrowing facilities with EFG Private Bank (EFG). NHT's assets included a portfolio of vintage cars worth £20 million. W had no assets or income of her own.

    Until 2009, H received an annual salary of about £120,000 from LCAL plus (what Singer J presumed were "prodigious") bonuses. He claimed this was the only distribution he ever received from NHT.

    H and the children were potential beneficiaries of NHT until 2010, when the family moved to France. W was never a potential beneficiary. H was advised that, for tax reasons, he and the children should be distanced from NHT and excluded from benefiting for a fixed period, until 2017. A deed to this effect was entered into in August 2010. LCAL ceased its air chartering operations and H built up the car portfolio, buying and selling expensive vintage cars and showing them on the international circuit. The family's living costs were met from funds made available for H to draw on at EFG and guaranteed by NHT, and followed a deposit at EFG by H of $2.1 million. H signed a counter-indemnity letter, undertaking to reimburse NHT for any amounts paid to EFG if NHT's guarantee was enforced. H's overdraft at EFG was £18 million by 2013.

    From 2010, the family's primary home was a French chateau, purchased in the name of a French property holding company (SCI), and funded by H's capital reserves and through the EFG debt facility. SCI's shareholding was subsequently varied, giving the parties' three children a 90% interest and H a 10% interest.

    Following the separation, H continued to occupy the chateau and W lived in rented accommodation nearby with the children. Heavily contested proceedings took place in France about arrangements for the children.

    Pre-Final Hearing Proceedings

    W started divorce proceedings in England in 2011, on the grounds that she and H were domiciled in the jurisdiction. H argued that he had acquired a domicile of choice in Spain. However, in 2013 H abandoned the claim, after complex litigation in which Singer J found that he demonstrated a significant lack of honesty. Decree nisi was pronounced and in May 2013, Singer J made an order restraining H and connected persons (including TB) from diminishing his worldwide assets below £35 million. The order allowed H to access £145,000 monthly. In June 2013, Singer J ordered H to pay maintenance pending suit (MPS) for W and the children for living expenses and legal costs. 

    H's Form E was served in July 2013 and annexed no trust deed or other documentation about NHT. Bannister J in the Commercial Division of the Eastern Caribbean Supreme Court had made an order absolving TB of any duty to provide H with documentation, and determining that H, as settlor, had no entitlement, in possession or reversion, to any trust assets and no right to require that any such entitlement be conferred on him.

    In September 2013, EFG notified H that TB was in default of the guarantee of H's debt facility, because EFG had not been informed that H had ceased to be a beneficiary of NHT from 2010. H could no longer make drawings and EFG demanded repayment of the sums loaned. NHT paid £12 million in its capacity as H's guarantor and issued proceedings, claiming it intended to recoup around $7 million from H's personal assets in France and Switzerland (although the value of H's assets specified at the final hearing appeared to be inconsistent with this figure):

    • French chateau, £2.5 million.
    • 1928 Bentley purchased in 2009, £472,000.
    • Piper Archer aircraft, £185,000.
    • land in Switzerland purchased in 2008, £1.7 million. 

    By late 2013, TB had already taken steps to exclude H permanently and irrevocably as a beneficiary of NHT, on the basis that the purpose of the trust was to benefit H's children and grandchildren and the trustees were obliged to protect NHT's assets from further losses which might arise because of the matrimonial proceedings. In November 2013, a deed was entered into to effect the exclusion, although Bannister J refused to approve it.

    After November 2013, H's only source of liquid capital was his 1928 Bentley, which he pledged to his solicitors on account of costs and which became the subject of protracted interim proceedings. W sought the Bentley's sale so the proceeds could be applied towards discharging arrears of MPS that H had failed to pay. 

    The 1928 Bentley was eventually transferred to NHT for £650,000, with £550,000 paid to H's solicitors to release their charge over it and the £100,000 balance used towards reducing H's liability to NHT. Following hearings in 2014, Singer J suspended H's liabilities for MPS and legal services provision and W's enforcement applications, pending the final hearing.  

    The Final Hearing 

    At the final hearing, H claimed he had been financially ruined and that he had only debts and no substantial assets or income because of NHT's claims against him. He argued he could not seek employment while living in France, was borrowing from friends and relatives and could only pay modest periodical payments for W and the children for the foreseeable future, and no capital.

    W sought a lump sum of £27million on the basis there were matrimonial assets of £54million and that H was not presenting a true picture of his financial position. She sought a finding that H beneficially owned the £20 million car portfolio and argued that the lump sum should be secured, in part, on properties in London held by NHT, which had a value of £4.5million. W also argued that NHT was an ante-nuptial settlement, capable of variation under MCA 1973 s.24(1)(c). 

    The key issue for Singer J at the final hearing was to determine the factual accuracy of H's description of events. 

    Singer J's decision 

    Singer J was concerned about the credibility of both parties, but found that H had exhibited blatant dishonesty. He described H's evidence in relation to the trust as a "rotten edifice founded on concealment and misrepresentation" and that his case was "a sham, a charade, bogus, spurious and contrived". W did not escape a tongue-lashing either with Singer J commenting "What she says must be subjected to close scrutiny and approached with a degree of scepticism having regard to the many extravagant and often inconsistent observations to which she committed herself".  

    However, he concluded that W's suspicions were correct and H had presented an''elaborate charade''. TB was bound, he said, to find a way for H to resume accessing NHT's assets to meet his income and capital needs after the financial remedy proceedings had concluded. In the foreseeable future, Singer J found that H was likely to return to car-related employment through NHT that would support a very affluent life-style. H's reasons for not currently seeking employment in France were, he concluded, to avoid tax.  

    Despite considering that there were indications that H, in reality, owned it, Singer J ultimately found that the car portfolio was owned beneficially by NHT. There were no internal accounting mechanisms within NHT showing H's personal expenditure and his expenditure on behalf of the trust.  

    Significantly, Singer J concluded that when NHT was settled in 2002, the parties were not in a relationship that was committed to the point of marriage. Marriage had only been contemplated as a "future contingency". NHT was not therefore a settlement made in contemplation of the parties' marriage and therefore lacked the nuptial element that would make it an ante-nuptial settlement, capable of variation (Burnett v Burnett). Singer J went on to confirm that Coleridge J's obiter proposition in Quan v Bray, that a settlement that is not nuptial at its inception can later become nuptialised, was incorrect. Instead, Singer J agreed with the conclusion in K v K that Burnett v Burnett ''clearly establishes that a non-nuptial settlement cannot become a nuptial one''.

    Given his conclusions, Singer J made the following orders:

    • adjournment of W's claims for lump sum and property adjustment orders. A supervisory regime was imposed to prevent H dealing with assets without W's knowledge. Singer J attributed H with an earning capacity of £200,000 a year and awarded W MPS, followed by annual periodical payments of £120,000; and 
    • H to pay all W's financial remedy proceedings costs since May 2013, (excluding those where a no costs order had been made) on an indemnity basis and within 14 days. This totalled £334,000. Singer J took H's ''outrageous conduct'' into account, saying that it would be "grossly unfair" to W not to regard H's conduct as the "prime touchstone" in the case but he did not impose a punitive element in making the costs order. He emphasised that "such conduct unravels all" whilst at the same time stressing the exceptional and extreme nature of the case where a "clear costs condemnation" had to be meted out by the court.  

    Implications

    This case illustrates the court's difficulties where a party is intent on putting offshore trust assets beyond its reach in financial remedy proceedings. Putting to one side the matter of concealment and non-disclosure, there are always additional issues at play when offshore trusts are involved. Whilst a trust can be varied by the English court even if located offshore (Charalambous v Charalambous), most offshore jurisdictions have placed restrictions ("firewall legislation") on its courts enforcing an overseas court order purporting to vary a trust in their jurisdiction and thereby reducing the effectiveness of the English variation of settlement order.

    It is a highly unusual step for a party's capital claims to be adjourned, because the general approach is that there should be finality in litigation and capital claims should not be left unresolved indeterminately. However, Singer J found this was a hard case that fell into a narrow category of decisions where fairness and justice meant the adjournment of W's capital claims had to have priority over the normal desirability of finality (Hardy v Hardy and MT v MT (Financial Provision: Lump Sum)). 

    In making that decision, Singer J reviewed other options available to him and considered they would be ineffective. He took into account TB's rigorous determination to protect NHT's assets. TB's open position in the face of proceedings was that the purpose of the trust was to benefit H's children and grandchildren and he was obliged to protect it from losses arising from W's financial remedy claims (i.e. continue to exclude H as a beneficiary for as long as W was attempting to make a claim). Singer J acknowledged that were he to make orders against H, he was sure TB would not make the necessary funds available to him to meet the obligation. On the findings, as a matter of law he could not make orders against NHT directly, but if he could, W was likely to face a doomed struggle to enforce them. W was in an invidious position. 

    Given H's ''elaborate charade'', Singer J questioned whether the arrangements by which NHT owned the car portfolio were a sham, ''at least in the non-technical sense of things not being quite what they appear''. He accepted that W's legal team had ''understandably'' not run W's case on the basis that NHT was a sham and that even if he were to make such a finding in the ''technical fiduciary-related sense'', the BVI court was unlikely to accept the conclusion and agree to enforce the English court's orders.

    W is likely to face difficulties whenever she does seek to restore her applications, given the steps H has taken to date to avoid meeting her financial claims and the costs of further litigation. It also remains to be seen how effective the supervisory regime is, imposed to prevent H from dealing with assets going forwards. Having spent in the region of £2million between them in legal fees, W could be forgiven for feeling like she has spent a lot of money to achieve very little given the inevitable prospect of further litigation. Even Singer J said "neither party has won". 

    The case is also significant in that it confirms that a trust that is non-nuptial at its inception cannot subsequently become nuptialised (contrary to the obiter comments of Coleridge J in Quan v Bray). Singer J concluded that were it otherwise every truly dynastic settlement without a nuptial character at its inception that provided benefits for an individual who subsequently became a spouse, would arguably become variable as soon as that individual, once married, received the benefits.  

    But what of the vintage Bentley? Drolly, Singer J said the car had been "high in his [H's] affections, although not sufficiently in his mind when in May 2013 he failed to include it in a list of his worldwide assets worth more than £100,000". All the dealings with the car were, on the face of it, contrary to a restraining order and it would seem H and his legal team only avoided the risk of imprisonment for contempt thanks to W's decision not to pursue her applications for committal. The car has now been bought for $1.06m by a purchaser in New Jersey.

    Nicola Rowlings
    Professional Support Lawyer, Mills & Reeve LLP

Article, published: 02/10/2015

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Published: 02/10/2015

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