Nd v Sd (1St Respondent) Y Trustees Ltd (2Nd Respondent) Ph (3Rd Respondent)

JurisdictionEngland & Wales
JudgeMrs Justice Roberts
Judgment Date21 June 2017
Neutral Citation[2017] EWHC 1507 (Fam)
Docket NumberCase No: ZC14D02449
CourtFamily Division
Date21 June 2017

Financial remedy – Trust – Self-declaration of trust – Whether legal sham – Whether dishonest intent – Whether wife retained beneficial ownership of company shares – Whether trust deed was reviewable disposition.

The husband and wife were born abroad but later moved to England. When they married in 1982, neither of them had any assets. After both obtaining Masters degrees, they set up an English property lettings business, which grew into a very substantial property investment portfolio. At the beginning the wife worked every day in the business and the husband helped when he was not at work; after a couple of years the husband left his employment and joined the wife to grow the business further. At this stage they each owned 50 per cent of the share capital in the business and were both directors of the company.

In 1994 the couple agreed on a corporate restructure for tax reasons; a new company, C Ltd, was set up in the husband’s country of origin. Because non-residents were not permitted to own shares in companies registered in this country, the legal title to the shares in C Ltd was initially divided between two resident corporate entities, as nominees; within a few months, a different solution was found and legal title in the C Ltd shares was transferred to the husband’s sister and brother-in-law. Effective day-to-day management of C Ltd was given to the husband by means of a power of attorney. The wife claimed that the restructure involved attendance at a series of meetings, during which she signed paperwork confirming that she held a beneficial interest in 50 per cent of the shares in C Ltd. The husband denied that there had been any such meetings or paperwork. The husband appointed a friend of his sister’s, EW, to act as C Ltd’s lawyer.

In 1998 a new company, D Ltd, was incorporated in England; this was owned equally by the husband and wife, and was used to acquire a significant property portfolio in north London. Over the years, various other companies were set up, some as wholly owned subsidiaries of C Ltd.

In 2002 the wife and the couple’s two children moved from the family home in north London to a home in the wife’s country of origin, on the basis that the husband would move with them and commute as necessary into London. Their property business expanded into this other country; the new company set up for this was a subsidiary of C Ltd, but the couple were listed as equal shareholders and were both directors. Various deeds were prepared at this time by EW; no signed versions survived but the drafts both indicated that the wife owned 50 per cent of the shares in C Ltd.

Unbeknown to the wife, in early 2006 a new holding company called N Ltd was set up by EW in the husband’s country of origin, with one of EW’s employees as the named shareholder holding the N Ltd shares on trust for the husband; the shares in C Ltd were then transferred to N Ltd by the husband’s sister and brother-in-law. At the same time EW created a draft trust deed providing for the husband, as settlor, to vest the shares in N Ltd and his 50 per cent of the shares in D Ltd in a trust to be run by EW’s recently established in-house corporate trustee vehicle; the named beneficiaries were the children and the husband; the protector was EW. However, the 2006 draft was never signed or implemented. Instead, in 2007 a slightly different version of the deed was signed and implemented, naming the children but not the husband as beneficiaries. The signed deed setting up the trust provided for the husband to continue to manage and operate C Ltd and D Ltd. In fact, the D Ltd shares were never transferred.

From about 2006 onwards the marriage was clearly in serious difficulties; the husband considered that the separation happened then; the wife did not view the marriage as over for another few years.

In 2013, needing to refinance because the bank that had provided loan funding for the business had collapsed into insolvency, the husband arranged for a new trust deed to be created, whereby N Ltd transferred all its shares in C Ltd to another of EW’s employees (PH), to be held on trust for the husband. The husband accepted that this was a sham trust, containing information that was not true.

The wife issued her divorce petition in 2014, after reading a copy of the husband’s will which asserted that she had no interest in C Ltd, now worth in the region of £50 million. In the course of the wife’s financial remedy proceedings, the husband disclosed in his Form E the existence of the 2007 trust.

The court was asked to decide as a preliminary issue whether the trust was genuine. Other issues in the case concerned the beneficial ownership of the shares in C Ltd. The trustees and PH, the legal owner of the shares in C Ltd under the 2014 deed, were parties to the proceedings, and were represented.

Held – (1) Applying National Westminster Bank v Jones [2001] 1 BCLC and A v A[2007] EWHC 99 (Fam), in order to establish that a trust was a legal sham: (i) there must be a dishonest intent, and (ii) where instruments or agreements were properly and formally drawn, absent a dishonest intent, there was a strong presumption that the parties intended to honour their rights and obligations thereunder. Before transactions or documents would be construed by the court as sham transactions, all the parties to them must share a common intention that the documents themselves would not create the legal rights and obligations which they gave the appearance of creating. In this context it was important to distinguish between motive as distinct from intention. It was sufficient for these purposes if the parties genuinely intended their agreements to be given effect in the form in which they were recorded; the courts would not enquire into their motives for so intending. it was an established legal principle that ‘if what is done is genuinely done, it does not remain undone merely because there was an ulterior purpose in doing it: applying Miles v Bull [1969] 1 QB 258 at 264. Very significantly, it was not sufficient to show that the settlor had a dishonest intention; unless the original or the current trustee was a party to a sham, the trust would not be a sham. It was clear from A v A that a trust that was not initially a sham could not subsequently become a sham (see [184], [188], [190], [191], [240], [244], below).

(2) As set out in Lewin on Trusts, 19th Edition (2015) para 3-004, no specific formalities were required for a self-declaration of trust: ‘If the property is in his own name, he simply makes a declaration’. Other than a requirement to identify the property to be settled, no more was needed in the case of a self-declaration. The husband here had declared in the context of a formal legal document that he was giving property to a trust which he himself had established. Although the shares in D Ltd had not been vested in the trust formally, the court was satisfied that since 2007 the husband had been holding those shares on trust for the trustees (see [238], below).

(3) Subject to the separate issue of what had gone into the trust at its inception, the court had no discretion in terms of maintaining a level playing field for this wife; either this was a genuine trust or it was not. In order to establish that the 2007 trust was a sham, the wife must establish on the balance of probabilities that both the husband and EW had intended that the trust assets would be held on terms other than those set out in the 2007 trust deed and that each of them had intended to give a false impression of the position to third parties. She had failed to do so. The trust set up in August 2007 was not a sham and nothing said or done subsequently in 2014 could make it a sham (see [201], [240], [244], [263], below).

(4) The 2014 deed of trust had been a sham transaction. The transfer of the legal ownership of the shares in C Ltd to PH and the registration of her ownership of those shares in the ‘Register of Certificates’ on 20 March 2014 had been effective to transfer the legal title of the C Ltd shares into her sole name but could not affect the underlying beneficial interests, which remained as they had been under the 2007 deed of trust (see [263], below).

(5) The wife had retained a beneficial interest in 50 per cent of the shares in C Ltd. She was entitled to call for an immediate transfer into her name of 50 per cent of the C Ltd shares. The 2007 deed of settlement had the effect of settling into the trust the husband’s beneficial interest in (a) 50 per cent of the shares in D Ltd and (b) 50 per cent of the shares in C Ltd. Subject to the trustee exercising the power which it held (with the consent of EW as protector) to add to the class of beneficiaries, the beneficial interest in those shares was now held for the children of the family. The legal ownership in the shares in C Ltd now vested in PH, following the sham transaction of 2014, but in equity, PH held those shares as to 50 per cent for the children of the family in accordance with the terms of the trust and as to 50 per cent for the wife, whose beneficial interest in the shares remained unaffected by the terms of the 2007 deed of settlement (see [263], [264], below).

(6) The court declined to hold that that the 2007 trust deed constituted a reviewable disposition for the purposes of s 37 of the 1973 Act. On the wife’s case the parties had not even separated when it was set up and there were no proceedings or any indication of a financial claim on her part until over 7 years later. The transfer of the husband’s 50 per cent interest in D Ltd and C Ltd into the trust could not be said to have been undertaken for the purposes of defeating the wife’s claims in the context of an application for financial remedy orders. The statutory presumption did not apply and she currently held her own 50 per cent interest in both D Ltd and C Ltd. Given the present value of those shareholdings, and for the purposes of this preliminary issue...

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