Posted: 08/04/2019
The ability of the Family Court to determine that assets owned or controlled by third parties, such as discretionary trusts or capital owned by a parent, are available to meet the needs of a separating spouse by virtue of s25(2)(a) of the Matrimonial Causes Act 1973 can cause difficulties to practitioners and clients alike. These assets are not in the absolute ownership of either of the separating spouses (although they may have an interest in them) and, as such, many think that they should be disregarded during the computation exercise of the court.
However, the Family Court can determine that these assets are available to a spouse and, while they cannot make an order against the third party, it can give them so-called ‘judicious encouragement’ about how the funds in their control should be applied. This concept was recently considered by Mr Justice Holman in the case of Daga v Bangur [2018] EWFC 91.
The parties, both of whom were under 40, married in 2007 and separated in 2016. They had one son with disabilities but both of them worked full time, earning sufficient income to meet their respective needs. The parties had never owned their family home as they had always rented. So, by the time of the final hearing, they had little by way of capital as they had spent significant sums litigating the finances as well as on the arrangements for their son.
The wife had a property and shares in India gifted to her by her father, although her father stated that these assets were security for the funds he had lent her during the course of the proceedings. In addition, the wife was one of a pool of beneficiaries of two separate trusts, the Mount Keen Trust and the Kiwara Trust. These were discretionary trusts that had been set up by the wife in 2015 upon the instruction of her father.
After creating the trusts, the wife had prepared letters of wishes which stipulated that the trustees should “act in accordance with her father’s advice” when distributing the trust funds.
Between March and June 2016, the wife’s father had transferred significant funds into an account in the wife’s sole name on the basis that she would then transfer the funds into one of the two above-mentioned trusts. The combined value of the trusts at final hearing was £17.6 million.
The husband initially sought a lump sum of £2.5 million to meet his needs, although this had been reduced to £1.5 million by the time his counsel gave his closing submissions. The husband’s case was that the wife could meet his needs by either liquidating her assets in India or persuading the trustees to make a distribution to her. Thus, the husband was asking the court to give the trustees judicious encouragement as to how to apply the funds held in either or both of the aforementioned trusts.
Mr Justice Holman found that the husband had failed to make his case on needs and that, in any event, the trusts in this case were not a resource available to the wife because:
a) the wife had never received funds from the trust for her benefit or the benefit of her “very needy son” and
b) the advisor to the trust, the wife’s father, made it clear during his oral evidence that he would not advise the trustees to distribute any funds during his lifetime or the lifetime of his daughter.
On this basis, the judge stated that it would be unreasonable for the court to expect the wife to persuade the trustees to distribute funds to her. The judge referred to the “overarching requirement” of the court - before relying upon judicious encouragement - to be satisfied that the trustees would be likely to respond to the court’s encouragement so that funds would actually be made available. He concluded that, in this case, the trustees would not.
Although the courts have cited judicious encouragement for many years, Thomas v Thomas 1995 is arguably the leading authority on this issue. The husband, Mr Thomas, had taken steps to tie up his assets and income by providing the family home as a guarantee to meet his liabilities (by virtue of his membership of Lloyds) and by receiving only small dividends from his family-run company.
The trial judge had made an order compelling the husband to meet the wife’s capital needs - despite the liquidity issues he faced as a result of the guarantee to Lloyds - and made a Periodical Payments Order (PPO) to the wife which, on the face of matters, left the husband in an income-deficient position each month. The husband appealed the order on the basis that the trial judge had gone further than the court’s discretion would allow.
On appeal, Waite LJ took a robust approach towards Mr Thomas and stated that, in his view, the husband would be able to rely upon his family to meet the deficiency in his income by changing the company’s policy and paying him more.
Despite the encouragement given, Waite LJ was careful to confirm that the court’s ability to provide judicious encouragement was subject to the following caveats:
“The court will not act in direct invasion of the rights of, or usurp the discretion exercisable by, a third party. Nor will it put upon a party undue pressure to act in a way which will enhance the means of the maintaining spouse. This does not, however, mean that the court acts in total disregard of the potential availability of wealth from sources owned or administered by others…”
While noting the limitations of the court to make orders against third parties, the judge was keen to emphasise that the court will go to great lengths to encourage third parties to act in a particular manner in order to achieve a fair settlement:
“There are bound to be instances where the boundary between improper pressure and judicious encouragement proves to be a fine one, and it will require attention to the particular circumstances of each case to see whether it has been crossed…”
It is of note, however, that in Thomas the wife was awarded only a small proportion of the husband’s overall wealth and the award did not exceed the assets in the absolute ownership of the husband. The court had therefore satisfied itself that the husband could meet the award without the assistance of any third parties, although he himself would have been left with very little without that assistance.
The court has subsequently drawn a distinction between encouraging trustees to release funds to a separating party - the trustee’s fiduciary duty being to reasonably discharge trust funds to the beneficiaries - and encouraging third parties to do the same. In TL v ML 2005, the wife asked the court to encourage the husband’s parents to release funds to the husband in order to meet her claim. The judge, Nicholas Mostyn QC, stated as follows:
“If the court makes a reasonable request of trustees to make funds available to meet an ancillary relief award then it can assume that ordinarily the trustees will accede to such a request. The same cannot be assumed of a request of a mere donor, for it is his prerogative to be unreasonable, if that is his inclination.”
Effectively, therefore, the judge placed a greater onus on trustees of discretionary trusts to make funds available to meet a financial order if they are asked to do so.
This was another trust case that reiterated the requirement that trustees must be “likely to advance capital immediately or in the foreseeable future” for judicious encouragement to be given. In this case, the letter of wishes made by the husband requested that the trustees make the assets available to him and, as such, the assets in the trust were treated as already belonging to the husband. The court offset the trust assets against the other matrimonial assets (the wife thereby receiving a greater share of the matrimonial assets and the husband the trust assets, as per Thomas v Thomas, and TL v ML above).
The AM v SS 2014 case displayed the ability of a third party to refuse to provide funds, despite how unreasonable their stance may be. In this case, the wife was attempting to persuade the court that the husband’s father’s wealth should be taken into account. In evidence, the father was clear that he would not provide funds to meet his son’s liabilities, particularly those that related to his wife. The court was therefore reluctant to conclude that the father’s wealth, great though it was, was an available resource to the husband, other than to prevent any grave hardship.
To assess the likelihood of a trust or third party property being determined as an available resource to a separating spouse - and thus, judicious encouragement being given - one must consider the previous distributions or funding that have been given; the attitude of the third party involved; and the overall assets in the case. Although the court is unlikely to make an award in excess of the matrimonial funds available, it may well offset matrimonial funds against third party resources.
For discretionary trusts, in particular, the court will look at the nature of the property in question. For example, if it was originated as matrimonial property, the trust may arguably be nuptial in any event. It will also look at the letter of wishes where there is one, together with the intentions of the trustees in respect of the trust funds, both stated and inferred. The court must be satisfied that the interests of the other beneficiaries in the trust are not appreciably damaged by the trustees making a distribution to the beneficiary in question.
Before giving judicious encouragement in any case, the court must consider whether or not any funds are likely to be advanced to the separating spouse. In the case of a beneficiary of a discretionary trust, the court is more likely to conclude that funds will be made available. However, that is not to say that judicious encouragement will be given in every case where there is a discretionary trust. In Daga v Bungur, Holman J stated:
“This tragic and destructive case should stand as a cautionary tale to those who would embark on expensive litigation which they can ill afford in the hope of prising money from a discretionary trust. A very careful and cool appraisal needs to be made at the very outset as to how realistic a prospect that really is”.
While many will still think it wrong in principle for a third party to be embroiled in protracted matrimonial proceedings and then be encouraged to make their funds available in a certain way, there are policy reasons as to why judicious encouragement exists, as per Waite LJ in Thomas v Thomas:
“The discretionary powers conferred on the court by…s23-25A of the Matrimonial Causes Act 1973 to redistribute the assets of spouses are almost limitless. That represents an acknowledgement by Parliament that if justice is to be achieved between spouses at divorce the court must be equipped, in a society where the forms of wealth holding are diverse and often sophisticated, to penetrate outer forms and get to the heart of ownership…”
Judicious encouragement is then, at its heart, a means of protecting vulnerable parties against those who may attempt to mislead the court about their wealth and the assets that are, in reality, available to them. But, as the case of Daga v Bungur shows, very careful consideration must be taken when advising clients about the potential risks and pitfalls of such applications when discretionary trusts are involved.
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