Think before you leap – are family trusts a ‘soft target’?

Mr Justice Holman is not known for ‘pulling his punches’ and his directness was apparent again in another judgment handed down shortly before Christmas. This decision (Ankul Daga v Aparna Bangur) will be of interest to trustees who are caught up in financial proceedings on a divorce.

The focus of the husband’s claims was two discretionary trust funds of which the wife was the settlor and a beneficiary, and which had combined assets of the equivalent of about £17.5 million (although his Counsel did argue that the wife could make the payment sought from her own assets in India). Ultimately the husband’s claims were dismissed and the judge had this to say:

‘But 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’.

The first point to make is that cases like this are all fact specific and care needs to be taken about extracting general principles but the judge was very clear about the appropriate outcome in this instance.

The couple met when they were both aged 20 and undergraduates at Warwick University. Their relationship started in 2003, they married in 2007 and the final breakdown was in 2016. According to the judgment the wife’s parents never approved of the match and always regretted that their daughter had married this particular husband. There was one child.

Throughout the marriage the parties lived in rented accommodation in London paying the rent out of their joint income. They were both successful, middle class, professional earners but they never owned their own home or, indeed, any property in England. The wife did, however, acquire some property and other assets in India funded by the generosity of her father. It was agreed that there were no marital assets and the husband based his claim on ‘need’ – he wanted to buy a home for £2.5 million (inclusive of purchase costs).

In 2015 the wife, as settlor, created the two discretionary trusts. The trusts were in identical terms and the trustees were the same. The current trustees were a company incorporated in Saint Vincent and Grenadines. The beneficiaries were ‘family members of the settlor, including the settlor’. Initially only nominal amounts were settled into each trust but in early 2016 the wife’s father made various substantial payments to the wife and by mid-June 2016 the total sum settled in the two trusts was about US$23 million.

The husband initially argued for £2.5 million but later reduced this to £1-1.5 million. This was against the ‘tragic’ backdrop of the parties having spent or incurred between them over £1m on legal costs; £380,000 related to litigation about their son and about £650,000 on finances. Savings built up during the marriage had been wiped out. There were no liquid matrimonial assets and each party had considerable debts. The husband argued that the judge should make a lump sum order designed to give ‘judicious encouragement’ to the trustees to distribute funds with which the wife could make the payment to him. This was despite the fact that no distributions had ever been made by the trustees.

The husband’s pleas fell on deaf ears. The judge was not prepared to accept either that the husband had the need he claimed or that the trusts were a ‘resource’ available to the wife.

As to the husband’s needs the court found that he did not have any objective, reasonable or justifiable need for a lump sum from the wife. He had a need to clear his debts but these were entirely referable to the costs he had incurred and a lump sum for that purpose would be the same as making a costs order in his favour which could not be justifiable. The judge expressed some sympathy for the husband’s position but found that it ‘is simply beyond argument that the husband can sustain into the foreseeable future a very good lifestyle, entirely comparable to that enjoyed during the marriage, without the need for any capital provision at all, but based (as it always has been) on renting’. The judge also thought that it was ‘highly unlikely’ that the wife would be able to purchase any home in England in the foreseeable future.

On the ‘resource’ point the judge was clear that the trust funds were not an available resource. The judge determined that whilst the husband fell within the class of discretionary beneficiaries prior to the decree absolute he did not post the decree absolute. The judge also referred to letters of wishes signed by the wife in which she indicated that it was her ‘irrevocable wish that the trustees act on the advice of my Father in regards to all matters concerning the Trust…’ He therefore proceeded on the basis that, even if a lump sum order was made, the father would advise the trustees not to distribute funds to the wife. The court must not put undue pressure on the trustees and the judge concluded that the trustees were highly unlikely to make funds available whatever he may say or do. There were various reasons to support this conclusion. The trustees were not within the jurisdiction of the court; they had never made any distributions to the wife or her needy son; there were very strong letters of wishes and it was highly likely that the father’s attitude would determine the trustees’ attitude.

The judge therefore ordered a clean break between the parties and ended his judgment by expressing the view that it would conclude ‘this destructive litigation’.

It can obviously be difficult to be objective in the midst of a highly charged divorce but this case demonstrates how badly wrong things can go.