The Family Division of the High Court has continued in its efforts to disregard a company's separate legal personality in order to bolster the matrimonial pot, following the case of DR v GR and Ors (Financial Remedy: Variation of Overseas Trust) [2013] EWHC 1196 (Fam).

Background

The couple were married for over three decades and, in that time a Jersey discretionary trust was established for the benefit of: (1) the husband (H); (2) any person who was or had been his spouse; (3) the issue of any person within (1) and (2), and any spouse of a person in (3). The trust topped a complex structure comprising of three corporate levels, at the bottom of which sat two UK companies owning two retirement villages in Lincoln and Gainsborough, as well as other UK assets.

In divorce proceedings the Wife (W) sought to vary the trust to allow for an outright transfer of one of the retirement villages by applying under s.24(1)(c) of the Matrimonial Causes Act 1973 ("MCA") for a variation of a post-nuptial settlement. H and the companies argued that the Court's power of variation was limited only to the discretionary trust itself; as such, only the shares in the Liberian company could be dealt with by the Court, not the retirement villages.

The Court was therefore asked to consider whether the interposition of the companies between the trust "at the top of the tree" meant that they could not deal directly with the assets "at the bottom of the tree".

Judgment

The Court considered that the definition of a 'settlement' under s.24(1)(c) MCA was a very wide one and developed a test for the composition of a 'nuptial settlement' as "any arrangement which makes some form of continuing provision for both or either of the parties to a marriage."

As the trust structure in this case comprised of assets being held by a group of companies and was arranged to provide for parties to the marriage, the Court held that the entire structure, when viewed as a whole, was a 'nuptial settlement'. Indeed, the Court did not accept that the interposition of companies between the trust at the top of the tree and the assets at the bottom, impeded its jurisdiction. Accordingly, the Court was entitled to vary the settlement so that the underlying assets, including the retirement villages, acted as security for an outright payment to W, payable by H and the trust within two years.

The Court went even further by suggesting that a company itself, which is not owned by a trust, could be regarded as a 'settlement' under s.24(1)(c) MCA, provided that it had traditionally made provisions for parties to a marriage and therefore had a sufficient nuptial element.

In addition, the Court considered an issue of procedure relating to the joining of trustees and companies in variation of settlement applications. The Court commented that under the Family Procedure Rules 2010 such parties need not automatically be joined to proceedings and outlined principles for joinders. In this case it was found that there was no need for the trustees and companies to be parties to the proceedings, who were accordingly disjoined.

Comment

While the recent landmark divorce case of Prest v Petrodel closed one chapter on the use of company assets for the benefit of a spouse in divorces, DR v GR has potentially opened up another chapter of equal significance. It is worth noting that the applicant wife in Prest v Petrodel attempted to argue the scope of s.24(1)(c) MCA but was declined by the Supreme Court, as it considered this was not "seriously arguable". This may indicate that the higher courts may have reservations over the decision in DR v GR if it is appealed and therefore places doubt on the weight to be given to it.

For the time being however, the decision in DR v GR still stands as good law and certainly adds to the increasing hurdles faced by wealthy individuals who wish to safeguard assets from the risks of divorce. In particular, wealthy individuals should now be cautious of using companies within their structure that safe house assets but simultaneously act as a funder to the spouses for nuptial, rather than commercial, reasons.

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