Defined purpose

Fiona O’Sullivan analyses the approach of the Court of Appeal in a case concerned with charitable trust assets.

In Quan v Bray [2017] the Court of Appeal had an opportunity to consider the status of trust assets and how they should properly be accounted for in financial remedy proceedings. The issue was important to the wife's financial claims as, during the marriage, the trust had received funding of £19.8m. If the wife had successfully persuaded the court to include the trust assets, this would have swelled the matrimonial resources significantly.

Background

The husband and wife met in 1989 when both studying for MBAs in Pennsylvania, USA. They married on 1 August 2001. There were no children of the marriage.

During the late 1990s, the wife became increasingly interested in wildlife conservation, particularly the conservation of the endangered South China tiger. On 6 April 2000, Save China's Tigers UK (SCT UK) was set up in the UK as a charity by the wife, the husband and Mr David Thomas. The purpose of the charity was to assist China with the conservation of the South China tiger. The wife, having seen other support of wildlife in South Africa by way of eco-tourism, wished to develop a similar model to save tigers in China. The project was to be funded through a trust to be called Chinese Tigers South African Trust (CTSAT). There were logistical arrangements in the early days of the trust including problems with regard to funding, but CTSAT was finally created on 18 November 2002 with a framework agreement establishing the Chinese tiger project, with the core objective of rehabilitating 'Chinese tiger cubs captive bred [in South Africa] to China' through the tigers becoming able to sustain themselves in the wild. Substantial obligations were imposed on CTSAT including the establishing and financing of a pilot reserve in China to support the rewilding of the Chinese tigers bred in South Africa under the programme.

A trust deed in respect of CTSAT provided for the distribution of any residual trust funds to the beneficiary on termination of the trust. The sole beneficiary was SCT UK. Most importantly, the SCT UK articles of association made specific reference as follows:

If upon the winding up or dissolution of the Company there remains, after the satisfaction of all its debts and liabilities, any property whatsoever, the same shall not be paid to or distributed amongst the members of the Company, but shall be given or transferred to some other charitable institution or instruction having objects similar to the objects of the Company.

It was this trust that the wife sought to persuade the court to vary as a post-nuptial settlement.

By December 2002, the relationship between the husband and wife and the original funders had broken down completely, resulting in litigation in South Africa that, although successfully resolved in favour of the husband and wife, seriously damaged the financial viability of the project. Importantly, this litigation required the husband and wife to file affidavit evidence that, in the subsequent financial remedy case, gave an account which was entirely consistent with the husband's position at the trial but entirely inconsistent with the wife's position. The wife's evidence in the litigation suggested that CTSAT had been set up urgently to step into the original funder's shoes and with a single charitable purpose. Her case in the financial remedy proceedings however was that she was largely unaware of what was going on at the time CTSAT was set up.

When the adverse impact of the litigation with the original funders threatened the financial viability of the project, the husband aimed to raise money for the trust using his considerable expertise in structured finance to put together investment packages to sell to external investors. Despite his endeavours there were insufficient investments from external funders and funding for the project was therefore augmented by way of loan and donation from the husband. This funding was later the subject of litigation between the husband and the lender, G Bank. The settlement of that litigation resulted in £19.8m being donated by G Bank to STC UK.

By April 2011, the marriage had broken down, and on 15 August 2012 the wife issued a petition for divorce.

On 21 August 2012, the wife filed a financial application in Form A. Importantly, in her Form A the wife did not include an application for variation of a post-nuptial settlement (ie of CTSAT) which would have enabled the court to bring into account the substantial trust assets. Through her solicitors on 31 November 2012, it was clarified that she simply sought to establish the donations made by the husband to the trust 'to ensure that they cannot subsequently be retrieved or diverted away from the charitable objectives'.

Perhaps surprisingly, the husband was largely unrepresented throughout the proceedings.

On 17 July 2013, some 11 months after the start of the proceedings and after a change of solicitors and counsel, the wife amended her Form A to include a claim to vary CTSAT as a post-nuptial settlement.

The final hearing was due to start on 9 December 2013. The trial judge, Coleridge J, identified the issues to be determined as:

  • The circumstances under which the Chinese tiger trust was set up;
  • The purpose of those trusts;
  • Whether those trusts were nuptial settlements;
  • The availability of funds within those trusts for the parties; and
  • Whether the funds within those trusts could only be utilised for tiger conservation.

The law

In his judgment, Coleridge J made it clear that if he was to conclude that CTSAT was a post-nuptial settlement, then it could be varied by the court and the funds unlocked to be the subject of claims by the wife. He expressed the view that, while not applicable to the present case, a settlement that is not nuptial at its inception can later become 'nuptialised' if there was a flow of benefit to the parties during the marriage from the trust.

If the trust was not a nuptial trust in the circumstances of this case, Coleridge J made it clear that the wife could still pursue a claim on the assets following Thomas v Thomas [1995]. That line of authority enabled the court to assume that the trustee would respond favourably to a request from one of the parties to the marriage for funds to be released to them. In Thomas, Glidewell LJ said:

If on the balance of probability the evidence shows that, if trustees exercise their discretion to release more capital or income to a husband, the interests of the trust or other beneficiaries would not be appreciably damaged, the court can assume that a genuine request for the exercise of such discretion would probably be met by a favourable response. In that situation if the court decides that it would be reasonable for a husband to seek to persuade trustees to release more capital or income to enable him to make proper financial provision of his children and his former wife, the court would not in so deciding be putting improper pressure on the trustees.

In Quan, Coleridge J was not persuaded by this argument and held that CTSAT could not be regarded, in the sense of assets per s25, Matrimonial Causes Act 1973, as a resource, saying:

CTSAT was always, and is, only for the Chinese Tigers. Accordingly it is not a post-nuptial settlement which can be directly invaded by a court order.

The judge did not specifically answer the five questions posed prior to the final hearing referred to above, but in his judgment identified three factual questions underlying the questions of law that he needed to determine, ie:

  • Whether the husband was ultimately capable one way or other of procuring changes to CTSAT to enable the parties to benefit from it;
  • Whether there was evidence to demonstrate past, present or future benefits to one or other of the parties from CTSAT; and
  • What was, or were, the intention or intentions underlying the creation of CTSAT.

In the witness box over the course of three days, the judge formed a very poor view of the wife. He held that her evidence was 'wildly inaccurate' in places, particularly in relation to the parties' standard of living. He concluded:

I am driven to find, overall, that she is an unreliable witness upon whom the court cannot rely. This is specially so when deciding where the truth lies about the underlying purpose of the CTSAT and any discussions which took place at the time of its creation.

He added that:

The wife is a very intelligent person, but she has become blinded by her desire for revenge and this has led her to fabricate where she thinks it will assist her case.

In contrast, Coleridge J found the husband to be a very compelling witness, commenting:

At the end of the day his passion for the Tiger Project was as evident as it was the wife and the longer he gave evidence the more convinced I became that he was telling the truth and doing his best to assist the court in arriving at the right answer. In contrast with the wife's evidence, I found his evidence bore all conventional hallmarks of honesty and accuracy.

Coleridge J held that the assets of CTSAT were for the Chinese tiger project, and that it would be wrong to make a lump sum order against the husband in the hope and expectation that funds will be provided by the trustees, as he reached the conclusion that the trustees would not grant such a request.

Court of Appeal

In her appeal, the wife sought to challenge the judgment of Coleridge J on the following bases:

  • That the judge had failed to give adequate reasons for his findings, and she challenged the reasons he did give;
  • That the failure to give adequate reasons was reflected in the fact that he inadequately analysed certain critical topics that would have informed his central findings;
  • That had the judge properly conducted this exercise he would have found that CTSAT was at least in part for the benefit of the parties from inception and therefore a post-nuptial settlement; and
  • That under the Thomas approach, the assets of the trust were a resource that could be called upon by the husband.

King LJ, who gave the leading judgment, summarised three considerations to be addressed on appeal arising from the submissions for the wife:

  • Was the basis on which the judge reached his decision clear, and could the parties understand the basis on which he reached his decision?
  • Were any or all of the topics raised by counsel on behalf of the wife critical to the decision of the judge, or did they fall within what might be termed the judge's margin of appreciation as to what issues were critical and what were peripheral to the determination?
  • On an analysis of the evidence available, if the judge had specifically made findings in respect of the issue/issues in question, would the outcome have been different?

In a unanimous decision, the Court of Appeal held that the judge's findings on the critical issue of the purpose of CTSAT would have been the same even if he had dealt specifically with all of the issues raised on behalf of the wife. As the wife's case sought to go behind the terms of the available written documents, the judge's assessment of the parties' credibility was critical and he was entitled to reach the conclusions he did. The Court of Appeal decided that Coleridge J made no error of law when concluding that CTSAT's assets were not a Thomas resource, nor in concluding that CTSAT was not a post-nuptial settlement.

The substantial assets were therefore found to be available for the Chinese tiger project and only for the Chinese tiger project.

Conclusion

This decision highlights the issue of the treatment by the higher courts of trust assets and reinforces previous authorities. It reminds practitioners of the importance of considering family law issues at all stages of trust planning and management. However, the majority of the appellate court's time was spent in considering the wife's attempt to persuade Coleridge J to rewrite his judgment by way of a Barrell application (per Re Barrell Enterprises [1973]), a course of action the judge regarded as a misuse of the process, and the Herculean task of the wife to persuade the Court of Appeal that the judge was wrong in law to discount the accuracy of the documentary evidence having formed such a damning view of the wife's credibility.

The case merits interesting reading for consideration of the range of possible arguments to present on appeal, but such legal niceties will not interest the tigers whose funding remains intact.

This article first appeared in Family Law Journal.

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