Determination of Property Ownership – The principle dealing with the existence and extent of interests in property derived from the law of trusts.
Ownership of property in law is in two levels and they are: –
- legal – ownership in law
- beneficial – ownership in equity
A property can be owned by two or more persons in either one of the two arrangements, that is,
- joint tenants; or
- tenants in common.
Dispute arises when there is a claim of ownership in a property from a person who is not the named owner of the property.
Express Trust – The legal principle on interests which are expressly declared is clear and that is “where the legal title to the property claimed to be in dispute is held in the parties’ joint names and the conveyance recites their respective beneficial interests that provision is conclusive.”
If there is no express declaration of ownership in the document, an interest in property held in the name of another person may arise by presumed intention under a resulting trust or constructive trust.
Resulting Trust – Where a person makes a financial contribution to the purchase of a property it raises a presumption that this person is entitled to a proportionate share in the property and the legal owner of the property is holding the property under a resulting trust in favour of this person. This presumption is rebuttable by contrary evidence such as gift or loan.
Constructive Trust – If the owner of a property has induced another person to make contribution to the property to this person’s detriment in the expectation that he would acquire an interest of the property.
STAR Trusts – The Special Trusts (Alternative Regime) Law, 1997, now incorporated into Part VIII of the Trusts Law (2011 Revision) (the “Law”) provides the legal basis on which private purpose trusts can be established in the Cayman Islands, without affecting the previously existing laws governing the creation and administration of traditional trusts.
Since their introduction in 1997, STAR trusts (as they are commonly referred to) have gained a strong reputation for being flexible estate planning tools where special purpose vehicles are too inflexible or otherwise inappropriate. Unlike traditional English common law trust principles (which is also the case in Hong Kong) under which a trust is not valid unless it is for the benefit of an identified person or class of persons or for charitable purposes, the STAR trusts can be
(i) for the benefit of an identified person or any number of persons or
(ii) solely for the benefit of charitable or non-charitable purposes or objectives provided that the purposes are lawful and not contrary to public policy.
Why use a STAR Trust vehicle?
Before the Special Trusts (Alternative Regime) Law, 1997, was enacted, it was not possible to create trusts for a purpose other than a charitable purpose. The Law also permits perpetual trusts; that is, trusts without a perpetuity or expiry period. Cayman Islands trusts which are not subject to the STAR trusts regime are currently limited to a maximum duration of 150 years.
STAR trusts can (unlike other trusts) be
(i) for the benefit of an identified person or any number of persons or
(ii) solely for the benefit of charitable or non-charitable purposes or objectives provided that the purposes are lawful and not contrary to public policy.
This is a unique feature of STAR trusts and highlights the flexibility offered by the STAR trust structure. It is a requirement of the STAR trust regime that at least one trustee of a STAR trust is a trust company licensed in the Cayman Islands or a private trust company registered as such in the Cayman Islands.
Key features of STAR Trusts
- i) The beneficiaries and/or objects may be persons, purposes or both.
- ii) There may be any number of beneficiaries and any number of purposes, whether charitable or not, provided that such purposes/objects are lawful and not contrary to public policy.
Any uncertainty as to the objects or mode of execution or administration of a STAR trust can be resolved by the Trustee (or any other person the STAR trust document so specifies) or by the Court, if necessary.
A STAR trust is therefore very unlikely to be declared void ab initio on grounds of uncertainty, (as could be the case with a poorly drafted non-STAR trusts).
The Trustee of a STAR trust must be or must include a trust company licensed to conduct trust business in the Cayman Islands.
This adds a level of oversight and regulation above and beyond other jurisdictions. There are criminal sanctions attached if these requirements are overlooked or bypassed.
STAR trusts must have an “Enforcer” who is the only individual person or corporate entity with legal standing to enforce the terms of the STAR trust (such enforcement powers having been removed from the beneficiaries by virtue of the Law).
The Law therefore makes a clear distinction between the capacity to benefit from a STAR trust and the actual capacity to enforce such a trust.
The effect is to remove rights of beneficiaries not only to enforce the trust, but also their right to seek disclosure of information regarding the trust and its ongoing administration (my emphasis)
The rule against perpetuities does not apply to STAR trusts. STAR trusts may be created for an unlimited duration (or not, depending on the terms of the trust deed), which eliminates the risk of a resulting trust in favour of the settlor at the end of the perpetuity period and the adverse tax consequences which may flow from such an event.
A STAR trust cannot hold land in the Cayman Islands but may hold an interest in a company, partnership or other entity which does.
What may STAR Trusts be used for?
STAR trusts are commonly used for, among other things, the following.
- To create dynasty-style trusts for multiple generations primarily for holding treasured family assets, investments, and preserving shares in family businesses.
- To create trusts for philanthropic purposes which are outside of the scope of what would be considered charitable as a matter of Cayman Islands law.
- To create trusts which restrict the rights of troublesome beneficiaries who may be tempted to challenge the trust, to seek to obtain information in relation to the trust, among other things.
- To create trusts which are unrestricted by a perpetuity period.
- To create trusts which benefit persons while at the same time achieving alternative objectives such as the continuation of family businesses.
- To form “Special Purpose Vehicles” for a wide range of commercial transactions in a safe, flexible, and bankruptcy remote manner.
- To act as a vehicle to hold shares in a private company, thus allowing a family member (or members) to retain a degree of control over the administration of the underlying trusts and influence decisions which may affect the underlying trusts and the assets they hold (most typically, shares in a family business).
- For clubs and associations whereby their members can enforce terms of contracts without actually being a party to the contract. Also, upon the dissolution of the club or association, the contributed assets may be returned to members in portions specified in the trust deed, rather than in an ad-hoc manner.
Regulation and Registration
The Trustee of a STAR trust must be or must include a trust company licensed to conduct trust business in the Cayman Islands. This adds a level of oversight and regulation above and beyond other jurisdictions.
The Trustee of a STAR trust is also required to keep, in its Cayman Islands office, a documentary record of:
- the terms of the STAR trust,
- the identity of the Trustee and the enforcer(s),
- all settlements of the property upon trust and the identity of the settlor(s),
- the property subject to the STAR trust at the end of each of its accounting years, and
- all distributions or applications of the trust property.
These additional obligations clarify any uncertainty in the common law regarding the retention of trust records and other vital information. These requirements therefore standardize and clarify important administrative expectations specifically imposed on STAR trust Trustees.
There is no requirement to register a STAR trust with the regulatory authorities in the Cayman Islands, hence confidentiality is preserved.
In fact, all trust deeds (except “exempted trusts”) are exempt from registration.
Therefore, the details of a STAR trust will remain confidential, subject only to disclosure as may be required by an order of the Cayman Islands Courts.
With sound professional advice, the STAR trust provides a flexible and valuable tool for structured financing arrangements, as well as for the estate and financial planning of private parties seeking a safe and reliable trust mechanism to satisfy their specific needs and purposes.
The court cannot change or adjust the proprietary interests unless there is fraud or mistake at the time of the transaction.
Petitt v Petitt  AC 777 – Facts: “In proceedings under section 17 of the Married Women’s Property Act, 1882,1 following a divorce, a husband claimed to be beneficially entitled to a share in the proceeds of sale of the former matrimonial home. The house in question had been purchased out of the proceeds of sale of a previous house belonging to the wife, and had been conveyed into her name alone. The husband’s claim was based on his having done work on the house by way of redecoration and improvement which he said had enhanced its value by £1,000. The registrar held that he was entitled to share in the proceeds to the extent of £300. The Court of Appeal affirmed that decision.
On appeal – Held (1) that section 17 of the Act of 1882 was a procedural provision only, and did not entitle the court to vary the existing proprietary rights of the parties.
(2) That upon the facts disclosed by the evidence it was not possible to infer any common intention of the parties that the husband by doing work and expending money on materials for the house should acquire any beneficial proprietary interest therein; and that, accordingly, in the circumstances the husband’s claim failed and the appeal must be allowed.”
The House of Lords ruled that “In the absence of agreement and any question of estoppel, one spouse who does work or expends money upon the property of the other has no claim whatever upon the property of the other.”
Lord Morris of Borth-y-Gest in his judgment said, “The mere fact that parties have made arrangements or conducted their affairs without giving thought to questions as to where ownership of property lay does not mean that ownership was in suspense or did not lie anywhere. There will have been ownership somewhere and a court may have to decide where it lay. In reaching a decision the court does not find and, indeed, cannot find that there was some thought in the mind of a person which never was there at all. The court must find out exactly what was done or what said and must then reach conclusion as to what was the legal result. The court does not devise or invent a legal result. Nor is the court influenced by the circumstances that those concerned may never have had occasion to ponder or to decide as to the effect in law of whatever were their deliberate actions. Nor is it material that they might not have been able even after reflection – to state what was the legal outcome of whatever they may have done or said. The court may have to tell them. But when an application is made under section 17 there is no power in the court to make a contract for the parties which they have not themselves made. Nor is there power to decide what the court thinks that the parties would have agreed had they discussed the possible breakdown down or ending of their relationship. Nor is there power to decide on some general principle of what seems fair and reasonable how property rights are to be re-allocated.”
Gissing v Gissing (1971) AC 886 – Facts: “The parties were married in 1935 when both were in their early twenties. The wife worked substantially throughout the marriage, until 1957 as a secretary at a firm of printers. In May, 1946, when the husband was out of work after demobilisation from the army, the wife obtained employment for him at the printers where he did well. In 1951 a house was bought in the name of the husband as the matrimonial home in which the parties lived until November, 1961, when the husband left to live with another woman. The price paid for the house was £2,695 of which £2,150 was raised by the husband on mortgage and £500 was loaned by the printers to the husband who paid the balance and costs. The wife paid £220 out of her savings for furnishings and the laying of a lawn. The husband paid the installments on the mortgage, gave the wife £8 to £10 a week for housekeeping and paid for holidays and general family expenses. The wife paid for her own clothes and those of their son and for some extras. Both saved. According to the wife, when the husband left in November, 1961, he told her that the house was hers and that he would pay the mortgage installments and out goings, which he did. The wife remained in the house and in January, 1966, she was granted a decree absolute of divorce on the ground of the husband’s adultery and an order for maintenance which was subsequently reduced to 1s. a year.
On the wife’s application by originating summons in the Chancery Division for an order regarding her beneficial interest in the house, Buckley J. held that the husband was sole beneficial owner of the house and was entitled to possession. The Court of Appeal, by a majority, reversed that decision.
On appeal by the husband – Held, allowing the appeal, that the wife had made no contribution to the acquisition of title to the matrimonial home from which it could be inferred that the parties intended her to have any beneficial interest in it.”
Lord Diplock said in his judgment: “Any claim to a beneficial interest in land by a person, whether spouse or stranger, in whom the legal estate in the land is not vested must be based upon the proposition that the person in whom the legal estate is vested holds it as trustee upon trust to give effect to the beneficial interest of the claimant as cestui que trust. The legal principles applicable to the claim are those of the English law of trusts and in particular, in the kind of dispute between spouses that comes before the courts, the law relating to the creation and operation of “resulting, implied or constructive trusts.”
Where the trust is expressly declared in the instrument by which the legal estate is transferred to the trustee or by a written declaration of trust by the trustee, the court must give effect to it. But to constitute a valid declaration of trust by way of gift of a beneficial interest in land to a cestui que trust the declaration is required by section 53 (1) of the Law of Property Act, 1925, to be in writing. If it is not in writing it can only take effect as a resulting, implied or constructive trust to which that section has no application. A resulting, implied or constructive trust – and it is unnecessary for present purposes to distinguish between these three classes of trust – is created by a transaction between the trustee and the cestui que trust in connection with the acquisition by the trustee of a legal estate in land, whenever the trustee has so conducted himself that it would be inequitable to allow him to deny to the cestui que trust a beneficial interest in the land acquired. And he will be held so to have conducted himself if by his words or conduct he has induced the cestui que trust to act to his own detriment in the reasonable belief that by so acting he was acquiring a beneficial interest in the land. This is why it has been repeatedly said in the context of disputes between spouses as to their respective beneficial interests in the matrimonial home, that if at the time of its acquisition and transfer of the legal estate into the name of one or other of them an express agreement has been made between them as to the way in which the beneficial interest shall be held, the court will give effect to it – notwithstanding the absence of any written declaration of trust. Strictly speaking this states the principle too widely, for if the agreement did not provide for anything to be done by the spouse in whom the legal estate was not to be vested, it would be a merely voluntary declaration of trust and unenforceable for want of writing. But in the express oral agreements contemplated by these dicta it has been assumed sub silentio that they provide for the spouse in whom the legal estate in the matrimonial home is not vested to do something to facilitate its acquisition, by contributing to the purchase price or to the deposit or the mortgage installments when it is purchased upon mortgage or to make some other material sacrifice by way of contribution to or economy in the general family expenditure. What the court gives effect to is the trust resulting or implied from the common intention expressed in the oral agreement between the spouses that if each acts in the manner provided for in the agreement the beneficial interests in the matrimonial home shall be held as they have agreed.”
Stack v Dowden  2 AC 432 – Facts:”The parties began a relationship in 1975 and in 1983 the defendant bought a house in her sole name in which the parties lived together as man and wife and had four children. The defendant, who throughout their time together earned more money than the claimant, and sometimes almost twice as much, made all the payments due under the mortgage and paid the household bills. The parties did a great deal of work in improving the house and in 1993 it was sold for three times the figure the defendant had originally paid for it. The parties then bought another property, which was conveyed into their joint names, as their family home. Over 65% of the purchase price was paid out of funds from a building society account held in the defendant’s sole name, funds which included the equity liquidated from the sale of the previous house. The balance of the purchase price was provided by a loan secured by a mortgage in the parties’ joint names and two endowment policies, one in their joint names and one in the defendant’s sole name. The claimant paid the mortgage interest and the premiums due under the endowment policy in their joint names and the defendant paid the premiums due under the endowment policy in her sole name. The parties kept separate bank accounts and made separate savings and investment. Over the course of their years in the house together the mortgage loan was paid off by a series of lump sum payments of which the defendant provided just under 60% of the capital. The parties separated in 2002 and the claimant left the property while the defendant remained there with the children. The claimant successfully applied to the judge for, inter alia, an order for sale of the property and an equal division of the proceeds. The Court of Appeal allowed the defendant’s appeal and ordered that the net proceeds of sale be divided 65% to 35% in the defendant’s favour.”
The House of Lords dismissed the appeal “(Lord Neuberger of Abbotsbury concurring in the result), that the defendant had contributed far more to the acquisition of the house than had the claimant; that the parties had never pooled their separate financial resources for the common good and everything, apart from the house and associated endowment policy, had been kept strictly separate; that the case was, therefore, highly unusual as there could not be many unmarried couples in the parties’ situation who had kept their affairs so rigidly separate; that those factors were strongly indicative that the parties had not intended their shares in the property to be equal; and that, accordingly, the defendant had made good her case for a 65% share of the beneficial interest.”
It was held in the House of Lords as follows – “that where a domestic property was conveyed into the joint names of cohabitants without any declaration of trust there was a prime facie case that both the legal and beneficial interests in the property were joint and equal; that the onus of proof lay upon any party seeking to establish that equity should not follow the law; that such a party had to prove that the parties had held a common intention that their beneficial interests be different from their legal interests, and in what way; that in order to discern the parties’ common intention the court should look at the parties’ whole course of conduct in relation to the property; that the law had moved on from the presumption of a resulting trust and many more factors other than the parties respective financial contributions might be relevant to divining their true intentions; and that when all relevant factors had been taken into account, cases in which the joint legal owners were to be taken to have intended that their beneficial interests should be different from their legal interests would be very unusual.”
Stack v Dowden is considered as the primary authority on resulting, implied constructive trust now. In Jackson’s Matrimonial Finance and Taxation para 15.30 it summarizes the main points arising from this case as follows – “(1) the first port of call must always be the documents of title. If these declare the legal and beneficial ownership of the property, that will preclude further enquiry in the absence of subsequent agreement, proprietary estoppel or rescission/rectification of the conveyance. …
(2) a distinction must be made between:
(i) step one—establishing that a property is in shared ownership (ie that the claimant has a beneficial interest); and
(ii) step two—quantifying the parties’ shares. Those two steps should not be elided;
(3) there is an assumption, from which departure will not lightly be permitted, that the beneficial interests in property follow the legal title. Where property is in the sole name of one person, the onus will be on the non-owner to show that he/she has a beneficial interest in it;
(4) in order for a claimant to prove that the beneficial interests should not follow the legal title, the majority view in Stack v Dowden was that the claimant has to show an intention to share the beneficial ownership in the property other than in a way that mirrors the legal title (ie the answer to this question lies in constructive trusts). Lord Neuberger, in his speech, which dissented on reasoning but not primary outcome, thought that this question should be investigated, firstly, under resulting trust principles (who paid what towards the property) and only where necessary should the court then move on to consider issues of constructive trust.
(5) the parties’ intentions in relation to the beneficial ownership may be express, inferred or imputed: This search cannot be conducted under the umbrella of what the court thinks is fair. Lord Neuberger did not agree that a common intention might be imputed;
(6) there are distinctions to be made between cases where the legal title is in joint names and those where the legal title is in the sole name of one party. Where the legal title is in joint names there will be the assumption (referred to above) that the beneficial ownership is held as beneficial joint tenants, unless the contrary is proved; in cases where the property is the sole name of one party, the assumption will be that the beneficial interest follows the legal title, unless the contrary is proved.
(7) in determining the parties’ intentions a broad view should be taken. Baroness Hale gave a long list of factors that might be relevant and which are expressly not confined to the parties’ financial contributions;
(8) once shared ownership has been established, the second step arises, ie what shares do the parties have? This step should be considered by the court undertaking a survey of the whole course of dealing between the parties and taking account of all conduct which throws a light on the question what shares were intended’.”
The list of factors given by Baroness Hale as referred to in (7) above, are set out in para 69 of her judgment where she said –
“69 In law, “context is everything” and the domestic context is very different from the commercial world. Each case will turn on its own facts. Many more factors than financial contributions may be relevant to divining the parties’ true intentions. These include:
- any advice or discussions at the time of the transfer which cast light upon their intentions then;
- the reasons why the home was acquired in their joint names; the reasons why (if it be the case) the survivor was authorised to give a receipt for the capital moneys;
- the purpose for which the home was acquired; the nature of the parties’ relationship;
- whether they had children for whom they both had responsibility to provide a home;
- how the purchase was financed, both initially and subsequently;
- how the parties arranged their finances, whether separately or together or a bit of both;
- how they discharged the outgoings on the property and their other household expenses.
When a couple are joint owners of the home and jointly liable for the mortgage, the inferences to be drawn from who pays for what may be very different from the inferences to be drawn when only one is owner of the home. The arithmetical calculation of how much was paid by each is also likely to be less important. It will be easier to draw the inference that they intended that each should contribute as much to the household as they reasonably could and that they would share the eventual benefit or burden equally. The parties’ individual characters and personalities may also be a factor in deciding where their true intentions lay. In the cohabitation context, mercenary considerations may be more to the fore than they would be in marriage, but it should not be assumed that they always take pride of place over natural love and affection. At the end of the day, having taken all this into account, cases in which the joint legal owners are to be taken to have intended that their beneficial interests should be different from their legal interests will be very unusual.”
Chan Chui Mee（陳翠美）v Mak Chi Choi Nelson（麥智才（又名麥子才） & Ors –  HKCU 1449 Facts: The Plaintiff in these proceedings is the ex-wife of the 1st Defendant. Though no document has been produced before me, I was told that the Plaintiff and the 1st Defendant were divorced in proceedings in the Family Court commenced in April 2005. The 3rd Defendant is their son. The subject matter of the proceedings is a property known as Flat No.1, 1st Floor, Block A, Pang Ching Court, No.6 Chui Chuk Street, Kowloon [“The Property”]. The Property is held in the name of the 1st efendant. Both the Plaintiff and the 3rd Defendant claim to have beneficial interest in the Property based on their contributions to the mortgage payments. The Plaintiff also said she paid for the deposit for the acquisition of the Property. It is their case that the 1st Defendant has no beneficial interest at all.
 The 2nd Defendant is not a family member. She is a creditor of the 1st Defendant. She obtained a default judgment against the 1st Defendant in her favour in HCA 19521 of 1998 on 10 December 1998 in the sum of $481,500 plus interest and costs. The total amount of the judgment debt, according to her calculation, runs up to $800,000 odd by now.
 The 2nd Defendant obtained charging orders in respect of the Property by way of enforcement of the default judgment: charging order nisi was obtained on 8 July 1999 and charging order absolute was obtained on 19 August 1999. These orders were registered at the Land Registry.
 By way of enforcement of the charging order, the 2nd Defendant commenced Order 88 proceedings against the 1st Defendant in DCMP 4229 of 2002 which was subsequently transferred to the High Court as HCMP 2100 of 2003. The 2nd Defendant sought order for possession and order for sale in respect of the Property. The 1st Defendant resisted the application. In the course of those proceedings, the 1st Defendant suggested he had decided to transfer his interest in the Property to his son, the 3rd Defendant and a Deed of Trust was executed on 1 January 1995. That document was not registered at the Land Registry. Nor was it stamped. …”
Lam J (as he then was) approved Stack v Dowden and said in his judgment that “ In the recent case of Stack v Dowden  2 AC 432, the House of Lords re-examined the law in this area. That was a case on beneficial ownership when the property was held under joint names. It was held that since Lloyds Bank v Rosset  1 AC 107, the law has moved on. The key is to identify the common intention of the parties.
Lam J continued in para 17 and said “It was also held that in the search for common intention, a holistic approach should be adopted in the quantification of the beneficial interest by undertaking a survey of the whole course of dealing between the parties and taking account of all conduct which throws light on the question what shares were intended.”
Discretionary Trust in Matrimonial Cases – Is a Trust was a financial resource
Poon Lok To Otto formerly known as Pun Lok To Otto v. Kan Lai Kwan also known as Kan Lai Kwan Kay and Anor FACV 21/2013
The Court of Final Appeal in this case gave a test on whether a discretionary trust is to be considered as financial resources for sharing.
Summary: “1. Poon Lok To Otto (the “Husband”) and Kan Lai Kwan (the “Wife”) were married in 1968. The Husband became very successful with his business from the mid-1990s. Analogue Holdings Ltd (“Analogue”) was incorporated to be the holding company of his business. In July 1995, a discretionary trust based in Jersey was set up (the “Trust”). The Husband was the Settlor, Protector and a potential beneficiary. HSBC International Trustee Limited was the Trustee. The Husband settled 84.63% of the shares of Analogue in the Trust.
2. In February 2009, the Husband petitioned for divorce on the basis of two years’ separation. The Wife did not defend the proceedings. The decree nisi was pronounced in May 2009 and made absolute in September 2010. The Wife applied for ancillary relief. She argued that the equal sharing principle should be applied to the entire value of the Trust, not only to two-thirds of that amount (which the Husband contended for). She also claimed that they had been separated only since 2008. The Husband, on the other hand, claimed that they had been separated since 2001. This was relevant due to the substantial profits generated by Analogue after 2001.
3. To decide whether the Trust was a financial resource of the Husband, the Court of Final Appeal adopted the test of asking whether, if the Husband were to request the Trustee to advance the whole or part of the capital or income of the Trust to him, the Trustee would, on the balance of probabilities, be likely to do so. Considering the creation and terms of the Trust, the Husband’s letters of wishes, the nature of the Trust assets and previous distributions made by the Trustee, the Court held that there was clear evidence of the overwhelming likelihood that the Trustee would, if requested by the Husband, advance the whole or part of the capital or income of the Trust to him. Accordingly, the Court of First Instance and the Court of Appeal were wrong to hold that the matrimonial assets included only a two-thirds interest in the value of the Trust. The entire Trust fund should be regarded as a financial resource available to the Husband.
4. Disagreeing with the finding of the Court of First Instance that the Husband and the Wife separated in 2001, the Court of Final Appeal held that as a matter of fact their marriage continued until they finally separated in 2008. The Court of Final Appeal also disagreed with the finding of the Court of Appeal, based on the doctrine of estoppel, that they separated in 2007. Whether the Husband and the Wife had separated was a question of fact. The Court was subject to a statutory duty to have regard to all the circumstances of the case. It was not estopped from finding that the Husband and the Wife in fact separated in 2008.
5. On the question of whether there should be a departure from the equality principle, the Court of Final Appeal held that the increased profits of Analogue did not provide a ground for such a departure. Those profits arose out of the business which had been built up during the Husband’s and the Wife’s marriage, in respect of which the Wife could legitimately assert an unascertained share.
6. Accordingly, the Court of Final Appeal unanimously allowed the Wife’s appeal and dismissed the Husband’s appeal.”
Ribeiro PJ said in his judgment, “26. The question which arises is whether the trust and its assets should be regarded as a “financial resource” which H has or is likely to have in the foreseeable future within the meaning of section 7(1)(a). In addressing that question, the Court is engaged in taking the first step in deciding an ancillary relief claim. As pointed out in LKW v DD, the first step is:
“… to ascertain the financial resources of each of the parties calculated as at the date of the hearing. … At this stage, the court need not attempt to distinguish between matrimonial and non-matrimonial property, that being an exercise best undertaken (if necessary) when considering distribution of the assets.”
27. Section 7(1)(a) is closely modelled on the equivalent English provision, making English decisions on section 25(2)(a) of the Matrimonial Causes Act 1973 helpful and persuasive. The approach adopted in England and Wales was laid down by the Court of Appeal in Charman v Charman,a case concerning a discretionary trust situated in Bermuda. Wilson LJ formulated the test as follows:
“Superficially the question is easily framed as being whether the trust is a financial ‘resource’ of the husband for the purpose of section 25(2)(a) of the Matrimonial Causes Act 1973, as substituted by the Matrimonial and Family Proceedings Act 1984, section 3 . But what does the word ‘resource’ mean in this context? In my view, when properly focused, that central question is simply whether, if the husband were to request it to advance the whole (or part) of the capital of the trust to him, the trustee would be likely to do so.”
28. This was confirmed to be the test in Charman v Charman (No 4), and has been treated as established in English law. A helpful elaboration can be found in the judgment of Lewison J in the English Court of Appeal in Whaley v Whaley:
“… a discretionary beneficiary has no proprietary interest in the fund. But under section 25 the court looks at resources; not just at ownership. Thus whether a beneficiary under a discretionary trust has a proprietary interest is not relevant. The resource must be one that is ‘likely’ to be available. This is the origin of the ‘likelihood’ test. No judge can make a positive finding about the future: the best that can be done is to assess likelihood. What is relevant is the likelihood of the trust fund or part of it being made available to him, either by income or capital distribution. If the husband were to ask the trustees to advance him capital, would the trustees be likely to do so: Charman v Charman  1 WLR 1053; A v A  2 FLR 467, 499? The question is not one of control of resources: it is one of access to them.”
29. Charman v Charman was cited with approval by this Court in KEWS v NCHC. That was a case involving parental financial support rather than a discretionary trust in which a similar test (asking what is the likelihood of such financial assistance continuing) was adopted. It is right that the Charman test should be adopted in this jurisdiction since the issue arising in cases like the present and since the Hong Kong provision are materially identical. To decide whether a discretionary trust is a financial resource of one of the parties, the Court asks whether, if that party were to request the trustee to advance the whole or part of the capital or income of the trust to him or her, the trustee would, on the balance of probabilities, be likely to do so.” (paras. 26 – 29)
The Charman test provides the approach to deciding whether a discretionary trust forms part of a party’s resources.
Ribeiro PJ continues to say, “33. It should be clearly understood that the Charman test does not postulate any impropriety on the trustee’s part. This was noted in Charman v Charman itself where Wilson LJ stated:
“A trustee – in proper ‘control’ of the trust – will usually be acting entirely properly if, after careful consideration of all relevant circumstances, he resolves in good faith to accede to a request by the settlor for the exercise of his power of advancement of capital, whether back to the settlor or to any other beneficiary.”
The Proper Application of the Charman Test – In the judgment, it said,
“60. As the Charman test has not been properly applied, it falls to this Court to decide whether it should be satisfied that if H were to request the trustee to advance the whole or part of the capital or income of the trust to him, the trustee, acting in accordance with its duties, would on the balance of probabilities be likely to accede to that request. In making its assessment the Court is able to consider the creation and terms of the trust; H’s letters of wishes; the nature of the trust assets; and previous distributions made by the trustee. As was held in KEWS v NCHC, the Court looks at the reality of the situation and regards past conduct as a useful guide.”
Court of Final Appeal – Kan Lai-kwan and Poon Lok-to Otto and HSBC International Trustees Ltd FACV 20 & 21/2013 on appeal from CACV 48/2012. Yet another robust, crystal-clear judgment from Ribiero PJ effectively adopting Lord Denning’s view that the doctrine of estoppel is subject to the courts statutory powers – in particular where the justice of the case demands it. Of more general application is the Court of Final Appeal’s clear signal that any ‘departure from equality’, particularly in a long marriage, will meet a very high hurdle indeed.
Chief Justice Ma, Mr Justice Ribeiro PJ, Mr Justice Tang PJ, Mr Justice Bokhary NPJ and Mr Justice Gummow NPJ
Date of Judgment: 17 July 2014
Summary – by Caroline McNally (Registered Foreign Lawyer) Gall Solicitors
The Court of Final Appeal (FACV) heard cross appeals by the husband and wife against the Court of Appeal’s judgment dated 25 March 2013 (Cheung and Fok JJA, and Macrae J CACV 48/2012). The original award was made by Deputy High Court Judge Carlson with the judgment handed down on 10 February 2012.
There were two issues before the FACV as follows:
- The proper approach to a discretionary trust set up by the husband; and
- Separation and estoppel in the context of ancillary relief where profits earned by the husband’s business increased substantially during the final years of marriage.
This was a long marriage of 40 years duration with both parties in their 80s. Sadly, they had suffered two tragedies in that two of their three children had died in 1995 and 2000 respectively.
The husband ran an engineering business which he set up in 1977. The business had mixed fortunes during the early years, and profits fell in 2003 to 2005 as a result of SARS. However, profits rose significantly from 2007 to 2010. The wife was a nurse.
When the husband’s business began to prosper he decided to restructure the group and an off-shore company was established to act as the holding company. The shares of the holding company were settled in an offshore discretionary trust (“The Family Trust”).
The property settled on trust consisted solely of shares in two private companies. One company, Analogue, was the husband’s business. The other company, Realty Limited, owned the former matrimonial home.
At first instance DHCJ Carlson accepted that the valuation of the shares held by the trust was $1,560,686,000.
The husband was the settlor of the Family Trust. He was also the protector and a potential beneficiary. The wife and the parties’ surviving child were also beneficiaries.
In 2008 the wife issued a petition on the basis of one-year separation with consent. This was, however, dismissed by consent and in February 2009 the husband issued his petition based on two years’ separation.
The husband affirmed that the parties had been separated since February 2001. The wife did not defend the petition and both parties used the separation date of 2001 in their Forms E. Shortly before the trial, the wife made an affirmation stating that the 2001 date was incorrect and that the parties had separated “some time in 2008”.
On 1 September 2010 the decree absolute was pronounced by the Court on the basis of the husband’s petition.
ISSUE 1: Treatment of The Family Trust
At first instance the Judge held that the trust assets were not a resource of the husband. Despite this he decided that two-thirds of the value of the Analogue shares held on trust should be ascribed in equal shares to the parties.
The Court of Appeal upheld the Judge’s decision that only two-thirds of the value of the shares held on trust should be regarded as matrimonial assets available for distribution.
The FACV up-held the wife’s appeal that the entire value of the trust assets were a resource available to the husband. It said:
“It is right that the Charman test should be adopted in this jurisdiction… To decide whether a discretionary trust is a financial resource of one of the parties, the Court asks whether, if that party were to request the trustee to advance the whole or part of the capital or income of the trust to him or her, the trustee would, on the balance of probabilities, be likely to do so”.
The FACV held that the Judge had fallen into error in treating the parties’ surviving daughter as a beneficiary with an interest to be protected against the other beneficiaries. The daughter, like the wife, did not have fixed beneficial interest in the trust fund.
Based on all the evidence, including the fact that the trustees had advanced to the husband funds to satisfy the Orders made in the Courts below, the FACV decided that it was overwhelmingly likely that the trustee, acting in accordance with its duties, would if requested by the husband, advance the whole or part of the capital or income of the trust to him.
ISSUE 2: Should there be a departure from equality on the basis of increase in profits of the husband’s business since separation
The first issue to decide was the date of separation.
The Judge at first instance held that the wife was estopped from denying that the separation had occurred in 2001. He held that the wife could not say that the parties only separated in 2008 because that was less than two years immediately preceding the presentation of the petition.
The Court of Appeal agreed with the Judge and stated:
“..the wife certainly cannot rely on separation that only began in 2008 because it will destroy the very foundation of the decree, namely, there was a two-year separation”.
However, the Court of Appeal held that separation had occurred in 2007.
The FACV decided that the evidence unmistakably pointed to the marriage (unhappy though it was) having continued until the parties finally separated when the husband moved out of the matrimonial home in 2008.
The next issue was whether a departure from equality was justified.
On the basis of a separation date of 2001, the Judge at first instance concluded that there should be a departure from equality for two reasons:
(1) Some adjustment should be made in the husband’s favour so that the wife could not share equally in the substantial profits of his business which had occurred after 2001.
(2) There were fears for the liquidity of the husband’s business.
The liquidity point was rejected by the Court of Appeal. On the basis of a 2007 separation date the Court of Appeal held that there should be no departure from the equality principle. Post-2007 accruals were seen to be based on the business foundation that the company was built up from its earlier years to which the wife had equally contributed over the life of the lengthy marriage.
The FACV considered the UK authorities on post-separation accruals and decided that the period of separation prior to the hearing was relatively insignificant in the context of a 40 year marriage. It upheld the Court of Appeal decision that no departure from equality was justified.
The Proper Approach to Estoppel in Matrimonial Cases
The FACV was unable to accept the adoption of a 2007 separation date as a “practical solution”. The real question was whether the Judge and the Court of Appeal were right to hold that they were estopped from finding that separation in fact occurred in mid-2008.
The FACV adopted the approach of Denning LJ in Thompson v Thompson. The parties are bound by the estoppel but, where the circumstances demand the Court’s intervention, it is free to override that estoppel in exercising its statutory jurisdiction and to act upon evidence which is material to its determination.
The FACV held that the Judge and the Court of Appeal were wrong in law to hold that the Court was precluded by the doctrine of estoppel from finding that separation occurred in 2008. It stated that the present case called out for the Court to override the estoppel created between the parties.