21st-century breakdown - English divorce law and foreign parties

Tuesday, 27 November 2012
Paul Tomlinson explores English divorce law and foreign parties: a foreign judgment would not automatically be enforced against a Jersey law trust - firewall provisions.

With divorce rates in the Russian Federation hovering around the 65 per cent mark, the UK around 53 per cent and the rest of the developed world much above 40 per cent,1 a seasoned trustee is likely to have encountered a fair number of family break-ups and the attendant issues that divorce proceedings can bring. A breakdown in marital relations is never an easy topic to discuss, but perhaps much pain and cost could be removed from the outset with correct and proper planning and the trustee being alert to their clients’ matrimonial harmony – or not, as the case may be.

Court battle

London is seen as a prime jurisdiction to commence divorce proceedings, principally because of the size of the awards being handed down, but also because of the ease with which a foreign party can gain access to the English courts. The recent case of Russian couple Elena Golubovich and Ilya Golubovich2is a good example. Both from privileged and wealthy backgrounds, their 18-month marriage made the headlines over the extent to which both sides sought to protect their position. What’s key here is that they had both lived in London during their marriage and had property available to them and their family in London. The subsequent breakdown of their marriage initiated a race whereby Elena sought to commence divorce proceedings in the UK, perceived as the more favourable jurisdiction for her, ahead of her husband’s attempts to commence the proceedings in Russia, more favourable for him.

The summary of events makes for interesting reading, with criticism levelled by the English courts against both sides. There were allegations against Ilya of fictitious hearings in Moscow and forged documents in his attempts to halt proceedings in the UK, and from Elena’s side the incurring of excessive costs in an attempt to halt the proceedings in Russia. Despite being in breach of an English injunction, Ilya continued to pursue the divorce in Russia and the marriage was dissolved in Moscow in December 2009.

In a divorce, the courts have broad powers of and may include a wide variety of assets

Elena then attempted to have the Russian decree set aside and, initially, she won. On appeal by Ilya, the Court of Appeal held that the Russian court was within its rights to dissolve the marriage, notwithstanding that this was in clear breach of the English court’s injunction against Ilya, as the Russian court was a court of competent jurisdiction and had taken into account the English court order. Nevertheless, the English High Court subsequently ruled that Ilya was to pay his ex-wife GBP2,485,000, with periodical payments of GBP60,000 per annum.

Valid title

The facts of this case are unlikely to be unique, and bitterly contested claims may on occasion include claims on assets held in trust. Therefore, on the creation of a trust, it is important from a Russian perspective that the Russian settlor has valid title to the assets they intend to transfer into a trust. From a Russian family law perspective, if the settlor is married, Russian law provides that ownership of property belonging to a married couple can be regulated by either Russian law or by an agreement between the parties.

During marriage, Russian law provides that property acquired during marriage is community property and is therefore a presumption that any such assets are owned jointly and equally. However, a presumption of spousal consent means trusts can be set up by either party. Although parties frequently rely on this presumption, the safer course is to obtain a notarised document containing consent from the other spouse or to conclude an appropriate post-nuptial agreement. It will also be important that both parties take appropriate legal advice at the time of entry into the agreement to limit, so far as reasonably possible, challenges further on.

An example of the consequences of failing to do so is to be found in a case3described by Mostyn J as a ‘chronic and complex piece of matrimonial litigation’. Boris Agrest, a successful Russian businessman, whose wealth is speculated upon but unknown, was being sued by his wife, Janna Kremen, an ex-military intelligence officer, who claimed half her husband’s alleged USD700 million fortune in divorce proceedings. In 2001, ten years after their marriage, she signed a post-nuptial agreement that limited any claim to his assets to a maximum of USD1.5 million. In court, she successfully argued that she entered into the agreement without a full and proper understanding of the terms of the agreement and the rights she eventually gave up. She was awarded GBP12.5 million and continues to battle to obtain payment of the sums awarded.

The Golubovich and Agrest cases are perhaps extreme examples of the lengths to which some wealthy Russian husbands are prepared to go. Clearly the generous awards of the English family courts have acted as an incentive for claimant spouses to try to bring themselves within the jurisdiction of the English courts, however tenuous the connection. This led Thorpe LJ, in the Golubovich case, to say: ‘There are only 17 judges of the family division whose primary responsibility is to do justice domestically. There they operate under great pressure of work. I question whether there should not be a more stringent allocation of judicial time to cases such as this where the parties have slender connection with our jurisdiction and where the extent of their financial resources permits disproportionate demands on our family justice system.’

Broad jurisdiction

Of course, another of the advantages that may be sought is the wide jurisdiction of the family courts to vary ‘nuptial’ settlements. The powers of variation may be exercised notwithstanding that the trustees may be offshore and the trust governed by a law other than that of England. When considering the redistribution of assets in the context of a divorce, the courts of England and Wales have broad powers of determination and may include a wide variety of assets, so long as there is evidence of an interest in the assets on the part of either party to the marriage. Inevitably, the matrimonial pot may be regarded as including assets held in an offshore trust.

It may be advisable to limit the scope of the beneficial class so as not to include current or future spouses

With that in mind, a trustee has to give careful consideration to how to react to proceedings in the English family division involving a beneficiary of a trust. In coming to a decision, the trustee would need to consider the extent to which requests for information about the trust for use in divorce proceedings should be complied with, whether or not the trustee should participate in the divorce proceedings and, if a judgment is handed down from the family division that may affect the trust in some way, how to respond to it.

Mounting a defence

In October 2006, article 9 of the Trusts (Jersey) Law 1984 was amended to provide greater certainty as to how the Royal Court of Jersey will deal with foreign judgments. The effect of the change is that a foreign judgment would not automatically be enforced against a Jersey law trust. Such statutory provisions, which are now common in offshore trust legislation, are often called ‘firewall provisions’.

The Jersey court had occasion to review the law in this area in a case called Mubarak v Mubarik,4 which was the culmination of extremely bitter and protracted divorce proceedings in the English courts. This example was an extreme case in which the Royal Court found a way to ultimately benefit the wife with assets held through an offshore trust. The Royal Court considered at length the extent of its general supervisory powers and while the circumstances of the case were probably exceptional, the firewall provisions as explained in Mubarak are likely to be effective in future cases to prevent the enforcement of a foreign court order against a Jersey trust.

Building barricades

Trustees, settlors and advisors should keep in the forefront of their thinking the impact divorce proceedings may have on a trust, in relation to both how records are kept and how the assets are held. While the Russian market may seem a lucrative one for trusts, the magnitude of the assets held by wealthy Russian individuals tends to increase the likelihood of divorce proceedings being bitterly fought and of the battles being played out in more than one jurisdiction.

It may also be advisable, and much will depend on the circumstances prevailing at the time, to limit the scope of the beneficial class so as not to include current or future spouses. Moreover, it is often recommended by advisors that the matrimonial home is not owned in trust, or, if it is, that there is sufficient separation from other trust assets and that any UK situs assets are again limited or owned in separate trusts so as not to bring the trust assets within the full scope of the UK courts.

Clients often have a wide, internally focused asset base, and care should be taken to consider the implications in each jurisdiction where assets are owned and how they are owned or indeed enjoyed. The use of a pre-nuptial agreement should also be considered and appropriate advice taken at the time to limit attacks in the future.

While much can be done to protect the trust and therefore its assets from attack, the outcome of any proceedings will often rest on the conduct of the parties, the facts of the case and the jurisdiction of the assets embroiled in the case. What is helpful in the recent amendments in the Jersey law is that the Royal Court of Jersey has made clear that it will not simply enforce English orders against Jersey trusts handed down in divorce proceedings, which will provide a greater degree of clarity for clients and trustees alike.

  • 1. www.divorce.com/article/worldwide- divorce-statistics
  • 2. Golubovich v Golubovich [2011] EWCA Civ 479.
  • 3. Agrest v Kremen [2011] EWCA Civ 259.
  • 4. Mubarak v Mubarik [2007] EWHC 220 (Fam).
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Paul Tomlinson

Paul Tomlinson TEP is a Private Client Associate Director for RBC Wealth Management in Jersey.

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