Fairness and trust

DM v JM [2011] CSOH 33 is an interesting case. Mr and Mrs M had a lengthy marriage (20 years). They had no children together, though Mr M had five children from two other relationships. During the marriage, Mr M started, then built up a successful business, becoming a multi-millionaire. While at his wealthiest he set up a trust for the benefit of his children. By the time this case came to court, the business had collapsed and Mr M’s only income was his monthly pension. In a complicated 16-day Court of Session proof on financial provision, the trust was separately represented, as were three of the five children.

The principles of financial division on divorce are well established. The court will first assess the value of the matrimonial property, defined as the assets acquired by the couple between the date of marriage and the date of separation, or “relevant date”. It will then consider whether an order for financial provision is justified by the principles of s 9 of the Family Law (Scotland) Act 1985. In doing so, the court is required to take into account the resources of the parties in terms of s 8 of the Act. In DM v JM Morag Wise QC, for Mr M, described this process as a three-stage test wherein the court will consider first valuation, then division, and finally the parties’ resources.

Fair sharing

By the proof Mrs M’s claims, although adjusted, remained substantial: a capital sum of £10 million, a pension sharing order, and periodical allowance of £800 per month. In addition, she requested that the court set aside the transaction whereby Mr M provided funds and assets to the trust.

Lady Clark valued the matrimonial property at approximately £5.5 million. The next step in the process would usually be to consider how to divide this between the parties. Interestingly, however, it was at this stage that Lady Clark took account of the collapse of Mr M’s business. She “stripped out” from the valuation of the matrimonial property the share value in the company, together with a loan after the relevant date by Mr M to the company, which was lost in the company’s demise. Lady Clark considered that Mr M’s investment represented a risk that, if successful, would have been beneficial for all represented parties. It followed that the fallout from the failure of this move should not be felt by Mr M alone.

After these two key deductions, Lady Clark moved on to consider how the re-evaluated matrimonial property of approximately £3.2 million should be divided. She considered that circumstances did not justify an unequal division, and sought to effect an even split with £1.6 million going to each party. Mrs M was in possession of approximately £600,000 of matrimonial assets. The difficulty in finding the remaining £1 million to satisfy her claim was that this sum was simply no longer available from Mr M.

Despite various assertions, Lady Clark found that Mr M did not have hidden property and bank accounts around the world. At the date of proof, the principal reserve was £700,000 in a capitalised pension fund. Rather than exercising her discretion to transfer the entire fund to Mrs M, Lady Clark opted to roughly equalise the pensions of Mr and Mrs M by effecting a pension sharing order for the transfer of £200,000 from the fund. She opined that it would not be fair and reasonable to make an order which would leave Mr M virtually penniless, commenting: “This is a family action and not an action for damages.”

Effect of the trust

In order to find the remaining £800,000 to satisfy Mrs M’s claim, Lady Clark looked to the trust. She determined that part of the reason Mr M was without sufficient resources was that he had previously invested money in the trust.

Under s 18 of the 1985 Act, the court may make an order setting aside or varying any transfer of, or transaction involving, property effected by a spouse not more than five years before the date of the making of a claim for financial provision. The court must be satisfied that the transfer or transaction had, or is likely to have, the effect of defeating the claim in whole or in part.

It was argued for both the trust and the children that the purpose of s 18 is not to set aside genuine transactions with no avoiding intention. Nevertheless, Lady Clark was firmly of the opinion that s 18 is not limited by reference to avoidance transactions. She considered that the words of the Act are perfectly plain and are directed to the effect of, rather than intention behind, the transaction. Importantly, however, she commented that “it would be a rare case in which the court will intervene if the court had concluded that the transaction which is the subject of s 18 was not intended to defeat a claim”.

On the facts, Lady Clark had no difficulty in finding that Mr M’s transactions in relation to the trust were not avoidance transactions. Mr M decided to set up the trust for his children at a time when his business interests were flourishing and his total wealth was (at least on paper) in the region of £300 million. The funds allocated to it represented a fraction of his total wealth and it certainly could not be said that he had at that stage attempted to defeat his wife’s claims. Nonetheless, Lady Clark determined that the unique circumstances of this case did justify interference by the court. She partially set aside the trust transaction to award Mrs M approximately £800,000, judging that this was fair and reasonable, as it would ensure that substantial assets remained available for the trust beneficiaries.

Practical approach

It is clear from the judgment that Lady Clark’s overriding aim in this case was to act in the interests of fairness to all parties. She made specific reference to Lord President Hope’s opinion in Little v Little 1990 SLT 785, wherein it was said that “the matter is essentially one of discretion, aimed at achieving a fair and practicable result in accordance with common sense”. Lady Clark was clear that this was what she sought to achieve.

Her solution involved, in her words, “an acceptance of the reality of the failure of the company which produced the wealth”. By taking the collapse of the company into account at the valuation stage, rather than the resources stage, Lady Clark ensured that, although certain funds would be removed from the trust and allocated to Mrs M, there would still be sufficient resources left for the children. She was of the opinion that “it would be unfair to give all the protection to the pursuer and none to the children”. Similarly, although awarding a share of Mr M’s pension to Mrs M, she ensured that Mr M retained sufficient funds to support himself going forward.

This is a landmark case which has been heralded as “running a coach and horses” through the law of trusts. In reality, however, it is likely that its effect will be limited. It is true that the case establishes a precedent for the setting aside of a trust established with no avoidance intention. Yet it should be noted that even on its uniquely distinctive facts, it was only considered appropriate to set aside the trust transaction to a very limited extent. Lady Clark’s overriding consideration was finding a commonsense solution which was fair, just and reasonable for all the parties in the exceptional circumstances.