ND v SD & Ors

A trust is not a sham merely because it is artificial or motivated partly by asset protection. The party alleging sham must prove that the settlor and trustee shared an intention that the trust should create rights and obligations different from those appearing in the trust deed, and that the arrangement was intended to mislead third parties or the court. A valid trust cannot later become a sham through subsequent conduct. A settlor may declare an immediate trust of shares without first transferring legal title. The disposition is effective only to the extent of the settlor’s beneficial ownership. A later sham trust deed cannot revest property already held on an earlier valid trust.

The applicant wife and respondent husband had been married for many years but were living separately. The wife sought financial remedy orders and challenged the genuineness of an offshore trust established by the husband in 2007 for their daughters. The trust purported to include the husband’s interests in shares in C Limited and D Limited. The wife also claimed that she had always beneficially owned 50% of the C Limited shares and that the husband had never been entitled to settle that interest.

The preliminary issues included whether the 2007 trust was a sham, whether it effectively settled the husband’s interests, the effect of a further 2014 trust deed used in refinancing negotiations, and whether section 37 of the Matrimonial Causes Act 1973 applied.

1. Sham. The wife had to establish, on the balance of probabilities, a common intention of the husband and Y Trustees Limited that the 2007 trust deed would not create the rights and obligations it appeared to create, together with an intention to give a false impression to third parties or the court. The court applied National Westminster Bank plc v Jones [2001] 1 BCLC, Snook v London and West Riding Investments Ltd [1967] 1 All ER 518, and Stone v Hitch [2011] EWCA Civ 63.
2. Artificiality and an ulterior motive, including a wish to protect assets from future claims, did not establish sham. The formal 2007 trust was genuine. The husband intended to transfer his beneficial interests for the children’s benefit, and the evidence did not establish that the trustee shared a contrary intention.
3. Following A v A [2007] EWHC 99 (Fam), a trust validly constituted at inception could not subsequently become a sham. The 2014 deed was itself a sham and had no legal effect, but it did not alter the status of the 2007 trust.
4. The husband’s execution of the 2007 deed amounted to an effective self-declaration of trust over his 50% interest in D Limited. The court applied Shah v Shah [2010] EWCA Civ 1408 and T Choithram International SA v Pagarani [2001] 1 WLR 1.
5. The C Limited shares had been beneficially owned 50% by each spouse since 1994. The husband could therefore settle only his own 50% interest. The 2007 trust validly held that interest for the children, while the wife’s 50% beneficial interest remained unaffected.
6. The transfer of legal title in C Limited to PH in 2014 was effective. In equity, PH held 50% for the children under the 2007 trust and 50% for the wife. The court declined relief under section 37(2)(a) of the Matrimonial Causes Act 1973, finding no reviewable disposition made for the purpose of defeating the wife’s financial claims.