Introduction

On 15 August 2008, the Royal Court of Jersey, Birt, DB presiding, delivered an important judgment on the highly topical issue of the circumstances in which the Royal Court can enforce or give effect to a matrimonial order of the English Family Division varying the terms of a Jersey trust. The case is also noteworthy in containing one of the very rare instances where a court has appointed a receiver over a trust.

This was an exceptional case as is illustrated by its history.

Having obtained an award of £4,875,000 by virtue of the order of Bodey J dated 10 December 1999 in the English Court ("the Bodey Order"), Mrs Mubarak has since 1999 been engaged in a perpetual, astonishingly costly and largely unsuccessful attempt to enforce the Bodey Order. Described by the English Court of Appeal as "Titanic" and "a serious blot on the otherwise carefully written pages of family jurisprudence", the Mubarak case is notorious in the English Family Division, spawning countless reported judgments, total costs of about £4.1 million, and involving some thirty judges. She is still owed some £7.6 million from the original lump sum, periodical payments and costs. The court described Mrs Mubarak’s and her children’s financial position as dire. Mr Mubarak has been consistently in contempt of the English court.

The Decision

The Royal Court held that:-

(1) By reason of Article 9(4) of the Trusts (Jersey) Law 1984 ("the Trusts Law"), it cannot enforce a judgment of the Family Division varying or altering a Jersey trust under the English Matrimonial Causes Act 1973, even where the trustees have submitted to the jurisdiction of the Family Division.

(2) Where the variation ordered by the Family Division does not amount to an alteration of the terms of the trust, the Court may give directions under Article 51 of the Trusts Law which have the effect of achieving the objectives of the English judgment. Whether the Court will do so in a particular case is a matter of discretion having regard to the interests of the beneficiaries.

(3) Where (as in this case) the variation ordered by the Family Division does amount to an alteration of the terms of the trust, there is no jurisdiction in the Jersey Court to give directions under Article 51 which authorise or direct the trustees to act in a manner which is outside the powers conferred on them by the trust deed.

(4) As a consequence the Jersey Court could not direct the Trustee to give effect to the English order.

(5) As the former husband had agreed before the English Court as a precondition to being heard, to write irrevocably confirming the Trustee should give effect to whatever order the English Court may make, all adult beneficiaries had in effect consented, and as the variation was in the interests of the minor children, the Court on their behalf gave its consent to the variation pursuant to Article 47 of the Trusts Law. As a result, the variation ordered by the Family Division was to be given effect by the Trustee.

(6) As the former husband was hostile and had control of the assets through a corporate structure, the trust lacked liquidity, the assets were outside Jersey, the Trustee had no funds for costs and it was unlikely that any other person would act as trustee, as an exceptional remedy, receivers would be appointed under the Court’s inherent supervisory jurisdiction.

(7) The receivers would be clothed with sufficient authority and a gagging order granted to enable the receivers to act in the meantime.

The Case In More Detail

Background: The Trust

Established by deed dated 2 September 1997 by Mr and Mrs Mubarak as settlors and The Craven Trust Company Limited as trustee ("the Trustee"), the Trust is a discretionary Trust governed by the laws of Jersey. The beneficiaries of the Trust are the settlors, their children Salem, Noor and Osman together with any other children or remoter issue of the settlors born thereafter. A fourth child of the marriage, Hamza, was born after the creation of the Trust.

The main asset of the Trust comprises shares in a company called Twenty First Century Holdings Limited ("TFCH"), a Bermudian holding company which in turn owns shares in a number of companies incorporated in inter alia Jersey, London, Dubai and Hong Kong (together "the Dianoor Group"). The Dianoor Group is engaged in the manufacture and trading of jewellery. As a result of a company re-organisation, just prior to the establishment of the Trust, TFCH owes US$34,333,522 to Mr Mubarak and US$557,978 to Mrs Mubarak (both of whom were prior to the re-organisation shareholders in TFCH).

Under the terms of the Trust, Mr Mubarak reserved to himself a number of powers, including the power to add and exclude beneficiaries. By deed of exclusion dated 20 April 1998 (just before the wife commenced divorce proceedings), Mr Mubarak exercised the power given to him under the Trust to revocably exclude Mrs Mubarak as a beneficiary and declare her to be an Excluded Person for the purposes of the Trust.

Procedural Background

In March 2005, Mrs Mubarak pursued one final strategy to enforce the Bodey Order: she attacked the Trust. In her application in March 2005 to the English High Court Family Division, she sought three things: first, the setting aside of her exclusion as a beneficiary; second, the setting aside of the transfer of her shares in TFCH to the Trust; and finally, an order that the English Court pursuant to s. 24(1)(c) of the Matrimonial Causes Act 1973 vary the Trust so as to require the Trustee to pay to her an amount equalling the sums outstanding under the Bodey Order.

Before the application came to be heard before Holman J in December 2006, Mr Mubarak faced the very real prospect that he would be barred from further participation on the basis of his on-going contempt of the Bodey Order, under what is known as the "Hadkinson principle". As the price for his participation in the English proceedings, Mr Mubarak was required to meet a number of preconditions. These included that he write to the Trustee in terms expressed to be irrevocable confirming inter alia that he wished the Trustee to give effect to whatever orders the English Court may make. After one unsatisfactory attempt to comply with this obligation, Mr Mubarak duly wrote to the Trustee in the required terms on 25 August 2006. He was accordingly allowed to participate in the English proceedings.

In a long, closely reasoned judgment, Holman J rejected Mrs Mubarak’s first two applications but made an order varying the Trust so as to reinstate Mrs Mubarak as a beneficiary to the extent of the sums outstanding under the Bodey Order ("the Holman Order"). In doing so, Holman J expressed considerable appreciation of the fact that as a general rule it would be an "exorbitant exercise of jurisdiction" for an English Court to vary a Jersey trust. However, in the light of Mr Mubarak’s prolonged recalcitrance, Holman J felt that he had no other option but to vary the Trust and the Jersey Court expressed considerable sympathy with this sentiment.

Various appeals were pursued, unsuccessfully, by the husband. And so the matter came before the Jersey Royal Court for consideration in April 2008 as an application for directions under the Trusts Law.

Legal Submissions

The application proceeded on two alternative bases: first, that the Court had power to enforce the Holman Order on the grounds of comity and therefore to vary the Trust as ordered by Holman J; alternatively, that the Court should treat all the adult beneficiaries, including Mr Mubarak by virtue of his August 2006 letter to the Trustee, as having agreed to a variation of the Trust and the Court should lend its consent to the variation on behalf of the minor and unborn beneficiaries in accordance with Article 47 of the Trusts Law.

Jurisdiction To Vary

The Trustee was neutral. However, its Advocate suggested that the Court did not have jurisdiction to vary the Trust and therefore could not enforce the Holman Order unless the matter could be brought within Article 47 of the Trusts Law. The basis for this submission was that the Court, on an application of this kind, stood in the shoes of the Trustee and could have no greater powers than the Trustee. Therefore, effect could not be given to the variation order made by Holman J on the basis that the Trustee had no power under the Trust to confer bounty on Mrs Mubarak, as an Excluded Person and non-beneficiary.

The Court considered the position prior to the coming into force of the Trusts (Amendment No 4) (Jersey) Law 2006. In overview, the position used to be that where the trustee had submitted to the jurisdiction of the foreign Court, the Jersey Court would as a matter of comity give substantial (if not complete) effect to the foreign judgment. The rationale for this was that, having voluntarily submitted, the trustee had had full opportunity to put forward submissions on the order which the foreign Court should make. Conversely, if the trustee had not submitted, any order in the foreign court would not be enforceable in Jersey and the Jersey Court, in a subsequent application to vary the trust to achieve the effect of the foreign Court order, would have a completely free hand.

With the coming into force of the Trusts (Amendment No. 4) (Jersey) Law 2006, the new article 9 of the Trusts Law appeared to have changed the landscape considerably. By virtue of Article 9(4) of the Trusts Law, no foreign judgment relating to a Jersey trust is enforceable to the extent that it is inconsistent with Article 9(1). That Article in turn provides that any question concerning inter alia the administration of a trust (which would include variation orders) should be determined by Jersey law. The effect of Article 9(4) on its face therefore is to render unenforceable any judgment relating to a Jersey trust which fails to apply Jersey law.

By way of elucidation, the Court firstly drew a helpful distinction between an order varying the trust by way of alteration of the trust deed itself (an "alteration"), and a variation which was within the four corners of the trust deed (for example, an order directing a certain sum to be held on trust absolutely for the wife in circumstances where she was already a beneficiary). The Holman Order, in purporting to reinstate Mrs Mubarak, an Excluded Person, as a beneficiary, constituted an alteration to the Trust. The preliminary question arising was whether the Court possessed a general jurisdiction to alter the terms of a trust.

The Court concurred with the Trustee and held that there was no such general jurisdiction. Its reasons for so holding were many and included that the English Chancery Division enjoys no such general power under its equivalent supervisory jurisdiction over trusts, Article 51 of the Trusts Law does not on its face suggest any power to alter the terms of a trust, there is a specific provision (Article 47) dealing with the Court’s power to approve an alteration and a general jurisdiction to alter would render Article 47 superfluous and there is no reason in principle for the Court to assume such a power and thereby override the express intentions of the settlor.

Having reached this finding, the Court then considered the effect of Article 9(4). The Court noted that the English Family Division, in accordance with Charalambous v Charalambous [2004] EWCA Civ 1030, applied English law when it alters or varies a foreign trust pursuant to its statutory powers. Such an approach clearly falls foul of Article 9(4), which requires all such questions to be determined in accordance with Jersey law. Accordingly, a judgment of the English Family Division altering or varying a Jersey trust under English law is unenforceable in Jersey by reason of Article 9(4), irrespective of whether the trustee has submitted.

This does not necessarily mean however that no effect can be given to foreign Court orders altering or varying Jersey trusts. Where the variation ordered by the Family Division does not amount to an alteration, the Court may give directions under Article 51 of the Trusts Law which have the effect of achieving the objectives of the English judgment (see the recent judgments of Re B Trust 2006 JLR 562 and Re H Trust [2007] JRC187). Whether the Jersey Court will do so in a particular case is a matter of discretion having regard to the interests of the beneficiaries. However, where the variation ordered by the Family Division does amount to an alteration, there is no jurisdiction in the Jersey Court to give directions under Article 51 which authorise or direct the trustees to act in a manner which is outside the powers conferred on them by the trust deed.

Applying this analysis to the facts of the case, Mrs Mubarak had been removed as a beneficiary and designated an Excluded Person by the husband. The power to add beneficiaries vested with the husband and in any event could not be exercised in favour of an Excluded Person. Therefore, the Holman Order amounted to an alteration to the terms of the Trust. As English law had been applied, the Holman Order was unenforceable by virtue of Article 9(4); furthermore, as the order amounted to an alteration to the terms of the Trust, the Court could not direct the Trustee to give effect to it under Article 51.

Variation Under Article 47 of the Trusts Law

The adult beneficiaries of the Trust comprised the husband and the two adult children, Salem and Noor Mubarak. The adult children had consented to the alteration contained in the Holman Order. The two questions that arose were (1) whether Mr Mubarak, by virtue of his August 2006 letter to the Trustee, had consented to the alteration; and (2) if he had, whether the Court should agree to the alteration on behalf of the minor and unborn beneficiaries.

The Court noted that in August 2006, the husband was presented with a clear choice. Either he could choose not to write in the required terms to the Trustee, in which case he would forfeit the right to contest the English proceedings; or he could elect to write the letter and thereby be permitted, despite his longstanding contempt of the Bodey Order, to participate in the English proceedings. Exercising his own free will, Mr Mubarak chose to write the letter to the Trustee. Having done so, he obtained the advantage of appearing before Holman J flanked by senior and junior Counsel. He succeeded in defeating two of the three applications brought by the wife.

In the circumstances, the Court strongly deprecated the idea that Mr Mubarak should now be permitted to disown the August 2006 letter. The Court emphasised that its decision to treat Mr Mubarak as having consented to the alteration for the purposes of Article 47 was wholly exceptional in the light of his flagrant contempt of the Bodey Order. Having held therefore that all the adult beneficiaries should be treated as consenting to the variation as ordered by the English Court, the Court found that the alteration was for the benefit of the minor and unborn beneficiaries and duly consented on their behalf to that variation.

Practical Consequences: Appointment of Receiver

In giving practical effect to the Holman Order, two particular issues arose for consideration. First, the Court considered the effect of the loan owed by TFCH to Mr Mubarak. Arguably, Mrs Mubarak should have sought recourse against the husband’s loan account, as a substantial asset belonging to him, prior to seeking to vary the Trust. However, the terms of the loan were that Mr Mubarak could not call for repayment until TFCH had sufficient funds with which to pay it. The Court acknowledged that if the variation order were granted, the Trustee could take steps to realise liquidity from lower down the Dianoor Group. When such funds came up to TFCH level, they would have to be paid in reduction of the loan owed to the husband and Mrs Mubarak could at that point take steps to attach to the loan.

A second practical difficulty concerned how the Trustee was to realise liquidity. The Trust fund was illiquid, consisting of shares in TFCH which in turn owned shares in a number of companies in inter alia London, Dubai and Hong Kong. Based on the conduct of the litigation to date, any exercise in realising liquid assets would be met by fierce resistance (orchestrated by the husband) and was likely to involve multi-jurisdictional litigation. The Trustee, a Jersey company specialising in trust and company administration, was not well suited to undertake this task. It was already owed very significant sums by the Trust. It was moreover unreasonable to expect the Trustee to fund speculative and contentious litigation around the world.

On the other hand, the wife had persuaded KPMG to volunteer their services to act as de facto liquidators. KPMG were prepared to act on the basis that their fees would be recouped from the assets realised. The issue was on what basis KPMG should be appointed to this task. The Trustee submitted that it would be wrong for KPMG to be appointed as its agents or delegates as this could lead to the Trustee being held liable for actions taken by KPMG on its behalf over which it had no control. The Court agreed, noting that the latter could lead to endless uncertainty as to who had the ultimate authority to authorise, as well as the liability for, a particular action.

Mrs Mubarak submitted that the Court had jurisdiction to appoint KPMG as receivers of the Trust. The Court noted that, as part of its general supervisory jurisdiction, the Chancery Division of the English High Court had the power to appoint receivers of a trust (see Lewin on Trusts at para 38-28 to 38-39). The remedy was exceptional and only to be granted if there was a clear need to do so. The Court held that this was such an exceptional case. The Court noted that KPMG were both willing to act, and better placed to do so in the context of multi-jurisdictional asset recovery proceedings. Furthermore, it was highly improbable that a trustee could be found who was willing to take on the trusteeship in the present circumstances. KPMG were not willing to act as trustee. Accordingly, the Court appointed KPMG as receivers.

Conclusion

This is an important judgment providing much needed clarity on whether, and if so how, the Royal Court can enforce or give effect to an order of the English Family Division relating to a Jersey trust. It is no less significant in constituting one of the very rare cases (there is thought to be only a handful of reported instances under English law) where a receiver has been appointed over the assets of a trust. No doubt the decision, perhaps most especially in relation to the appointment of KPMG as receivers over the Trust, will provoke significant debate. The judgment, which will be found on the Jersey Legal Information Board website (www.jerseylaw.je), is being appealed by the husband. James Gleeson appeared as Advocate for the Trustee.

For further information contact:

Litigation: Anthony Robinson or James Gleeson
Trusts and Private Capital: Alan Dart or Anthony Dessain