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When divorce bites back: reputational damage and the professional adviser

Date:28 NOV 2017
Third slide
Marcus Dearle & Ruben Sinha
Family Asset Protection | BLP Private Wealth

Professional advisers need to tread very carefully when a client wants to pursue an aggressive strategy to frustrate a spouse’s financial claims during divorce proceedings. Aggressive asset protection might well achieve a client’s financial objectives – at least in the short term. But the consequential reputational damage caused to the client, his or her advisers and their firms can be severe – and lasting.

These issues and risks were starkly illustrated in the case of Joy v Joy-Morancho and Others (No 3) [2015] EWHC 2507 (Fam), [2016] 1 FLR 815.

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A brief background to the Joy case

The case began in 2011, when the wife issued divorce proceedings in London. The majority of the family’s wealth derived from the husband’s business interests and was held in a discretionary trust which he had settled in the British Virgin Islands in 2002. The trustee was a Hong Kong based fiduciary company, Royal Fiduciary Group, of which Mr Tim Bennett was a director. The husband and his children were potential beneficiaries, although the wife never was.

By late 2013, Mr Bennett had taken steps to exclude the husband irrevocably as a beneficiary of the trust on the basis that a) the purpose of the trust was to benefit his children and grandchildren, and b) the trustees were obliged to protect the trust’s assets from further losses which may arise due to the divorce proceedings. By late 2013, the husband said his only liquid capital was a 1928 Bentley, which had been pledged to his solicitors on account of costs. The wife had very little capital of her own and sought a lump sum of £27m on the basis that the total ‘pot’ available for division was £54m.

An ‘elaborate charade’

The court found that the husband’s claims were an ‘elaborate charade’ designed to defeat the wife’s application. The Judge concluded that the husband’s case had been conducted ruthlessly and without regard to cost’. Furthermore, he found that trust assets would become available to the husband at a later stage and the husband would ‘find  a way’. The assets had been vigorously protected by the trustees, who had attempted to ensure that they would not be shared with the wife. Unusually in this case, the court adjourned the wife’s claim for a lump sum, allowing her to proceed further with her application for capital.

The judge gave some very clear warnings.

His view was that: 

'Where one party hatches a wholly deceptive presentation, pursues it persistently to the  conclusion, and is found to have done precisely all of that, then he or she  should expect no quarter from the court when it comes to costs. Such conduct  unravels all and can and should in an extreme case where the conclusions are  clear have clear costs condemnation meted out as the court’s response.’ 

Having concluded the husband’s conduct and attitude as being both, ‘scandalous and outrageous’, the judge ordered him to ‘take responsibility for W’s costs ‘at large’ and made the point that, ‘it is no less an outcome than such  aberrant conduct deserves’. 

When a client says 'You should have warned/stopped me!'

These are words which should concern professional advisers everywhere, whether they be accountants, bankers, lawyers, financial advisers or trustees. A client who was initially adamant that they wanted to give a spouse as little as possible might well turn their fire on advisers when a judge criticises these tactics later on, or they become the subject of negative gossip in the press.

Even if a client has ‘won’ in a narrow financial sense, conducting a case in this way can cause irreparable damage to family relationships in addition to the damage to the client’s reputation, resulting in legal claims against advisers.

Lawyers and other professionals are caught in the crosshairs in this situation. They may have followed client instructions to the letter and achieved what the client wanted, but they can still be criticised, named and shamed for their role in a controversial case. In Joy, the name of the protector was also set out in the judgment, in addition to the names of the trustee and the legal advisers.

There is no suggestion, of course, that the husband in Joy was concerned at all about the judge’s razor-edged criticisms or that he turned on his advisers. But, in another case, the position could have been very different. Some spouses would have found Singer J’s criticisms hard to swallow – criticisms which might also have potentially career-ending consequences: for instance his finding that the husband had shown 'a very significant lack of integrity and honesty'.

Top 5 tips for avoiding reputational damage

So, what should advisers do when they are caught in the crosshairs?

The Joy case is a classic example of aggressive asset protection planning. The main lesson to learn is that professional advisers and trustees need to take care not to overlook reputation damaging risks to themselves – and not just to the resisting spouse. These risks are very real when a court finds that a settlor/beneficiary has sought to put financial resources beyond its reach with the involvement (‘corrosive collusion’ as the judge described it) of trustees.

It is worth noting this comment from the judge:

‘There is a clear distinction between the question whether a trust can be characterised as a sham (which was, as rightly stated, not asserted at the hearing), and the conclusion which I reached that the case collusively advanced by H and TB was a rotten edifice founded on the concealment and mispresentation and therefore a sham, a charade, bogus, spurious and contrived. I do not shrink from applying to it the description  fraud, a deliberate design to deceive, inflicted on W and on the court, and found by the court so to be.’ 

It is important to make clear that the wife did not run a 'sham' case in the 'technical fiduciary-related sense' as the judge put it. He indicated that that decision was for 'understandable legal reasons'.  So this was in significant contrast to the more recent Pugachev case where the English High Court Chancery Division held that the five New Zealand trusts owned by the Russian businessman, Sergei Pugachev were in fact technical 'shams' resulting in any assets within the trusts as being available for enforcement by default.

1. Steer the client

Problems often arise because advisers avoid giving unwelcome advice, especially to clients who are wealthy and powerful. However, this can backfire if you are later accused of failing to advise a client of the very real risks involved in adopting an overly aggressive approach. Be firm and assertive. Clients should be paying advisers to give them the advice they need to hear – not necessarily what they want to hear.

2. Sensible and responsible asset protection

The court is less likely to intervene and/or criticise (in contrast to the Joy case) when parties implement responsible asset protection arrangements. This involves the execution of a pre- or post-nuptial agreement, which sufficiently covers (at the very least) the financially weaker party’s needs. In those circumstances, advisers can take a more robust approach to the asset protection advice they give to clients.

3. Don’t play games

Hastily moving assets offshore or suddenly relocating to a more favourable jurisdiction when a relationship begins to strain will not find favour with a court. Those involved in proceedings need to be reminded of the ongoing duty to provide full and frank financial disclosure and that any failure to comply with that duty will likely result in adverse consequences.

4. Make an offer

All too often, advisers fail to engage in proper negotiations. The consequences, both emotionally and financially, of proceeding to a trial can be very costly. Advisers should engage in constructive settlement negotiations as early as possible. When a party makes sensible and reasonable offers to settle, a court is more likely to look favorably at attempts to protect assets within the proceedings.

5. Some things matter more than money

Focusing exclusively on the financial elements of a divorce often means that the impact on family relationships and personal reputations can be overlooked. Clients should be reminded of this, particularly where children are involved.  

Family Asset Protection is about family protection. Not just asset protection.