Following on from their recent Autumn Series Seminar: Jacqueline Julyan S.C. and Gemma Lindfield share their in-depth analysis of Trusts in the context of divorce proceedings, sham transactions, reviewable dispositions and TOLATA.

The family courts are frequently met with the question of whether there has been a disposition of an asset by a party to financial proceedings. A party who believes that a disposition of property has been made can apply to set this aside as a reviewable disposition under s37 of the Matrimonial Causes Act 1973 (“MCA”). 

Family life and the arrangements within them are often less than straight-forward. Thus caution must be exercised when responding to such an application, whether on behalf of the party who is said to have disposed of the property, or any third party who is said to have benefited from such a disposition.

A practical example shines a light for practitioners in relation to an application to set aside a reviewable disposition that things may not be as they appear. 

Case study: M v M

The wife (W) and the husband (H) married in June 1995, having co-habited since late 1994.  The wife had sons from a previous relationship, one of whom is S.  On the 5th of August 2004, the wife purchased a property, 7, Lion Close, in her sole name.  It was funded by a deposit of £10,000 and the balance of £195,000 by a mortgage with the Northern Rock.  S was to occupy the property as his home.  The wife’s case was that she did not intend to and had never lived in the property.

S’s case was that he had provided a £7,000 deposit that was given by his father to him, and the balance was from S himself.  There was a statement from the mortgage broker confirming that the reason for the arrangement was that S was already on a mortgage with his then wife, whom he was divorcing and he could not obtain a mortgage. The intention was that the house was to be S’s and that W was helping him.  That explanation accorded with W’s case as supported by S.

In July 2005, the mortgage was changed to add S and the property was put into joint names.  Later that year W sold a property which allowed her to redeem the Northern Rock mortgage which was in the sum of £195,000. W remained on the title. W’s case was that S paid her monthly what he had been paying to Northern Rock, which was about £800. The funds were paid into an account to which both she and H had access.

In 2012, Lion Close was sold and another property, 23 Gazelle Crescent, was purchased for £275,000. S obtained a £75,000 mortgage.  The property was bought and registered in the joint names of S and W.  By 2014, W’s case was that the loan had effectively been repaid and so she transferred her interest to her son. This was because W no longer needed the security of remaining on the title as a joint owner.  It was this transfer, completed in August 2014, that the husband H claimed was a reviewable disposition.

H’s case was that the marriage was in difficulty from November 2013 and that the steps taken by W, beginning in February 2014, to effect the transfer, were made in the circumstances of a failing marriage and with the intention of defeating his financial remedies claim.  H asserted that up until this point, he had always understood, because he had been told, that the property was effectively the wife’s and that S was a tenant, paying rent to W.

W’s case was that at no point between 2004 to 2014 did she enjoy beneficial ownership of either Lion Close or Gazelle Crescent.  She held any interest in either property on trust for S. The transfer into her son’s name merely reflected that. Even if there were some beneficial ownership, the transfer was not made with the intention of defeating her claim but for other reasons altogether.  W asserted that the marriage was not over in November 2013.  In December of that year, she went on a safari with H.  They also discussed the purchase of a villa in France.  Although the transfer was not finalised, due to mistakes by the bank, until August 2014, W’s case was that action had been taken to transfer in February 2014.

The evidence

The evidence of the two persons to the agreement as to beneficial ownership, being W and S, was that the property at 23 Gazelle Crescent was that of S.

  • S was responsible for all the costs and expenses relating to the property, which would in the ordinary course be paid by the owner.
  • Both W and S explained that when the mortgage on 7 Lion Close (the predecessor to 23 Gazelle Crescent) was discharged by W, this was regarded as a loan by her to S.
  • This loan was repaid in monthly instalments, and by way of additional payments over and above the monthly payments.
  • The amount paid monthly to W was far higher than a monthly rental for a similar property would have been.
  • The evidence of H was that he did not know what the arrangements between W and S were, but the W told him the payments S was making were “rent”.
  • Neither W or S was challenged in cross-examination on the evidence that all payments made were in repayment of a loan, and not payment of rent.
  • S’s wife was clear in her evidence that the family always spoke of it as a loan by W to S.
  • S testified that he would not have paid the expenses for the property he did, had he been the tenant, and that he did so as owner.
  • The only explanation that H could offer for this that “this is what they did as mother and son”.
  • The objective facts that could not be contradicted by H, supported the contention that beneficial ownership of the property vested in S.
  • It was accepted that S paid all the expenses that an owner of property would pay, and conducted himself as owner.
  • S did not qualify for a mortgage in 2004 as tied to one with his wife.
  • W acquired 7 Lion Close in her name.
  • S paid all mortgage instalments.
  • As soon as he was able to and in 2005 S became liable on the mortgage to Northern Rock.
  • All costs for the acquisition of the property, such as the deposit, solicitor’s fees and stamp duty were paid by S.
  • The property was insured by S.
  • All repairs and maintenance costs were paid by S.
  • Improvements were effected and paid for by S.
  • The mortgage was discharged by W, and S then paid to W the amounts he had been paying to the mortgage instalments.
  • Lion Close was sold to purchase 23 Gazelle Crescent, in joint names.
  • Again, all costs and expenses, which would be paid by an owner were paid by S.
  • S was then paying not only the monthly payments to W, but also the mortgage instalments.
  • The monthly payments to W were at a rate far higher than a rental rate for the property would have been.

The issues

The court was asked to decide that the transfer by W to S of her share in 23 Gazelle Crescent was to be set aside as a reviewable disposition under s37 of the MCA.

The first issue to determine was whether it were a disposition. Only if it were a disposition, could the court then determine whether it was reviewable.

Disposition: legal and beneficial ownership

The presumption is that beneficial interest follows legal ownership. However, this can be rebutted on evidence.

In Stack v. Dowden [2007] 2 AC 432 Baroness Hale stated (at paragraph 69) that each case will turn on its own facts and that many more factors than financial considerations may be relevant to divining the parties' true intentions. Baroness Hale provided examples of evidence that may rebut the presumption:

  • any advice or discussions at the time of the transfer which cast light upon their intentions then;
  • the reasons why the house was acquired in their joint names;
  • the reasons why (if it be the case) the survivor was authorised to give a receipt for capital moneys;
  • the purpose for which the home was acquired;
  • the nature of the parties' relationship;
  • whether they had children for whom they both had responsibility to provide a home;
  • how the purchase was financed, both initially and subsequently;
  • how the parties arranged their finances, whether separately or together or a bit of both;
  • how they discharged the outgoings on the property and their other household expenses.

When a couple are joint owners of the home and jointly liable for the mortgage, the inferences to be drawn from who pays for what may be very different from the inferences to be drawn when only one is the owner of the home. The arithmetical calculation of how much was paid by each is also likely to be less important. It will be easier to draw the inference that they intended that each should contribute as much to the household as they reasonably could and that they would share the eventual benefit or burden equally.

The parties' individual characters and personalities may also be a factor in deciding where their true intentions lay.

The presumption that legal ownership and beneficial ownership coincide can be displaced with evidence: Agarwala v Agarwala [2013] EWCA Civ 1763; [2014] 2 FLR 1069.

Agarwala v Agarwala was a dispute between a brother-in-law (S) and sister in-in-law (J), about ownership of a property. The property was purchased in J’s name and the mortgage was in her name. That there was an oral agreement on the purchase of the property was not disputed. The dispute was what the terms of that agreement were, the two versions being diametrically opposed. J contended it was to be her property, S contended it was to be his. Neither party contended for shared equity: it was either 100% his or 100% hers. Joint ownership was not a question. Each contended for “an ‘all or nothing’ conclusion as to the beneficial ownership of the property” (page 1071 para [4]).

The Court of appeal held:

“The weight to be given to the assumption will depend on the facts of the particular case” and  “”…where it is common ground that there was an agreement as to how this business asset was to be bought, held and used, the presumption is only the starting point” (Page 1074 para [13]).

The trial judge was considered to have “correctly focused on ascertaining what, on the balance of probabilities, were the terms of that agreement” (page 1077 para [24]).

Reviewable disposition: the requirements of Section 37

Section 37(4) of the MCA 1973 reads:

Any disposition made by the other party to the proceedings for financial relief in question (whether before or after the commencement of those proceedings)  is a reviewable disposition for the purposes of subsection (2)(b) and (c) above unless it was made for valuable consideration (other than marriage) to a person who, at the time of the disposition, acted in relation to it in good faith and without notice of any intention on the part of the other party to defeat the applicant’s claim for financial relief.

Section 37(1) defines “financial relief” and states:

“For the purposes of this section “financial relief” means relief under any of the provisions of sections 22, 23, 24, 27, 31 (except subsection (6)) and 35 above, and any reference in this section to defeating a person’s claim for financial relief is a reference to preventing financial relief from being granted to that person, or to that person for the benefit of a child of the family, or reducing the amount of any financial relief which might be so granted, or frustrating or impeding the enforcement of any order which might be or has been made at his instance under any of those provisions.”

It is therefore presumed that any disposition is reviewable unless the respondent to the application can establish all the matters mentioned, namely:

  • Valuable consideration;
  • Transferee acting in good faith;
  • Transferee without any notice of the transferor’s intention to defeat applicant’s claim.

The onus is on the respondent or transferee to satisfy the court of the matters outlined above.

In Mubarak v. Mubarak [2007] 2 FLR 364 it was held that section 37 requires an actual intention to defeat a claim to be in existence at the time of the disposition. In Mubarak Holman J could not be satisfied that the husband had made the disposition with the intention of defeating the claim for ancillary relief, rather than tax evasion.

Applying to set aside a disposition poses different considerations to applying to prevent a disposition. This is because it may be that a third party will have acquired rights in the property concerned.

The knowledge required for notice of intention to defeat the applicant’s claim is not confined to actual knowledge but extends to constructive knowledge.

The test for constructive knowledge derives from the statement of Farwell J in Hunt v Luck [1901] 1 Ch 45:

“Constructive notice is the knowledge which the courts impute to a person upon presumption so strong of the existence of the knowledge that it cannot be allowed to be rebutted, either from his knowing something which ought to have put him to further inquiry or from his wilfully abstaining from inquiry, to avoid notice.”

Sham transactions?

In ND v SD & Ors [2017] EWHC 1507 (Fam) the preliminary issue was whether a transfer, after the parties had separated, of a significant portion of his assets, by the husband to a trust, was a sham. The wife’s fall-back position was that it was a reviewable disposition, to be set aside under s 37.

The husband provided an offshore trust deed dated 3 August 2007, as part of the disclosure exercise in financial remedy proceedings. The trust placed must of the husband’s assets into an irrevocable trust. The wife challenged this as a sham trust and the issue was heard at a trial commencing 16 December 2016. During the trial another document produced showed that some years after executing the 2007 trust deed, on 27th March 2014, the husband, together with PH, executed a second trust deed.  This purported to declare a trust in respect of some of the same shares as had been placed in trust by the 2007 trust deed.

Roberts J directed her mind to Diplock LJ in Snook v London & West Riding Investments Limited [1967] 2 QB 786, at page 802:

"For acts or documents to be a "sham", with whatever legal consequences follows from this, all the parties thereto must have a common intention that the acts or documents are not to create the legal rights and obligations which they give the appearance of creating."

Roberts J then then cited "five fundamental principles", in relation to sham acts or documents which she took from Arden LJ, in Stone v Hitch [2001] EWCA Civ 63.  The five principles are:

  • First, in the case of a document, the court is not restricted to examining the four corners of the document.  It may examine external evidence.  This will include the parties' explanations and circumstantial evidence, such as evidence of the subsequent conduct of the parties.
  • Second, as the passage from Snook makes clear, the test of intention is subjective.  The parties must have intended to create different rights and obligations from those appearing from (say) the relevant document, and in addition they must have intended to give a false impression of those rights and obligations to third parties.
  • Third, the fact that the act or document is uncommercial, or even artificial, does not mean that it is a sham.  A distinction is to be drawn between the situation where the parties make an agreement which is unfavourable to one of them, or artificial, and a situation where they intend some other arrangement to bind them.  In the former situation, they intend the agreement to take effect according to its tenor.  In the latter situation, the agreement is not to bind their relationship.
  • Fourth, the fact that parties subsequently depart from an agreement does not necessarily mean that they never intended the agreement to be effective and binding.  The proper conclusion to draw may be that they agreed to vary their agreement and that they have become bound by the agreement as varied: see for example Garnac Grain Co Inc v H.M.F. Faure and Fairclough Ltd [1966] 1 QB 650, 683-4 per Diplock LJ....
  • Fifth, the intention must be a common intention.”

Drawing on the principles Roberts J said (at paragraph 184):

“Thus, two headline points emerge at the outset: (i) there must be a dishonest intent before the court will find an instrument to be a sham, and (ii) where instruments or agreements are properly and formally drawn (i.e. "perfectly proper agreements on their face") absent dishonest intent, there is a strong presumption that the parties intend to honour their rights and obligations thereunder".

On the issue of whether there was a sham trust Roberts J said (at paragraph 244):

  “Thus, as part of his opening skeleton argument, it was said by Mr Amos on behalf of the wife that, in relation to the (admittedly sham) 2014 Trust Deed, the husband must now be presumed to be fixed by his representation that he was the beneficial owner of the C Limited shares.  As the innocent third party, the wife is entitled to rely on the representation made in the later Trust Deed and he cannot now in this litigation advance a contrary case.  I agree with Mr Warwick [counsel for the Trustee] that this is not a free-standing point of law but rather part of the jurisprudence in relation to the issue of sham transactions.  It is quite clear from the judgment of Munby J in A v A that a trust which is not initially a sham cannot subsequently become a sham.  I have found that the ABC Trust which was set up in August 2007 was not a sham and it therefore seems to me that nothing which was said or done subsequently in 2014 can make it a sham.  The husband could not give away in 2014 that which was not his to give."

In a careful analysis of the passage of dealings, Mrs Justice Roberts held that the creation of the trust was not a sham.

On the question of s37 the disposition was held not to have been made with the intention to defeat the wife’s claim [para 265].

Rebuttable presumption of s37(5)

Section 37(5) of the MCA 1973 reads:
“Where an application is made under this section with respect to a disposition which took place less than three years before the date of the application or with respect to a disposition or other dealing with property which is about to take place and the court is satisfied—

(a) in a case falling within subsection (2)(a) or (b) above, that the disposition or other dealing would (apart from this section) have the consequence, or

(b) in a case falling within subsection (2)(c) above, that the disposition has had the consequence, of defeating the applicant’s claim for financial relief, it shall be presumed, unless the contrary is shown, that the person who disposed of or is about to dispose of or deal with the property did so or, as the case may be, is about to do so, with the intention of defeating the applicant’s claim for financial relief.”

Although the statutory presumption of s37 (5) did not apply in ND v SD, as the disposition was made more than 3 years before proceedings, the factors considered are pertinent to a determination of whether the presumption of s37(5)has been rebutted.

In ND v SD the parties had separated but “there were no extant divorce proceedings……..There is no evidence that he sought advice at that stage in relation to the wife’s likely entitlement in the event of a divorce under either English, Z country or X country law.” (para 193).

The result in M v M

The court held that W had never had beneficial ownership in respect of either property. Thus W had held the properties in trust for S.

Accordingly, there was no disposition, so section 37 did not bite.

The court further held that even if it were a disposition, it was not reviewable as the evidence was sufficient to rebut the presumption of section 37(5).

Reverse TOLATA

Looking at it from another perspective, had W and S fallen out, and S claimed ownership of the entirety of 23 Gazelle Crescent, he would have been found to be the beneficial owner of the property.

Using this test, a reverse TOLATA, there was no disposition by W to S upon the transfer of 23 Gazelle Crescent.

Back to Basics
The case study demonstrates the need to consider and analyse family arrangements.

What seemed to be a simple case – the transfer of property by W to S in the context of a failed marriage – where the transfer would be set aside as a reviewable disposition in terms of s 37, was turned around by considering what the inter-family transactions represented. 

When looked at from the perspective of W holding the properties in trust for S, the allegation of “dodgy dealings” was proved unfounded.

Jaqueline Julyan S.C. has an international family practice and is an expert in the field. She is also a skilled practitioner in all aspect of domestic and child matters. Jaqueline is astute and has an eye for the fine detail, and is able to achieve the best possible outcomes for her clients.

Gemma Lindfield is an experienced extradition, family, criminal and public law barrister with a particular focus on human rights. Gemma has been instructed in some of the most complex and high-profile extradition cases.