Piercing a Trust Façade in Matrimonial Proceedings

Man Wai Cheung, JD/PCLL Graduate, The Chinese University of Hong Kong and Peter Chang, Associate, Freshfields Bruckhaus Deringer

Section 7(1)(a) of the Matrimonial Proceedings and Property Ordinance (Cap. 192) requires the Court to determine a divorcing couple’s financial resources when granting ancillary relief. In Poon Lok To Otto v Kan Lai Kwanand another [2014] HKCFA 66 (17 July 2014), the husband settlor created a discretionary trust, with the trustee having the discretion from time to time to advance the trust’s capital or income to any of the discretionary beneficiaries, which consisted of the husband, the wife, and the daughter. Having referred to Charman v Charman (No. 4) (2007) and KEWS v NCHC (2013), the Court decided that such discretionary trust would constitute a financial resource if, at the husband settlor’s request, the trustee acting in good faith would likely advance the trust’s capital or income to the husband settlor.

According to Poon, assessing such likelihood required the Court to weigh the following overlapping factors:

In short, the Court would examine the totality and the reality of the situation, and discern whether the trustee would accord great deference to the settlor. If so, when granting ancillary relief, the Court would pierce the trust façade and treat the trust as a financial resource to the husband.

Additionally, while not directly relevant to the facts of Poon, the Court also referred to Tasarruf Mevduati Sigorta Fonu v Merrill Lynch Bank and Trust Company (Cayman) Limited [2011] UKPC 17 and stated that if a settlor had not effectively divested himself of the trust property because the settlor had retained the unfettered power to revoke the trust, such power of revocation would be tantamount to retaining ownership over the underlying assets, making such assets potentially available for ancillary relief in divorce proceedings.