Charities and internal investigations
Throughout 2016 there have been some interesting and thought-provoking court decisions in the sphere of trust litigation. With decisions covering claims varying from breach of trust to rescission on the grounds of mistake, we set out some of the key cases of 2016 below.
1. Singha v Heer  EWCA Civ 424
In February the Court of Appeal upheld the decision of HHJ Gerald sitting in the Central London County Court that letters written between former business partners did not amount to declarations of trust entitling one of the partners to the full beneficial interest in one of the partnership properties.
Mr Singa and Mr Heer, who were childhood friends, had formed a partnership for acquiring properties together in around 1998. The property in dispute was 1 Eaton Close (“the Property”), which was registered in the sole name of Mr Singha and became the matrimonial home of Mr and Mrs Singha. Mr Heer alleged that he had provided £45,000 to Mr Singha in 2001 towards the purchase of the Property, to be repaid within 5 years. He claimed that it was agreed that the legal ownership was to be in Mr Singha’s name only, but that the sole beneficial owner would be Mr Heer until the £45,000 was repaid in full. The sum was not repaid and Mr Singha and Mr Heer fell out in around 2003, following which the partnership was dissolved by agreement.
In 2010, in connection with divorce proceedings between Mr and Mrs Singha, Mr Singha was ordered to transfer the Property to his wife entirely so that she could sell it and take £125,000 from the proceeds. Mr Heer asserted for the first time in 2011 that he had a beneficial interest of 100% in the Property. Proceedings were issued by Mrs Singha and the court was asked to determine Mr Heer’s beneficial interest (if any) in the Property.
Mr Heer relied on three letters written to him by Mr Singha between 2005 and 2009 which referred to Mr Singha holding the property “on trust” for him. Mr Heer alleged that the letters collectively amounted to an express declaration of trust by Mr Singha of his entire interest in the Property in favour of Mr Heer.
The Court of Appeal ruled that the letters were not sufficient to amount to a full declaration of trust. Just because the word ‘trust’ had been used, it did not mean that Mr Singha had intended to use it in a legal sense. It was important to look at the letters “as a whole” and the court found “no compelling reason why they should be read in a technical sense as carrying all the connotations of a trust”. There was no declaration of trust and the court upheld the decision made at first instance, that Mr Heer had only a 50% interest in the Property.
Whilst this case arose from the breakdown in a business partnership, the same legal principles would apply to unmarried couples or joint purchasers in relation to property transactions. The decision serves as a reminder that intentions about jointly owned property should be set out in the clearest of terms in writing, especially where the parties’ beneficial interests are intended to be different to the position reflected by the legal title.
2. Bainbridge and another v Bainbridge  EWHC 898 (Ch)
In this case the High Court found that transfers into trust (which had triggered disastrous and unexpected tax consequences) could be rescinded for mistake using equitable tracing.
A father and son (the Claimants) who farmed in partnership had transferred several pieces of land into a discretionary trust. The trust was created, purportedly on the advice of the Claimant’s solicitors, with the land being transferred into it in June 2011. The trustees of the discretionary trust were the Second Claimant, his son, and a partner in the firm of solicitors who acted for them. The Claimants believed that no capital gains tax would be chargeable on the transfer of the land into the trust, but capital gains tax was chargeable on the transfer, in excess of £200,000. The Claimants made a claim to set aside the transfer into the trust. The sole Defendant was the Second Claimant’s son and one of the trustees. He did consent to the relief sought, but the solicitor trustee was not a party and was not involved in the claim, so even though the claim was unopposed it was still necessary for the court to be satisfied that the relief sought by the parties was justified.
Master Matthews ordered that the transfer of the land be set aside on the grounds of mistake, applying the principle in Pitt v Holt . He was satisfied that there had been “a distinct mistake, not just ignorance… that the mistake was basic to the transaction, that the Claimants did not deliberately run the risk of being wrong, and that it would unconscionable or unjust to leave it uncorrected”. Master Matthews also ordered the rescission of the transfer of two plots of land into the trust which by the time the claim was heard had been sold by the trustees, who had used the proceeds of sale to buy two new plots of land. The transfers of the original plots of land into the trust were treated as never having happened and the sales (which were actually carried out by the trustees) were imputed into the original owners (the Claimants).
The Claimants were successful in their application for rescission of the transfers into the trust, essentially because they were mistaken in their belief as to whether capital gains tax would be payable, which was an issue that was “basic to the transaction”. The sole Defendant did not oppose the claim and HMRC was not a party to the claim (having confirmed it did not wish to be joined). It would be interesting to see what arguments against rescission might have been presented to the court, had the circumstances been such that the claim was opposed by the Defendant or HMRC. The full judgment can be found here .
Blades v Isaac and another (2016) EWHC 601 (Ch)
In this case the High Court considered a claim by a beneficiary of a discretionary trust created by the will of Mrs Valeria Mary Lee, dated 9 August 2012, for disclosure of information (including trust accounts). Mrs Lee died on 19 June 2013 and left her entire estate to her trustees on discretionary trusts for a class of objects consisting originally of the Claimant (one of Mrs Lee’s two daughters), the Claimant’s husband and children, and Mrs Lee’s her cleaner.
Mrs Lee also left a letter of wishes which included suggested gifts to members of the class, but also 5% of the estate for her other daughter (the Claimant’s sister), who was not originally a member of the class. The Defendant trustees exercised their power to add the Claimant’s sister to the class and distributions were subsequently made out of the will trust to all members of the class, except the Claimant’s husband. The Claimant was unhappy with the Defendants’ handling of the administration and in particular expressed concern about the level of costs. On a number of occasions the Claimant asked the Defendants for a detailed breakdown of the estate but these requests were refused on the basis that (i) the estate accounts were confidential to the executors and trustees and (ii) that the trustees had concerns about the relationship between the Claimant and her sister, which was said to be “difficult”. The Defendants premised this decision on counsel’s advice.
The Defendants later consulted different counsel for a second opinion, which resulted in the disclosure of the information sought. The Claimant submitted that because she had in substance achieved what her claim set out to achieve (that is, the disclosure of the information), the Defendants should pay her costs as well as their own without recourse to the assets of the estate or the will trust.
The matter for the court to decide was therefore whether it should order the Defendants to pay the Claimant’s costs. The court held that the trustees had “at most committed a breach of their duty to account to the beneficiaries by providing appropriate information” but that they had “genuine concerns about the harm that might be done to the relationship between the two sisters” if the information had been provided showing the unbalanced treatment of them by the trustees. No loss had been caused to the trust fund and “the trustees did what they thought was right, took specialist chancery counsel’s advice when challenged… and said that they would seek the court’s directions”. The trustees had taken “reasonable steps” and the costs of all parties were therefore to be paid out of the trust fund.
In this case the court took a clearly positive view of the fact that the trustees had obtained counsel’s opinion in relation to their duties of disclosure, despite the advice initially being incorrect. Professional trustees will take comfort in this decision, which can be added to the list of cases where the court shown a willingness to look sympathetically on trustees who seek professional advice in relation to their duties. The full judgment can be found here.
4. Daniel and another v Tee and others  EWHC 1538 (Ch)
In July the High Court dismissed a claim for breach of trust bought by two beneficiaries (the Claimants) of a valuable will trust against professional trustees on the grounds that the trustees had failed to take appropriate care to invest in a properly diversified investment portfolio and had wrongly relied on the advice of professional investment advisers.
The Claimants were the children of the late Jack Raymond Daniel and the beneficiaries of a trust established by his will. At the time of their father’s death in 1999 the Claimants were aged 13 and 16. The trustees of the will trust (and Defendants of the claim) were Mr Daniel’s solicitors, Mr Redfern and Mr Osborne (who was later replaced by fellow solicitor Mr Tee).
The trustees had no personal expertise in managing investments and during 2000 to 2002 relied on the advice of professional investment advisors, Taylor Young Investment Management Limited, in relation to the investment of Trust funds. Many years later, as adults, the Claimants claimed compensation of over £1.4million for breach of trust in connection with the investment of the Trust funds between 2000 and 2002. They alleged that the defendant trustees were “at fault in failing to take appropriate care to formulate and implement a suitable investment strategy, and to review the investments made… and in relying on Taylor Young’s advice and recommendations”, which in fact turned out to be poor investment advice and costly to follow.
The Court concluded that the Claimants had established some breaches of duty but had failed to prove that they had suffered loss as a result of those breaches. The Court stated that even if the trustees had been liable for breach of trust, section 61 Trustee Act 1925 would likely have applied, thus excusing them from breach of trust. The trustees had acted to the best of their abilities and in reliance on what they reasonably believed to be competent professional advice.
Considerable emphasis was placed by the court on the fact that the Claimants had failed to prove that the alleged breaches had resulted in any losses which would otherwise not have occurred. This case is a reminder that breach of duty claims are very difficult against trustees who can show that they have sought appropriate professional advice, particularly where the alleged breach makes no difference to the decisions made or overall outcome. The full judgment can be found here.
5. Barnsley v Noble  EWCA Civ 799
In this case the Court of Appeal had to consider the proper interpretation of an exoneration clause contained in a will to relieve the trustees under trusts set out in the will of personal liability in respect of certain breaches of duty by them.
The Appellants, Mr Barnsley and Gill Noble, appealed against the dismissal of their claim for equitable compensation against the Respondent, Phillip Noble. Philip and his brother Michael had built up a substantial business and property empire known as the Noble Organisation. Michael died in 2006 and the disposal of his estate was governed by a will which appointed his brother Philip, his widow Gill Noble, and Mr Barnsley (an accountant who had acted for the Noble Organisation), as his executors.
After Michael’s death it was agreed that there should be a demerger of the business and property sides of the Noble Organisation such that, broadly speaking, Philip would take the business assets and Gill would take the property assets. Negotiations for the demerger took place over an extended period, during which it was discovered that some of the businesses within the Noble Organisation had potential claims for repayment of VAT arising from judgments pending in the ECJ. The demerger was concluded, following which the Noble Organisation submitted a series of claims for repayment of substantial sums of VAT in relation to the business side of the Organisation (recently acquired by Philip). The Appellants felt they had been misled by Philip about the value of the VAT repayment claims available to the businesses and they commenced proceedings against him for, inter alia, breach of fiduciary duty as executor and trustee. One of the allegations was that Philip had failed to disclose all of the information he had about the VAT repayment claims in the course of the demerger negotiations.
Michael’s will contained an exoneration clause which stated that “in the professed execution of the trusts and powers hereof no trustee shall be liable for any loss to the trust premises arising by reason of any improper investment made in good faith… or by reason of any other matter or thing except wilful and individual fraud or wrongdoing on the part of the trustee…”. Philip relied on this clause in his defence to the claims against him, and the High Court found in Philip’s favour at first instance.
On appeal against the High Court’s decision to dismiss the claims against Philip, the Appellants argued (amongst other things) that the exoneration clause did not apply because the Respondent had not acted “in the professed execution of the trusts and powers” of the will and that the Respondent could not rely on the exoneration clause because he had engaged in “wilful and individual fraud or wrongdoing” by giving effect to the demerger. The latter argument relied on an assertion that “wilful” equated to “intentional”.
The Appellants’ arguments were rejected by the Court. The full decision can be read here . This is a useful decision because exoneration clauses of this type are common (indeed the clause in this case is found in the Encyclopaedia for Forms and Precedents), and this case acts as guidance as to the meaning and application of such clauses. Further, it is another example of a failed attempt to make trustees liable.
6. Baker v Dunne  EWHC 2318 (Ch)
In this case the court heard a Beddoe application by the claimants, who were the trustees of the trust of the will of Jean Montgomery, who died in September 1997. The defendants were the three children of the deceased, who were the equal beneficiaries of the trust.
The main asset of the trust was a pub known as the Albert Arms. The first defendant, Jonathan, had been running a business from the pub premises for several years on an informal basis without paying rent or any alternative compensation to the trustees. They sought vacant possession of the Albert Arms. The trustees’ application was supported by two of the defendants, but opposed by Jonathan.
By the time of the hearing the trustees had already obtained a possession order in respect of the pub and a number of Beddoe orders. Jonathan alleged it would be a breach of trust for the trustees to seek vacant possession because the value of the premises would be increased by him remaining in possession and running the business. However, the trustees had obtained specialist valuation evidence from a firm specialising in licensed premises, which had advised that if Jonathan remained in occupation on the current basis the value of the property would be nil.
In light of Jonathan’s threatened claim for breach of trust the trustees sought the approval of the court to take steps to obtain vacant possession of the pub and sell the freehold “out of an abundance of caution”.
The court granted Beddoe relief to the trustees for a number of reasons, including the fact that they had obtained unequivocal valuation advice which had not been contradicted. There was no “real alternative to obtaining vacant possession and selling in accordance with the advice obtained” and Chief Master Marsh said that the claim for breach of trust amounted to “little more than a complaint that the Trustees have chosen not to sell the Albert Arms to Jonathan”. He said that “the trustees were perfectly entitled to proceed cautiously”.
It is always helpful for trustees and those who act for trustees to receive further guidance about how the courts approach Beddoes applications, which this case provides. The court took the view that in the face of a difficult defendant, trustees are entitled to proceed cautiously and to obtain a number of Beddoe orders to ensure that every step which they take is authorised by the court.
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