Trust – Application by representor to set aside transfer of assets
to a trust on the ground of mistake.
[2012]JRC071
Royal Court
(Samedi)
30
March 2012
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Before :
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M. C. St. J. Birt, Esq., Bailiff, and Jurats
Kerley and Nicolle.
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|
Between
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CC Limited
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Representor
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And
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Apex Trust Limited
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Respondent
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Advocate R. J. MacRae
for the Representor.
Advocate D. J. Petit for the Respondent.
judgment
the bailiff:
1.
This is an
application by the Representor (“the Company”) to set aside a
transfer of assets to a trust on the ground of mistake. Amongst other matters, it requires the
Court to consider whether the matter is governed by Jersey
law or English law.
2.
At the conclusion
of the hearing, we granted the relief sought and we now give our reasons.
Background
3.
The Court
has been provided with a detailed affidavit from one of the directors of the
Company (“the son”) and a shorter one from his sister (“the
daughter”).
4.
At the
material time, the son’s mother (“the mother”) was the owner
of certain fishing rights and two properties in the UK. She, the son and the daughter (together
“the family members”) also each owned a portfolio of securities. All of these assets are compendiously
hereafter referred to as “the Assets”.
5.
In 2002,
the mother consulted a firm of English solicitors called Baxendale Walker. They devised a plan with a view to saving
capital gains tax and inheritance tax. In briefest outline, it involved the
establishment of a partnership between the three family members to which they
would each assign the portion of the Assets which belonged to them. Subsequently, the family members would
establish a company of which they would each be a director and equal share
holder. The Assets would be
transferred from the partnership to that company. Thereafter, the company would establish a
trust and would transfer the Assets to that trust.
6.
Baxendale
Walker advised the family members that, although they would not be able to
receive outright distributions of income or capital from the trust (described
as an Employee Benefits and Shares Trust) (“EBT”), they would be
able to receive loans on a commercial basis. Baxendale Walker pointed out that the
receipt of loans would provide an “inheritance tax shelter” on the
death of the relevant family member. It was emphasised to the family members
that monies in the trust could be accessed at short notice and would be
available to the mother to use during her lifetime. It was also specifically stated that a
beneficiary (i.e. a family member) of the EBT would be able to leave a letter
of wishes which would describe what he or she wished to happen after his or her
death. The trustees would have
power, after the death of a family member, to exercise their discretion to make
payments to the persons nominated as beneficiaries by the family member.
7.
The family
members emphasised to Baxendale Walker that the mother relied on the income
which she received from some of the Assets, as did the son. Baxendale Walker provided assurances
that, in order to obtain money, all the family members had to do was to ring
the trustees and ask; and the son was assured that he could receive by way of
loans each year the equivalent of the dividends on the share portfolio which he
would be contributing.
8.
In due
course the family members decided to go ahead on the basis of the advice
received and on 2nd August,
2002, the partnership was established. The Assets were contributed to the
partnership on 5th August,
2002. The Assets
contributed by the mother constituted the bulk of her assets and those
contributed by the son and the daughter constituted a material proportion of
their assets.
9.
The second
step in the plan took place on 4th
June, 2003, when the Company was established. The Assets were transferred by the
partnership to the Company on 12th
June, 2003.
10. On 24th October, 2003, Baxendale Walker submitted a report to
the Company suggesting that a different type of trust from the EBT should be
used, namely a “Commercial Security Trust”.
11. Baxendale Walker assured the family members
that they would still be able to receive loans out of the trust provided that
they were at a commercial rate, as this did not amount to a benefit. They also confirmed that, following the
death of each of the family members, the trustees could make distributions to
the beneficiaries nominated by the family member. This was elaborated in November 2003 when
it was explained to the mother that she could take out loans from the trust,
usually on a ten year repayment basis. If any of the loans were outstanding on
the mother’s death, the value of her estate would decrease, so less
inheritance tax would be payable. The same would apply in respect of the
son and, potentially, the daughter, although she lived in Australia and
no specific tax advice was given in relation to her position.
12. On the basis of the assurances that they would
be able to have access to the trust fund by way of loans during their
respective lifetimes and could nominate beneficiaries to receive the Assets
after their respective deaths, the family members decided to go ahead. Thus they procured that the Company
create a Commercial Security Trust on 17th November, 2003, (“the Trust”). Atlas Trust Company (Jersey)
Limited (“Atlas”) was the first trustee. The Assets were transferred by the
Company to Atlas as trustee of the Trust by deed dated 28th November, 2003, (“the Deed
of Assignment”), made between the Company and Atlas. The Deed of Assignment was expressed to
be governed by English law.
13. It is the gift effected by the Deed of
Assignment which the Company seeks to have set aside on the ground of mistake.
The terms of the Trust
14. It is convenient at this stage to turn to the
Trust. It has to be said
immediately that it was incapable of satisfying the two assurances which had
been given to the family members and the Company.
15. The proper law of the Trust was stated in the
trust deed to be the law of Jersey. The Trust was established as a
non-charitable purpose trust pursuant to Article 12 of the Trusts (Jersey) Law 1984 (“the 1984 Law”).
16. Pursuant to the trust deed, the Trust has two
purposes, a primary purpose and a secondary purpose. By virtue of clause 3.2, the trustee is
to hold the trust fund upon trust to execute the primary purpose. Subject to execution of the primary
purpose, the trustee is, pursuant to clause 4.2, to hold the trust fund upon
trust to execute the secondary purpose. The family members are defined in clause
1.1 as “the Enforcer“ of the Trust.
17. Clause 3.1 defines the primary purpose as the “undertaking
of the Security Undertaking”. By clause 1.1 of the deed, “the
Security Undertaking” means “the management and discharge of Debt
Obligations”. “Debt
Obligation” is defined to mean “any debt liability of any kind
(whether secured or unsecured) which is owing at any time during the Trust
Period by the Founder to any person or persons”. “The Founder” is defined as
the Company and accordingly the primary purpose of the Trust is to manage and
discharge any debt of the Company.
18. The secondary purpose is defined in clause 4.1
as “undertaking of the Business”. By clause 1.1 of the trust deed “the
Business” means “(i) the business of
acquiring, holding, investing in and trading in shares and/or securities of
bodies corporate incorporated in any jurisdiction in the world; (ii) any
commercial undertaking with a view to profit by utilisation of the property
from time to time subject to the Purpose Trusts”. Thus the secondary purpose is essentially
investment in shares and securities and any commercial undertaking.
19. From this it can be seen that there are no
defined beneficiaries and there is no ability to apply the trust fund for the
benefit of any individual; in particular there is no ability for descendants of
the family members nominated by them to receive benefits after their respective
deaths.
20. Furthermore, although under paragraph 1.12 of
Schedule 1 of the trust deed, the trustee has power to lend any part of the
trust fund to any person whether or not taking security for the same and on
such terms as the trustee may think fit, clause 14 of the deed provides as
follows:-
“14.1 The Trustee shall not
by any means whether directly or indirectly exercise any power, duty or
obligation vested in the Trustee by this Deed (or any amendment or modification
thereof) nor otherwise allow, arrange or procure that any Excluded Person
obtains any factual benefit whatsoever (whether in money or otherwise) from the
Trust Fund which is or has been or becomes at any time held by the Trustee upon
the Purpose Trusts.
14.2 Without prejudice to the
generality of clause 14.1, no Excluded Person shall by any means be provided
with any factual or legal advantage (including any property, interest, power or
right) nor shall any Excluded Person enjoy the remission (in whole or part) of
any factual or legal disadvantage or liability from the utilisation by any
means of any part of the Trust Fund.”
21. Under Schedule 2 of the trust deed, “Excluded
Persons” include the Founder, any person connected with the Founder, any
participator in the Founder, any person connected with any such participator,
the Enforcer and any person connected with the Enforcer. It is clear that each of the family
members is an Excluded Person within this definition, as is the Company.
22. Following the establishment of the Trust, loans
were made to the mother (totalling £76,010), the son (totalling
£27,000) and the Company (totalling £10,000). The terms on which the loans were made
were those advised by Baxendale Walker. The loans were unsecured and were issued
on what was referred to as a “deep discount” basis. Thus no periodic interest was payable but
the amount payable on maturity of the 10 year loan was very much greater than
the amount originally loaned and the increased sum was calculated by reference
to notional interest.
23. Atlas retired as trustee on 29th February, 2008, in
favour of Nautilus Trust Company Limited (“Nautilus”). Nautilus considered that the terms of the
Trust did not permit it to make loans of the type which had been made and it
retired in favour of Apex on 20th
January, 2009. However
Apex too has concluded that the trust deed does not permit loans to be made on
the basis originally envisaged. Apex has been advised and accepts that,
unless loans on the terms in question could be obtained from a commercial
lender, they would constitute a benefit arising to the Company or to the family
member and accordingly are not permitted under the deed. It is accepted that loans on the “deep
discount” terms on which the previous loans were made would not be
available from a commercial lender.
24. Thus the upshot is that the family members
cannot obtain access to any of the Assets, on the basis that to allow them to
do so would constitute a benefit and that is not permitted by the trust deed. Furthermore, there is no ability on the
part of the trustee, after the death of a family member, to distribute the
trust property to any descendant or other person nominated to receive benefit
by the family member. In effect,
the Assets are locked into the Trust for its duration and can only be used for
the primary or secondary purpose, neither of which permits the Assets to be
applied for the benefit of the family members or any person they wish to
benefit after their respective deaths. The Company was operating under these two
mistakes when it entered into the Deed of Assignment.
25. The Company asserts that it would not have
created the Trust and gifted the Assets by means of the Deed of Assignment had
it known that this was the position. The Court accepts that that is so.
Jersey law and English law
26. A question arises as to whether the Court
should apply Jersey law or English law to the
issue of whether the Deed of Assignment may be set aside on the ground of
mistake. It is therefore necessary
to summarise very briefly the differences between the two systems.
27. Under English law, following the decision in Gibbon-v-Mitchell
[1990] 1 WLR 1304, in order for a gift to be set aside, a mistake on the part
of the donor had to be one as to the effect of the transaction itself
and not merely as to the consequences or advantages to be gained by
entering into it (see Millett J at 1309).
28. Following an exhaustive review of the
authorities, the Court of Appeal in Pitt-v-Holt [2011] 3 WLR has upheld
this distinction between a mistake as to effect and one as to
consequences. In order for the
equitable jurisdiction to set aside a voluntary disposition for mistake to be
invoked, there must be a mistake on the part of the donor either as to the
legal effect of the disposition or as to an existing fact which is basic to the
transaction. A mistake as to a
consequence (in which the court included fiscal liabilities) is not sufficient.
Furthermore the mistake must be of
so serious a character as to render it unjust on the part of the donee to
retain the property given to him, thereby endorsing the test set out in the
case of Ogilvy-v-Littleboy (13 TLR 399).
29. Jersey law has followed a different course. In Re the A Trust [2009] JLR 447
the Court (Commissioner Clyde-Smith) rejected the distinction in Gibbon-v-Mitchell
between an effect and a consequence and held simply that the test was as set
out in Ogilvy-v-Littleboy, namely whether the
donor or settlor was under some mistake of so serious a character as to render
it unjust on the part of the donee to retain the property given to him. In applying that test the Court had to be
satisfied that the donor or settlor would not have entered into the transaction
“but for” the mistake. The
decision in The A Trust was followed by further cases such as Re the Lochmore Trust [2010] JRC
068 where it was said at paragraph 11 that the Court had to ask itself the
following three questions:-
“(i)
Was there a mistake on the part of the settlor?
(ii) Would the settlor not have
entered into the transaction “but for” the mistake?
(iii) Was the mistake of so serious
a character as to render it unjust on the part of the donee to retain the
property?”
30. Following the decision of the English Court of
Appeal in Pitt-v-Holt, the Royal
Court reconsidered the Jersey
law of mistake in Re the S Trust [2011] JRC
117. After a thorough review of Pitt-v-Holt,
the Court (Bailhache Commissioner) preferred the approach developed in Re
the A Trust and Re the Lochmore Trust and accordingly
continued to reject the distinction between effects and consequences.
31. There remains therefore a material difference
between English law and Jersey law.
32. However, we do not think that it makes any
difference to the outcome of the present case as to which system of law is
applied because we are quite satisfied that the two mistakes made by the
Company were both mistakes as to the effect of the transaction. The Company believed, following the
advice it had received from Baxendale Walker, that the effect of the Trust was
that the family members would be able to benefit from the Assets contributed to
the Trust by means of the power on the part of the trustee to make loans. That is not so. Secondly, based on the advice received
from Baxendale Walker, the Company believed that the trust deed permitted
monies to be paid out to individuals whom the family members could nominate to
receive trust property after their respective deaths. The trust deed does not permit that. Both of these mistakes were mistakes as
to the legal effect of the Trust and, accordingly, the legal effect of the gift
of the Assets to the Trust.
33. Furthermore, there is no question of the
mistake being as to the fiscal consequences of the transaction. Whilst it is true that the transaction as
a whole was undertaken originally to obtain fiscal advantages in terms of
capital gains tax and inheritance tax, there is no suggestion that these
advantages have not accrued. On the
contrary, the family members and the Company accept that, if the Deed of
Assignment is set aside (so that the Assets remain in the ownership of the
Company) full disclosure will be made to HMRC and the Company and/or the family
members will face additional tax liabilities as a result. The mistakes relate to the legal effect
of transferring the Assets to the Trust in terms of the ability of the family
members to benefit from those Assets and the ability of individuals nominated
by the family members to benefit after their respective deaths.
34. Accordingly, even if English law were to apply,
there would be jurisdiction to set the Deed of Assignment aside on the ground
of mistake.
The applicable law
35. Although, for the reasons stated, it may make
no difference to the outcome in this particular case, the Court nevertheless
needs to decide which system of law is applicable to the issue which it has to
determine and apply that law to the facts of the case.
36. In the absence of the provision of the 1984 Law
to which we shall refer in a moment, there are arguments in support of both
English law and Jersey law. In support of English law is the fact
that the Deed of Assignment is expressed to be governed by English law and it
is therefore arguable that English law should determine whether the donation to
the Trust effected by the Deed of Assignment should be set aside on the ground
of mistake.
37. On the other hand, it can be argued that
mistake goes to the issue of whether the Deed of Assignment is valid at all
and, if it is not valid, the choice of English law in the Deed was not valid
either and should not determine the issue. Furthermore, it could be argued that the
underlying mistakes relied upon relate to the terms of the Trust i.e. the terms
upon which the trustee (as donee) will hold the Assets transferred. The Trust is governed by the law of Jersey, the trustee is resident in Jersey
and the Trust is administered in Jersey. Article 11 of the 1984 Law – which
relates to Jersey trusts established as a
result of a mistake – might be said clearly to imply that it is Jersey law which will be applicable to determine whether
the trust has been established as a result of a mistake.
38. However we do not need to determine these
issues because it seems to us that the matter is covered by statute. Article 9 of the 1984 Law applies to all
trusts governed by Jersey law. The relevant provisions of Article 9 read
as follows:-
“9 Extent of application of law of Jersey to creation, etc of a trust[5]
(1) Subject
to paragraph (3), any question concerning –
…
(b) the
validity or effect of any transfer or other disposition of property to a trust;
…
shall be determined in accordance
with the law of Jersey and no rule of foreign
law shall affect such question.
…
(3) The
law of Jersey relating to –
…
(b) conflicts
of law,
shall not apply to the
determination of any question mentioned in paragraph (1) unless the settlor is
domiciled in Jersey.
…
(7) Despite
Article 59, this Article applies to trusts whenever constituted or
created.”
39. This seems to us clear and unambiguous in its
terms. Article 9(1) provides that Jersey law is to apply to any question concerning the
validity of a transfer of property to a trust and no rule of foreign law shall
affect such question. Were it not
for Article 9(3), it could be argued that Jersey
law in this context includes its rules as to the conflict of laws. So, for example, if the Jersey conflict
of law rules were to say that the validity of a transfer is governed by its
proper law and the proper law of the transfer in question were (as in this
case) English law, Article 9(1) could be understood to say that the validity of
the transfer must be determined in accordance with the system of law which
Jersey law (including its conflict of law principles) provides i.e. on the
above example, English Law.
40. However, paragraph (3) makes it clear that this
is not the case. Paragraph (3)
states specifically that the reference in paragraph (1) to the law of Jersey is, in effect, to the domestic law of Jersey excluding its conflict of law principles.
41. Thus, Article 9(1) requires that, whenever the
validity of a transfer or other disposition to a trust governed by a Jersey law is in question, the issue must be determined
in accordance with the domestic law of Jersey
i.e. the law of Jersey without reference to
its conflict of law principles. So
where the validity of a transfer is challenged on the ground of mistake, the
effect of Article 9(1) is that it is the Jersey
law of mistake which is to be applied; and no rule of English law shall affect
such question.
42. We therefore apply the Jersey
law of mistake in the present case. We have described earlier the three
questions which must be considered under Jersey law to determine whether the
Deed of Assignment should be set aside on the ground of mistake (see para 29
above). Our answer to all three
questions is in the affirmative. First,
there were two mistakes on the part of the Company as described at paras 24 and
32 above. Secondly, as we have
found at para 25, the Company would not have entered into the Deed of
Assignment “but for” the mistakes. Thirdly, we are quite satisfied that the
mistakes were of so serious a character as to render it unjust on the part of
the trustee to retain the Assets. The
effect of the mistakes had been disastrous. The family members cannot gain access to
the Assets, which they need to maintain themselves during their lives. Furthermore the Assets cannot be applied
for the benefit of any of their descendants or other individuals who they may
nominate after their deaths. In
effect, the Assets are locked up for the duration of the Trust without the ability
to benefit any particular individual.
43. We therefore set aside the transfer of the
Assets to the Trust.
Authorities
Trusts (Jersey)
Law 1984.
Gibbon-v-Mitchell [1990] 1 WLR 1304.
Pitt-v-Holt [2011] 3 WLR.
Ogilvy-v-Littleboy
13 TLR 399.
Re
the A Trust [2009] JLR 447.
Re
the Lochmore Trust [2010] JRC
068.
Re
the S Trust [2011] JRC 117.