Trust – application by the Representor as trustee of the settlement
for approval to enter an agreement to settle various claims against the trust.
[2013]JRC029
Royal Court
(Samedi)
6 February 2013
Before :
|
Sir Michael Birt, Kt., Bailiff, and Jurats
Le Breton and Milner
|
Between
|
Capita Trustees Limited
|
Representor
|
And
|
RS
|
First Respondent
|
And
|
NS
|
Second Respondent
|
And
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The Trustees in Bankruptcy of RS
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Third Respondent
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IN THE MATTER OF THE DUNLOP SETTLEMENT
Advocate D. M. Cadin for the Representor.
The First Respondent did not appear and was
not represented.
Advocate M. P. Renouf for the Second
Respondent.
Advocate S. J. Young for the Third
Respondent.
judgment
the bailiff:
1.
This is an
application by Capita Trustees Limited (“Capita”) in its capacity
as trustee of the Dunlop Settlement (“the Trust”) for approval to
its entering into an agreement intended to settle various claims against the
Trust. The effect will be to exhaust
the assets of the Trust. The Court
agreed to accept Capita’s surrender of its
discretion and at the conclusion of the hearing, approved of Capita entering
into the agreement. The Court now
gives its reasons.
Background
2.
The Trust
was established by deed dated 22nd December, 1997, with Roker
Trustees (Jersey) Limited as original trustee. In 1999 Roker
was replaced as trustee by Osiris Trustees Limited and that company was in turn
replaced by Stirling Trustees Limited (“Stirling”) as trustee on
7th February, 2001.
3.
In
December 2006, Capita purchased Stirling and subsequently, on 10th September,
2007, a formal merger took place between those two companies, which therefore
continued in the form of Capita.
The result is that Capita became the trustee on 10th September,
2007. However, as a matter of law,
Capita (in its former guise as Stirling) has been the trustee since 7th
February, 2001. We shall use the
expression Capita or Stirling interchangeably depending on the context.
4.
The Trust
is a discretionary trust governed by Jersey law. The original beneficiary was a named
charity but the first respondent (“RS”) and his wife, the second
respondent (“NS”) were added as beneficiaries on 12th July,
2004. The charity was only informed
that it was a beneficiary in January 2012 and has since written to the Court
disclaiming any interest in the Trust.
5.
At all
material times, the affairs of the Trust were looked after almost entirely by
Mr Richard Arthur. He appears to
have been a man wearing several hats.
He was a partner and director of various firms and companies conducting
business in Jersey as part of the BDO Group, including in particular a company
called BDO Secretaries Limited (“BDOS”). He was also a director of Stirling from
June 2004 to September 2007 and one of the beneficial owners of Stirling until
its purchase by Capita. Mr Arthur
is currently prohibited from being employed by any financial business in Jersey
as a result of a direction of the Jersey Financial Services Commission.
6.
It seems
clear that Mr Arthur did not keep proper records in relation to the Trust or
its underlying assets or in relation to the various other entities which he
looked after. Accordingly, the
current management of Capita, none of whom had anything to do with the relevant
events, have been trying to piece together the history of the Trust.
7.
RS was
declared bankrupt on 14th November, 2008, in the Bradford County Court. He has since served a term of
imprisonment for conspiracy to defraud.
His Trustees in Bankruptcy (“TIB”) have had their
appointment recognised in Jersey by this Court, so that they have standing in
this jurisdiction.
8.
From the
enquiries carried out by the current management of Capita, the Trust would
appear to have three main assets:-
(i)
A property
known as Kildwick Hall in Yorkshire together with
some associated land. RS and NS
reside in part of that property. Kildwick Hall is in fact registered in the name of BDOS
but, as mentioned later, there is no document making clear exactly for whom
BDOS holds the property.
(ii) A property called The Mullions, also in Kildwick, which is registered in the name of Capita. This is occupied by the mother of
NS.
(iii) A potential claim against BDOS for
£275,000 in respect of the sale of a property 2 Kildwick
Hall Mews, which was previously owned by the Trust.
There are said to be some other minor
assets such as some chattels and possible claims against certain BDO companies
in relation to sums paid out of the Trust, against Mr Arthur and against
RS.
9.
There is
another trust which is relevant to the matters before us, namely the Humberstone Trust which was created in May 1997. Faircliff
Property Limited is a BVI company which is wholly owned by the Humberstone Trust.
Another relevant company is Pestana Investment
Limited (“Pestana”). Ownership of this is not entirely clear
to us but it would seem that it was probably also owned by the Humberstone Trust.
At one stage it was stuck off the register but it has now been
re-instated.
10. BDOS was trustee of the Humberstone
Trust from January 1999 to 31st January, 2001, at which time Stirling was
appointed trustee in its place. As
mentioned already, Stirling in due course became Capita and it remained as
trustee of the Humberstone Trust until replaced by
the current trustees (“the Humberstone
Trustees”). At all material
times Mr Arthur was responsible for administering on behalf of BDOS and/or
Stirling both the Humberstone Trust and the Trust
together with their underlying companies.
11. It appears that Mr Arthur used the assets of the
Humberstone Trust to provide financing for a number
of other entities which he administered.
The Humberstone Trustees (together with other
plaintiffs such as Faircliff and certain
beneficiaries of the Humberstone Trust (referred to
as “the Humberstone plaintiffs”) have now
brought proceedings in Jersey against Capita in its capacity as former trustee
(when it was Stirling) of the Humberstone Trust and
others alleging that loans were made out of the Humberstone
Trust or its wholly owned companies which should never have been made and which
have not been recovered and accordingly seeking recovery for breach of
trust. For the most part the loans
are said to have been made by Faircliff. The total lent is said to be £12.6
million and interest (compounded) is put at £13.9 million, so that the
total claim is a little under £26.6 million. Some (though only some) of the loans
were made to the Trust or companies within it. At present, no proprietary claim against
assets in the Trust has been brought but we have been advised that the Order of
Justice in the Humberstone proceedings is to be
amended to include such claims.
12. At the conclusion of its enquiries, Capita
prepared a detailed statement of facts (the “Statement of Facts”)
which, following application to this Court on 15th November, 2011, was sent to
the Humberstone Trustees, the TIB, RS and NS.
The claims against the Trust
(a) Claims by Faircliff/Pestana/The Humberstone Trustees
13. The following claims have been intimated by one
or other of the above entities:-
(i) Loan for Kildwick
Hall
14. Kildwick Hall was purchased in July 2000. The aggregate sum required for its
purchase was £1,164,731.26.
According to Capita, there is evidence that the money for this purchase
came from Pestana. Thus:-
(i)
the monies
came from a BDOS designated account CP50, which is said to be the client
account for Pestana;
(ii) a document produced by Mr Arthur in early 2001
shows the Kildwick Hall loan as an asset of Pestana;
(iii) a draft loan facility agreement between Faircliff and Stirling as trustee of the Trust referred to Faircliff re-financing a loan from Pestana
to the Trust in exactly the sum referred to above. Although no executed copy of that loan
agreement has been found, accounts for Faircliff
thereafter showed the loan in respect of Kildwick
Hall as an asset of Faircliff.
15. As already mentioned, Kildwick
Hall is registered in the name of BDOS. It is accepted that BDOS does not own Kildwick Hall in its own right nor did it acquire it as
trustee of the Humberstone Trust, notwithstanding
that it was trustee of that trust at the time of acquisition. It is agreed that there are only three
possibilities:-
(i)
that BDOS
was registered as owner in order to provide security to the lender and that
therefore it holds the properties on a trust to discharge the loans made to
enable the properties to be purchased and thereafter either for Capita as
trustee of the Trust or alternatively for RS;
(ii) that it holds on bare trust for Capita as the
trustee of the Trust; or
(iii) that it holds on bare trust for RS.
16. In the event of either of the first two
possibilities turning out to be the correct position, it is said that the
effective result is that the Trust is liable to either Pestana
or Faircliff (depending on whether Faircliff did in fact fund final repayment of the original
loan from Pestana) in the principal sum of
£1,164,746.26 together with interest thereon.
(ii) Claim by Faircliff in
respect of the acquisition of The Mullions
17. There is an executed loan agreement dated 9th
September, 2002, whereby Faircliff loaned
£380,000 to Stirling as trustee of the Trust in order to purchase the
property known as The Mullions. The
purchase was completed on 19th December, 2002. ,It is said therefore that Faircliff has a claim for the sum of £380,000 plus
interest. ,The Mullions is occupied by the mother of NS.
(iii) The loan of £550,000 by Faircliff
18. Faircliff advanced £550,000 in two separate payments on 24th February,
2004. The advance was made direct
to RS. There were, however, draft
loan facility agreements in existence which pre-supposed that Faircliff would lend the money to Stirling as trustee of
the Trust, which would then lend the money on to RS. The money was intended to repay various
RS owned companies for work carried out to Kildwick
Hall and the Mullions. Leading
counsel instructed by Capita, Elizabeth Jones QC, has advised that a court
would be likely to find that the advance by Faircliff
was to the trustee of the Trust rather than to RS and that it is therefore a
liability of the Trust. Leading
counsel instructed by NS, Mr Nicholas Le Poidevin QC, does not disagree.
(iv) Claim under the novation agreement
19. The history of this matter is set out in
considerable detail at paragraphs 28 – 46 of the Statement of Facts. It is not necessary for our purposes to
go into any detail. In essence, a
company called Burnley Park Limited (owned ultimately by the Trust) had
borrowed money from Pestana for various property
acquisitions. On 1st January, 2001,
Faircliff entered into a written agreement to
re-finance Burnley Park’s indebtedness to Pestana
in the total amount of £2,397,076.65. Faircliff
subsequently agreed to provide further facilities to Burnley Park.
20. In July 2002 Burnley Park was sold and in order
to facilitate that sale, a novation agreement was entered into between Burnley
Park, Faircliff and Stirling on 6th June, 2002, under
which the debts of Burnley Park to Faircliff in the
stated amount of £2,521,580.03 were novated to
Stirling as trustee of the Trust. Subsequently
various sums were paid by Stirling to Faircliff but
there is a question mark as to how much of this was attributable to liability
under the novation agreement. According
to Capita, a minimum of £527,752.23 and a maximum of £744,484.32
remains owing to Faircliff together in each case with
interest from 1st January, 2002.
21. Faircliff has claimed for some £673,000 and both Ms Jones and Mr Le
Poidevin have advised that this a reasonable figure.
(b) Claim by Trustees in Bankruptcy
22. The TIB have indicated a claim that the Trust
is a sham and that accordingly all of the assets are held as nominee for the
bankrupt RS (who it is said was the person who in reality was the settlor) and
therefore for the TIB. A
substantial ground relied upon for this claim is that, in the context of a tax
investigation, RS and Mr Arthur both asserted that the Trust was a sham and
that the properties therefore belonged to RS. This was accepted at the time by the UK
Revenue and resulted in a considerable saving of tax. Mr Arthur and RS have since reneged on
that stance and now assert that the Trust is valid.
23. The second claim intimated by the TIB is that
RS spent £550,000 on improving Kildwick Hall
and is entitled to claim that sum.
24. However, we do not need to address these
further, given that it is really a matter for Faircliff/Pestana as to how much they are willing to allow to the TIB
in recognition of their claim.
(c) Strength of the claims
25. We have been provided with a number of opinions
from Ms Jones and Mr Le Poidevin. Following
the adjournment of these proceedings in June, they were asked to prepare
further opinions and to clarify where they agreed and where they disagreed. The Court is most grateful to both of
them for undertaking this exercise. As one would expect, both sets of opinions
are closely reasoned and have been of great assistance to the Court. Although there has been some discussion
in the opinions as to the exact nature of some of the claims and whether they
are proprietary or personal, we do not think it necessary to delve into this
area in view of the large measure of agreement between them. Both counsel (and Mr Le Poidevin in
particular) have emphasised that their advice is given on the basis of the
information currently available and this is of course understood.
26. They are agreed that, on the information
presently available, there are no viable defences to contractual claims in
respect of the Mullions loan (£ 380,000), the loan of £550,000 and
the claim under the novation agreement (£673,000).
27. As to interest, Ms Jones has advised that,
although some of the relevant agreements or draft agreements contain
contractual rates of interest and higher default rates of interest, a more
likely outcome would be that interest would be awarded at 2% above base rate
from time to time compounded annually. Mr Le Poidevin agrees that a lower rate
of interest than this is unlikely. On
this basis they are agreed that, in round terms, the claims by Pestana/Faircliff come to the
following:-
(i)
The
Mullions loan £612,000
(ii) Loan of £550,000 £696,000
(iii) Novation agreement £1,130,000
£2,438,000
28. As to the claim in respect of the Kildwick Hall loan, leading counsel are not agreed. Ms Jones is of the view, for the reasons
set out in her opinion, that there is substantial evidence that the monies for
the purchase came from Pestana and that accordingly
there is a valid claim either by Pestana (if the
facility agreement with Faircliff was never executed)
or by Faircliff (if it was). Mr Le Poidevin, on the other hand,
considers that the evidence that Pestana provided the
initial funds can only be regarded as being 50/50. Furthermore, if the claim is made by Faircliff rather than Pestana,
there may be a possible defence of limitation.
29. The real property owned by the Trust (i.e. Kildwick Hall and the Mullions) has been valued at
£2.1m. If one adds the
possible claim against BDOS of £275,000, the total assets of the Trust
come to £2,375,000. No-one
has argued that any value should be placed on the other possible assets. As can be seen therefore, even
discounting the Kildwick Hall loan claim, the claims
exceed the total value of the trust assets. If one also allows for the Kildwick Hall claim, the total claims come to just under
£4.4m, which exceeds by a substantial margin the assets of £2.375m.
The agreement
30. Following distribution of the Statement of
Facts, negotiations have taken place, although RS and NS have not participated.
A draft agreement was placed before
the Court which would be between the Humberstone
Trustees, Faircliff, Pestana,
the TIB and Capita in its capacity as trustee of the Trust. The agreement would have the following
broad effect:-
(i)
Proceedings
will be brought by the TIB at the TIB’s initial cost to obtain vacant
possession of Kildwick Hall and The Mullions.
(ii) The TIB will carry out the sale of Kildwick Hall and The Mullions, again at its own initial
cost.
(iii) The net proceeds of Kildwick
Hall and The Mullions, the claim against BDOS and the chattels belonging to the
Trust at Kildwick Hall (if any) will be divided as to
25% to the TIB and 75% to Faircliff; but if the
realisable assets exceed £4.8m, the balance over that sum will be split
equally between the TIB, Faircliff and Capita as
trustee of the Trust.
(iv) The other assets of the Trust such as the
potential claims against Mr Arthur and RS are allocated to Faircliff.
(v) It follows that all the known assets and the
known liabilities of the Trust are dealt with. Provision is also made for the position
if new assets are discovered.
(vi) The agreement is expressed to be in full and
final settlement of any claim which could be made by Faircliff,
Pestana, the Humberstone
Trustees or the TIB against Capita as trustee of the Trust.
(vii) The TIB and Faircliff
confirm that they will not seek payment of rent or mesne
profits from NS in respect of her occupation of the property prior to the date
of the agreement.
31. As can be seen, given the value of the trust
assets, the effect of the agreement is that all the assets of the Trust will be
paid to Faircliff or the TIB as claimants and there
will be nothing left for the beneficiaries.
Consideration of the application
32. We begin by accepting the surrender of
discretion by Capita. Capita, in
its capacity as trustee of the Humberstone Trust,
faces a substantial claim by the Humberstone
plaintiffs. To the extent that any
monies are recovered from the Trust, this will go to reduce any liability of
Capita to the Humberstone plaintiffs in respect of
loans made to the Trust. It is
therefore clearly in a position of conflict of interest. In those circumstances it is right that
Capita should surrender its discretion to the Court and that the Court should
accept that surrender.
33. As is well established, once discretion has
been surrendered, the Court must place itself in the position of the trustee
and act as trustee in the best interest of the beneficiaries.
34. Capita’s case was simple. Even
if one discounted the claim in respect of the loan of Kildwick
Hall, the valid claims by Faircliff exceeded the
value of the trust assets. If one
also allowed for the Kildwick Hall loan claim, the
total claims came to just under £4.4m, which exceeded by a substantial
margin the possible assets of £2.375m. It followed that there was no equity in
the trust assets available for the beneficiaries. The correct course was therefore to
recognise and accept the inevitable. Furthermore, there was a benefit for NS
in that she would be released from any possibility of a claim for rent or mesne profits.
35. On behalf of NS, Advocate Renouf put forward
the following arguments in support of his contention that the Court should not
approve the agreement:-
(i)
Although
there appeared to be agreement between Ms Jones and Mr Le Poidevin that the
three claims totalling £2.438M were likely to succeed, the fact remained
that it was not certain that they would do so. There had not yet been discovery in the Humberstone proceedings. The documentary evidence available to
Capita was incomplete because of the failures on the part of Mr Arthur. It was therefore wrong to capitulate at
this stage without seeking discovery from all possible parties in order to see
if further documents might cast a different light on the perceived strength of
the claims.
(ii) A trustee must act in the best interests of the
beneficiaries. Given that the
trustee in this case had surrendered its discretion, the Court must act
similarly. There was no benefit to
the beneficiaries as a result of the agreement. There would be no assets left in the
Trust following its implementation and RS and NS would be evicted from their
home of many years.
(iii) The application should be adjourned for further
negotiation to see if an improved offer could be obtained. The original offer suggested by Ms Jones
had included allocating a field adjacent to Kildwick
Hall to NS in the hope that it might one day receive planning permission and
thereby increase in value. This
suggestion had not found its way into the agreement.
(iv) There would be no disadvantage if the Court
refused to approve the agreement at this stage. The result would be merely to put Faircliff/Pestana and the TIB to
proof of their respective claims.
(v) The agreement provided no cap on the Faircliff/Pestana claim in the
event of further assets of the Trust coming to light.
Decision
36. We have considered the points put forward by
Advocate Renouf. However, we are satisfied that the Court should authorise
Capita to enter into the agreement. We would summarise our reasons as
follows:-
(i)
We think
that the prospect of obtaining further information relating to the Faircliff/Pestana claims which
would cast a different light on them is extremely remote. Capita has expended considerable effort
– it has incurred costs of some £500,000 paid out of its own pocket
– in seeking to establish what occurred. Capita has sought and obtained
information and documents from BDO, Faircliff and the
Humberstone Trustees/Mr Humberstone,
Mr Arthur, the police (in respect of documents seized from Mr Arthur), the tax
report, the TIB and NS. Mr Arthur
has been ordered to provide information but has failed to do so. The police have seized documents from him
and supplied those relating to the Trust to Capita. BDO have said that they have provided all
documents in their possession relating to the Trust. BDO, the TIB and Faircliff/Pestana have provided documents to Capita in answer to
correspondence from Capita since June 2011. As for RS and NS, NS has stated in July
and August 2011 that she knew very little and RS has not provided anything.
(ii) We are therefore left with the position that
both leading counsel are of the opinion that the claims in respect of the
Mullions, the loan of £550,000 and the novation agreement are likely to
succeed. That is also our
assessment. Indeed, in our
judgment, the claim in respect of the Kildwick Hall
loan is also likely to succeed:-
(a) For the reasons set out by Ms Jones at
paragraph 34 – 38 of her further opinion of 17th July, 2012, we think
that there is fairly strong evidence that the money for the purchase of Kildwick Hall came entirely from Pestana.
It is not so clear whether Faircliff subsequently provided money to enable repayment
of Pestana but that is of no significance; the claim
is either by Pestana or by Faircliff.
Our conclusion in this regard is
strengthened by the fact that there is simply no evidence that anyone else
provided the money for the purchase of Kildwick Hall
and we think it highly unlikely that any such evidence will come to light.
(b) On the contrary, in a witness statement dated
16th May, 2012, NS put forward various suggestions that the Kildwick
Hall purchase had been funded from other assets which had been contributed by
RS. However, it is fair to say that
her suggestions were effectively demolished by a witness statement filed on
behalf of the TIB and by the 11th affidavit filed by Fiona Milne, the employee
of Capita who has been in charge of reconstructing what occurred. Advocate Renouf had to concede during the
hearing that the suggestions in NS’s affidavit as to the source of funds
for the purchase of Kildwick Hall had been
effectively negated.
(c) One is therefore left with the evidence that Pestana paid for the property together with the fact that
this is consistent with the practice which Mr Arthur was following at the time,
namely using Faircliff/Pestana
as a source of lending to other entities which he managed.
(iii) We see no point in adjourning the proceedings
in the hope that further negotiations will result in a better outcome for the
beneficiaries of the Trust. Unfortunately,
NS chose not to participate in the negotiations which led to the agreement even
though she had been invited to the meeting. She was therefore not able to press her
case in respect of the field. However,
following the adjournment of proceedings on 28th June, 2012, NS did in fact
make an offer to withdraw her objections to the agreement and to vacate Kildwick Hall for £240,000. That offer was rejected by both the TIB
and Faircliff and despite invitations by Capita to
the TIB, Faircliff and to NS, no further offers have
been forthcoming.
(iv) We agree that a trustee must act in the best
interest of the beneficiaries. But
this does not mean that a trustee must fight a hopeless claim. A trustee is under a duty to act
reasonably and if satisfied that a claim is due, he should pay it. Advocate Renouf accepted that this was so
where the claim was “open and shut” but we think it extends to
where the trustee is satisfied on good grounds that the claim is properly due.
(v) We see no benefit to the beneficiaries in
declining to approve the agreement at this stage. If we were to do so, one must presume
that Faircliff/Pestana
would institute the necessary proceedings. There are no liquid funds with which to
pay for any defence and a trustee does not have to dip into his own resources
in such a case. Capita might
attempt to borrow against the properties or to sell them in order to fund a
defence. But it seems unlikely that
a court would authorise defence costs to be incurred in this way given that the
claims of Pestana/Faircliff
include proprietary claims (according to Ms Jones), that the legal advice is
that the claims are strong and that, in the event of Faircliff/Pestana succeeding, the Trust’s defence would have
been paid for out of their assets, in circumstances where there is no evidence
that the beneficiaries or anyone else has contributed to the value of these
properties. There is no evidence
that NS will be in a position to fund a defence and RS is bankrupt. Thus we see no prospect of Capita or the
beneficiaries being able to mount a defence of the Faircliff/Pestana claims.
(vi) We accept that there is no cap on the Faircliff/Pestana claim in the
event of further assets of the Trust being discovered but we do not see why
this should be so. Given the
strength of the claims, it seems unlikely that Faircliff/
Pestana would agree to such a cap or that it would be
reasonable to expect them to do so.
(vii) The agreement may be said to confer some minor
benefit for NS in the abandonment of any claim for mesne
profits, but we accept that it is by no means clear that such a claim could be
brought and we therefore place little weight on it.
37. In summary, the Court is satisfied that there
are strong grounds for concluding that the valid claims of Pestana/Faircliff exceed the value of the trust assets (even
discounting the Kildwick Hall loan which, for the
reasons given by Ms Jones, we consider is also likely to succeed) and that
there is therefore no “equity” in the trust fund available for the
beneficiaries. We think it entirely
proper and reasonable for a trustee in such circumstances to accept the
inevitable and to pay debts which he considers on good grounds are lawfully
due. We therefore authorise Capita,
in its capacity as trustee of the Trust, to enter into the agreement.
No Authorities