Trust – reasons for making of an order for rectification in
accordance with the representation.
[2015]JRC160
Royal Court
(Samedi)
31 July 2015
Before :
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W. J. Bailhache, Esq., Bailiff, and Jurats
Fisher and Olsen
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Between
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IFM Corporate Trustees Limited
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Representor
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And
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Jeanine Helliwell
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First Respondent
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And
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Geraldine Louise Mountain
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Second Respondent
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Advocate H. E. Brown for the Representor.
judgment
the bailiff:
1.
On 8th
June the Court heard an application for rectification of a trust pursuant to
the Court’s powers under Article 51 of the Trusts (Jersey) Law 1981
(“TJL”). The Court gave
judgment making an order for rectification in accordance with the prayer of the
representation with reasons reserved. This judgment contains those reasons.
2.
The
Representor is trustee of the Contractor Solutions Employer-Financed Retirement
Benefit Scheme 2012 (“the Trust”). The Trust was established upon the
acquisition of an employment business by Lighthouse Trustees Limited as trustee
of the K2 Contractor Solutions Trust (“the Settlor”) by an
instrument dated 14th May, 2012, (“the Trust
Instrument”). The business of
the Settlor was to second its staff to third parties, primarily in the UK, and
the Settlor ceased its trade on 31st March, 2014. As a consequence the Trust is no longer
active.
3.
The Trust
was an employer financed retirement benefits scheme under which the employees
could benefit, and as such was intended to motivate and incentivise the
employees of the Settlor, which employed approximately 2000 employees all of
whom were intended to form part of the class of beneficiaries under the Trust. The principal trusts were for the trustee
to hold and invest the trust fund, accumulating income as an accretion to
capital save insofar as the same was appointed, and otherwise upon the
expiration of the trust period to appropriate the income and capital amongst
the persons entitled to benefit at the absolute discretion of the trustee as to
the recipient and as to the quantum of benefit. The trustee had discretionary power to
make appointments before the end of the trust period if it thought fit.
4.
The
predecessor owner of the Settlor’s business carried out a similar
business and put in place a similar structure for rewarding employees as was
put in place by the Settlor. It is
clear that both the Settlor and the trustee intended that the employees should
be rewarded in the way in which employees of the previous business had been
rewarded.
5.
Essentially
the Settlor paid employees the UK national minimum wage as a salary. This payment was made quite independently
of the Trust. In addition to the
salary, the Settlor also made discretionary loans to employees by way of reward
for their services. These loans
again were made at the sole discretion of the Settlor, and were not made in any
sense by the trustee or by the Trust. At the end of each month, the Settlor
transferred the right to repayment of the discretionary loans to the Trust. At the same time the Settlor would make a
cash contribution to the Trust. Discretionary loans, loan rights and cash
contributions were all generally contributed to the Trust on a monthly basis.
6.
The loan
rights and contributions, once settled into trust, were handled in the
following way:-
(i)
The loan
rights were held on the trusts of one sub-fund (“the Initial
Sub-Fund”), which had only two main beneficiaries, including the First
Respondent (a specified employee) and the Second Respondent (“the Missing
Beneficiary”). The cash
contributions were held on the trusts of other sub-funds (“the Subsequent
Sub-Funds”) which had a large and variable number of main beneficiaries.
(ii) Following the appointment of the loan rights
and cash contributions, the trustee entered into an instrument of transposition
by which the loan rights and the cash contributions would be transposed so that
the Initial Sub-Fund held all the cash contributions and the Subsequent
Sub-Funds held the loan rights. In
this way, on the repayment of a discretionary loan by an employee, the trustee
could potentially benefit employees who were beneficiaries of the Subsequent
Sub-Fund. There is no dispute that
the Settlor motivated its employees in this way so that various tax advantages
in the UK might be secured. The
trustee has been advised that no change in the UK tax treatment of the Trust,
the Settlor or the beneficiaries would occur if the order for rectification
were made.
7.
The terms
of the Trust include a definition of the expression “beneficiaries” which extends to any specified
employee, the spouse for the time being and widow of any specified employee,
the children or remoter issue, and parent or remoter ancestor of any specified
employee and the spouse of issue and ancestors who were the spouse of such a
person immediately before their death. There were other potential beneficiaries,
but what was missing from the Trust was language which would have added other
classes of beneficiaries, namely:-
“(i) Any child or remoter
issue of any grandparent of any specified employee.
(ii) The spouses of all persons
described in paragraph 1 above.
(iii) Any person who was the
spouse of a person described in paragraph 1 above immediately before his
death.”
8.
In
relation to the Initial Sub-Fund, the problem arises because the third schedule
to the Trust which sets out the beneficiaries does not include paragraphs (i),
(ii) and (iii) set out above and the trustee seeks rectification to introduce
those potential objects as beneficiaries of the Trust. This would enable the Second Respondent
to benefit from the Initial Sub-Fund.
9.
The test
for rectification has been considered by the Royal Court on a number of
occasions, one of which is In the matter of the Exeter Settlement [2010]
JLR 169. As Birt, Bailiff, said
then at paragraph 37:-
“… The test for
rectification is well established as follows:-
(i) The court must be satisfied
that as a result of a genuine mistake the trust deed does not carry out the
true intentions of the parties and the settlor in particular;
(ii) There must be full and frank
disclosure; and
(iii) There should be no other
practical remedy.”
10. We apply that test here.
11. The Court has before it an affidavit of Mr Juan
Luis Medina, a director of the corporate trustee, and also a director of the
corporate settlor. Mr Medina
deposes that he was involved with the decision making process of both trustee
and Settlor and in relation to this particular sub-fund, he indicates that it
was the Settlor’s intention that the Missing Beneficiary was to be a
beneficiary of the Trust and was one of the people whom it was anticipated the
trustee would be likely to benefit. Although there are some 2000 named
beneficiaries of the Trust itself, the Sub-Fund defines beneficiaries by
reference to named individuals and accordingly the beneficiaries of any of the
Subsequent Sub-Funds will be unaffected by any rectification of the Initial
Sub-Fund. The first respondent who
is a specified beneficiary does not object and in those circumstances, the
Court is faced with an application where trustee and Settlor are agreed that a
mistake was made at the time of the creation of the Initial Sub-Fund, the only
person likely to benefit from that Sub-Fund does not oppose the rectification
on the grounds of mistake and there is no other practical remedy for enabling
benefit to be paid from the Sub-Fund to the Missing Beneficiary. We are satisfied that there was a genuine
mistake in that the trust instrument does not reflect the intentions of the
Settlor and the trustee, and that there is no practical remedy other than
rectification.
12. That leaves over the question of full and frank
disclosure. In the papers which
were submitted to the Court, there was little mention of the tax position in
the United Kingdom and the Court was initially concerned that this particular
scheme might have fallen into the category of aggressive tax avoidance and, if
that were so, might therefore have been the sort of scheme where in the
exercise of its discretion, the Court should consider whether such a fact, if
true, should lead to the refusal to exercise discretion in favour of the
applicant. If it had been necessary
to do so, we would have appointed an amicus to argue this point against
Advocate Brown who contended that this was an irrelevant consideration both
generally and especially in the present case, as the arrangement underlying the
present trust did not constitute any unacceptable tax avoidance. This Court recognises that there are
strong ethical arguments why tax payers should recognise their obligations to
the state in which they live, making their fair and appropriate contribution
towards the outgoings which any modern state has in the provision of services
for the benefit of the community. Indeed,
many tax payers across the world recognise those obligations and, some
uncomplainingly, make their contributions accordingly. On the other hand, it has long been the
case that, as a matter of law, a citizen is entitled to retain his property
unless by appropriate legislation, the state takes it away, or makes it
chargeable to tax. That is the
basis of the distinction between tax evasion, which is unlawful, and tax
avoidance, which is not. To
organise one’s affairs so as to minimise tax has often been seen as a
fundamental freedom, enabling the individual to live his life in accordance
with the rules which the state sets down, of which taxation is but one. It might be said that there would be
great uncertainty if citizens did not know what they could or could not
lawfully do to minimise tax.
13. Historically, the courts have always applied
the principles of law rather than what are perhaps inchoate and uncertain
ethical considerations in this area. What seems to us perhaps to be open to
argument is whether, in an area which involves the exercise of a judicial
discretion in cases where the court’s assistance is being sought for a
mistake which has been made, there is room for the argument that the discretion
ought not to be exercised if on the facts of a particular case, the scheme in
question is lawful but appears to be so contrived and artificial that it leaves
the Court with distaste if, in effect, it is required to endorse it.
14. It turned out in argument that these
considerations did not apply in the present case. It was only in the course of argument
that the Court understood that this was a DOTAS scheme – this regime
allowing Her Majesty’s Revenue and Customs to keep up to date with what
types of tax avoidance schemes are in circulation. Advocate Brown advised us that HMRC were
aware of the scheme generally, the scheme promoter having been required to
disclose the main elements to HMRC who are then enabled to monitor the
scheme’s use and if necessary legislate to terminate it. It would have been helpful if this
information had been provided on affidavit to us rather than through
submissions by counsel, but we have accepted them as she is an officer of this
Court, given that there is no underlying dispute between those involved. There has therefore been full and frank
disclosure, albeit rather late.
15. In connection with lateness, we mention also
that the papers were received on the Friday afternoon before the Court sat the
following Monday to hear the representation. This was too late, and all advocates are
reminded of the need to comply with the practice directions for the delivery of
bundles in good time before the hearing takes place.
16. The Court is satisfied that the relevant
criteria for rectification have been met, for the reasons given above, and we
therefore order that, in order to give effect to the intention of the Settlor
and the trustee at the time, the Trust instrument is rectified by inserting the
following words after paragraph (H) of the Third Schedule to the trust
instrument, before the words “provided
that no excluded person shall be a beneficiary”:-
“(i) Any child or remoter
issue of any grandparent of any specified employee
(j) The spouses of all persons
described in paragraph (i) above
(k) Any person who was the
spouse of a person described in paragraph (i) above immediately before his
death.”
Authorities
Trusts (Jersey) Law 1981.
In
the matter of the Exeter Settlement [2010] JLR 169.