Inland Revenue Commissioners v Broadway Cottages Trust

English Equity & Trusts

AN
‘Anonymity’ by Ben Will

Uncertainty as to the exact class of trust beneficiary lies central to the disposition and taxation of funds, when after establishing two virtually identical charitable trusts (the Broadway Cottages Trust and the Sunnylands Trust), the nominated trustees and now appellants were faced with claims by the Inland Revenue that any monies generated by the use of the trust were lawfully subject to taxation under the Income Tax Act 1918.

In the summer of 1950, the now deceased settlor bequeathed a sum of £80,000 for the benefit of a number of beneficiaries, while the design was such that the appellants were granted discretionary powers to invest and apply the money, so as to accrue sufficient income for his wife and numerous other parties for the duration of the trust.

However the appellees claimed that clause 8 of the trust instrument was void for uncertainty, on grounds that while it stated in relevant part that:

“[T]he trustees shall hold the income of the trust fund from the date or respective dates from which the trustees shall become entitled to such income upon trust to apply the same for the benefit of all or any one or more of the donor’s said wife and the beneficiaries….

The beneficiary schedule conversely included:

“1. All persons (other than the settlor and any wife of his and any infant child of his) who have been in the past or (as the case may be) at the date of these presents or subsequently thereto at any time during the period ending on December 31, 1980, or during the appointed period whichever shall be the shorter employed by: (a) the settlor; (b) the wife of the settlor; (c) William Timpson deceased (father of the settlor and who died on January 20, 1929); (d) Katherine Chapman Timpson deceased (mother of the settlor and who died on December 16, 1940); (e) William Timpson Limited or by any other limited company which may succeed to the business of William Timpson Limited; (/) Any other limited company of which the settlor is a director at the date of these presents.
2. The wives and widows of any such persons as is specified in cl. 1 of this schedule.
3. All persons (other than the settlor and any wife of his and any infant child of his) who are the issue however remote of the said William Timpson deceased . . . and Charles Henry Rutherford deceased (father of the wife of the settlor and who died on February 17, 1930).
4 , 5, 6, 7. [Certain named persons.]
8. Alastair John Grenville Stevenson and any spouse of his or issue of him.
9. [The trustees of the settlement and their spouses or issue].
10. Joseph Baker and any spouse of his or issue of him.
11. Godchildren of the settlor or his wife.”

And so the appellees argued that there was no clear and ascertainable list of beneficiaries upon which to refer, while the appellants contended that the trust afforded them discretionary powers to assign the funds to those parties they believed to be ascertainable, and so the trust remained valid under clause 10, which read in relevant part that:

“The trustees shall also have power during the appointed period to apply the whole or any part of the capital of the trust fund in their discretion for the benefit of all or any one or more of the beneficiaries either by way of advancement on account of his or her or their share or shares or not as the trustees may in their discretion think fit….”

In the first instance, the Inland Revenue Special Commissioners reviewed the claim, and awarded for the respondents, while holding that:

“[T]he trusts of the settlement in so far as they related to the income of the trust fund were not void for uncertainty, and that the trustees under the provisions of cl. 8 of the settlement had a power of selection and that it was a valid and effective trust of the income of the trust fund, and that, accordingly, the sums of money received by the respondents from the trustees were the income of the respondents and thus entitled to the exemption claimed.”

Whereupon the appellees challenged the judgment in the Chancery Court, who allowed the appeal, while instead holding that:

“[I[n cases of an imperative trust to distribute there must be certainty as to the objects.”

Upon which the appellants challenged the judgment in the Court of Appeal, who then relied upon In re Gestetner Settlement, in which the Chancery Court had held that:

“[I]n a case where there is a duty on a trustee to select from a number of persons which of them shall be the recipients of the settlor’s bounty, there must be a certainty as to those recipients.”

Thus the court dismissed the appeal whilst reiterating to the parties that:

“[A] trust for such members of a given class of objects as the trustees shall select is void for uncertainty, unless the whole range of objects eligible for selection is ascertained or capable of ascertainment….”

In re Baden’s Deed Trusts (No.2)

English Equity & Trusts

Baden's Deed Trusts
‘Il Quarto Stato’ by Guiseppe Pellizza da Volpedo

In what was to become an overly protracted and yet hotly debated case, the question of trust instrument validity and the limiting scope of trust powers, fell upon the English courts to answer, when what appeared at the time was judicial wisdom, later proved a confused doctrine that polluted similar cases in the years following its declaration.

Having become the director of a highly successful M&E company first established in 1927, and as a man of inherent providence, the deceased had taken it upon himself to draft a trust deed in 1941, that would allow his current and former employees to benefit from financial gifts on a potentially recurring basis, while in addition to this their immediate relatives were also to enjoy similar windfalls, as was contained in clause 9(a) of the trust, which read that:

“The trustees shall apply the net income of the fund in making at their absolute discretion grants to or for benefit of any of the officers and employees or ex-officers or ex-employees of the company or to any relatives or dependants of any such persons in such amounts at such times and on such conditions (if any) as they think fit and any such grant may at their discretion be made by payment to the beneficiary or to any institution or person to be applied for his or her benefit and in the latter case the trustees shall be under no obligation to see the application of the money…”

However upon his death in 1960, the appointed executors notified the trustees that the trust was void for uncertainty, as it would be almost impossible to distinguish one employee from another, never mind any relatives known to exist at the time of his passing, which was a position adopted in light of the company’s growth from 110 to 1,300 employees during the preceding years.

Commencing by way of an originating summons in 1967, the trustees argued that clause 9(a) merely represented a power to distribute funds to a class of beneficiaries, while the executors held that the use of the word ‘shall’ created instead, a mandatory trust that once unable to be fully executed, would nullify itself and thus fall within the residual estate.

In the first instance, the Court of Chancery examined the construction of the deed, and found that due to discretionary nature of clause 9(a), the trust conferred a power upon the trustees, and not an immutable instruction that once unfulfilled, rendered the trust void for uncertainty; a statement upon which the executors challenged the findings in the Court of Appeal.

Here, the court referred to In re Gestetner Settlement, in which Harman J had held that when ascertaining the exactness of a trust deed beneficiary class:

“[T]he trustees must worry their heads to survey the world from China to Peru…”

Which was to suggest an immense undertaking for trustees, unless it could be proven that the deed conferred a mere power, in which case, reasonable certainty of the beneficiary class ought then be shown. In light of this precedent, the court subsequently held that as before, the context of clause 9(a) was such that the trustees were afforded discretionary powers, and so held that:

“[C]lause 9 of the deed may properly be construed as the judge did, by holding that it creates a power and not a trust…”

At which point the executors along with the deceased’s widow, pursued their argument before the House of Lords on grounds that clause 9(a) represented a mandatory trust, and that as such, the ruling in the recent Inland Revenue Commissioners v Broadway Cottages directed the decision of the court when it held that:

“[A] trust for such members of a given class of objects as the trustees shall select is void for uncertainty, unless the whole range of objects eligible for selection is ascertained or capable of ascertainment…”

Which it was argued, was now impossible due to the vast number of both former and existing employees, causal employees and extended family members; a contention that left the House allowing the appeal by way of reference back to the Chancery Court for greater clarification, while also holding that in their opinion:

“[T]he trust is valid if it can be said with certainty that any given individual is or is not a member of the class.”

Once again in 1972, the court reviewed the position on the wording, and thereby meaning of trusts and powers, along with the validity of the trust in relation to s.164 of the Law of Property Act 1925, which stipulated that:

“1. No person may by any instrument or otherwise settle or dispose of any property in such manner that the income thereof shall…be wholly or partially accumulated for any longer period than one of the following…(a)the life of the grantor or settlor; or (b) a term of twenty one years from the death of the grantor, settlor or testator…” 

And so with a thoughtful, albeit exhaustible, examination of the deed, the court held that a discretionary trust did exist, and that despite the 31 years since its execution, such an instrument was valid when called into purpose, which echoed the sentiment of the House when the court further held that the trust was valid on the principle that there were sufficient company records to show, and thereby establish, who was reasonably eligible for the benefit of the funds when distributed by the trustees, upon which the executors challenged the judgment before the Court of Appeal one final time.

Here, the executors argued that unless an individual could not be proven as falling outside the scope of the trust, the trust must fail, while the court reasoned that while operating within the bounds of practicality, the trustees had shown that they were equipped to trace staff records back to the inception of the company, and thereby allocate the majority of employees and their immediate relatives, whereupon the court conclusively dismissed the appeal, while simply holding that:

“[A] trust for selection will not fail simply because the whole range of objects cannot be ascertained.”

Twinsectra v Yardley

English Equity & Trusts

Twinsectra v Yardley
‘A Country Solicitor’ by Edward Lamson

Interference with the performance of a contract, and assistance in a breach of trust, lie central to a matter involving two solicitors and a property developer, whose triangulated relationship resulted in financial abuses and ethical ignorance by those expected to conduct themselves with nothing less than self-discipline and professionalism.

Having owned and operated a number of business ventures, the respondent had ventured to obtain a business loan for the purposes of acquiring further properties, however at the time of inquiry his bank was unable to commit to lending the money, therefore he made contact with the plaintiffs, so as to borrow the sum of £1m, to which the plaintiffs requested that the loan agreement be underwritten by a qualified solicitor.

Upon consultation with the appellant his request was denied, and so with time against him he approached another law practice, whose second partner had a business history with the defendant, and through which the partner had become liable to the defendant to the sum of £1.5m.

In order to repay the debt owed, the partner then agreed to become principle debtor to the loan by way of its underwriting, while keeping the truth of their arrangement from the plaintiffs, and so when signing the loan agreement, they were now legally subject to its terms, in which sections 1 and 2 read:

“1. The loan moneys will be retained by us until such time as they are applied in the acquisition of property on behalf of our client. 

2. The loan moneys will be utilised solely for the acquisition of property on behalf of our client and for no other purpose.”

While s. 4 further read that:

“We confirm that this undertaking is given by us in the course of our business as solicitors and in the context of an underlying transaction on behalf of our clients which is part of our usual business as solicitors.”

However once the money had been loaned, the partner contacted the appellant, and asked that he retain the funds in a client account until such time that the plaintiff required it. While both solicitors were aware that such a transfer was tantamount to a breach of s.1, the money was nonetheless accepted and then released by the appellant to the respondent with no proof that any of the money was being used for the purchase of properties, as per s. 2 of the agreement.

At the point of initial litigation, the plaintiffs sued for recovery of the funds following non-payment by the now dissolved partner on grounds of breach of trust, and for dishonest assistance on the part of the appellant when holding the money and paying it to the respondent upon his request, despite knowledge of the initial breach prior to his receipt of the funds from the partner.

While in the first instance the Court of the Queen’s Bench dismissed the claim on grounds that the appellant had merely acted recklessly in the course of his duties, the Court of Appeal reversed the judgment on grounds that the appellant had knowingly received money destined not for the purchase of property, and thereby in breach of s.2, and that he had wilfully closed his eyes to the facts when agreeing to both hold and transfer the funds to the respondent.

Upon appeal to the House of Lords, the appellant argued that his involvement in the matter was certainly naive and remiss but in no way unlawful, and so the House agreed to examine the details of the case for the purposes of clarity.

Turning first to Royal Brunei Airlines Sdn Bhd v Tan, the House noted that the Court of Appeal had explained how:

“A fraudulent and dishonest design is not confined to personal gain. It is sufficient if the stranger knowingly assists in the use of trust property in a way which is not permitted by the trust.”

And that in its simplest form:

“[A] trust is a relationship which exists when one person holds property on behalf of another. If, for his own purposes, a third party deliberately interferes in that relationship by assisting the trustee in depriving the beneficiary of the property held for him by the trustee, the beneficiary should be able to look for recompense to the third party as well as the trustee.”

Thus in its conclusion, the court had held that:

“[D]ishonesty is a necessary ingredient of accessory liability. It is also a sufficient ingredient. A liability in equity to make good resulting loss attaches to a person who dishonestly procures or assists in a breach of trust or fiduciary obligation.”

And so it was clear that when the appellant acquiesced to the instructions of the partner, he had, whether intentionally or not, become complicit in the misuse of what was held to be trust property of the plaintiffs, while the House also also referred to Gilbert v Gonard in which the Court of Chancery had also held that:

“[I]f one person makes a payment to another for a certain purpose, and that person takes the money knowing that it is for that purpose, he must apply it to the purpose for which it was given. He may decline to take it if he likes; but if he chooses to accept the money tendered for a particular purpose, it is his duty, and there is a legal obligation on him, to apply it for that purpose.”

Although the House drew the distinction that unlike civil courts, equity relies less upon the mens rea of a man and more on his behaviour, and while the appeal was founded upon a breach of trust and dishonest assistance, there was insufficient evidence to suggest certainty as to the mind of the appellant when carrying out his part of the agreement. However, the House did conclusively note that under the circumstances there was ample grounds for a liability under wrongful interference with a contract and for assisting in a breach of trust, therefore the court of appeal judgment was upheld and reversed in part, while the House held that:

“[E]quity looks to a man’s conduct, not to his state of mind.”

And:

“Where a third party with knowledge of a contract has dealings with the contract breaker which the third party knows will amount to a breach of contract and damage results, he commits an actionable interference with the contract…”

Barclays Bank Ltd v Quistclose Investments Ltd

English Equity & Trusts

Barclays Bank Ltd v Quistclose Investments Ltd
Image: ‘Bankers in Action’ by Remedios Varo

Conditional lending, while perhaps overlooked during commercial and personal loans, forms the bedrock of such delicate transactions, and so should the borrower find themselves unable to apply the funds as expected, the nature of the agreement remains lawfully intact in favour of the lender. In this matter, an insolvent debtor’s bank attempted to convert such monies into company assets at the expense of the lender, at which point the reassurance of equity intervened.

In 1964, the shareholders of a relatively successful enterprise took steps to issue dividends of around £210,000, however upon inspection, they discovered that without adequate liquidity, the payment would be impossible. With that in mind, the company owner secured a conditional loan from the respondents, on the express condition that the funds were to be used for dividend issue only.

Once received, the owner wrote to the company bank, giving instruction to open a standalone account for the retention of the funds, while stipulating that:

“We would like to confirm the agreement reached with you this morning that this amount will only be used to meet the dividend due on July 24, 1964.”

Unfortunately, on July 17 1964, the company entered into voluntary liquidation, whereupon the monies held remained unused, as per the instructions given at the point of receipt. Some time later, the respondents demanded repayment of the money loaned, after which the appellant bank argued that it had since become a corporate asset, and was therefore subject to the priorities of all associated creditors involved in the bankruptcy process.

At the point of litigation, the respondents held that the money loaned was subject to a resulting trust, and that the bank by virtue of their position, were now under a fiduciary liability as constructive trustees for the amount loaned. In the first hearing, the judge awarded in favour of the appellants, on grounds that equitable principles did not apply when arms-length dealings fail, whereupon the respondents appealed and the Court held that in matters involving third parties to a failed transaction, recovery under equity was a principle long enjoyed, and routinely evidenced through a number of judgments across hundreds of years.

Presented again to the House of Lords, the House examined the complexity of the transaction, and noted that in Toovey v Milne, Abbot CJ had ruled that failure to apply the money loaned in the way originally intended, allowed for recovery of the funds during insolvency, under the principle that:

“[T]his money was advanced for a special purpose, and that being so clothed with a specific trust, no property in it passed to the assignee of the bankrupt. Then the purpose having failed, there is an implied stipulation that the money shall be repaid.”

Here again, reference was made to the express conditions applied to the loan, as well as the statement made in the letter at the time the money was passed to the appellant bank. It was further noted that while in circumstances where the lender agrees to loan on non-specific terms, there is an implied assumption that such funds become part of the corporate estate (albeit not entirely free of equity), however on this occasion there was ample testimony that the respondents had bargained with the borrowers on clear conditions, therefore the House uniformly and unreservedly held that the Appeal Court decision was to remain untouched and the bank’s appeal dismissed.

Strong v Bird

English Equity & Trusts

Strong v Bird
Image: ‘Debtor Night’ by Seminary Road

While English common law requires the perfecting of a gift through written documentation, the circumstances of that prerequisite can be somewhat altered when the moment calls. On this occasion, a testatrix was ultimately able to complete an oral debt release through the appointment of her debtor as an executor.

In 1866, the deceased was cohabiting with her son in-law when due to her sizeable wealth, she entered into an agreement whereby a significant amount of rent was paid on a quarterly basis, after which the defendant borrowed £1100, on the proviso that she deducted £100 per quarter until the balance owed was clear.

After only two payments, the deceased relinquished the debt, and explained that no further deductions were necessary. This evidence was supported both by his wife and from handwritten notes left on the cheque counterfoils used before her demise.

Upon her passing, the beneficiary to her will contested that the £900 unpaid, was now owed under law, as the cessation of the loan had not been committed to any form of written notice aside from the cheque stubs, which were deemed insubstantial as proof.

Relying upon the essence of equity, the court examined the context in which her wishes had been executed, and knowing the oral and notary testimony were insufficient to stand as perfect, her appointment of the defendant as executor to her will, was evidence enough, and that while:

“The law requires nothing more than this, that in a case where the thing which is the subject of donation is transferable or releasable at law, the legal transfer or release shall take place. The gift is not perfect until what has been generally called a change of the property at law has taken place.”

Thus the court held that the deceased, having made no express acknowledgement of a debt within her will, was proof enough that the gift was perfect, and that its absence created in the defendant, an absolute right to title of the £900, therefore no challenge could be made, equitably or otherwise. The court further noted that her further payments of full rent for a period of four years after the money had been loaned, showed again that she considered the sum paid in full, and so sought no recovery in death, as she might in life.

Hasham v Zenab

English Equity & Trusts

Hasham v Zenab
‘Palace Gate, Udaiper’ by Colin Campbell Cooper

Specific performance and cessation of contract on grounds of mistake, are both viable arguments for either continuation of contractual obligations, or the cessation of a transaction for reasons non-detrimental to both contractees. However, both approaches rely upon the honesty and accountability of at least one party should the courts take a view to upholding either of them.

In this instance, a Gujarati widower entered into an agreement to convey a determinate plot of land for an agreed sum, yet immediately after signing the disposition, she tore up the document and refused to continue with the transaction on grounds that she had been misled as to (i) the size of the plot, and (ii) the identity of the individual to whom the purchaser was planning to sell it to.

During initial litigation in the Supreme Court of Kenya, her argument for the fraudulent misrepresentation was based upon her limited grasp of the English language, and so she had elected a representative to be present with her at the time of signing. However, it was also argued that no mention had been given of the size of the plot, which in the first instance was alleged to be half an acre, and not the two acres contained within the conveyance, a fact discovered only after the signing.

When cross-examined, the respondent was proven to have falsified the statement, and thus her witness was accused of perjury, whereas contrastingly, the appellant contested that during preliminary talks, the proposed plot was described as two acres, and not the half-acre suggested.

The contract itself was signed in the presence of a third party, however the respondent also relied upon the contention that at no point during an earlier meeting did anybody translate the contents of the contract, despite the appellant claiming that not only did he explain it, but that the respondent’s cousin had also clarified its contents to her.

It was likewise argued by the appellant that the respondent tore up the contract, not because of the plot variation, but upon the knowledge that the land was to be resold to an individual she disliked, however this was also proven to be untrue after lengthy cross-examination and questioning of oral evidence.

Upon summation, the trial judge awarded in favour of the appellant, despite reservations around the integrity of both parties, and so when presented to the Court of Appeal of East Africa, the Court took issue with the reliability of the appellant’s statements and proceeded to reexamine the facts, before reaching the same conclusion as the lower court.

Take finally to the House of Lords, it was noted that vol. 2 of ‘Williams on Vendor and Purchaser’ clearly illustrated that:

“[A]s a rule, either party to a contract to sell land is entitled to sue in equity for specific performance of the agreement. This right is, in general, founded on a breach of the contract, but not in the same manner as the right to sue at law. The court has no jurisdiction to award damages at law except in case of a breach of the contract; while the equitable jurisdiction to order an agreement to be specifically performed is not limited to the cases in which at law damages could be recoverable.”

Which translated that when contracting parties hold a good account of themselves throughout their dealings, equity would provide sufficient weight as to instigate specific performance; yet on this occasion, neither party had been anywhere near as truthful as a court would rightfully expect, and so on this principle it was impossible to uphold the appeal, nor enforce the equitable rights of the appellant, or those forwarded by the respondent, thus the appeal was dismissed while the House held that:

“In equity all that is required is to show circumstances which will justify the intervention by a court of equity.”

Bray v Ford

English Equity & Trusts

Bray v Ford
Image: ‘Advocate’ by Honore Daumier

Profiting from a fiduciary position, while not expressly forbidden, is a feature that requires careful consideration by both trustees and beneficiaries, and so in this matter the billing of fees for legal services proved both offensive and damaging for the party accused.

In 1895, the Governor of the Yorkshire College took issue with the vice-chairman after discovering that he had for a period of fourteen years, been providing legal function as a solicitor whilst holding a position based upon a voluntary footing. Incensed at this opportunistic behaviour, the now appellant wrote a lengthy letter to the respondent, accusing him of breaching his fiduciary duty to the institution her served, while stressing that he had:

“[U]sed religious, educational and philanthropic schemes as a hypocritical cover for the purpose of serving his own ends.”

The respondent argued that the terms of the memorandum of association had provided him with rights to both charge and profit from his work, a contention that remained largely unproven at the point of litigation. In the first hearing, the judge underemphasised the importance of the accusation levelled, instead focussing on the libellous tone used in the letter, which at the time, was circulated amongst three hundred other college governors.

Having convinced the jury that the respondent was justified in his collection of payment for legal services, the judge again placed greater weight upon the damaging effects of the written statements, after which the jury returned a verdict in favour of the respondent, and with damages set at a lofty 600l.

Upon appeal, the appellant was left facing a similar outcome after the Court agreed that the libel charges remained as effective as they would have should the respondent have been proved wrong, thus prompting a final plea before the House of Lords.

Here, the roots of the matter were revisited, along with Order XXXIX r.6 of the Rules of the Supreme Court 1883, which explained how:

“[A] new trial shall not be granted on the ground of misdirection or of the improper admission or rejection of evidence,…unless in the opinion of the Court to which the application is made some substantial wrong or miscarriage has been thereby occasioned in the trial…”

It was thus uniformly agreed by the House that from the outset, the nature of the action had been grossly overlooked in favour of aspersions, and that the trial judge had clearly failed to acknowledge the gravity of a fiduciary breach, which if proven correct, went some way to justifying the claims made by the appellant at the start. It was for this reason that the House held that there had been a clear miscarriage of justice, and that in failing to recognise this, the Court of Appeal had conversely erred in judgment.

In light of these collective mishaps, the House duly reversed the Court of Appeal’s decision, directed a re-trial under the Supreme Court Rules, and ordered repayment of all courts costs and damages to the appellant.