Journal

Rules of disclosure

Fiona Poole, May 2012

Fiona Poole is a Senior Associate at Maurice Turnor Gardner LLP in London.

Whether in the context of court hearings or tax tribunals the ability to require disclosure of pertinent documents has always been an important, and often frustrating, part of proceedings.

Disclosure in the course of ordinary litigation is complex and English lawyers look to the Civil Procedure Rules (CPR) to assist in determining which documents a party may be entitled to request disclosure of. Not unnaturally, a party can only be required to disclose documents that they have (or have had) some ability to obtain themselves; whether or not they have the appropriate ability may be hotly disputed in some cases.

For example, CPR 31.8 deals generally with the ambit of disclosure and the inspection of documents. It provides that:

‘(1) A party’s duty to disclose documents is limited to documents which are or have been in their control

(2) For this purpose a party has or has had a document in their control if:

(a) it is or was in their physical possession

(b) they have or have had a right to physical possession of it; or

(c) they have or have had a right to inspect or take copies of it.’

Similarly, CPR 71.2 enables a judgment creditor to make an application requiring a judgment debtor to appear in court and to ‘produce at court documents in their control which are described in the order.’1

A similar but separate area is HMRC’s ever-expanding information and inspection powers, now contained in schedule 36, Finance Act 2008. Whereas the rules of disclosure under CPR tend to relate to documents that are in a person’s ‘control’, HMRC’s powers are more concerned with whether documents are within the taxpayer’s ‘possession or power’. The former test has, until recently, been interpreted as being a strict test only satisfied by a present and enforceable legal right to a document.

This article considers two recent cases that have examined the extent of one’s ‘power’ over certain trust documents sought for disclosure and to what extent that power can translate to a document being in one’s ‘control’.

The case of North Shore Ventures Ltd v Anstead Holdings Incorporated2 looked at disclosure in the context of the CPR. The second case, that of Commissioners for Revenue and Customs v Parissis and Others,3 considered this in the context of s20 Taxes Management Act 1970 (the predecessor to schedule 36, Finance Act 2008, and referred to in this article as s20). Both of these cases seek to distinguish what has been the leading authority in this area, Lonrho Ltd and Another v Shell Petroleum Co Ltd4 and raise questions both on the practical operation of trusts and on the widening of the Courts’ and HMRC’s ability to require the disclosure of information.

Possession, custody or power?

Most relevant to the meaning of the term ‘possession’ in the context of s20 is the phrase that appears in the CPR in relation to the inspection and discovery of documents for the purposes of civil litigation in the High Court. Under these rules a party is required to list for disclosure purposes the documents that are or were in their ‘possession, custody or power’.

The meaning of the threefold test was considered in the matrimonial case of B v B,5 where Dunn J said: ‘For this purpose “possession” means the right to the possession of a document. “Custody” means the actual, physical, corporeal holding of a document regardless of the right to its possession, for example holding a document by a party as servant or agent of the true owner. “Power” means an enforceable right to inspect the document or to obtain possession or control of the document from the person who ordinarily has it in fact. The requirements of the rules are disjunctive in the operation, so far as possession, custody and power are concerned.’

It appears clear from this that Dunn J was of the view that the term ‘possession’ is limited to lawful possession. De facto control or physical possession without a right to possession was not sufficient. One would think that this definition of ‘possession’ should apply equally in s20 (and schedule 36), which refers to ‘possession or power’.

‘Power’ has a number of meanings and was considered by the House of Lords in the context of access to information in Lonrho.

Lonrho: ‘presently enforceable legal right’

In this 1980 case, the House of Lords considered whether documents in the possession of a company’s foreign subsidiary were within the ‘power’ of the parent company for the purposes of the Rules of the Supreme Court Order 24 rule 2(1) (Order 24 was the predecessor to CPR 31). The House of Lords held: ‘In the context of the phrase “possession, custody or power” the expression power must, in my view, mean a presently enforceable legal right to obtain from whoever actually holds the document inspection of it without the need to obtain the consent of anyone else.’6 (Lord Diplock at 635)

This recognised the fundamental principle that a company is entitled to manage its own affairs, and as such, has the right to grant or refuse permission to its parent to see documents. Although this seems logical, it is widely regarded as having established (or at least confirmed) important territorial limitations to disclosure. This is a known source of frustration to HMRC (and, doubtless, to civil litigants), who would clearly wish to be able to obtain documents from the offshore subsidiaries of onshore corporate defendants.

Lord Diplock also noted, however, that the facts of that particular case were so exceptional that it was not appropriate to make a ‘general disquisition’ and that, depending on the particular facts of another case, different considerations may apply.

North Shore: ‘within a person’s control’

North Shore addressed the rules of disclosure of documents in a person’s control under CPR 71.2(6) in the context of a trust. The question was whether, if documents are in a person’s ‘control’, this necessarily means that the person also has a ‘presently enforceable legal right’ to those documents.

This case concerned a loan of USD50 million from North Shore to Anstead in March 2003, which was guaranteed by two individual controlling shareholders of Anstead. In August 2008, North Shore issued a claim for monies owed by Anstead to North Shore. However, in the interim period the two shareholders had disposed of virtually all of their (and Anstead’s) assets, having transferred them to certain trusts of which the shareholders, their wives and children were discretionary beneficiaries. Anstead had then been put into liquidation.

Judgment was given in March 2010 and in October 2012 North Shore applied for orders under CPR 71.2(6) that the shareholders be required to produce certain trust documents. The shareholders submitted that they were no longer beneficiaries of the discretionary trusts to which the assets had been transferred and that any order should be qualified by the words ‘in so far as they are within their knowledge, possession, custody or control’.

Floyd J disagreed with the shareholders. The wives and children of the shareholders were still beneficiaries of the trust and accordingly the order for disclosure should be made.

The shareholders sought to rely on Lonrho and appealed, claiming that the documents relating to the administration of the trusts were not within their control. Following the decision in Lonrho, you would think that this would be correct because the appellants had no present and enforceable legal right to obtain the documents sought.

However, the Court of Appeal dismissed the appeal. It was held that the nature of the relationship between the trustee and the appellants was such that there was an understanding that the trustees would take whatever steps the appellants wanted in the administration of the trusts. The Court stated that, if the trustee were an ‘agent’ of a litigant, the Court would not hesitate to make an order for disclosure of such documents.

Therefore, the judge at first instance was entitled to regard the documents in the physical possession of the trustees as being documents within the appellants’ ‘control’ within the meaning of CPR31.8.

This appears to demonstrate the Court of Appeal’s view that the word ‘control’ (which is not separately defined in CPR 71.2) has the same meaning as that under CPR 31.8 for the purposes of CPR 71.2(6). Furthermore, the concept of ‘right to possession’ in CPR 31.8(2)(b) covered the situation where a third party is in possession of documents as agent for a litigant; even, in this case, where the agency could only be implied from the circumstances.

In considering the relevant case law, Toulson LJ importantly noted that, although Lord Diplock gave a definition of ‘power’ in Lonrho, Lord Diplock had also, as mentioned above, indicated that the facts of that case were so exceptional that it was not appropriate to make a ‘general disquisition’. The case was therefore distinguished.

Parissis: ‘de facto control’

The provisions of s20 Taxes Management Act 1970 (TMA) (setting out the powers of HMRC to serve a notice requiring the disclosure of information by a taxpayer or by any third party who may have relevant information) are now contained in schedule 36, Finance Act 2008. However, as Parissis dealt with a request under a s20 notice, it is appropriate to recite s20 here. Both provisions required disclosure of documents in the taxpayer’s ‘possession or power’. Section 20 set out the power for an inspector to call for documents of a taxpayer or others. The provisions might ‘require a person –

(a) to deliver to him [the inspector] such documents as are in the person’s possession or power and as (in the inspector’s reasonable opinion) contain, or may contain, information relevant to:

(i) any tax liability to which the person is or may be subject, or

(ii) the amount of such liability, or

(b) to furnish him with such particulars as the inspector may reasonably require as being relevant to, or the amount of, any such liability.’

Even before Parissis, the question of ‘power’, and whether it means a ‘practical’ power or a strict ‘legally enforceable right’ in the context of HMRC’s information powers, had been considered in the case of Meditor.7 In Meditor it was suggested that ‘power’, in the context of an HMRC notice, should not have the same restricted meaning as was applied in Lonrho by the House of Lords in the context of discovery of documents for legal proceedings.

In particular, the First-Tier Tax Tribunal held that the CPR (and the former Rules of the Supreme Court) looked to the past and the present – i.e. has the document been, or is the document in a person’s possession, custody or power – whereas s20 looked to the present and the future, i.e. does the person have the document or can it be obtained.

The Court in Parissis took this further. The case was heard by the First-Tier Tax Tribunal and concerned a Guernsey administered trust. The Tribunal ordered that the taxpayer was required to produce documents held by a non-UK trustee because they were deemed to be within the taxpayer’s practical power. The documents were considered to be within the taxpayer’s power for the purposes of s20 where the taxpayer would have (in the Tribunal’s view) been given documents by a third party upon their request for the same (unless they could show that their request for those documents has been legitimately refused).

The Tribunal did not regard it as necessary for there to be any legal mechanism entitling the taxpayer to demand the information, i.e. no ‘present and enforceable legal right’ for the taxpayer to obtain the documents sought. The Tribunal took the view, rather, that the documents were ‘de facto within the taxpayers’ power because they, as settlors and beneficiaries, can be presumed to have real power over the trustees’.

In Parissis, HMRC applied for penalties to be imposed on the respondent taxpayers for their failure to comply with notices issued under s20(1). The respondents had owned a public limited company. They sold the companies within the group to a team of directors. The commissioners alleged that the respondents had failed to supply documents relating to a particular company that had been owned by a Guernsey trust company. The shares in the company were held on trust equally for the benefit of three trusts. The respondents were the settlors and beneficiaries of those trusts and had described themselves as the beneficial owners of the company in question.

The documents that HMRC alleged had not been disclosed comprised the trust deed and letter of wishes for one trust, all correspondence in connection with that trust, all correspondence and documents issued at the time the trusts were established, the trust accounts and bank statements for each trust, plus copies of accounts for the company since its incorporation.

The respondents argued (following Lonrho) that they did not have a presently legally enforceable right to any of the material sought by the commissioners and that the material was therefore not within their ‘power’ for the purposes of s20(1).

The First-Tier Tax Tribunal held that Lonrho applied to a different question of law (following Meditor), i.e. in the context of the disclosure rules within CPR (formerly the Rules of the Supreme Court) and not in the specific context of s20. CPR dictates that, for documents to be capable of disclosure by a party, those documents need to be in the ‘possession, custody or power’ of that party. It was considered that ‘power’ had a different meaning in the context of s20.

Among other things, the purpose of s20 was to compel a taxpayer to produce documents that were relevant to their tax liability; it was not a case of giving a list of documents that the person had or could make available for inspection.

Impact of North Shore and Parissis

The House of Lords decision in Lonrho is still good law, but as Lord Diplock pointed out, each case must turn on its own facts. Indeed, it would appear that tax cases distinguish themselves entirely because the interpretation of ‘power’ in Lonrho applied only to disclosure under the CPR and not in the specific context of HMRC notices under s20 (or now, schedule 36, Finance Act 2008).

‘North Shore and Parissis both held that it is not the legal right to obtain documents that gives a person control or power over those documents’

The interpretation of a person’s ‘power’ under the CPR, namely where they had a present and enforceable right to obtain a document, appears now to have been broadened to include where a person has the ability to obtain documents sought by influence or otherwise, and without great expense, from another person, even when that person has the legal right to refuse to produce them.

Accordingly, although looking at two different aspects of the law, the findings from North Shore and Parissis appear to be incredibly similar. In both cases, it was held that it is not the legal right to obtain documents that gives a person control or power over those documents; it is instead the ‘real’ power a person has by virtue of their relationship with the third party who is in possession of those documents.

Whereas the Court in North Shore confined its decision to the disclosure of trust documents, Parissis will have wider ramifications both domestically and internationally (there has been a long-standing and well-known frustration that HMRC can only exercise its powers domestically) not just for individuals and trustees, but also for companies that are under the ‘real’ power of a UK taxpayer who receives an information request from HMRC.

The trustee/beneficiary relationship is generally (and necessarily) a close one, but the willingness of the Courts and HMRC to equate this to a presumption of ‘real’ power could pave the way for wider and more dangerous assumptions as to the independence of trustees and the legitimacy of the trust itself. In this case, the documents sought for disclosure were not limited to trust documents; they also related to underlying companies. It is not clear that a presumption of ‘real’ power over a trust should be permitted to extend to a presumption of control over company documents, yet this was a finding that the Tribunal was prepared to make (in effect) in Parissis.

It seems quite clear that this is a developing area of law and one that trust and corporate service providers in offshore jurisdictions will need to watch carefully, particularly in the conduct of their relationships with settlors and beneficiaries.

  • 1. CPR 71.2(6).
  • 2. [2012] All ER (D) 89.
  • 3. [2011] UKFTT 218 (TC).
  • 4. [1980] 1 WLR 627.
  • 5. [1978] Fam 181.
  • 6. This decision was followed in the judgments of Tomlinson J in Three Rivers District Council v Bank of England [2002] EWHC 1118 (Comm) and by the Court of Appeal in Three Rivers District Council and Others v HM Treasury and Others [2002] EWCA Civ 1182.
  • 7. Meditor Capital Management v Feighan [2004] STC 273.

Article Search