A round-up of recent wills and trust cases

Sunday, 01 November 2009
A summary of several interesting cases covering issues such as a review of the definition of "per stirpes", foreign revenue enforcement, rescission of trust documentation, trustees' indemnity and proprietary estoppel.

Doctrines old and new have been before the Courts in recent months. Of the old, perhaps most practitioners had taken it as read that the meaning of ‘per stirpes’ was well settled. The Privy Council was nonetheless called upon to deliberate upon this point at some length in Sammut v Manzi [2009] 1 WLR 1834,[2009] WTLR 1051. Elsewhere, the long‑standing principle that the Courts will never enforce a foreign revenue debt was reiterated by the High Court of Singapore in the most orthodox terms in Relfo Limited v Varsani [2008] SGHC 105, [2009] WTLR 1019, despite such doctrinal rigour requiring the Court to assist an unattractive defendant. Bhatt v Bhatt [2009] WTLR 1139 saw the old equitable doctrine of rescission for mistake marshalled in the arguably modern social context of an elderly non-English speaking widow who had been encouraged by her more sophisticated adult children to sign away property. Issues with a more recent provenance falling for determination included whether or not a trustee should be allowed to meet his legal expenses from assets frozen as suspected proceeds of crime under the Proceeds of Crime Act 2002 in The Serious Organised Crime Agency [SCO]v John Szepietowski & Others [2009] All ER (D) 279 (Feb), [2009] WTLR 1239. Finally, the burgeoning body of case law concerning proprietary estoppel continues to grow and develop with the unusual remedy afforded to the claimant in Porntip Stallion v (1) Albert Stallion Holdings (Great Britain) Limited(2) Lilibeth Stallion 2009 EWHC 1950 (Ch).

A root and branch discussion of ‘per stirpes’ by the Privy Council

In Sammut v Manzi [2009] 1 WLR 1834,[2009] WTLR 1051, the Privy Council was asked to deliberate on the meaning of ‘per stirpes’. Raymond Adams (the testator) had died on 29 February 2004, leaving an estate of $30million. The contentious provision in his Will was sub-clause 6(ii) concerning the distribution of 25 per cent of his estate. Sub-clause 6(ii) was itself divided into two paragraphs: paragraph 6(ii)(a) named four cousins of Mr Adams and 6(ii)(b) named Ruby, the ex-wife of Mr Adams. Sub-clause 6(ii) provided that the 25 per cent share was to be left to the cousins and Ruby ‘in equal shares’. Should any of the beneficiaries named in sub-clause 6(ii) predecease the testator, that beneficiary’s issue would take per stirpes. If such a predeceasing beneficiary have no issue, that predeceasing beneficiary’s share would be paid to the surviving beneficiaries named in sub-clause 6(ii) ‘in equal shares per stirpes.’

The question was how the 25 per cent should be divided. At first instance and in the Court of Appeal of the Bahamas, it was held that despite the provision that the cousins and Ruby should take ‘in equal shares’, the 25 per cent share was to be divided into two equal portions of 12.5 per cent. One was to be shared between the four cousins (each cousin thus receiving 3.125 per cent), with the other 12.5 per cent received by Ruby. The Court at first instance attached importance to the fact that sub-clause 6(ii) itself contained separate paragraphs 6(ii)(a) and 6(ii)(b). It was held that this use of separate paragraphs manifested an intention to distribute the 25 per cent to the cousins as one class separate and distinct from Ruby, meaning that this ‘was a distribution per stirpes and not per capita’. The Court of Appeal of the Bahamas upheld the decision and held that the fact that Ruby had been placed separately in 6(ii)(b) ‘operated to tilt the scale in favour of a per stirpes distribution as opposed to a per capita distribution’.

This was a remarkable decision given the generally settled meaning of per stirpes. Variously translated as meaning by (or through) the stem, branch, root or stock, per stirpes has invariably meant that a deceased beneficiary’s share is divided between his or her surviving issue. However, in Sammut v Manzi, no beneficiary was deceased and the cousins did not even have a common parent. Consequently there did not appear to be any basis for finding that there was a ‘stem’ or ‘branch’ for the cousins to take through, save that the Court appeared to consider that paragraph 6(ii)(b) was itself the ‘stem’. A reasonable inference seemed to be that the concept had only crept into the Court’s deliberation because of references elsewhere in the Will to per stirpes distribution. Firstly, there was the express provision that a deceased beneficiary’s issue would take that beneficiary’s share per stirpes (there is of course nothing unusual about this). Secondly, there was a more puzzling direction that where such deceased beneficiary had no issue, the remaining beneficiaries in sub-clause 6(ii) (not all of whom were even blood relatives) should take ‘in equal shares per stirpes.’

On appeal to the Privy Council, the appellant cousins argued that the provision for distribution in the event of a beneficiary predeceasing without issue ‘in equal shares per stirpes’ simply meant that the share of such a beneficiary would be distributed equally among all the remaining beneficiaries identified in sub-clause 6(ii). There was nothing else it could sensibly mean and consequently the words ‘per stirpes’ were inappropriate and otiose. Ruby and her son (the respondents to the appeal) argued that ‘per stirpes’ in this context meant that if one of the cousins died without issue then that cousin’s share would be divided into two equal parts, one to be shared between the remaining cousins and the other to go to Ruby.

The Privy Council allowed the appeal. In their Lordships’ opinion, the obvious reason for placing Ruby in the same sub-clause 6(ii) as the cousins was because the testator wanted Ruby and the cousins to receive the same equal 5 per cent share of the estate. Had the testator wanted Ruby to take 12.5per cent and the cousins to take 3.125per cent each, then the obvious way of doing this would have been to have two entirely separate sub-clauses leaving different shares of the estate. The use of separate paragraphs (a) and (b) to separate the cousins from Ruby did not mean that the words ‘in equal shares’ should be interpreted as meaning that the 25 per cent should be divided into only two equal shares. It appeared that without more, the effect of using punctuation and sub-paragraphs alone was limited. The effect of the words ‘in equal shares’ immediately after all five beneficiaries had been identified by name meant that those words qualified the whole of the bequest in sub-clause 6(ii). Ignoring the superfluous ‘per stirpes’, the construction placed on sub‑clause 6(ii) by Ruby and the Courts below was at odds with the obvious and natural meaning of the words that had been used.

A general reminder was given by their Lordships as to the correct approach when interpreting a will. When determining the meaning of a will, the starting point is to determine the intention of the testator by giving words their natural meaning within the context of the will as a whole. Little assistance is to be gained from the manner in which similar wording has been construed in other cases. As to the specific point at issue in this case, their Lordships unambiguously clarified the meaning of ‘per stirpes’. In their Lordships’ view, the interpretation of ‘per stirpes’ adopted by Ruby and by the Courts below was not correct. For modern purposes, per stirpes can be taken to mean ‘by family’. Where a beneficiary predeceases the testator leaving issue, the issue is substituted for the deceased parent. This means that a named beneficiary’s issue only takes in substitution to their parent if that parent predeceases the testator. Descendants do not take in competition with their own living immediate ancestor. Until the parent to whom the share is left dies, there is no room for a per stirpes analysis. Where (as in Manzi v Sammut) there is reference to a per stirpes distribution among named individuals, the words say nothing about how the gift should be divided between those individuals if they all survive.

Foreign revenue enforcement within the context of knowing receipt

Relfo Limited (in liquidation) v Varsani [2008] SGHC 105, [2009] WTLR 1019 was a decision of the Singapore High Court where the plaintiff was a British company (Relfo Limited) acting by its English liquidator trying to recover the proceeds of a breach of trust. In April 2004 the United Kingdom Inland Revenue issued a notice warning of legal proceedings to Relfo based on a 2001 tax liability of £1,409,871.30. Payment was required by 3 May 2004 but no payment was made. On 4 May 2004, the plaintiff’s director (Mr Gorecia) paid away £500,000 (about $890,050) to a British Virgin Islands (BVI) company. The defendant was Mr Varsani, a business associate of Mr Gorecia. On 5 May 2004, Mr Varsani’s Singaporean bank account was credited with $878,479.35. Shortly afterwards, the Mr Varsani transferred $100,000 to Mr and Mrs Gorecia. On 23 July 2004, the plaintiff was wound up. The liquidator entered into a settlement agreement with Mr and Mrs Gorecia on 29 October 2004.

Relfo’s liquidator claimed against Mr Varsani for knowing receipt or dishonest assistance. Mr Varsani submitted that the monies he received were not the monies paid away by Mr Gorecia and made the serious allegation that various documents relied upon by the liquidator were forgeries. However, Mr Varsani elected not to call any evidence at trial. He submitted that there was no case to answer on the basis that Relfo’s claim was a concealed claim by the UK Revenue for recovery of unpaid tax and was therefore unenforceable under the private international law principle that Courts should never enforce a foreign revenue debt.

Lady Justice Judith Prakash held that on Mr Varsani’s plea of no case to answer, the evidence only needed to be subjected to a minimal evaluation. In order to establish knowing receipt, dishonesty was not a requirement. Instead, it was necessary for the plaintiff to show three elements. Firstly, had Relfo’s assets been disposed of in breach of trust and/or fiduciary duty? This requirement was plainly satisfied in that Mr Gorecia had clearly paid the monies away in breach of his fiduciary duty. Secondly, had Mr Varsani received assets traceable to Relfo’s assets? This was also established on the basis of inferences that could be drawn from the liquidator’s unchallenged evidence. Thirdly, did Mr Varsani have knowledge that the assets were traceable to the plaintiff’s assets that made it unconscionable for him to retain them? This too was established. The test was whether there was a want of probity that made it unconscionable for the defendant to retain the assets. All that was needed to establish this want of probity was knowledge that the assets were traceable to a breach of duty. The mere fact that Mr Varsani had received an unusual sum into his bank account where there was no good reason for its receipt called for some enquiry by him. The judge inferred that the defendant knew that the money emanated from a breach of duty and it was unconscionable for him to retain it.

Up to this point, the liquidator had succeeded on everything. In a nutshell, Prakash J found that there was sufficient evidence to conclude that the money standing to the credit of Mr Varsani’s bank account was Relfo’s money. Despite this, the liquidator failed. It was held that as a principle of private international law, both direct and indirect enforcement of revenue laws by a foreign state (or its nominee) is prohibited. This was both a matter of substance and form. Contrary to the liquidator’s argument, this was not an archaic principle but had been frequently applied in recent times. The principle in Government of India v Taylor [1955] AC 491 that under no circumstances will the Courts directly or indirectly enforce the revenue laws of another country still held firm.

On behalf of the liquidator, strenuous attempts were made to show that the plaintiff’s claim was not in substance a claim by the UK Revenue. Nevertheless, a rigorous and unrelenting approach to foreign revenue enforcement was taken by the Court. Firstly, Prakash J held that although it was correct that Relfo had been placed into liquidation by its directors and not by the Revenue, the real reason for its liquidation had been the pressure exerted by the Revenue. Secondly, it did not assist the liquidator that at the start of the proceedings the Revenue’s claim was one of two creditor claims in the liquidation of Relfo (i.e. the Revenue was not the sole creditor). Instead, what was significant was that by the time of trial the other claim had been withdrawn. This meant that the Revenue was the only party that would benefit from a judgment against Mr Varsani. This was case notwithstanding that the other claim had been lodged by Mr and Mrs Gorecia and it seemed likely that their claim had been withdrawn only for the purpose of strengthening Mr Varsani’s argument on this very point. Prakash J held that such motivation was not relevant to the plain fact that the Revenue was the only creditor. Thirdly, it was also irrelevant that the Revenue was neither funding nor directing the proceedings. This was merely superficial. The purpose of the liquidator’s appointment by the Revenue was to recover assets for the creditors and all the funds recovered would go to the Revenue as Relfo’s sole creditor. On the facts of this case, a finding that Mr Varsani had knowingly received Relfo’s money following a breach of trust was still not enough to disapply the fundamental principle of non‑enforcement of foreign revenue debts. On the facts of this case, a finding that Mr Varsani had knowingly received Relfo’s money following a breach of trust was not enough to disapply the fundamental principle of non‑enforcement of foreign revenue debts.

Rescission of trust documentation where mistake made by a non-English speaker

Mr Martin Mann QC (sitting as a deputy judge of the Chancery Division) recently heard the case of Bhatt v Bhatt & ors [2009] WTLR 1139. This case required the Court to examine the law on setting aside of trust documentation for mistake The claimant (Mrs Bhatt) was an elderly widow and the defendants were her children. Mrs Bhatt sought rescission of a number of trust documents and rectification of the registered title to her home. In 1992, Mrs Bhatt and her late husband had purchased their property from their local authority. Mrs Bhatt and her late husband initially held the property as joint tenants but had executed a notice of severance in 2003. Following her husband’s death on 28 December 2003, Mrs Bhatt sought advice from her solicitor (Mr Saujani) in March 2004. Mr Saujani advised Mrs Bhatt to consult a tax adviser (Mr Kakad). Mrs Bhatt was wrongly advised by Mr Kakad that she was likely to be faced with a significant inheritance tax (IHT) liability following her husband’s death and might need to sell her home to pay it.

Following Mr Kakad’s advice, Mr Saujani prepared a declaration of trust and several other documents. A transfer of the property was also prepared from Mrs Bhatt as transferor to Mrs Bhatt together with two of her children as transferees to hold as tenants in common. The declaration of trust declared trusts for Mrs Bhatt as to 50 per cent of the beneficial interest in the property and the two children as to the other 50 per cent on the terms of a discretionary sub-trust. Pursuant to the discretionary sub-trust, the two children had a special power of appointment among the rest of Mrs Bhatt’s children. The documents were signed at Mr Saujani’s office on 12 March 2004.

The claimant spoke little English and her ability to read documents in English was limited. It was Mrs Bhatt’s case that Mr Saujani did not explain the documents to her. Mr Saujani gave evidence and claimed that the claimant had received a written ‘financial review’from Mr Kakad. Mrs Bhatt’s evidence was that she had not received such a document and that even if she had she would not have been able to read it. Mr Saujani’s evidence was that he had himself followed Mr Kakad’s advice and (remarkably) that he considered that he did not need to use his professional skill to verify Mr Kakad’s advice.

Rescission was sought by Mrs Bhatt on the basis that she was led mistakenly to believe that immediate steps were required to avoid IHT on her late husband’s estate (when in fact there was no need owing to the surviving spouse exemption), that IHT would be lessened or avoided on her own death if she executed the documents and crucially that her unrestricted right to occupy and control the property would continue. Mrs Bhatt argued that but for this catalogue of mistaken bases she would not have entered into the transaction.

The deputy judge reiterated that the test in equity for setting aside a voluntary transaction based on mistake is the test set out in Gibbon v Mitchell [1990] 1 WLR 1304: the mistake must be a mistake as to the effect of the transaction and not merely as to its consequences or advantages. Mr Martin Mann QC quoted with approval the reasoning of Lewison J in In re Griffiths [2009] 2 WLR 394. In re Griffiths had concerned a settlor who had been suffering from cancer. The operative mistake in that case was that the settlor had mistakenly believed that there was a real chance that he might survive for another seven years (see Trust Quarterly Review, Vol.7, Issue 1, 2009, p.42 for an analysis of that case). Mr Martin Mann QC approved Lewison J’s conclusion in In re Griffiths that in order for the equitable jurisdiction to set aside a transaction to be engaged, the mistake must be extant at the time a transaction is entered into and the Court must also be satisfied that had the true facts been known, the transaction would not have been entered into. Crucially, however, it is not necessary to show what would have been done instead had the mistake not been made.

As to the specific facts of Bhatt v Bhatt, Mr Martin Mann QC considered it plain from Mr Saujani’s evidence that he would not have been capable of explaining the documents and that he gave little or no detailed advice as to their effect to Mrs Bhatt. Not only was Mrs Bhatt unable to understand English, but Mr Saujani knew her sufficiently well to know that she would not have been able to understand the effect of the transaction without an explanation in Gujarati. This alone was fatal to the transaction. It was ultimately concluded that the documents failed to carry Mrs Bhatt’s intentions into effect and she had unwittingly entered into the transaction. Her expectations in giving her instructions (rather than merely as to the consequences of those instructions) were so falsified that the whole transaction had to be set aside.

Trustees’ indemnity within the context of asset recovery

The Serious Organised Crime Agency [SOCA]v John Szepietowski & Others [2009] All ER (D) 279 (Feb), [2009] WTLR 1239 was a case where the defendants applied under section 252 of the Proceeds of Crime Act 2002 (POCA 2002) for an exclusion from an interim receiving order so that legal expenses could be met. The Court was required to consider whether the principle that a trustee’s costs of litigation should be met on an indemnity basis from trust assets applied in a case where an interim receiving order had been made. In the underlying proceedings, a civil recovery order was sought by SOCA in respect of $2.4million remitted from Turkey to the UK in 1999. SOCA believed this to represent the proceeds of drug trafficking. An interim receiving order had been made against the defendants on 27 July 2005.

The first defendant was Mr Szepietowski. He was a solicitor to whose firm’s client account the suspicious funds had been remitted in August 1999. Mr Szepietowski had devised a complex offshore structure to hold the funds comprising a Manx trust (of which Mr Szepietowski was trustee) and corporate entities both in the UK (the third defendant) and the British Virgin Islands (the fourth defendant). Four previous exclusions in respect of legal expenses had been granted in the proceedings totalling £98,700 plus VAT. Mr Szepietowski and the companies had been ordered to provide detailed statements of assets by 31 December 2008. There were a variety of significant shortcomings in Mr Szepietowski’s evidence. In particular, a dramatically lower than expected valuation of Mr Szepietowski’s matrimonial home had been prepared by an estate agent who was also a longstanding associate of Mr Szepietowski. SOCA produced rival valuation evidence and also drew attention to various inconsistencies, omissions and unsupported statements in Mr Szepietowski’s evidence.

It was central to Mr Szepietowski’s application that the usual starting point for litigation involving a trustee led to the conclusion that he was entitled to be indemnified out of the trust assets in respect of his costs. It was submitted that the exclusion order regime was not exhaustive and it could not have been the intention of Parliament to force a trustee defendant to choose between not defending proceedings or funding the defence himself.

Mr Justice Henderson decided that when deciding whether or not to order an exclusion from an interim receiving order, the Court must carry out a balancing exercise where primary regard is had to the desirability of legal representation on the part of the defendant. It was not decisive either way whether or not assets existed that were not covered by the terms of the interim receiving order. The mere existence of other assets was not sufficient. Instead, what the Court had to consider was whether that person could reasonably be expected to meet his legal expenses from such assets.

Of most relevance to readers of this journal, the conclusion of Henderson J pointed away from affording special treatment to trustees under the exclusion regime. Henderson J held that the statutory exclusion regime was exhaustive and self-contained. There was no reference in the statute to persons sued in a trustee or fiduciary capacity and the omission was not accidental. Crucially, it was concluded that a trustee with available personal assets will be unable to obtain an exclusion from the regime. However, a trustee who behaved reasonably should be able to recover all or most of his costs at the conclusion of the proceedings. Henderson J went further still and commented that it is not an absolute rule that a trustee is entitled to be indemnified in respect of the costs of proceedings. Whether or not costs are properly incurred depends on all the circumstances, including whether the trustee has obtained directions from the Court, acted in the interests of the fund or in substance for his own benefit or behaved unreasonably. The unfavourable conclusion for trustees is likely to be attributable to the unattractive nature of the application and the inference that this was not a bona fide trust. Indeed, since this decision was handed down, SOCA has successfully applied to have the earlier exclusions set aside (see [2009] All ER (D) 58 (Jul)).

Proprietary estoppel – an unusual balance struck between competing needs

Porntip Stallion v (1) Albert Stallion Holdings (Great Britain) Limited(2) Lilibeth Stallion 2009 EWHC 1950 (Ch) (to be reported in the October 2009 (edition 93) of Wills andTrusts Law Reports) showed that proprietary estoppel continues to provide a rich resource for claimants. In this case, Porntip Stallion sought a declaration concerning her rights in respect of a property known as The Cut in Waterloo, London. The Cut was owned by Albert Stallion Holdings (Great Britain) Limited. Porntip Stallion was a Thai lady who had been married to the late Albert Stallion from 1989 to 1995. Porntip had been Mr Stallion’s third wife. The second defendant was a Philippino lady called Lilibeth Stallion. Lilibeth had been married to Mr Stallion from 1995 until his death in 2004. Mr Stallion had been an entrepreneur in the whiteboard industry and The Cut was part-residential and part‑commercial in nature. Sarah Asplin QC (sitting as a Deputy High Court Judge) accepted evidence that Mr Stallion had been an impulsive character who had a reputation as a womaniser and heavy drinker. He had travelled extensively in the Far East, both for business and for pleasure. At the date of trial, The Cut was occupied by Porntip, Lilibeth and Lilibeth’s new husband and their daughter.

A declaration was sought by Porntip that she was entitled to a life interest in The Cut, with exclusive possession based on a proprietary estoppel. The estoppel was said to have arisen from representations made by Mr Stallion to Porntip. Porntip contended that these representations had been made by Mr Stallion in order to induce her not to contest their divorce and to forego her right to seek an order for ancillary relief. There was an evidential dispute as to the nature of the representations made by Mr Stallion, both orally and in the form of a written document. What was remarkable was that it was common ground that Porntip had continued to reside at The Cut after the divorce, despite there also being intermittent occupation of the property by Mr Stallion and Lilibeth as husband and wife. Lilibeth opposed Porntip’s claim and submitted that none of the requirements for proprietary estoppel were met in that there was no causal link between the representation and any forbearance shown by Porntip. Furthermore, the pattern of occupation of The Cut was said to show a lack of reliance on the part of Porntip. Finally, Lilibeth argued that Porntip’s claim was out of all proportion to any equity she might have.

Coming so hard on the heels of the House of Lords decision in Thorner v Major [2009] 1 WLR 776, the legal principles to be applied to a proprietary estoppel claim were not in dispute in this case. Firstly, there had to be a representation or assurance given to Porntip by Mr Stallion that was sufficiently clear and unequivocal. Secondly, Porntip needed to show reliance on the assurance and that such reliance had been reasonable in all the circumstances. Thirdly, some detriment needed to have been suffered by Porntip as a consequence of her reliance that was sufficient to justify the intervention of equity. While the promise and the detriment had to be causally linked, there was no need for the promise to be the sole inducement for the detriment. Unconscionability was an objective value, regardless of state of mind and the Court was required to do the minimum to satisfy the equity and do justice. The judge found that the three necessary ingredients for proprietary estoppel were all present. In particular, it was noted that foregoing ancillary relief proceedings and giving up the certainty of a Court order by Porntip was a sufficient detriment.

What set this case apart was the unusual decision by the judge as to disposal. It was held that while Porntip had the benefit of a proprietary estoppel, her detriment had to be weighed against Lilibeth’s position. At the date of trial, Lilibeth, Lilibeth’s new husband and their child also resided at The Cut along with Porntip. The judge held that Porntip’s equity would be satisfied by a declaration that Porntip could live at The Cut rent free for life but without the exclusive possession Porntip sought. Sarah Asplin QC acknowledged that while it was unusual for the Court to create a situation where a claimant and defendant continued to live together, Porntip and Lilibeth had already been doing so for many years. Over the course of a five-day trial, the judge of course had ample opportunity to assess the demeanour and quality of relationship between Porntip and Lilibeth and cannot have taken this decision lightly. It seemed that despite the fact that the two adversaries had just been engaged in fully contested proceedings in the Chancery Division, they nevertheless got on tolerably well and could continue to live together, perhaps for many more years.

Author block
Joseph Curl

Joseph Curl is a Barrister practising at 9, Stone Buildings, Lincoln’s Inn, London.

STEP Journal
United Kingdom