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England and Wales Court of Appeal (Civil Division) Decisions
You are here: BAILII >> Databases >> England and Wales Court of Appeal (Civil Division) Decisions >> Collier v Collier [2002] EWCA Civ 1095 (30 July 2002)
URL: http://www.bailii.org/ew/cases/EWCA/Civ/2002/1095.html
Cite as: [2002] EWCA Civ 1095, [2002] BPIR 1057, 6 ITELR 270
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- The appellant Diane Collier is the daughter of the respondent Michael Collier. I will refer to them respectively as the daughter and the father.
- On 4th March 1999 the daughter started proceedings in the Chancery Division against the father seeking possession of premises at 146 Clapham High Street, London SW4 and ancillary relief. Those premises comprised at the time a night-club, a recording studio and a penthouse flat. They were all controlled and occupied by the father. The father disputed the claim upon grounds to which I will come later. He also counterclaimed for a declaration that the Clapham High Street premises were held on trust for him and as a consequence sought an order that the freehold and title should be transferred to him.
- On similar grounds the father asserted that premises at Chertsey, called “The Empire”, that had been operated as a bingo club had been held on trust for him. As a consequence he claimed that he was entitled to the proceeds of sale from the compulsory acquisition that had taken place.
- The background facts go back to 1969 when the father acquired the freehold of the Chertsey premises. The freehold of the Clapham High Street premises was acquired by the father in 1979. On 18th December 1986, at a time when the father thought he would be in financial difficulties, he granted the daughter a lease over both premises. Clause 5 of those leases gave the daughter an option to purchase the freehold of the premises on payment of £100,000 in respect of each of them. On 26th January 1987 the daughter registered the options in the appropriate part of the Charges Register.
- In June 1995 the daughter gave notice that she wished to exercise the options pursuant to clauses 5 of the leases. The transfers took place in 1996 and 1997. The purchase money of £100,000 for the Clapham High Street premises was provided as to £85,000 by the father and as to the remaining £15,000 by the daughter. She borrowed that money from a company called Litton Grove Properties Ltd and it was secured by a legal charge on her freehold interest in the Clapham High Street premises.
- In April 1997 the daughter fell out with the father over a claim by her to a share in the profits of the business that was being run at the Clapham High Street premises. On 4th March 1999 she served a notice to terminate the licence under which she claimed that her father was occupying those premises. That was disputed and there followed these proceedings.
- I have set out the way that the properties came into the possession of the daughter. However the various transactions took place against a background of financial worries of the father that arose from his guarantee of the debts of Morton Music Limited. In 1985 Bass Holdings Ltd started proceedings against Morton Music Ltd for breaches of covenant. Those proceedings were decided in favour of Bass Holdings by Scott J in July 1986 and Morton Music, was ordered to pay the costs. Those costs and the damages would have had to be paid by the father. However in 1987 Morton Music’s appeal was allowed. Despite that success the father proceeded to mortgage the Clapham High Street premises in July 1989 and the Chertsey premises in December 1989 without informing the mortgages of the options. The subsequent transfers to the daughter of the freeholds had no connection with the Bass Holdings action, but were carried out “with the object of defrauding the respective mortgagees of their security” (see judgment page 5 lines 17 to 20).
- The issues before the judge were numerous. For example it was alleged that documents granting the leases should be rectified and also that the father had the full title to the premises because he had occupied the premises for sufficient time to obtain title by reason of his adverse possession. But the main issue turned upon the claim by the father that both premises had been held on trust for him by his daughter.
- The main witnesses were the father and the daughter. The judge found the father was “not only a thoroughly dishonest witness, but also a singularly stupid one.” As to the daughter, the judge disbelieved her evidence that the premises had been transferred as “a generous gift”. He said, “I have no difficulty in disbelieving her and concluding that she had accepted that she should be a mere nominee for the purpose of the transaction and no gift was intended or believed by her.”
- The judge considered at length the intention of the parties. He held that the leases, when granted, were treated by the parties as if they did not exist. The judge also recorded that “Much time was spent in the course of the hearing investigating the circumstances in which the options [contained in the leases] came to be exercised with Mr Collier’s co-operation and, in the case of Southside [the Clapham High Street premises], largely with his money.” The judge recorded that counsel for the father had not sought to resist the conclusion that this was done with the object of defrauding the respective mortgagees of their security. The judge concluded that Mr Isaacs, the solicitor who had advised Mr Collier, had improperly colluded with Mr Collier to deceive the mortgagees as to the true position in respect of the leases. The purpose of the exercise of the options was according to the judge, to preserve the father’s assets for the family at the expense of the mortgagees.
- The case put forward by Mr Collier was that the leases had been granted only upon terms that they should be held on trust for him, so as to reduce inheritance tax liabilities. The judge disbelieved that. He said:
- The judge went on to say:
- To establish the trust, the father relied upon a letter dated 7th August 1986, an admission against interest made by the daughter’s mother and the general tenor and content of the father’s and daughter’s evidence. The letter of 7th August 1986 stated:
- The judge held that on the balance of probabilities that that letter was not a genuine document, but had been manufactured by the father in order to deceive the court.
- The alleged admission against interest appeared in handwriting on a letter dated 19th April 1990. The handwriting part was that of the father. It was as follows:
- The judge concluded that the daughter had held the leases on trust for the father. He held that the hand-written part of the letter of 19th April 1990 was an admission against interest. He went on:
- The judge concluded:
- To give effect to that conclusion, the judge made declarations, as sought by the father, that the daughter held the freehold title of the Clapham High Street premises on trust for him and ordered that the freehold title should be transferred to him free from encumbrances. He also declared that the daughter held the net proceeds of sale of the Chertsey premises on trust for the father and ordered assessment of the appropriate sum to be paid.
- It was accepted before the judge and before us that the leases had legal effect and that the options had been validly exercised. The parties were also inclined to accept that there had been a presumption of advancement in favour of the daughter. However that did not feature in their submissions after Chadwick LJ suggested that the factual background did not give rise to a resulting trust in favour of the father. Thus the appeal turned on whether the judge was correct to hold that there was an express trust which was the pleaded case of the father and, if so, whether he was precluded from relying upon due to its illegal purpose.
- Before us the case for the daughter was simple. First, there was no evidence upon which the judge could have found that the daughter held the leases and therefore the premises on trust for the father. At most the father had an expectation that the leases would be surrendered if he requested that to be done. Second, if there was a trust, then it included terms which were illegal, namely that the property was held on trust so as to defraud the Inland Revenue and the father’s creditors. Thus to establish the trust the father had to rely upon his own illegality. That was not permissible.
- It was submitted that this case was indistinguishable in principle from Tinker v Tinker [1970] P. 136. In that case a husband bought a garage business in Cornwall and found a house nearby for his family. His evidence was that at first he intended to buy the house in his own name, but that he was advised by his solicitors that if the new business venture should fail the house could be taken by his creditors as part of his business assets. The solicitors recommended that it should be put in his wife’s name and that was explained to his wife by the solicitors. The house was bought in the wife’s name and conveyed to her. Shortly thereafter the marriage broke down. The husband applied for a declaration that the wife held the house on trust for him. The registrar found that the husband was an honest businessman, intending and able to honour his financial commitments and held that he had rebutted the presumption of advancement and made the declaration sought. On appeal to the Court of Appeal, the appeal was allowed. The Court held that the husband, being an honest man, must have genuinely intended that the house should belong to his wife because that was the only honest intention he could have.
- It is interesting to note that in the report of the argument at page 139 Salmon LJ said:
- Counsel in Tinker submitted that there was no inescapable dilemma for there was a middle alternative, namely that on the Registrar’s finding the husband had an open mind, having accepted proper legal advice. Lord Denning MR at page 141 said:
- Lord Denning went on consider the attempts of counsel to distinguish the facts of that case from the authorities that he had quoted and concluded:
- Salmon LJ was of the same view. He said at page 142 F:
- Lord Justice Salmon went on at page 143C:
- As I have said the daughter’s case is simple. The judge found that the grant of the leases and the exercise of the options was a dishonest plot designed to defraud the father’s creditors, namely Bass Holdings and the mortgagees. The documents were a sham. In those circumstances the court should, to adopt the words of Salmon LJ, “let the estate lie where it falls” as the father had not come to the court with clean hands. He could not take advantage of his own wrong.
- Mr David Phillips QC, appearing with Mr Nesbitt for the father, referred us to the concession recorded by the judge at page 6 of his judgment that “Mr Knott, on behalf of the claimant, accepts that in respect of that transaction, Mr Collier is entitled to adduce evidence of dishonest motive in order to rebut the presumption of advancement which would otherwise arise in respect of a transfer to his daughter at an undervalue.” He submitted that it was because of that concession that the judge felt that he did not have to deal with the case of illegality now relied upon. Mr Phillips also asked us to reject the daughter’s submission that the judge had been wrong to conclude there had been a trust. He submitted that there was clear evidence that there was a trust. Mr Phillips went on to submit that the father did not need to rely upon any illegality to establish his case. All he had to prove was the trust. Thus the principles laid down in Tinker v Tinker and Tinsley v Milligan [1994] 1 AC 340 did not apply.
- Mr Phillips also submitted that if the trust had included a term which was illegal, the father was not precluded from relying upon it as the alleged purpose had not been carried into effect. It had not been executed and therefore following the guidance given in Tribe v Tribe [1995] 3 WLR 913 the trust was enforceable.
- The Concession – Mr Ullstein QC, who appeared for the daughter, submitted that the concession was irrelevant. He did not seek to suggest that any of the father’s evidence should be shut out and accepted that he was entitled to adduce evidence of dishonest motive. He submitted that if the concession was to be understood as allowing Mr Collier to rely upon evidence which only partly told the story, then this Court should allow the concession to be withdrawn. In any case this Court was under a duty to take the point that the motive was illegal. For that proposition he relied upon Snell v Unity Finance Company Ltd [964] 2 QB 203.
- For my part, I do not believe that the concession, as recorded by the judge, should have any bearing upon the case. I can see no reason why Mr Collier should have been prevented from adducing evidence to the effect that his motive was that the property should be held on trust, but as the judge said at page 6 line 7, “I have no doubt that Mr Collier’s motives at that stage were indeed also dishonest in a manner with which I must deal in due course.” I believe the judge should have decided the dispute between the parties upon all the evidence and it was right that Mr Collier was not shut out from putting forward the evidence which he wished to rely upon, even if that evidence established a dishonest motive. The crucial question concerned the effect that such evidence should have on the outcome of the case. In those circumstances there is no need to withdraw the concession.
- The Trust – The judge relied upon the hand-written statement of the mother on the letter of 19th April 1990 as an admission of the daughter’s agent which was admissible against her as an admission against interest.
- Mr Ullstein did not dispute that the mother had signed that statement as the father had given evidence to that effect which had not been challenged in cross-examination. He submitted that there was no evidence that the mother had express or ostensible authority to act as the daughter’s agent, let alone to make that admission on behalf of the daughter. The mother had attended court, but had not given evidence and it had not been suggested during the cross-,examination of the daughter that the mother had acted as her agent.
- Mr Phillips submitted that if the correspondence is read as a whole, it is clear that the mother was the person to whom solicitors wrote giving advice as to the position of the daughter. Taking that into account and the cross-examination of the daughter, it was appropriate for the judge to conclude that the mother had acted as the agent of the daughter.
- I cannot accept that submission of Mr Phillips. Clearly the mother was intimately concerned in the affairs of the daughter, but there was no evidence that she acted as her daughter’s agent, let alone that she did so when she signed the hand-written statement on the letter of 19th April 1990. The statement was, according to Mr Collier, written at some time after 19th April 1990. Its purpose was “Julie Collier [the mother] wanted some confirmation and I wanted some agreement about what was going on re this matter” (Evidence 1 page 13 line 8). That being so, it is unlikely that the mother was acting as the daughter’s agent, particularly as that was never suggested by the father and was never suggested to the daughter in cross-examination.
- Even though I have concluded that the judge was in error when he relied upon the hand-written statement as an admission against interest, I have not felt it right to disagree with his conclusion that there was a trust. The judge saw the witnesses give their evidence. He disbelieved the daughter’s evidence that there was no trust and concluded that she had accepted that she should be a mere nominee. After the leases were granted the parties continued to treat the properties in the same way as before, with the father being in control and no rent being paid. The judge held that the father “made the grant to his daughter, upon whose compliance he felt able to rely, with the intention that if it served his interest he would treat the grants as gifts, but if it did not he would claim that the grant was subject to his beneficial interest”. The judge therefore had to decide whether that position was accepted by the daughter. He disbelieved her evidence to the contrary. In those circumstances the judge was entitled to conclude that there was an agreement between the parties that gave rise to a trust.
- On the judge’s findings the agreement between the father and the daughter did not create a bare trust. The daughter was to be his nominee “and effectively the leases should be available to be used only if required in order to deceive.” (Judgment page 13 line 6). Thus the trusts included terms which were illegal. In effect the terms of the trust were that the leases and the property were to be held in trust so as to defraud the Inland Revenue and the father’s creditors. To establish that trust the father had to prove its terms. They included illegal terms. The father therefore had to rely on his own illegality. That he cannot do (see Tinsley v Milligan).
- Illegality – Mr Phillips on behalf of the father accepted that a person cannot rely upon illegality in order to establish his case, but he submitted that that only applied when the illegal purpose had been carried into effect. For that proposition he referred us to Tinsley v Milligan and in particular to the passages in the speeches of Lord Goff at page 356 F-G and Lord Browne-Wilkinson at page 374 A-B.
- At page 356 Lord Goff said:
- He continued at page 357 B:
- Lord Browne-Wilkinson said at page 374A:
- Mr Philips also relied upon the explanation of the law given in the judgements of this court in Tribe v Tribe [1995] 3 WLR 913. In that case the plaintiff held 499 of the 500 issued shares of a company. In 1986 he wished to retire and transferred 30 shares to his son, one of four children, who was to take over the business. In 1988 he was worried about a bill for dilapidations and to safeguard his position and with the intention of defrauding his creditors, he transferred the remaining shares. The judge found that the father and the son had agreed that the shares would be held on trust for the father pending the settlement of the dilapidation claims. Both the judge and the Court of Appeal held that since the transfer was voluntary the presumption of advancement applied, unless it could be rebutted. The Court held that, as a general rule, any rebuttal would fail if the transferor needed to rely upon illegality; but that did not arise in this case as the illegal purpose had not been carried into effect.
- Millett LJ, whose judgment was agreed to by Otton LJ, referred at page 928 to Tinsley v Milligan and continued:
- Millett LJ went on to analyse the nature of the relationship between the primary rule and the doctrine of locus poenitentiae. He said at page 937:
- Mr Phillips on behalf of the father submitted that the leases were granted with the intention of preventing Bass Holdings being able to use the properties to satisfy any order for damages or costs that would be made in the litigation. As that litigation was resolved in favour of the defendants, no obligation arose and therefore the intention was never satisfied. It follows that the father had withdrawn and could therefore rely on evidence of the illegal transaction.
- I cannot accept that submission. The father’s pleaded case was that the properties were held on a bare trust, but his stated intention was that the leases were granted to avoid inheritance tax. Thus upon that intention the leases would be held for himself, but that if he died before that happened then the trust would not be disclosed and would terminate. The illegal purpose, which was to defraud the Inland Revenue, had been carried into effect. He had had the benefit of the illegal purpose for a number of years, namely to defraud the Inland Revenue if he died.
- The judge did not entirely accept the father’s evidence. He held that an inheritance purpose was at most a small part. The leases were entered into for the purpose of defrauding creditors. The trust was for the father with a term that it should be hidden to defraud creditors to prevent them recovering the property. That is demonstrated from consideration of the dispute between the parties. It was over the title to the freehold of the Clapham High Street premises and the proceeds of sale of the Chertsey premises. They vested in the daughter by reason of the exercise of the options. Those transactions were carried into effect to defraud the mortgagees (see judgment page 5 lines 17 to 20). That was accomplished. The father did not withdraw from the transaction before the illegal purpose had been carried into effect.
- The true position was that the leases “were shams as between father and daughter”. The daughter “should at most be his nominee and effectively the lease should be available to be used only if required in order to deceive”. He made the grants to the daughter “with the intention that if it served his interest he should treat the grants as gifts, but if it did not he would claim that the grant was subject to his beneficial interest.” The transfers were carried out “with the object of defrauding the respective mortgagees of their security”. There had been no voluntary withdrawal from the transaction. To recover the property the father needed to rely upon the agreement which set up the trust. That agreement provided that the trust should be concealed from creditors and the Inland Revenue. The result is that the father cannot dispute the effect of the transfers of the property without relying upon his illegality. The property must lie where it rests.
- I am not concerned about the rights of the mortgagees. The judge found that the leases were shams. If so, the mortgagees would appear to have claims against the daughter and the father.
- I would allow the appeal and set aside the order of the judge.
- The appellant, Diane Collier, is registered at H M Land Registry under title number 365897 as proprietor with title absolute of the property known as 146 Clapham High Street, London SW4. In these proceedings she seeks an order that her father, Michael Collier, give possession of those premises. By counterclaim under CPR Pt 20 the father seeks a declaration that his daughter holds the property on trust for him absolutely; and an order that the property be transferred to him. He seeks, also, a declaration that she holds upon trust for him absolutely the net proceeds of sale of other premises, known as the Empire Bingo Club, Chertsey, of which (until sale) she was also registered proprietor, under title number SY257208. The circumstances in which those claims are made are fully set out in the judgment of Lord Justice Aldous.
- It is common ground that the freehold of the property known as 146 Clapham High Street was transferred to the appellant by her father in early 1996. She was registered as proprietor on 26 April 1996. The transfer, dated 15 March 1996, is expressed to be made in consideration of £100,000. It followed the exercise by her of an option to purchase contained in a lease granted to her by her father on 18 December 1986. The purchase monies were provided as to £86,000 by the father; but, as to the balance, by the appellant from borrowing which she secured by a charge in favour of Lytton Grove Properties Limited. It has not been suggested that the provision of part of the purchase price by the father gave rise, of itself, to any resulting trust in his favour.
- As I have said, the transfer of the property to the appellant in March 1996 followed, and was made in pursuance of, the exercise by the appellant (by notice dated 19 June 1995) of an option to purchase the reversion granted by a lease dated 18 December 1986. The lease was for a term of twenty one years from 29 September 1986 at an initial rent of £5,000 per annum subject to review on 29 September 2001. So far as material the option, contained in clause 5(1) of that lease, was in these terms:
- At the date of the transfer in 1996 the property was subject to a charge, dated 11 July 1989, to secure monies advanced to the father by Britannia Building Society. The building society accepted that the option, which had been protected by an entry in the charges register made on 26 January 1987, had priority to its charge; so that, on transfer to the appellant, she held the property free from the charge. The purchase monies were paid to the building society in reduction of the father’s liability; but the effect was that the building society could not enforce its security for the greater part of the monies owed to it.
- The trust upon which the father relies is pleaded in paragraph 5 of his defence and counterclaim, dated 17 January 2000 and verified by a statement of truth:
- Further, and again to state the obvious, if the leasehold interest were held by the appellant upon trust for her father at the time that the option was exercised in 1996, the exercise of the option and the transfer to the appellant for the purpose of defeating the security held by the building society as chargee of the freehold can only be described as a fraud on the lender. As the judge recorded, the father (through his counsel) accepted that the purpose of the exercise of the option was to defeat the security; and did not resist the conclusion that, on the case which he was advancing in these proceedings, the lender was defrauded.
- Subject to any question whether an agreement entered into with a view to effecting an illegal purpose could be enforced, it is not in dispute that, if the appellant did agree that any legal interest which she might acquire under the 1986 lease would be held by her in trust for her father, that trust would extent to any interest in the reversion which she acquired by the exercise of the option conferred by the lease. If the father could establish the agreement alleged in paragraph 5 of his defence and counterclaim, it was unnecessary for him to rely on the further agreement alleged in paragraph 8 of that pleading:
- The appellant’s primary case was that she never made the agreement alleged in paragraph 5 of the defence and counterclaim. Her pleaded response is found in paragraphs 1 and 2 of the reply dated 17 March 2000:
- The Chertsey premises, also, were transferred to the appellant by her father in early 1996 in circumstances which are indistinguishable from those which I have just described – that is to say the Chertsey premises were transferred following the exercise by the appellant of an option to purchase the reversion conferred by a lease granted to her by her father on 18 December 1986. In this case the effect – and as was accepted, the purpose – of the exercise of the option and the transfer was to defeat the security granted to Barclays Bank plc by a charge dated 11 December 1989. The bank had appointed receivers under that charge in April 1994. But the Chertsey property had, for some time, been the subject of a compulsory purchase order; and, on 8 December 1997, it was transferred by the appellant to Runnymede Borough Council for a consideration of £275,000.
- The father’s claim to the net proceeds of sale of the Chertsey property is founded upon the same agreement as that alleged in respect of 146 Clapham High Street. Paragraph 28 of his defence and counterclaim is in these terms:
- The judge directed himself that the only issue which he had to determine was whether the grant of the 1986 lease was subject to a trust. He obtained little or no assistance from the evidence of the father or the daughter; neither of whom he regarded as credible witnesses. But he reached two important conclusions of fact. First, he held that the father’s principal purpose in granting the lease was put the asset beyond the reach of his creditors – in particular, beyond the reach of Bass Charrington plc with whom he was in litigation at the time – and that:
- In my view – and, as the judge recognised - it is impossible to reach the conclusion that the 1986 leases were “sham” in the sense in which that concept is understood by the law. As Lord Justice Diplock explained in Snook v London and West Riding Investments Ltd [1967] 2 QB 786, at page 802:
- Whatever may have been the father’s intention, it cannot be said that he did not intend to create a leasehold interest (coupled with an option to purchase the reversion) out of the freehold estate vested in him in 1986. His evident purpose in executing each lease was to create an interest in the land which could be relied upon (if need be) to reduce the value of the freehold estate. That purpose is manifest in the registration, on 26 January 1987, of an entries in the charges register of each title and the filing of the copy leases. His case was never advanced on the basis that the leases were sham – that is to say, that neither lease was ever intended to create the interest in land which it purports to create – and there was no evidence upon which the judge could reach that conclusion.
- Nor, in my view, is it appropriate to describe either of the 1986 leases as gift – if, by that, it is intended to suggest that the lease was a grant of an interest in land for no consideration. There was consideration for the grant of the leasehold interest in the form of the rent reserved; and there was consideration for the option, in that it was a term of a lease which contained the usual tenant’s covenants. Further, the option was exercisable only on payment of £100,000. There may well have been an element of bounty - in that the terms of the lease and the option price were generous to the lessee – but there was no absence of consideration sufficient to require any presumption of resulting trust. The question whether a presumption of resulting trust was rebutted by a presumption of advancement did not arise. The trusts alleged by the father in his defence and counterclaim are express trusts, arising from an agreement between the parties that the leasehold interests in the two properties should be held on trust. There is no allegation of resulting or constructive trust. That seems to me to reflect a correct appreciation by the pleader that the circumstances in which the leases were granted are not such as to give rise to resulting trusts.
- I would approach this appeal, therefore, on the premise that, if the appellant became trustee of the leasehold interests and of the benefit of the options conferred by the 1986 leases, she did so because she agreed to take the leases as nominee for her father. I would hold, further, if there were such an agreement, it could only have effect if it were made before the leases were granted. An oral agreement made after the leases had been granted would not be enforceable, unless made for consideration (which is not alleged); and could not take effect as a declaration of trust – see section 53(1)(b) of the Law of Property Act 1925.
- The questions for determination, therefore, are: (i) was there an agreement between the appellant and her father, made before the grant of the 1986 leases; if so, (ii) what were the terms of that agreement; and (iii) can the father rely on an agreement in those terms in order to establish the equitable interests which he claims.
- For my part, I find difficulty in supporting the judge’s conclusion that there was an agreement between the appellant and her father; whether made before the grant of the leases or at all. The judge’s conclusion that the appellant “accepted that she should be a mere nominee for the purpose of the transaction” is based, as it seems to me, on three factors. First, on a manuscript endorsement, in the hand of Michael Collier but signed by his former wife (and the appellant’s mother), Julie Collier, on a letter dated 19 April 1990. The judge treated the content of that endorsement as an admission against the appellant’s interest. Second, on his rejection of the appellant’s evidence that she thought she had been the recipient of a “generous gift” from her father. Third, on the admitted fact that the father continued to act, after the grant of the leases, as if he were proprietor of both properties and no rent was demanded or paid.
- As to the first of those factors – the supposed admission against interest – I agree with Lord Justice Aldous that it is impossible on the evidence before the judge to reach the conclusion that the mother sought or obtained specific authority from the appellant to sign the endorsement which was put before her; or that she had some general authority from the appellant which empowered her to make such an admission. The father gave no evidence to that effect; the point was never put to the appellant; and the mother, although available in court, was not called to give evidence. The judge’s finding on that point cannot stand.
- The appellant’s evidence of a “generous gift” - to which the judge referred and which he rejected - was given in the course of her cross-examination on 4 July 2001 (transcript of proceedings, page 31 line 1 to page 32 line 1):
- I accept, of course, that the judge – who had the advantage of seeing and hearing the appellant under cross-examination – was entitled to reject her evidence that she thought that she had been the recipient of a “generous gift”. But rejection of her evidence that she thought her father intended to make her a gift does not lead to the conclusion that she agreed to take and hold the leases as his nominee. If her professed belief that her father was making a gift is left out of account, a fair reading of her evidence suggests that she did not know why her father wanted to create leasehold interests out of his existing valuable freeholds. I do not find it surprising that, in the circumstances of this family in 1986, the appellant should accept that her father wanted to make some disposition of his property within the family for purposes which he did not choose to explain; or that she should be content to co-operate in the proposed transaction, by taking the leases as lessee, without thinking it necessary to question what those purposes were. Nor do I find it surprising that the father was content to make the disposition without any explanation of his purposes; in the belief that he could rely on his daughter to act in accordance with his wishes in the future. As the judge found, the father granted the leases to his daughter “upon whose compliance he felt able to rely” with the intention of deciding, in the future, whether he wanted to assert a beneficial interest of his own in the leasehold interests which he intended to create. That finding is, as it seems to me, consistent with there being no express agreement – or even implied understanding – between father and daughter as to where the beneficial interest would lie in the meantime.
- The father’s own evidence did not support a finding of an agreement; and the judge does not appear to have relied upon it. It is, nevertheless, of some interest to see the answers which the father gave in cross-examination (transcript of proceedings, 3 July 2001, page 23 line 20 to page 24 line 36):
- The third factor on which the judge relied was the admitted fact that the father continued to act, after the grant of the leases, as if he were proprietor of both properties and no rent was demanded or paid. That is not, of itself, sufficient to give rise to a trust if no trust arose by agreement at the time when the leases were granted; but it may be evidence from which the fact of a prior agreement can be inferred. The difficulty, as it seems to me, is that, in the circumstances of this family between 1986 and 1996, the fact that the father continued to act as proprietor of both properties and the fact that no rent was demanded and paid are as consistent with there being no express agreement or implied understanding between the father and the daughter as to where the beneficial interest should lie until the father had decided whether he wished to assert that it remained in him as it is with an agreement that the daughter be trustee or nominee in the meantime. If the position were, as the judge found, that the father had granted the leases to his daughter with the intention of deciding, in the future, whether he wanted to assert a beneficial interest of his own, then, for my part, I would find it a matter of no surprise that the interim arrangements were that the father continued to act as if he were still the proprietor; and that the daughter was content that he should continue to run the nightclubs, recording studio and bingo club at the premises and so generate an income for the benefit of the family. It is, I think, pertinent that the judge found that the mother, although divorced from the father, continued to work for him; and was concerned to preserve his assets for the family.
- It follows that I think that the judge was wrong to conclude, on the evidence before him, that there was an agreement between the father and the daughter, before the grant of the leases in 1986, that she should hold the leasehold interests on trust for him; or even that she led her father to believe that she had accepted the leases on the basis that “she would be a mere nominee for the purpose of the transaction”. In my view the judge ought to have reached the conclusion that there was no discussion, and no agreement, about where the beneficial interests should lie. The father may well have intended that, if it suited him in the future, he would assert an interest; and may well have expected that, if he did so, his daughter would comply with his wishes. And, if that had been put to the daughter at the time, she might well have accepted that he was entitled to expect that she would comply with his wishes. But there is no evidence that that was ever spelt out in discussion or agreement at the time. I would accept that the father trusted the daughter – in the sense that he was confident that he could rely on her to deal with the leases as he wanted in the future – but I would not accept that that was sufficient to create a trust in the proprietary sense alleged in this case.
- I would allow the appeal on that ground.
- A further difficulty, as it seems to me, is that it is impossible to identify, with sufficient certainty to meet the requirements necessary for the creation of a trust, what were the terms of the agreement which the judge did find. An agreement that the daughter would hold the leasehold interests granted to her as bare trustee or nominee, without more, would not meet the father’s purposes – whether those purposes were as the father had asserted in his pleading and his evidence or as the judge found them to be. If the leases were granted with the object of avoiding inheritance tax legitimately – as the father contended – the imposition of a bare trust for the father was pointless; it must have been obvious that a bare trust would defeat the purpose. If the leases were granted with the object of evading inheritance tax by a pretence – which the father denied and the judge did not find to be the case – the imposition of a bare trust could only be explained on the basis that the daughter was willing to join in the pretence; that is to say, that she was willing to contemplate that, in the event of her father’s death, she would deny the trust. It was never put to her that she had agreed to do that; or that that was something that she had been willing to contemplate. If, as the judge found, the pressing reason for granting the leases was to put the father’s assets beyond the reach of Bass Charrington plc, the imposition of a bare trust for the father was, again, not only pointless but would defeat the purpose unless the appellant were willing to be party to the deception.
- The judge found that “Mr Collier’s intention, at least so far as the tenancies were concerned, was that the claimant should at most be his nominee and effectively the leases should be available to be used only if required in order to deceive.” But he did not find – as I read his judgment – that the appellant had agreed to be party to that deception; or that she had ever been told that that was her father’s intention. In the circumstances that the point was never put to her at the trial, I do not think that it would have been open to the judge to find that she had agreed to be a party to deception.
- It follows therefore (i) that to hold that the agreement made before the grant of the leases in 1986 was that the daughter would hold the leasehold interests granted to her as bare trustee or nominee, without more, would be inconsistent with the judge’s finding that the father’s purpose was to put his assets beyond the reach of his pressing creditor – because such an agreement would not meet that purpose – and (ii) that to hold that the agreement was that the daughter would hold the leasehold interests granted to her as bare nominee or trustee, but on terms that she would deny the trust (and assert her own interest) in order to defeat the claims of her father’s creditors, would be to make a finding against her of dishonest participation of a conspiracy which was never alleged and which she was not given the opportunity to meet.
- I approach this issue on the basis that I am wrong in my view that the judge ought to have reached the conclusion that there was no discussion, and no agreement, about where the beneficial interests should lie. On that basis it must be assumed that the daughter agreed to accept the leases as trustee or nominee; and that the father, at least, intended, when granting the leases, that both he and she would deny the existence of the trust if it were necessary to do so in order to defeat the claims of his creditors – and, in particular, the claims of Bass Charrington. It is not, I think, necessary to make any assumption that the daughter agreed that she would participate in that fraudulent design. As I have said, the question whether she did or did not agree to participate in the fraud which the father proposed is relevant in the context of deciding whether there was any agreement at all; because an agreement under which she did not undertake to deny the existence of the trust if required would not have served the father’s purpose. But, if it be held that she did agree to accept the leases as trustee or nominee, it is (as I understand the principles to be applied) irrelevant to the question whether a court of equity will assist the father to enforce that trust whether she also knew of, and agreed to assist in, his fraudulent purpose.
- The question whether, and in what circumstances, a court of equity will assist a person to recover property which he (or she) has transferred to another – or which he has purchased in the name of another – with an unlawful or dishonest intention was considered by the House of Lords in Tinsley v Milligan [1994] 1 AC 340. It must now be recognised, I think, that the answer to that question is not as simple as might have appeared from the principle identified by Lord Goff of Chieveley in his dissenting speech, at page 356A-B:
- In the present case, as I have sought to explain, the creation of the leases in 1986 is not to be regarded as a voluntary transfer of property such as to give rise to any presumption of resulting trust. The leases, on their face, are granted for consideration. No presumption of resulting trust arises. And, if it did, it would be displaced by a presumption of advancement in the circumstances that the grant was by a father to his child. This is a case in which the father has to rely on an agreement to establish his equitable interest; and, in relying on the agreement which the judge found to have been made, he has to disclose his dishonest or fraudulent purpose.
- In Tribe v Tribe [1996] Ch 107, at page 124D-E (in the passage which Lord Justice Aldous has already set out), Lord Justice Millett treated as settled law the proposition that, neither at law nor in equity, might a party rely on his own fraud or illegality to found a claim or rebut a presumption; but that common law and equity alike will assist him to protect and enforce his property rights if he could do so without relying on the fraud or illegality. Lord Justice Millett described that as “the primary rule”. But he went on to say this, [1996] Ch 107, 124E-F:
- In the present case, application of the primary rule leads to the conclusion that equity should not assist the father by enforcing a trust founded on an agreement which (at the time that it was made) he, himself, intended to deny if it were necessary to do so in order to defeat the claims of his creditors. The father could escape the result to which application of the primary rule must lead if he could invoke the doctrine of the locus poenitentiae. But, in the circumstances that he did subsequently give effect to his original dishonest intent by directing his daughter to exercise the option and take a transfer of the freehold interest in 1996, the doctrine of the locus poenitentiae does not assist him.
- Lord Justice Millett described the question which arose in Tribe v Tribe [1996] Ch 107 as one of legal policy – see his observation at page 133F. If (contrary to my primary view) the judge was right to hold that the daughter accepted the leases in 1986 as trustee or nominee, the same may be said of the question which arises in this case. For the reasons which I have sought to explain legal policy requires that the father must be denied a remedy.
- This dispute between the appellant daughter and her respondent father highlights the technicality of some of the English principles governing illegality, and the importance of the Law Commission’s project on Illegal Transactions: The Effect of Illegality on Contracts and Trusts (Consulatation Paper No 154; ref. 30-188-01).
- The judge rejected the father’s case that the grant of the leases was intended as a device to reduce inheritance tax liability. He did “not accept that an inheritance tax purpose was more than at most a small part of his intention in granting the lease”. I would not myself feel safe in relying upon this as a finding that inheritance tax was in fact any significant part of the father’s purpose. The real or dominant purpose appears by the judge’s next sentence:
- As Aldous LJ has pointed out, the leases in respect of 146 Clapham High Street and The Empire Bingo Club, Guildford Street, Chertsey were granted between the times of the first instance and appellate decisions in the Bass Charrington litigation. The intention of the leases and ancillary agreements was to keep them out of the reach of creditors. The purpose must be viewed in those general terms. Bass Charrington could not be foiled, unless all creditors were. Further, the father can have had nothing particular against Bass Charrington; his only interest in them was as creditors.
- The key factual issue is how the father implemented this purpose in relation to his daughter. Did he grant to her genuine leases which she was to have and hold for her own benefit (cf. Tinker v Tinker [1970] P 136)? Or was it agreed between them that she should hold the leases for or at his disposal, in other words as his nominee. In deciding this issue, whether or not she knew of her father’s purpose in granting the leases is of potential relevance, though not decisive. Discarding as bogus (as the judge did) the letter dated 7th August 1986, the judge’s finding that she agreed to hold the two properties as nominee seems to have rested upon (a) the daughter’s supposed admission written on the letter dated 19th April 1990, (b) the judge’s rejection of the daughter’s evidence that she believed that her father was making a very generous gift to her and (c) both father and daughter’s subsequent treatment of the leases as shams (to use the judge’s word), or in other words as if they did not exist. The judge’s further apparent finding (at TR 7/29-8/4) that the daughter was prepared to co-operate with her father and mother in 1996 in a fraud on the mortgagee banks may also have played a part in the judge’s thinking.
- The first of these factors was the supposed admission. I agree that the judge was wrong to rely on the mother’s signed statement written on the letter dated 19th April 1990 purportedly on behalf of herself and her daughter as an admission against interest by the daughter. At one stage, I felt some doubt about having to determine the factual position in this court, apart from any admission, although neither party suggested any other course. But I have reached the decision that, even without the support provided by the supposed admission, the judge’s conclusion holds good.
- Rejection of evidence given by a witness does not of itself imply the opposite to what he has asserted. A witness may lie or be inaccurate in what is said for many reasons. But there are circumstances in which a rejection as untruthful of an assertion, made by someone who must have known the true position, will indicate convincingly that the opposite is true. Here, the daughter must have known the truth. The judge disbelieved her evidence that she had thought that her father was making a generous gift. She sought to explain the leases as “just a gift and it was a wonderful gift” (TR3/32). She did not suggest, and in the light of her own and her father’s subsequent conduct could hardly have suggested, that the leases had any commercial justification or reality. If she was lying when she gave this evidence, the judge had a strong basis for concluding that the truth must, in the circumstances of this particular case, be that she understood that she was receiving the properties to hold them at her father’s disposal.
- The daughter’s state of mind does not seem to me to have been as fully or satisfactorily investigated in the witness box as might have been the case. This may well have been because she was a most unsatisfactory witness, and in part also because the case put to her by her father (that the leases were entered into to avoid inheritance tax) was itself also untruthful. However, it was clearly put to her that she was not telling the truth about the extent of her knowledge in 1986, and that she understood that she was to hold the leases for her father (see e.g. TR3/33 and 4/16). The judge concluded that she was not telling the truth, and I find little difficulty in seeing why, studying the transcript of her evidence. In the 1990s, she had experienced personal problems and ill-health, but the events in 1986 took place prior to these at a time when she was fit and well. Her evidence at trial would, if accepted, have indicated a remarkable, and to my mind (despite her comparative youth and her father’s over-bearing and evasive character) implausible, lack of knowledge and interest in 1986 in what was going on. She said in oral answers was that there was some discussion in which her father said of the proposed transaction that “It made sense. It’s something that he wanted to do. That’s what he said”, but that she could not remember “word for word” and “he didn’t go into it” and then that “I mean with hindsight I suspect it was probably something to do with the Bass litigation. But at the time I didn’t analyse”. The judge cannot have accepted the truthfulness or accuracy of this evidence regarding her lack of knowledge of the purpose. It contrasts with her further evidence that her mother was in 1986 “looking after her interests” and was keeping her “informed of what she was doing” (TR 3/10-11), in which connection it is clear that her mother knew that the purpose of the leases was to keep the properties out of the hands of creditors (see her solicitors’ letters to her dated 20th and 29th December 1986). Although the judge did not refer to this expressly, the daughter’s evidence also appears to me to be in sharp contrast with her witness statement (which stood as her evidence in chief). There she asserted positively (presumably from personal knowledge) that “It was one problem in particular, I believe, which prompted my father to take this step [transferring the properties into her name]”, that problem being fear of losing the Bass Charrington litigation – see paragraphs 10 and also 26 of her statement. Her particulars of claim asserted similar motivation on her father’s part in respect of both the 1986 leases and the 1996 exercise of her option (paragraphs 3 and 9). Her written opening at the trial said with reference to her father’s case that the leases were executed with a view to avoiding inheritance tax:
- It was evidently also understood that the father would not require payment of the rent purportedly payable under the terms of each lease (and, presumably, that he would indemnify his daughter if he required her to exercise either option to purchase his freehold). Hence the judge’s conclusion that the leases were “shams as between father and daughter. They were intended to be no more”. One may add that, after the options were exercised, there was also no question of any rent being paid by the father to the daughter. Once one rejects as untruthful the daughter’s evidence that all this occurred because her father was in 1986 prepared to make her “a very generous gift” in order to keep the properties in the family and out of his creditors’ hands, the natural inference is, as I have said, that it occurred because she was simply to hold the leases and any interest acquired under them for her father. I do not read this as being inconsistent with the judge’s conclusion that the father “made the grants to his daughter, upon whose compliance he felt able to rely, with the intention that if it served his interest he would treat the grants as gifts, but that if it did not he would claim that the grant was subject to his beneficial interest”. That conclusion postulates that the properties remained, as the judge found elsewhere, at the father’s disposition, with his daughter holding them as a mere nominee.
- In all these circumstances, I consider that the other evidence, apart from the supposed admission, itself justified the judge’s conclusion that there was agreement between the daughter and her father, prior to the 1986 leases, that any interest acquired by the daughter under the leases (including the option to purchase clauses which they contained) should be held on trust for the father.
- The judge said that the father’s intention was “that the claimant should be at most his nominee and effectively that the leases should be available to be used only if required in order to deceive”. They were intended to be shams.” Aldous LJ concludes from this it was a term of the father and daughter’s agreement that the lease would be available to be used only if required in order to deceive. If the daughter was the father’s nominee, I am not sure that there is a place for a term that the leases should “only” be used if required to deceive. On the other hand, I would agree that the purpose of deceiving creditors could only be fulfilled if father and daughter kept quiet about the fact that the daughter was a bare trustee. It may be that this means that silence towards third parties was a term of their agreement, although I am not confident that it is realistic to treat dishonest parties as having purported to contract together to behave dishonestly. I do not, however, consider that the existence of such a term is, at least on the present state of the law, critical. The present legal position (as will appear below) is that a purpose to deceive a third party by means of an agreement to hold on trust may, in some circumstances, itself be capable of rendering the agreement unenforceable by a party to that purpose.
- It is common ground that the leases were effective to pass legal title to the daughter. The issue is whether it is open to the father to set up against the daughter’s legal title her agreement to hold on trust as found by the judge, having regard to the purpose of the leases and associated agreements. This issue has two aspects. The first is whether the father’s case falls in principle within the primary rule of unenforceability, in the modified form in which that rule subsists after Tinsley v Milligan [1994] 1 AC 340. The second is whether, if so, the father can claim the advantage of the locus poenitentiae, an exception to the primary rule now established in an expanded form in Tribe v Tribe [1996] Ch 107. Before the judge, the whole issue of illegality appears to have been concluded by a concession by counsel for the daughter that “Mr Collier is entitled to adduce evidence of dishonest motive in order to rebut the presumption of advancement which would otherwise arise in respect of a transfer to his daughter at an undervalue”. As Aldous LJ has pointed out, this concession went, on its face, only to the admissibility of evidence; and, in a case like the present, it may only be after admitting, and making findings on, the evidence that it is possible to determine whether there was illegality barring the father’s case. On the other hand the primary rule of unenforceability for illegality is itself sometimes described as a rule precluding a party “from leading evidence of an illegal situation” (cf e.g. Tinsley v Milligan, 374F per Lord Browne-Wilkinson). As I see it, counsel’s agreement must have been meant in this wide sense, to indicate to the judge that there was no call to decide any issue of illegality. Hence, the judge did not consider the principles in Tinsley v Milligan, Tribe v Tribe or any other of the cases cited to us. Since the issue of illegality is one of law and any concession by the daughter’s counsel only occurred in final speeches, after all the evidence had been heard, I agree that there is no reason why the concession should not be withdrawn.
- The judge’s reference to the presumption of advancement was on any view in inappropriate terms. It was made in the course of the judgment, before the judge had expressed any conclusion that the leases were shams. The mere grant of leases at an undervalue, but for good consideration, would not give rise to any such presumption. However, given the judge’s findings that the leases were shams, in the sense that no rent or (presumably) other burdens were intended to fall upon the daughter under them, it seems to me that the transfer of a legal interest under them, first as lessee and then (as a result of the exercise of the options) as freehold owner could be regarded as bringing into play the presumption of advancement. In Chettiar v Chettiar [1962] AC 294, Privy Council had to consider a transfer of property by a father to his son made and put into effect for a fraudulent purpose, namely to deceive the public administration into believing that there were two separate properties, each under 100 acres, so that each would be assessed by a District Officer, rather than an Assessment Committee. The transfer had involved the ostensible sale of the property to the son for $7000, but in reality nothing was ever paid, or intended to be paid. That having been proved, the Privy Council spoke of the presumption of advancement as relevant. Likewise, in Tribe v Tribe [1996] Ch 107, there was a signed transfer of shares for a stated consideration of £78,030, which was however never paid or intended to be paid. Both the judge and this court treated the presumption of advancement as applicable.
- Assuming that the presumption of advancement applies, the present position is, I believe, dictated by authority at the highest level. In Chettiar v Chettiar Lord Denning giving the advice of the Privy Council said at pp.301-3:
- The decision and Lord Denning’s reasoning in Chettiar v Chettiar were expressly approved by Lords Jauncey and Browne-Wilkinson (with both of whose reasoning Lord Lowry also agreed) in Tinsley v Milligan [1994] 1 AC 340, 366E, 369A, 372B-C and 375D-376D. The fact that the agreement to hold on trust was made for the illegal purpose of deceiving a third party was fatal to enforcement of the trust. I have to say, however, that the scope of the reasoning is not wholly clear, at least to me. How does one judge whether evidence of purpose is necessary in order to prove a trust clearly and distinctly? Why should the presumption of advancement, which depends upon the precise family relationship (so that, for example, distinctions between a wife or partner, a child or brother become central), play so potentially important a role in determining the enforceability of a transaction between two parties implicated in illegal purpose? Having said that, it does not appear to me possible to draw any sensible distinction on the facts between the purpose which was fatal in Chettiar v Chettiar and the father and daughter’s purpose in the present case. I shall however revert to the possible rationale of the present distinction, together with some vigorous criticism addressed to it in previous authority in this court.
- What then is the position if (contrary to the above) the presumption of advancement is treated as inapplicable in this case? On the face of it, the daughter acquired in her own right first leasehold and later freehold interests in the two properties. To rebut the appearance of outright acquisition, the father had to explain the true transaction. That involved showing that it was agreed that the daughter was never to bear any burden under the leases and was to hold them and any freehold interest acquired on trust for her father. Either because it was necessary in order to know the full terms of the agreement or simply because it was necessary evidentially, the father could not do this, without disclosing the purpose, for which the trust was agreed. This is consistent with the fact that, when he came to plead his case, he found it necessary to assert that each lease “was created in an attempt by the Defendant to avoid Inheritance Tax”, as the immediate prelude to his plea that it was agreed that any legal interest acquired under the lease would be held by the daughter on trust for the father. The purpose that he asserted regarding inheritance tax was, of course, untrue, but the fact that any such assertion was made at all points to his need to support his case that there was a trust by (as he hoped) convincing explanation of its purpose. The question is whether the true purpose, now established by the judgment below, disentitles the father from asserting his beneficial interest in the property.
- The answer under the present law seems to me to follow from the authorities and principles already discussed. First, the position is closely analogous to that existing where the presumption of advancement applies. The daughter’s ostensible leasehold and freehold interests are, like the presumption of advancement, objective ‘legal facts’, which it was incumbent upon the father challenging them to displace. If proof of the purpose of an agreement is necessary to rebut the presumption of advancement, where it applies, it is difficult to see any reason why it should be any less necessary to displace the ostensible legal position deriving from the daughter’s express leasehold and freehold interests. Secondly, the majority in the House of Lords in Tinsley v Milligan expressly preserved what I will call “the reliance principle” – whereby a party cannot found on an unlawful agreement (366F per Lord Jauncey) or rely on his own illegality to prove his equitable right (368G per Lord Lowry and 369D-370C and 375C per Lord Browne-Wilkinson). Lord Browne-Wilkinson contemplated at several points that reliance on illegality could occur where a party had either to assert or to lead evidence of illegality in order to advance a positive case: see 369D and F-G, 371G-H an 372B-C and 374F. The procedural “reliance” test which the House thus accepted is capable of leading to results which take no account of the seriousness of the misconduct, or of both parties’ joint participation in it, compounded on this footing by the daughter’s conduct in seeking to go back on her agreement to hold the properties for him..
- Tinsley v Milligan concerned a situation where there was no presumption of advancement, but the plaintiff had contributed to the purchase price of the property acquired in the defendant’s name. The objective fact of the plaintiff’s contribution gave rise to a resulting trust, which the plaintiff was held entitled to assert, without reference to or need to rely on the illegal purpose for which the property was put in the defendant’s sole name: see 367G-H per Lord Lowry, 371F-G and 376F per Lord Browne-Wilkinson, with whose reasons Lord Jauncey also agreed at 367D. Here there is no equivalent objective fact, and the father’s only prospect of success rests upon proof of the agreement to hold on trust, made for the purpose of deceiving creditors.
- I note however that at pp.370C-D Lord Browne-Wilkinson expressed the principles governing the recognition of legal interests (with which he later equated those governing the recognition of equitable interests) as including this proposition:
- In the present case, Mr Phillips QC for the father also asked us to consider the position if there had been a simple express trust, duly recorded in writing, in respect of the daughter’s leasehold and freehold interests. The requirements of s.53(1)(c) the Law of Property Act 1925 would then have been satisfied, and there would have been no need to prove or give evidence of any contractual agreement. Such a case would, it seems to me, be analogous to that which Lord Browne-Wilkinson had in mind at 37C-D, or indeed to the situation in Tinsley v Milligan itself, where the objective fact of monetary contributions to the purchase price gave rise, prima facie and without proof of more, to a resulting trust. By contrast, in the present case, the father cannot rely on any particular objective fact, but has to assert and prove an oral agreement in order to establish any beneficial interest.
- It is also right to observe that at 376F Lord Browne-Wilkinson spoke of the resulting trust as being established by Miss Milligan
- Millett LJ in the passages identified in the preceding paragraph refers to the possibility of an express declaration of trust, but it seems clear that he had in mind a case such as Mr Phillips asked us to hypothesise, where the father could produce an express written declaration of trust. That is also confirmed by a further passage in Millett LJ’s judgment at 128H-129D. Millett LJ’s hypothesis is a complex one - of circumstances prima facie giving rise to a resulting trust, which the transferee can prima facie rebut by leading evidence that the transferor must have intended to transfer the property outright, since the underlying purpose was to prevent it falling into the hands of creditors and this was the only way that could honestly be done (cf Tinker v Tinker [1970] P 136). But Millett LJ goes on to consider the position if the transferor then sought to rebut that evidence:
- This expresses the same conclusion as that to which I find myself, somewhat reluctantly, compelled by the present state of the authorities. Thus, where a party’s entitlement to a beneficial interest depends upon no more than an agreement entered into for the illegal purpose of deceiving third persons, that party may not be able to assert such entitlement. The line between this situation and cases where he can derive prime facie entitlement from some objectively provable and apparently neutral fact (e.g. payment of or contribution to the purchase price, giving rise prima facie to a resulting trust) can, evidently, be a narrow one. But, even under the new regime introduced by Tinsley v Milligan, this appears to be the distinction dictated by the authorities and supported, as I have said, by the position with regard to the analogous situation of rebuttal of the presumption of advancement.
- If the distinction thus drawn has a principled rationale, it is that the existence of objective and neutral facts preserves a limited distance between the court and the illegality. In my view, however, the effect is little more than cosmetic - in all these cases the court is perfectly well aware of close involvement on the part of both the parties in illegality, and it can hardly be suggested that any real difference in opprobrium exists between the conduct of the successful Miss Milligan and the father in, say, Chettiar v Chettiar or the present case. I therefore strongly sympathise with the criticisms of the present law by the Law Commission (and by Nourse LJ in Lowson v Coombes and Silverwood v Silverwood (1997) 74 P&CR 453). The Australian High Court in Nelson v Nelson has refused to follow, or, in the case of Dawson J, has adopted a severely limited view of the meaning of “reliance” under, what I perceive as the principles in Tinsley v Milligan. I have been tempted to take the same approach as Dawson J., but I come to the conclusion that this is not a course open to me. If English law in this area is to be further refashioned judicially after Tinsley v Milligan, it seems to me that it should be at the highest level. The Law Commission in its Consultation Paper No 154 has expressed a provisional view in favour of legislative intervention, to abandon the “reliance” principle accepted in Tinsley v Milligan and adopt a more discretionary approach.
- In the circumstances, the remaining point is whether the father can circumvent the problem of illegality by reference to the doctrine of locus poenitentiae. This is, speaking generally, an even more difficult area of law, as Millett LJ indicated at p.938F in Tribe v Tribe. If further confirmation of the difficulties were necessary, it is provided by the three illuminating articles which Millett LJ mentions at p.938G-H (by Grodecki (1955) 71 LQR 254, Beatson (1975) 91 LQR 313 and Merkin (1981) 97 LQR 420) and perhaps even by the critique of Tribe v Tribe itself by Professor D. Prentice in Chitty on Contracts vol. 1, para. 17-174. Taking Tribe v Tribe, as I do, as the most recent and an authoritative statement of the law, this court there held withdrawal under the doctrine of locus poenitentiae to be possible, despite the existence of a presumption of advancement, so as to enable recovery from a person into whose names shares had been transferred, with a view to deceiving creditors. There was however no evidence that the transfer had ever been communicated to creditors or relied on or used for this illegal purpose in any way. The shares were in these circumstances recoverable by their transferor.
- The present case raises issues concerning the scope of the illegal purpose, and whether it was carried into effect in such a way and to such an extent as to make it too late for the father to “withdraw” and recover the property as beneficial owner. I proceed on the basis that “genuine repentance” is not required, and that “voluntary withdrawal from an illegal transaction when it has ceased to be needed” suffices: see Tribe v Tribe, 938H per Millett LJ; and also Professor Merkin (above) at pages 428-431. Mr Phillips submits that the original aim was deceive Bass, but, as I have already said, I do not think that this aim can be separated from a necessary wider aim, to deceive creditors generally. Mr Phillips submits that, in either case, that aim must be treated as having expired, since the leases remained in the daughter’s name long after the father’s financial difficulties of the mid-1980s were over. But it is notable that, despite the improvement in his financial position, the father mortgaged the two properties in 1989 without telling the mortgagees about the options contained in the leases, and that he apparently disregarded his solicitors’ advice in April 1990 that “in all the circumstances and bearing in mind your present position we could now safely arrange to surrender the leases”. Further financial difficulties then arose in relation to the mortgagees, each of which appointed receivers during the course of 1994 over the respective property charged to it. In 1995-97, the father and daughter arranged for the daughter to exercise the options, nominally on her own behalf, in order to deceive the mortgagees. The purchase of the freehold of the Clapham property was completed on 15th March 1996, and that of the Chertsey property on 22nd April 1997. The deceit was in each case successful, since, as the judge records, the mortgagees as a result of it only received from the father the option monies (£100,000 in the case of each lease) instead of being able to look to the actual value (which in the case of the Clapham lease at least was and is very much higher) to meet the father’s unpaid indebtedness over and above the amount of the option monies. So far as appears, this deceit was successful, at any rate until after the hearing before the judge. The judge required, and it was made a condition of the order drawn up, that the father should within 14 days give written notification, to those who were immediately prior to 15th March 1996 the mortgagees of the Clapham property, regarding the court’s determination that the beneficial interest was then and remained vested in the father. We were told that this undertaking was honoured. But this cannot alter the historical fact that the purpose of deceiving the father’s creditors was successfully effected in and after 1996.
- The next question is whether the illegal purpose thus effected was the same illegal purpose for which the father’s beneficial interest was created. It was, for the reasons already given, the same kind of illegal purpose – that is, to deceive creditors. The daughter’s title and the trust created in the father’s favour were never terminated. The father must have preferred to leave them in place. One may ask why – if not in case of the residual possibility they might prove useful in relation to any creditors who might exist from time to time, such as the mortgagees to whom the properties were mortgaged from 1989 onwards. Moreover, when further financial difficulties did arise in the mid-1990s, this was how the apparent leases and options were deployed. The exercise of the options to purchase in 1995 was, admittedly, agreed and undertaken for the illegal purpose of deceiving creditors (the mortgagees). If parties put in place machinery for fraud, leave it in place and then so strikingly use it for the purpose of committing (in the event successfully) the same kind of fraud, it would be artificial to treat them as ever having withdrawn from the original scheme. At most any illegal scheme was held in suspension. Not surprisingly perhaps, we were shown no case precisely parallel to the present, but dicta in the cases speaking of withdrawal “before the illegal purpose has been wholly or partly carried into effect” (cf e.g. Tribe v Tribe, p.938C per Millett LJ) must also be read in context, rather than transposed too literally to a special situation like the present.
- In Tribe v Tribe at p. 134A-B Millett LJ said that:
- The interests of innocent third parties at whom an illegal agreement was aimed are therefore in my judgment a legitimate consideration. Indeed, it has been suggested by extension that the precise limits of the exception, in particular the point at which an illegal contract is regarded as “executed” by the effecting of its illegal purpose, should be “at the point whereby recovery will not increase the chances of thwarting the illegal purpose”: see Professor Beatson’s article (above), and its quotation by Professor Prentice in Chitty (above) at paragraph 17-180. The undertaking that the judge required from the father was informed by the same general policy. But, however generous an attitude is taken to the exception, I do not think that it can sensibly cover a situation, where creditors have been successfully deceived over a number of years, by being misled into accepting and treating the proceeds of the exercise of the options as the father’s only interest in the properties. This is so, even though their rights to pursue the father for his outstanding indebtedness remained (so far as appears) unaffected after 1996-97.
- As Aldous LJ has observed, if the daughter succeeds in retaining the Clapham property and the proceeds of the Chertsey property as against her father, the mortgagees may have other, tortious remedies against the daughter and father. Another possibility (although we heard no argument about it) may arise because illegality is a procedural, rather than a substantive bar, capable only of affecting those party or privy to the illegality: see Tinsley v Milligan, 374D-E, per Lord Browne-Wilkinson and Tribe v Tribe, 133C. per Millett LJ. It may perhaps be that innocent third parties in the mortgagees’ position could thus rely upon the father’s beneficial entitlement to, and enforce their claims against, the freehold of the Clapham property still held by the daughter (as well as, perhaps, the proceeds of the Chertsey property), despite the father’s inabilility to do so: see Bessey v Windham (1844) 6 QB 166 (referred to by Professor Merkin (above) at page 435 footnote 53) and its citation of Doe, dem. Roberts v Roberts (1819) 2 B. & Ald. 367, esp. 369, per Bayley and Holroyd JJ.
- On the basis that the daughter was party to the illegal purpose, I have no great liking for the result which we reach. It will (at least temporarily) enable the enjoyment of uncovenanted benefits by Miss Collier. However, I conclude that existing authority binding on this court requires us on this basis to refuse to give effect to Mr Collier’s beneficial interest at his instance, because of the scope of the procedural “reliance principle” recognised in Tinsley v Milligan. It follows that Miss Collier’s appeal succeeds as against her father, by virtue of her apparent ownership following the transfers to her, under the options in the leases, of the freeholds of the Clapham and Chertsey properties.
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM CHANCERY DIVISION
HIS HONOUR JUDGE RICH QC (SITTING AS
A JUDGE OF THE CHANCERY DIVISION)
Strand, London, WC2A 2LL | ||
B e f o r e :
LORD JUSTICE CHADWICK
and
LORD JUSTICE MANCE
____________________
| DIANE JULIETTE COLLIER | Claimant/ Appellant | |
| - and - | ||
| MICHAEL CLAYTON COLLIER | Defendant/ Respondent |
____________________
D. Phillips QC and T. Nesbitt (instructed by Streeter Marshall) for the Respondent
Hearing date : 17th May 2002
____________________
Crown Copyright ©
Lord Justice Aldous:
“I do not accept that an inheritance tax purpose was more than at most a small part of his intention in granting the lease. I am satisfied that he feared being liable for costs in an action against Bass Charrington which he had lost at first instance and in which he was then, as he told me, successful in the Court of Appeal only on a technicality.”
“I have concluded that he [the father] made the grants to his daughter, upon whose compliance he felt able to rely, with the intention that if it served his interest he would treat the grant as gifts, but if it did not he would claim that the grant was subject to his beneficial interest.”
“Dear Daddy,
Should you not decide to sell the above properties elsewhere and transfer them into my name as agreed, they will be held in trust.”
“To M. Collier,
I am confirming to you on behalf of Diana, we are both aware and understand Diana has no legal rights as a tenant to the above property. Also Diana has never occupied or paid any rent to you re these premises. It was always agreed the lease has always been held in trust on your behalf.”
It appeared to have been signed by the daughter’s mother and was stated to have been signed in the presence of the father.
“Having heard the claimant giving evidence of the “generous gift”, which she claims she believes had been made to her, I have no difficulty in disbelieving her and concluding that she had accepted that she should be a mere nominee for the purpose of the transaction and no gift was intended or believed by her.”
“I have accepted that Mr Collier’s intention, at least so far as the tenancies were concerned, was that the claimant should at most be his nominee and effectively the leases should be available to be used only if required in order to deceive. They were shams as between father and daughter. They were intended to be no more. But as is agreed at the Bar, although shams they do have legal effect to pass the legal title to the tenancies which they created and thus to the options that they granted. It follows that their intended effect has to be achieved by treating such title as subject to the trust which Mr Collier asserts, and I so hold. The consequence is that Mr Collier is entitled to retain possession of Southside [Clapham High Street] and, subject to Barclays’ interest, is also entitled to the net proceeds of sale of The Empire.”
“The husband is in an inescapable dilemma. Either he is honest, in which case the house belongs to his wife; or he is dishonest. The registrar has found that he is honest.”
“So it is plain that the husband had the house put into his wife’s name so as to avoid any risk of it being taken by his creditors in case his business was not a success. What is the result in law? In Gascoigne v Gascoigne [1918] 1 K.B. 223, it was held that when a husband put a house in his wife’s name so as to avoid it being taken by his creditors, the house belonged to the wife. The husband could not be heard to say that it belonged to him because he could not be allowed to take advantage of his own dishonesty. That case was applied In re: Emery’s Investment Trusts [1959] Ch. 410; and also McEvoy v Belfast Banking Co. Ltd. [1934] N.I. 67. We were invited by Mr Wheatley to overrule those decisions but in my opinion they are good law.”
“But whether the solicitor gave that advice or not, I am quite clear that the husband cannot have it both ways. So he is on the horns of a dilemma. He cannot say that the house is his own and, at one and the same time, say that it is his wife’s. As against his wife, he wants to say that it belongs to him. As against his creditors that it belongs to her. That simply will not do. Either it was conveyed to her for her own use absolutely: or it was conveyed to her as trustee for her husband. It must be one or the other. The presumption is that it was conveyed to her for her own use: and he does not rebut that presumption by saying that he only did it to defeat his creditors. It belongs to her.”
“It seems to me to follow from the registrar’s finding that he was an honest man, that the husband must have intended that the house should belong to his wife. That is why I say his evidence strengthens the presumption of advancement. As far as I can see, the only possible alternative to what I have just described would be the husband dishonestly putting the house in his wife’s name with the intention of himself having the beneficial interest in it, and also with intention, when he failed in business, to give to his creditors and say quite untruthfully and dishonestly:
‘I have no interest in this house. You can look at the documents, they are plain enough to show that I have none.’
The registrar negatived that dishonest frame of mind and certainly this court would not interfere with that finding. But the only other alternative is the one I first stated, namely that he really intended to and did make the house over to his wife so that he could honestly say to his creditors: ‘It’s not mine’ ...”
“All I want to add is this: since some attack has been made on Gascoigne v Gascoigne [1918] 1 KB 223, I entirely agree with the Master of the Rolls that Gascoigne v Gascoigne was correctly decided as MacAvoy v Belfast Banking. It is trite law that anyone coming to equity to be relieved against his own act must come with clean hands. If in a case such as the present he were to put forward as a reason for being relieved against his own act a dishonest plot on his part, for example, to defraud his creditors the court would refuse him leave and say let the estate lie where it falls.”
“From these two principles there is to be derived the principle invoked by the appellant in the present case, viz., that if A puts property in the name of B intending to conceal his (A’s) interest in the property for a fraudulent or illegal purpose, neither law nor equity will allow A to recover the property, and equity will not assist him in asserting an equitable interest in it. This principle applies whether the transaction takes the form of a transfer of property by A to B, or the purchase of A of property in the name of B.
…
… the existence of the principle has been recognised on numerous occasions, even where it has not been given effect to on the facts of the case in question. In particular, an exception to the principle is to be found in cases in which the illegal purpose has not been carried into effect; but all those cases in which that exception has been recognised have proceeded on the basis that, absent those exceptional circumstances, the principle would have applied.”
“The reason why the court of equity will not assist the claimant to recover his property or to assert his interest in it has been variously stated. It is sometimes said that it is because he has not come to equity with clean hands. This was the reason given by the Lord Chief Baron Sir William Alexander in Groves v Groves, 3 Y. & J. 163, 174 and by Salmon L.J. (with whom Cross L.J. agreed) in Tinker v Tinker [1970] P. 136, 143. Sometimes it is said that the claimant cannot be heard or allowed to assert his claim to an equitable interest, as in Curtis v Perry, 6 Ves. 739, 746, per Lord Eldon L.C.; Childers v Childers (1857) 3 K. & J. 310, 315, per Page Wood V-C and Cantor v Cox 239 E.G. 121, 122, per Plowman V-C. But this is, as I see it, another way of saying that the claimant must fail because he has not come to the court with clean hands. It follows that in these cases the requirements necessary to give rise to an equitable interest are present; it is simply that the claimant is precluded from asserting them. This explains why, in cases where the unlawful purpose has not been carried into effect, the court is able to hold that, despite the illegality, there is an equitable interest to which the claimant is entitled.”
“The law was developing in another direction during the 19th century. There was originally a difference of view as to whether a transaction entered into for an illegal purpose would be enforced at law or in equity if the party repented of his illegal purpose before it had been put into operation, i.e. the doctrine of locus poenitentiae. It was eventually recognised both at law and equity that if the plaintiff had repented before the illegal purpose was carried through, he could recover his property: see Taylor v Bowers, 1 Q.B.D. 291; Symes v Hughes, L.R. 9 Eq. 475. The principle of locus poenitentiae is in my judgment irreconcilable with any rule that where property is transferred for an illegal purpose no equitable proprietary right exists. The equitable right, if any, must arise at the time at which the property was voluntarily transferred to the third party or purchased in the name of the third party. The existence of the equitable interest cannot depend upon events occurring after that date. Therefore if, under the principle of locus poenitentiae, the courts recognise that an equitable interest did arise out of the underlying transaction, the same must be true where the illegal purpose was carried through. The carrying out of the illegal purpose cannot, by itself, destroy the equitable interest. The doctrine of locus poenitentiae therefore demonstrates that the effect of illegality is not to prevent a proprietary interest in equity from arising or to produce a forfeiture of such right: the effect is to render the equitable interest unenforceable in certain circumstances. The effect of illegality is not substantive but procedural. The question therefore is “In what circumstances will equity refuse to enforce equitable rights which undoubtedly exist?”
“It is, therefore, now settled that neither at law nor in equity may a party rely on his own fraud or illegality in order to found a claim or rebut a presumption, but that the common law and equity alike will assist him to protect and enforce his property rights if he can do so without relying on the fraud or illegality. This is the primary rule.
It is, however, also settled both at law and in equity that a person who has transferred property for an illegal purpose can nevertheless recover his property provided that he withdraws from the transaction before the illegal purpose has been wholly or partly performed. This is the doctrine of the locus poenitentiae and it applies in equity as well as at law: see Symes v Hughes (1870) L.R. 9 Eq. 475 for the former and Taylor v Bowers (1876) 1 QBD 291 for the latter. The availability of the doctrine in a restitutionary context was expressly confirmed by Lord Browne-Wilkinson in Tinsley v Milligan [1994] 1 AC 340, 374.”
“In my opinion the following propositions represent the present state of the law. (1) Title of property passes both at law and in equity even if the transfer is made for an illegal purpose. The fact that title has passed to the transferee does not preclude the transferor from bringing an action for restitution. (2) The transferor’s action will fail if it would be illegal for him to retain any interest in the property. (3) Subject to (2) the transferor can recover the property if he can do so without relying on the illegal purpose. This will normally be the case where the property was transferred without consideration in circumstances where the transferor can rely on an express declaration of trust or a resulting trust in his favour. (4) It will almost invariably be so where the illegal purpose has not been carried out. It may be otherwise where the illegal purpose has been carried out and the transferee can rely on the transferor’s conduct as inconsistent with his retention of a beneficial interest. (5) The transferor can lead evidence of the illegal purpose whenever it is necessary for him to do so provided that he has withdrawn from the transaction before the illegal purpose has been wholly or partly carried into effect. It will be necessary for him to do so (i) if he brings an action at law or (ii) if he brings proceedings in equity and needs to rebut the presumption of advancement. (6) The only way in which a man can protect his property from his creditors is by divesting himself of all beneficial interest in it. Evidence that he transferred the property in order to protect it from his creditors, therefore, does nothing by itself to rebut the presumption of advancement; it reinforces it. To rebut the presumption it is necessary to show that he intended to retain a beneficial interest and conceal it from his creditors. (7) The court should not conclude that this was his intention without compelling circumstantial evidence to this effect. The identity of the transferee and the circumstances in which the transfer was made would be highly relevant. It is unlikely that the court would reach such a conclusion where the transfer was made in the absence of an imminent and perceived threat from known creditors.”
Lord Justice Chadwick:
146 Clapham High Street
“If the tenant wishes to purchase the freehold reversion of the Premises and shall give to the Landlord not less than 6 months notice in writing (“the Tenant’s Notice”) expiring not later than the expiry of the said term then the Landlord shall upon the expiration of the Tenant’s Notice and upon payment of the sum of one hundred thousand pounds (£100,000) . . . assume the freehold of the Premises to the Tenant . . . free from incumbrances. . . ”
The lease contemplated assignment of the leasehold interest (and with it, the benefit of the option) in the sense that, although it contained (at clause 2(8)) a covenant not to assign or underlet the whole of the premises without the lessor’s consent, that covenant was qualified by the usual provision that consent was not to be withheld unreasonably.
“The 1986 lease was created in an attempt by the Defendant to avoid Inheritance Tax. Before the lease was made the Claimant and the Defendant agreed that any legal interest in 146 Clapham High Street that the Claimant acquired under the lease would be held by her on trust for the Defendant absolutely.”
At the risk of stating the obvious, an agreement that the leasehold interest be held by the grantee on trust for the grantor is inconsistent with an attempt to avoid inheritance tax by lawful means. If the grant of the lease were to avoid (or reduce) the inheritance tax that would otherwise be payable on the death of the grantor – by reducing the value of the freehold interest which the grantor retained to an amount which was no greater than the option price - it was essential that the leasehold interest – and, in particular, the benefit of the option – should not form part of his estate. The arrangement as pleaded could, of course, be used as a means of evading inheritance tax by unlawful means if it were the intention of both the grantor and the grantee of the lease that, in the event of the death of the grantor during the term of the lease, the existence of the trust should not be disclosed. But, at the outset of his cross-examination, the father denied that he had any intention to evade inheritance tax by an unlawful scheme:
“Q. In 1986, you had an idea to save inheritance tax.
A. Yes, sir.
Q. I assume you did not want to do anything unlawful.
A. No.
Q. It was a perfectly straightforward scheme which, if it worked, might save tax; is that how you put it?
A. Possibly.”
“On 25 April 1996 the freehold legal title of 146 Clapham High Street was transferred to the Claimant. Before the transfer was made the Claimant and the Defendant agreed that after the transfer the freehold legal title of 146 Clapham High Street would be held by her on trust for the Defendant absolutely.”
“1. In so far as it may be material the principal reason why the Defendant executed the 1986 lease was because he was in financial difficulty and wished to divest himself of a substantial interest in the property. Whether he also hoped to avoid Inheritance Duty the Claimant does not know, but if that was his intention it was certainly consistent with an intention to benefit her.
2. The Claimant did not agree that her interest under that lease would be held on trust for the Defendant.”
She denied, also, any agreement, at or about the time of the transfer in 1996, to the effect that the freehold interest would be held on trust for her father – see paragraph 7 of her reply.
The Chertsey premises
“The 1986 Chertsey lease was created in an attempt by the Defendant to avoid Inheritance Tax. Before the lease was made the Claimant and the Defendant agreed that any legal interest in the Chertsey premises that the Claimant acquired under the lease would be held by her on trust for the Defendant absolutely.”
There is no allegation of any subsequent agreement in relation to the Chertsey premises at or about the time of the transfer in 1996. It is common ground that if the father is entitled to succeed in his defence to the appellant’s claim for possession of 146 Clapham High Street on the basis of an agreement made in 1986, then he is also entitled to succeed in his counterclaim in respect of the net proceeds of sale of the Chertsey premises.
The judge’s findings of fact
“. . . he made the grants to his daughter, upon whose compliance he felt able to rely, with the intention that if it served his interest he would treat the grants as gifts, but that if it did not he would claim that the grant was subject to his beneficial interest.”
Second, he held that the appellant:
“. . . had accepted that she should be a mere nominee for the purpose of the transaction and that no gift was intended or believed by her.”
On the basis of those findings the judge concluded, in the passage set out by Lord Justice Aldous:
“. . . that Mr Collier’s intention . . . was that the claimant should at most be his nominee and effectively the leases should be available to be used only if required in order to deceive. They were shams as between father and daughter. They were intended to be no more. But as is agreed at the Bar, although shams they do have legal effect to pass the legal title to the tenancies which they created and thus to the options that they granted. It follows that their intended effect has to be achieved by treating such title as subject to the trust which Mr Collier asserts, and I so hold”
In those circumstances he did not find it necessary to address the father’s allegation that there had been a further agreement at the time of the transfer in 1996.
The issues on this appeal
“. . . for acts or documents to be a “sham”, with whatever legal consequences follow from this, all the parties thereto must have a common intention that the acts or documents are not to create the legal rights and obligations which they give the appearance of creating.”
That passage was described by Lord Justice Bingham in Antoniades v Villiers and another [1990] 1 AC 417, 437, 444G-445D as “the accepted definition of a sham”.
Was there an agreement made before the grant of the leases in 1986?
“Q. Did you have any discussion with your father in the summer or autumn of 1986 about his plans to grant you the leases of these properties?
A. Summer ’86? I can’t remember. The first time I heard about it was a conversation at mum’s house when we were all talking. I mean, I can’t remember if that was the summer month. If it was it would have been the summer. I don’t remember.
. . .
Q. Did you have any direct discussion with your father about his intentions, his plans?
A. I can’t remember.
Q. Is it not the truth, Miss Collier, that your father had explained to you that he was going to grant the leases because he hoped it would create a tax advantage after he had died?
A. Absolutely not. There is no mention of tax, inheritance tax. Absolutely not. Absolutely not.
Q. Was there a discussion between the two of you as to why he was doing it?
A. It made sense. It’s something he wanted to do. That’s what he said.
Q. He told you that?
A. I can’t remember word for word but it was - - no, he didn’t go into great detail about why he - - he wanted me to know why he was doing it, he didn’t, no. I mean with hindsight I suspect it was probably something to do with the Bass litigation. But at the time I didn’t analyse.
Q. So you believed, did you, that your father was making you a gift of those very valuable properties?
A. Yes, I did.
Q. You were aged 22?
A. Yes.
Q. And you were being given properties worth in excess of £1 million?
A. Probably about that.
Q. It was very generous of him, was it not?
A. It seemed so but obviously not because of what’s going on now. Obviously he didn’t intend to give them to me. I truly believed the exact - - you know, it was as I believed it to be.
. . .
Q. . . . I am asking you whether you did not think he was behaving extremely generously?
A. Yes . . . Yes, it was a very generous gift.”
“Q. . . . Your evidence is that although you granted the leases there was a trust.
A. A verbal trust between your client and myself?
Q. Yes A. Yes
Q. So your case is “Really and truly, although I granted the leases, it was still my property. They were both still my properties”.
A. Yes.
Q. “Really and truly, I could have said to Diane at any time, ‘I think I had better get my name back on the deeds, so just give me your leases, if you will, and I will tear them up and we will go back to the beginning’.” . . .
Q. You could have said that.
A. Yes I could have done.
Q. You would have been entitled to say that, on your evidence.
A. Yes, sir.
Q. Because, really and truly, Diane had no interest in the property at all: it was just a paper transaction.
A. That is not quite right, Mr Knott. She would have an interest if I got knocked down by a bus or dropped dead of a heart attack or something like that. That is the whole set up. That is what it was set up for.
. . .
Q. The leases were just paper transactions. You did not tell her that, did you?
A. What did I tell Diane in 1986 and what did I tell her other parent in 1986? “If I die, this might help inheritance tax.”
Q. Never mind “If I die”, that is a different question.
A. Well that is what it was done for, Mr Knott
Q. You did not say to Diane in 1986, did you, “Please understand, I am not giving you anything at all, this is just a paper transaction?
A. It never got into that depth of detailed conversation.
Q. That is not very detailed.
A. Well I am answering your question, sir. It never got into any conversation at all, and it was done mainly, if my memory serves me correctly, through your client’s other parent.
Q. I do not want to be unfair to you. Is your evidence this? You never told Diane it was just a paper transaction.
A. I cannot recall saying those words.
. . .
Q. . . . My question is, did you tell her? Did you explain it to her.
A. I do not know. I would be guessing, and I do not want to guess, sir.”
Although the judge placed no reliance on that evidence, there are, as it seems to me, two points of significance which emerge from it. The first is that the father does not suggest that he did explain to his daughter the purposes which he had in mind in granting the leases. The second is that he rejected the suggestion put to him that the grant of the leases was intended to be “just a paper transaction” under which his daughter was to have no beneficial interest in the property at all.
What were the terms of the agreement, if made?
Can the father rely on the agreement to establish the equitable interests which he claims?
“ . . . if A puts property in the name of B intending to conceal his (A’s) interest in the property for a fraudulent or illegal purpose, neither law nor equity will allow A to recover the property, and equity will not assist him in asserting an equitable interest in it.” [emphasis added]
The true principle is that equity will assist the transferor if he can assert an equitable interest in the property transferred without the need to rely on the fraudulent or illegal purpose – as Lord Browne-Wilkinson (with whose speech Lord Jauncey of Tullichettle and Lord Lowry expressly agreed) explained. Thus, in a case where the transferor can rely on the presumption of resulting trust, he can recover because he does not have to rely on the fraudulent or illegal purpose to establish his equitable interest. The position is otherwise – subject to any locus poenitentiae – where the presumption of advancement displaces the presumption of resulting trust. Two passages in Lord Browne-Wilkinson’s speech make this clear:
“Where the presumption of resulting trust applies, the plaintiff does not have to rely on the illegality. If he proves that the property is vested in the defendant alone but that the plaintiff provided part of the purchase money, or voluntarily transferred the property to the defendant, the plaintiff establishes his claim under a resulting trust unless the contrary presumption of advancement displaces the presumption of resulting trust. Therefore, in cases where the presumption of advancement does not apply, a plaintiff can establish his equitable interest in the property without relying in any way on the underlying illegal transaction.” [1994] 1 AC 340, 371G-H.
“A party to an illegality can recover by virtue of a legal or equitable property interest if, but only if, he can establish his title without relying on his own illegality. In cases where the presumption of advancement applies, the plaintiff is faced with the presumption of gift and therefore cannot claim under a resulting trust unless and until he has rebutted that presumption of gift: for these purposes the plaintiff does have to rely on the underlying illegality and therefore fails.” [1994] 1 AC 340, 375C-D
“It is, however, also settled both at law and in equity that a person who has transferred property for an illegal purpose can nevertheless recover his property provided that he withdraws from the transaction before the illegal purpose has been wholly or partly performed. This is the doctrine of the locus poenitentiae and it applies in equity as well as at law: . . .”
Lord Justice Millett posed the question “Is the doctrine of locus poenitentiae coextensive with and by way of general exception to the primary rule?” After a detailed examination of the authorities, he gave this answer, at [1996] Ch 107, 133G-134B:
“The doctrine of the locus poenitentiae is an exception which operates to mitigate the harshness of the primary rule. It enables the court to do justice between the parties even though, in order to do so, it must allow a plaintiff to give evidence of his own dishonest intent. But he must have withdrawn from the transaction while his dishonesty still lay in intention only. The law draws the line once the intention has been wholly or partly carried into effect. [emphasis added]
Seen in this light the doctrine of the locus poenitentiae, although an exception to the primary rule, is not inconsistent with the policy which underlies it. It is, of course, artificial to think that anyone would be dissuaded by the primary rule from entering into a proposed fraud, if only because such a person would be unlikely to be a studious reader of the law reports or to seek advice from a lawyer whom he has taken fully into his confidence. But if the policy which underlies the primary rule is to discourage fraud, the policy which underlies the exception must be taken to be to encourage withdrawal from a proposed fraud before it is implemented, an end which seems no less desirable.”
Lord Justice Mance:
The facts
“I am satisfied that he feared being liable for costs in an action against Bass Charrington which he had lost at first instance and in which he was then, as he told me, successful in the Court of Appeal only on a technicality”.
“The claimant insists that nothing of the sort was mentioned. The true purpose was (a) to benefit her by way of a generous gift and (b) to put both properties together beyond the reach of the defendant’s creditors, in particular Bass Charrington with whom he was engaged in some heavy litigation”.
The skeleton also refers to the daughter being encouraged in 1996 to exercise her options “against [the] background” of the fathers’ financial difficulties at that time. The picture which her witness statement and skeleton seems to me to give is that she understood at the relevant times both the background to and motivation of both the 1986 and the 1996 transactions.
Illegality – the issue
Illegality – the application of the primary rule
“…. in the present case the plaintiff had of necessity to disclose his own illegality to the court and for this reason: He had not only to get over the fact that the transfer stated that the son paid $7000 for the land. He had also to get over the presumption of advancement, for, whenever a father transfers property to his son, there is a presumption that he intended it as a gift to his son; and if he wishes to rebut that presumption and to say that his son took as trustee for him, he must prove the trust clearly and distinctly, by evidence, properly admissible for the purpose, and not leave it to be inferred from slight circumstances: see Shepherd v. Cartwright [1955] AC 431. The fact that the father received the income does not suffice ….. The father had also to get over this pertinent question: If he intended the son to take as a trustee, why did he not insert on the memorandum of transfer the words “as trustee” and register the trust as he could have done under section 160 of the Land Code?
In these circumstances it was essential for the father to put forward a convincing explanation why the transfer took the form it did, and the explanation he gave disclosed that he made the transfer for a fraudulent purpose, namely, to deceive the public administration ….. Once this disclosure was made by the father, the courts were bound to take notice of it, even though the son had not pleaded it …. in the present case the father has of necessity to put forward,, and indeed, assert, his own fraudulent purpose, which he has fully achieved. He is met therefore by the principle stated long ago by Lord Mansfield “No court will lend its aid to a man who founds his cause of action upon an immoral or illegal act,” see Holman v. Johnson (1775) 1 Cowp 341, 343).”
“a plaintiff can at law enforce property rights so acquired [that is under a contract which is illegal and which would therefore have been unenforceable as a contract] provided that he does not need to rely on the illegal contract for any purpose other than providing the basis of his claim to a property right”.
I find this to be a distinction more easy to state than to apply. Transposed to the context of equitable interests, the passage quoted by itself suggest that a party could always rely on a beneficial title arising under an agreement for the implementation of some illegal purpose (possibly even where the agreement contained an express term so providing). I have considered the judgments of Dawson J. in Nelson v Nelson (1995) 184 CLR 538 and of Robert Walker LJ in Lowson v Coombes [1999] Ch 373, 383F-H, both underlining the distinction between enforcing an illegal contract and recognising that property rights may pass under it. With some reluctance, I conclude that to apply that distinction in the father’s favour in the present context would be inconsistent with the tenor of the House of Lords speeches in Tinsley v Milligan, and, in particular, with the House of Lords’ approval of Chettiar v Chettiar. Lord Browne-Wilkinson’s words were clearly modelled on cases such as Bowmakers v Barnet [1945] KB 65, where title was acquired from Smith under express written agreements, which were unlawful as being in breach of the Defence Regulations. Bowmakers, who had acquired such title, were entitled to assert it against Barnet. The illegally acquired title was in a sense no more than history as between Bowmakers and Barnet.
“by showing that she had contributed to the purchase price of the house and that there was a common understanding between her and Miss Tinsley that they owned the house equally”;
and went on:
“She had no need to allege or prove why the house was conveyed into the name of Miss Tinsley alone, since that fact was irrelevant to her claim; it was enough that the house was in fact vested in Miss Tinsley alone. The illegality only emerged at all because Miss Tinsley sought to raise it.”
The reference to showing “that there was a common understanding …. that they owned the house equally” might be said to open the way to an argument that, even in the absence of any contribution to the purchase price, Miss Milligan could simply have relied upon an underlying agreement to share the beneficial interest in the house. That was a view that Dawson J evidently shared in Nelson v Nelson. Again, it would not seem to me consistent with the general tenor of the majority speeches, or with the analogous principle governing the situation where a presumption of advancement exists. The judgments of this court in Tribe v Tribe treat Tinsley v Milligan as turning on the recognition of a resulting trust (i.e. a trust arising by implication from the objective circumstances): see p.111F per Nourse LJ and pp.124H, 133A and 134F per Millett LJ. The resulting trust was of the type recognised in Gissing v Gissing [1971] AC 886, and under that authority, as I understand it, the mere fact of Miss Milligan’s contribution to the cost of the property gave rise to a prima facie resulting trust, unless Miss Tinsley could in some way displace the intention to create such a trust. So Miss Milligan could rely on the mere fact of her contribution as constituting a sufficient prima facie case of a resulting trust (including a sufficient prima facie case regarding the relevant intention to create one). A later authority to similar effect in this court is Lowson v Coombes.
“The transferor would have to give positive evidence of his intention to retain a beneficial interest and dishonestly conceal it from his creditors, evidence which he would not be allowed to give once the illegal purpose had been carried out.”
Locus poenitentiae
“…. if the policy which underlies the primary rule [of unenforceability] is to discourage fraud, the policy which underlies the exception must be taken to be to encourage withdrawal from a proposed fraud before it is implemented, an end which is no less desirable.”
Conclusions