England and Wales Court of Appeal (Criminal Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CRIMINAL DIVISION)
ON APPEAL FROM WOOD GREEN CROWN COURT
HIS HONOUR JUDGE W PAWLAK
T20080610

		Royal Courts of Justice Strand, London, WC2A 2LL
		24/01/2011

Lord Justice Etherton :

Introduction

1. The short issue on this appeal is whether the Respondent's interest under a standard form Friends Provident Children's Trust, which was set up by his grandfather in August 1999 ("the Trust"), is his "free property" and so part of his "available amount" for the purpose of the confiscation provisions of the Proceeds of Crime Act 2002 ("POCA"). HH Judge Pawlak, when making a Confiscation Order on 10 July 2009 in the Wood Green Crown Court, held that it was not. The Crown appeals against that decision.

The background

2. The Respondent pleaded guilty to 5 counts of possessing a controlled drug with intent to supply, 2 counts of possessing criminal property and 1 count of common assault. In December 2008 he was sentenced to a total of 45 months imprisonment.
3. Directions were made with a view to confiscation proceedings. The confiscation hearing took place on 10 July 2009 before HHJ Pawlak. It was common ground between the parties that the Respondent had a "criminal lifestyle" as defined by POCA because the offences of which he had been convicted are Schedule 2 offences. It was also agreed, and found by the Judge, that the Respondent had benefited from his criminal conduct and that the value of his benefit was £25,854.00.
4. The Court then had to decide the "recoverable amount". For that purpose, the Judge had to decide the value of the Respondent's "free property" as at 10 July 2009. It was common ground that he had assets of £9,422.42. The issue between the parties was whether that was the limit of his assets, or whether his interest under the Trust should also be taken into account. The Respondent contended that it should not, and that the available amount was therefore £9,422.42, and so the Confiscation Order should be for that sum. The Crown contended that the available amount should include the sum of £17,606.54 in respect of the value of the Respondent's interest as a beneficiary under the Trust. If that was correct, the Respondent's assets would exceed the value of the Respondent's benefit from his criminal conduct, and the Confiscation Order would be for £25,854.00, being the amount of that benefit. The Judge accepted the Respondent's contention, and so made the Confiscation Order for £9,422.42. The Crown appeals against that determination.

The legislation

5. The provisions of POCA relevant to this appeal are as follows.
6. Section 6(5), which applies in the present case, provides that, if the defendant has a criminal lifestyle and has benefited from his criminal conduct, the court must decide "the recoverable amount" and make a confiscation order requiring him to pay that amount. The recoverable amount is, so far as relevant to this appeal, defined in section 7 as follows:

"7 Recoverable amount

(1) The recoverable amount for the purposes of section 6 is an amount equal to the defendant's benefit from the conduct concerned.

(2) But if the defendant shows that the available amount is less than that benefit the recoverable amount is—

(a) the available amount, or

(b) a nominal amount, if the available amount is nil."

7. The "available amount" is, so far as relevant, defined in section 9 as follows:

" 9 Available amount

(1) For the purposes of deciding the recoverable amount, the available amount is the aggregate of—

(a) the total of the values (at the time the confiscation order is made) of all the free property then held by the defendant minus the total amount payable in pursuance of obligations which then have priority, and

(b) the total of the values (at that time) of all tainted gifts."

8. The value, for that purpose, is the market value of the property: section 79(2).
9. Section 82 provides that property is free, for these purposes, unless an order is in force in respect of it under any of the legislative provisions specified in section 82(a) to (f). None of those applies in the present case.
10. Property is, so far as relevant, defined in section 84 as follows:

"84 Property: general provisions

(1) Property is all property wherever situated and includes—

(a) money;

(b) all forms of real or personal property;

(c) things in action and other intangible or incorporeal property.

(2) The following rules apply in relation to property—

(a) property is held by a person if he holds an interest in it;

….

(h) references to an interest, in relation to property other than land, include references to a right (including a right to possession).

11. Section 22 enables a receiver or prosecutor to return to court for a new amount to be paid under the Confiscation Order where, among other things, the original amount was less than the benefit but the defendant has acquired further free assets.
12. If a Confiscation Order is made, and is not subject to appeal, the Court may appoint a receiver in respect of "realisable property": section 50(1). Realisable property is any free property held by the defendant, and any free property held by the recipient of a tainted gift: section 83. The Court may confer on such a receiver various powers specified in section 51 in relation to the realisable property, including taking possession of the property, managing or otherwise dealing with it, realising it, and starting, carrying on or defending legal proceedings in respect of it.

The Trust

13. Clause 1 of the "Terms and Conditions" of the Trust specified the beneficial entitlements as follows:

"1. Beneficial Trusts

(i) The Applicant hereby declares that the capital and income of the Trust Fund shall be held in trust for such of the Beneficiaries as shall attain the Specified Age or be living at the expiration of the Trust Period in such shares as the Trustees shall be deed or deeds revocable or irrevocable appoint (regard being had to the law concerning remoteness) and in default of and subject to any such appointment in equal shares per stirpes provided that the Trustees shall not make or revoke any such appointment if to do so would have the effect of increasing the share of any beneficiary who shall have attained the Specified Age.

(ii) The share in the Trust Fund of each Beneficiary shall not vest in him or her absolutely on attaining the Specified Age but shall be retained by the Trustees.

(a) upon trust to pay the income thereof to him or her during his or her life with power at any time or times during the Trust Period to pay transfer or apply the whole or any part or parts of the capital thereof to him or her or for his or her benefit as the Trustees shall in their discretion think fit.

(b) subject as aforesaid upon trust as to capital and income for such of his or her children and remoter issue as shall be living at the expiration of the Trust Period and if more than one in equal shares per stirpes and

(c) subject as aforesaid upon the trusts and with subject to the powers and provisions which are then subsisting in relation to the share or shares of the other beneficiary or beneficiaries and if more than one equally between them.

(iii) Provided that if any beneficiary shall die under the Specified Age during the Trust Period leaving a child or children who shall attain the Specified Age or be living at the expiration of the Trust Period such child or children shall take the substitution and if more than one equally between them the share to the Trust Fund which his her or their parent would have taken had he or she lived to attain a vested interest under sub-clause (1) above.

(iv) Subject as aforesaid the Trust Fund and the income thereof shall be held upon trust for the last of the beneficiaries to die absolutely.

14. By virtue of the definitions in the Trust, the Applicant was the Respondent's grandfather, Brian Laundy; the Beneficiaries are the Respondent, who was 21 at the date of the Confiscation Order, the Respondent's sister Daisy, who was 18 at that date, and their cousin Axel, who was born on 28 May 1996; the specified age is 18; and the Trust Period is 80 years. The value of the trust fund, as at 10 July 2009, was £52,819.62. It is or was apparently all invested in the Friends Provident "Capital Investment Bond", a non-income producing bond.

The judgment

15. The essence of the Judge's decision on the point in issue was that, although the Respondent, having attained 21, had a capital share of one-third of the trust fund, his beneficial interest was not free property because his entitlement to capital was dependent on the exercise of the trustees' discretion under clause 1(ii)(a). The material part of his judgment is as follows:

"I agree and find that this is a closed class of [Beneficiaries]; that the Trustees cannot alienate capital away from him and that he, the defendant, cannot be excluded and, therefore, he will, undoubtedly, receive at least one third of the capital at some time in the future.

This issue, whether I can or cannot include that expectation of benefiting from the trust at some future stage, really turns on the meaning of words in section 9 of the Act; namely, whether he holds that asset today, "then held."

I don't think section 84 really helps me. The thing in action or other intangible or incorporeal property can include the right of a beneficiary under a Trust, but that right has to be exercisable today.

I agree with and so find, Mr Bird's submission that the Trustees have no discretion to alienate him from the property or to pay him anything less than one third of the capital, and that that share will not decrease.

I agree with and find it's not a Jersey discretionary or Red Cross Trust, where total discretion is given to the Trustees not to pay, but I don't find that it is "free property" held by the defendant as of today. Even if his interest is held today, it's not free, because of the discretion under sub-paragraph (ii) (a) of Paragraph 1 of the Terms and Conditions.

This view is supported, in my view, by the fact that Section 22 of the Act enables the Court to reconsider the available amount and to make a new calculation. In fact, where this section, section 22, applies, the Court must make a new calculation and apply Section 9, as if references to the time the Confiscation order is made were to the time of the new calculation, and as if the references to the date of the Confiscation order were to the date of the calculation.

There is no time limit to the making of the Section 22 application; therefore, there is nothing to prevent recovery of the balance of the benefit figure whenever the capital is paid by the Trust."

The Appeal: discussion and conclusion

16. Notwithstanding the Judge's reasoning and the able submissions of Mr Sam Stein QC, for the Respondent, the Respondent's beneficial interest under the Trust is plainly, in our judgment, free property of the Respondent within section 82 of POCA. Essentially for the reasons lucidly articulated by Mr James Brightwell, who appeared with Mr Andrew Bird as counsel for the Crown, the Respondent had a vested life interest in possession in one third of the trust fund at the date of the Confiscation Order.
17. When the Respondent attained 18, the grandchildren eligible as beneficiaries became limited to those then alive, namely himself, his sister Daisy and his cousin Axel. He therefore became entitled to one third of the capital, but it did not vest in him absolutely. It was held on the terms of clause 1(ii) and (iii) of the Trust. Under clause 1(ii)(a) the Respondent became entitled to a life interest in his one third share, that is to say, the right to receive the income from that one third for life. The trustees had power to pay, transfer or apply the whole or part of the capital of his one third share to him or for his benefit, but he had no other right to the capital save in very remote and contingent circumstances specified in clause 1(ii)(c) and (iv).
18. While the Respondent's hope that the Trustees might exercise their power to appoint capital to him was not free property within section 82 of POCA, his vested life interest in one third of the capital of the trust fund undoubtedly was. It was property within section 84(1)(c) and (h) of POCA.
19. Mr Stein submitted that the investment powers of the trustees prevented the Respondent's interest from being an interest in possession. Those powers of investment are set out in clause 3 of the Trust and are in the usual very wide terms conferring on the trustees the same full and unrestricted powers of investment as if they were the absolute beneficial owners of the trust fund. Mr Stein relied particularly on the express power of the trustees under clause 3 "to invest trust monies in the purchase or other acquisition of real or personal property of any kind whether or not producing income..." He submitted that the power to invest all the trust fund in non-income producing assets precluded the Respondent from having an interest in possession because, by virtue of that power, the Respondent did not have and does not have a present right to present enjoyment of any income.
20. In support of that submission, Mr Stein relied upon the decision of the House of Lords in Pearson v IRC [1981] AC 753. The question in that case was whether trustees' power to accumulate income precluded an interest in possession. It was held that it did. Mr Stein referred to passages in the speeches of Viscount Dilhorne and Lord Keith. The question in issue was posed in the following way by Viscount Dilhorne at page 772H to page 773C:

"As to that, there are, it seems to me, two possible conclusions. The first is that the power of appointment under clause 2 not having been exercised, the three sisters on reaching that age acquired interests in possession defeasible should the trustees decide to exercise their power to accumulate income. They were then entitled absolutely to the capital and income of the trust fund in equal shares subject to the exercise of that power. The second is that they never secured an interest in possession for they never acquired on reaching that age the right to the enjoyment of anything. Their enjoyment of any income from the trust fund depended on the trustees' decision as the accumulation of income, They would only have a right to any income from the trust fund if the trustees decided it should not be accumulated or if they failed to agree that it should be or if they delayed a decision on this matter for so long that a decision then to accumulate and withhold income from the sisters would have been unreasonable."

21. Viscount Dilhorne decided in favour of the second alternative. He said at page 774C:

"Clause 3 (a) gives the trustees power to accumulate as they think fit and the sisters' entitlement depends on whether that power is exercised."

22. He concluded at page 775E:

"In my opinion the words "interest in possession" in Schedule 5 should be given their ordinary natural meaning which I take to be a present right of present enjoyment and as in my view the sisters on attaining 21 did not obtain that, this appeal should succeed and paragraphs 1 and 2 of the commissioners' determination should be upheld."

23. Lord Keith said at page 786C/D:

"In the present case Fiona certainly did not have an absolute right to any income of the property as it accrued. At that moment her entitlement was qualified by the existence of the trustees' power of accumulation, to the effect that she had no immediate right to anything, but only a right to later payment of such income as the trustees, either by deliberate decision or by inaction for more than a reasonable time, did not cause to be subjected to accumulation."

24. There is, in our judgment, a plain difference between Pearson and the present case. In Pearson the court was concerned with the effect of a dispositive power, the power of accumulation, which precluded any right to income at all until the trustees had decided not to accumulate; whereas the present case concerns the effect of an administrative power, the power of investment, which cannot preclude the Respondent's entitlement to such income as there is, immediately income is produced by the invested assets. So far as the power of accumulation is concerned, the Revenue's argument in Pearson was recorded as follows at page 756E-G:

"The power to accumulate under clause 3 (a) of the settlement is a power over income which is already in the hands of the trustees. When they receive the income they have a reasonable time in which to decide whether to accumulate it or not. Only if they decide not to accumulate it or they fail within a reasonable time to accumulate it are the principal beneficiaries entitled to the income, that is, to demand payment of the income…. Accordingly in the present case Fiona and Serena were not entitled to demand payment as soon as the trustees received income. The position is the same as if clause 3 contained a power to use income to maintain the three beneficiaries and a trust to accumulate the balance...."

25. The investment clause of the Trust is, as we have said, usual. Mr Stein accepted that the Respondent is entitled to any income which arises, at the moment it arises. It is an administrative power. The fundamental difference in this context between dispositive powers and administrative powers was explained as follows by Viscount Dilhorne in Pearson at page 774H to page 775B:

"These provisions show that Parliament distinguished between the administration of a trust and the dispositive powers of trustees and in my opinion there is a very real distinction. A life tenant has an interest in possession but his interest only extends to the net income of the property, that is to say, after deduction from the gross income of expenses etc. properly incurred in the management of the trust by the trustees in the exercise of their powers. A dispositive power is a power to dispose of the net income. Sometimes the line between an administrative and a dispositive power may be difficult to draw but that does not mean that there is not a valid distinction. In the present case the revenue contended that the power given by clause 21 to apply income towards the payment of duties, taxes etc. which but for the provisions of the clause would be payable out of or charged upon capital was a dispositive power and that this clause alone would prevent the sisters having an interest in possession on reaching 21. I do not think that this is so. I think this clause falls on the administrative side of the line and merely elucidates the meaning to be given to clause 14."

26. A helpful and correct analysis is to be found in Thomas and Hudson on The Law of Trusts (2nd ed) at para 34.09 as follows :

"The discussion thus far assumes that the assets comprised in the settled fund actually produce income. But what if an asset is non-income producing, for instance a life insurance policy or a capital growth bond which pays no dividend or an interest-free loan which has been made out of the trust assets in favour of the income beneficiary? The answer is that the 'present right to present enjoyment', which is the defining characteristic of an interest in possession, includes the right to call for the income, if any [my emphasis], of the settled property and that a beneficiary who would be entitled to call for the income of the settled property if it produced any [my emphasis] is entitled to an interest in possession in such property."

27. There is no doubt, therefore, that the Respondent's life interest in possession in one third of the trust fund is free property within sections 82 and 84 of POCA, and hence realisable property within section 83 of POCA. It is a quite different issue what was its value at the date of the Confiscation Order for the purpose of ascertaining "the available amount" under section 9, and hence "the recoverable amount" under sections 6 and 7 of POCA. Ordinarily, a life interest in possession which is capable of assignment has a value. It can be sold. There is nothing in the Trust which precludes the sale of the Respondent's life interest. As we have said, the trust fund is apparently currently invested in a non-income producing bond, but that does not necessarily mean that the Respondent's life interest has no value. As counsel for the Crown have observed, the trustees have to exercise the power to invest as fiduciaries, fairly having regard to the respective interests of those entitled to capital and to income: Nestle v National Westminster Bank plc [1993] 1 WLR 1260. A purchaser of the Respondent's life interest would be entitled to take steps to enforce that fiduciary obligation of the trustees.
28. There is no expert or other evidence before the Court as to the market value of the Respondent's life interest as at the date of the Confiscation Order. We have to decide what order to make in those circumstances. Section 32(1) of POCA provides that, on an appeal by the prosecutor in respect of a Confiscation Order, the Court of Appeal may confirm, quash or vary the Confiscation Order. Although there undoubtedly is a market for the sale of life interests in possession under trusts, there are complications in the present case. The trust fund is apparently not currently invested in income producing assets. If that is correct, there is a question as to enforcing against the trustees their fiduciary obligations fairly to consider the interests of the person entitled to income. Further, the trustees have a wide discretion under the investment provision, and they must bear in mind the interests of those entitled to capital as well as those entitled to income. It is therefore not easy to predict, even if the trustees did properly fulfil their fiduciary duties under the investment clause, how much income would be produced by the Respondent's one third share.
29. We have to consider the considerable and disproportionate costs of adjourning this hearing, in order to enable the parties to obtain expert evidence as to the market value of the Respondent's interest in one third of the trust fund, and of a further hearing, set against the difficulties and imponderables we have mentioned in establishing the market value of a right to income from a modest amount of capital. Taking all these consideration into account, we do not consider it is in the public interest to prolong these proceedings, and shall therefore confirm the Confiscation Order, notwithstanding the Crown's success on the point of principle.

Conclusion

30. For the reasons we have given, we confirm the Confiscation Order in the amount of £9,422.42