England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

		Royal Courts of Justice Strand, London, WC2A 2LL
		15th October 2007

Mr Justice Norris :

1. This is an action about what should be done with a fund of €127,500 (some £89,000) held in a Swiss bank account. The impression that I have gained from the nature of the pleaded cases, from the evidence which has been exchanged between the parties and from the points taken in argument is that the action owes more to the personal antipathy of the Claimant and the Defendant than it does to legal merit or to commercial good sense. One has the deep suspicion that this action is really now about costs rather than anything else.
2. The uncontroversial facts may be shortly stated. The Claimant and the Defendant are half brothers. Prior to 1993, each of them effectively owned 50% of the shares in a New Zealand company called Santhagens Properties Limited ("SPL"). The Claimant, Mr Lars Wester's, interest was held via a wholly owned company called Westcom Pty Limited ("Westcom"). In 1993, the Defendant, Euan Borland, agreed, for consideration, to transfer his 50% shareholding in SPL to or at the direction of the Claimant. Although the consideration was paid in full, in the event the Defendant transferred only 1% of the shares to the Claimant. Although he had signed a transfer form relating to the balance of 49% and delivered that transfer form to the Claimant, the Claimant for his own reasons did not register the transfer with the company. Since 1993, therefore, 49% of the shares in SPL have continued to be registered in the name of the Defendant, but as trustee on a bare trust for the Claimant.
3. In February 2002, SPL was placed into voluntary liquidation in New Zealand. On 22nd March 2002, the New Zealand liquidator paid to the Defendant (by crediting the Defendant's Swiss bank account) a sum in respect of the distribution due to registered shareholders at the conclusion of the liquidation. The sum paid into the Defendant's Swiss bank account was converted into euros. It is that sum of €127,500 with which this action is concerned. It is, as I have said, common ground that it is held by the Defendant upon a bare trust for the Claimant. In March 2002, the Claimant requested that those funds should be transferred to him, but the Defendant declined to transfer the funds. They remain in his name and under his control in a Swiss bank account.
4. The present proceedings were commenced in March 2006. The present claim asserts that, in retaining the entirety of the fund, the Defendant is acting in breach of trust. The relief sought is a declaration that the Defendant holds the monies in respect of the shares on trust for the Claimant; an order that the Defendant account to the Claimant in respect of those funds and anything else received by the Defendant during the period 1993 to date by virtue of his legal ownership of the shares; and an order that the Defendant do pay to the Claimant the sums found to be due to him on the taking of an account, together with interest.
5. Although the bare trust on which the Defendant holds the funds is not in issue, the Defendant does not by his Defence admit the Claimant's claim. He asserts in paragraph 14.7 that the Claimant's behaviour in failing to effect the share transfer of the 49% gives rise to reasonable suspicions about the Claimant's conduct of the affairs of SPL and, therefore, taints the funds which were disbursed following the liquidation of SPL in 2002. He says that the Claimant's explanations as to what has gone on are contradictory and misleading, so that the Defendant harbours reasonable and real suspicions about whether the funds are tainted by criminal activity. He further says that he has no confidence in the reasons given for the initial deposit of money into his Swiss bank account or the Claimant's intentions in relation to it. The Defendant asserts that he is concerned about the Claimant's conduct, particularly that the Claimant should not have misled the New Zealand tax authorities or anyone else as to the true position so as to implicate the Defendant in potential wrongdoing and subjecting him to some form of liability.
6. In support of those lines of Defence, the Defendant has counterclaimed what he originally called "a right to set-off" or, alternatively, damages. He also claims his costs of and incidental to the present proceedings on an indemnity basis.
7. The present application was issued by the Claimant seeking summary judgment and the striking out of the Defence and Counterclaim. In essence, it is necessary to approach the application as consisting of two parts: first, summary judgment on the claim on the footing that none of the issues raised by the Defendant raises a real prospect of successfully preventing the grant of the relief sought in the claim, namely a declaration, an account and payment on the taking of the account; secondly, summary judgment on the Counterclaim on the footing that the Defendant has no real prospect of successfully claiming his set-off or damages or the costs which he seeks.
8. The two jurisdictions invoked by the Claimant are the jurisdiction to strike out under CPR Part 3 and the jurisdiction to grant summary judgment under Part 24. I propose to approach this case under Part 24, since a substantial part of the submissions was focused upon evidence which has been filed in support of the application and in opposition to it, not on the bare form of the pleaded cases contained in the Particulars of Claim, the Defence and Counterclaim and the Reply.
9. In each case, it is for the Claimant to show that there is no real prospect of success in the lines of Defence and Counterclaim advanced by the Defendant. Any hearing for summary relief is not an occasion for making any findings of fact, in particular findings of fact which impute bad faith to one party or another. I shall, therefore, approach the matter on the footing that the issues can be adjudicated upon without examining the motives of the parties involved in the actions and simply by assessing the actions themselves and their reasonableness.
10. The foundation of the Defendant's claim to retain possession of the bank account notwithstanding a request that he should pay it over to the Claimant is that he is exercising "a right of set-off". In the course of this application, it has become clear that the right that it is sought to exercise is a right of lien. It is not controversial that a trustee, including a bare trustee, has a right to be indemnified against proper costs, expenses and liabilities which he incurs, or to which he is exposed, by reason of his office as trustee. Nor is it controversial that the trustee has a right of lien over trust funds in his hands in support of that indemnity.
11. Mr Clarke, for the Defendant, draws my attention to the decision of Mrs Justice Arden in X v A [2000] 1 All ER 490 at 493 for the convenient summary of the rule, in these words:-

"A trustee has a lien over the trust fund for his proper costs and expenses and these extend to an indemnity against future liabilities."

I, therefore, take my guidance from that statement of principle.

12. It is, however, important to bear in mind that the trustee has the right of indemnity and the right of lien because he is a fiduciary who has control over someone else's property. As Mr Montagu-Smith submitted, this inevitably gives rise to a conflict of interest. I consider it well settled that where a trustee purports to exercise his power of lien over the trust fund, he must take into account the proper interests and concerns of the beneficiaries whose property it is and so exercise that right having regard to their independent proprietary interests.
13. My attention has not been drawn to any authority which deals in detail with the manner in which a lien should be exercised, but I consider that a burden must lie upon a trustee to demonstrate that there are substantial grounds upon which to exercise the lien and that he has taken all reasonable steps to ascertain his liability. Once he has achieved that, it is then for the beneficiaries who are claiming the right to be paid to demonstrate that the objection of the trustee can be overcome. For present purposes, I would adopt the rule, without having heard argument upon it, that it is for the beneficiary to present facts and circumstances to the court that are sufficiently compelling to persuade the court that it is beyond reasonable doubt that the risk to which the trustee adverts is not one which will bring liability home to him. Against that background, I turn to consider the three lines of defence advanced by the trustee in the instant case, the reasons why the Defendant now says that he has held on to the money notwithstanding the request for repayment and which he says, even now, entitled him to continue to hold on to it.
14. The first relates to the trustee's exposure to liability under New Zealand tax laws. The evidence before me indicates that, prior to 1988, SPL had incurred losses of approximately NZ$15,000. Under the relevant New Zealand tax laws, these losses could be used to off-set profits made in the tax year 1991-92 immediately before the voluntary liquidation of SPL. It was, however, a necessary condition for the availability of that relief that there should be a common 49% shareholding by an individual both in the year in which the loss was incurred and the year in which the loss was to be off-set. Accordingly, if the pre-1998 losses were to be available to off-set SPL's tax for 1991-92, the Defendant would have had to be a common shareholder at those two dates, the other shareholding being vested not in an individual but in Westcom. It is this which would appear to lie behind the Claimant's decision to take the transfer of SPL shares to him in 1% and 49% parcels, to register the 1%, which gave him control, but not to register with SPL the 49%. According to the share register, the Defendant, although no longer the beneficial owner, would then be a common shareholder both at the date when the losses were incurred and at the date when the off-set was claimed.
15. The evidence before me suggests, however, that, for the purposes of New Zealand law, it is substantial not legal ownership that is required for this relief to be available. In these circumstances, the evidence suggests that SPL ought not to have claimed off-set relief for its final year. The sum involved as tax was very modest. Taking into account interest, however, it amounted in October 2007 to approximately NZ$45,000. In order for the tax to be recovered, it would be necessary for the New Zealand revenue authorities to restore SPL to the register and then to claim the unpaid tax in the voluntary liquidation. Alternatively, the New Zealand revenue authorities would have to find some direct claim against either the directors or the shareholders. The Defendant wrote to the New Zealand tax authorities to ascertain the position, but he only wrote in June 2007, five years after he had received the money and four and a half years after repayment had been requested and he had been provided with access to the relevant documents.
16. In my judgment, the Defendant was entitled to require to be satisfied as to his exposure under New Zealand tax law. It is not possible to say that when demand was first made of him he should not have investigated the position and satisfied himself as to his exposure arising out of transactions of which he was not aware. However, I consider that he ought to have ascertained the position prior to the commencement of the present proceedings in March 2006. It is not enough for a trustee to say "There may be some tax liability, but I do not know what it is. I am not going to enquire what it is and I shall simply retain the entirety of the fund in my hands without further enquiry." The existence of the potential tax liability at the date when this action was commenced would not have been a proper ground upon which to resist liability to account.
17. Further, in my judgment, because the trustee was entitled to know what his liability was, he could reasonably have taken advice to ascertain that exposure. But again that advice ought to have been taken at the time when he was exercising his lien, not some five years after the issue had arisen. In my judgment, the trustee ought to have submitted to an order for an account at the very commencement of this action.
18. As to the liability that might be brought home to the trustee by means of restoration of the company to the register and an attempt to recover distributed funds, there is no prospect of that ever now occurring. The New Zealand tax authorities have confirmed, in October 2007, as the result of an enquiry from the Claimant (not the Defendant), that they have no intention of restoring the company to the register.
19. As to the alternative indirect means of recovery, the trustee has now taken advice. There are two possible routes whereby he might be exposed to a claim. The first is under section HK 11 of the New Zealand Income Tax Act 1994. This relates to liability imposed on a company director if he enters into an arrangement which results in the company being unable to pay its tax, and it can be concluded (a) that the director should have anticipated that tax would need to be paid and (b) that the purpose of the arrangement was to avoid the payment. This liability attaches to the Defendant in his character as director. It has no bearing on his character as shareholder and is not a liability that he could properly have sought to recover by retaining trust assets in his hands. Moreover, it is the Defendant's very case that he did not know what was going on: so the factual foundation for liability is absent. There is no suggestion that at trial a different picture will emerge.
20. The second method of bringing home liability would be under section 147 of the New Zealand Tax Administration Act 1994. This exposes to liability an agent or officer of the company who by act or omission causes tax evasion to be committed by him. It is common ground before me that, although the Defendant was a director in name, he took no part in any executive actions of the company: so again the factual foundation is entirely lacking, so again the factual foundation is entirely lacking, and will remain so.
21. In my judgment, there is nothing substantial in the trustee's fear that section 147 of the New Zealand Act might expose him to liability in New Zealand, and no one other than the advisers he has now belatedly contacted have suggested such to be the case. Indeed, those advisers themselves do not say that this liability is other than theoretical. It, therefore, seems to me that, in so far as the Defendant asserts that the existence of the potential tax liabilities as at the commencement of this action entitled him to resist an order for a declaration and an account, and the payment over of the sum found due on the taking of the account, that Defence has no real substance.
22. In so far as the Defendant relies on those matters as founding a proper counterclaim for an indemnity in respect of the expenses which he has incurred, I would hold that he is entitled to claim those expenses but only such expenses as might properly have been incurred had he made the enquiry at the time when he ought to have made it and not any additional expenses incurred by reason of his prolonged delay in seeking advice. In those circumstances, I do not think it is possible to give summary judgment dismissing the Counterclaim because there is a real issue as to whether any proper expenses are claimable on the taking of the account.
23. The second line of Defence related to the trustee's concerns that he was exposed to liability under the Proceeds of Crime Act. The provisions of this far-reaching statute are sufficiently familiar for me simply to summarise them. By section 328, a person commits an offence if he becomes concerned in an arrangement which he suspects will facilitate the use of criminal property by another person. A transfer of the money in the Swiss bank account by the Defendant to the Claimant would be such an arrangement. That would depend upon the contents of the Swiss bank account being criminal property. "Criminal property" is defined in section 340 of the Act as "property which constitutes a person's benefit from criminal conduct", "criminal conduct" being defined as "conduct which constitutes an offence in any part of the United Kingdom or would constitute an offence if it occurred there". The only relevant offence could be an offence under New Zealand law for wrongly claiming off-set relief on the grounds that legal ownership of the 49% shareholding did not suffice as a foundation for the claim.
24. Mr Clarke submits that the offence of cheating the public revenue is a crime in England, that the offence does not require a positive act of deceit such as a false representation and that an omission, such as the failure to make a return, may be sufficient where the purpose of the omission is to avoid the payment of money.
25. This short reference to the law does not, in my judgment, cover what the Claimant is alleged to have done. All that can be established on the evidence is that the Claimant deliberately left a 49% shareholding in SPL in the name of the Defendant rather than procuring its transfer to himself in order to found a claim to off-set relief which, on examination, turns out not to be maintainable. I do not think that a reasonable trustee could objectively have had a sound ground for fearing participation in an arrangement falling within the Proceeds of Crime Act by reason of the mistaken claim to off-set relief in New Zealand. It is to be noted that the Proceeds of Crime Act only came into effect in February 2003, after the demand for payment had been made. It, therefore, did not provide a sound ground for refusing to pay in 2002.
26. The Act provides a machinery whereby consent can be obtained. Consent may be either actually obtained or, alternatively, if a disclosure is made but the authorities do not seek to interfere in the transaction, then consent is deemed to have been given within seven days of the disclosure. There is, therefore, a very simple way of drawing to the attention of the authorities any intended transaction and obtaining consent. The Defendant had failed to avail himself of that very simple procedure at any time between 2002 and the commencement of this action. Indeed, when the Claimant asked if disclosure had been made, the Defendant's response was that he was not obliged to tell the Claimant.
27. In these circumstances, the Claimant made his own disclosure and no objection was taken by the authorities to the transfer of the funds. I do not consider that the Defendant's suspicions under the Proceeds of Crime Act provide a sound basis for his refusal to hand over the money when requested to do so or at the commencement of this action. The fear does not seem to me to be measurable, and it could with the simplest of steps have been eliminated. In these circumstances, I hold that the Defendant has no real prospect of successfully establishing that the Proceeds of Crime Act provides a Defence to the Claimant's claim for a declaration, an account and payment due on the taking of the account. Nor does it provide a sound basis on which the Defendant can claim to be reimbursed for costs expended in disposing of this shadowy doubt.
28. The third line of Defence relates to the potential for a claim by a third party to ownership of the money in the bank account. This is not advanced formally as a ground of defence, but is something which the Defendant wishes to place before the court as a possible reason for not making a declaration that the monies in the Swiss bank account are held, as the Defendant himself admits them to be held, on trust for the Claimant. The third party involved is Westcom. The Defendant suggests that no declaration ought to be made unless the court is satisfied that it is the Claimant and not Westcom that is entitled to the Swiss bank account.
29. I am satisfied that it is the Claimant and not Westcom who has that entitlement, because Westcom has disclaimed any interest in the funds in question. In these circumstances, I see no bar to granting summary relief on the claim, but I will order by way of declaration that the Defendant holds the shares and the funds in the Swiss bank account on trust for the Claimant. I will order that the Defendant account to the Claimant for those funds and other monies received in respect of them. I will order that he pay to the Claimant the sum found due on the taking of the account.
30. I must now turn to a separate and independent claim for damages for breach of trust. The Claimant asserts that, given that the property is held upon trust for him, the Defendant has by his conduct wrongfully caused additional costs to be incurred which fall to be borne by the fund. Those additional costs amount to some NZ$12,000. The nature of the case advanced by the Claimant is that, at the time of the liquidation, the liquidators indicated that they anticipated the total costs of the liquidation would be a further NZ$3,000 or thereabouts, but their actual costs have been of the order of NZ$15,000 and that this has been brought about because the Defendant did not immediately acknowledge a liability to transfer the funds.
31. I decline to give summary judgment in respect of this damages claim. I consider that there is a real prospect of successfully challenging this claim to damages for breach of trust. The computation upon which the claim is founded seems to me to be very rough and ready. The evidence showing that it is the Defendant's conduct which has caused these costs to be incurred is scant and there are distinct suggestions in the evidence from the Claimant himself that the liquidators' costs were unreasonably incurred because of acts which they took on their own initiative and not upon the request of the Claimant or in response to anything the Defendant himself had undertaken. I, accordingly, refuse summary judgment under paragraph 4 of the Particulars of Claim.
32. This brings me, finally, to the Defendant's Counterclaim. I refuse to give summary judgment for the Claimant on the Defendant's Counterclaim. I consider, as I have indicated, that the Defendant has a proper claim on the taking of the account or for the costs and expenses which he incurred in taking advice as to his exposure to New Zealand tax. He has no proper claim to reimbursement for the costs which he incurred in investigating and taking advice upon the Proceeds of Crime Act issue, however. His proper claim for costs for taking tax advice seems to me, as I have indicated, to be limited to that which he would have incurred had he taken the advice in time; and there should be excluded on the taking of the account additional costs, if any, incurred by reason of the delay in taking that advice. I, therefore, dispose of the present application in that way, bringing (so far as I can properly do so) the action over this modest sum to a conclusion.
Further legal argument as to costs
33. I should deal with the costs of the application. The application was for summary judgment, both on the Claim and on the Counterclaim. It has succeeded so far as the Claim is concerned but failed in relation to one issue on the Counterclaim. In these circumstances, I propose to order that the Defendant shall pay 80% of the Claimant's costs of the application, to be assessed on the standard basis in default of agreement.
34. So far as the costs of the action itself are concerned, the summary judgment in favour of the Claimant determines the action in his favour. I shall, therefore, order the Defendant to pay the Claimant's costs of the action to date, to be assessed on the standard basis in default of agreement.
35. So far as the Counterclaim is concerned, I shall order that the costs of the Counterclaim be reserved to the conclusion of the taking of the account. The reason for making that separate order is that the Claimant failed on its application for summary judgment on the taking of the account, but the Defendant failed to sustain one of the two principal grounds on which the Counterclaim was advanced. It will not be known until the taking of the Counterclaim to what extent, if any, the retention of the entire fund was justified by the Defendant's claim for costs in relation to taking advice on New Zealand tax. That is the order that I will make in relation to costs.
Further legal argument as to leave to appeal
36. I am going to refuse permission to appeal on both counts. So far as costs are concerned, it is a matter of discretion. Whilst the issues might strike different minds in different ways, I consider that I have carried out the correct exercise in reaching my view about costs.
37. So far as the Proceeds of Crime Act claim is concerned, I see no real prospect of a finding that I have incorrectly applied the law to the question which faced the trustee and faced me on this application, namely whether there was a real prospect of the trustee establishing that he had a substantial ground for objecting to the transfer of the funds either in 2002 or at the time when the action was commenced in March 2006.
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