Strand, London, WC2A 2LL
B e f o r e :
| In the matter of two Trust Deeds dated 1st October 1940 and 4th November 1940
respectively and both made between Arthur C England and J.W. England & Ors
In the matter of Section 57 of the Trustee Act 1925
PETER WILLIAM SUTTON
MICHAEL FRANCIS COKER
ADAM VERE BALFOUR BROKE
(as the Trustees of the trusts arising under the abovementioned Trust Deeds)
|- and -
LANCASHIRE & YORKSHIRE REVISIONARY INTEREST COMPANY LIMITED
SOUTHGATE INVESTMENTS LLC
MR. C. McCALL Q.C. (instructed by Baker & McKenzie LLP) for the 2nd & 6th Defendants.
MISS B. RICH (instructed by Messrs Martineau) for the 1st, 3rd, 4th & 5th Defendants.
Hearing dates: 27th & 30th November 2009
Crown Copyright ©
Mr Justice Mann :
The Settlement and current beneficiaries
(i) On the death of the last surviving issue of the 4 brothers living at the date of the settlement, the fund was to be divided between the issue of the brothers in the proportions per stirpes 50%, 20%, 15% and 15% respectively.
(ii) Until that death, the income was to be paid equally to the brothers until their deaths, and thereafter (subject to powers of appointment that do not matter for present purposes) the equal shares were to be paid to their children in equal shares per stirpes, with successive generations taking if prior generations failed.
(iii) There were cross-accruer provisions within each stirps, and in favour of the other stirpes if any stirps failed.
i) 29.41% to Jane England and Michael John England (grandchildren of Charles, taken through their father John);
ii) 29.41% to Southgate Investments LLC;
iii) 8.825% to Mrs Jones;
iv) 11.765% to Mrs Worster;
v) 20.59% to the reversionary company referred to above.
The perceived problems in the trust
"It is manifest that an interest in half the income of an undivided fund is quite different from the whole income of a divided half of that fund."
The parties to this litigation accept the view which the trustees have hitherto adopted, which is that the present trusts fall into the former of those categories (proportionate shares of the income of an undivided fund). There are one or two provisions of the Settlement which might be thought to be inconsistent with that, but the overall tenor of the Settlement is to that effect. There is no dispute about that, and having seen the Settlement I agree that that is the correct view of its effect. I shall therefore not set out the wording of the relevant parts of the Settlement in order to make that good.
The Hotchpot issue
The appropriation and advancement points
"57(1) Where in the management or administration of any property invested in trustees any sale, lease, mortgage, surrender, release, or other disposition, or any purchase, investment, acquisition, expenditure, or other transaction, is in the opinion of the Court expedient, but the same cannot be effected by reason of the absence of any power for that purpose vested in the trustees by the trust instrument, if any, or by law, the court may by order confer upon the trustees, either generally or in any particular instance, the necessary power for the purpose, on such terms, and subject to such provisions and conditions, if any, as the court may think fit and may direct in what manner any money authorised to be expended, and the costs of any transaction, are to be paid or borne as between capital and income.
(2) the court may, from time to time, rescind or vary any order made under this section, or may make any new or further order."
It is contended by the trustees, supported by the Southgate beneficiaries, through Mr McCall, that this section can be used to vest a power of appropriation in the trustees despite the fact that such a power is not, on its face, quite like any of the transactions listed in section 57. Miss Rich did not take a contrary position. It is said that an appropriation would be expedient, and would be an act of "management or administration" for the purposes of that section. It is further submitted that a number of authorities support that proposition.
"This therefore being a case where partition cannot be effected under any power vested in the trustees by the trust instrument or by law, I am entitled to consider whether it is expedient and ought to be carried into effect. If so I can authorise the trustees to effect it under the Trustee Act, 1925, s. 57, provided that I am satisfied that it cannot be effected in any other way.... Now here the evidence justifies me in saying that partition is expedient, and I will confer power on the trustees to make a partition. But I cannot at present approve the particular partition proposed. The trustees can either partition on their own responsibility or can come again with full evidence to obtain the Court's approval to this particular partition."
Farwell J was not apparently troubled by the idea that a power of appropriation would vary beneficial interests and go beyond the concepts of management and administration. However, those concepts troubled Goff LJ in Re Freeston. That was a case in which there was a perpetual gift to charity (and not a case in which there was to be an ultimate capital distribution). One of the two charities entitled to share the income questioned a partition of the fund that had been carried out by trustees and in that context drew the distinction that I have referred to in the citation appearing above, holding that its case fell into the first category (a share of the income of an undivided fund). At page 752 Goff LJ considered whether the partition could be effected under section 57 and said:
"Mr Baker next argued that such a transaction as we are considering could be effected under section 57 of the Trustee Act 1925, but the court cannot act under that section if what it is asked to do would vary the trusts, and therefore this cannot be varying the beneficial interests. But that does not seem to me to carry him anywhere either. The first inquiry would be whether it does or does not vary the beneficial interests and if one comes, as in my judgement one must come, to the conclusion that it does, then it would be a case where the court could not authorise it under that section."
It is apparent from the report that Re Thomas was cited by counsel, but Goff LJ does not refer to it, which is at first sight curious. The statement looks as though it is a blanket statement that section 57 cannot be used to confer a power of appropriation because such an act would potentially vary the beneficial interests, and that cannot be done under that section. He makes no attempt to reconcile Re Thomas. It is therefore useful to consider in a little more detail what Goff LJ actually held.
"The effect of the appropriation in 1950, if it was valid, was to displace that trust [of a moiety of the income] and substituted a trust under which the foundation was entitled to the income of the severed moiety of the corpus of the fund. It is said on behalf of the college that the appropriation was mere administration. I do not think it was. In my opinion it was an alteration of the beneficial interests. The right to one moiety of the income of a fund is quite a different thing from the right to the income of a severed moiety of the fund. And the difference is not just a technicality. The advantages from the point of view of investment and administration in keeping a large fund intact may be substantial." ( 1 WLR 120 at page 127-8.)
Since it altered the beneficial interests it could not be done under the statutory powers relied on in that case, which did not allow the alteration of such interests. He does not deal with section 57, but his analysis of the effect of the appropriation is an important starting point for considering what Goff LJ was saying.
"Not only did the legislature do neither of those things, but it did not even mention beneficial interests from the beginning of the section to the end, or give the slightest indication that it was intending to give power to vary or interfere with such interests or intermeddle with them in any way - except to the extent that they might incidentally be affected by the exercise of the powers which the section does in terms confer." (counsel's emphasis)
What counsel sought to extract from this passage is that if a power of apportionment can be classified as administrative or managerial (which they say it can) then it can be conferred if its exercise brings about only an incidental effect on beneficial interests. Mr McCall drew attention to the fact that this passage was expressly approved in the House of Lords (in the decision in Re Chapman  AC 429).
"23. That being so, it would follow that the jurisdiction exists of what is proposed here by way of transaction for the partition of the Trust into sub-funds is in essence to be regarded as administrative but not dispositive in nature, as being expedient in the interests of the administration or management of the trusts.
24. Even though the transaction would expressly and directly involve the partition of the Trust Fund into three sub-funds and so fundamentally alter the structure of the Trust, I am satisfied that the predominant purpose and practicalities are essentially administrative in nature. This is primarily for the reason already mentioned - that the sub-funds will remain governed by the trusts of the Z Trust [ie the trust in question] and so there are not intended to be any alterations of the respective beneficial interests.
25. There perhaps will, nonetheless, be some unintended, unforeseen and incidental change to the practical beneficial entitlements. This may be in the sense envisaged in [Freeston] where it is said 'it is manifest that an interest in half the income [(of an undivided fund)] is quite different from the whole income of a divided part of that fund.'
26. Put another way, the idea is that as a single larger fund when invested could potentially yield more than the combined income of three equal sub-funds derived from it; a one-third interest in the single fund could be worth more than the full interest in any of its sub-divisions.
27. While such a potential diminution in benefit must be recognised; I accept, on the authority of the case law, that while the jurisdiction given to the Court by section 63 [ie the equivalent of section 57] does not involve a power to vary or interfere with or intermeddle with the existing beneficial trusts; there is to be recognised an acceptable exception to the extent that beneficial interests might be affected, but only incidentally affected, by the proper exercise of the powers which the section of the Law does in terms expressly confer. This - I add merely in parenthesis here - notwithstanding the contrary views expressed, but only obiter, by Goff LJ in [Freeston]."
He went on to consider Downshire and said:
"In my view, [the citations from Downshire] embody an exception which the Court recognised as necessarily arising from the performance by trustees of administrative powers which are fiduciary and discretionary in nature and which - as some earlier and later cases show - could often entail in their proper exercise, an overlap between the pure management of trust assets with administrative actions taken genuinely in the interests of the trust as a whole but which could incidentally affect beneficial interests."
He gives some examples, and specifically refers to Re Thomas. At paragraph 40 he expresses the view that in the case before him any potential alteration or interference with beneficial interests was a necessary incident of the proper management and administration of the trust, and at paragraph 41 he expressly emphasises:
"that here no alteration of the beneficial interests or entitlements are [sic] contemplated."
" that, if the sub-fund election had taken effect, no person would be a beneficiary under both the sub-fund settlement and the principal settlement." (paragraph 8)
If there were an appropriation without more, then this condition would not be fulfilled because of the cross-accruers within the stirps. It will be remembered that the beneficiaries under each stirps are potentially beneficiaries under others if the others die out. If the beneficiaries under any one stirps die out before the distribution date, then the other beneficiaries under the other stirpes pick up the interests under the expired stirps. It is those interests which have to be extinguished, so far as the Southgate stirps and its beneficiaries are concerned, if an election were to be validly made.
i) So far as Christopher's cross-accruer rights in respect of Richard's share in the fund are concerned, there is to be an advance so that they are held for Christopher absolutely free of contingency. The same is to be done mutatis mutandis for Richard's cross-accruer rights in Christopher's part. Thus each holds an accelerated absolute interest in that part of the fund, and (I think) that is intended to exclude the other beneficiaries from this part of the fund.
ii) Christopher's cross-accrual rights in relation to the rest of the fund are to be advanced so that they are held by him free from any contingency but on trust to be held on the same trusts as would have applied to them had he and Richard died without issue as at the date of the resolution. The effect of that is said to be that those rights are held thenceforth for the benefit of the remaining family members free from any rights that Christopher might have in them. The same is proposed for Richard's cross-accrual rights in the rest of the fund.
"Trustees may at any time or times pay or apply any capital money subject to a trust, for the advancement [etc]"
(a) the money so paid or applied for the advancement or benefit of any person shall not exceed altogether in amount one-half of the presumptive or vested share or interest of that person in the trust property
(b) if that person is or becomes absolutely or indefeasibly entitled to a share in the trust property the money so paid or applied shall be brought into account as part of such share " (my emphasis)
Thus a distinction is drawn between an interest in the trust property on the one hand, and the trust property itself on the other. An advancement under the section deals with the latter. The proposal of the trustees deals with the former. What they are proposing is a variation of the trusts to exclude contingent interests, not the application of "capital money [property] subject to a trust". Mr McCall (who was the principal proponent of this point) was unable to show me any authority which justified, or even illustrated, a transaction of this kind under section 32. All he could manage was some examples which, so far as they bore on the point, assumed that which they set out to prove. In the absence of authority my view is that the transaction cannot be done by the trustees under section 32. That view is supported by the definition of advancement in Lewin at paragraph 32-01:
"The general purpose of a power of advancement is to enable trustees in a proper case to anticipate the vesting in possession of an intended beneficiary's contingent or reversionary interest by raising money on account of his interest and paying or applying it immediately for his benefit. By doing so they release it from the trusts of the settlement and accelerate the enjoyment of his interest "
What is proposed in this case is nothing like that. I therefore decline to make an order giving the trustees liberty to carry out that part of the scheme.
"Payment of tax
The Trustees may pay tax liabilities (and interest on such tax) in relation to the trusts under this Settlement even though such liabilities are not enforceable against the Trustees"