England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURTS OF JUSTICE
CHANCERY DIVISION

		Royal Courts of Justice Strand London WC2A 2LL
		27th July 2010

MR JUSTICE HENDERSON:

1. This is a claim brought by the trustees of the Wyatt Family Discretionary Settlement, which was made by the First Claimant, Mr Roger Stanley Wyatt, as settlor on 18^th June 2003. The trustees have at all material times been Mr Wyatt, his wife Brenda Jean Wyatt and Mundays Trustee Services Limited.
2. The claim relates to a Deed of Exclusion also dated 18^th June 2003 and executed shortly after the settlement, whereby Mr Wyatt's son Jonathan was irrevocably excluded from benefit under the settlement until the earliest date when no "Restricted Securities," as defined in the Deed, should be comprised in the Trust Fund.
3. By their amended Part 8 claim form the trustees ask the court to rectify the Deed of Exclusion by replacing the word "irrevocably" in clause 1 with the word "revocably". Alternatively, they ask the court to set aside the Deed of Exclusion on the grounds of mistake; and in the further alternative, they ask for a declaration that the Deed of Exclusion is void, or alternatively voidable and such that it ought to be avoided, by application of the rule known as the rule in Hastings Bass.
4. The Defendants to the claim are the five adult children of Mr and Mrs Wyatt, in each case by earlier marriages. The First, Second and Third Defendants are children of Mr Wyatt, namely Lauren Tyrrell, Jonathan and Jonathan's twin brother, Simon Wyatt. The Fourth and Fifth Defendants are daughters of Mrs Wyatt, Lisa-Kate Laarhoven and Anna-Louise Beuren.
5. All five defendants have filed acknowledgements of service saying they do not oppose the claim. In the case of Jonathan, that is hardly surprising: the purpose of the application is to enable him to regain his original position as a beneficiary under the settlement. In the case of the other four defendants, it would prima facie be in their financial interest for Jonathan to remain an excluded person, but they are nevertheless content for the court to grant the relief sought. I shold add that the position was explained to them in letters sent by the Wyatts' solicitors, Mundays LLP, in November 2009. I was also told today by counsel appearing for the trustees, Mr Waterworth, that the question was fully discussed between the five children at a family conference.
6. No further beneficiaries have been joined as defendants, although the question was considered at a directions hearing before Master Teverson on 31^st March 2010, when it was ordered that the claim should in the first instance be referred to a judge in the general list to be considered on the papers. With the benefit of hindsight it is, I think, a little unfortunate that in a case of this nature, involving a Trust Fund which largely consists of shares in private companies but appears to be worth several million pounds, no representative minor beneficiary should have been joined to present argument to the court against the relief claimed. It needs to be clearly understood that claims for rectification, or for relief from the consequences of a mistake, are rarely simple or straightforward, and that the court normally requires full argument on both sides before granting relief. In circumstances where the claim is unopposed, and there is no defendant to present the contrary argument, it is the duty of the trustees to assist the court by ensuring that both sides of the case are fairly presented. This duty is partly a reflection of the fact that trustees owe their duties to all of the beneficiaries alike and not just to those who are now adult and who, for whatever reason, support the claim. However, the duty is also an important part of their duty to the court. If trustees seek the assistance of the court, they must ensure that the court is provided with all the necessary assistance to decide the question, both on the facts and on the law. I was initially concerned whether I could properly proceed to hear the case today, because counsel's skeleton argument in support of the claim was confined to setting out the arguments in favour of granting the relief sought and rather rashly, in my view, described the matter as being "entirely straightforward." There was no review of the possible counter arguments, and only scanty reference to authority, especially in relation to the so-called rule in Hastings Bass.
7. A further unfortunate point was that the skeleton made no reference to the observations of David Richards J in his order of 6^th May 2010, when he directed that the claim was not suitable for disposal on the papers and should be listed for an oral hearing. He then said this:

"Having considered the papers pursuant to paragraph 2 of the order of Master Teverson dated 31^st March 2010, I am very doubtful that either the claim for rectification or the claim to set aside the deed of exclusion on the grounds of mistake is supported by the evidence of the Trustees' intention in executing the Deed. A claim based on the Hastings Bass principle may well succeed, but it requires an oral hearing." (Quote unchecked)

8. It now transpires that this order, or at least those observations by David Richards J, were apparently not transmitted to the claimants' solicitors and therefore never came to the attention of counsel. No blame can therefore attach to counsel for his failure to address them in his skeleton argument, but the omission nevertheless added to my strong general impression that the trustees and their advisers might not have fully appreciated the nature and extent of their duty to the court on an application of this nature. That said, however, Mr Waterworth was able to provide me with all the assistance I required in his oral submissions, and I am satisfied that he has now drawn to my attention all the relevant matters that could reasonably be advanced in opposition to the claim. Despite some misgivings, I was therefore prepared to proceed with the hearing.
9. With this introduction, I will now turn to the terms of the settlement. It was made, as I have said, on 18^th June 2003. The initial Trust Fund consisted of 2,700,000 £1 preference shares, and 200,000 £1 ordinary shares, in a company called Octagon Group Limited ("Octagon Group"). The Beneficiaries were defined in clause 1.4 as excluding any Excluded Person, but subject thereto as meaning the five children of Mr and Mrs Wyatt, whom I have already mentioned, and certain other categories of person as follows: the Wyatts' grandchildren, whether living at the date of the deed or born subsequently within the 80 year Trust Period; the spouses, widows and widowers, whether or not remarried, of such children and grandchildren; Mr Wyatt's two brothers, Paul Wyatt and Hugh Martin Wyatt, and Mrs Wyatt's sister, Margaret Bower, together with their children and remoter issue; charities; and finally, such other persons as might be added under clause 3. Clause 1.5 then provided that Excluded Person should mean any person so constituted under clause 4. Clause 4 was headed "Power of Exclusion," and reads as follows:

"4.1 The Trustees may, with the written consent of the Settlor, at any time during the Trust Period declare by deed that the objects or persons named or specified (whether or not ascertained) in such deed, who are, would or might, but for this clause, be or become Beneficiaries or otherwise able to benefit, as the case may be, shall, in relation to the whole or any part of the Trust Fund, be Excluded Persons.

4.2 The power conferred by sub-clause 4.1 shall not be capable of being exercised so as to derogate from any interest to which any of the Beneficiaries has previously become indefeasibly entitled, whether in possession or in reversion or otherwise.

4.2 Any declaration made pursuant to sub-clause 4.1 may be revocable during the Trust Period, or irrevocable but to take effect before the end of the Trust Period, and shall have effect from the date (not being earlier than the date of such deed) specified in the deed. Any such declaration may specify a date when it will cease to have effect, or an event or occurrence upon the happening of which it will cease to have effect; and from such date the declaration shall cease to have effect."

10. It is convenient at this point to move on to clause 16.1, which sets out the consequences of being an Excluded Person and so far as material reads as follows:

"No discretion or power conferred on the Trustees or any other person by this Deed or by law shall be exercised, and no provision of this Deed shall operate directly or indirectly, so as to cause or permit any part of the capital or income of the Trust Fund to become in any way payable to or applicable for the benefit of ... any Excluded Person ... or the spouse for the time being of ... any Excluded Person ..."

11. I can now return to the operative trusts, which are in a standard discretionary form and, so far as I can see, contain no unusual features. Clause 5.1 contains an overriding power of appointment over capital and income in favour of the Beneficiaries, that power being exercisable at any time during the Trust Period, but only with the written consent of the settlor during his lifetime. There has, to date, been no exercise of that power. Clause 6 then contains a discretionary trust of income during the Trust Period subject to and in default of any appointment under clause 5, and subject also to a power to accumulate income during a 21 year accumulation period. Clause 7 then contains a power to apply capital to or for the benefit of any of the Beneficiaries, such power again being exercisable at any time during the Trust Period. Clause 8 contains a default trust of capital at the end of the Trust Period for such of the children of the Wyatts as are then living, if more than one in equal shares per stirpes; and clause 9 contains an ultimate default trust, vesting immediately, in favour of the children in equal shares absolutely.
12. In order to understand why the Deed of Exclusion was entered into on the same day as the settlement was made, I turn to the witness statement of Mr Wyatt dated 6^th January 2010 which, with its exhibits, constitutes the only evidence before the court. He explains that Octagon is a specialist developer of prestigious homes. It began business in 1980 as Octagon Developments Limited ("Developments"). He became the chairman of Developments in March 1980 and continued to hold that post until his retirement in 2002. Jonathan was also a director of Developments from 30^th March 2001 until his resignation on 28^th February 2006. Jonathan was also a shareholder in Octagon Group, although his shares were eventually bought back by that company in October 2006.
13. Before 1999 Mr Wyatt owned 60 per cent of Developments and the remaining 40 per cent of the shares were owned by the co-founder of the business, a Mr David James. In January 1999 John Laing Homes Limited bought a 20 per cent shareholding in Developments as a strategic investment. At the same time, a number of shares in Developments were issued to senior employees. In 2001 a management buy-out took place as a result of which John Laing Homes increased its shareholding to 30 per cent. At the same time all of the shares in Developments were acquired by Octagon Group, which was a newly formed company, shares in Octagon Group being given to shareholders in exchange for their shares in Developments. At this time, says Mr Wyatt, the parent company of John Laing Homes, namely John Laing plc, intended in due course to form a new residential development company, which would acquire the shares in John Laing Homes, Octagon and another company called Beechcroft Limited. The intention was that this new development company would be floated on the Stock Exchange with the result that Mr Wyatt's shares in Octagon Group would be sold.
14. At the time of the management buy-out in 2001, the Articles of Association of Octagon Group were amended. Articles 10 and 11 of the Articles set out the basis upon which members were entitled to transfer their shares. Under those provisions it was possible for Mr Wyatt to transfer his shares in Octagon Group to so-called privileged relations, or to trustees to hold for the benefit of such privileged relations, but the privileged relations in relation to Mr Wyatt specifically excluded Jonathan. The reason for this, apparently, was to ensure that the balance of power within the company was maintained in the event that Mr Wyatt did not sell his shares to David James. I confess I do not find that explanation entirely easy to understand, but what matters is the fact that those restrictions were plainly contained within the Articles of Octagon Group. There is no need for me to refer to the terms of the Articles in any detail. It is enough to say that Jonathan was clearly excluded as a permissible transferee of Mr Wyatt's shares, and he was also debarred from being a beneficiary of any family trust of those shares which Mr Wyatt might subsequently establish.
15. Returning to Mr Wyatt's statement, he says in paragraph 18:

"In 2003, I decided that I wanted to settle my shareholding in Octagon and my preference shares in the company upon trust for the benefit of my family. I instructed the late Mr Ray Walley, of Mundays Solicitors, to check Octagon's articles of association in order to see whether or not this would be possible. Mr Walley explained that Jonathan was not a Privileged Relation and that, therefore, he would not be permitted to benefit under the proposed trust. Mr Walley's proposed solution to this problem was the inclusion of a provision in the Discretionary Settlement that Jonathan was to be an Excluded Person for so long as the Settlement might hold shares in Octagon Group. He suggested that following any sale of the Group shares, the Trustees would then be able to confer benefits under the Settlement in favour of Jonathan and his children."

16. This advice was evidently accepted, and pursuant to it the Deed of Exclusion was executed. The Deed was made by the trustees of the first part and Mr Wyatt, in his capacity as settlor, of the second part. It was expressed to be supplemental to the settlement, and it recited the provisions of clause 4. Recital (D) referred to the shares in Octagon Group then comprised in the Trust Fund, and continued:

"Such capital holdings and interests in Octagon Group Limited ("The Company") may, as a result of any amalgamation, restructure or rearrangement of capital or the sale of the company's business, become represented by substituted capital holdings or interests in another company or companies and in this Deed the term "restricted securities" shall mean those capital holdings and interests in the company or those substituted capital holdings or interests in another company or companies, but only to the extent that they are not quoted on any recognised securities exchange. Upon any restricted security becoming listed on any such exchange it shall cease to be a restricted security." (Quote unchecked)

Recital (E) then said that the trustees wished to declare the person specified in the second schedule, namely Jonathan, to be an Excluded Person while the Trust Fund contained any restricted securities. The operative provisions then read as follows:

"1. In exercise of the power given to them by clause 4 of the settlement the Trustees hereby irrevocably declare that from the date of this Deed until the earliest date when no restricted securities are comprised in the Trust Fund the Excluded Beneficiary shall be an Excluded Person.

2. The Settlor hereby consents to the above." (Quote unchecked)

17. On the same day, Mr Wyatt also signed a letter of wishes addressed to the trustees. In paragraph 2, under the heading "overall aims", he explained that the settlement had been created as a tax planning exercise and he said that unless and until there was a disposal of the settled shares in Octagon Group it was not his intention that the shares in the settlement should depart from its regime. He added that once there had been a disposal, and more readily realisable assets were comprised in the Trust Fund, he would wish the trustees to give favourable consideration to distributing the funds to their five children in equal shares. In part 3 of the letter, headed "Beneficiaries" he then said this:

"Under the Articles of Association of Octagon Group Limited, Jonathan Wyatt cannot benefit under a "Family Trust" nor can he be a "Privileged Relation." These provisions were inserted in order to obtain the right balance, so as to satisfy the requirements of Laing in particular. On any sale or flotation, their concern will no longer be appropriate and efforts can be made at that point to amend the Articles if necessary.

However, the Settlement has been drafted so as to permit Jonathan to be an Excluded Beneficiary for so long as the Settlement contains shares in Octagon Group Limited. Once there are no such shares (defined as "Restricted Securities") comprised in the Trust Fund there will be no need to exclude Jonathan from benefit and he will automatically cease to be an Excluded Beneficiary.

For so long as Jonathan is an Excluded Beneficiary, he cannot benefit from any other assets of the Settlement either; you should bear this in mind if a proposal is put, to acquire additional assets to add to the Trust Fund."

18. It is abundantly clear both from the Deed of Exclusion and from the letter of wishes that the trustees, with the consent of Mr Wyatt as settlor, deliberately excluded Jonathan from all benefit under the settlement until such time as there should no longer be any Restricted Securities contained in the Trust Fund. That was the only stated event which would bring the exclusion, which was otherwise irrevocable, to an end. The parties envisaged that this would occur upon a sale or flotation of the shares, and no doubt it was the confident expectation of Mr Wyatt and the trustees that the then current negotiations with John Laing Plc would soon bear fruit in that way. Unfortunately, however, nobody seems to have given any thought to what would happen if the planned sale or flotation did not take place, or if the relevant restrictions in the Articles of Octagon Group were subsequently removed without the Restricted Securities leaving the Trust Fund. As Mr Wyatt frankly puts it in paragraph 19 of his statement:

"What Mr Walley did not take account of was the possibility that the restriction imposed by the articles on Jonathan's benefiting under any trust of the Group shares might in the future be lifted. The possibility that John Laing would relinquish its interest in Octagon (and with it, the need for any restriction in relation to Jonathan) simply never occurred to me (or, it seems, to Mr Walley) and we gave it no further thought at the time. Mr Walley's proposal to exclude Jonathan until any sale of the Group shares seemed to me to be an appropriate way of dealing with the matter and I was happy for him to proceed on this basis. Relying on Mr Walley's advice I proceeded to make the Settlement and my fellow Trustees and I then proceeded to execute the Deed of Exclusion in the form advised and prepared by Mr Walley. When deciding to exercise our power of exclusion in this way, the Trustees completely failed to consider what would happen and what would be the effect of the Deed of Exclusion in the event that the articles of association should at some future point be amended in such a way as to remove the restriction on Jonathan's benefiting from a trust of Group's shares. As I have noted above, the possibility simply never occurred to me or my fellow Trustees."

19. I can now briefly describe the subsequent events which have led to the present application. The proposed flotation never took place, and John Laing decided in due course to dispose of its investment in Octagon. In March 2007 a further restructuring took place whereby John Laing's shares were re-acquired by Octagon Group, and the shares in that company were exchanged for shares in a new holding company, Octagon Group Holdings Limited ("Holdings"). As a result, the Trust Fund now principally consists of shares in Holdings instead of shares in Octagon Group. However, there has been no sale or flotation of those shares, and none is currently planned or envisaged. Accordingly, the shares in the Trust Fund are still Restricted Securities, and Jonathan remains excluded as a beneficiary.
20. To complete the picture, on 18^th October 2007 the Articles of Octagon Group were re-amended in such a way as to remove the restrictions previously imposed in relation to Jonathan. Nor are there any equivalent or comparable restrictions in the Articles of Holdings. The original commercial rationale for Jonathan's exclusion has therefore gone, and this has been confirmed in a letter from the chief executive of John Laing plc, sent to Mundays LLP on 24^th July 2009, in which he said that John Laing has no ongoing involvement in Octagon and there is no need for the original restriction in the Articles to be retained.
21. Against this background, I must now consider the three alternative grounds on which the trustees advance their claim. The first two grounds, rectification and setting aside for mistake, may in my judgment be rapidly disposed of, because the evidence simply does not support them. The problem is not that the Deed of Exclusion fails to record the transaction which the trustees intended to carry out, or that it does something which they did not intend to do. It seems to me that the deed had precisely the effect which the trustees meant it to have. It excluded Jonathan from all benefit under the settlement for so long as the shares in the Trust Fund were Restricted Securities, that is to say, unless and until the shares were listed on a recognised exchange. The problem is, rather that the trustees completely failed to address their minds to the position if the flotation did not go ahead, or if the restrictions concerning Jonathan in the Articles of Octagon Group became a dead letter or were removed.
22. The problem, therefore, is one of defective decision making by the trustees and a failure to appreciate all the reasonably foreseeable consequences of what they deliberately chose to do. A failure of that nature may engage the Hastings Bass principle, but a remedy cannot, in my judgment, be found either in the law of rectification or in the general law of mistake.
23. The Hastings Bass principle has been the subject of much recent authority at first instance, and it has come a long way from the case which gives it its name. This is not the occasion for a lengthy or detailed exposition of the subject, not least because that exercise has already been performed in a number of recent cases, including most notably in the judgment of Lloyd LJ, as he had by then become, in Sieff v. Fox [2005] 1 WLR 3811. Furthermore, I was told by Mr Waterworth that the whole subject is due to be revisited by the Court of Appeal in a forthcoming appeal expected to be heard this autumn. I was, however, referred by him to the valuable discussion of the Hastings Bass principle in Lewin on Trusts, 18^th Ed (2008), at paragraphs 29-238 to 254 (pp. 1075 to 1083).
24. A convenient starting point is the restatement of the positive formulation of the principle by Lloyd LJ in Sieff v. Fox at paragraph 49:

"Where a trustee acts under a discretion given to him by the terms of the trust, but the effect of the exercise is different from that which he intended, the court will interfere with his action if it is clear that he would not have acted as he did had he not failed to take into account considerations which he ought to have taken into account, or taken into account considerations which he ought not to have taken into account."

This reformulation makes it clear that the court will interfere with the exercise of a discretion by trustees if, inter alia, they would not have acted as they did had they not failed to take into account considerations which they ought to have taken into account. Furthermore, although the formulation refers to the effect of the exercise being different from what the trustees intended, it is clear from the modern authorities, at any rate at first instance, that a mistake as to the consequences of the exercise of the power will suffice; see Lewin at paragraph 29-244 and the cases there cited. Such consequences are often ones of a fiscal nature, but I can see no reason why a mistake or misunderstanding or oversight about non-fiscal consequences should not also be capable of engaging the principle.

25. So understood, the principle is, in my judgment, well capable of applying in the present case, and I am satisfied on the evidence before me that it would be proper for the court to intervene. The trustees failed to apply their minds to the consequences of the Deed of Exclusion if, for whatever reason, the flotation did not go ahead, or if the relevant restrictions in the Articles of Octagon Group were removed while those shares remained in the Trust Fund. These were clearly very important considerations, which they should have taken into account; and, if they had done so, I am satisfied that they would not have executed the Deed of Exclusion in the form which it took. It is impossible to say how they would have dealt with these eventualities; and since Mr Walley, who advised them, is now unfortunately dead, it is probably not profitable to speculate further about it. What is certain, however, to my mind, is that the deed would have been modified in some way which meant that it would cease to apply, or would become revocable, in circumstances when its original commercial rationale was at an end. Those circumstances have now clearly come to pass, and the continued exclusion of Jonathan is something that the trustees could not sensibly have contemplated if they had given proper consideration to the exercise of the power of exclusion. Nor, it seems to me, is the readmission of Jonathan to the class of Beneficiaries something about which any of the other beneficiaries could have a legitimate complaint.
26. It follows, in my judgment, that the Deed of Exclusion must be set aside. There is an unresolved question whether the effect of the Hastings Bass principle, when it applies, is to make the relevant transaction void or voidable: see Lewin at para 29-249. It is unnecessary for me to resolve this question, because my conclusion would be the same in either case. I will merely say that, in a case of the present type voidability rather than voidness ab initio seems to me to provide a more appropriate solution to the problem. It was necessary that Jonathan should have been excluded as a Beneficiary when he was, and the failure of the trustees lay only in their failure to cater for the circumstances in which his exclusion woulds no longer be required. The preferable solution, therefore, is one which recognises the initial validity of the exclusion, but which permits it to be set aside when the original rationale for the exclusion is clearly spent.
27. The result is that this application succeeds on the third ground relied upon by the trustees.
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