England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
BIRMINGHAM DISTRICT REGISTRY

		Birmingham Civil Justice Centre The Priory Courts 33 Bull Street Birmingham B4 6DS
		23 May 2013

HHJ SIMON BARKER QC :

Introduction

1. 30 April 2013 was to be the first day of a four day trial to determine (1) whether Mr Michael Walden ("C") had a beneficial interest in the property at 16 Farm Road, Leamington Spa ("16 Farm") and, if so, the extent of C's beneficial interest, and (2) whether, in addition or alternatively, C is entitled to be repaid a loan in the sum of £8,000 ("the Loan") together with interest from 29 January 2010.
2. C's interest in 16 Farm was said to result from its purchase on 5 October 1993 by Dennis Walden ("DW") using the proceeds of sale of another property, 37 Archery Road, Leamington Spa ("37 Archery"), in which C claimed to be beneficially interested, subject to the life interests of DW and DW's twin brother, Maurice Walden ("MW"), both of whom are now dead.
3. However, the skeleton argument lodged on behalf of Mr Brian Atkins ("D") by Mr Paul Burton, D's counsel, raised two preliminary points, each of which was said to be a complete answer to MW's case even on his own evidence.
4. In the event, and having regard to the overriding objective, I acceded to Mr Burton's application in respect of one of the two points and, notwithstanding the fact that it was raised very late and, even then, only by reference in Mr Burton's skeleton argument, ruled that it should be argued as a preliminary issue; I directed that that issue be argued on 1 May 2013 and that the trial be adjourned to recommence on 28 May 2013, subject, of course, to the outcome of the preliminary issue.
5. Before turning to the preliminary issue, I should outline the relevant facts, which are not entirely straightforward, and the way in which C formulates his claim.

Outline of the facts and C's pleaded case

6. DW and MW were C's uncles, although C had been brought up as their younger brother. When employed, DW and MW had been in low paid employment; C, on the other hand, had enjoyed a degree of success in business on his own account. In 1971, he had purchased 37 Archery from Edith Walden ("EW"), who had raised C as her youngest child, albeit that she was in fact his grandmother, on terms that EW would continue to live at 37 Archery rent free, and, if they so wished, DW and MW could reside at 37 Archery with their mother.
7. On C's case, in 1975, he considered that his interest in 37 Archery, then valued as a freehold property at £15,000, was potentially vulnerable to his obligations under business loans and in order "to provide a degree of security for … himself and his own children"^[1] he orally agreed to sell and transfer 37 Archery to DW and MW on the following terms ("the 1975 Agreement") :

(1) C would transfer 37 Archery to DW and MW;

(2) the price would be £15,000;

(3) DW and MW would pay such sum as they could afford to raise by mortgaging 37 Archery and legal fees totalling £500 (in the event a total of £7,500 was raised by mortgage and paid to meet these obligations);

(4) the balance of the price (in the event £8,000) would be an interest free loan repayable on the death of the survivor of DW and MW; and,

(5) 37 Archery would be held by DW and MW on trust as follows : (i) DW and MW would hold 37 Archery on trust for C subject to their own life interest therein; (ii) on the death of the first of DW and MW to die, the survivor would continue to have a life interest in 37 Archery; (iii) on the death of the survivor of DW and MW, 37 Archery, or any property representing the same, would be held on trust for C absolutely and, in default, for his three daughters in equal shares; (iv) 37 Archery was not to be sold or leased without C's prior agreement; and, (v) C would pay for the maintenance of 37 Archery Road.

Further, DW and MW each agreed to provide in their wills for the title to 37 Archery to pass first to the survivor of them and thereafter to C and, in default, to his three daughters equally.

8. The 1975 Agreement was implemented on 19 January 1976 by the transfer of 37 Archery to DW and MW and payment as outlined above was funded by a building society mortgage loan secured on 37 Archery.
9. By the Particulars of Claim ("P/C"), C alleges that, in 1977 (sic), and in performance of the 1975 Agreement and/or in reliance on the 1975 Agreement, [C] suffered detriment (1) by giving up his own absolute beneficial interest in 37 Archery for substantially less than its then value; and, (2) by taking on the burden of paying for the maintenance of 37 Archery, an instance of which occurred when C paid for the property to be re-roofed.
10. On 30 January 1978, the 1975 Agreement was recorded in writing ("the 1978 Agreement"). By the P/C, C relies on the 1978 Agreement as an express declaration of trust for the purposes of s.53(1)(b) of the Law of Property Act 1925. C's solicitor caused a restriction to be entered on the proprietorship register in respect of C's interest under the 1978 Agreement.
11. On 12 March1981, MW died leaving a will executed 10 days earlier by which C was appointed executor but which was silent as to 37 Archery and MW's residuary estate. C and DW agreed to "update" the 1978 Agreement to reflect the fact that MW had died, but otherwise to adhere to the terms of the 1978 Agreement, which, C alleges, they then did ("the 1981 Agreement"). The original of the 1981 Agreement has been lost and no copy is available.
12. On C's case, relations between C and DW deteriorated in 1992; in July 1993, DW caused the restriction to be removed; in September 1993, DW sold 37 Archery; and, in October 1993, DW purchased 16 Farm, funding the purchase from the net proceeds of 37 Archery. D accepts that, as from 1992, C became "alienated" from his wider family.
13. On 6 August 1997, DW executed a will devising 16 Farm to D and making no provision for C or, in default, his daughters. C's pleaded case is that this constituted a breach of trust and/or a breach of one or more of the 1975, 1978 and/or 1981 Agreements.
14. DW died on 29 January 2010.
15. Although not referred to in the pleadings, it is common ground that C was adjudged bankrupt on 12 June 1992.

C's formulation of his claim

16. By the P/C C's claim is put in the alternative as follows :

"It is averred that, pursuant to the 1975 Agreement and/or the 1978 Agreement and/or the 1981 Agreement, [C] is entitled to the entire beneficial interest in [16 Farm] : … under an expressly declared trust; and/or under an implied trust as a result of the aforementioned agreements whereby [DW] agreed to leave [37 Archery] (and any property representing the same) to [C] in his will.

Further or alternatively, it is averred that it is unconscionable for [D] to deny that [C] was entitled to a beneficial interest in [37 Archery] and any property now representing the same. [C] is therefore entitled under an equitable estoppel and/or a constructive trust arising as a result of an express, alternatively an inferred, common intention between [C] and [DW] (and formerly [MW])".

D's preliminary issue

17. At paragraph 22 of his skeleton argument on behalf of D, Mr Burton puts in issue C's locus or standing to pursue the claim.
18. Through Mr Burton, D asserts that C's interest in 37 Archery/16 Farm became subject to the official receiver's ("OR") control upon the making of the bankruptcy order and vested in C's trustee in bankruptcy on appointment; that, in consequence, C was divested of such equitable interest as he had in 37 Archery/16 Farm; and, further, that any such interest will not have re-vested in C on his discharge from bankruptcy.
19. Mr Burton relies on C's P/C as verified by a statement of truth that C believes the facts stated in the P/C to be true.
20. For present purposes it is not necessary to know why the point raised as a preliminary issue has been taken at such a late stage. I note from D's witness statement, which is dated 21 June 2012, that D was then aware of C's bankruptcy. Mr Burton has assured me that there is a good explanation why this point was not raised earlier; depending on my decision, D's explanation may be relevant to costs.
21. Mr Glenn Willetts, C's counsel, contends that C's claimed interest is based upon a cause of action in equitable estoppel alternatively a remedial constructive trust and, for reasons which he developed in argument, is not caught by the provisions of the Insolvency Act 1986 ("IA 1986"), and therefore did not vest in C's trustee.
22. The purpose of this preliminary issue hearing is to decide a point of law on facts alleged by C and assumed for present purposes to be true. If C raises an answer to the preliminary issue which appears to be realistically arguable, the case should proceed to a full trial.

IA 1986 provisions

23. S.287(1) IA 1986 provides that, between the making of a bankruptcy order and the vesting of the bankrupt's estate in a trustee, the OR is the receiver and manager of the bankrupt's estate.
24. By s.306(1) IA 1986, a bankrupt's estate vests in the trustee immediately upon the latter's appointment taking effect or, in the case of the OR, on his becoming trustee. Vesting is by operation of law, and no conveyance, assignment or transfer is required (s.306(2) IA 1986).
25. A bankrupt's estate is defined at s.283 IA 1986. Subsection (1) sets out a general definition which is subject to exclusions and limitations provided for by the subsections which follow. The general position is that a bankrupt's estate comprises :

(a) all property belonging to or vested in the bankrupt at the commencement of the bankruptcy, and

(b) any property which by virtue of the following provisions of Part IX (bankruptcy) of IA 1986 is comprised in that estate or treated as falling within (a).

26. At s.436 IA 1986, property is defined non-exhaustively as :

""property" includes money, goods, things in action, land and every description of property wherever situated and also obligations and every description of interest, whether present or future or vested or contingent, arising out of, or incidental to, property".

27. The effect of discharge from bankruptcy is that a bankrupt is released from all bankruptcy debts (s.281(1) IA 1986), but the functions, so far as they remain to be carried out, of the trustee of the bankrupt's estate are unaffected (s.281(1)(a)). The functions of the trustee, whether a trustee in bankruptcy or the OR, are to get in, realise and distribute the bankrupt's estate (s.305(2) IA 1986).
28. It is relevant in the context of this case to note that, for the purposes of the IA 1986, property is defined inclusively in very wide terms which are subject to specified exclusions and limitations identified in some detail. The reason for this approach includes, in particular, providing guidance for the identification of what it is that a trustee may look to get in and realise in order to satisfy, or to go towards satisfying, the bankrupt's debts.

D's contentions on the preliminary issue

29. D contends that (1) the definition of property at s.436 IA 1986 is extremely wide and unquestionably covers a beneficial interest under a trust of land notwithstanding that the interest is not in possession; (2) C's interest in 37 Archery at 12 June 1992 was property within the statutory definition; (3) although not notified to his trustee, C's future interest in 37 Archery vested in the trustee on the latter's appointment by operation of law; (4) C's discharge from bankruptcy had no effect upon the trustee's entitlement; (5) upon the sale of 37 Archery and purchase of 16 Farm, what would otherwise have been C's interest therein became vested in the trustee; and (6) accordingly, C has no locus or standing to seek any of the relief claimed.
30. As to C basing his claim on proprietary estoppel as distinct from assertion of an interest as beneficiary of an express, implied, resulting or constructive trust, Mr Burton relied upon the recent decision of Mr Nicholas Strauss QC in Webster v Ashcroft and others [2012] 1 WLR 1309. In that case, and in so far as relevant to this case, the claimant ("W") alleged that in 1970 his grandfather ("A") had promised his son, W's father, ("V") that if V and his wife lived with and looked after A and his wife and helped to run A's farm, he (A) would bequeath to V his home and certain agricultural land ("the promise"). However, in April 1992, by deeds of voluntary conveyance and gift, A conveyed and gave to his own wife an equal interest as tenant in common in their home and full title to the agricultural land. W claimed that (1) V and his wife had relied upon and, to their detriment, fulfilled the terms of the promise without remuneration and at considerable cost to themselves; and, (2) in consequence, and based on a proprietary estoppel, a constructive or equitable trust had arisen in favour of the residuary beneficiary of V. V had been made bankrupt in December 1992. Two of the defendants sought summary judgment on this claim on the ground that W had no locus to bring the claim. Mr Nicholas Strauss QC held, on the assumption that the promise, reliance and detriment were all established, that V had an interest in A's home and the agricultural land in the form of a right acquired long before 1992; that such right became vested in V's trustee in bankruptcy; and, that W had no locus standi to bring this claim. In so doing, Mr Strauss QC rejected the argument on behalf of W that no property interest arose until the death of the promisor unless the promisor did something inconsistent with the promise during his lifetime to the knowledge of the promisee, and held that this argument confused the right with the circumstances in which it is enforced. The relevant property was not the cause of action but the equity, and the equity came within the definition at s.436 IA 1986 and passed, on V's bankruptcy, to the OR as his trustee.
31. Mr Burton submitted that the facts of Webster v Ashcroft are sufficiently close to be directly analogous to this case and that it is not realistically open to C to contend that he has the necessary locus or standing to bring the claim the subject of this action.

C's answer to D's contentions on the preliminary issue

32. Mr Willetts' submissions focussed on the basis of C's claim, described in his submissions as equitable estoppel and remedial constructive trust (as distinct from common intention constructive trust). For the purposes of the preliminary issue, Mr Willetts made no reference to the fact that the trust claim pleaded on behalf of C (not by Mr Willetts) is based on a common intention constructive trust; and, for the purposes of this application, I disregard that aspect of C's pleaded case.
33. Mr Willetts submitted that whether described by reference to equitable estoppel or a remedial constructive trust, correctly analysed what had been created by the 1975 Agreeement, the 1978 Agreement and/or the 1981 Agreement was no more than a negative personal obligation on the part of DW and MW giving rise to an expectation on the part of C that he would or might in the future acquire property, and such an expectation is something entirely outside the scope of s.436 IA 1986.
34. Mr Willetts posited that what might have happened included that, at some point prior to his death, and for this purpose Mr Willetts assumed an unspecified date before C's bankruptcy, DW, as the survivor of DW and MW, might have made a will and, thereby, a testamentary gift giving effect to the promise the subject of the Agreements. Mr Willetts submitted that, had that happened, it would not have made any difference because the gift did not fall in until 2010, long after C's bankruptcy. However, that did not happen.
35. On the assumed facts, what happened was that by the sale of 37 Archery to DW and MW in January 1976 at a discount greater than 50% on the then market value, C acted to his detriment in reliance on the promise the subject of the 1975 Agreement. The promise thereby became irrevocable and the estoppel arose. The 1978 Agreement (and the 1981 Agreement) merely confirmed what had happened.
36. Mr Willetts noted that C might not have outlived DW and MW, in which case his estate would have received nothing and his daughters would have benefited; alternatively, during C's lifetime the promise might have been made good in some other way and the estoppel would then have fallen away. At the time of C's bankruptcy, the estoppel was no more than something which may only possibly come into existence on some uncertain event in the future. Thus, the equitable cause of action had not arisen as of 1992. All that had happened was that DW and MW had become subject to a negative personal obligation.
37. Turning to the authorities, Mr Willetts relied first upon In re Campbell [1997] 1 WLR 14. In that case, a person who had suffered serious injuries as a result of a criminal assault applied to the Criminal Injuries Compensation Board ("CICB") for an award of compensation; she received an interim payment of £17,850, was later adjudicated bankrupt (in 1990), and was later still awarded £200,000, including the interim payment, (in 1992). Analysing the nature of the CICB award, Knox J noted that there is no right to sue for such an award, or even for recovery of an award once made, and that it was common ground that such an award was merely a 'hope' and not a chose in action. After reciting the definition of property at s.436 IA 1986 and commenting on its circularity, Knox J considered whether money that was prospectively going to be paid if and when an award was made came within the definition of property for the purposes of s.436 IA 1986. Knox J did not accept that property as defined at s.436 was intended to describe anything other than an existing item; in other words, Knox J did not accept that property was "susceptible of referring to something which has no present existence but may possibly come into existence on some uncertain event in the future" (p.17C-E and p.18A-E).
38. Mr Willetts also referred to and relied upon the consideration given, obiter, (p.18E-G) to the owner of a lottery ticket, in respect of which the draw is to take place in the following week, becoming bankrupt and the ticket possibly being in the same category; the argument being that it could not be said that there was a future or contingent interest arising out of or incidental to property because there was no underlying existing property which, or the proceeds of sale of which, were susceptible to the existence of a proprietary interest, even a future one.
39. It appears from the report of Webster v Ashcroft that In re Campbell was not cited in written or oral argument.
40. Mr Willetts submitted that the analogy to be drawn is that, just as the CICB award arose not out of property but out of an injury, so, in the present case, the equity arises out of C having suffered a detriment in reliance on a promise. The equity remained entirely personal until at the earliest DW's execution of an inconsistent will in 1997 or, more logically, given that a will speaks from death, the point at which it became irrevocable, namely DW's death on 29 January 2010. Either way, the relevant event occurred long after C's bankruptcy, and prior to C's bankruptcy there was nothing that could be classified as property within the definition at s.436 IA 1986.
41. Mr Willetts submitted that a significant feature of both equitable estoppel and a remedial constructive trust is that any relief granted is at the court's discretion and is fashioned according to what is necessary to satisfy the claimant's equity. In this context, Mr Willetts referred to the judgment of the Court of Appeal in Pascoe v Turner [1978] 1 WLR 431, in particular at p.436C-E and pp.437C-438H, to the leading judgment of Robert Walker LJ, as he then was, in Gillett v Holt [2001] Ch 210, in particular at p.232D-F and p.235E-F, and to the leading judgment of Mummery LJ in Uglow v Uglow [2004] EWCA Civ 987, in particular paragraphs 8-9 and 29-32. These judgments emphasise that the detriment which has been suffered is to be judged by reference to the time when the promisor has sought to go back on the promise; that, when so doing, the court will stand back and take a broad view of whether what the promisor has done is or is not unconscionable; and, if it is, the court may grant relief by ordering the minimum necessary to satisfy the equity.
42. Mr Willetts also referred extensively to the decision of the House of Lords in Thorner v Majors [2009] 1 WLR 776, and in particular to the speeches of Lord Hoffmann (paragraphs 1, 2, 5 and 7), Lord Scott (paragraphs 14, 19 and 20), Lord Walker (paragraphs 57, 62 and 65), and Lord Neuberger (paragraphs 88,99 and 101). Drawing on the passages referred to, Mr Willetts emphasised that equitable estoppel does not look forward to the future, rather it looks backwards from the moment when the promise falls due to be performed and asks whether, in the actual circumstances of the case, it would be unconscionable for the promisor not to keep the promise.
43. Mr Willetts submitted that for the purposes at least of the cause of action founded in equitable estoppel, the promise made by DW and MW did not create an immediate interest in property but one that arose on the death of the survivor of them or on the occasion of an earlier inconsistent act; and, that that was because equity approaches equitable estoppel by looking backwards and analysing and measuring what in fact happened.
44. Finally, Mr Willetts submitted that Webster v Ashcroft is inconsistent with the decision in In re Campbell and is at odds with binding superior authority as to the nature of an equitable estoppel.

Analysis and conclusion

45. In my view, the flaw in Mr Willetts' argument is that it proceeds on the basis that because examination of an equitable estoppel is a retrospective process, "look[ing] backwards from the moment when the promise falls due to be performed and ask[ing] whether, in the circumstances which have actually happened, it would be unconscionable for the promise not to be kept"^[2], it follows that there is no property until that process may be undertaken. However, the examination in fact being undertaken is one of measurement or valuation of an equitable interest which already exists or has existed.
46. The examination relevant to determining whether the subject matter of the equitable estoppel is property for the purposes of s.436 IA 1986 requires consideration of the circumstances at an earlier point in time, namely as they were at the time of the bankruptcy.
47. The fact that it may not be possible to say, until after the happening of some future contingent event, whether or not an equity has been satisfied and, if not, to identify the minimum relief necessary to satisfy the equity does not mean that the equity did not come into existence, or that it could not have existed, unless and until the future contingent event occurs.
48. The equity comes into existence, if at all, as the result of a promise being made to and relied upon by and a detriment being suffered by a promisee. It is at that point that the promise becomes irrevocable, the equity is recognised, and it is this equity to which the definition of property at s.436 IA 1986 is to be applied.
49. In my judgment, the very fact that DW and MW recognised, by the 1975 Agreement, made orally, and by the 1978 and 1981 Agreements, reduced to writing, that C had the right to direct DW and MW to leave 37 Archery and/or the difference in price (£8,000) to his daughters should he predecease them speaks volumes in this regard.
50. It might have been the case that before the death of the survivor of DW and MW (in the event, 29 January 2010), that C's claimed right might have been satisfied, wholly or in part, in some other way. An example of how partial satisfaction might have occurred is if 37 Archery had required maintenance, but C had reneged on his promise, and DW and/or MW had undertaken the maintenance work or paid for it to be undertaken. That might have affected the extent or value of the equity when it crystallised; but, the possibility of such an event occurring would not have prevented the equity from coming into existence. In short, the fact that a future event may undermine or extinguish what has been promised does not prevent the promise from giving rise to a right or interest recognised as property.
51. By way of analogy, the opportunity to exercise an option within a stated period might be expressed to turn upon a future event entirely outside the control or influence of the parties to the option, the occurrence of which may even be random, but the question of whether or not the option should be classified as property for the purposes of s.436 IA 1986 would not be determined by waiting for the stated period to expire and identifying whether or not the future event occurred and the opportunity to exercise the option arose.
52. In my judgment, an unenforceable award under the CICB is simply not comparable to an enforceable (whether potentially or actually does not matter) negative obligation relating to identified property. The ratio of the decision in In re Campbell is obviously distinguishable from the facts of this case; and, this may well explain why it was not cited in Webster v Ashcroft.
53. A useful way of testing why the prospective CICB award was not property for the purposes of s.436 IA 1986 is to ask rhetorically : at the date of the bankruptcy, was there something which the trustee could get in and realise?
54. As to the comparison with a lottery ticket, upon which Mr Willetts also relied, first, I note that Knox J's remarks were obiter; However, I have some misgivings about the proposition that a lottery ticket and the prize that it may yield might be other examples falling outside property as defined at s.436 IA 1986. A lottery ticket is a tangible object and as such would seem to qualify as property (although its value before the relevant draw is a different question altogether). If that is correct, it would seem to follow that the lottery ticket would vest in the trustee if its owner became bankrupt before the draw. I do not find it easy to see why, without more, if the numbers on the ticket become prize winning when the draw takes place and if the right to collect the prize involves presentation of the ticket, the fact that the draw had not happened when the ticket holder became bankrupt might defeat the trustee's title to the ticket and the prize.
55. Applying a 'get in and realise' test at a point in time when DW and C were both alive (12 June 1992) to the prospect of enforcing the promise of the beneficial interest in 37 Archery as replaced by 16 Farm and £8,000 upon the death of DW provided C outlived him, there was plainly something capable of being got in and realised. Such a prospect or expectancy, with its inherent risk or uncertainty, would be capable of actuarial measure and valuation, alternatively the trustee might wait and see.
56. I therefore conclude that what was promised to C under the 1975 Agreement was, as from 19 January 1976, property as defined at s.436 IA 1986 and that such property came under the control of the OR on 12 June 1992 and vested in C's trustee in bankruptcy upon the latter's appointment.
57. Mr Willetts carefully avoided referring to the other ways in which C's claim had been pleaded, and I have followed that course on the basis that if any line of argument could be identified which is realistically arguable, the trial should go ahead. In my judgment, there is no realistically arguable basis on which C may contend that he has standing to pursue his claim based on equitable estoppel or remedial constructive trust.
58. Although framed as a preliminary issue, D's application was tantamount to a defendant's application for summary judgment. In my judgment, C has no real prospect of succeeding on his claim. The P/C should be struck out.
59. Of course, it does not follow that D is entitled to deal with 16 Farm or £8,000 in DW's net estate in accordance with DW's will.
60. The trial due to commence on 28 May 2013 is vacated. However, there must be a further hearing in this case. To allow time for the parties to consider this judgment and obtain instructions on what, if any, consequential applications to make, there will be a further hearing at 10.30a.m. on 29 May 2013.

Note 1   Particulars of Claim paragraph 12    [Back]

Note 2   Lord Walker in Thorner v Majors, at paragraph 57, citing Hoffmann LJ, as he then was, in Walton v Walton, 14 April 1994 unreported, at paragraph 21     [Back]