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Cite as: [2016] EWHC 1132 (Ch)

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		Neutral Citation Number: [2016] EWHC 1132 (Ch)
		Case No: HC-2013-000240

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

Rolls Building,
Royal Courts of Justice
Fetter Lane, London, EC4A 1 NL

13/05/2016

B e f o r e :

MR JUSTICE HENDERSON
____________________

Between:

	Alan Hamilton	Claimant
	- and -
	(1) Carolyn Hamilton (2) Douglas Smith	Defendants

____________________

Mr Steven Thompson QC and Mr Owen Curry (instructed by Suttons Solicitors) for the Claimant
Mr David Halpern QC and Mr Hamid Khanbhai (instructed by Hughes Paddison) for the First Defendant
Hearing dates: 12, 15 – 19, and 24 February 2016
____________________

HTML VERSION OF JUDGMENT
____________________

Mr Justice Henderson:

Introduction and background

In January 1939 the late David Hamilton (then David Zwingerman) ("David") escaped from Nazi Germany to England as an unaccompanied child under the Kindertransport programme. He was 15 years old. His sister, Hannah, tried to go with him on the same train, but was refused permission to travel because she was over the age of 16. During the war, she and both their parents were murdered in the Holocaust. These terrible events had a deep psychological impact on David for the rest of his life. He never returned to Germany, and after forging a successful career in business in England (first in the garment trade, and then as a property investor) he died in London on 10 February 2007, aged 83.

David was survived by his widow, Laura, their two children (Alan, born in August 1947, and Carolyn, born in November 1951), and four grandchildren (Alan's son Andrew, and Carolyn's three daughters by her first marriage to David Yates which was dissolved in about 1988). Shortly after Alan's birth, David adopted the English surname of Hamilton.

Alan has made his career as a global tax accountant. He has lived and worked in New York City since 1974, and is now a partner of Hamilton & MacAvery CPA's (i.e. Certified Public Accountants), which has its office on Madison Avenue. He and his partner offer professional tax services for both corporate bodies and individuals. Earlier in his career, Alan was a partner in KPMG, again in New York. Despite his background, he has never been a specialist in domestic UK tax law. Since the 1980s, his specialism has been international taxation.

Carolyn, by contrast, has made her career in England, although in recent years it has involved much travel abroad. She is a distinguished law academic, specialising in children's rights. For many years she was a member of the Law School at the University of Essex, where she taught family law, child law and human rights. She retired in 2011, and was granted the title of Professor Emeritus. She also qualified as a barrister in 1997 and then practised part-time for about 10 years. Since leaving practice, she has held a number of senior posts in the legal world related to her areas of expertise, and has also worked extensively for the United Nations. She has been the CEO of the Children's Legal Centre since 1995, but her work is now almost entirely with the UN, where she provides technical assistance to governments of developing countries, conducts research and publishes work on children's rights.

While she was at the University of Essex, Carolyn met and married Professor James ("Jim") Gobert. This marriage broke down in 2006, and was terminated by decree absolute of divorce in December 2008. The financial settlement was agreed and finalised by consent in November 2008.

At the date of his death, David was a wealthy man. His London property portfolio alone, held by a private company (Hamilton & Ray Limited) in which he owned 39% of the shares, was worth about £12 million. By his Will dated 6 March 2006 ("the Will"), David appointed his solicitor, Douglas Smith of Tarlo Lyons, and Carolyn as his executors and trustees. Subject to various legacies, including a legacy of £500,000 to his widow and generous legacies to members of his staff, he left the residue of his Estate (defined as "all my property of every kind, wherever situate") to be held upon trusts for the primary benefit of Alan and Carolyn in equal shares. Under the trusts applicable to each share, Alan and Carolyn had a life interest in income, with remainder to their respective children. The trustees also had wide dispositive powers, including an overriding power of appointment over each fund, and power to enlarge the life interests of Alan and Carolyn into absolute interests.

I now come to a matter which lies at the heart of the present case. In December 1995 David took steps which led in February 1996 to the establishment of a foundation (or "stiftung") in Liechtenstein, called the Rainbow Foundation ("Rainbow" or "the Foundation"). It is common ground that all the necessary formalities for this purpose were complied with, and that a foundation under Liechtenstein law has separate legal personality. Under the original regulations of Rainbow, David was "solely entitled to the enjoyment of the foundation's assets and its income during his lifetime", and after his death Carolyn was to be wholly entitled. The funds which David initially placed in Rainbow were apparently the proceeds (or part of the proceeds) of sale of a clothing business in Hong Kong, previously carried on through a local subsidiary of Hamilton & Ray Limited. Later on, probably between about 1999 and 2002, further funds were added representing the proceeds of sale of certain properties in Berlin of which restitution had been made to the Hamilton family by the German government. By the date of David's death, the total value of the funds held in the Foundation, notionally converted into sterling, was approximately £3.25 million.

Rainbow's assets were originally invested and/or deposited with Union Bank of Switzerland ("UBS"). David also had personal accounts, both named and unnamed, with UBS, and he subsequently opened similar personal accounts with United Mizrahi Bank ("UMB") in Switzerland. As well as holdings in various major currencies, investments of Rainbow's assets were made in bonds and stocks and shares, including some UK shares.

In 2004, the Foundation's assets were divided into two parts, labelled A and B. Under new regulations dated 19 July 2004, David remained solely entitled to enjoyment of the whole of the assets during his lifetime. After his death, Carolyn would be solely entitled under Part A (comprising Part A of Rainbow's account at UBS) and Alan would be solely entitled under Part B (comprising Part B of Rainbow's account at UBS, together with an account opened in Rainbow's name at UMB). Further regulations were made on 8 April 2005, which may for present purposes be ignored. By the date of David's death, Part B of the UBS account was empty, and had effectively dropped out of the picture.

David was habitually secretive about his financial affairs, and he never disclosed the existence of Rainbow or his personal Swiss bank accounts to his English professional advisers. Nor did he disclose their existence to the UK tax authorities ("HMRC" or "the Revenue"), or enter any income or gains derived from them on his annual tax returns. It is important to note, however, that (until a few days before his death) David retained his German domicile of origin, and was therefore entitled to be taxed on any foreign income or gains on the remittance basis. In colloquial terms, he was a "non dom". He must have been aware, at least in general terms, of what this entailed, because he had at least one other foreign source of income (a bank account in Germany), which he did disclose, and in or about the late 1990s he remitted to one of his UK companies the proceeds of sale of one of the German properties, thereby giving rise to a lengthy enquiry by the Revenue.

The precise extent to which Alan and Carolyn knew about the existence and value of Rainbow before their father's death is in issue, but it is not in dispute that Carolyn knew a good deal more than Alan, not least because she accompanied her father on two trips to Zurich in 2004 and early 2006 and met the key personnel who managed Rainbow's accounts, Mr Roger Althaus at UBS and Mr Josef Rhein at UMB. Carolyn was also shown at UBS a statement of account, or summary statement of assets, which indicated that Rainbow's funds were held in a range of currencies and investments.

Shortly after their father's death, Alan and Carolyn decided not to divulge the existence of Rainbow to Carolyn's co-executor, Mr Smith. Mr Smith was by then a partner of Blake Morgan LLP. Within a few days of David's death, Alan and Carolyn attended a meeting at Mr Smith's offices. He handed them a sealed envelope which David had given him. Inside was a letter for each of them, stating that they were entitled to assets in Switzerland. Nothing was said by either of them to Mr Smith about the Foundation or the Swiss bank accounts, even though Mr Smith asked them standard questions for the purposes of filling in a probate questionnaire, including questions about foreign or undisclosed assets.

A few weeks later, probably on 23 March 2007, Alan and Carolyn travelled to Switzerland and went to UBS to meet Mr Althaus. They were shown into separate rooms, and were each told about their share of the assets in the Foundation. Carolyn's share amounted to approximately £2.2 million, but Alan's amounted to only some US $2.06 million, which at the then rate of conversion of $1.96 to the £ meant that it was worth about £1.05 million. In other words, her share was worth about twice as much as his.

On the way home, Alan asked Carolyn about the size of her share. She admits that she gave an untruthful answer, which was designed to give the impression that her share was somewhat smaller than his. Alan, for his part, said truthfully that he had received about $2 million. Thereafter, each of them took steps to transfer his or her share into a separate foundation in Liechtenstein, and later in 2007 Rainbow was dissolved. In May 2009, Carolyn with the advice of her Swiss lawyers transferred her share from Liechtenstein to a foundation in Panama called the Alexina Foundation.

There matters would probably have rested, had Carolyn's divorced husband, Professor Gobert, not decided to apply to reopen their divorce settlement on the grounds of material non-disclosure. This took place towards the end of 2009, and prompted Carolyn to inform her personal accountant, Mr Derek Levy, about her share in Rainbow and the undisclosed income which she had been receiving from it since her father's death. Since Carolyn has at all material times had an English domicile, she does not qualify for taxation on the remittance basis, and on any view this income should have been disclosed by her in her tax returns. Mr Levy was also advising the executors on tax issues, and he had been David's personal accountant since 2001. Before that, Mr Levy had acted for one of David's companies from the mid-1990s.

Mr Levy correctly and properly appreciated that full disclosure had to be made by Carolyn to the Revenue, and he advised her accordingly. He advised her to make disclosure under the favourable terms of the recently introduced Liechtenstein Disclosure Facility ("the LDF"), which HMRC had announced in September 2009. The LDF enabled UK taxpayers to declare previously unreported liabilities arising from overseas assets, and to elect for taxation at a composite rate of 40% together with interest and a penalty (save in cases of innocent non-disclosure) of 10% of the unpaid tax. In return for this, broadly speaking, any risk of prosecution for tax evasion was eliminated, and HMRC agreed to accept the composite rate tax in satisfaction of all relevant outstanding tax liabilities, including liability to inheritance tax ("IHT") and capital gains tax ("CGT") as well as income tax.

Carolyn's disclosure under the LDF included income tax and CGT for which she was potentially liable as David's executor, as well as tax owed by her personally since his death. In September 2010 Mr Levy proposed to HMRC that the amount payable at the composite rate should be £200,816, which HMRC accepted. This sum comprised (a) the income tax which should have been paid on UK-source income from investments held in Part A of Rainbow in the last six years of David's life, with interest but no penalties (which cannot be levied on a deceased person), and (b) the income tax for which Carolyn was liable from the date of her father's death, with interest and penalties. Carolyn paid the full amount, and was reimbursed by the estate for the amount referable to David's lifetime, which was £140,535.

When she made her disclosure to Mr Levy, Carolyn was apparently under the misapprehension that she was the only beneficiary of Rainbow after her father's death, and that the provision which he had made for Alan was contained in a separate foundation called Treotto. Carolyn had not at this stage seen the 2004 regulations of Rainbow, which divided it into Parts A and B. For this reason, Mr Levy had not consulted Alan before making the LDF disclosure on Carolyn's behalf. In June 2010, however, Carolyn told him for the first time that David had established a second foundation of which (as she thought) Alan was the beneficiary following his death. Mr Levy then contacted Mr Smith, and in July 2010 they agreed that Mr Levy would contact Alan, which he then did. The intention was to propose a further disclosure under the LDF in relation to Alan's share of the offshore assets, to deal with any taxable income during David's lifetime, subject to the usual six year time limit, and with any inheritance tax due on the undisclosed assets.

Negotiations ensued with Alan, in the course of which the true position about the division of Rainbow into Parts A and B became known to Carolyn and her advisers. In May 2011, Mr Levy, on behalf of the executors, made a further LDF disclosure in respect of Part B, but in September of that year HMRC informed Mr Levy that no further income tax was payable on dividends received in David's lifetime, because any such claim had to be made within three years of the date of death. HMRC could have protected their position by raising protective assessments before 5 April 2011, but they had failed to do so. Furthermore, HMRC confirmed that the claim to the composite rate option by Carolyn had covered all taxes due both in her capacity as an executor and as a beneficiary. This apparently meant HMRC had concluded that no inheritance tax was due on either her or Alan's share of the undisclosed assets, and HMRC formally confirmed this in writing on 7 October 2011.

I pause to note what an astonishing outcome this was. At the time when he established Rainbow, David indubitably had a deemed UK domicile for IHT purposes, having been resident in the UK for at least 17 out of the previous 20 years of assessment: see section 267(1)(b) of the Inheritance Tax Act 1984 ("IHTA 1984"). On the assumption (which would have been hard to resist) that the establishment of Rainbow created a settlement, within the very wide definition of that term in section 43(2) of IHTA 1984, the result was that none of the settled property situated outside the UK was excluded property for IHT purposes: see section 48(3). David was beneficially entitled to an interest in possession in the settled property, so by virtue of section 49(1) he was treated for IHT purposes as beneficially entitled to the settled property itself. Accordingly, when his interest in possession terminated on his death, IHT was prima facie chargeable on the full market value of the property contained in the Foundation at the rate of 40%. Thus, if the value of the assets in the Foundation was £3.25 million, the prima facie liability to IHT would have been £1.3 million.

Under section 200(1) of IHTA 1984, the persons liable for this tax would have been the trustees of the settlement, and by virtue of paragraph (c):

"so far as the tax is attributable to the value of any property, any person in whom the property is vested (whether beneficially or otherwise) at any time after the death …"

The only limit on such liability would have been that it could not exceed the extent of the property so vested: see section 204(3). Accordingly, since Alan and Carolyn took possession of their shares in Rainbow, HMRC would have been entitled to seek recovery of the full amount of the tax from either or both of them; and, even if recovery would not in practice have been possible from Alan, because of his foreign residence, the full amount could have been recovered from Carolyn, because it would have amounted to substantially less than the £2.2 million odd which became vested in her after her father's death.

By a side wind, however, this very substantial potential liability seems to have been escaped as a consequence of the disclosure and payment of tax under the LDF. The parties, understandably enough, viewed this outcome with equanimity. In answer to questions from myself, Mr Levy described it as "their good fortune", and pointed out that the LDF had been successful in raising substantial amounts of tax for HMRC on offshore assets which would otherwise never have been disclosed. I made it clear more than once during the hearing that I regarded this as a most unsatisfactory result, from the point of view of the general body of taxpayers, but as it is not directly relevant to any issue which I have to resolve I will say no more about it at this stage.

Early in 2011, for the purposes of his proposed LDF disclosure, Alan requested copies of relevant bank statements from UBS and UMB. Perhaps inadvertently, UBS sent to Alan a statement of the total assets held by UBS for Rainbow as at 21 November 2005, totalling £2,217,517. By this date, the whole of this amount would have been comprised in Part A, and subject to any withdrawals made by David in the last 15 months of his life would have passed on his death to Carolyn. Alan therefore came to the correct conclusion that Carolyn had received far more from Rainbow than he had. It was this discovery which ultimately led to the commencement of the present action by a claim form issued by Alan on 5 February 2013, against Carolyn and Mr Smith as defendants. The central issue in the case is whether the assets of Rainbow form part of David's estate, in which case they pass under the Will, and subject to due administration of the estate (which in other respects was long ago concluded) they fall to be equally divided between Alan and Carolyn (who under a deed of appointment dated 23 March 2010 are now absolutely entitled to their respective shares of residue).

There can be no doubt, in my judgment, that the driving force behind this most unfortunate litigation, which pits brother against sister, and opens to public scrutiny financial and tax affairs which one might have imagined the family would all have preferred to keep confidential, is Alan's inability to accept that his father wished Carolyn to inherit substantially more than he did from the Foundation. As Alan admitted, in a revealing passage during his cross-examination (transcript, Day 2, page 14):

"My complaint is that she got more than me. Whether it was done outside the estate or not is a matter for the executors to decide."

Since it is only under the Will that Alan and Carolyn share equally, it is obvious that the only way in which Alan could achieve his objective was by alleging, several years after his father's death and after he had taken possession of the assets contained in Part B of the Foundation, that all of the Foundation's assets fell into David's estate and passed under the Will.

In a letter to Mr Smith dated 5 December 2012, Alan's solicitor (Mr Stephen Sutton, trading as Suttons Solicitors) articulated his claim in the following way:

"It seems to us perfectly clear that the establishment of the Rainbow Foundation under these Regulations [i.e. the Regulations of 9 July 2004] was ineffective on its face to divest David of his beneficial interest in the Foundation's assets up to the point of his death. Furthermore, we understand from the managers at [UMB] and UBS that the board of the Foundation executed powers of attorney in favour of David allowing him to deal directly and exclusively with the bank, and that he did in fact do so without any involvement by the board of the Foundation. In the circumstances, either this arrangement was a bare nomineeship for David or a sham apparently designed to deceive the UK tax authorities and possibly others into believing that David had transferred his legal and beneficial interest in assets to the Foundation.

As executors, you and Ms Carolyn Hamilton were under a duty to investigate this position, collect in the assets of the Rainbow Foundation and then deal with them under the terms of David's last will. In the light of your failures to do [so], we are now instructed to commence proceedings against you and Ms Carolyn Hamilton on the basis of wilful default."

The evolution of Alan's claim

The claim form described Alan's claim as a derivative claim, brought by him on behalf of David's estate, seeking an order that Carolyn should account for and pay over to the estate the value of the assets which she had received from Rainbow, being assets belonging to the estate, or alternatively damages for her unjust enrichment at the expense of the estate. Mr Smith was joined as second defendant in his capacity as an executor and necessary party to the action. It is convenient to record at this stage that Alan's claim against Mr Smith has been settled, and he was not in the event called by either Alan or Carolyn as a witness to give evidence at the trial, although his witness statement remained in the trial bundle.

In his original particulars of claim, the nub of Alan's case was concisely pleaded by his counsel, Steven Thompson (now QC):

"8. The Regulations of the Rainbow Foundation at all times (including those dated 8 February 1996, 9 July 2004 and 15 April 2005) provided that David should be solely entitled to the enjoyment of the Foundation's assets and its income during his lifetime to the exclusion of any other beneficiaries.

9. The board of the Rainbow Foundation executed one or more powers of attorney in favour of David, effectively abdicating responsibility for control over the assets held by the Foundation and enabling David to deal directly with banks which held those assets.

10. At all material times, David dealt with the assets of the Rainbow Foundation as his own, without informing the board of, or anyone else at, the Foundation of his dealings.

11. From the above facts and matters, it is to be inferred that David and the board of the Rainbow Foundation both intended at all material times that the capital and income of the Foundation should be treated, during David's lifetime, as beneficially owned by him.

12. In the premises, until David's death:

(a) The Rainbow Foundation held its assets as a bare nominee for David; or

(b) The Rainbow Foundation was a sham, designed and intended by both David and the board of the Foundation to give the erroneous impression that the assets held by the Foundation were no longer beneficially owned by David after he had transferred them to it.

13. For the avoidance of doubt, it is averred that the terms of the constitution of the Rainbow Foundation were ineffective to act as a testamentary disposition of David's assets.

14. Accordingly, from the time of David's death, the assets of the Rainbow Foundation were part of his estate …"

In due course, directions for expert evidence were given at a case management conference held before Deputy Master Nurse on 19 March 2014. Each party was given permission to adduce expert evidence in the field of Liechtenstein law to address issues of what principles apply and what facts need to be found as a matter of Liechtenstein law for the court to determine the questions:

"(a) Whether transfers from time to time of assets by David Hamilton to the Rainbow Foundation were or were not effective to dispose of the entirety of his interest or interests in those assets.

(b) Whether the Rainbow Foundation was or was not merely a nominee for David Hamilton or a sham."

The expert instructed by Alan was Professor Martin Schauer, who has been Professor of Private Law at the University of Vienna since 2001. Among his fields of specialisation are succession law and the law of foundations, including those of Liechtenstein. Since 2007, he has taught at the University of Liechtenstein on foundations and establishments (or "anstalts"), and he was the major external consultant to the government of Liechtenstein for the preparation of the new law relating to foundations which was adopted in 2008 and came into force in 2009. With these qualifications, he was clearly well placed to give expert evidence on the issues of Liechtenstein law relevant to the present case.

The extensive material supplied to Professor Schauer by Suttons, under cover of their letter of instruction dated 5 November 2014, included Alan's second witness statement dated 19 September 2014. This statement included the following passage:

"7. I know that my father was always anxious to keep funds in a safe haven as he felt that had his father made similar arrangements he could have saved his family from extermination. I learnt some years ago during the 1980's from my father that he kept money offshore in Switzerland. He was reluctant to make any open declaration of the existence of these funds. He was also, of course, fearful that he was in breach of UK tax regulations. He had a general fear of conflict with anyone in authority. He felt a need to have an "escape" fund should history ever repeat itself."

In his first report, dated 12 December 2014, Professor Schauer examined the concepts of sham in Liechtenstein foundation law. He said that there were various concepts which might lead to the conclusion that the formation of a foundation would be null and void, including a general principle in private law called Mentalreservation (lack of intent), and the concept of abuse of the legal form, or Rechtsmissbrauch. He went on to express the opinion that the latter concept would apply where a foundation was established in Liechtenstein in order to evade foreign taxes, and a Liechtenstein court would be willing to rely on the principle of abuse of legal form even to protect the tax revenues of a foreign state, at any rate if the foreign state had a similar economic system and its legal system shared the same basic values as that of Liechtenstein.

Professor Schauer also said, in paragraph 52 of his first report:

"Based on the information I received about the case, the Rainbow foundation was an instrument which the founder used for tax evasion on a large scale in the UK."

It is unclear to me what Professor Schauer based this statement upon, if it was intended to go further than the passage which I have quoted from Alan's second witness statement. There was certainly no statement to that effect in Mr Sutton's letter of instructions. Perhaps it was an inference which Professor Schauer felt that he could safely draw from the totality of the material before him, although he had been expressly told he was not expected to form a view on the parties' evidence where it was disputed.

Be that as it may, Professor Schauer's report led to the addition of a further ground of challenge to the validity of the Foundation in Alan's pleaded case. It was contained in paragraphs 12A and 13A of the particulars of claim, added by way of amendment on 12 March 2015:

"12A. David's intention in setting up the Rainbow Foundation was to evade English tax. This intention can be inferred from the fact that the Rainbow Foundation was used by David to evade tax during his lifetime. In particular:

(a) David transferred money from the Rainbow Foundation to Swiss accounts in his own name, from which accounts he spent money for his personal benefit and from which accounts he settled personal debts accrued on a credit card in his own name. As a matter of UK tax law, such expenditure was chargeable to tax in David's hands under the remittance basis, but he did not declare it; and

(b) during David's lifetime, the Rainbow Foundation would have been treated, as a matter and for the purposes of UK tax law, as a nominee arrangement or a trust, so that its income, when remitted to the UK for David's benefit, would have been chargeable to UK income tax in David's hands. Despite this, David did not in his lifetime declare that income or pay tax upon it: the tax liability was settled only posthumously, in 2010, by the Defendants as his executors under [the LDF].

13A. By reason of the matters aforesaid, under Liechtenstein law, the Foundation was at all material times void and its assets would have been treated as David's assets during his lifetime."

Permission to make these amendments was granted by Rose J at a hearing on 12 March 2015. For that, and other, reasons, the trial of the action, which was then floating from 20 April 2015, was vacated and relisted for the first available date after 30 September 2015, with a time estimate of nine days. Further directions were also given for the service of consequential amendments to the defence and the reply, and for completion of the expert evidence.

In his third (and final) witness statement dated 24 November 2015, Alan set out the further factual evidence upon which he wished to rely in support of his amended case. In paragraphs 2 and 3, he explained his approach as follows:

"2. In this statement I will provide a further and more detailed account of my relationship with David and in particular my knowledge of his use of overseas bank accounts to evade tax …

3. … Since those amendments [i.e. the amendments to the particulars of claim] were made I have reflected further on my knowledge and recollection of David's use of off-shore bank accounts. As a result I have recalled in more detail my knowledge of David's use of off-shore bank accounts. In particular I now recall that I knew (for reasons I explain below) that David had an off-shore bank account in the 1960s which he used to avoid tax. In my earlier statement I said that I learnt that he kept money in Switzerland in the 1980s. On further reflection I think that I knew that he had bank accounts in Switzerland rather earlier than that as I will now explain."

Alan then went on to set out the fuller evidence upon which he now relied.

I have traced this evolution in the pleading of Alan's case, and of his evidence in support of it, because early in his cross-examination of Alan leading counsel for Carolyn, David Halpern QC, put it to him that he had deliberately changed his case in the light of Professor Schauer's report, and then fabricated evidence of evasion to support it. Mr Halpern put it to Alan that his knowledge of what had been in his father's mind should not have changed, merely because a different case was now being pleaded, and that Alan had deliberately changed his evidence because it now suited him to put forward a different story. I found this wholesale challenge to the veracity of Alan's further evidence unconvincing, and I do not accept that he deliberately changed his story or set out to deceive the court. I can see nothing sinister in the way in which Alan's pleaded case developed after receipt of Professor Schauer's first report, and the lack of detail in Alan's former statement about the evasion of UK tax by his father is readily explicable by the fact that it was of no direct relevance to the way in which his case was initially pleaded. That is not to say, of course, that I necessarily accept or can safely rely upon the fuller evidence in Alan's third statement. Indeed, I will need to consider this evidence with some care later in my judgment. But I do acquit Alan of the very serious charge which Mr Halpern was, quite properly, putting to him, and which Alan firmly denied.

Tax evasion and tax avoidance

In this judgment I observe the conventional distinction between tax evasion and tax avoidance. Tax evasion is unlawful, and a breach of the criminal law, because it involves dishonestly taking steps to conceal from the Revenue, or otherwise escape from paying, a liability to tax which has in fact and law already arisen. Tax avoidance, on the other hand, is lawful, because it involves taking lawful steps which either prevent a liability to tax from arising in the first place, or remove (or mitigate) such a liability after it has arisen. Tax avoidance, so defined, covers a wide spectrum, ranging from artificially contrived schemes at one extreme, which thwart the obvious intention of Parliament while complying with the letter of the law, to routine acts of tax mitigation at the other end, where the taxpayer takes advantage of a fiscal incentive or opportunity which the legislation intentionally provides. A subscription to an Individual Saving Account (or ISA), which confers exemption from income tax and CGT on the assets within the ISA envelope, would be a good example of tax mitigation, as would the avoidance of income tax on part of one's earnings by making payments (within prescribed limits) into an approved pension scheme.

Another example, arguably closer to the middle of the spectrum, is provided by the deed of variation of the dispositions under the Will which was executed on 8 February 2009 by Carolyn, Alan, David's widow Laura and Mr Smith. The effect of the variation was to insert a short-term interest in possession for Laura in the income of the residuary estate, running from the date of David's death for the shorter of her lifetime and two years from the date of the deed. As a result, by virtue of section 142(1) of IHTA 1984, the entire residuary estate escaped the charge to IHT which would otherwise have arisen on David's death, because advantage could now be taken of the exemption for property passing to a surviving spouse. Furthermore, when Laura's interest in possession terminated, on 8 February 2011, she would then have been treated as making a potentially exempt transfer of the residuary estate, with the consequence that no IHT would become chargeable if she survived for a further seven years. Happily, Laura is still alive, so her deemed transfer will presumptively become an exempt one on 8 February 2018.

Although this point was not explored in the evidence or submissions before me, my provisional view is that, if Alan's case is correct, and the assets in Rainbow formed part of David's estate, they would fall within the scope of the deed of variation and would thus benefit from the advantageous IHT treatment which I have described. If, on the other hand, the Rainbow assets do not form part of the estate, it is clear that the deed of variation cannot apply to them, and it is only the disclosure under the LDF which has saved the family (and Carolyn in particular) from the liability to IHT of approximately £1.3 million which I have referred to earlier in this judgment: see [20] to [22] above.

Rainbow: its establishment, constitution and operational framework

In his first report, Professor Schauer provides some useful background information about the history of the Liechtenstein legal system, and the methods which it has used to attract foreign investment and foreign capital since the 1920s. Among the large number of legal forms provided by Liechtenstein law for foreign investors, the most popular historically has been the foundation. About a decade ago, there were over 50,000, although the number has since dropped to below 30,000 as a result of international pressure on tax havens and the increasing willingness of Liechtenstein to co-operate with foreign tax authorities.

Professor Schauer identifies four reasons for the overwhelming success of the Liechtenstein foundation. The first reason is that it may be established for any legal purpose, which does not have to be a charitable one. In practice, most foundations are instruments of estate planning of the founder, for the benefit of the founder's family. A foundation may therefore "serve as a functional equivalent to a trust or a will".

Secondly, foundations have a high degree of organisational flexibility. In Professor Schauer's words:

"The legal framework does not impose many restrictions. There is no rule against perpetuity. The statutes may provide for special organs of the foundation to control the board … or to consult the board on how to invest the assets of the foundations or even instructing the board or to choose the beneficiaries and to decide upon the benefits they will receive. The founder may also reserve a strong position for himself. In the statutes, he may reserve the right to change any part of the statutes, including the purpose of the foundation; and he may even reserve the right to revoke the foundation. This is why some critics call a Liechtenstein foundation just a bank account in disguise."

In cross-examination, Professor Schauer described this last remark as an ironic comment by practitioners, with no legal basis, but he said it reflected the reality that in a number of cases foundations in Liechtenstein were indeed operated just like bank accounts.

Professor Schauer's third reason is the lack of disclosure and transparency, which operates at different levels. Most foundations, including family foundations, are not registered in a public register, so creditors of the founder or beneficiaries have no reliable access to information about them. Furthermore, the governing documents of the foundation are typically divided between the statutes, which contain only basic information about the foundation such as its name and an outline of its general purpose, and the by-laws ("Beistatuten"), which contain details of the real beneficiaries and their respective interests. Another category of documents is the regulations adopted by the board of the foundation. Neither the by-laws nor the regulations need to be disclosed to a third party, for example when the foundation opens a bank account.

The fourth reason is the historic lack of co-operation between Liechtenstein and other countries in the field of mutual legal assistance, including notably the execution of foreign judgments. Professor Schauer comments that, even though Liechtenstein has been a member of the EEA since 1995, it has successfully resisted joining the Lugano Convention on jurisdiction and the enforcement of judgements in civil and commercial matters. Accordingly, "Liechtenstein may still be called a safe haven in the field of asset protection".

A further point mentioned by Professor Schauer is that an investor hardly ever establishes a foundation by himself, but rather uses the services of a Liechtenstein-based professional who will act as a fiduciary. The fiduciary will establish the foundation in his own name, as legal founder, although acting on behalf of his client, the so-called economic founder. There will then be a contract of mandate between the fiduciary and the client, under which the fiduciary will manage the foundation by nominating the members of the board and instructing them how to make use of their powers. All of this forms part of the machinery designed to make the real operation of the foundation as opaque as possible to outsiders.

In the case of Rainbow, the economic founder was David, and the fiduciary was an establishment called Auctoriana Anstalt ("AA"). On 14 December 1995, David signed a written document requesting AA as fiduciary to constitute Rainbow as a foundation, and naming as the first members of Rainbow's board Dr Matthias Donhauser and Mr Utho Pohl. He also designated AA as Rainbow's legal representative.

Rainbow was then formally established on 8 February 1996, which is the date of its statutes ("the Statutes") and its first set of regulations ("the 1996 Regulations"). Article 1 of the Statutes recorded that Rainbow had been established in Vaduz, with its own legal personality in accordance with the provisions of the Liechtenstein Law on Persons and Companies ("PGR"). Article 2 said that the initial capital of the Foundation was CHF 100,000, and the founder and/or third parties might donate other assets of any kind to it at any time. Article 3 described the object of the Foundation in very general terms, as follows:

"The object of the Foundation shall be to defray the costs of education, training, equipment and support or of the general subsistence of members of one or more designated families, and the pursuit of similar purposes.

The Foundation may also grant benefits to natural or legal persons, institutions etc.

The Foundation shall operate no business run on commercial lines."

Article 4 provided that the organs of the Foundation were to be its board and its legal representative, and Article 5 said that the founder members of the board were to be appointed by the founder. As we have seen, David had already appointed Dr Donhauser and Mr Pohl. Article 6 then set out the tasks and responsibilities of the board, as follows:

"The Foundation Board shall administer the Foundation and represent it, in legally binding manner, in external relations.

It shall be self-constituting and appoint the persons (from among its number and/or third parties) with authority to represent it, and shall determine their signing powers.

The Foundation Board may transfer the exercise of powers to one or more persons, who need not be members of the Foundation Board.

The Foundation Board shall pass its resolutions by simple majority at meetings or in writing, unless the [Statutes] prescribe otherwise.

The Foundation Board shall issue one or more sets of By-Laws nominating the beneficiaries and the nature and scope of their benefits.

The Foundation Board may at any time revoke or amend By-Laws, in whole or in part, unless all or part of the By-Laws is expressly designated as irrevocable."

It follows from these provisions that the board could delegate the exercise of any of its powers to a third party, including (in the absence of provision to the contrary) the founder. Furthermore, the board was not obliged to make its resolutions in writing, in the absence of any requirement to that effect in the Statutes, but could also do so by a simple majority at meetings, of which a written record would not necessarily be kept.

Article 8 stated that the beneficiaries of the Foundation were to be defined in the by-laws; that their entitlement to benefits could only be alienated, transferred or charged with the consent of the board; and that their enjoyment of benefits was to be protected from their creditors, by virtue of Article 567 of the PGR. Article 10 empowered the board to amend the Statutes, and also to dissolve the Foundation if its object was no longer reasonably feasible.

The 1996 Regulations named David as the person "solely entitled to the enjoyment of the Foundation's assets and its income during his lifetime". Upon his death, Carolyn was designated as the person "entitled to the enjoyment of the Foundation's assets and its income". Section 9 empowered the board to amend the regulations at any time, with the approval of David during his lifetime.

David also entered into a mandate agreement on 8 February 1996 with a firm of lawyers in Vaduz called Dr Dr Batliner & Partner. This agreement described David as "sole beneficiary", and defined him as the Mandator, while Dr Dr Batliner & Partner were the Mandatories. Under the agreement, Dr Dr Batliner & Partner were to appoint at least one member of Rainbow's board, and bound themselves to exercise the mandate on David's behalf and in accordance with his instructions. They appointed their "partner/employee" Dr Donhauser as a member of the board. Section III of the agreement then provided that the mandate would be exercised by their board member "solely in accordance with the instructions of the Mandator, whether these instructions are given … directly by the Mandator or by a third party designated by the Mandator by means of registered mail". The section continued:

"Neither the Mandatories nor the Member of the Foundation council are authorised or obliged to act independently.

By accepting the above obligation, the exceptions, which are imposed by law, justice and public morals as well as by the Mandatories and the Member of the Foundation council's social and business positions, are retained."

On 9 July 2004, with David's approval attested by his signature, the board of Rainbow adopted new regulations ("the 2004 Regulations"). As I have already said, these left David's sole beneficial entitlement during his lifetime unchanged, but split the assets into Parts A and B after his death, with Part A to be taken by Carolyn and Part B by Alan. Part A was designated as the assets and income of the Foundation held with UBS in account number 230/235.396, Part A. Part B was designated as the assets and income of the Foundation held (a) with UMB, and (b) with UBS in the same account 230/235.396, Part B. This split was reflected in the statements of account provided by UBS for the account numbered 230/235.396. With effect from July 2004, five pre-existing accounts in various currencies were designated "Part A", and five new accounts designated "Part B" were also opened.

A further set of new regulations, again approved by David, was adopted by the board some nine months later on 15 April 2005 ("the 2005 Regulations"). There are slightly differing versions of the 2005 Regulations in the trial bundle, but fortunately nothing turns on the differences, and it is agreed that any changes made by the 2005 Regulations may for present purposes be ignored.

Returning to Rainbow's board, Dr Donhauser and Mr Pohl remained the sole members from 8 February 1996 until 27 May 1998. They were then replaced by a Mr Simmen and a company incorporated in the British Virgin Islands called Corpboard Limited ("Corpboard"), which it is common ground was closely associated with UBS. Mr Simmen retired on 22 February 2002, and was replaced by a Dr Marxer and AA. On 17 May 2006 Dr Marxer retired, and was replaced by Dr Gasser. After David's death, Corpboard resigned on 2 April 2007, followed by Dr Gasser and AA three days later.

Dr Donhauser, Mr Simmen, Dr Marxer and Dr Gasser were all associated with Dr Dr Batliner & Partner, and were appointed pursuant to the mandate agreement between David and that firm. AA was of course the fiduciary which had established Rainbow in the first place, and was also its appointed legal representative.

On 1 October 2003, David entered into a further mandate agreement with AA in its capacity as a member of the board. AA agreed to act in accordance with David's instructions, in terms materially very similar to those contained in the earlier mandate agreement between David and Dr Dr Batliner & Partner.

It appears from a signature card dated 8 February 1996 that, when Rainbow was established, David had a sole signature right over the UBS accounts, while the two members of the board (Dr Donhauser and Mr Pohl) had joint rights. When Mr Simmen and Corpboard were appointed in 1998, they too had joint signature rights, recorded on a card dated 22 May 1998, but David's sole right remained unrevoked. From 1 October 2003 onwards, Corpboard had sole signature rights and the other two board members had joint rights. This change was effected pursuant to a letter dated 15 September 2003 from David to the board, in which he asked for his power of attorney to be cancelled with immediate effect. The letter continued:

"Please take note that I usually will need up to CHF 100,000 every year. In order to facilitate the procedure I agree that you grant an individual power of attorney to Corpboard Ltd, member of your board, with regard to the foundation's accounts."

Pursuant to this request, the board (which then consisted of AA, Dr Marxer and Corpboard) signed a resolution on 1 October 2003 in the following terms:

"1. To pay the first beneficiary, on request, an annual total of up to CHF 100,000 in one or more instalments, on the occasions of his visits, as part of his enjoyment of the Foundation endowment and of the income from it;

2. To authorise Corpboard Limited, a member of the Foundation Board, to make such disbursements/transfers;

3. And, for this purpose, to grant Corpboard Limited sole power of disposal over the Foundation's accounts/custody accounts, with the obligation to use them only in the context of item 2 of this resolution."

Although incorporated in the British Virgin Islands, Corpboard appears to have been operated on the ground from the offices of UBS in Zurich. There are various pieces of evidence from which this may be inferred, including a resolution of Corpboard regarding signing rights for Rainbow's UMB account and an associated signature list, which includes three individuals who can be identified as authors of letters sent on behalf of UBS in Zurich.

With regard to the UMB account, which was opened in September 2003 on Rainbow's instructions, the position was that any two of the members of Rainbow's board had joint signing rights. This was recorded on a signature card dated 22 September 2003 and signed by the three members of Rainbow's board. The account opening information included a document in "Form A", as required by Swiss banking legislation, which identified David as the beneficial owner of the assets in the account, and a request for quarterly statements of assets and other documents to be sent to Rainbow, care of AA, in Vaduz. A client profile identified David's occupation as "textile business", owning real estate and selling women's wear; his country of business as England; and the source of the initial funding of the account as being his current business occupation. His investment objectives were described as "conservative growth, also stock investments".

Similar documents of a formal nature had also been filed when Rainbow opened its initial account with UBS in February 1996. This documentation included an instruction dated 8 February 1996 requiring UBS to retain bank statements, correspondence and other documents relating to the account, and not to dispatch or forward any such material to Rainbow. UBS was also "requested to examine the folder from time to time and to destroy all papers older than five years, including communications from third parties". This request appears to have been faithfully observed, and one consequence of it is that no detailed information survives about the operation of the UBS account before January 1999. Since the UMB account was not opened until 2003, it follows that there is no surviving record of any of the Foundation's day to day activity in the period of nearly three years from its establishment in February 1996. This is a point which it is important to have in mind when examining the object of David in setting up the Foundation.

The remittance basis of taxation

At the time when Rainbow was established, UK income tax was chargeable under Cases IV and V of Schedule D in respect of income arising from securities and possessions out of the UK, not being income consisting of emoluments of any office or employment. Under section 65(1) of the Income and Corporation Taxes Act 1988 ("ICTA 1988"), such tax was in principle chargeable on the full amount of the relevant income arising in the year preceding the year of assessment, whether or not the income had been or would be received in the UK. By virtue of section 65(4), however, this treatment was disapplied in the case of any person who, on a claim made to the Board of Inland Revenue, satisfied the Board that he was not domiciled in the UK.

Section 65(5) then provided as follows:

"Where subsection (4) above applies the tax shall, subject to sections 66 and 67, be computed –

(a) in the case of tax chargeable under Case IV, on the full amount, so far as the same can be computed, of the sums received in the United Kingdom in the year preceding the year of assessment, without any deduction or abatement; and

(b) in the case of tax chargeable under Case V, on the full amount of the actual sums received in the United Kingdom in the year preceding the year of assessment from remittances payable in the United Kingdom, or from property imported, or from money or value arising from property not imported, or from money or value so received on credit or on account in respect of any such remittances, property, money or value brought or to be brought into the United Kingdom, without any deduction or abatement other than is allowed under the provisions of the Income Tax Acts in respect of profits or gains charged under Case I of Schedule D."

This was the so-called remittance basis, which entitled persons not domiciled in the UK, having satisfied the Revenue of their status, to pay income tax under Cases IV and V only on the amounts of income actually received in or remitted to the UK.

The wording of subsection (5)(b), and the detailed provisions of subsections (6) and (7), which it is unnecessary for me to set out, make it clear that the concept of a "remittance" was by no means a straightforward one. In particular, it was no longer possible for a taxpayer to avoid application of the remittance basis by "exporting" a debt and then using his foreign income to satisfy it: see IRC v Gordon [1952] AC 552. Nevertheless, it was well known by specialists in the area that the charge could often be avoided with relative ease by a well-advised taxpayer. So, for example, in the second (1998) edition of their Textbook on Revenue Law, Professor Adrian Shipwright and Elizabeth Keeling said at p747:

"Despite the width of the remittance basis, it is relatively easy for taxpayers who wish to avoid remitting income to do so. If, for example, the taxpayer makes an outright gift of the income to his spouse or adult child (so that he no longer has any claim over it) the fact that the income is subsequently brought into the United Kingdom by the recipient does not lead to a remittance of the taxpayer's overseas income (Carter v Sharon [1936] 1 All ER 720). Alternatively, the overseas income can simply be spent abroad (by, for example, financing overseas holidays) so that it is never remitted to the UK and no UK tax charge can arise."

A footnote added that "[o]ther methods include opening separate accounts for capital and income and remitting only from the capital account".

Another expedient, noted as early as July 1988 in a consultation document on residence published by the Inland Revenue, was to close an account or sell an income producing asset in one year, and then remit accumulated income in the next year when there was no longer a source of income that could be charged to tax.

In the light of public concern and debate about the remittance basis, it was significantly strengthened and reformed with effect from 6 April 2008, but this was after David's death, and long after he had established Rainbow.

In cross-examination, Mr Levy said that the rules relating to the remittance basis during David's lifetime were "very complex", and he very much doubted whether David would have understood them himself without professional advice. He also emphasised that it was not possible to conclude, merely from the fact that David may have received in the UK income derived from Rainbow, that the income was necessarily taxable in his hands on the remittance basis. It is always necessary to look at the precise sum which has been remitted to the UK, and to examine the source and nature of the funds. Mr Levy expanded on this evidence in re-examination. He explained that Rainbow would have been regarded for income tax purposes as equivalent to an interest in possession trust, with the result that all its income was to be treated as David's, in the same way as if the Foundation's assets were money held by him in a foreign personal bank account. Even so, however, the remittances might have escaped taxation in the UK under one of what he described as the "flaws and anomalies" in the system.

I conclude with three points. First, the remittance basis also applied for CGT purposes to chargeable gains accruing to a UK-resident taxpayer on the disposal of assets situated outside the UK: see section 12 of the Taxation of Chargeable Gains Act 1992.

Secondly, both sides were content to proceed on the footing that the remittance basis was the only basis upon which David might have been liable during his lifetime to either income tax or CGT in respect of Rainbow's assets. I was not, for example, asked to consider whether any liability might in principle have arisen under Case VI of Schedule D pursuant to the provisions relating to settlements in Part XV of ICTA 1988.

Thirdly, I need to emphasise that, if David was ever guilty of tax evasion, this could only have occurred when he received in the UK income or gains which were properly chargeable to tax on the remittance basis, and then dishonestly failed to enter them on his tax return. Whatever one's views may be about the morality of such arrangements, there is nothing unlawful about holding assets abroad in a tax haven, taking advantage of the secrecy which such arrangements typically provide, or even holding money in numbered Swiss bank accounts. Arrangements of this nature undoubtedly facilitate tax evasion, but they do not themselves constitute it.

The witnesses of fact

Alan gave evidence in support of his claim, and was vigorously cross-examined by Mr Halpern for rather less than three hours. His evidence was for the most part clear and forthright, and he stuck firmly to the story which he invites the court to accept, namely that his father had from the 1960s onwards been routinely engaged in tax evasion. I formed the impression that Alan has a forceful and dominating character, and (although he denied it) is at times prone to be a bully and act aggressively, particularly if he does not get his way. I do not believe he consciously set out to deceive the court, but his dispute with Carolyn is so bitter, and his jealousy of her so corrosive, that he has persuaded himself of the justice of his case, and shaped his vision and recollection of past events accordingly. I therefore treat his evidence with considerable caution, especially when it is uncorroborated or inherently improbable.

Alan's other witnesses, outside the banking world, were his son Andrew, and David's long-standing friend and personal assistant, Glynis Andreanoff. A recurrent theme was that David had been generous to each of them in his lifetime, using money from Swiss bank accounts to pay a significant proportion of Andrew's fees at Yale, and to make substantial gifts to Ms Andreanoff by transfers to her bank account in Menorca where she co-owned a property. Ms Andreanoff gave her evidence in response to a witness summons. Both were briefly cross-examined by Mr Halpern. There are no issues about their credibility, although I am inclined to think Andrew's recollection of some minor matters, upon which nothing turns, may have been mistaken.

Ms Andreanoff described the payments made to her by David during his lifetime as gifts intended to reward her for her loyalty. In answer to a question from myself, she confirmed that the payments were made outside the payroll of the company by which she was employed, and without deduction of tax. Mr Levy subsequently produced some figures, drawn from papers to which he had access, showing that during the relevant period Ms Andreanoff's remuneration through the company payroll had remained more or less constant.

In relation to the Swiss bank accounts, Alan called three witnesses from UMB: Mr Josef Rhein, Mr Eli Brandeis and Mr Israel Rosengarten. Mr Rhein is now retired, but from 1980 until May 2006 he worked at UMB in Zurich. He was David's main point of contact at the bank, and also often met him at his offices in London at 38 Great Portland Street, W1, to discuss his investments. They also spoke by telephone on many occasions. Following Mr Rhein's retirement at the age of 65 in 2006, the management of David's and Rainbow's accounts at UMB was taken over by Mr Brandeis, who continued in that role until David's death. Mr Brandeis left UMB in 2008, and he now works as an account manager with another Swiss bank. There was a period of three months before Mr Rhein's retirement when he and Mr Brandeis worked together, and Mr Rhein introduced Mr Brandeis to his clients, including David. Mr Rosengarten started work at UMB in January 2008, and is still an account manager at the bank, but he had no personal involvement with David or his financial affairs before his death.

All three of the witnesses from UMB were willing to give evidence on Alan's behalf, and had no compunction in offering confident views about how David had operated the Rainbow accounts. In this respect, their evidence differed markedly from that of the two witnesses from UBS, who gave evidence pursuant to a request from the English court to the Swiss court, and initially refused to answer any questions about Rainbow's accounts on grounds of client confidentiality. The readiness of the UMB witnesses to give evidence for Alan may be connected with the fact that Alan continues to have a banking relationship with UMB. I also gained the impression, both from the way in which their statements had been drafted and from their oral evidence, that they were at times willing to say what they thought Alan wanted them to say, and that at least some parts of their statements had probably been drafted for them by Alan or at his behest. I therefore treat their evidence with caution, where it goes beyond purely factual matters relating to the relevant accounts.

Mr Rhein had suffered a fall shortly before the start of the trial, so he gave his evidence by video link from Zurich. Mr Brandeis and Mr Rosengarten attended court, and were cross-examined by Mr Halpern.

The two witnesses from UBS were Mr Althaus and Mr Beat Friedrich. As I have explained, they gave their evidence on commission before the Swiss court, in response to a request from the English court which set out an agreed list of questions for them to answer. They were also asked supplementary questions by the parties' representatives.

Mr Althaus' evidence was taken before the District Court of Bremgarten, in the Canton of Aargau. At the first hearing on 17 February 2015, Mr Althaus said that he was a former employee of UBS, and had been authorised by UBS to make statements concerning David and his connection with the bank, but he had no authority to answer questions relating to Rainbow. He confirmed that he no longer had access to banking documents in his capacity as a former employee of UBS, and he had not stored any such documents at his home. A further hearing took place on 1 October 2015, after a form of release from the obligations of client confidentiality had been obtained from Rainbow. On this occasion, Mr Althaus answered the questions which he had refused to answer before, and again answered some supplementary questions. I will quote the concluding impression of the Swiss presiding judge:

"Overall, the statements by the witness Althaus make a plausible impression. Although the witness could no longer remember all of the details, he made an effort to make statements which were as accurate as possible and also clearly stated if he was uncertain of a particular matter."

Mr Friedrich's evidence was taken before a District Magistrate in the Zurich District Court, first on 16 February 2015, and then (after the necessary release had been obtained from Rainbow) on 13 October 2015. Mr Friedrich had worked for UBS for over 20 years, and was still an employee of the bank. He explained that in July 2006 he took over responsibility for customer liaison in relation to David's personal account, having previously been the deputy to David's former customer adviser. When questioned about Rainbow at the resumed hearing, he confirmed that his role in relation to Rainbow and its accounts had been similar to his role in relation to David's personal account. Apart from himself and Mr Althaus, the Wealth Planning Department of UBS had also been involved in the management of Rainbow. He described this as an internal department of UBS, which was responsible for the administration of Rainbow, and instructions received from David were forwarded to it.

There is no assessment by the Swiss judge of Mr Friedrich's evidence, but it is clear from the transcript that he did his best to answer the questions put to him, and no challenge has been made to his credibility.

Apart from herself, Carolyn's only witness was Mr Levy. I found Mr Levy to be an impressive witness, and was much assisted by his evidence on various taxation matters and the operation of the LDF. I need to bear in mind, however, that his continuing role as Carolyn's personal accountant may have influenced some of his evidence and made him understandably unwilling to criticise her.

Carolyn herself was cross-examined, often quite aggressively, by Mr Thompson, for about an hour at the end of day three and for the whole of the following day. For the most part, I am satisfied that she did her best to assist the court, but at times I found her answers evasive or unconvincing, particularly in relation to her conduct since her father's death. These matters, however, are not directly relevant to the key issues which I have to consider, although they may throw some light on the reliability of her evidence in relation to events during her father's lifetime. In general, I feel that I need to treat much of her evidence with caution, especially where it is uncorroborated. Like Alan, she has become convinced of the rectitude of her view that Rainbow's assets fell outside her father's estate, and she finds it difficult to look at the question objectively.

I would add that Carolyn's surprising ignorance, for a lawyer, about English tax law and her duties as an executor may be accounted for, at least in part, by the fact that her area of specialisation lies in children's law. Although she qualified as a member of the English bar in 1997, she did so as a distinguished academic and did not have to sit any bar exams. She told me that her initial legal training had been for a law degree at Bristol University in the early 1970s, and her only study of tax law had been one module when she qualified as a solicitor in 1974.

I also accept that Carolyn has found the present dispute very painful from a personal point of view. Near the end of her cross-examination, she said this:

"No, I don't hate my brother. I think it's very sad. I think the whole proceedings is immensely, immensely sad. To rip apart a family for this sake is just incredibly sad. No contact now between my nephew and my children. The whole family ripped apart. My poor mother conflicted by it all. It's terrible. I think it shaming and sad."

The expert evidence

I have already introduced Alan's expert witness, Professor Schauer. There is no doubt that he is a very distinguished academic, and his opinions on questions of Liechtenstein law are entitled to great respect. On the other hand, there is force in the criticism made by Carolyn's counsel in their written closing submissions, that Professor Schauer did not appear to understand fully the role of an expert witness on foreign law. He seemed to see it as part of his function to form a view on the contested facts of the case, and to proceed on the footing that David was guilty of tax evasion on a large scale. He was also ready, at times, to make sweeping generalisations about the sham nature of many Liechtenstein foundations, and the role of vested interests in defending them. For example, in his supplemental report dated 23 April 2015 he said this:

"The ironic quotation from Dr Santo Passo, who before retirement was one of the most experienced practitioners in Liechtenstein, that a Liechtenstein foundation is just a bank account in a disguise is well known among Liechtenstein lawyers. It shows that Liechtenstein practitioners are fully aware of the fact that many of their foundation[s] are shams which, however, for obvious reasons most of them would not admit in public."

To similar effect, in a response to written questions dated 2 February 2015 he said:

"Many Liechtenstein law firms are heavily engaged in the foundation industry and therefore have a vested interest in defending the legal products they sell to their clients. When an impartial approach is taken, the outcome would be that many foundations have to be considered shams indeed."

Carolyn's expert witness in Liechtenstein law is Dr Markus Summer, who is a partner of a major law firm in Vaduz, Marxer & Partner. Dr Summer was educated at the University of Innsbruck, Kings College London, the University of Texas and Edinburgh Business School. He has passed bar exams in Liechtenstein, Austria and New York, and after serving as a judicial clerk at several courts he has worked for two law firms in Vaduz since 1998, joining Marxer & Partner in 2005 as an associate, and being made a full partner in 2008. He is also a full member of the Society of Trust and Estate Practitioners.

Although Dr Summer does not have the academic credentials of Professor Schauer, I find that he has a clear understanding of his role as an expert witness, and is well qualified by his legal and practical experience to state his opinion on the questions of Liechtenstein law put to him. In both his written and his oral evidence, his views were clearly and cogently expressed, and firmly supported by relevant material.

What were David's intentions in establishing Rainbow?

I now come to one of the critical issues in the case. What were David's subjective intentions in establishing Rainbow in December 1995, and transferring to it monies raised from the sale of his clothing business in Hong Kong? In particular, was it David's dominant or main purpose to use Rainbow as a vehicle for evading UK tax?

I begin with a point rightly emphasised by Carolyn's counsel. David stands accused by his son of setting up Rainbow in order to evade UK tax, which would have involved criminal conduct. But the accusation was never put to David during his lifetime, and he has never had an opportunity to answer it. Counsel therefore submit, and I agree, that the court should be slow to accept the allegation unless it is substantiated by clear and convincing evidence.

In support of this submission, counsel referred me to the decision of Plowman J in Thomas v Times Book Co Ltd [1966] 1 WLR 911, where the issue was whether Dylan Thomas had during his lifetime made an oral gift of the manuscript of Under Milk Wood. It was common ground that the court had to approach the claim made by the defendants that there was a gift with suspicion, and at 915G Plowman J quoted from the decision of the Court of Appeal in In Re Garnett (1885) 31 Ch D 1 at 8, where Brett MR said:

"The law is that when an attempt is made to charge a dead person in a matter, in which if he were alive he might have answered the charge, the evidence ought to be looked at with great care; the evidence ought to be thoroughly sifted, and the mind of any judge who hears it ought to be, first of all, in a state of suspicion …"

Plowman J continued, at 916B:

"Therefore, not only in this case is the onus of proof on the defendants, but I am enjoined by authority to approach their story with suspicion having regard to the fact that the other actor in this story, the late Dylan Thomas, is dead and cannot therefore give his own version of what took place."

The next question is what it would actually mean to say that David had such an intention. As I have already said, there is nothing unlawful about a UK taxpayer keeping or (since the abolition of exchange control in 1979) moving assets abroad, and evasion of UK tax occurs only if income or gains received in the UK and properly chargeable to tax on the remittance basis are dishonestly concealed from the Revenue. How, then, could the evasion of UK tax have been David's intention in establishing Rainbow? Presumably only if it was his settled intention from the outset that income and gains from Rainbow:

(a) would be transmitted to him in the UK (or used in some other way which fell within the scope of the remittance basis); and

(b) would not be disclosed by him to the Revenue.

For a number of reasons, however, this seems to me a most implausible intention to impute to David.

In the first place, if that was really David's governing intention, it is hard to see why he should have gone to the trouble and expense of establishing a foundation in Liechtenstein. It would have been enough to hold the money in numbered Swiss bank accounts, and never disclose their existence to the Revenue. Instead, David set up a foundation with separate legal personality and an elaborate constitutional structure to be administered by a fiduciary company.

Secondly, if this had been David's dominant intention, one would not expect to find him using Rainbow's assets to make gifts or provide for his family and friends abroad in ways that could never have given rise to a charge to tax on the remittance basis. I have already given two examples of this: the payments which David made to help defray his grandson's education at Yale, and the substantial gifts (totalling some £77,500) which he made to Ms Andreanoff's bank account in Menorca on nine occasions between November 2003 and January 2007. Other examples could easily be added. For instance, in 2002 money in Rainbow was used to buy a holiday home for Carolyn on the island of Hvar in Croatia. Two pieces of adjoining land were also bought, with funds from the same source, in 2003 and 2004, and additional sums of money were transferred to a bank account which Carolyn shared with a friend in Croatia, for refurbishment and/or running expenses of the property. It emerged early in Carolyn's cross-examination that the amounts which she had received in this way were significantly understated, probably by some €52,000, in her witness statement. That illustrates the need for care in accepting much of her evidence at face value, but for present purposes the important point is that it shows David using the resources of Rainbow to provide for his family offshore in a way which would not apparently have engaged the remittance basis.

Thirdly, David clearly had extensive offshore financial interests at various stages of his life, and although he was generally secretive about his financial affairs, there is no reason to suppose that Rainbow fell into a separate category as the receptacle of assets earmarked for tax evasion. The evidence about David's other offshore interests is scanty, but there is no dispute that he had very substantial business interests in Hong Kong before their sale from the mid-1980s onwards, that he had at least one other Liechtenstein foundation (Treotto, no doubt so named after 38 Great Portland Street), and personal bank accounts in Switzerland and Germany.

Lastly, and most importantly, there is ample evidence that, in holding assets abroad, David was strongly motivated by the traumatic events of his early life. Carolyn put it this way, in evidence which I fully accept:

"My father was very deeply affected all his life by his pre-War experience in Berlin and the loss of all his family, and he talked about it endlessly. He felt guilty that he had been selected for the Kindertransport and sent to England and that he had survived, while his parents, and particularly his sister, who was one year older than him, did not. At the same time, he felt that his father had done insufficient to protect his family, and had left them vulnerable to the tragedy that occurred. He used to say that had my grandfather put money aside in Switzerland, the family could have got out of Germany. My father believed that the events of the 1930s could recur at any time and was determined that he would be ready to move if there was a need. He told me that it was for this reason he wanted a pot of money in Switzerland. He did not believe that Jews could ever be really safe and that with money in a neutral country that he could access he would be able to save his family, if necessary, and start a new life in another country."

This evidence is corroborated by Mr Rhein, whose witness statement dated 18 September 2014 pre-dates the amendment of Alan's case. He says that over the years he established "a warm personal and professional relationship" with David, and they trusted each other. He admired David greatly, and regarded him as a "mensch", a Yiddish expression which Mr Rhein translated as meaning "he was a true gentleman in every respect". He then said:

"Understandably David Hamilton having survived the Holocaust was concerned that he might once again be a victim of persecution. I understand that for that reason he established the Rainbow Foundation. He wanted to ensure that he had monies available to help his family and himself in the event of any persecution in the future …"

Even Alan, in a striking passage of his cross-examination, acknowledged the enduring impact which his father's early experiences had had upon him:

"Q. Was he paranoid about having an escape fund in case the holocaust should be repeated?

A. Over the years, I think he became much less so.

Q. In the early years?

A. I think in the earlier years it was fresher in his mind, obviously he was more concerned.

Q. For someone who had been a refugee from Nazi Germany and who felt the need for an escape fund, it would be attractive to use a Liechtenstein foundation with its regime of secrecy, would it not?

A. Yes.

Q. It would also be attractive to use a Swiss bank account, particularly a numbered account, with its provisions for secrecy?

A. Yes.

Q. There is nothing necessarily unlawful in doing either of those things, is there?

A. No.

Q. So the use of a Liechtenstein foundation and of Swiss bank accounts, which you seem to treat as a hallmark of fraud, is perfectly acceptable in the case of someone with David's history?

A. It could be."

In paragraph 12A of the amended particulars of claim, set out at [33] above, it is pleaded that David's intention in setting up Rainbow can be inferred from the fact that it was used by him to evade tax during his lifetime. Two instances of such alleged evasion are then given. The first is that David transferred money from Rainbow to Swiss accounts in his own name, from which he spent money for his personal benefit and settled personal debts on a credit card in his name. It is now common ground that there were indeed some occasions when monies originating in Rainbow were transferred to Swiss accounts in David's own name, and that some of his expenditure from those accounts did constitute remittances chargeable to tax on the remittance basis. However, the cases in which this can be established with any certainty are few in number, and relatively insignificant in amount. For example, paragraph 14A of Carolyn's amended defence says that the total amount paid out of David's personal Swiss account in settlement of debts incurred on his UK credit cards was no more than approximately £21,000. I have been shown no credible evidence that the figure was significantly higher than that.

There is also evidence that substantial sums were in 2006 and 2007 transferred from Rainbow to David's personal account at UBS, and thence to the Swiss bank account of a friend and assistant of David's called Ora Hutmacher, which she then withdrew in cash. But what then happened to the money is largely a matter of speculation, in the absence of any evidence from David and Ms Hutmacher herself. It is likely that some of the money was brought to England, and may then have become taxable on the remittance basis; but much of it may have been used abroad, for example to pay for medical treatment which David received in Switzerland towards the end of his life. The evidence is simply too scanty, and the possibilities of lawful use so numerous, that I feel quite unable to conclude with the requisite degree of confidence that David was guilty of UK tax evasion even in relation to these sums of money withdrawn in cash. Further, even if such evasion were established, it would relate only to the final two years of David's life, and a small fraction of Rainbow's total assets. To go on to infer that, more than ten years before, David's primary intention in establishing Rainbow had been to evade UK tax would in my judgment be unwarranted, unsafe and unfair.

The second matter relied upon in paragraph 12A of the amended particulars of claim is that David did not in his lifetime declare the income which should have been taxed on the remittance basis, and his liability was settled only posthumously in 2010 by the settlement reached with the Revenue under the LDF. This adds nothing of substance, however, to the admitted fact that there were some remittances, in the later years of his life, which David failed to declare and pay tax upon. Whether this failure was dishonest, reckless or merely negligent is not a question upon which I am in a position to express any firm view. I am certainly not prepared to hold, on the evidence before me, that David was guilty of defrauding the Revenue. Furthermore, even assuming that he was, it would in my judgment be going several steps too far to infer that tax evasion had been his intention in establishing Rainbow in the first place.

For the avoidance of doubt, I should also make it clear that the disclosure made under the LDF did not include any income or gains which were taxable on the remittance basis during David's lifetime. The declared arrears of tax during the period of six years before his death related to dividends on shares in UK companies owned by Rainbow. This was income with a UK source, and therefore taxable in David's hands whether it was remitted to the UK or not. Thus the settlement with the Revenue, although it would have covered any tax due from David on the remittance basis during those years, did not involve any admission that any such tax was due in David's lifetime.

In order to complete the picture, and before reaching a final conclusion on this part of the case, I need to refer to the evidence of tax evasion by David contained in Alan's third witness statement. Upon analysis, this evidence seems to me too flimsy, and too circumstantial, to ground any firm conclusions adverse to David on a charge of such gravity. I must now explain why I take that view.

Alan says it was an "open secret" for many years in his family, dating back to the early 1960s, that David had assets in Switzerland which he did not reveal to the UK tax authorities. When Alan was about 14, and at school in London, he sometimes worked at David's office at Jersey Masters Limited for a couple of weeks during the school holidays, helping to move or deliver stock to shops in London, or to pick up and deliver cloth from the cutters. According to Alan, David then told him that he had a Swiss bank account, and that overseas customers were directed to pay their invoices to his Swiss accounts rather than to his bank in London. In his statement, Alan said he saw the invoices which requested payment like this, and they were sent out with the packing slips. In cross-examination, however, he denied seeing the requests on the invoices, and offered no alternative explanation of how the requests had been made. He also seemed to accept that, if David's business partner Georgina Ray had not herself been part of the fraud, she would have been a victim of it in her capacity as a shareholder in the parent company of Jersey Masters Limited, Hamilton & Ray Limited, because the profits of the subsidiary would have been understated.

Alan also says he remembers his father telling him at this time that he arranged his affairs in this way so as to ensure that no tax was paid on those sales. However, he offered no explanation of how the fraud was supposed to work, bearing in mind that the invoices and other sales documents would presumably still have existed, and the accounts of Jersey Masters Limited (a UK company) would have been subject to annual audit. Alan merely says that, according to his father, this was a common practice at the time in the rag trade, and he sometimes heard his father discussing the use of similar offshore bank accounts with friends and colleagues who used to visit his office from time to time. Alan's impression was that they were all rather proud of avoiding tax in this way.

In my view this evidence is far too flimsy and unsubstantiated, and dates from far too early in Alan's life, for me to be able to place any weight at all upon it. Indeed, I think it is regrettable that Alan has chosen to resurrect and place before the court his childhood recollections of what may well have been no more than loose gossip about matters of which he had no first hand knowledge.

Once Alan had finished school and university in England, he spent two years in America where he did an MBA. He then returned to England in 1970, and for the next three years worked here. For some of that time he worked with his father, helping him to find properties that he would then buy. Alan says that from time to time his father would go to Switzerland to manage the money he kept there, referring to it as his investment. His recollection is that David did not fly directly to Switzerland, but used to fly to Italy instead, and then drive or take a train to Switzerland from Italy. Alan says David did not mention any particular bank to him at the time, and he did not know the details of what his father did during these visits. He simply knew that he was going there to manage his investments. Alan continues, in his written evidence:

"I know he was very keen to leave no "footprint" (in his words). So far as I am aware no bank statements concerning his Swiss investments were ever sent to his office in London and he was not contacted on the telephone regarding his Swiss accounts. I suspect that it was to avoid leaving a "footprint" that David did not fly directly to Switzerland."

In cross-examination, Alan accepted that his father had business interests in Italy, and that there was therefore a legitimate reason why he might have chosen to go to Switzerland via Italy. He maintained, however, that David had also told him that he did not want to have a record of his flying to Switzerland. I am prepared to accept that David may at this time have preferred to make his visits to Switzerland via Italy, and that he wanted to keep the existence of his Swiss investments a secret. But this does not prove that he evaded UK tax due on the remittance basis in respect of income or gains from these investments, and there is not a scrap of direct evidence that he did so. Furthermore, these events took place over 20 years before the foundation of Rainbow.

Alan's next allegation is that in the mid-1980's (he cannot recall the exact year) David sold a company which he had established in Hong Kong in the previous decade. In his written evidence Alan said he could not remember the name of this company, but in cross examination he thought it was probably a subsidiary of Hamilton & Ray Limited called the Winnipeg Trading Company. Alan says this company undertook manufacturing and sales in Hong Kong, and when it was sold David told him that some of the proceeds were paid directly into his Swiss bank account. Alan's understanding was that the sale raised several hundred thousand pounds. According to Alan, this meant that the proceeds of sale of the foreign subsidiary should have been subject to UK corporation tax, and then taxed again when transferred to David as a dividend as a shareholder of Hamilton & Ray Limited. These taxes, says Alan, were evaded.

Again, I think it is unfortunate that Alan should have chosen to make such a serious allegation upon such a flimsy basis. Without full details of what happened, it is quite impossible to form a view about how the transaction should have been taxed, or whether David took steps to evade the payment of any UK tax that fell due. Depending on how the sale was structured, there may have been perfectly legitimate reasons for paying part of the proceeds to David, and (if so) he was fully entitled to have the money paid into his Swiss accounts. There is no suggestion that any exchange control regulations were breached, even if the transaction took place before the abolition of exchange control in the UK. Furthermore, any improper diversion of money by David would again prima facie have involved defrauding Georgina Ray, and concealment from the auditors of Hamilton & Ray Limited. I therefore firmly decline to make any finding that David evaded UK tax in connection with the sale.

Alan accepted that his relationship with his father was often difficult in the later years of his life, but he says that when he was younger they had a close and warm relationship, which explains why his father spoke to him about the Swiss accounts. When he did so, he would always say "sshhh … this is secret". David would also often tell Alan that the monies in Switzerland would be inherited by him and Carolyn one day in the future. In my view this evidence adds nothing of any value or relevance. It merely shows that David wished to keep the existence of his Swiss accounts secret, which is hardly surprising and not disputed by Carolyn. But secrecy is not the same thing as tax evasion, although it may facilitate it.

Having now reviewed the evidence relating to alleged tax evasion by his father in Alan's third statement, I can state my final conclusion on the issue whether David's intention in establishing Rainbow was to evade UK tax. For all the reasons which I have given, I am satisfied that David's primary intention in setting up the Foundation was to provide a source of offshore wealth for himself and his family, which in particular would be available as an escape fund if the terrible events of David's childhood were ever to be repeated, or in other emergencies of a similar nature. I am equally satisfied that tax evasion was not the sole, main or primary purpose of establishing Rainbow. I accept that David intended to keep the existence of Rainbow concealed from the Revenue and his English professional advisers, and that he probably turned a blind eye to the question whether he might be liable to UK tax on remittances from Rainbow received by him in the UK. To that extent, his conduct was discreditable, as was the subsequent conduct of Alan and Carolyn in failing to disclose the existence of Rainbow after their father's death. But, as I have explained, the available evidence indicates that David used the funds in Rainbow for many purposes, and not just as a vehicle for remitting money to himself (or to be applied at his direction) in the UK. The general picture which emerges, in my view, is of a substantial offshore fund which David set up and maintained for the benefit of himself and his family, and then used during his lifetime for a variety of purposes. Any evasion by him of UK tax which may have occurred was incidental. It was emphatically not the driving force which led David to establish Rainbow.

These findings of fact are sufficient to dispose of Alan's amended case, and they make it unnecessary for me to consider whether the formation of Rainbow was arguably void under Liechtenstein law through application of the concept of abuse of legal form, or Rechtsmissbrauch.

David's role in the operation of Rainbow

The next main factual issue which I need to consider is David's role in the day to day operation of Rainbow, with particular reference to the allegations in paragraphs 9 and 10 of the amended particulars of claim that:

(a) Rainbow's board executed one or more powers of attorney in his favour, effectively abdicating responsibility for control over the assets held by the Foundation and enabling David to deal directly with banks which held those assets; and

(b) David dealt with the assets of Rainbow as his own, without informing the board (or anyone else at Rainbow) of his dealings.

The inference which the court is asked to draw from these matters, together with his beneficial interest during his lifetime in Rainbow's assets under the 1996 and subsequent Regulations, is that at all material times both David and the board intended that Rainbow's capital and income "should be treated, during David's lifetime, as beneficially owned by him".

I have already described Rainbow's constitution, the membership of the board during David's lifetime, the signing rights over Rainbow's accounts at UBS and UMB, and the mandate agreements which David entered into with Dr Dr Batliner & Partner in 1996 and with AA in 2003. I must now describe the powers of attorney which were granted to David.

The first was a general power of attorney dated 6 December 1999, in a standard form provided by UBS. It was signed in Zurich by the two members of the board, Mr Simmen and Corpboard, and verified by Mr Althaus on behalf of UBS. By it, Rainbow granted to David "unlimited power of attorney (without right of substitution)" to be the representative of the board to UBS, and to dispose of any and all assets deposited in Rainbow's name at UBS under the customer master number 230/235.396, and to incur liabilities. The small print included express authority for David to give legally binding instructions to UBS in Rainbow's name for the administration of assets, including dispositions in his own favour and the opening and closing of accounts. The power was exclusively governed by Swiss law, and would remain valid until UBS received explicit written revocation.

I have already noted (see [57] above) that David previously had sole signing rights over the UBS accounts from the time when Rainbow was established. There is no surviving legal document which explains why David had those initial signing rights. Perhaps there was an earlier power of attorney in his favour, or perhaps UBS were content to rely on his sole beneficial interest during his lifetime under the 1996 Regulations. In any event, the December 1999 power of attorney formalised the position and confirmed David's power to control Rainbow's accounts at UBS without reference to the board.

This then remained the position until 1 October 2003, when (as I have already explained) there was a significant change in David's formal powers in relation to Rainbow. At his request, his power of attorney was cancelled with immediate effect, and was replaced with the board resolution of the same date authorising annual payments of up to CHF 100,000 to David, authorising Corpboard to make the necessary disbursements or transfers, and for that purpose granting Corpboard sole powers of disposal over Rainbow's accounts: see [57] to [58] above. The reason for these changes appears to have been a tightening up of UBS's policy with regard to general powers of attorney. This may be inferred from an internal file note by Juliane Weigt of AA of a telephone conversation which she had on 11 November 2003 with Mr Althaus, in which she referred to a letter from Mr Althaus requesting AA to issue "an asset management mandate" to David. She pointed out that the documents which had been sent by UBS to AA were in the wrong form (viz. a general power of attorney), and she added "it is also UBS policy no longer to grant sole signing rights". Mr Althaus agreed.

In fact, however, there is no record of any management power of attorney over the UBS accounts having been granted to David until 15 April 2005, at the same time as the 2005 Regulations were adopted. This document, described as a "Power of attorney for the management of assets", appointed David to manage on Rainbow's behalf all the assets deposited in Rainbow's UBS accounts, with authority to give instructions for the purchase and sale of investments and so forth. By way of contrast to the previous general power, however, David was expressly not authorised to make withdrawals from the account, or dispositions in favour of himself or third parties.

In relation to the UMB accounts, which were not opened until 17 November 2003, David had from the outset an "Administration power of attorney for third parties" which was granted on the same date by the board of Rainbow and authorised David to make dispositions of an administrative nature in relation to the UMB accounts. By article 3, David was expressly "not empowered to withdraw and/or pledge all or part of any assets of any nature whatever".

The position with regard to powers of attorney therefore seems to have been as follows:

(a) from 8 February 1996 to 6 December 1999, David had sole signing rights over Rainbow's UBS accounts concurrently with the joint signing rights of the two board members;

(b) from 6 December 1999 to 1 October 2003, David had a general power of attorney granted by the board over the UBS accounts, which permitted him to withdraw or dispose of the assets as he thought fit, for the benefit of himself or third parties;

(c) after 1 October 2003, David had no signature rights over the UBS accounts, and no power of attorney, but Corpboard could authorise receipt by him of up to CHF 100,000 per annum and held sole signing rights for that purpose;

(d) from 15 April 1 2005 onwards, David also had a management power of attorney over the UBS accounts; and

(e) David never had signing rights over the UMB accounts, but from their inception in November 2003 he held an administrative power of attorney over them.

I now turn to the surviving documentary evidence of operation of Rainbow's accounts in which David was involved. The relevant documents are conveniently collected in volume 15 of the trial bundle, and are summarised in a Scott schedule. They begin on 30 April 2002, when €122,700 was transferred from Rainbow's euro account at UBS to the vendor of the Croatian property which David bought for Carolyn. At that date, David had a general power of attorney over Rainbow's UBS accounts, so unsurprisingly there is no evidence of any independent involvement of the board in this transaction.

During the remainder of the period for which David held the general power of attorney, i.e. until 1 October 2003, we find two more payments connected with the Croatian property, and two payments of fees for Andrew Hamilton at Yale. Apart from those payments, there are also four internal transfers of funds between different accounts at UBS on David's instructions. There is no evidence of separate board approval for any of these payments or transfers, but again this is unsurprising given the existence of David's general power of attorney.

On 5 January 2004, David faxed instructions from the office of Jersey Masters Limited in London to Mr Althaus for the payment of three further sums in euros connected with the purchase of the Croatian property. The payments totalled €29,900, and were implemented on the same day. There is no evidence of any involvement by the board, or by Corpboard acting alone, even though David's general power of attorney had been cancelled three months earlier, and there is no evidence that he had yet been granted a management power of attorney over the UBS accounts. On the other hand, it is possible that the documentary record is incomplete, or that Corpboard authorised the transactions informally because of their connection with previous payments relating to the Croatian property made by David under his general power.

Between 9 July 2004 and 26 August 2004, there were ten internal transfers between Rainbow accounts at UBS. Eight of these, in July 2004, were evidently connected with the division of the UBS accounts into Parts A and B. Although there is no evidence of separate approval of these transfers by the board, I infer that they were approved because of their connection with the 2004 Regulations which the board adopted on 9 July 2004. The other two internal transfers took place on 26 August 2004. They involved the crediting of US$ 2,000 and €800 to Rainbow's accounts in those currencies, and the debiting of the sterling equivalents to the sterling account. There is no surviving record of approval by the board of these two small transactions.

At around the same time, there took place the only two transfers from Rainbow's UMB accounts during David's lifetime. The first was a transfer of £80,000 on 9 August 2004 to one of David's personal accounts at UMB. This was subsequently authorised on 16 August 2004 by a written resolution of the board of Rainbow, signed by or on behalf of AA, Dr Marxer and Corpboard, pursuant to a request which David had faxed to Mr Althaus on 22 July 2004. Mr Althaus was evidently content to set in train the necessary process of authorisation, even though he was an employee of UBS, not UMB.

The other UMB transfer had taken place some two months earlier, on 7 June 2004. It was a transfer of £4,600 from Rainbow's sterling account with UMB to David's personal sterling account with UMB. There is no evidence of express authorisation for this transfer, but it may have been authorised by Corpboard pursuant to the resolution of Rainbow's board dated 1 October 2003. The reference to "transfers" in paragraph 2 of that resolution shows reasonably clearly that the authority granted to Corpboard was not intended to be confined to cash withdrawals.

Reverting to the UBS accounts, the next transfer took place on 21 October 2004, in the sum of £4,722. This was a payment to the London School of Economics in respect of fees for David's granddaughter, Rachael Yates. It was made pursuant to a written request faxed by David to Mr Althaus on 18 October 2004, and was authorised in writing by Corpboard on 20 October.

The next payment out of Rainbow was on 14 April 2005, of £10,000 to Carolyn's account in Croatia. Carolyn's original request to her father for this payment was made on 5 April 2005, and on 13 April the UBS wealth management team in Zurich sent drafts of the necessary distribution resolution, distribution authority and signed distribution request to AA in Vaduz. The documents were returned with the necessary signatures on the same day.

The only other payment out of Rainbow made in 2005 was another payment of university fees for Rachael Yates, made on 20 September. This was authorised by a written resolution signed by Corpboard on 16 September. There were also four internal transfers made in late November 2005, all of which would have fallen within the scope of David's management power of attorney.

In 2006, we find 15 transfers nine of which were expressly authorised by Rainbow's board, or by Corpboard pursuant to its delegated authority. Of the remaining six payments, one was an internal transfer that would clearly have been within David's administrative power of attorney, and another was a payment from David's personal account to his German bank account and therefore irrelevant. The remaining four payments need to be looked at a little more closely.

The first two of them were cash withdrawals made in Zurich on 5 May 2006 of £5,050 and CHF 11,400. These withdrawals were presumably made during David's visit to Zurich with Carolyn. If, as seems likely, they were made by David himself during his visit, it is hardly surprising that no express authorisation from the board, or Corpboard, was obtained. Another possibility is that the withdrawals were informally authorised by Corpboard, without a written resolution.

The next transfer was made pursuant to a written request faxed by David to Mr Althaus on 23 June 2006, asking him to transfer £10,000 to Ora Hutmacher. The request did not specify that the money was to come from Rainbow, but a manuscript note on the fax by Mr Althaus shows that he gave instructions to debit the sum to Rainbow's sterling account at UBS and transfer it to David's personal account, whence it would be transferred to Ms Hutmacher. She then made a cash withdrawal of the same amount on 5 July 2006, and presumably disposed of it in accordance with David's instructions. There is no evidence of any express authorisation from either the board or Corpboard alone for this transaction.

The final apparently unauthorised payment (of £25,000) was made on 29 August 2006 to a Swiss lawyer, Dr Patrizia Holenstein of Beglinger Holenstein pursuant to a request faxed by David to Mr Althaus on 25 August. Carolyn's evidence is that during her visit to Zurich with her father in 2004, he took her to meet Ms Holenstein, and she was told by him that the existence of Rainbow must not be revealed, and that any payments from Rainbow should be made through Beglinger Holenstein, rather than directly from the bank. Carolyn says she does not know why her father insisted on such secrecy, especially as he referred to his Swiss funds from time to time; but her belief is that this was part of "his general aversion to anyone asking him about his financial arrangements or affairs". In any event, it seems safe to infer that this payment was, in one way or another, intended to be for David's benefit. There is no evidence of any express authorisation for it on behalf of Rainbow, but again the possibility of a gap in the written record or an informal authorisation by Corpboard cannot be excluded.

The final transaction in David's lifetime, on 15 January 2007, was a payment of £20,000 from Rainbow to Ms Hutmacher, pursuant to a request faxed by David to Mr Althaus on the same day. The instruction appears to have been implemented by Mr Friedrich, whose signature appears on the fax. The money was transferred from Rainbow to David's private account, and thence to Ms Hutmacher's account who withdrew it in cash on the same day. It should be noted that this transfer was fully authorised by Corpboard, which signed draft documentation sent by UBS wealth management to AA in Vaduz and returned it on the same day.

The pattern which emerges from this all evidence, in my judgment, is not one of wholesale disregard by David and Rainbow of the need for Rainbow to authorise transfers or payments out of the Foundation's accounts with UBS and UMB. The great majority of the relevant transactions were either expressly authorised, or were made by David pursuant to his general power of attorney (before 1 October 2003) or his administrative power of attorney (after 15 April 2005). In the handful of cases which do not fall into those categories, it is always possible that the surviving documentary record is incomplete, the possibility of informal authorisation by Corpboard often cannot be excluded, and on at least one occasion UBS was probably acting on instructions given by David in person in Zurich.

This provisional conclusion is reinforced by the evidence of the two UBS witnesses, Mr Althaus and Mr Friedrich. Mr Althaus confirmed that he had managed the day to day operation of Rainbow for about six to seven years, and had received a total of perhaps 50 to 100 instructions from David during that period. Instructions relating to investment transactions were always given by David. External payments or transfers were initially made by David under his general power of attorney, but later had to be authorised by Rainbow. Mr Althaus said that when such instructions were received from David, they were first verified and then forwarded to the wealth planning department in order for the necessary authorisation to be obtained. He said that he "could not make any payments to third parties without written authorisation", and he would not carry out the instruction until the authorisation had been obtained. When it was put to him by the presiding judge that David carried out the internal restructuring of Rainbow on his own, but (external) payments required the authorisation of Rainbow, he replied:

"That is correct. I could not do anything without the consent of the Rainbow Foundation."

Mr Althaus was also asked some supplementary questions by Alan's lawyer, in response to which he said that the need for additional authorisation by Rainbow (when David's general power was revoked) had been the result of "a change in business policy at UBS". After that, external payments were only made on the basis of authorisation by the board. Mr Althaus said that he never had personal contact with the board, because the necessary authorisation was always obtained by Wealth Planning.

Similar evidence was given by Mr Friedrich. He said that, before David's instructions for transfers were implemented, "all documents were forwarded to the Foundation Board and then returned by the Foundation Board with instructions for their implementation". This process was carried out by Wealth Planning, which he described as an internal department of UBS responsible for the administration of Rainbow. There was no single person within that department responsible for managing the relationship with Rainbow: it was the responsibility of the department as a whole.

In answer to supplementary questions from Alan's lawyer, Mr Friedrich said that internal UBS guidelines require that, even if the customer has a general power of attorney, instructions by the customer which relate to a UBS foundation are countersigned by the foundation board. This answer must, I think, be read as referring to the current guidelines of UBS, because Mr Friedrich had no responsibility for Rainbow during the period when David's general power of attorney was in force.

Mr Friedrich was also asked to comment on a note of a conference telephone call between him and Alan on 19 November 2012. Alan's solicitor, Mr Sutton, was present with Mr Friedrich in Zurich throughout the call. The discussion appears to have centred on the split of the funds in Rainbow into Parts A and B, and it was in that context that Alan asked:

"When UBS made transfers between Part B and Part A or indeed when UBS bought securities for the Rainbow Foundation who did UBS take instructions from?"

Mr Friedrich then replied:

"Absolutely UBS took instructions from David. This was a "look through entity" and the funds most definitely belonged to David Hamilton. The Foundation Board was a mere "rubber stamp". David had full authority over his assets during his lifetime including the Rainbow Foundation assets which were David's. He bought and sold the shares and gave UBS instructions. He made transfers and withdrawals. David "set the rules"."

Read in context, it seems to me that Mr Friedrich's reference to the board being a mere "rubber stamp" relates only to investment decisions taken by David, and not to transfers and withdrawals from Rainbow. This was confirmed, to my mind, when Mr Friedrich said in his oral evidence, of the passage which I have just quoted:

"[It] omits that even though David Hamilton was the economic beneficiary, all of his instructions had to be approved by the Foundation Board. His was not a one-man show."

I come finally to the evidence given by the witnesses for UMB. It needs to be remembered, when considering this evidence, that the UMB accounts were only opened in November 2003, and only two external transfers or payments were ever made from those accounts before David's death. Of those, by far the larger was the transfer of £80,000 on 9 August 2004 to David's personal account at UMB, which was expressly authorised by Rainbow's board. This authorisation, however, was obtained via Mr Althaus and the Wealth Management department of UBS, and was not provided until 16 August 2004, a week after the transfer had been effected by UMB on 9 August. This may explain why Mr Rhein felt able to say in his written evidence that UMB always acted on David's instructions alone, and he (Mr Rhein) had never come into contact with the board of Rainbow or with any individual connected with Rainbow. Indeed, Mr Rhein says he never saw any statutes or regulations of Rainbow, and was unaware of their existence.

Apart from the Rainbow accounts with UMB, David also had two personal accounts which he opened at the same time, one in his own name and the other unnamed. Mr Rhein does not always clearly distinguish between these accounts in his written evidence. For example, when he says he is "quite certain" that UMB treated David as the only person "entitled to operate the Rainbow Foundation account number 150786", the account referred to was in fact one of the accounts in David's own name. Given that David at all material times also had an administrative power of attorney over the Rainbow accounts, it is perhaps unsurprising that Mr Rhein gained the firm impression that all of the UMB accounts were operated on David's sole instructions. Although he said in his statement that he was not aware of the power of attorney, Mr Rhein agreed in cross-examination that it was a standard form document and he had been aware of it from the time when it was signed.

I have already pointed out some significant errors in Mr Rhein's written evidence, as well as the fact that (possibly unknown to Mr Rhein) the transfer of £80,000 in August 2004 was in fact authorised (albeit after the event) by Rainbow's board. Mr Rhein is now elderly, and has been retired for some ten years. He also suffered a fall not long before giving his oral evidence by video link. For all these reasons, I find that I need to treat his evidence with considerable caution, and although on balance I am prepared to accept he genuinely believed that all of the UMB accounts were operated under David's sole control, I am unable on the strength of his evidence alone to draw any firm conclusion that the Rainbow accounts were, in effect, merely further personal accounts of David's.

I am also unable to derive much assistance from the evidence of Mr Brandeis, who took over from Mr Rhein as account manager of the relevant UMB accounts on Mr Rhein's retirement in May 2006. Allowing for the overlap period of three months which preceded this, Mr Brandeis' involvement with the accounts therefore covered the final year of David's life. During this period, there were no external transfers or withdrawals from the Rainbow accounts, so the only instructions received from David in relation to those accounts would have been of an administrative nature. As Mr Brandeis rightly recognises in his statement, such instructions would have fallen within the scope of David's administrative power of attorney, and therefore no question of authorisation by the board of Rainbow arose. As Mr Brandeis says, a typical telephone call from David would have been a request to invest money in a particular stock or to transfer money from one Rainbow account to another. Mr Brandeis never had occasion to speak to or correspond with representatives of Rainbow, but there is no reason why he should have.

Under cross-examination, Mr Brandeis accepted that from January 2006 until David's death no transfers had been made from any of Rainbow's four separate currency sub-accounts to either of David's personal accounts. Mr Brandeis also referred in his statement to the transfer of £4,600 which had been made into one of David's personal accounts on 7 June 2004, but he agreed it took place before his time at UMB. He was unable to explain why he had chosen to refer to this transaction, and not to the much larger transfer of £80,000 which had been authorised. Mr Brandeis denied that his reference to the £4,600 transfer had been suggested to him, and said it was entirely his own idea. I am afraid I do not accept this evidence. I think that here, and at some other places in his statement, Mr Brandeis was saying what he knew (or had been told) Alan wanted him to say.

I would make the same comments in relation to some of the evidence of Mr Rosengarten, who like Mr Brandeis expressly referred to the transfer of £4,600 and the alleged lack of authorisation for it, even though he did not start working at UMB until January 2008, nearly a year after David's death. Mr Rosengarten also referred to the transfer of £80,000, but again like Mr Brandeis he omitted to mention that it had been authorised by Corpboard. His confidently expressed conclusions about the manner in which the Rainbow account was at all times operated in accordance with David's instructions were similar to those of Mr Brandeis, but based upon no first-hand experience. They add nothing of any value, and I discount them.

Having now reviewed the evidence relating to David's role in the operation of Rainbow, I will state my conclusions by reference to the allegations in paragraphs 9 to 11 of the amended particulars of claim, and then consider whether they need to be modified in the light of the control over individual board members which David had under the two mandate agreements.

First, I am not prepared to infer that Rainbow's board abdicated responsibility for control of the Foundation's assets. Rainbow's constitutional arrangements, the documentary record of how the bank accounts were operated in practice, and the evidence of the UBS witnesses satisfy me on the balance of probabilities that Rainbow's board was not a mere cipher or nominee, always willing to comply with David's requests without giving any independent thought to the matter. I would in any event be reluctant to make such a finding, unless the evidence in support of it were of compelling strength, without the allegation having been put to Rainbow and without hearing evidence from anybody on behalf of Rainbow. Absent such a challenge, there must in my view be a rebuttable presumption of regularity to the effect that Rainbow was governed in good faith under its constitution and the Regulations in force for the time being. I am not deterred from taking this approach by Professor Schauer's anecdotal evidence that a large number of Liechtenstein foundations are sham, although I accept that the evidence of how Rainbow was operated needs to be scrutinised with particular care.

It is true that there is no recorded instance of any of David's requests having been turned down by Rainbow (or, pursuant to its delegated authority, by Corpboard), but that is not surprising in view of David's sole beneficial interest in Rainbow during his lifetime. Unless a proposed transfer or application of assets were unlawful in some way, or involved some other obvious impropriety, or were so unreasonable as to raise a real question about David's capacity or freedom of action, I find it hard to envisage circumstances in which David's requests could reasonably have been refused. But that merely reflects the comprehensive nature of his beneficial entitlement, and is not in itself a ground for inferring that the board was no more than his agent or alter ego.

Secondly, I do not accept that David dealt with Rainbow's assets as his own, without informing the board (or anyone else at Rainbow) of his dealings. There may have been some occasions when this happened, particularly in the early days before he was granted the general power of attorney by Rainbow; but I cannot come to any firm conclusion on this point in the absence of bank statements and related documentation before 1999. During the period when the general power of attorney was in force, David was presumably entitled to rely upon it without recourse to the board of Rainbow (although I should say I have heard no evidence of Swiss law, by which the power of attorney was governed). In such cases, however, David would have acted under and in accordance with the governance structure of the Foundation. The same applies to all actions of an administrative nature, such as changes of investments and transfers between Rainbow accounts, undertaken by David while his two administrative powers of attorney (over the UBS and the UMB accounts) were in force, that is to say from 17 November 2003 in the case of the UMB accounts, and from 15 April 2005 in the case of the UBS accounts (David's general power having been cancelled in September 2003).

Thirdly, whatever the position may have been while David's general power of attorney was in force, I am satisfied that from October 2004 until David's death in February 2007, nearly two and a half years later, both Rainbow and David were alive to the need for authorisation of transfers which did not fall within the scope of either David's administrative power or the delegated authority of Corpboard, and in the great majority of cases a written record of such authorisation survives. In evidence which to my mind rang true, Carolyn said in connection with her visit to Zurich with her father in 2006, when it was put to her that he could very easily access the cash in Rainbow and give it to her:

"He always had and told me he had to get permission from the foundation board and he groaned and moaned about it, taking time, costing money, but always it had to go through the board."

It was then put to Carolyn that she was making up this evidence, because she said nothing about it in her witness statement. Her final reply, which again I accept, was as follows:

"I didn't say anything about it in my witness statement because you can see all the board resolutions for everything that he does. I can't see that it's relevant to know that he grumbled about having to pay every time there was a board resolution, that there was a fee."

It follows that I decline to draw the inference pleaded in paragraph 11 of the amended particulars of claim, namely that "David and the board … both intended at all material times that the capital and income of the Foundation should be treated, during David's lifetime, as beneficially owned by him". On the contrary, the inference which I draw is that David and the board both intended, at all material times and in particular after the cancellation of David's general power of attorney, that Rainbow's assets should be treated during his lifetime as beneficially owned by Rainbow, but held by Rainbow for David's benefit, and at his disposal with the board's approval or authority, in accordance with the Statutes and Regulations in force for the time being.

I now need to consider the significance of the partial control which David had over the composition and acts of the board, by virtue of the mandate agreements which he entered into with Dr Dr Batliner & Partner on 8 February 1996 and with AA on 1 October 2003: see paragraphs [51] and [56] above. As a result of the former of these agreements, there was throughout one member of the board who had been appointed by Dr Dr Batliner & Partner, and who apparently had no authority to act independently of David's instructions, subject only to the "retained exceptions" set out in section III of the agreement. As a result of the second agreement, AA was in a similar position when it was a member of the board, at any rate from 1 October 2003 onwards (that being the date of the agreement: AA was first appointed to the board on 22 February 2002). Thus, from 1 October 2003 until David's death two of the three members of the board (AA and Dr Marxer, then AA and Dr Gasser) were apparently obliged in all normal circumstances to act in accordance with David's instructions, and only the third member (Corpboard) was free from that constraint. Moreover, the board was at all times able to act by a simple majority, so in case of disagreement the two "mandated" members could have prevailed over Corpboard.

Each mandate agreement was governed by Liechtenstein law, and the experts took them into account when forming their views on the question whether the Foundation was a sham under Liechtenstein law. At this stage, there is only one aspect of their evidence in relation to the mandates upon which I wish to focus. In his first report, Professor Schauer referred to what I have called the "retained exceptions" which come immediately after the provision stating that the mandated member is neither authorised nor obliged to act independently. For convenience, I will repeat the wording of the exceptions in the agreement with Dr Dr Batliner & Partner:

"By accepting the above obligation, the exceptions, which are imposed by law, justice and public morals as well as by the Mandatories' and the Member of the Foundation council's social and business positions, are retained."

In his main report, Professor Schauer said that the exceptions contradicted the preceding obligation, and the contradiction should be resolved by disregarding the exceptions. As Professor Schauer put it, in paragraph 50:

"Therefore, the second sentence cannot have had any legal effect because it was superseded by the clear and unambiguous instructions contained in the first sentence in the contract of mandate."

The possibility that the exceptions should be construed as a qualification, or derogation from, the preceding obligation does not seem to have occurred to him, although to an English lawyer that probably seems the natural way to interpret the two provisions. In cross-examination, however, Professor Schauer moved from his initial position, and agreed that the last paragraph of section III should be read as qualifying the two preceding paragraphs. This is of some importance, in my view, because it shows that even the mandated members of the board, if they fulfilled their role conscientiously, had a real function to perform. They were not just obliged to follow David's instructions unthinkingly, but had to satisfy themselves (broadly speaking) that the instructions did not conflict with the requirements of law or morality. Moreover, Professor Schauer seems to have accepted this, as the following exchange with Mr Halpern shows:

"Q. In practice all they [i.e. the board] would need to worry about was not acting illegally or immorally, and that's what this last paragraph does; do you agree with that?

A. I think I can agree with that, yes."

In conclusion, therefore, I do not accept that David's control over the mandated board members significantly alters the picture presented by the other evidence which I have reviewed. In practical terms, the partial control which David exerted over the board contributed to the near-certainty that he would be able to use Rainbow's assets as he wished during his lifetime; but it does not lead to the conclusion that both he and Rainbow intended to treat him as the beneficial owner of those assets.

The law applicable to Alan's claim

Alan's primary case is that English law governs the question whether David effectively disposed of his beneficial interest in the assets which he transferred to Rainbow. It is only in relation to Alan's amended case based on tax evasion, which I have rejected on the facts, that Liechtenstein law is pleaded in the particulars of claim.

Carolyn's defence, however, is that the question is governed by Liechtenstein law. Paragraph 5 of her defence says:

"The issue as to the effect of the transfer by David of assets to the Rainbow Foundation is a matter governed by Liechtenstein law and in accordance with that law the legal title and beneficial interest of David in the assets was effectively transferred to the Rainbow Foundation to be held by it on the terms of its regulations."

I therefore need to resolve the issue of which law applies to Alan's primary claim.

It is common ground that the search for the applicable law involves a three-stage enquiry, which Staughton LJ described as follows in Macmillan Inc v Bishopsgate Trust (No. 3) [1996] 1 WLR 387 at 391G:

"In any case which involves a foreign element it may prove necessary to decide what system of law is to be applied, either to the case as a whole or to a particular issue or issues … Conflict lawyers speak of the lex causae when referring to the system of law to be applied. For those who spurn Latin in favour of English, one could call it the law applicable to the suit (or issue) or, simply, the applicable law.

In finding the lex causae there are three stages. First, it is necessary to characterise the issue that is before the court. Is it for example about the formal validity of a marriage? Or intestate succession to moveable property? Or interpretation of a contract?

The second stage is to select the rule of conflict of laws which lays down a connecting factor for the issue in question. Thus the formal validity of a marriage is to be determined, for the most part, by the law of the place where it is celebrated; intestate succession to moveables, by the law of the place where the deceased was domiciled when he died; and the interpretation of a contract, by what is described as its proper law.

Thirdly, it is necessary to identify the system of law which is tied by the connecting factor found in stage two to the issue characterised in stage one."

It is clear, however, that the exercise is not a mechanical one, that the three questions are inter-connected, and that the overall aim is to identify the most appropriate law to govern a particular issue: see Raiffeisen Zentral Bank Österreich AG v Five Star Trading LLC [2001] EWCA Civ 68, [2001] QB 825, at [26] to [29] per Mance LJ, with whom Charles J and Aldous LJ agreed.

The following extracts from the guidance given by Mance LJ (as he then was) seem to me particularly pertinent:

"26. … The [three stage] process falls to be undertaken in a broad internationalist spirit in accordance with the principles of conflict of laws of the forum, here England.

27. While it is convenient to identify this three-stage process, it does not follow that courts, at the first stage, can or should ignore the effect at the second stage of characterising an issue in a particular way. The overall aim is to identify the most appropriate law to govern a particular issue. The classes or categories of issue which the law recognises at the first stage are man-made not natural. They have no inherent value, beyond their purpose in assisting to select the most appropriate law. A mechanistic application, without regard to the consequences, would conflict with the purpose for which they were conceived. They may require redefinition or modification, or new categories may have to be recognised accompanied by new rules at stage 2, if this is necessary to achieve the overall aim of identifying the most appropriate law …

28. The three-stage process identified by Staughton LJ cannot therefore be pursued by taking each step in turn and in isolation …

29. There is in effect an element of interplay or even circularity in the three-stage process identified by Staughton LJ. But the conflict of laws does not depend (like a game or even an election) upon the application of rigid rules, but upon a search for appropriate principles to meet particular situations."

(1) How should the relevant issue be characterised?

According to Alan, the relevant issue in dispute should be characterised as whether the transfer by David of his assets to Rainbow effectively disposed of his beneficial interest in them. According to Carolyn, however, the relevant issue is whether the assets belonged legally and beneficially to Rainbow. At first sight, there may seem to be little difference between these two formulations, but there is in fact an important distinction. Alan's formulation focuses on the transfer made by David, and asks whether he thereby effectively divested himself of his beneficial interest in the assets transferred. Carolyn's formulation, by contrast, looks at the position after the transfer has been made, and asks whether Rainbow then had full legal and beneficial title to the assets transferred. The difference is brought into focus by the fact that Carolyn says the appropriate connecting factor, at stage two, is the rule of conflict of laws that the validity of an entity is governed by the law of the place where it is established and registered. In other words, the core enquiry is about the validity of Rainbow. On the other hand, Alan says that the relevant connecting factor at stage two is the law applicable to a transfer between donor and donee.

This disagreement brings out an important point, which is that it would be a fallacy to assume that there is necessarily only one relevant issue to be identified at the first stage. In my judgment there are two separate issues in play, each of which must be determined by reference to the most appropriate law. The first issue is the validity of Rainbow. This is an enquiry of a familiar kind in the conflict of laws, where the validity (both formal and essential) of a foreign entity of a type unknown to English law has to be ascertained. The second issue is the one identified by Alan. Assuming Rainbow to have been validly established under the relevant law, was the transfer of assets to Rainbow by David effective to divest him of his beneficial ownership of those assets? This issue involves looking at a bilateral transaction between donor and intended donee, or at least between transferor and transferee.

(2) What are the relevant connecting factors, and which systems of law do they import?

I find it convenient to consider the second and third stages of the enquiry together. I have already mentioned the connecting factors upon which the parties rely, and I will begin with the validity of Rainbow.

In agreement with the submissions for Carolyn, I consider that the question of the validity of a Liechtenstein foundation should be determined in accordance with the law of the place where the entity is established and registered, namely Liechtenstein. This may sound like the obvious answer, but is none the worse for that. It has often been emphasised that the search for the appropriate law to determine an issue should be conducted in a non-technical and internationalist spirit, with a proper respect for the principles of comity and the avoidance of exorbitant claims to extra-territorial jurisdiction. It is almost self-evident, to my mind, that questions about the formal or essential validity of a Liechtenstein foundation, which is a form of legal person unknown outside Liechtenstein, should be determined by reference to the law to which such a foundation owes its very existence. If an English court were to purport to determine the question by reference to a different system of law, such as English law, it is difficult to see how the principles of comity and avoidance of exorbitant jurisdiction would be respected. Mr Halpern aptly referred me in this context to the observations of Sir Mark Potter P, giving the judgment of the Court of Appeal in Charman v Charman (No. 4) [2007] EWCA Civ 503, [2007] 1 FLR 1246, at [58], where he endorsed the decision of the Royal Court of Jersey in Re Fountain Trust [2005] JLR 359:

"in which it observed, at para [18], that an assumption of jurisdiction by a judge of the Family Division in England to declare a Jersey trust to be a "sham", such as had there occurred, would generally be exorbitant".

Although counsel were unable to find any authority on the question of what system of law should be applied to the issue of the validity of a Liechtenstein foundation, it is a well-established principle of English private international law that "[t]he existence … of a foreign corporation duly created … under the law of a foreign country is recognised in England": see Dicey, Morris & Collins, The Conflict of Laws, 15^th edition, Rule 174. As the editors say in the accompanying commentary, at paragraph 30-010:

"Whether an entity exists as a matter of law must, in principle, depend on the law of the country under which it was formed. That law will determine whether the entity has a separate legal existence. The law of that country will determine the legal nature of the entity so created, e.g. whether the entity is a corporation or partnership, and, if the latter, the legal incidents which attach to it."

Another long-established principle is embodied in Dicey, Morris & Collins, Rule 175(2):

"All matters concerning the constitution of a corporation are governed by the law of the place of incorporation."

Counsel for Carolyn also referred me to Lewin on Trusts, 19^th edition, at paragraph 1-024, where the authors say this under the heading "Trust and foundation":

"The private foundation is a civil law institution which has become increasingly common in offshore common law jurisdictions in the last 15 years following the introduction of legislation generally designed to emulate the provisions of the Liechtenstein Law on Persons and Companies which first created the civil law private foundation. A private foundation is a creature of the statutory provisions of the country in which the foundation is formed: to that extent the requirements for the creation of a valid private foundation vary between jurisdictions."

It is clearly implicit in this passage that, as one would expect, the validity of a private foundation depends on the law of the jurisdiction in which it is established.

I now turn to consider the law applicable to the transfers of property between David and Rainbow. An initial difficulty is that details of when and in what form these transfers were made are no longer available. However, the evidence, such as it is, indicates that the only assets transferred into Rainbow by David consisted of money, either following the sale of his Hong Kong business or following the sale of properties in Berlin restored to him (and presumably Carolyn) by the German government. I therefore proceed on the assumption that the monies transferred into Rainbow were sums standing to David's credit in various bank accounts. On that footing, the relevant connecting factor would seem to be the English choice of law rule applicable to the assignment or transfer of intangible property, consisting of the debts owed to him by the relevant banks.

Under the general heading "Assignment of intangible things", Rule 135 in Dicey, Morris & Collins reads as follows:

"(1) As a general rule,

(a) the mutual obligations of assignor and assignee under a voluntary assignment of a right against another person ("the debtor") are governed by the law which applies to the contract between the assignor and assignee; and

(b) the law governing the right to which the assignment relates determines its assignability, the relationship between the assignee and the debtor, the conditions under which the assignment can be invoked against the debtor and any question whether the debtor's obligations have been discharged.

(2) But in other cases (semble), the validity and effect of an assignment of an intangible may be governed by the law with which the right assigned has its most significant connection."

In the commentary on this rule at paragraphs 24-051 and following, the editors explain that the choice of law rules which govern the assignment or transfer of intangible property are not easy to state with certainty, in view of the multifarious nature of such transactions, but they express the belief that the category is still a coherent one, and the choice of law rule stated as Rule 135 is accurate. The reason for this, they say, is that the statutory rule for choice of law now contained in Article 14 of the Rome I Regulation (and, before that, in Article 12 of the Rome Convention on the law applicable to contractual obligations), is in all essential respects the same as the choice of law rule developed by the common law. Materially for present purposes, they also say in paragraph 24-061:

"Clause (1)(a) [of Rule 135], which is closely derived from Art. 14(1) of the Rome I Regulation, which is in substance the same as Art. 12(1) of the Rome Convention, is expressed in terms of contractual assignments. But the Convention, and surely the regulation as well, applies to gifts, and there is no reason to suppose that they do not apply to assignments inter vivos by way of gift. In such a case, the law applicable to the transfer between donor and donee will be determined as if the transaction were a contract; and questions of the validity of the gift, e.g. whether it may be revoked for ingratitude, will be governed by the law which, according to the Rome I Regulation, governs the gift."

Adopting this approach, I accept the submission for Alan that the law applicable to the transfers between David and Rainbow should be ascertained as if the transaction were a contract governed (as the relevant times) by the Rome Convention. No questions arise in the present context about the assignability of the underlying debts owed by the banks, or about David's relationship with the banks, so clause (1)(b) of Rule 135 is not relevant. If, then, the search is for the system of law most closely connected with the transfers between David and Rainbow, I accept the further submission for Alan that the answer must be English law. England was David's country of habitual residence, and England is where he had built up and managed his business interests, including those carried on through subsidiary companies in Hong Kong. England was the centre of both his family and his business life, and although he had not acquired an English domicile of choice (or, at least, had satisfied the Revenue that he had not done so), there is no evidence that David retained any significant connections with Germany. Furthermore, the role of Rainbow in the transactions was a purely passive one, in the sense that Rainbow owed its existence to David's desire to establish a foundation in Liechtenstein as a means of keeping a substantial part of his wealth offshore.

As counsel for Alan submit, persuasive support for this approach, and this conclusion, may be found in the judgment of Sarah Asplin QC, as she then was, in Gorjat v Gorjat [2010] EWHC 1537 (Ch), 13 ITELR 312. That case concerned the estate of a French citizen, Jean Gorjat, who was domiciled and resident in England and died intestate in 2007. The claimants were the three adult children by his first wife; the defendant was Jean's widow and his second wife. Jean had held a number of accounts with Credit Suisse in Lausanne, and a few months before his death he gave instructions to transfer those funds into new accounts in the joint names of himself and the defendant. The claimants challenged the validity of the transfer instructions, on the basis of lack of mental capacity and undue influence by the defendant. They sought a declaration that the money was held on trust for Jean's estate, and ancillary relief. It was common ground that, if the claim succeeded, the value of the joint account at the date of Jean's death would fall into his intestate estate, of which the only beneficiaries were the claimants and the defendant.

Initial questions arose whether the English court had jurisdiction to determine the issues about the transfer of the Swiss accounts, and (if so) whether England was the proper forum. There was no dispute between the parties about either of those questions, but the judge recorded at [6] that she needed to be satisfied about them, and counsel for the claimants (Ms Barbara Rich) had referred her to the relevant materials. After referring to passages in the previous edition of Dicey, Morris & Collins, in substantially identical form to those which I have mentioned, the judge accepted that the issue before her should be characterised as a question of the validity of an assignment of intangible property, and expressed her conclusions as follows:

"11. Article 4 of the Rome Convention provides that in the absence of an express choice a contract and therefore, in this case, a gift, shall be governed by the law of the country with which it is most closely connected, which is presumed to be the place of the habitual residence of the person who is to effect the performance "which is characteristic of the contract" …

12. As it is not disputed that the performance which was characteristic to the contract in this case was the unilateral assignment of an interest in intangible property which was effected in England and England was Jean's country of habitual residence … in my judgment, English law applies in relation to the assignment itself and questions as to its validity …"

As counsel for Alan submit, it is natural that the search for the connecting factor in the present case should focus on the transferor, as prime mover and sole operating mind, rather than on the entirely passive recipient of a gift. This produces a just answer to the question, and is not the result of a mechanistic application of rigid rules. They go on to submit that an analogy can helpfully be drawn with other types of case where persons resident in England wish to find a hiding place for their assets abroad, whether their motive is to keep them safe from creditors, or to hide the proceeds of crime, or put them out of the reach of a divorcing spouse. To quote from counsels' written closing submissions:

"80. The focus in this sort of dispute must be on the circumstances of the transfer, and in particular the action and intention of the transferor. The acts (if any) and state of mind of the recipient is nothing to the point. It would be absurd if an English fraudster or English dishonest ex-husband, in defending an English claim by his true creditors in England, could pray in aid the fact that the law of the place of his hidden assets recognised the validity of the receipt; the relevant issue is nothing to do with receipt so the connecting factor cannot be [the] law governing the validity of the transferee's passive receipt …

81. The illogical consequences of tying the exercise to the place of receipt can be illustrated by considering the case of an evasive husband who hides his assets in a variety of shady jurisdictions. In each case, he is just hiding his assets. Should the English conflict rules allow him to thwart the claims of his creditors by identifying the peculiar and particular rules of each of his chosen safe havens?"

In my judgment this submission needs to be treated with caution, quite apart from the fact that I must not be taken to accept any subliminal suggestion that David was himself acting dishonestly when he established Rainbow. On the one hand, I agree that it can be helpful to look at the present issue from a wider perspective, and to compare David's transfers to Rainbow with other cases where an English resident may wish to make gratuitous transfers of assets to a foreign safe haven. On the other hand, I certainly do not agree that one should pay no attention to the nature of the recipient entity and the terms upon which the gift or transfer is received. There is, for example, a clear and important distinction between the gratuitous transfer abroad of assets to a person or entity who receives them as a mere nominee or bare trustee for the transferor, and cases where the recipient is genuinely intended by the transferor to become the beneficial owner of the assets, or to hold them on trusts declared by the transferor. In cases of the former type, a presumption of resulting trust will normally apply; but in cases of the latter type, any such presumption will be rebutted, because the true intention of the transferor is to part with his beneficial interest in the property. To take the case of an evasive husband, there may be all the difference in the world between one who arranges for his assets to be held by nominee foreign companies (as in Prest v Prest [2012] UKSC 34, [2013] 2 AC 415), and one who settles assets abroad by transferring them to the trustees of an offshore trust.

The validity of Rainbow

This issue falls to be determined by the law of Liechtenstein.

In a decision dated 29 January 1990 (reference number 02 C 264/87/29, reported at LES 1991, 91), the Oberster Gerichtshof (the Supreme Court of Liechtenstein, "the OGH") stated in paragraph 16 that the transaction of setting up a foundation "must contain three declarations of will and intent from the founder, as a unilateral … legal transaction, so that a foundation can be established to begin with". The OGH identified these essential ingredients, or "essentialia negotii", as:

"the intent to establish an independent foundation, designate the initial assets to be allocated to the foundation, and to record the purpose of the foundation. These three declarations of will and intent must originate from the will of the founder themselves, since the foundation is terminologically a legal person that arises from the will and intent of the founder …"

In paragraph 17 of its decision, the OGH also referred to the so-called "freezing principle" for foundations, which it described as follows:

"According to this principle, the foundation detaches from the person of the founder as of the instant in which it has been established by the unilateral legal transaction of setting up, creating, and dedicating the foundation. The will of the founder is thus frozen immediately at that instant in the foundation letter and in the foundation statutes … The foundation has detached itself from the assets of the founder, and henceforth constitutes as an outside asset, which henceforth emerged as a legal entity in and of itself."

There is no dispute between the experts that the second and third of the requirements for the establishment of a valid foundation were satisfied when Rainbow was set up, but they differ on the question whether David had the necessary intent to establish an independent foundation. The experts agree that the validity of a foundation is potentially open to attack on the ground of "Mentalreservation", which may be defined as a unilateral lack of intent on the part of the founder. According to Professor Schauer, the legal consequences of Mentalreservation are that "the pretended legal act is null and void", subject to an exception which protects third parties acting in good faith in reliance upon the legal act. It is also common ground, and the OGH has held in various decisions, that the concept of Mentalreservation applies to foundations.

In paragraph 30 of his first report, Professor Schauer said (and in cross-examination Dr Summer agreed) that the concept would apply if the founder, by exercising his rights to give instructions, would promote only his personal benefit and not the affairs and purposes of the foundation, or if he reserved the right to interfere in the foundation with the intent of making further use of its assets for his sole personal benefit. Professor Schauer also accepts, however, that a founder may legitimately "reserve a strong position for himself", including the right to revoke the foundation and to change its statutes (paragraphs 13 and 34 of his report). Furthermore, the experts also agree in their joint report "that generally it is legally possible for the founder to enter into a mandate agreement with the foundation board members binding them to the instructions of the founder". According to Dr Summer, this means that "practically total control of a foundation by its founder is possible". He relies on a number of decisions of the OGH which hold that in such circumstances the founder then becomes a "shadow director", who acts through a real board member who is bound to his instructions. The only limitation is that the foundation board members cannot legally be bound to execute instructions of the founder that would violate the law or the foundation documents (which is not alleged in the present case). The relevant decisions of the OGH, according to Dr Summer, are at least six in number, and span the period from 2001 to 2011. Because the founder then becomes a shadow director, it must follow that the foundations were not void.

According to Dr Summer, the same analysis applies to the general power of attorney to operate the UBS account which David had until 1 October 2003. Since David was the primary beneficiary of Rainbow during his lifetime without any limitations, any withdrawals which he made from Rainbow's bank accounts could hardly have violated the Statutes and Regulations. It cannot therefore be deduced from the existence of the general power that David lacked the intent to establish a foundation. Indeed, his intention to do so was confirmed when he arranged for the Regulations to be amended in 2004 and 2005.

Professor Schauer stresses, however, that the question of lack of intent of the founder is always one of fact, and he says it is likely to be clearly indicated by a combination of a contract of mandate (which does not allow the board to perform any activity without being instructed) and an extensive power of attorney (which permits the founder to dispose of the foundation's assets as if they were still his property). Both experts also agree that it may be possible to infer the necessary lack of intent from the way in which the foundation is subsequently operated.

In my opinion Professor Schauer is right to emphasise that the question is always one of fact, but it is a notable feature of the decisions of the OGH to which I was taken that Liechtenstein law clearly allows a great deal of latitude to the founder of a foundation, and there does not appear to be a single reported case in which a Liechtenstein court at any level has ever declared a foundation to be void on the ground of Mentalreservation.

So, for example, in the OGH decision of 29 January 1990 from which I have already quoted, the court addressed, and rejected, an argument that the foundation in question was invalid because under its initial statutes the founder had reserved "the position of a ranking organ of the foundation". Referring to an earlier decision of the OGH in 1973, the court said in paragraph 17 of its decision:

"These principles set forth at that time by the Supreme Court, and from which there is no reason to deviate in the present case, clearly make it recognisable that the founder can very much secure further channels of influence for himself over the foundation, namely by reserving for himself in the foundation statutes a position as an organ of the foundation. As part of such a reservation under the provisions of Article 559 Section 4 PGR, the founder can secure for himself through the founding statutes an organ position within the foundation, and thus ensure that he will have abilities to style and configure the foundation. These abilities remain in effect even after the foundation has been separated from the assets of the founder. The ability of the founder to influence the foundation is ensured for the future by the foundation having obtained a legal personality of its own that is distinct from the person of the founder."

In the light of these principles, and the detailed findings of fact which I have already made about the way in which Rainbow was operated, I am satisfied that Rainbow was not void for lack of intent, or Mentalreservation, on the part of David when he established it in 1995. I consider that he intended to establish Rainbow as a separate legal entity, and that he intended Rainbow to become the beneficial owner of the assets which he transferred to it. It is well established by decisions of the OGH, and Professor Schauer accepted in cross-examination, that a foundation has full ownership of its assets, and Liechtenstein law does not recognise the distinction between legal and beneficial interests which is fundamental to the English law of trusts. It follows that so-called beneficiaries under a Liechtenstein foundation do not in any sense own the assets, but instead have legally enforceable rights to receive certain benefits, which could be enforced if necessary by suing the foundation. Precisely because a validly constituted foundation acquires full beneficial ownership of its assets, many founders, David included, are at pains to ensure that their rights to benefit during their lifetime are framed in the widest terms, and that the foundation will in practice be operated in accordance with their wishes. The end result may therefore look very similar to the beneficial ownership of the assets which David had before he transferred them to Rainbow. But it does not follow from this that David lacked the necessary intention to establish Rainbow as a valid foundation. Rather, it helps to explain why the Liechtenstein foundation has for so many years offered an attractive opportunity to those who wish to divest themselves of their assets, safe in the knowledge that they will be held in an entity over which the transferor continues to enjoy full, or virtually full, control.

Did David retain beneficial ownership of the assets under English law?

I have decided that the validity of the transfer of money (or any other intangible property) which David made into Rainbow is to be determined under English law. It is therefore necessary for me to consider the two main submissions which Alan makes under this heading. The first main submission is that David retained beneficial ownership of the assets, either because Rainbow held them as his bare nominee, or pursuant to a resulting trust.

As I have already indicated, I am unable to accept this submission. Any presumption of resulting trust is in my judgment clearly rebutted by David's intention to establish a valid foundation in Liechtenstein, which would acquire full beneficial ownership of the assets transferred to it. English law is not so blinkered or parochial that it would disregard the nature of the entity to which the assets were transferred, or the intention which David had in making the transfer. In so far as the question may involve consideration of the essential validity of Rainbow, I have already explained that this is a question to be determined under Liechtenstein law, and I have answered it in Rainbow's favour. For the same reasons, the proposition that David transferred the assets to Rainbow to hold as his nominee is in my judgment unsustainable.

The situation is in my judgment quite different from that in Prest v Prest, upon which Alan's counsel placed much reliance. The Supreme Court there had to consider the beneficial ownership of seven London properties transferred by the husband to three companies incorporated in the Isle of Man which were under his control. The question arose in the context of ancillary relief proceedings, and the wife had expressly alleged that the husband used these companies to hold legal title to properties that belonged beneficially to him: see the judgment of Lord Sumption JSC at [47]. The companies had deliberately refused to co-operate, although they were joined to the proceedings. It was clear that they had adopted this stance at the husband's direction. It was therefore a fair inference that the main, if not the only, reason for their recalcitrance was to protect the London properties; which in turn suggested that the properties were indeed held beneficially by the husband, as the wife had alleged: ibid.

In relation to three of the properties, each of which had been transferred for a nominal consideration of £1, Lord Sumption said at [49] that there was nothing to rebut the ordinary presumption of equity that the Manx company was not intended to acquire a beneficial interest in them, so there was an "ordinary resulting trust back to the husband". The position in relation to the other four properties was a little more complex, but the court was able without much difficulty to reach a similar conclusion. Lord Sumption then said at [52]:

"Whether assets legally vested in a company are beneficially owned by its controller is a highly fact-specific issue. It is not possible to give general guidance going beyond the ordinary principles and presumptions of equity, especially those relating to gifts and resulting trusts."

The differences from the present case are in my view palpable. Mr Prest and the companies were before the court, and in principle able to answer for their actions. If they failed to co-operate, adverse inferences could properly be drawn. The transferees were ordinary Manx companies, and there is no suggestion that any of them had special characteristics under Manx law which were of any relevance to the enquiry. The husband had an obvious motive for seeking to conceal the ownership of his assets from his wife, and there was nothing to rebut the obvious inference that this was indeed his purpose. Finally, as Lord Sumption pointed out at [45], there is a substantial inquisitorial element in matrimonial proceedings, and the concept of the burden of proof cannot be applied in the same way to such proceedings as it is in ordinary civil litigation. These considerations, he said, "are not a licence to engage in pure speculation", but "judges exercising family jurisdiction are entitled to draw on their experience and to take notice of the inherent probabilities when deciding what an uncommunicative husband is likely to be concealing".

The second main way in which Alan advances his primary case is to argue that, as a matter of English law, Rainbow was a sham. This seems to me, with respect, a rather misleading way of posing the relevant question, because Alan's submissions on the choice of law, which lead to the application of English law in the first place, focus upon the transfers made by David to Rainbow, rather than the formal and substantial validity of Rainbow itself. The latter enquiry, as I have explained, is one that needs to be determined under Liechtenstein law. If, however, the relevant question is whether the transfers of assets which David made to Rainbow were valid, the answer seems to me obvious: they were. There is nothing to suggest that the transfers were in any way ineffective, or intended on either side to do anything other than vest legal title to the assets in Rainbow.

If I am wrong, and it would (at least to some extent) be appropriate to apply the English law concept of sham to the establishment of Rainbow, my conclusion would in any event be the same. The classic statement of the doctrine remains that of Diplock LJ in Snook v London and West Riding Investments Ltd [1967] 2 QB 787 at 802:

"I apprehend that, if it has any meaning in law, it means acts done or documents executed by the parties to the "sham" which are intended by them to give to third parties or to the court the appearance of creating between the parties legal rights and obligations different from the actual legal rights and obligations (if any) which the parties intend to create. But one thing, I think, is clear in legal principle, morality and the authorities … that for acts or documents to be a "sham", with whatever legal consequences follow from this, all the parties thereto must have a common intention that the acts or documents are not to create the legal rights and obligations which they give the appearance of creating."

The need for all the parties to the alleged sham to share the requisite common intention has been repeated at least twice in decisions of the Court of Appeal: see Hitch v Stone [2001] EWCA Civ 63, [2001] STC 214, at [69] per Arden LJ, and R v Quillan [2015] EWCA Crim 538, [2015] 1 WLR 4673, at [89] per Lord Thomas of Cwmgiedd CJ, giving the judgment of the court.

In the light of my findings of fact, it is impossible to contend that David and Rainbow shared a common intention to create legal rights and obligations different from those which they ostensibly created. There is therefore no basis for finding that Rainbow itself, or the acts of David in establishing Rainbow, were sham under English law.

Conclusion

For these reasons, I am satisfied that Alan's primary case, like his amended case, must fail. It follows that the action will be dismissed, and it is unnecessary for me to express any view on the question whether Alan has the necessary standing to bring a derivative claim on behalf of his father's estate.

Subject to any submissions which the parties may make when or before this judgment is handed down, I propose to direct that the papers in the case be referred to HMRC for them to consider whether there are any useful lessons to be learnt from the operation of the LDF in this case, albeit that the LDF itself has now been discontinued.