Jersey Unreported Judgments

Trust - application to set aside by reason of mistake.

[2024]JRC009

Royal Court

(Samedi)

12 January 2024

IN THE MATTER OF THE REPRESENTATION OF CRAIGMONIE HOTEL LIMITED

AND IN THE MATTER OF THE CRAIGMONIE HOTEL LTD COMMERCIAL SECURITY TRUST

AND IN THE MATTER OF ARTICLE 11 OF THE TRUSTS (JERSEY) LAW 1984 (AS AMENDED)

Advocate F. J. Littler for the Representor.

Advocate D. Petit for Valla Limited.

judgment

the deputy bailiff:

1.        Craigmonie Hotel Limited ("the Company") brings this application heard on 6 December 2023 to set aside the Craigmonie Hotel Limited Commercial Security Trust ("the Trust") by reason of mistake. 

2.        The Company was incorporated in Scotland in 1983.  Its sole beneficial owners and directors for most of the Company's life were B, who died in 2018, and his wife C, who died in 2023. 

3.        B's shares passed to his wife upon his death, and she was sole director of the Company until her poor health led to her having deemed to have vacated that office.  The sole director of the Company is now their son, D, and he and his four siblings are the beneficial owners of the shares in the Company. 

4.        For most of its life, the Company owned an hotel in Inverness.  This was sold on 25 February 2003 for £1.4 million and the Company has not traded since.  It will be wound up after this application has been determined. 

5.        D was head chef at the hotel for the duration of its ownership by his parents and swore the affidavit on behalf of the Company.  His parents retired upon selling the hotel and remained living in Inverness. 

6.        At about the time of the sale of the hotel, B and C took advice which led to the establishment of the Trust.  As they are dead, we do not have first hand evidence of what they were told, but it is clear that they were recommended by their financial advisers, St James' Place Partnership whom they had used for a number of years, to take further advice from Baxendale Walker, a firm of lawyers whose advice has led to a number of cases being determined by this Court.

7.        This application concerns the proceeds of sale of the hotel, but Baxendale Walker also advised B and C in relation to a tax structure that they proposed be set up in respect of three other properties in Inverness, in order to protect their children from the effects of inheritance tax.  That advice has already been the subject of proceedings before this Court, leading to a judgment reported at [2014] JRC 252 as Moffat v Apex Trust Company.  In that case, Sir Michael Birt, Bailiff, giving the judgment of the Court, summarised the background to the application at paragraphs 3 to 5 of the judgment.  In respect of the three properties, Baxendale Walker produced advice to the effect that B and C should transfer the properties to trustees resident outside the United Kingdom, in exchange for which the trustees would agree to provide a deferred annuity income to B and C, with the assets in the Trust being exempt from UK inheritance tax.  The Trust itself, which was governed by Jersey law, was a purpose trust, the purpose being for the, inter alia, execution and performance of "Authorised Contracts", in turn defined as the provision of deferred annuities.

8.        Before the Court, evidence was placed indicating that the advice given by Baxendale Walker was (paragraph 19 of the judgment) "completely wrong and....inheritance tax remains payable on the assets in the Trust in the event of [B and C's] deaths".  Further, the scheme itself was "impossible" for a number of reasons, in that the properties transferred into the Trust would never produce sufficient rental to pay the annuities envisaged. 

9.        The Court determined, for reasons set out in the concluding paragraphs of the judgment, that the Trust and associated documentation was invalid by reason of mistake.

10.     As to the Trust that the Court is considering today, it was not a subject of the application made to the Court in 2014 and the Court made no relevant findings in respect thereto.  However, in B's affidavit sworn in June 2013 for the purpose of the previous application to Court, he explained that the purpose of the initial meeting that he and C had with Baxendale Walker in March 2003 was "to discuss how we might legitimately deal with the sale proceeds of our hotel business to avoid or minimise the impact of Inheritance Tax".  He went on to say that he had made it plain that he wished "everything to be completely legitimate and above board as my wife and I did not wish to be party to any tax evasion or illegal practices". 

11.     We saw the advice produced to the board of the Company in relation to the Trust, entitled "Commercial security trust arrangements" dated 18 August 2003.  That advice, given by Baxendale Walker, noted that Baxendale Walker had reviewed the concept of a trust and drafted the trust instrument.  The Trust was recommended as "the appropriate type of trust vehicle for the achievement of the Company's commercial objectives".  The advice went on to say "The Trust promotes the proper administration of the Company's debt liabilities without prejudice to any present or prospective future creditor [sic]".  The "primary purpose" of the Trust was to be, it appeared, to service the debts of the Company, and it was noted that the "establishment and funding of the [Trust] empowers and obliges the Trustees to pay and secure the Company's present and future debts".  This was, in essence, a nonsense as the Trust had virtually no creditors - they did not exceed £20,000.  Although we did not have evidence from B and C, it was plain from what subsequently occurred that they were told that they and their children would be permitted to benefit from the terms of the Trust.  In fact, that was impossible. 

12.     Pursuant to the terms of the Trust, the Company was the "Founder", and Atlas Trust Company (Jersey) Limited ("Atlas") were appointed the Trustee. 

13.     The definitions in Clause 1 of the Trust defined "Excluded Persons" as all and any persons described in Schedule 2 of the Trust.  The "Enforcer" was defined as B and C. 

14.     The Primary Purpose of the Trust was defined as "the undertaking of the Security Undertaking".  This was further defined as the "management and discharge of Debt Obligations".  There were, in effect, no such obligations.  It is not necessary to set out other terms of the Trust as they have limited relevance to this application.  The power of amendment of the Trust was limited and did not extend to altering the schedules to the deed.  As to Excluded Persons pursuant to Clause 14 the Trustee was prohibited from directly or indirectly exercising any power so as to benefit any Excluded Person.  The powers of the Trustee in Schedule 1 were extensive and included a power to lend money.  However, the Excluded Persons listed in Schedule 2 included the Founder (the Company) and "any person connected with the Founder", and "the Enforcer" and "any person connected with Enforcer".  The Schedule went on provide that the terms "participated" and "connected with" should have the meanings ascribed to them in the Income and Corporation Taxes Act 1988. 

15.     Pursuant to Section 839 of that Act, a person is connected with, in this case, the Company, if they have control of the same.  Further, a person is connected with an individual - in this case, B and C - if they are a "relative" of that individual.  Accordingly, B and C were doubly excluded from benefit - as being connected to the Founder and as Enforcers.  Their children were also excluded from benefit as they were connected to the Enforcer.  It is possible that they were also excluded in other ways pursuant to the provisions of Schedule 2 which we have not set out in full, but we were not addressed on such matters, nor was it necessary that we should be.

16.     The proceeds of sale of the hotel were transferred to Atlas in August 2003.  Atlas subsequently retired in favour of Nautilus Trustees Limited ("Nautilus") in February 2008, and Nautilus retired in favour of Apex Trust Company Limited ("Apex"), now called Valla Limited ("Valla"), the current Trustee of the Trust, in January 2009.

17.     Various loans were made by Atlas through a Jersey company owned by Atlas, namely E Company, between November 2004 and February 2008.  They were as follows:

(i)        A loan agreement between E Company and B and C pursuant to which the latter borrowed £16,500, dated November 2006 but effective November 2004;

(ii)       An agreement between the same parties dated November 2006 effective from November 2005, in the sum of £16,500;

(iii)      An agreement between the same parties effective from November 2006, in the sum of £16,500;

(iv)     An agreement between E Company and one of B and C's daughters dated September 2007, in the sum of £305,000;

(v)      An agreement between E Company and B and C dated February 2008, pursuant to which E Company loaned B and C £16,500;

(vi)     An agreement between the same parties dated November 2008, effective 2 November 2006, in the sum of £1,375;

(vii)     An agreement between the same parties dated November 2008, effective 30 November 2006, in the sum of £1,375; and

(viii)    An agreement between the same parties dated November 2008, effective from February 2007, in the sum of £16,500.

18.     Such loans were always made after letters of requests written by B and C to Atlas.  Nautilus refused to make further loans to B and C and indicated that it did so on the basis of legal advice. 

19.     Apex appears to have made one final loan to B and C in the sum of £16,500 on 11 February 2009.  The agreement for this was signed on 18 March 2009.  E Company assigned the benefits of its loans to Apex. 

20.     B requested a further loan in April 2010, but Apex wrote that following the decision in GL v Nautilus [2009] JRC 164A it was unable to make any further loans on the same basis that loans had previously been made to B and C.  There was subsequent correspondence between Baxendale Walker and HMRC in relation to the validity of the Trust, with HMRC quite rightly identifying as early as March 2007 that owing to the inability of the Trustees to fulfil the primary purpose, the Trust "might be regarded as being void".  They questioned the commercial rationale of the decision to set up the Trust for reasons that plainly arise from the summary of the facts that we have set out above.  Ultimately, HMRC agreed in principle to accept the sum of £252,031 from C in full and final settlement of any monies owing by the Company to HMRC, on the assumption that the Court would set aside the Trust by reason of mistake.  This sum was calculated by reference to, it is understood, inheritance tax due and statutory interest thereon.  C paid this sum on 7 December 2021 in order to prevent further interest accruing.  It is necessary for this trust to be set aside before HMRC can close its file.

21.     It is clear from the evidence that B and C would never have had agreed to the Company placing these monies in trust had they known that the advice from Baxendale Walker was wrong, that there would be no taxation benefits in the way described and, most importantly, that they could not legitimately derive any benefit from this trust, nor could their children, owing to its terms. 

22.     The Court considered very similar circumstances in CC Limited v Apex Trust Limited [2012] JRC 071.  Giving the judgment of the Court, Birt, Bailiff, noted that in that case Baxendale Walker advised the family in question that although they would not be able to receive outright distributions of income or capital from the trust, they would be able to receive loans on a commercial basis.  The trust was called a "Commercial Security Trust" and on the basis of assurances that they would be able to receive loans during their lifetime, the family members decided to go ahead with the trust.  It was called a Commercial Security Trust and created in November 2003 - about the time that the Trust in this case was created.  Atlas was the first trustee.  The terms of the trust in that case were similar to the Trust in this one with the trustee having a power to lend, but not being permitted to directly or indirectly benefit any Excluded Persons, as defined.  Such persons were, again, set out in Schedule 2 of the deed, including any Founder or any person connected with the Founder, the Enforcer or any person connected to the Enforcer.  The Court said "It is clear that each of the family members is an Excluded Person within this definition, as is the Company". 

23.     At paragraphs 24 and 25 of the judgment the Court said:

"Thus the upshot is that the family members cannot obtain access to any of the Assets, on the basis that to allow them to do so would constitute a benefit and that is not permitted by the trust deed.....

25. The Company asserts that it would not have created the Trust and gifted the Assets by means of the Deed of Assignment had it known that this was the position. The Court accepts that that is so."

24.     The Court noted that Article 9 of the Trust (Jersey) Law 1984 ("the Law") required that whenever the validity of a transfer or other disposition to a trust governed by Jersey law is in question, the issue must be determined in accordance with the domestic law of Jersey.  Accordingly, where validity of a transfer is challenged on the grounds of mistake, the effect of Article 9 is that the Jersey law of mistake is to be applied.  Article 11 of the Law provides that, inter alia, a Jersey trust shall be invalid to the extent that the Court declares that "the trust was established by...mistake...".  The test to be applied was settled in Re S Settlement [2011] JLR 375.  The Court must consider the following matters:

(i)        Was there a mistake on the part of the Company?

(ii)       Would the Company not have entered into the transaction but for the mistake?; and

(iii)      Was the mistake of so serious a character as to render it unjust on the part of the Trustee to retain the assets in question?

25.     Applying this three-stage test, we conclude:

(i)        The Company through its then directors, B and C, believed the advice of Baxendale Walker that they and their children would be able to benefit from the proceeds of sale of the hotel transferred into the Trust by means of, inter alia, loans and that there would also be an inheritance tax benefit which would accrue.  These beliefs were wrong - the Trust fund can only be used for the primary purposes.  None of the other purposes permitted the assets to be applied for the benefit of the family, and the family were also misled in respect to the inheritance tax benefit.

(ii)       The Company, acting through the family, would not have established the Trust and settled the assets into trust had they known the true position, i.e. but for the mistake.

(iii)      Finally, the mistake was of so serious a character as to render it unjust on the part of the Trustee to retain the assets placed in Trust.  The family and their children have been unable to access this significant part of their family's wealth since 2009.  They have incurred significant fees over the years, including the substantial fees paid to Baxendale Walker at the outset, without benefit.  There will be a continuation in the incurring of fees unless the Trust is set aside.  There are no beneficiaries under the Trust or other third parties who will suffer by it being set aside.  Indeed, the Trust in effect has no beneficiaries at all.

26.     Indeed, in CC v Apex Trust Company Limited the Court observed:

"In effect the [trust assets] are locked up for the duration of the Trust without the ability to benefit any particular individual."

27.     Accordingly, we had no doubt that it was right to declare that the Trust was void and accordingly all assets of the Trust are and have at all times been held on bare trust for the Company by the trustee from time to time of the Trust.  In respect of the loans, we were invited by the Company through D to make no orders.  It is not suggested that this order should disturb the costs and other expenses incurred by the trustee of the Trust from time to time such costs were incurred in good faith by the trustee, albeit as a trustee de son tort.  In these circumstances, such trustee cannot rely upon the terms of the Trust for the payment of its remuneration and reimbursement of its costs and expenses, but can rely upon Article 26 of the Trusts (Jersey) Law 1984 and the Court's inherent jurisdiction.  We regard it as appropriate to make an order to the effect that the trustee from time to time can retain the benefit of such remuneration on the footing that such trustee has acted in good faith.

28.     Accordingly we declare that:

(i)        the Trust is invalid ab initio by reason of mistake pursuant to Article 11(2)(b)(i) of the Law;

(ii)       the Trust Fund is held by Valla on trust for the Company as settlor absolutely;

(iii)      Valla and prior trustees of the Trust can retain remuneration already charged and reimbursement already received in respect of expenses and liabilities reasonably incurred up to the date of this declaration; and

(iv)     Valla and the previous trustees are relieved from personal liability for any breach of the bare trust upon which it has held the trust assets, save to the extent that any breach of such bare trusts would have constituted a breach of the Trust had it been validly constituted.

Authorities

Moffat v Apex Trust Company [2014] JRC 252. 

GL v Nautilus [2009] JRC 164A. 

CC Limited v Apex Trust Limited [2012] JRC 071. 

Trust (Jersey) Law 1984. 

Re S Settlement [2011] JLR 375