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Jersey Unreported Judgments |
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You are here: BAILII >> Databases >> Jersey Unreported Judgments >> In the matter of the Dunlop Settlement [2013] JRC 029 (06 February 2013) URL: http://www.bailii.org/je/cases/UR/2013/2013_029.html Cite as: [2013] JRC 29, [2013] JRC 029 |
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Before : |
Sir Michael Birt, Kt., Bailiff, and Jurats Le Breton and Milner |
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Between |
Capita Trustees Limited |
Representor |
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And |
RS |
First Respondent |
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And |
NS |
Second Respondent |
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And |
The Trustees in Bankruptcy of RS |
Third Respondent |
IN THE MATTER OF THE DUNLOP SETTLEMENT
Advocate D. M. Cadin for the Representor.
The First Respondent did not appear and was not represented.
Advocate M. P. Renouf for the Second Respondent.
Advocate S. J. Young for the Third Respondent.
judgment
the bailiff:
1. This is an application by Capita Trustees Limited ("Capita") in its capacity as trustee of the Dunlop Settlement ("the Trust") for approval to its entering into an agreement intended to settle various claims against the Trust. The effect will be to exhaust the assets of the Trust. The Court agreed to accept Capita's surrender of its discretion and at the conclusion of the hearing, approved of Capita entering into the agreement. The Court now gives its reasons.
2. The Trust was established by deed dated 22nd December, 1997, with Roker Trustees (Jersey) Limited as original trustee. In 1999 Roker was replaced as trustee by Osiris Trustees Limited and that company was in turn replaced by Stirling Trustees Limited ("Stirling") as trustee on 7th February, 2001.
3. In December 2006, Capita purchased Stirling and subsequently, on 10th September, 2007, a formal merger took place between those two companies, which therefore continued in the form of Capita. The result is that Capita became the trustee on 10th September, 2007. However, as a matter of law, Capita (in its former guise as Stirling) has been the trustee since 7th February, 2001. We shall use the expression Capita or Stirling interchangeably depending on the context.
4. The Trust is a discretionary trust governed by Jersey law. The original beneficiary was a named charity but the first respondent ("RS") and his wife, the second respondent ("NS") were added as beneficiaries on 12th July, 2004. The charity was only informed that it was a beneficiary in January 2012 and has since written to the Court disclaiming any interest in the Trust.
5. At all material times, the affairs of the Trust were looked after almost entirely by Mr Richard Arthur. He appears to have been a man wearing several hats. He was a partner and director of various firms and companies conducting business in Jersey as part of the BDO Group, including in particular a company called BDO Secretaries Limited ("BDOS"). He was also a director of Stirling from June 2004 to September 2007 and one of the beneficial owners of Stirling until its purchase by Capita. Mr Arthur is currently prohibited from being employed by any financial business in Jersey as a result of a direction of the Jersey Financial Services Commission.
6. It seems clear that Mr Arthur did not keep proper records in relation to the Trust or its underlying assets or in relation to the various other entities which he looked after. Accordingly, the current management of Capita, none of whom had anything to do with the relevant events, have been trying to piece together the history of the Trust.
7. RS was declared bankrupt on 14th November, 2008, in the Bradford County Court. He has since served a term of imprisonment for conspiracy to defraud. His Trustees in Bankruptcy ("TIB") have had their appointment recognised in Jersey by this Court, so that they have standing in this jurisdiction.
8. From the enquiries carried out by the current management of Capita, the Trust would appear to have three main assets:-
(i) A property known as Kildwick Hall in Yorkshire together with some associated land. RS and NS reside in part of that property. Kildwick Hall is in fact registered in the name of BDOS but, as mentioned later, there is no document making clear exactly for whom BDOS holds the property.
(ii) A property called The Mullions, also in Kildwick, which is registered in the name of Capita. This is occupied by the mother of NS.
(iii) A potential claim against BDOS for £275,000 in respect of the sale of a property 2 Kildwick Hall Mews, which was previously owned by the Trust.
There are said to be some other minor assets such as some chattels and possible claims against certain BDO companies in relation to sums paid out of the Trust, against Mr Arthur and against RS.
9. There is another trust which is relevant to the matters before us, namely the Humberstone Trust which was created in May 1997. Faircliff Property Limited is a BVI company which is wholly owned by the Humberstone Trust. Another relevant company is Pestana Investment Limited ("Pestana"). Ownership of this is not entirely clear to us but it would seem that it was probably also owned by the Humberstone Trust. At one stage it was stuck off the register but it has now been re-instated.
10. BDOS was trustee of the Humberstone Trust from January 1999 to 31st January, 2001, at which time Stirling was appointed trustee in its place. As mentioned already, Stirling in due course became Capita and it remained as trustee of the Humberstone Trust until replaced by the current trustees ("the Humberstone Trustees"). At all material times Mr Arthur was responsible for administering on behalf of BDOS and/or Stirling both the Humberstone Trust and the Trust together with their underlying companies.
11. It appears that Mr Arthur used the assets of the Humberstone Trust to provide financing for a number of other entities which he administered. The Humberstone Trustees (together with other plaintiffs such as Faircliff and certain beneficiaries of the Humberstone Trust (referred to as "the Humberstone plaintiffs") have now brought proceedings in Jersey against Capita in its capacity as former trustee (when it was Stirling) of the Humberstone Trust and others alleging that loans were made out of the Humberstone Trust or its wholly owned companies which should never have been made and which have not been recovered and accordingly seeking recovery for breach of trust. For the most part the loans are said to have been made by Faircliff. The total lent is said to be £12.6 million and interest (compounded) is put at £13.9 million, so that the total claim is a little under £26.6 million. Some (though only some) of the loans were made to the Trust or companies within it. At present, no proprietary claim against assets in the Trust has been brought but we have been advised that the Order of Justice in the Humberstone proceedings is to be amended to include such claims.
12. At the conclusion of its enquiries, Capita prepared a detailed statement of facts (the "Statement of Facts") which, following application to this Court on 15th November, 2011, was sent to the Humberstone Trustees, the TIB, RS and NS.
13. The following claims have been intimated by one or other of the above entities:-
14. Kildwick Hall was purchased in July 2000. The aggregate sum required for its purchase was £1,164,731.26. According to Capita, there is evidence that the money for this purchase came from Pestana. Thus:-
(i) the monies came from a BDOS designated account CP50, which is said to be the client account for Pestana;
(ii) a document produced by Mr Arthur in early 2001 shows the Kildwick Hall loan as an asset of Pestana;
(iii) a draft loan facility agreement between Faircliff and Stirling as trustee of the Trust referred to Faircliff re-financing a loan from Pestana to the Trust in exactly the sum referred to above. Although no executed copy of that loan agreement has been found, accounts for Faircliff thereafter showed the loan in respect of Kildwick Hall as an asset of Faircliff.
15. As already mentioned, Kildwick Hall is registered in the name of BDOS. It is accepted that BDOS does not own Kildwick Hall in its own right nor did it acquire it as trustee of the Humberstone Trust, notwithstanding that it was trustee of that trust at the time of acquisition. It is agreed that there are only three possibilities:-
(i) that BDOS was registered as owner in order to provide security to the lender and that therefore it holds the properties on a trust to discharge the loans made to enable the properties to be purchased and thereafter either for Capita as trustee of the Trust or alternatively for RS;
(ii) that it holds on bare trust for Capita as the trustee of the Trust; or
(iii) that it holds on bare trust for RS.
16. In the event of either of the first two possibilities turning out to be the correct position, it is said that the effective result is that the Trust is liable to either Pestana or Faircliff (depending on whether Faircliff did in fact fund final repayment of the original loan from Pestana) in the principal sum of £1,164,746.26 together with interest thereon.
17. There is an executed loan agreement dated 9th September, 2002, whereby Faircliff loaned £380,000 to Stirling as trustee of the Trust in order to purchase the property known as The Mullions. The purchase was completed on 19th December, 2002. ,It is said therefore that Faircliff has a claim for the sum of £380,000 plus interest. ,The Mullions is occupied by the mother of NS.
18. Faircliff advanced £550,000 in two separate payments on 24th February, 2004. The advance was made direct to RS. There were, however, draft loan facility agreements in existence which pre-supposed that Faircliff would lend the money to Stirling as trustee of the Trust, which would then lend the money on to RS. The money was intended to repay various RS owned companies for work carried out to Kildwick Hall and the Mullions. Leading counsel instructed by Capita, Elizabeth Jones QC, has advised that a court would be likely to find that the advance by Faircliff was to the trustee of the Trust rather than to RS and that it is therefore a liability of the Trust. Leading counsel instructed by NS, Mr Nicholas Le Poidevin QC, does not disagree.
19. The history of this matter is set out in considerable detail at paragraphs 28 - 46 of the Statement of Facts. It is not necessary for our purposes to go into any detail. In essence, a company called Burnley Park Limited (owned ultimately by the Trust) had borrowed money from Pestana for various property acquisitions. On 1st January, 2001, Faircliff entered into a written agreement to re-finance Burnley Park's indebtedness to Pestana in the total amount of £2,397,076.65. Faircliff subsequently agreed to provide further facilities to Burnley Park.
20. In July 2002 Burnley Park was sold and in order to facilitate that sale, a novation agreement was entered into between Burnley Park, Faircliff and Stirling on 6th June, 2002, under which the debts of Burnley Park to Faircliff in the stated amount of £2,521,580.03 were novated to Stirling as trustee of the Trust. Subsequently various sums were paid by Stirling to Faircliff but there is a question mark as to how much of this was attributable to liability under the novation agreement. According to Capita, a minimum of £527,752.23 and a maximum of £744,484.32 remains owing to Faircliff together in each case with interest from 1st January, 2002.
21. Faircliff has claimed for some £673,000 and both Ms Jones and Mr Le Poidevin have advised that this a reasonable figure.
22. The TIB have indicated a claim that the Trust is a sham and that accordingly all of the assets are held as nominee for the bankrupt RS (who it is said was the person who in reality was the settlor) and therefore for the TIB. A substantial ground relied upon for this claim is that, in the context of a tax investigation, RS and Mr Arthur both asserted that the Trust was a sham and that the properties therefore belonged to RS. This was accepted at the time by the UK Revenue and resulted in a considerable saving of tax. Mr Arthur and RS have since reneged on that stance and now assert that the Trust is valid.
23. The second claim intimated by the TIB is that RS spent £550,000 on improving Kildwick Hall and is entitled to claim that sum.
24. However, we do not need to address these further, given that it is really a matter for Faircliff/Pestana as to how much they are willing to allow to the TIB in recognition of their claim.
25. We have been provided with a number of opinions from Ms Jones and Mr Le Poidevin. Following the adjournment of these proceedings in June, they were asked to prepare further opinions and to clarify where they agreed and where they disagreed. The Court is most grateful to both of them for undertaking this exercise. As one would expect, both sets of opinions are closely reasoned and have been of great assistance to the Court. Although there has been some discussion in the opinions as to the exact nature of some of the claims and whether they are proprietary or personal, we do not think it necessary to delve into this area in view of the large measure of agreement between them. Both counsel (and Mr Le Poidevin in particular) have emphasised that their advice is given on the basis of the information currently available and this is of course understood.
26. They are agreed that, on the information presently available, there are no viable defences to contractual claims in respect of the Mullions loan (£ 380,000), the loan of £550,000 and the claim under the novation agreement (£673,000).
27. As to interest, Ms Jones has advised that, although some of the relevant agreements or draft agreements contain contractual rates of interest and higher default rates of interest, a more likely outcome would be that interest would be awarded at 2% above base rate from time to time compounded annually. Mr Le Poidevin agrees that a lower rate of interest than this is unlikely. On this basis they are agreed that, in round terms, the claims by Pestana/Faircliff come to the following:-
(i) The Mullions loan £612,000
(ii) Loan of £550,000 £696,000
(iii) Novation agreement £1,130,000
£2,438,000
28. As to the claim in respect of the Kildwick Hall loan, leading counsel are not agreed. Ms Jones is of the view, for the reasons set out in her opinion, that there is substantial evidence that the monies for the purchase came from Pestana and that accordingly there is a valid claim either by Pestana (if the facility agreement with Faircliff was never executed) or by Faircliff (if it was). Mr Le Poidevin, on the other hand, considers that the evidence that Pestana provided the initial funds can only be regarded as being 50/50. Furthermore, if the claim is made by Faircliff rather than Pestana, there may be a possible defence of limitation.
29. The real property owned by the Trust (i.e. Kildwick Hall and the Mullions) has been valued at £2.1m. If one adds the possible claim against BDOS of £275,000, the total assets of the Trust come to £2,375,000. No-one has argued that any value should be placed on the other possible assets. As can be seen therefore, even discounting the Kildwick Hall loan claim, the claims exceed the total value of the trust assets. If one also allows for the Kildwick Hall claim, the total claims come to just under £4.4m, which exceeds by a substantial margin the assets of £2.375m.
30. Following distribution of the Statement of Facts, negotiations have taken place, although RS and NS have not participated. A draft agreement was placed before the Court which would be between the Humberstone Trustees, Faircliff, Pestana, the TIB and Capita in its capacity as trustee of the Trust. The agreement would have the following broad effect:-
(i) Proceedings will be brought by the TIB at the TIB's initial cost to obtain vacant possession of Kildwick Hall and The Mullions.
(ii) The TIB will carry out the sale of Kildwick Hall and The Mullions, again at its own initial cost.
(iii) The net proceeds of Kildwick Hall and The Mullions, the claim against BDOS and the chattels belonging to the Trust at Kildwick Hall (if any) will be divided as to 25% to the TIB and 75% to Faircliff; but if the realisable assets exceed £4.8m, the balance over that sum will be split equally between the TIB, Faircliff and Capita as trustee of the Trust.
(iv) The other assets of the Trust such as the potential claims against Mr Arthur and RS are allocated to Faircliff.
(v) It follows that all the known assets and the known liabilities of the Trust are dealt with. Provision is also made for the position if new assets are discovered.
(vi) The agreement is expressed to be in full and final settlement of any claim which could be made by Faircliff, Pestana, the Humberstone Trustees or the TIB against Capita as trustee of the Trust.
(vii) The TIB and Faircliff confirm that they will not seek payment of rent or mesne profits from NS in respect of her occupation of the property prior to the date of the agreement.
31. As can be seen, given the value of the trust assets, the effect of the agreement is that all the assets of the Trust will be paid to Faircliff or the TIB as claimants and there will be nothing left for the beneficiaries.
32. We begin by accepting the surrender of discretion by Capita. Capita, in its capacity as trustee of the Humberstone Trust, faces a substantial claim by the Humberstone plaintiffs. To the extent that any monies are recovered from the Trust, this will go to reduce any liability of Capita to the Humberstone plaintiffs in respect of loans made to the Trust. It is therefore clearly in a position of conflict of interest. In those circumstances it is right that Capita should surrender its discretion to the Court and that the Court should accept that surrender.
33. As is well established, once discretion has been surrendered, the Court must place itself in the position of the trustee and act as trustee in the best interest of the beneficiaries.
34. Capita's case was simple. Even if one discounted the claim in respect of the loan of Kildwick Hall, the valid claims by Faircliff exceeded the value of the trust assets. If one also allowed for the Kildwick Hall loan claim, the total claims came to just under £4.4m, which exceeded by a substantial margin the possible assets of £2.375m. It followed that there was no equity in the trust assets available for the beneficiaries. The correct course was therefore to recognise and accept the inevitable. Furthermore, there was a benefit for NS in that she would be released from any possibility of a claim for rent or mesne profits.
35. On behalf of NS, Advocate Renouf put forward the following arguments in support of his contention that the Court should not approve the agreement:-
(i) Although there appeared to be agreement between Ms Jones and Mr Le Poidevin that the three claims totalling £2.438M were likely to succeed, the fact remained that it was not certain that they would do so. There had not yet been discovery in the Humberstone proceedings. The documentary evidence available to Capita was incomplete because of the failures on the part of Mr Arthur. It was therefore wrong to capitulate at this stage without seeking discovery from all possible parties in order to see if further documents might cast a different light on the perceived strength of the claims.
(ii) A trustee must act in the best interests of the beneficiaries. Given that the trustee in this case had surrendered its discretion, the Court must act similarly. There was no benefit to the beneficiaries as a result of the agreement. There would be no assets left in the Trust following its implementation and RS and NS would be evicted from their home of many years.
(iii) The application should be adjourned for further negotiation to see if an improved offer could be obtained. The original offer suggested by Ms Jones had included allocating a field adjacent to Kildwick Hall to NS in the hope that it might one day receive planning permission and thereby increase in value. This suggestion had not found its way into the agreement.
(iv) There would be no disadvantage if the Court refused to approve the agreement at this stage. The result would be merely to put Faircliff/Pestana and the TIB to proof of their respective claims.
(v) The agreement provided no cap on the Faircliff/Pestana claim in the event of further assets of the Trust coming to light.
36. We have considered the points put forward by Advocate Renouf. However, we are satisfied that the Court should authorise Capita to enter into the agreement. We would summarise our reasons as follows:-
(i) We think that the prospect of obtaining further information relating to the Faircliff/Pestana claims which would cast a different light on them is extremely remote. Capita has expended considerable effort - it has incurred costs of some £500,000 paid out of its own pocket - in seeking to establish what occurred. Capita has sought and obtained information and documents from BDO, Faircliff and the Humberstone Trustees/Mr Humberstone, Mr Arthur, the police (in respect of documents seized from Mr Arthur), the tax report, the TIB and NS. Mr Arthur has been ordered to provide information but has failed to do so. The police have seized documents from him and supplied those relating to the Trust to Capita. BDO have said that they have provided all documents in their possession relating to the Trust. BDO, the TIB and Faircliff/Pestana have provided documents to Capita in answer to correspondence from Capita since June 2011. As for RS and NS, NS has stated in July and August 2011 that she knew very little and RS has not provided anything.
(ii) We are therefore left with the position that both leading counsel are of the opinion that the claims in respect of the Mullions, the loan of £550,000 and the novation agreement are likely to succeed. That is also our assessment. Indeed, in our judgment, the claim in respect of the Kildwick Hall loan is also likely to succeed:-
(a) For the reasons set out by Ms Jones at paragraph 34 - 38 of her further opinion of 17th July, 2012, we think that there is fairly strong evidence that the money for the purchase of Kildwick Hall came entirely from Pestana. It is not so clear whether Faircliff subsequently provided money to enable repayment of Pestana but that is of no significance; the claim is either by Pestana or by Faircliff. Our conclusion in this regard is strengthened by the fact that there is simply no evidence that anyone else provided the money for the purchase of Kildwick Hall and we think it highly unlikely that any such evidence will come to light.
(b) On the contrary, in a witness statement dated 16th May, 2012, NS put forward various suggestions that the Kildwick Hall purchase had been funded from other assets which had been contributed by RS. However, it is fair to say that her suggestions were effectively demolished by a witness statement filed on behalf of the TIB and by the 11th affidavit filed by Fiona Milne, the employee of Capita who has been in charge of reconstructing what occurred. Advocate Renouf had to concede during the hearing that the suggestions in NS's affidavit as to the source of funds for the purchase of Kildwick Hall had been effectively negated.
(c) One is therefore left with the evidence that Pestana paid for the property together with the fact that this is consistent with the practice which Mr Arthur was following at the time, namely using Faircliff/Pestana as a source of lending to other entities which he managed.
(iii) We see no point in adjourning the proceedings in the hope that further negotiations will result in a better outcome for the beneficiaries of the Trust. Unfortunately, NS chose not to participate in the negotiations which led to the agreement even though she had been invited to the meeting. She was therefore not able to press her case in respect of the field. However, following the adjournment of proceedings on 28th June, 2012, NS did in fact make an offer to withdraw her objections to the agreement and to vacate Kildwick Hall for £240,000. That offer was rejected by both the TIB and Faircliff and despite invitations by Capita to the TIB, Faircliff and to NS, no further offers have been forthcoming.
(iv) We agree that a trustee must act in the best interest of the beneficiaries. But this does not mean that a trustee must fight a hopeless claim. A trustee is under a duty to act reasonably and if satisfied that a claim is due, he should pay it. Advocate Renouf accepted that this was so where the claim was "open and shut" but we think it extends to where the trustee is satisfied on good grounds that the claim is properly due.
(v) We see no benefit to the beneficiaries in declining to approve the agreement at this stage. If we were to do so, one must presume that Faircliff/Pestana would institute the necessary proceedings. There are no liquid funds with which to pay for any defence and a trustee does not have to dip into his own resources in such a case. Capita might attempt to borrow against the properties or to sell them in order to fund a defence. But it seems unlikely that a court would authorise defence costs to be incurred in this way given that the claims of Pestana/Faircliff include proprietary claims (according to Ms Jones), that the legal advice is that the claims are strong and that, in the event of Faircliff/Pestana succeeding, the Trust's defence would have been paid for out of their assets, in circumstances where there is no evidence that the beneficiaries or anyone else has contributed to the value of these properties. There is no evidence that NS will be in a position to fund a defence and RS is bankrupt. Thus we see no prospect of Capita or the beneficiaries being able to mount a defence of the Faircliff/Pestana claims.
(vi) We accept that there is no cap on the Faircliff/Pestana claim in the event of further assets of the Trust being discovered but we do not see why this should be so. Given the strength of the claims, it seems unlikely that Faircliff/ Pestana would agree to such a cap or that it would be reasonable to expect them to do so.
(vii) The agreement may be said to confer some minor benefit for NS in the abandonment of any claim for mesne profits, but we accept that it is by no means clear that such a claim could be brought and we therefore place little weight on it.
37. In summary, the Court is satisfied that there are strong grounds for concluding that the valid claims of Pestana/Faircliff exceed the value of the trust assets (even discounting the Kildwick Hall loan which, for the reasons given by Ms Jones, we consider is also likely to succeed) and that there is therefore no "equity" in the trust fund available for the beneficiaries. We think it entirely proper and reasonable for a trustee in such circumstances to accept the inevitable and to pay debts which he considers on good grounds are lawfully due. We therefore authorise Capita, in its capacity as trustee of the Trust, to enter into the agreement.
