Analysis
A deceased was survived by his widow and the defendant, his daughter. Although he had been a successful businessman during his lifetime, during the economic downturn that began in 2007 the deceased’s business empire collapsed, and he died heavily indebted. The defendant obtained a grant of probate of the deceased’s will and began to administer his estate with the assistance of professional advisers. More than six years after the death of the deceased, when she realised that the estate was insolvent, the defendant applied to the County Court for an insolvency administration order under the Administration of Insolvent Estates of Deceased Persons Order 1986 (the 1986 Order). The application was successful, and the claimant was appointed as trustee in bankruptcy of the bankruptcy estate. In the present claim, the claimant sought various orders against the defendant in respect of assets that he alleged were, or should have been, part of the bankruptcy estate.
The claims
The claimant’s case was that certain dispositions to the defendant were void dispositions by virtue of s284 of the Insolvency Act 1986 (the 1986 Act) and, from the claimant’s appointment as trustee in bankruptcy, the defendant held, or should have held, the same on a bare trust for the claimant for the benefit of the estate’s creditors:
- (1) The deceased had taken out a life insurance policy on his life (the Guardian policy). On his death, a lump sum (the Guardian lump sum) was paid out and then transferred to the defendant. The claim was that the disposition of the Guardian lump sum to the defendant was void and, together with a small amount of interest, should have been part of the bankruptcy estate.
- (2) The deceased had begun a pension policy with NPI (the NPI pension). After his death a lump sum death benefit (the NPI death benefit) was paid out and transferred to the defendant. Five days before his death, the deceased signed a letter relating to the NPI pension, in which he gave authority to have the defendant as his nominated beneficiary for the policy, but there was no such nomination facility and, in any event, no such nomination was made. The claim was that the disposition of the NPI death benefit to the defendant was void and should have been part of the bankruptcy estate, with interest.
- (3) The deceased owned a number of shares in Rosetta Capital Ltd (the Rosetta shares), which was a management company. The Rosetta shares were sold to the defendant for consideration, under an asset purchase agreement (the asset purchase agreement) between the defendant, as executrix, and herself, as an individual. The consideration was alleged to have been satisfied by the reduction of a debt owed by the estate to the defendant. The Rosetta shares were then transferred to the defendant. The claim was that the disposition of the Rosetta shares to the defendant was void and that they were held by the defendant on a bare trust for the claimant, as part of the bankruptcy estate.
- (4) The deceased was a member of BML Participation Holdings Limited Partnership (BML) and had made a capital contribution. It was a vehicle entitled to profit shares in funds under the management of Rosetta. The deceased’s interest in BML (the BML interest) passed to his executors. The BML interest was sold to the defendant personally as part of the asset purchase agreement and transferred to her. Since then, she received profit share payments in respect of the interest. The claim was that the disposition of the BML interest to the defendant was void and that it was held by her on a bare trust for the claimant, as part of the bankruptcy estate. In addition, it was claimed that the profit share received by her was also held on trust for the claimant, as trustee in bankruptcy.
- (5) Roseway was registered as a limited partnership after the deceased’s death. It was a vehicle entitled to profit shares in a venture capital fund under the management of Rosetta. Although the deceased had no legal entitlement to participate in Roseway, it was alleged that Roseway’s general partner had a discretion to offer participation to whomever they wished. The Roseway general partner did assign an interest in Roseway (the Roseway interest) to the defendant personally. Since then, she received profit share payments in respect of the interest. The claim was that the receipt of the Roseway interest, and profit shares in respect of it, represented an unauthorised profit, made by virtue of, or in conflict with, the defendant’s position as trustee of the Rosetta shares, and was held on a constructive trust for the claimant, for the benefit of the estate’s creditors.
Held:
Procedural
Particulars of claim must include a concise statement of the facts on which the claimant relies (CPR r16.4(1)). In the present case it was also necessary for the particulars of claim to contain details of all breaches of trust on which the claimant relied (CPR Practice Direction 16 PD.8.2). The claimant should also summarise in the particulars of claim, in a way that is clear and helpful to the court and the parties, the legal basis for their claim. On careful reflection, the judge was satisfied that the claimant’s case met these requirements.
Preliminary issues
The Guardian lump sum and the NPI death benefit
The defendant argued that the Guardian policy and the NPI pension had been held in trust, so that they did not form part of the deceased’s estate on his death. The judge did not find any evidence of the existence of any such trust and held that there was none. The defendant argued that the letter that was signed by the deceased five days before his death, in which he gave authority to have the defendant as his nominated beneficiary for the policy, was a declaration of trust. The judge found that, even if the policy had offered a facility for nomination, the letter signed by the deceased was no more than a wish for the trustees of the policy to exercise their discretion in the defendant’s favour, and they did not do so. He held that the nomination letter did not amount to a declaration of trust; it gave permission for the defendant to be treated as nominee but was not an instruction or direction to treat her in any particular way.
The defendant argued that the deceased’s widow had been entitled to a spouse’s pension under the NPI pension and this needed to be taken into account. The judge held that there was no material before him to conclude that there had been such an entitlement, but even if he was wrong, it did not assist the defendant.
The defendant also argued that the NPI pension had never formed part of the deceased’s estate by virtue of s11 of the Welfare Reform and Pension Act 1999 (the 1999 Act), which provided that where a bankruptcy order had been made against a person on a petition, any rights of theirs under an approved pension arrangement were excluded from their bankruptcy estate. It was held that:
- (a) on a literal reading of the 1986 order, no bankruptcy order was ever made, only an insolvency administration order; and
- (b) the same result would follow on the application of a purposive interpretation of s11 of the 1999 Act.
The purpose of the section was to give bankrupts a measure of protection in their future retirements, not to protect third parties.
The BML interest
The defendant argued that the BML interest never formed part of the deceased’s estate because he was insolvent during his lifetime. It was held that, even if this was the case, no bankruptcy petition was presented and no bankruptcy order was made against the deceased during his lifetime and any inability to pay his debts did not divest him of the BML interest.
The defendant argued that, by s4(3) of the Limited Partnerships Act 1907, the deceased had never been entitled to the BML interest, save, perhaps, in respect of his capital contribution. The subsection provided that a limited partner could not during the continuance of the partnership draw out or receive back any part of their contribution, with specified consequences if they did so. It was held that the subsection did not apply in this case because the sums received in relation to the BML interest were profit shares and did not relate to a withdrawal of the deceased’s capital contribution. Furthermore, the BML partnership agreement provided that, on the death of the deceased, the BML interest fell into his estate.
Section 284 of the 1986 Act
The judge stated that:
- (1) The 1986 Order amended s284 of the 1986 Act so that all dispositions and payments of estate property made by a personal representative between the date of death of a deceased person and the making of an insolvency administration order were void, unless validated by the court (s284(1)) or in respect of property received in good faith, for value and without notice of the presentation of the petition (s284(4)). If the disposition or payment was void, the recipient expressly held the sum received on trust for the estate.
- (2) The general law applied to determine the remedy for the void transaction.
- (3) On the making of a void disposition or payment, the recipient held what they received on trust, although there could be no breach of trust before the appointment of the trustee in bankruptcy.
- (4) Once the insolvency administration order was made and the trustee in bankruptcy appointed, a bare trust was created in favour of the trustee in bankruptcy, and the recipient was under a duty to transfer the assets to the trustee in bankruptcy on being called on to do so.
- (5) The remedy available to the trustee in bankruptcy was restitutionary, requiring the recipient to restore to the trustee in bankruptcy what was received if still in their hands, otherwise to pay compensation for what the bankruptcy estate had lost.
The Guardian lump sum and the NPI death benefit
It was held that the dispositions of the Guardian lump sum and the NPI death benefit to the defendant were void. If the defendant retained the sums received, she was to pay them to the claimant as trustee in bankruptcy. If she did not retain them, she was to pay to the claimant specified sums by way of equitable compensation.
The Rosetta shares and the BML interest
The defendant, as executrix, had disposed of the Rosetta shares and the BML interest to herself personally under the asset purchase agreement. Although the transaction had been expressed as being in consideration of the forgiveness of a specified debt owed by the deceased’s estate to the defendant, the evidence was that the debt was not actually owed to her personally. The judge considered whether the defence in s284(4) (receipt in good faith, for value and without knowledge) applied but decided that, even if the estate was in fact indebted to the defendant, he was doubtful whether she received either the Rosetta shares or the BML interest in good faith or for full consideration.
It was held that the dispositions of the Rosetta shares and the BML interest to the defendant were void and the defendant held them on trust for the claimant as trustee in bankruptcy. She was ordered to complete those documents that were appropriate to allow the claimant to be registered as the holder of the Rosetta shares and to become the assignee of the BML interest.
The Roseway interest
Although no evidence was adduced to prove that the Roseway general partner had a discretion as to whom they could assign the Roseway interest, the judge proceeded on the basis that they did. He found that Rosetta’s shareholders were at the forefront of the Roseway general partner’s consideration for the receipt of interests in Roseway and that the Roseway general partner thought of the Roseway interest as belonging to the deceased’s estate. In addition, the defendant understood that she would be receiving the Roseway interest because she was the deceased’s personal representative. The Roseway interest was assigned to her without any payment by her to the estate.
Furthermore, it was held that by the time the Roseway interest was assigned to the defendant, the Rosetta shares had already been transferred to her and, as that transfer was a void disposition, she held the Rosetta shares on trust; she owed a duty of loyalty to the beneficiaries of that trust and, by accepting the assignment of the Roseway interest, she was in breach of the conflict rule and held it on a constructive trust for the claimant as trustee in bankruptcy. She was ordered to pay the claimant a lump sum in relation to the Roseway interest.
Section 61 Trustee Act 1925
The defendant applied to be relieved from liability for any breaches of trust under s61 of the Trustee Act 1925 (s61). Her case was that she relied on advice from professional advisers in respect of the transfers of the various interests and shares. It was held that, in relation to any of the claimed assets that the defendant continued to retain, s61 had no application: the claimant did not need to establish that there had been a breach of trust. To the extent that s61 might have operated, on the facts found by the judge he concluded that, where the defendant had acted in breach of trust, she did not act reasonably, and it would not be fair to excuse her from liability at the expense of the creditors of the estate. The application for relief was therefore refused.
Validation order
The defendant applied for a validation order in respect of the Guardian lump sum, claiming that she and the deceased had paid the policy premiums, although no evidence of this was adduced. Under the Insolvency Practice Direction, it was necessary to satisfy the court that a validation order would be beneficial to or would not prejudice the interests of unsecured creditors. It was held that none of the transactions in the case would be beneficial to the creditors of the deceased’s estate and that each of the transactions prejudiced those creditors. The application was refused.
The rule in ex parte James
Under this rule, the court will not permit its officers to act in a way that, although lawful and in accordance with enforceable rights, does not accord with the standards that society would think should govern the conduct of the court and its officers (see per David Richards LJ in Lehman Bros Australia Ltd v MacNamara [2020], para 35). The defendant applied for the court to exercise this jurisdiction in this case, claiming that the claimant failed to warn her of the risks of her petitioning for, and obtaining, an insolvency administration order and the court should not permit him to bring his claims. It was held that society would not think it inappropriate or unfair for the claimant to pursue the claims against the defendant. The application was refused.
Set off
Although a set off defence was pleaded by the defendant, it was not pursued at trial. The judge held that there was no evidence that there had been mutual dealings between the defendant and the deceased during his lifetime. The claim was refused.
Limitation
The District Judge had permitted the claimant to amend the particulars of claim. In preparing his judgment, the judge realised that the limitation periods for the amended claims might have passed by the time of the order of the District Judge. No limitation defence had been pleaded. No appeal had been made against the District Judge’s order, so the judge was bound by the order. He held that, in any event, he could not see, on all the evidence, how the defendant could raise a successful statutory limitation defence.
JUDGMENT HHJ KLEIN: [1] Charles Edward Holroyd (‘Mr Holroyd’) died on 8 May 2009, leaving alive wife and a daughter, the Defendant (‘Mrs Callin’). According to Mrs Callin, during his lifetime Mr Holroyd had been a successful businessman. He had trained as a chartered accountant but then took over the running of his family’s businesses, …Continue reading "Sleight v Callin [2021] WTLR 1147"