Smith & anr v Michelmores Trust Corporation Ltd & ors [2021] WTLR 1051

Analysis

The testatrix (T), whose husband predeceased her, was survived by her four children, B1, B2, B3 and B4. T had appointed B3 and the partners of a solicitor firm as the executors of her will. She left the residue of her estate on trust to be divided into four equal shares: one for the benefit of each of B1, B2 and B3, and the fourth upon discretionary trusts, which included a wide power of appointment, for the benefit of B4 and his children and remoter issue. At the time of the hearing, B4 had three adult children and one minor grandchild. T died in 2010 and probate of her will was granted in 2011 to B3 and S, one of the firm’s partners.

In a handwritten letter of wishes, T stated that she had created the discretionary trust with the intention of safeguarding the quarter share for the benefit of B4 or, in the event of his death, his children’s sole benefit; and that any requests for funds by B4 should be met without question or interference. The judge found that B4’s first wife had left him, and that T was concerned to preserve B4’s inheritance against claims by the former wife.

T’s estate was difficult to administer because of the dissolution of a partnership that had existed between T and B4 before her death. The dispute led to litigation between T’s executors and B4, resulting in a judgment in 2019 against B4 of almost £400,000 plus costs. B4 was unable to satisfy the judgment debt and the executors presented a petition for his bankruptcy, based on a statutory demand of over £500,000, and on 15 May 2020 he was adjudged bankrupt and trustees in bankruptcy were appointed.

Following the bankruptcy order, T’s estate comprised the judgment debt against B4 and around £230,000 held in the solicitor firm’s client account. In the ordinary course, the bankruptcy was due to be discharged on 15 May 2021 (Insolvency Act 1986, s279).

Soon after the bankruptcy order, B1 died and, on 26 December 2020, B3 died.

On about 26 March 2021, the trustees in bankruptcy suggested that while B4 remained an undischarged bankrupt (until 15 May 2021), the will trustees should appoint to B4 the whole of the one quarter share that was held on discretionary trusts for him and his issue. The property or interest so appointed would constitute ‘after acquired property’, within the Insolvency Act 1986, s307, and the trustees in bankruptcy would have 42 days in which to claim the property for the benefit of the bankrupt estate, of which T’s estate was the largest creditor, owed around four times as much as all the other creditors put together.

The following events then occurred on 7 May 2021:

1. (1) as the surviving will trustee, S appointed G as an additional will trustee;
2. (2) as the surviving executrix, S resolved to distribute the sum of £55,000 to the will trustees, before 15 May 2021, to hold on the discretionary trusts;
3. (3) the will trustees determined to execute a draft deed of appointment in favour of B4 absolutely, subject to the ‘blessing of the court’;
4. (4) a copy of draft proceedings prepared for that purpose was sent to B4, without any prior discussion with, or any warning to, him; and
5. (5) S and G issued proceedings in the present action.

On 13 May 2021, B4 executed a deed of disclaimer of his interest under the discretionary trusts. The hearing of the action took place on 14 May 2021, one day before the expected discharge of B4’s bankruptcy.

By the action, S and G applied for directions under the second category of the jurisdiction in Public Trustee v Cooper [2001]: there was no doubt as to the will trustees’ powers, but there was doubt as to the propriety of their exercise of the power. They were not surrendering their discretion to the court. B2, B4 and the administrators for each of B1 and B3’s estates were joined as defendants. The evidence of S stated that the will trustees had taken into account the interests of the discretionary objects other than B4. The evidence of B4 made it clear that he did not want this money to be transferred to him so that it could be used as part of his bankrupt estate, with the consequence that he would not receive any benefit from it whatsoever.

The claimants argued that:

1. (1) the will trustees had to balance the competing obligations arising out of the will;
2. (2) the executrix had to maximise the value of the estate for all beneficiaries, which included recovering as much as possible in respect of the estate’s main asset, the judgment debt against B4, within his bankruptcy;
3. (3) the court could be satisfied that the decision of the will trustees was one that a reasonable body of trustees could properly have arrived at, and they had properly taken into account all and only relevant matters; and
4. (4) the decision was a rational one and was not vitiated by any conflict of interest.

B4 argued that:

1. (1) the proposed decision appointment was not within the will trustees’ power at all, because it was not for his benefit;
2. (2) even if it was in their power, it would be a fraud on the power; and
3. (3) the proposed decision would be the product of a conflict of interest: S was one of the will trustees and (as executrix of T’s estate) the largest creditor of the bankrupt estate.

Held:

1. (1) B4’s children and remoter issue had an interest under the discretionary trusts, and therefore in the estate. They could benefit directly, in a way that B4 could not (until 15 May). They were not joined as defendants in the action. Although as a general rule claimants were entitled to pursue which defendants they wished, CPR r64.4 and practice direction PD64B, para 4, provided for exceptions to the general rule in a claim, such as this, for directions under CPR 64. In the circumstances, in which there was no time to postpone the hearing for the joinder or proper representation of B4’s children and further issue, it was therefore held that the claim was not properly constituted, and the application was refused.
2. (2) In case he was wrong about the problems of constitution, the judge went on to consider the merits of the claim.
   1. (a) If the appointment was made before the discharge of the bankruptcy, it would finance no more than a small fraction of the bankruptcy debts (a little under 11%) and would confer no benefit on B4 at all. If the appointment was made after the discharge, it would benefit B4 directly. If no appointment was made, the funds would be available to benefit other objects. Accordingly, the proposed appointment would not put any money in B4’s pocket, nor would it enable more than a fraction of his bankruptcy debt to be paid. Accordingly, it was not within the scope of the will trustees’ powers.
   2. (b) Even if it could be said that, on a technical level, the proposed exercise of the discretion was for the benefit of B4, it was not being used for the intended purpose, which was to benefit B4 or his children or remoter issue. The real beneficiary of the appointment would be T’s estate, so that the proposed appointment would be a fraud on the power and should therefore not be sanctioned by the court.
   3. (c) The decision was not one that a reasonable body of trustees could properly have reached and it was irrational.
   4. (d) As the will trustees had taken into account the interests of T’s estate, to which B4 owed a lot of money, they had not properly taken into account all and only relevant matters.
   5. (e) There was a stark and obvious conflict of interest: S, as executrix, was the main creditor of B4’s bankruptcy but was proposing, with G, to appoint funds effectively in favour of the estate. This was an additional reason for the court not to approve of the proposed appointment.
3. (3) As to the disclaimer, at common law, although there was a presumption of acceptance of transfer, a person could not be compelled to accept a transfer of property. An intended beneficiary could disclaim their interest under a trust, including the interest of a discretionary beneficiary before any exercise of the discretion in his favour, if the disclaimer were for value or by deed. In this case the rights being disclaimed included the duty of consideration owed by the will trustees to B and the rights that could be vindicated by court action, including that to restrain by injunction a threatened breach of trust. Although B4 disclaimed his interest more than ten years after he learnt of his interest in the discretionary trusts, nothing had yet been paid out, nor accepted by him; nor had he accepted his interest or relied on it in any way. Accordingly, B4 had validly disclaimed interest in the discretionary trusts.

JUDGMENT HHJ PAUL MATTHEWS: Introduction [1] On 14 May 2021, I heard and determined a claim under CPR Part 8 issued only one week before, on 7 May 2021, for an order that the Court give its approval to a proposed distribution by the claimants out of a discretionary trust created by the will of …

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