The Court of Appeal (CoA) heard a case regarding whether the sale of some trust assets was the result of the improper exercise of a fiduciary power.
Background:
There were three trusts, each formed part of an Employer-Financed Retirement Benefit Scheme (EFRBS); specifically, Anthony Doull EFRBS established in 2011; K2 Contractor Solutions EFRBS established in 2012; and the Hyrax Resourcing EFRBS established in 2014. These EFRBSs were used to facilitate loan schemes, pursuant to which participants would receive remuneration from their employer by way of loans which would not be subject to income tax. The loan assets settled on the trusts amounted to a substantial loan portfolio involving over 2,000 participants/beneficiaries.
Pinotage was appointed as trustee of each of the trusts on 22 January 2018 to assist with the implementation of a scheme that sought to avoid or mitigate the Loan Charge. At the same time, PNG Services Ltd., the third appellant in the Pinotage Appeal, was appointed as Protector of the 2011 and 2012 Trusts, while HRL remained as the Protector of the 2014 Trust. Pinotage went into liquidation in December 2019 and was dissolved in March 2020.
After the scheme failed to gain traction with the beneficiaries, FS Capital Ltd. was incorporated by associates of the trustee in order to purchase the loan assets from the trusts. Shortly before the sale, Pinotage retired as trustee in favour of a private trust company (PTC) controlled by the same individual.
The book value of the assets sold was over £410m. However, the consideration payable by FS Capital was just £33,000 of initial consideration for each trust and a potential further sum capped at £392,011.31 in respect of each trust. In the first instance, the High Court concluded that the disposal of the assets constituted a breach of the trusts and was void in equity.
Decision:
The CoA dismissed the appeals. The Court concluded that FS Capital was not a bona fide purchase as it failed to prove all the elements. The Judge noted, “If one intends to rely upon a lack of knowledge of anything improper, it behoves one to plead the relevant facts and to prove them.”
The sale of trust assets was void in equity based on Jersey law that the improper exercise of a fiduciary power is void rather than voidable. The Court noted “English law is indeed settled. Although it would be open to the Supreme Court to conclude that the improper exercise of power is voidable rather than void, that would involve jettisoning authority going back over 300 years in an area of law that has traditionally attached importance to certainty and predictability. Sometimes it is more important that the law should be certain and predictable than that it should be perfect.”
Lord Justice Males noted “They did know better. The Judge found that none of them thought that it was legitimate to disregard the interests of the beneficiaries in disposing of the loan assets in this way.”
Pinotage was liable for the breaches of trust committed by its successor trustee based on the principle in Head v Gould [1898]. A retiring trustee will be liable for breaches committed by its successor if those breaches were contemplated. The Court noted, “Even if the outgoing trustee has legitimate reasons for wanting to retire, it cannot rely upon those reasons as a means of avoiding its duty to safeguard the trust fund.”
Implications:
This decision underscores the importance of a defendant seeking to rely on the bona fide purchaser's defence to demonstrate it through sufficient evidence. This judgement confirms that the exercise of a power for an improper purpose is void and not merely voidable.
The decision also provides good guidance on retiring trustees and their liability for their successor’s breaches. If the retiring trustee contemplated a potential breach, then they will be held liable as they should have taken appropriate steps to ensure that the right successor was appointed.