Re Mr Leonard Granville-Grossman's Settlement
Abbreviations
| The settlor |
Mr Leonard Granville-Grossman |
| Jonathan |
Jonathan Granville-Grossman, the son of the settlor |
| The cousins |
Jonathan's three cousins, the children of the settlor's brother |
| The settlement |
A discretionary settlement made by the settlor on 27 December 1973 |
| The 1976 appointment |
An appointment made by the trustees of the settlement on 29 March 1976 |
| The 1976 power |
A power of appointment contained in the 1976 appointment |
| The 1989 deed |
A deed executed by the trustees of the settlement on 2 August 1989 |
| CTT |
Capital Transfer Tax (now retitled Inheritance Tax) |
Overview
- The present trustees of the settlement ask the court to determine questions which arise in connection with the settlement, the 1976 appointment and the 1989 deed. The essential question is whether the trust fund is held on trust entirely for Jonathan (and his future children), or whether it is held on trust in four equal shares for Jonathan and his three cousins (and their respective future children). (For brevity in this judgment I will sometimes omit references to the interests of future children of Jonathan and the cousins, and I will refer simply to whether the fund is held on trust for Jonathan alone or for Jonathan and the cousins.) In my judgment the latter is the case: the fund is held on trust for Jonathan and the cousins, not for Jonathan alone.
- I will describe the details later, but in outline the issue arises in this way. The settlement in its original form was a conventional discretionary trust.
The trustees had an overriding power of appointment. By the 1976 appointment they appointed trusts in favour of Jonathan and the cousins in four equal shares. (At least that is what on the face of it they did, although there are arguments, which I will consider later, that the 1976 appointment failed to have any effect.) The 1976 appointment itself contained a further power of appointment under which it was open to the trustees, among other things, to reappoint the fund in favour of Jonathan alone. This was the 1976 power. By the 1989 deed the trustees sought to exercise the 1976 power, and to appoint the whole fund in favour of Jonathan and his children However, the 1976 appointment provided that the 1976 power had to be exercised before a date, which in the event was 2 August 1989. The trustees purported to exercise the power on the date, that is on 2 August 1989. To initial appearances this was a day too late.
- So at first sight the effect appears to be as follows. The 1976 appointment created trusts under which Jonathan and the cousins all had interests. The 1989 deed purported to change that by appointing the whole fund away from the cousins and in favour of Jonathan, but failed to take effect because it was executed after the 1976 power had expired. Therefore the trusts of the 1976 appointment, under which the cousins as well as Jonathan had interests, remained in force. That position can no longer be changed. So Jonathan's interest is only the interest in a quarter of the fund which was conferred on him by the 1976 appointment.
- Although that is how the matter appears at first sight it has been urged upon me that, on fuller examination and analysis in the light of the authorities, the true effect is different, and that the fund is held on trust for Jonathan (and his children) on the terms set out in the 1989 deed. That result is contended for by the trustees and by Jonathan. Several different arguments have been advanced by them, and I shall consider them all as this judgment progresses. However, I say now that, having considered most carefully all the arguments and the authorities on which they are based, on final examination the matter still seems to me as it seemed on first examination. The conclusion that Jonathan and his children have an interest in a quarter of the trust fund and not in the whole of it appears to me to be inescapable.
- Submissions were presented to me on behalf of the trustees, on behalf of Jonathan, and on behalf of the cousins. Mr Warren QC and Miss Furze appeared on behalf of the trustees. Mr Turnbull appeared on behalf of Jonathan. Mr Green QC and Miss Bryant appeared on behalf of the cousins. Mr Warren explained to me that, although in most applications by trustees to the court for directions, the trustees adopt a neutral position and leave the competing arguments to be presented by the rival beneficiaries, in this case the trustees consider that they should present positive arguments in support of the claim of Jonathan and in opposition to the claim of the cousins. That is because the wish of the trustees in 1989 definitely was that only Jonathan (and his children) should benefit. The trustees believe it appropriate that they should present arguments to the court to the effect that their wish was indeed achieved.
The facts in detail
- The settlor, Mr Leonard Granville-Grossman, created the original settlement on 27 December 1973. It was a discretionary trust in conventional terms. The discretionary beneficiaries were the children and remoter issue (and their spouses, widows and widowers) of the settlor himself of his brother and of his sister-in-law. So they included Jonathan and the cousins. Jonathan was the settlor's only child. He had been adopted, but because the adoption took place before the settlement was made he was a child of the settlor within the discretionary class (Adoption Act 1958 sl6(2)(a)). The first trustees were resident in the United Kingdom. They were Barbinder Limited (a company associated with the leading firm of chartered accountants, Coopers & Lybrand) and Mr Stanley Jones (a solicitor). The nominal trust fund was £100, but I believe that a number of shareholdings in property companies were transferred to the trustees. I have no details of what happened to the trust fund over the years, but I think that it is now worth something in the region of £1.5m.
- In 1973, when the settlor made the settlement, discretionary trusts had many attractions, but within a couple of years they needed to be reconsidered as a result of the introduction of CTT in place of estate duty by the Finance Act 1975. Whereas the impact of estate duty on discretionary trusts had been fairly benign, the impact of CTT was going to be severe. When property was removed from a discretionary trust there was an 'exit charge' at rates which, on a large fund, could be very high Further, as long as property remained within the discretionary trust there were charges every 10 years at rates of one third of the exit charge rates. The exit charges applied both when property was transferred out of trust altogether and when it remained within the trust but the trust was no longer discretionary. For the purposes of CTT there were two other main kinds of trusts: 'interest in possession trusts' and 'accumulation and maintenance trusts'. Exit charges applied if property held on a discretionary trust became held instead on an interest in possession trust or an accumulation and maintenance trust. Typically this would happen upon an exercise by the trustees of a power of appointment.
- Accumulation and maintenance trusts are of importance for this case, and in order that later parts of this judgment should be intelligible I need to say something about them. Paragraph 15 of Schedule 5 to the Finance Act 1975, under the cross-heading 'accumulation and maintenance settlements', defined a kind of trust to which it gave a relatively favourable CTT treatment. Trusts of this kind came to be referred to by practitioners at the time as 'para 15 trusts', and J shall use that expression in this judgment. (The term has now largely gone out of use in response to statutory changes and consolidations. The equivalent provisions are now to be found in section 71 of the Inheritance Act 1984.) The critical statutory words were (and still are) that the relieving provisions for accumulation and maintenance trusts applied if -
one or more persons (in this paragraph referred to as beneficiaries) will, on or before attaining a specified age not exceeding twenty-five, become entitled to, or to an interest in possession in, the settled property ...
The paradigm case of a para 15 trust was one where the fund was held on trust for a beneficiary contingently on his or her attaining an age of up to 25. At 25 (or at an earlier age if the trust specified one) the beneficiary either had to become entitled to the trust fund absolutely or had to become entitled to an interest in possession in it. I have used the words 'had to' deliberately. They correspond to 'will' in the statute, and in Inglewood v IRC [1983] STC 133, the Court of Appeal confirmed that 'will' meant 'will', and did not mean 'may' or 'will as matters now stand'.
- As regards the intermediate income of the trust fund until the beneficiary attained 25 or the earlier specified age, the trustees had to have trusts and powers which permitted it to be accumulated or applied for the beneficiary's maintenance, education or benefit.
- The critical CTT points in relation to para 15 trusts were: (1) there was no exit charge if the fund was transferred out of the settlement to the beneficiary; (2) there was no exit charge if, on the beneficiary becoming 25 or the earlier specified age, the accumulation and maintenance powers came to an end but the property stayed in trust (being thenceforth held on the trusts of an interest in possession settlement); and (3) there were no periodic charges while the trust property remained subject to the accumulation and maintenance powers.
- In paragraph 8 above I described what I called the paradigm case of a para 15 trust. It was a case of a fund held for a single beneficiary who was below the age of 25. However, up to a point the statute did allow for more complicated structures which would still be para 15 trusts and which would not be exposed to the CTT rigours of the discretionary trusts regime. If there were a number of beneficiaries, all under 25 at the outset (like Jonathan and the cousins), the fund could be held on accumulation and maintenance trusts for them as a class. If their respective shares were specified in advance successive tranches of the fund would move out of the category of a para 15 trust as each beneficiary became 25. Further, with careful drafting it was possible to create para 15 trusts for a number of beneficiaries at an early date while retaining flexibility to fix the shares definitively at a later date. In a trust or appointment of that sort it was generally accepted that the shares had to become fixed not later than when the oldest of the beneficiaries attained 25. As I will explain later the trustees in this case sought in 1976 to create para 15 trusts of that flexible kind; the time when the flexibility had to stop was when the oldest beneficiary attained 25.
- There is one other important point about CTT which I must explain. I have said in paragraph 7 above that there was an exit charge if property ceased to be subject to discretionary trusts. One of the cases where such a charge would arise was where the trustees of a discretionary settlement exercised a power of appointment so as to subject the fund to para 15 accumulation and maintenance trusts. In principle the Act provided for the exit charge to be at a high rate, but Schedule 5 para 14 (headed 'transitional relief for settlements made before 27 March 1974') dramatically reduced the rates at which exit charges would be made if it was in the early years of the new tax that the property ceased to be held on discretionary trusts. If the event giving rise to the charge occurred between 1976 and 1980 the rate was reduced to a fraction of what it otherwise would have been, and the earlier the event was, the lower the fraction. For charges arising before 1 April 1976 the rate of exit charge would be only one-tenth of what it would have been but for the transitional relief conferred by Schedule 5 para 14.
- Mr Granville-Grossman's settlement was a pre-1974 discretionary settlement for a class of beneficiaries all of whom were under 25 years of age. The provisions which I have described gave to trustees of settlements like that a substantial incentive to convert them (through the exercise of powers of appointment) into para 15 accumulation and maintenance trusts, and to do so as early as possible. There would be some CTT to pay in consequence of the conversion, but on!y at the heavily reduced transitional rates, and thereafter the fund ought to be capable of being kept free of CTT charges for many years. That was why the trustees in this case made the 1976 appointment. It was made on 29 March 1976, just in time to qualify for the maximum reduction in the CTT rate during the transitional period.
- The 1976 appointment is a crucial document in the case. I will try to summarise the vital parts of it. It was made in exercise of the overriding power of appointment in the original settlement. It defined 'the Principal Beneficiaries'. At the time they were Jonathan and the cousins, and since neither the settlor nor his brother had any more children, Jonathan and the cousins remained the only 'Principal Beneficiaries' at all relevant times thereafter. The ]976 appointment also defined a 'Closing Date'. It was
the day being one day before the day on which the first of the Principal Beneficiaries ... to attain the age of twenty five years shall attain that age ...
The oldest beneficiary was one of the cousins. If she survived she would become 25 on 3 August 1989. She did survive, so as matters turned out the Closing Date was 2 August 1989, the day before her birthday. The age of 25 referred to in the definition was obviously chosen because of the conditions for para 15 trusts. In order to comply with para 15 it would have been satisfactory for the Closing Date to have been the day on which the beneficiary attained 25, but the draftsman chose to specify the day before that day. He was presumably being cautious, but in the events that happened later his caution caused problems rather than avoided them. This use of the word 'before' is not the one which directly caused the major problem in this case, but it was, I think, a step towards the problem.
- The 1976 appointment then created the power of appointment which the trustees attempted to exercise in 1989. I will describe the power in the next paragraph. At this point I think that it is most helpful to describe the default trusts which were set out in the next clause, clause 5. They were the trusts which took effect immediately on the execution of the appointment, and which would stay in force indefinitely if the 1976 power expired without being exercised (as in my opinion it did). The trustees were to pay the income to the children of the settlor or of his brother in equal shares for their lives, with remainders to their children (that is to the grandchildren of the settlor or his brother), and with power to pay to any child of the settlor or his brother capital out of his or her share of the fund. At the time the children of the settlor and his brother were Jonathan and the three cousins, so the 1976 appointment gave to each of the four of them an interest in a quarter of the trust fund: and so it continued thereafter. I should mention, however, that the 1976 appointment provided that the trusts were to take effect in favour, not only of the children of the settlor or his brother 'now living', but also in favour of any children 'hereafter bom or adopted'. There were no such children, but an argument has been addressed to me by reference to the words 'or adopted'. I will consider it at a later point in this judgment. (See paragraphs 88 et seq.)
- I now turn to the 1976 power contained in the 1976 appointment. This is the power which the trustees attempted to exercise, but in my judgment failed to exercise, by the [989 deed. Clause 3 of the 1976 appointment reads as follows (with words which are of particular importance or which require discussion later set out in bold type and italicised):
The Trustees shall stand possessed of the Trust Fund and the income thereof UPON TRUST for the Principal Beneficiaries or any one of more of them exclusive of the other or others in such shares as the Trustees shall from time to time by deed or deeds revocable or irrevocable executed before the Closing Date and not revocable thereafter appoint.
Clause 4 then elaborates on the kinds of trusts which may be created under the 1976 power. I need not go into the clause in detail. It was plainly drafted with Schedule 5 para 15 in mind, and it attempted -successfully as far as I can see - to give the trustees a modicum of flexibility while ensuring that any trusts which they might appoint would have to be para !5 trusts.
- I spell out here the obvious point that the power was expressed to be exercisable before the Closing Date. The Closing Date was expected to be, and in the event was, 2 August 1989 (the day before the 25th birthday of the oldest of the cousins), so the natural reading of the clause was that the power had to be exercised by, at the latest, 1 August 1989. But as I describe later, the 1989 deed was executed on 2 August 1989. One of Mr Warren's arguments, with which I am not able to agree, is that in clause 3 'before the Closing Date' meant 'on or before the Closing Date'. I consider that argument in detail in paragraphs 35 et seq below.
- Having made the 1976 appointment the trustees notified the Revenue. The Revenue claimed CTT at the heavily reduced transitional rate, as had been expected, and the trustees paid it. The Revenue have long since closed their file on the matter.
- There were a number of changes of trustees over the years from 1976 to 1989. The only one which I need mention is the appointment on 28 February 1989 of three trustees in the Isle of Man in place of trustees resident in the United Kingdom. The trustees were a Manx trustee company controlled by the Douglas office of Coopers & Lybrand, and two partners in that office, Mr Breadner and Mr Cannell. They were both directors of the Manx trustee company. Mr Breadner was the trustee with the main responsibility for the affairs of the settlement. He had met the settlor and was aware of the settlor's wishes for the fund.
- The settlor's wishes were that the fund should all be held for his son Jonathan. Even before the settlement was 'exported' to the Isle of Man the settlor had contacted a London partner in Coopers & Lybrand and raised the point that, because the oldest of the cousins would become 25 on 3 August 1989, it would be necessary before long to exercise the 1976 power in favour of Jonathan, otherwise the fund would continue to be held on trust for Jonathan and the cousins in equal shares. Mr Breadner was aware of this and was content with the settlor's wishes. He had not met Jonathan or the settlor's brother (the father of the cousins). All that he knew about the cousins was a small amount that he had been told by the settlor. Mr Breadner took the view that the proposal for an appointment to be made in favour of Jonathan before the power expired was uncontroversial. I do not disagree with him. If the 1989 deed had been executed a day earlier I do not think that there would have been any controversy about it.
- The usual practice in the office for uncontroversial appointments was that the partner with the direct contact with the settlor (in this case Mr Breadner) arranged for a draft document to be prepared, and on the date for execution he explained it to his fellow trustee. Making the realistic assumption that the fellow trustee would be content, they would then join in executing the document. Mr Breadner and Mr Cannell were also directors of the company which was the third trustee, so if they decided as individual trustees to execute the document it could be taken for granted that the company also agreed. Mr Breadner cannot now specifically remember what happened in the case of the 1989 deed, but he has no reason to think that it was any different from the usual practice. He and his co-trustee both worked in the same offices in Douglas, so the matter could be, and presumably was, dealt with informally by Mr Breadner (or an assistant accountant who was working on the matter) going into Mr Cannell's office with the engrossment of the deed, explaining it to Mr Cannell, and obtaining his signature.
- Mr Breadner gave oral evidence and was cross-examined. He did not accept that he simply did what the settler told him to do, and I accept that he did not. Nor do I think that there is anything inherently wrong in the relatively informal procedure which was followed, or in trustees having an inclination that, other things being equal, they should follow the settlor's wishes unless some breach of trust or other impropriety would be involved. Mr Breadner did accept, however, that he did not investigate the circumstances of the cousins as carefully as he perhaps should have done: after all the 1989 deed, if it had been effective, would have taken away from the cousins interests which they currently possessed under the 1976 appointment. Mr Breadner also confirmed that, although he, being one of the trustees, considered whether or not the trustees should exercise the 1976 power before it expired and formed the view that they should, the trustees as a collective body (which meant in practice himself and Mr Cannell) did not consider that question until 2 August 1989, which (subject to one of Mr Warren's arguments, with which, however, I do not agree) was too late. To put the matter at its lowest the power appeared to have expired on the previous day. Mr Warren says that this failure by the trustees was a breach of trust, and it is part of the reasoning which underlies another of his arguments.
- I said earlier that in the case of appointments which Mr Breadner thought to be uncontroversial he used to arrange for a draft document to be prepared. He did that in this case, instructing a local firm of solicitors to prepare a deed of appointment which would appoint the whole fund to Jonathan and his children. The solicitors prepared a deed which, as far as I can see, was admirably worded. I do not know whether they gave specific advice to Mr Breadner about the date by which it had to be executed. Probably not: the typed deed said that it was made on the [blank] day of [blank] 1989, leaving the actual date and month to be inserted in manuscript, as in fact they were.
- Unfortunately someone, possibly the solicitors but more probably Mr Breadner or his assistant, made a mistake. The deed needed to be executed not later than 1 August 1989 (the day before the Closing Date, which was itself the day before the 25th birthday of the oldest cousin). Mr Breadner or his assistant must have believed that the last date for execution was 2 August, because that was the day on which the deed was in fact executed, and was the date which someone wrote in in manuscript on the engrossment of it.
- There was no specific evidence of how the mistake arose, but I do not find it hard to imagine how it did. It was in all probability a consequence of the draftsman of the 1976 appointment having been excessively cautious thirteen years earlier. The statutory requirements for para 15 trusts would, I think, have been complied with if the 1976 appointment had provided that the 1976 power had to be executed not later than on the day when the first beneficiary attained 25; to require execution not later than the day before was not strictly necessary. Nevertheless it was in my experience common to provide that the power had to be exercised before, not on, the Closing Date. What was not common was for the Closing Date to be defined, not as the 25th birthday, but as the day before it. My conjecture is that the mistake was not a failure to appreciate that clause 3 of the 1976 appointment required the 1976 power to be exercised before the Closing Date, but rather a failure to appreciate that the Closing Date in this case was defined as being one day before the birthday rather than, as was more usual, the birthday itself
- However that may have been, the 1989 deed was not executed before the Closing Date, and, unless Mr Warren's argument that 'before' in the 1976 appointment meant 'on or before' is right, the 1976 power was not exercised until after it had expired. Strictly everything that has happened since 2 August 1989 could be irrelevant to the question which I have to decide, but I ought briefly to outline the events between then and now.
- For about two years everyone assumed that the 1989 deed was fully effective. The trustees administered the settlement on the footing that the fund was held wholly for Jonathan and his children, and that the cousins no longer had any interest in it. At some time in 1992 it must have occurred to the trustees that there could be a problem, or someone must have drawn the possibility to their attention. They consulted leading counsel. In August 1992 he advised that the 1976 power had lapsed a day before the 1989 deed, and that in consequence the deed was void. It followed that the cousins still had interests in three-quarters of the fund, pursuant to the default trusts in clause 5 of the 1976 appointment.
- The trustees wrote to the cousins informing them of the advice, and asking them what their position on the matter was. There was at least one letter in which the trustees sought to persuade the cousins that they should not make any claim for their entitlements under the settlement. The cousins, entirely properly, consulted solicitors. The solicitors, as I would have expected, said that the cousins should receive the benefits to which they were entitled. From late 1992 to 1998 the trustees administered the settlement accordingly, paying income to the cousins, and making a fairly modest capital advance to one of them. J understand that the cousins have made some complaints about some aspects of how the trustees have managed the settlement. Those complaints are not before me, and I have no idea whether there is or is not any substance in them.
- In 1998 the trustees consulted other counsel, including Mr Warren. He and junior counsel advised that there were arguments that, despite what leading counsel had advised in 1992, the fund was held by the trustees on the trusts (wholly for Jonathan and his children) set out in the 1989 deed. They recommended that the trustees should bring the matter before the court and seek the court's directions. The present proceedings before me are the result.
- There is only one other point to make about the facts. The impression that I glean from Mr Warren is that the trustees feel indignant about the position adopted by the cousins: they consider that the cousins are taking unreasonable advantage of a mistake of one day. I am not going to be influenced by emotions of indignation or the like, but I am not in sympathy with the trustees in this respect. It seems to me that, if emotions are going to come into the matter, there is some ground for dissatisfaction being felt, particularly by Jonathan, towards the trustees. They are professional trustees, and they have created the present situation by their own mistake. I do not find it attractive when they complain about the cousins, on advice from solicitors, claiming the beneficial interests to which, according to the trustees' own letter, they were entitled. When the predecessor trustees structured the 1976 appointment in the sophisticated form which they did, there was an inherent risk that the interests of the cousins would become indefeasible if for some reason a reappointment away from them was not made in time. When that risk materialised I think that the trustees should blame themselves, and not try to share the blame with the cousins.
The arguments
- There are four principal arguments. They all arise against the background that (as is correctly submitted by Mr Green and not really disputed by Mr Warren or Mr Turnbull) the initial appearance is that the 1989 deed was executed too late to be a valid exercise of the 1976 power, so that the trusts which remain in force are the default trusts in clause 5 of the 1976 appointment. Under those trusts Jonathan and the cousins (and their respective children) each take interests in a quarter of the trust fund. AH four of the arguments are attempts to get away from that conclusion, and to produce a result under which the fund is held on trust solely for Jonathan and his family.
- Mr Warren (on behalf of the trustees) first argues that, in clause 3 of the 1976 appointment, 'before the Closing Date' meant 'on or before the Closing Date', so that the 1989 deed was executed in time. Second, he argues that, if he is wrong on his first argument, there is a principle of equity that in the particular circumstances of this case the trustees should be directed to hold the fund on the trusts which would have applied if they had exercised the 1976 power in time instead of out of time. If there is no such established principle of equity he submits that there is always a first time, and that I should find the existence of the principle and declare it in this case. In both of these arguments Mr Warren is supported by Mr Turnbull on behalf of Jonathan. Mr Humbug addresses to me a third argument, in which he is supported by Mr Warren, that the apparently defective 1989 deed should be rescued by a new application of an ancient doctrine of equity that in certain circumstances equity will relieve against the defective execution of powers.
- The fourth argument is advanced by Mr Warren alone. He says that in any event the 1976 appointment may have been void. In that case either the 1989 deed takes effect as a valid exercise of the overriding power of appointment in the original discretionary settlement itself notwithstanding that the trustees did not consider themselves to have been exercising that power, or the entire fund is still held on the trusts of the discretionary settlement. Mr humbug does not support this argument. Jonathan may wish to pursue a claim against the trustees if I do not uphold any of the first three arguments. His claim would rest on some form of negligence or other breach of duty by the trustees in failing properly to exercise in 1989 the power which they wanted to exercise. It would not fit well with that claim for Jonathan to argue that the 1976 appointment was invalid, since that would have meant that the trustees never possessed the 1976 power, rather than that they possessed it but culpably failed to exercise it.
- Mr Green's position on all of these arguments is that they are wrong. I agree with him, and I will set out the reasoning as I deal with each of the arguments in turn.
'Before' or 'on or before'?
- Under clause 3 of the 1976 appointment the 1976 power had to be executed by deed 'executed before the Closing Date and not be revocable thereafter'. The Closing Date was the day before the day on which the first of the beneficiaries became 25. So in the events that happened the power had to be exercised before the day before the 25th birthday of the oldest beneficiary. The birthday concerned fell on 3 August 1989, so on the face of it the last day for exercise of the power was 1 August 1989, not 2 August 1989. Mr Warren argues that exceptionally a court may construe the word 'before' as meaning 'on or before', and refers me to a Scottish case, admittedly in a wholly different context, where the word 'before' in a statute was construed in the sense of 'on or before': Drummond v Walker [1934] SC 279. He argues that there are enough indications here to enable me to hold that the draftsman of the 1976 appointment intended to convey the sense of 'on or before', and that it was within modem principles of construction for me to hold that the word 'before' in clause 3 did have that meaning.
- I cannot agree. There are six specific points which I wish to make. First, although I appreciate that the modem approach to construction of a legal document has loosened to quite some degree from a formal syntactical approach (see further paragraph 39 below), it remains the case that the starting point, and usually the finishing point as we!}, is to identify the natural and ordinary meaning of the words which the draftsman has used. The leading authority for the modem approach is Investors Compensation Scheme Ltd v West Bromwitch Building Society [1998] 1 WLR 896, but in that case one of the observations of Lord Hoffman was:
' .... the 'rule' that words should be given their 'natural and ordinary meaning' reflects the common-sense proposition that we do not easily accept that people have made linguistic mistakes, particularly in formal documents ... '
It is of course true that Lord Hoffman was mainly concerned to bring out that there are circumstances where it is appropriate to depart from the natural and ordinary meaning of words, but he had particularly in mind cases where it was realistic to acknowledge that the draftsman had made a linguistic mistake.' In this case, for reasons which I will enlarge on in the next few paragraphs, I do not think that the draftsman of the 1976 appointment made a linguistic mistake. He said what he intended to say. So why should not the 'natural and ordinary meaning' of his words be adopted? There is only one natural and ordinary meaning of the words used in clause 3. Something which has to happen 'before' a date cannot happen 'on' the date. It simply is not the case that 2 August 1989 was before 2 August 1989. 1 August 1989 was, but 2 August 1989 was not. That may seem a platitude, and indeed Mr Warren does not dispute it as a generalisation. It nevertheless bears saying, because it brings out the difficulty of the conclusion for which Mr Warren contends.
- Second, a few lines later in the 1976 appointment the draftsman actually uses the words 'on or before'. On all conventional criteria of construction this supports an argument that, when in the same document he had used the word 'before' alone, he did not intend it to mean 'on or before'. Many authorities in support of this approach could be cited. One, to which my attention was drawn by Mr Green, is re Hambro [1949] Ch 484.
- Third, I do not believe that the draftsman of the 1976 appointment failed to realise what he was doing when he provided that the 1976 power had to be exercised before the Closing Date. I repeat the point made in paragraph 25 above. It was common for draftsmen of appointments such as the 1976 appointment deliberately to be cautious and to require the power to be exercised at !east a day before the last possible date which would permit an appointment to create para 15 trusts complying with the conditions laid down by the CTT legislation. I think that it is unlikely that Mr Breadner and his colleagues were misled into thinking that the draftsman intended the power to be exercisable right up to the Closing Date itself. What is more likely to have misted them is the unusual feature that the Closing Date was not defined as the date on which the interests had to vest indefeasibly to comply with the statute, but rather the day before that date. They may have taken it for granted that the Closing Date was the beneficiary's 25th birthday, because in nearly all similar cases it would have been. In this case, however, the draftsman had been doubly cautious, and that may have caused the error which arose. But there is no way that the definition of 'the Closing Date' (contained in clause 1 of the 1976 appointment) can be construed as meaning the beneficiary's 25 birthday rather than the day before it. It would be entirely wrong to compensate for the inability to adopt that construction of 'the Closing Date' by departing from the meaning which I believe the draftsman intended to apply to the expression 'before the Closing Date' in clause 3.
- Fourth, and a related point. I was naturally referred to the two recent and leading House of Lords cases on construction of Mannai Investment Co Ltd v Eagle Star Life Assurance Co [1997] AC 749, and Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896. Mr Warren submitted that the modem approach to construction set out in those cases supported his construction in this case of 'before' as meaning 'on or before'. But I do not think that it does. The two cases support the proposition that, if a draftsman uses words which grammatically mean one thing but it is obvious that he intended them to mean something else, the words can be construed to bear the obviously intended meaning, not the grammatically correct meaning.
- I do not think that this case is like that. I assume and believe that, when the draftsman of the 1976 appointment said that the Closing Date was to be the day before the oldest beneficiary's 25th birthday, what he intended to say was what he actually said. He did not intend to say that the Closing Date was the day of the oldest beneficiary's 25th birthday. And, more directly in point for Mr Warren's argument, when the draftsman said that the power had to be exercised before the Closing Date I see no reason to suppose that what he really intended to say was that it had to be exercised on or before the Closing Date. Mr Warren's real point is that the draftsman did not need to say that the power had to be exercised before the Closing Date. If he had said that it could be exercised on or before the Closing Date, the 1976 appointment would still have been an effective para 15 appointment for CTT purposes. That is true, but ail that it shows is that this draftsman was particularly cautious. It does not show that he intended his words to have a meaning which differed from the only tenable meaning which, on grammatical and linguistic principles, they can bear.
- Fifth, the Mannai Investment and Investors Compensation Scheme cases were both ones where, if the court did not adopt a construction which departed from the dictionary or grammatical meaning of the words, the document would fail to achieve its obvious purpose. In my view the same cannot be said in this case. The purpose of the 1976 appointment was for the trustees to make a para 15 appointment in 1976, securing the most advantageous rate for the CTT exit charge, while retaining until 1989 a continuing measure of flexibility as to the ultimate destination of the trust funds. The 1976 appointment achieved those purposes, and there is no need to construe 'before' in the ungrammatical sense of 'on or before' to enable them to be achieved.
- Sixth, I accept that Mr Warren has a fair point when he notes that clause 3, as well as saying that the 1976 power had to be exercised before the Closing Date, also said mat it could not be exercised so as to permit the appointment to be revocable after the Closing Date. Mr Warren says that, if 'before' really did mean before, it would have been logical for the draftsman to have precluded revocation on or after the Closing Date, not simply after the Closing Date. Otherwise there was one whole day - the Closing Date itself- on which nothing could be done: an appointment could not be made, and an existing appointment could not be revoked. I agree with Mr Warren on this aspect, but all it means is that the appointment has not achieved logical perfection in all respects. This does not persuade me that the word 'before' in clause three was intended to have anything other than its ordinary meaning. The same applies to a number of other drafting inelegancies or deficiencies which Mr Warren identifies at other places in the 1976 appointment. Those inelegancies or deficiencies may exist, but they do not begin to persuade me that, in clause 3, 'before' does not mean before, but means on or before instead.
- I therefore reject the first argument put forward by Mr Warren and supported by Mr Turnbull. The 1989 deed was not a valid exercise of the 1976 power, which had expired before the deed was executed and (if it matters) before me trustees took any form of collective decision to exercise it.
Do the trusts in (he 1989 deed nevertheless take effect in equity?
- Mr Warren's second argument, also supported by Mr Turnbull, is that, even if the 1989 deed failed to take effect as a valid exercise of the 1976 power as contained in the 1976 appointment, nevertheless in the circumstances of this case equity should hold that the trust fund is held on the trusts which the trustees ineffectively set out in the 1989 deed. In their skeleton argument Mr Warren and Miss Furze say:
In those circumstances, the appropriate remedy is for the trustees to be directed to hold the trust fund on trusts reflecting those intended to be created by the [1989 deed].
- They accept that there is no authority which supports this striking result, but they fairly point out that there is no authority which specifically refutes it either. This is, as far as they and I know, the first time that anything of this kind has been argued. I am not clear whether the argument is that in equity the fund has at all times been held on the trusts in the 1989 deed, so that I would merely be declaring what the position already is; or whether the argument is that, although the fund is at present held on trust for Jonathan and the cousins pursuant to clause 5 of the 1976 appointment, I can and should direct that from now on it shall be held instead on the trusts of the ineffective 1989 deed. I think that Mr Warren probably puts the arguments in the alternative, since either would be acceptable to his clients. However, as far as I am concerned whichever way it is put does not make any difference, because I do not agree with the argument either way.
- As I see the argument there are three essential elements which underpin it. (1) Although the trustees did not have a duty to exercise the 1976 power, they did have a duty, before the power expired, to consider whether to exercise it. The trustees failed to comply with that duty: as I have already explained Mr Cannell, the second individual trustee, did not know anything about the matter until 2 August 1989, by which date the power had expired. (2) If the trustees had considered in time whether to exercise the power they would certainly have decided that they should exercise it, and they would have made an appointment in favour of Jonathan and his children in the terms of the ineffective 1989 deed. In many cases there might be evidential difficulties about knowing what the trustees would have done if they had thought about it, but in this case there are no such difficulties. (3) There is a developing principle of equity, which is coming to be referred to as 'the principle in Hastings-Bass, and which is capable of being extended so as to justify the decision for which Mr Warren contends in this case.
- I will address each of those three elements later, but first I wish to make some more general observations. The 1976 power expired at midnight on 1 August 1989 and had not been exercised. Until then the cousins' beneficial property rights which had been vested in them by the 1976 appointment were defeasible by an exercise of the 1976 power. At the precise point in time when the 1976 power expired the possibility of the cousins' property rights being defeated disappeared. Their rights were no longer vested but defeasible. They were vested indefeasibly. Mr Warren's argument amounts to saying that I have an equitable jurisdiction to deprive trust beneficiaries of indefeasibly vested interests. That would be a very strong thing for the court to do, and I do not accept that I have power to do it.
- At the time when I am writing this judgment there exists a fund of money and investments the legal ownership of which is vested in the trustees. Who owns the fund beneficially? Certainly not the trustees, so how do I find out who does? The answer is: from the terms of the trust instruments. There is no suggestion in this case of a secret trust or anything of that nature, and if I do not discover the beneficial interests from the trust instruments I do not know where I do discover them. Under the trust instruments there is no doubt (or, for the purpose of testing this argument of Mr Warren, I must assume that there is no doubt) that the cousins and their children are beneficially entitled to three quarters of the fund. I would need an enormous amount of persuading that I can take that beneficial entitlement away from them on the ground that they are extremely fortunate to have it, and in a!) probability would not have it if the trustees had done their job properly. Jonathan has a substantial grievance against the trustees, but I do not think that that can justify me in depriving the cousins of the property interests which are clearly and indefeasibly vested in them.
- Turning more specifically to the three elements which underlie Mr Warren's argument (see paragraph 46 above), I accept the correctness of points (1) and (2). Thus I agree that the trustees had a duty, before the 1976 power expired, to consider whether or not to exercise it. See Lord Wilberforce in re Baden's Deed Trusts, [1971] AC 424 at 456H, and Sir Robert Megarry VC in re Hay's Settlement Trusts, [1982] 1 WLR 202. I also agree that the trustees failed to perform that duty. Further, I accept that if they had performed the duty they would have made an in-time appointment in favour of Jonathan on the terms of the 1989 deed. But I cannot see how either or both of those points, with or without the principle in Hastings_Bass (which I examine later), leads to the conclusion for which Mr Warren contends.
- It is trite law that there is a distinction between two kinds of dispositive discretions which may be vested in trustees. There are discretions which the trustees have a duty to exercise (sometimes called 'trust powers'), and discretions which the trustees may exercise but have no duty to exercise (sometimes called 'mere powers'). The distinction is most familiar in the context of discretions to distribute income. In cases of trust powers the trustees are bound to distribute the income, but have a discretion as to how it should be divided between the beneficiaries. In cases of mere powers the trustees have two discretions - first a discretion whether to distribute the income or not, and second, if they decide that they will exercise the first discretion, a further discretion as to how to divide the income between the beneficiaries. In the latter kind of case there will usually be a default trust which deals with the income if the trustees do not exercise their discretion to distribute it. Typically the default trust will provide for the undistributed income to be accumulated or to be paid as of right to a beneficiary whose interest in it is vested but defeasible by the trustees exercising their discretion to distribute.
- The distinction is explained by Lord Upjohn in re Gulbenkian's Settlement [1970] AC 508 at 525, and illustrated by re Locker's Settlement [1977] 1 WLR 1323 (a trust power case), and re Allen-Merick's Will Trusts [1966] 1 WLR 499(a mere power case).
- Sometimes the distinction does not matter, but there is an important difference between the two kinds of case if the trustees do not exercise the discretion to distribute income within the normal time for exercising it. That time is usually 'a reasonable time'. If there is a trust power and, although the trustees are required to exercise it within a reasonable time, they do not do so, the discretion still exists. If the trustees are willing to exercise it. albeit later than they should have done, the court will probably permit them to do so. That is what happened in re Locker's Settlement (supra). Alternatively the court will exercise the discretion itself. But if the discretion to distribute income is a mere power, and the trustees do not exercise it within a reasonable time of the receipt of an item of income, the discretion no longer exists as respects that income. The default trusts take effect indefeasibly. That is what happened in re Allen-Meyrick's Will Trusts (supra).
- The distinction between trust powers and mere powers is, as I have said, most commonly encountered in connection with powers to distribute income. But the distinction also exists in connection with other kinds of dispositive powers, including powers of appointment. Thus it existed in the case of the 1976 power contained in the 1976 appointment.
- The 1976 power was a mere power, not a trust power which the trustees had a positive duty to exercise. That is so notwithstanding the word 'shall' which I have emphasised in the extract from clause 3 of the 1976 appointment quoted in paragraph 16 above. Indeed the contrary was not really argued. In my judgment the opening words of the later clause 5 (summarised in 15 above) make this clear. They read: 'Subject to and in default of any appointment made under Clause 3 hereof... ' The clause 5 default trusts are capable of continuing until the perpetuity date in 2053, so the draftsman of the 1976 appointment clearly contemplated the possibility that the trustees would not appoint any trusts under clause 3 before their power to do so expired, leaving the 1976 appointment to carry on into the future regulated solely by the default trusts of clause 5. That, indeed, is what I think is happening now.
- Given that the 1976 power was a mere power which the trustees did not have to exercise, it ceased to be exercisable on 1 August 1989, and the fact that the trustees had failed to perform their duty to consider whether or not to exercise it cannot mean that it continued to be exercisable after all. The power had still expired, and it did not exist on 2 August 1989, when the trustees purported to exercise it. Mr Green says that the duty to consider whether to exercise the power was ancillary to the power, and cannot have an independent and continuing existence apart from the power itself. I agree with him. The trustees' failure to consider whether to exercise the power may give rise to consequences between them and Jonathan, but it cannot mean that the interests of the cousins under the 1976 appointment continued to be defeasible after 1 August 1989.
- Mr Warren and Miss Furze say that the cousins 'need to rely on the trustees' breach of duty to have any entitlement'. I do not agree. I would agree that, if the trustees had not been in breach of their duty to consider whether to exercise the 1976 power, the cousins would not have the entitlement which they now have. But that does not mean that they rely on the trustees' breach. They rely on (1) the terms of the 1976 appointment, which was made in 1976 by the trustees then in office without any breach of any duty, and (2) the fact that, since there never was a valid exercise of the 1976 power and now there never can be, the interests which they have under the 1976 appointment are indefeasible. At neither stage do they rely on any breach of duty by the trustees.
- Mr Warren submits to me that the cousins took their interests in the fund subject to the unperformed duties of the trustees. I do not know what that means. If it means that, as against the cousins, the trustees can now say that they still have to consider whether to exercise the 1976 power and they have decided that they will exercise it, I do not accept that they can say any such thing. A related submission which Mr Warren has advanced is that equity should act on the consciences of the cousins and require them to give up the interests which they ostensibly have under the 1976 appointment. I do not agree with that either. I think that the cousins are fortunate in the way that things worked out for them, and I am sorry for Jonathan, but my conscience does not impel me to say that the cousins must not be allowed to retain the interests which the deliberate actions of the settlor and the trustees have conferred upon them. Jonathan may or may not be able to recover what he has effectively lost through an action against the trustees. I accept that it will not be plain sailing for him, since apart from anything else there is a trustee-exoneration clause in the settlement. But any possibility of redress for Jonathan lies, if at all, in a claim against the trustees, and not in an attempt to take the cousins' property rights away from them.
- That is all that I wish to say about the first two of the elements on which Mr Warren relies in support of this particular argument. I now turn to the principle in Hastings-Bass. It might be useful for me first to say what I understand the principle to be. It is an emerging principle which may be applied to exercises of powers by trustees, and it has obvious affinities to the much more developed area of the principles which courts will apply when judicially reviewing the exercises of statutory powers by public authorities. If trustees, in exercise of one of their express powers, take an action which on the face of it falls within the letter of the power, the action may nevertheless be held to have been ineffective if (1) the trustees fail to take into account something which they ought to have taken into account, or (2) the trustees take into account something which they ought not to have taken into account, and (3) in either case the trustees would not have taken the action if they had not failed, as in (1), to take into account what they ought to have taken into account, or had taken into account, as in (2), what they ought not to have taken into account.
- The principle derives from the following passage in the judgment of the Court of Appeal in re Hastings-Bass [1975] Ch 25 at 41, and in particular from the words following (2):
... whereby the terms of a trust ... a trustee is given a discretion as to some matter under which he acts in good faith, the court should not interfere with his action notwithstanding that it does not have the full effect which he intended, unless (1) ... or (2) it is clear that he would not have acted as he did (a) had he not taken into account considerations which he ought no! to have taken into account, or (b) had he not faded to take into account considerations which he ought to have taken into account.
The court declined to apply the principle in the Hastings-Bass case itself, as is implicit in the negative formulation ('the court should not interfere ... unless'). In Mettoy Pension Trustees v Evans [1990] 1 WLR 1587 at 1621 et seq, Warner J recognised that the principle existed, reformulating it in positive terms ("the court will interfere if ... '). However, he too declined to apply the principle, since he considered on the facts that the trustees would still have done the same thing anyway. That is, the condition which, in my formulation in paragraph 58 above, I have expressed in (3) was not satisfied.
- The only case to which I have been referred in which the principle has been applied is the recent decision of Jonathan Parker J in Green v Cobham (2000, as yet unreported). (Hastings-Bass was mentioned in Stannard v Fisons Pension Trust Limited, [1991] PLR 225, but that was a rather special case which, as I read it, turned mainly on principles particularly applicable to pension trusts, and not on the general Hastings-Bass principle.) In Green v Cobham a large trust fund was held outside the United Kingdom for a class of beneficiaries most of whom were resident abroad. There was an appointment, apparently valid, of a trustee of a sub-fund. The trustees did not realise it, but the appointment would cause the whole settlement to be resident in the United Kingdom for capital gains tax, with truly alarming tax consequences. The judge found that the trustees would never have made the appointment of the new trustee if they had taken into account the tax consequences. He therefore applied the principle in Hastings-Bass and held that the appointment had been void.
- The principle is still at an early stage of development, and the limits to it have not been established. There must surely be some limits. It cannot be right that, whenever trustees do something which they later regret and think that they ought not to have done, they can say that they never did it in the first place. Further, there is no reported decision (or. as far as I know, unreported decision) in which the principle has been applied so as to take away beneficial interests from the persons who are properly entitled to them under the trust instruments.
- So far as the present case is concerned, the most important point about the Hastings-Bass principle is that it has been developed and explained as a principle whereby the courts will hold to have been ineffective something which the trustees have in fact done. In this case, by way of contrast, Mr Warren's argument would involve the court imposing on the trustees, or at least on the trust fund, something which the trustees did not do, but which Mr Warren says that they would have done if they had taken all proper considerations into account. Mr Warren recognises that what he contends for is not an application of the Hastings-Bass principle, but would be a new principle. However, he says that it is a natural and logical development from Hastings-Bass, and urges me to adopt it.
- In my judgment, however, there is a very big difference between, on the one hand, the courts declaring something which the trustees have done to be void, and, on the other hand, the courts holding that a trust takes effect as if the trustees had done something which they never did at all. It is a big step from Hastings-Bass, not a small one, and I am not witling to take it, especially when I would be changing the beneficial interests and depriving the cousins of what I consider to be their property, however unpalatable it may be to the trustees that it is the cousins' property. I also believe that such indications as are to be found in the authorities are that the court may undo something which the trustees have done, but will stop short of doing something which the trustees might have done but did not do. In Hastings-Bass itself the court noted (at pp 41 -42) that the court was not being asked to exercise any discretion, but only to determine whether the trustees had validly exercised their discretion. In Mettoy Warner J observed (at p 64) that, if a case arose where the trustees had done something but, if they had taken all relevant factors into account, would have done something quite different, the court should declare void what they had done. There is no suggestion that the court would or might substitute the different thing which it thinks that the trustees would have done themselves. To do that would not be much different from what Mr Warren wants me to do. I do not think that Warner J would have done it, and I will not do it either.
- Finally on this part of the case I must consider an authority which was not referred to in the hearing, but of which I was sent a copy after the hearing, together with the submissions upon it of Mr Warren and Miss Furze on the one hand and Mr Green and Miss Bryant on the other. It is the decision of Lloyd J in Buckley v Hudson Forge Ltd, [1999] PLR 151. The case was about a pension trust. A lot of points arose in it, but the one which is said to be relevant here arose as follows. Rule 4H of the pension scheme provided: 'any pension ... shall be reviewed annually, and a rate of increase determined at the trustees' discretion.' Mr Warren says, and so far I agree, that that was comparable to the duty of the trustees of Mr Granville-Grossman's settlement to consider whether or not to exercise the 1976 power. As a result of the principal employer becoming insolvent the pension trust went into a process called 'winding-up'. Another rule, rule 10B proviso, stated: ' ... if after providing the benefits stipulated above any balance remains unexpended the trustees shall refund such balance to the employers.' The trustees took the view that there was no discretion left to them, and that because of rule 10B proviso they had to pay the surplus in the fund to the employer. A member of the scheme argued that, under the earlier rule 4H, the trustees still had to review the rate of his pension, and had a discretion to determine upon an increase to it. Lloyd J agreed with the member.
- Mr Warren relies on this case, but I do not think that, when it is carefully analysed, it helps him. The critical point is that there was nothing in the rules of the scheme which provided that, when the winding-up process started, the trustees' discretion under rule 4H to determine an increase in pension rates expired. Thus there was nothing comparable to the clear wording in the present case of the 1976 power, stating that it had to be exercised 'before the Closing Date'. Further, in the Hudson Forge case the ultimate trust to pay any surplus to the company only took effect 'after providing the benefits stipulated above', and the judge took the view that one of the 'benefits stipulated above' was the right of a member under rule 4H to have an annual review of his pension rate in order that the trustees could consider whether or not to increase it. The member had not yet had his annual review, so the obligation to pay any unexpended surplus to the company had not, on the true construction of the rules, yet come into effect. In the present case, on the other hand, I consider it clear that, on the true construction of the 1976 appointment, the power of the trustees to make an appointment under the 1976 power expired at the end of August 1989, so that the clause 5 default trusts (for the cousins as to three-quarters) became indefeasible.
- I wish briefly to refer to one feature of the present case which Mr Green says was unsatisfactory, but on which I do not place any significant reliance in not accepting Mr Warren's argument. That feature is that the trustees, in deciding to execute the defective 1989 deed in favour of Jonathan in a manner which would cut out the cousins altogether, acted at the instigation of the settlor, following his wishes and not giving any effective consideration to the circumstances and the needs of the cousins, of whom they knew very little. It is, of course, entirely proper for trustees to consult their settlor, and, other things being equal, to be inclined to go along with his wishes, but I certainly think that it would have been better in this case if the trustees had taken steps to inform themselves about the cousins. Nevertheless, if the trustees, not having informed themselves about the cousins and not having given any effective consideration to such needs as the cousins might have had, had executed the 1989 deed in time instead of after the 1976 power had expired, no-one would have challenged the validity of the in-time appointment in favour of Jonathan. If anyone had challenged its validity I do not think that the court would have held the appointment to be invalid.
- So, although some fault may be found with the way in which the trustees did not consider the cousins in 1989 (and I have already mentioned that Mr Breadner in his evidence accepted that point), I do not base my conclusion on it. However, for all of the other reasons which I have mentioned I do not accept the submissions of Mr Warren and Miss Furze, supported by Mr Turnbull, that on equitable principles I should conclude that the trustees hold the fund on trusts identical to those set out in the ineffective 1989 deed.
Equitable relief against the defective execution of a power
- I now address the argument which was developed by Mr Turnbull and supported by Mr Warren. Mr humbug presented the argument clearly and cogently, but I am not able to accept it. The argument seeks to come to essentially the same conclusion as the argument of Mr Warren and Miss Furze which I considered in the previous part of this judgment, but by a different route. The result of it would be that the 1989 deed, despite being executed after the 1976 power had expired, should nevertheless take effect in equity. But whereas Mr Warren and Miss Furze's argument would reach that result by a new route, Mr Turnbull's argument relies on what his skeleton argument described as 'an ancient principle under which equity can come to the aid of powers defectively executed.'
- The skeleton cites the formulation of the doctrine in Halsbury's Laws of England, Vol 36(2) para 359:
If the execution of a power is invalid at law through failure to comply with all the requirements of the power, equity will in certain cases aid the execution. The principle is that whenever a person who has power over an estate, whether or not a power of ownership, shows an intention to execute the power in discharge of some moral or natural obligation, equity will act on the conscience of those entitled in default of appointment and compel them to perfect the intention.
The argument is that the execution by the trustees of the 1989 deed was an execution by them of the 1976 power, but was invalid at law through failure to comply with the requirement that the power had to be exercised before the Closing Date. This (so the argument continues) is one of the 'certain cases' where equity will aid the execution. It will act on the consciences of the cousins and compel them to perfect the intention of the trustees to exercise the power.
- Before I examine the doctrine more closely I should say that Mr Turnbull's description of it as ancient is accurate and fair. Much of the material on which his argument is based was taken from the last edition of Farwell on Powers, which was published in 1916, and which itself relies on cases many of which were decided in the 18th Century. The most recent case cited to me in which the doctrine was actually applied was decided in 1908, and in the most recent case in which it was considered but not applied (re Hambro, [1949] Ch 484) it was said that the leading case was Tollet v Tollet, 2 Peere Wms 489, which was decided in about 1735. The case on which Mr Turnbull principally relies (although the court declined to apply the doctrine) was decided in the Court of Appeal in Chancery in 1867. That case is Cooper v Martin (1867) 3 Ch App. 47. I will consider it in some detail in later paragraphs.
- I will state a number of specific reasons why in my judgment the doctrine does not apply in this case so as to have the effect contended for, but I think that it is fair for me to acknowledge that I start with a disinclination to accept the argument. The summary of the doctrine in Halsbury brings out that part of the underlying theory is that equity acts on the consciences of the beneficiaries entitled in default and prevents them from taking what their entitlement would otherwise have been. Sympathetic though I am to Jonathan, I do not feel that there is anything unconscionable on the part of the cousins in their wishing to retain the interests which were conferred on them by the ! 976 appointment and which were not removed from them by a valid exercise of the power which, for a time, the trustees could have used in order to appoint away from them. I feel that all the more strongly in the particular circumstances of this case which I have briefly described earlier: the trustees, advised by leading counsel, wrote and informed the cousins that they had indefeasible interests in three quarters of the fund, and administered the trusts on that basis for several years. They now say that the cousins ought to feel compelled by their consciences to allow Jonathan (and his children) to take the entire beneficial interest in the whole of the fund.
- In this connection it may be relevant that, as I understand the doctrine, it did not apply automatically in equity from the moment when the trustees ineffectively executed the 1989 deed. If it did, a decision on my part agreeing to Mr Turnbull's argument would merely be declaring and confirming what the position has been all along. However, if I have the position correctly, the defective execution by the trustees of the 1976 power remains defective until equity intervenes to aid it. That means that the cousins keep their interests unless and until a court of equity makes some order to the contrary. The order would be directed against the cousins, and would be to the effect that they be compelled to perfect the intention of the trustees which the trustees had not succeeded in perfecting themselves. As will appear below, I do not in any event consider that this case possesses the characteristics which are required before equity will make such an order relieving against the 'defect', but, if I thought that it did, I am not clear from the authorities whether I would have any discretion in the matter. If I did have a discretion I would be disinclined to exercise it.
- I now turn to the more specific conditions which, in my judgment, are lacking in this case but would be required before the doctrine could take effect. There are four points which I wish to make. The first is that, as far as counsel's researches have shown, every case in which the doctrine has been applied has been one in which, at the time when the trustees attempted to exercise the power but did so defectively, the power existed and could have been exercised effectively. In this case, when on 2 August 1989 the trustees executed the 1989 deed and thereby attempted to exercise the 1976 power, the power did not exist. It had existed on the day before, but it did not exist any longer. It is relevant to note that Farwell on Powers draws a distinction between defective execution of a power, against which relief may in some circumstances be given, and non-execution of a power, against which relief cannot be given: 'The court wilt not aid the non-execution of the power' (proposition 4 at p.383 of the 3rd Edition). Mr Green submits that this case, carefully analysed, is an instance of non-execution of the power, not of defective execution. I am inclined to agree. Mr Turnbull's point is not so much that the trustees had a power and exercised it defectively, as that they failed to exercise it at all when they could have done.
- The second point is that, with the possible exception of some observations in Cooper v Martin, which I consider below, the cases indicate that the area in which the doctrine operates is where there is some defect in the form in which the power is exercised, not where the power has been exercised out of time. The proposition from Farwell which I quoted in the previous paragraph is followed a few lines later by this passage:
Non-execution of a power is where nothing is done: detective execution is where [here has been an intention to execute sufficiently declared; but the act declaring the intention is not an execution in the form prescribed.
The two most recent cases in which the doctrine has been applied illustrate the point. In Kennard v Kennard (1872) 8 Ch App 227, the power was expressed to be exercisable by deed or will. The holder of the power sought to exercise it by a signed but unsealed document. That was neither a deed nor a will, but equity relieved against the defect of form and held that the power had been effectively exercised. In re Walker [1908] Ch 560, the power was expressed to be exercisable 'by her last will and testament in writing ... signed in the presence of and attested by two or more witnesses.' The testatrix was domiciled in Scotland where a holograph wi!l was valid and did not requite to be attested by witnesses. She attempted to exercise the power by a will in that form, and the exercise, though defective in form (because the will was not attested by two witnesses), was upheld by reason of equity relieving against the defect.
- In this case, if the execution by the trustees of the 1989 deed was a defective execution of the 1976 power rather than a non-execution of it, the defect was of a different kind from the defects in the form of execution exemplified both by the cases which I have cited and, I believe, by all the other cases with the possible exception of Cooper v Martin.
- The third point is that the doctrine does not apply to every possible exercise of a power vested in anyone and in favour of any object of the power. The passage from Halsbury which I quoted in paragraph above refers to an intention to exercise the power 'in discharge of some moral or natural obligation.' The cases show that this means that equity will only aid the defective execution of a power where there is some sort of close relationship between the holder of the power and the person in whose favour he intended to exercise it. The two foremost examples are a husband seeking to exercise a power in favour of his wife, and a parent seeking to exercise a power in favour of a child. The doctrine has been developed in cases where, although the property was trust property, the power was vested in someone having, in his or her personal capacity, a natural or moral obligation to the intended beneficiary. There has been no case where the power was exercisable by the trustees themselves.
- In this case the power was not exercisable by Mr Granville-Grossman, who did have a natural obligation towards Jonathan, his son. It was exercisable by the trustees, who did not have a personal relationship with Jonathan. Mr Turnbull says that in a case like this one it is logical to look through the trustees to the settlor, and if there is the required natural obligation between the settlor and the beneficiary (as there is here) to hold that that is sufficient. I follow the argument, and to a degree I am sympathetic towards it. It would however require a conscious expansion of the doctrine to cover circumstances to which it has not been applied before. I might be willing to expand the doctrine if I felt that it had vitality in modem conditions and ought to be expanded. However, I do not fee! that. A doctrine which was last applied in 1908 is falling into disuse. I believe that it was developed when family settlements, and powers exercisable in relation to trust funds, took very different forms from those which they take today. Most modem settlements are drafted in much detail and give to trustees, who are often professional trustees who charge for their services, extensive powers of many kinds. Where the trustees have failed to exercise a power I do not feel an inclination to expand the circumstances where the court may intervene and hold that the trust should be administered as if they had exercised it, thereby taking away from beneficiaries property rights which had apparently vested indefeasibly.
- The fourth point is that, even if the defect is of form and even if there is the right sort of relationship between the holder of the power and the beneficiary, it is not every defect which will be cured by the intervention of equity. Farwell (op. cit. p. 380) puts it in this way: 'Equity relieves only against defects which are not of the essence of the power.' The text continues: 'Courts of equity never uphold acts which will defeat what the person creating the power has declared, by expression or necessary implication, to be a material part of his intention.' Cooper v Martin, which I discuss below, is cited as the authority for this. It seems to me that what matters here is the intention of the person who created the power, and not whether the court agrees with him that it was sensible or necessary for him to have the intention.
- In this case the 1976 power was created by the trustees who were in office in 1976, and I take it for granted that they received legal advice from someone who in all probability was the draftsman of the power. As I have already said in the different context of Mr Warren's argument on construction of the power (the argument that 'before the Closing Date' should be construed as 'on or before the Closing Date') there is no getting away from the conclusions, first, that the draftsman intended the Closing Date to be the day before the oldest beneficiary's 23th birthday, and not the birthday itself, and, second, that he intended the last day for exercise of the power to be the day before the Closing Date, and not the Closing Date itself. In my opinion he made those two points of the essence of the power which he created, and, in accordance with the principle set out in Farwell, I do not think that the court can override his intentions in these respects. Mr Turnbull says that it was not of the essence of the power in this case that it had to be exercised not later than the day before the Closing Date. However, what Mr Turnbull means is that the draftsman did not need to require it to be exercised by then to ensure that the 1976 appointment was a para 15 appointment for purposes of CTT. I agree with Mr Turnbull about that, but the draftsman deliberately chose to impose these two intervals, each of one day, and I assume that he did that because he thought that it was at least possible that there was a good reason for it.
- Thus I think that the draftsman made it of the essence of the power that it had to be exercised not later than two days before the beneficiary's 25th birthday, and I do not believe that I can ignore that on the ground that the draftsman did not need to make it of the essence of the power. The fact was that he did make it of the essence. Mr Green commented that Mr Turnbull's argument on this point amounted to reintroducing by the back door Mr Warren's incorrect argument on construction. I do not think that that is what Mr Turnbull thought that he was doing, but I nevertheless think that there is quite a tot of substance in Mr Green's comment.
- Finally on this part of the case I come to Cooper v Martin (1867) 3 Ch App 47. Like many mid-19th Century trust cases it is quite difficult for a contemporary reader, even one fairly familiar with modem trust practice and terminology, to assimilate, but I will try to explain it as clearly as I can. Mr and Mrs Cooper had three sons, S1, S2 and S3, and the dispute was whether the family property (Pain's Hill) was inherited by S1 alone or by S1, S2 and S3 in equal shares. Ultimately, as I will explain, the question turned on whether the doctrine that equity would relieve against defective execution of powers did or did not apply to an attempt by Mrs Cooper to exercise the power by will in 1841.
- Originally Pain's Hill had been owned by Mr Cooper. By his will he left it on trust for his widow for life and after his death on such trusts as his widow might appoint. The critical point was that the widow had to exercise the power of appointment 'by deed or instrument sealed and delivered before the youngest son attained 25.' S3 would become 25 in 1851, so the widow needed to exercise the power before then. (If she did not there was a default trust for S2 and S3, excluding S1.) Further, so far as form went the power had to be executed by deed or other sealed instrument. In 1841, well in time, the widow did two apparently inconsistent things. First she made a deed revocably appointing Pain's Hill in favour of S1, S2 and S3 equally. If nothing else happened thereafter to change the position it was accepted that, after the widow's death, this deed would have been regarded as having been a valid exercise of the power, so that S1, S2 and S3 would take the estate. In the event that was the result, but only after considering whether other things which had happened in the meantime made any difference. The second thing which the widow did in 1841 was to make a will appointing Pain's Hill to S1 alone. She never revoked either the 1841 deed or the 1841 will. She died in 1863, twelve years after the power of appointment had expired.
- Who was entitled to the estate after her death? S2 and S3 claimed one-third shares each. They said that the 1841 deed was a valid exercise of the power of appointment, and had never been revoked. S1 claimed a 100% share on the basis that the 1841 will was an exercise of the power of appointment in his sole favour, and must be taken also to have operated as a revocation of the appointment made in favour of himself and his brothers by the earlier 1841 revocable deed. The reply to this of S2 and S3 was that the power had to be exercised by deed before 1851, and was not effectively exercised by a will, especially since the will did not have any effect until the widow died, which was long after 1851. S1 sought to escape from these arguments by relying on the doctrine that equity would relieve against the defective execution of a power. He said that the points which S2 and S3 took against the will being a valid exercise of the power were defects against which equity would relieve. The court disagreed. The power had been validly exercised by the 1841 deed; it had not been validly exercised by the 1841 will; and the ineffectiveness of the will to exercise the power was not a defect against which equity would relieve. So S2 and S3 got their one-third shares each.
- The reasons given by the two members of the Court of Appeal in Chancery (Lord Cairns and Sir John Rolt) for not accepting S1's arguments do not exactly coincide, but there is a measure of common ground between them. Lord Cairns took the view that, if the only problem had been that the widow had exercised by will a power which had to be exercised by deed, equity would have intervened and relieved against the defect. However, there was the further point that the power had to be exercised not later than the 25th birthday of the youngest son, and since the will spoke only from the death and could be revoked at any time until then, that requirement had not been complied with. The testator appeared to have had a reason (which Lord Cairns explained) for wishing the power to be exercised, if at ail, not later than S3's 25th birthday, In those circumstances the defect was not the sort of defect against which equity would relieve. Sir John Rolt, if I read his judgment correctly, agreed with all of Lord Cairns' reasons, but he also took the view that, as a matter of construction, the testator had made it of the essence of the power that it had to be exercised by deed, not by will. Sir John (I think) would not have given equitable relief even if the power could have been exercised by the widow at any time, and did not have to be exercised by the time that S3 became 25.
- I have taken a tot of time to describe Cooper v Martin, but Mr Turnbull relies on it as his main authority, and it is very difficult to explain it shortly. For myself I cannot see that it gives any significant support to Mr Turnbull's argument. He says that it shows that a failure to exercise a power in time may be a species of defect against which equity will relieve as long as the time limit for exercise was not of the essence of the power. The case certainly does not say that directly, and the result was that the court refused relief The proposition for which Mr Turnbull relies on the case has to be teased out of it inferentially, and only with great difficulty. The case does not cause me to come to any conclusion which differs from the conclusion to which I would come without it. There is also the point (my fourth point explained in paragraphs 78 to 80 above) that in my opinion the draftsman of the 1976 power did make the time limit of the essence of the power anyway.
- For the foregoing reasons I do not accept that the attempted trusts in favour of Jonathan invalidly declared in the 1989 deed are saved and take effect after all by virtue of the old doctrine that equity will relieve against the defective execution of powers.
Was the 1976 appointment itself invalid?
- Logically this might be the first argument to consider, but all counsel preferred to deal with the case first on the footing that the 1976 appointment was valid, and to concentrate on whether the 1989 deed could take effect as a valid exercise of the !976 power contained in the 1976 appointment. After all, everyone had accepted for well over 20 years that the 1976 appointment was effective. CTT was paid on that basis, and the Revenue has closed its file on the matter. Only Mr Warren and Miss Furze, on behalf of the trustees, now raise the question of whether the 1976 appointment might have been invalid all along. Mr Turnbull, on behalf of Jonathan, does not support them. They recognise that the argument has unattractive aspects, but they nevertheless say that it is technically correct, and therefore they put it before the court.
- The argument derives from the inclusion of the words 'or adopted' in the default trust contained in clause 5 of the 1976 appointment:
... UPON TRUST trust during their respective lives to the children of the Settlor or the Settlor's brother now living or hereinafter bom or adopted before the Closing Date in equal shares ...
There are associated provisions which cause shares of capita! to follow shares of income to the children of the Settlor or his brother or to the children of such children. The key point is the attempted inclusion in the class of default beneficiaries of 'children hereinafter adopted.' The problem is that such adopted children were not beneficiaries of the original settlement, which defined the beneficiaries simply to include 'any child' of the Settlor or of his brother or of his sister-in-law. That expression included any child who was already adopted, and thus included Jonathan. But by the relevant terms of the Adoption Act it did not include any child who might be adopted in future. The result of this was that the inclusion by the 1976 appointment of future adopted children in the clause 5 default trusts was outside the power contained in the original settlement.
- On the facts it is relevant to record that between 1976 and 1989 (when on the face of it the clause 5 default trusts became indefeasible) no further children were in fact adopted by the Settlor or by his brother. So in the event the only default beneficiaries were Jonathan and the three cousins, each of whom was a 'child' within the class of beneficiaries under the settlement, and each of whom was certainly a person in whose favour the power of appointment in the settlement could be exercised.
- Mr Warren has two different arguments which he bases on the inclusion of future adopted children in the clause 5 default trusts. The first is that it invalidates the whole 1976 appointment. I can deal with this argument immediately. I do not accept it. At the time of the 1976 appointment all the existing default beneficiaries were 'children', and therefore were authorised objects of the power under which the appointment was made. It would be extraordinary if they could not take any interest because of the mere possibility of future adoptions. If the possibility never happened, as in the event it did not, the four beneficiaries would retain their equal interests under the 1976 appointment. If the possibility had happened the sizes of the interests of the four default beneficiaries would have been reduced, but the 1976 appointment would have remained valid and they would still have had vested interests under it. For example, if the Settlor had adopted one more child between 1976 and 1989, the interests of Jonathan and of his three cousins which became indefeasible under clause 5 on the Closing Date (2 August 1989) would have been interests in one fifth of the trust fund each, instead of interests in one quarter of the trust fund each. In so far as authority may be needed to support what I have said, it will be found in re Witty [1913] Ch 666.
- I can explain Mr Warren's second argument by reverting to the example of what would have happened if another child had been adopted by the Settlor (or indeed by his brother) between 1976 and 1989. As I have explained, four-fifths of the trust fund would have been held for Jonathan and his three cousins under the default trusts of clause 5. What about the other fifth? It would not go to the adopted child, because the inclusion of him or her as a beneficiary of the 1976 appointment was ultra vires the power of appointment contained in the original settlement. Counsel are agreed that the other one-fifth share would fall back into the discretionary trusts of the original settlement.
- Mr Warren therefore argues that, although nobody realised this at the time, the 1976 appointment was not a para 15 appointment for CTT after all. As I have indicated earlier, the word 'will' in para 15 of Schedule 3 to the Finance Act 1975 did indeed mean 'will' and not 'may' or 'will as matters now stand.' ('... one or more persons ... will, on or before attaining a specified age not exceeding twenty-five, become entitled to, or to an interest in possession in, the settled property ...'). Mr Warren says that the word 'will' was not satisfied by the 1976 appointment, because it all depended on whether the Settlor or his brother adopted any children, and if so how many, before the oldest grandchild attained 25. The existing four beneficiaries (Jonathan and his three cousins) certainly would become entitled to interests in possession, but it could not be said with certainty that their interests would, between them, extend to the whole of the fund. If, for example, there were six new adopted children, the interests in possession of Jonathan and the three cousins would extend to four tenths of the fund, and the other six-tenths would be subject to the discretionary trusts.
- Mr Warren says that the consequence was that the 1976 appointment was not, even as respects any part of the trust fund, a para 15 appointment, and the Revenue were wrong in 1976 when they accepted that it was. The next step in the argument reintroduces the principle in Hastings-Bass, which I have explained at an earlier stage of this judgment. (See paragraphs 58 et seq above.) It is argued that, if the trustees had realised that the 1976 appointment was not an effective para 15 appointment, they would not have made it in the first place. Therefore, under what is said to be an application of the Hastings-Bass principle, the appointment which they purported to make was wholly ineffective.
- I am not prepared to conclude that the Hastings-Bass principle can have such an extreme and surprising result. The argument that, because of the reference to future adopted children, the appointment was not a para 15 appointment might be seen now to have had some technical force, but it had no merits of a more general nature. It was certainly abstruse and recondite. Those who advised on the 1976 appointment when it was made certainly did not think of the argument, nor did the Revenue when the documents were presented to them. Twenty-two years went by without anyone suggesting that there was anything wrong with the appointment, and I cannot put out of my mind the difficulties which would arise at this late stage if the argument was to be raised and acted upon. I referred earlier to the analogy between the principle in Hastings-Bass and the law concerning judicial review of exercises by public bodies of statutory powers. In judicial review there are tight time limits within which a challenge to some action by a public body must be brought. It would be astonishing, and to my mind unacceptable, for the emergent Hastings-Bass principle to be capable of being invoked in an attempt to upset some action by trustees which may have been taken decades ago (as in this case), and on the basis of which many intervening decisions and actions have been taken.
- Mr Warren refers to the decision of Jonathan Parker J in Green v Cobham (see paragraph 60 above), the recent case in which an apparently valid appointment of new trustees of a sub-trust was held to have been ineffective because of the unappreciated capital gains tax consequences which it would have had. I do not say that I disagree with the decision, but I would accept Mr Green's comment to the effect that, despite Green v Cobham, there must be limits to how far the courts will allow the principle in Hastings-Bass to rescue trustees from the consequences of their tax-planning misjudgements. I do not feel impelled to suggest precisely where the dividing line lies between a case like Green v Cobham, where the court will hold an appointment by trustees to have been invalid, and a case like this one, where in my judgment the court will not, I point out. however, that in Green v Cobham the capital gains tax consequences of the appointment, if it stood, were most serious, and were appreciated at an early date after the appointment had been made. In this case, even if it had occurred to the advisers of the trustees in 1976, rather than in 1998 (when Mr Warren and his colleague wrote their opinion), that the 1976 appointment, once executed, might not have been a valid para 15 appointment after all, no serious CTT consequences would have followed. It is true that the trust fund would still have been potentially subject to the CTT rules for discretionary trusts, not the more favourable rules applicable to accumulation and maintenance trusts within para 15. But no CTT liability would have been incurred yet, and the appointment could have been modified so as to comply with para 15 thereafter. This could have been done before 1 April 1977 at the cost of an exit charge only marginally greater than that which the trustees had expected to pay (and on the actual facts did pay) by reason of the 1976 appointment itself.
- In case it is relevant I also state that I am not entirely convinced that, if the trustees had been advised, before executing the 1976 appointment in the form of the draft that had been prepared for them, that it might fail to rank as a para 15 appointment because of the reference in it to future adopted children, they would not have gone ahead with the appointment. There was no specific evidence about this (obviously so, given the many years which have passed since it happened). If it is a matter for inference, there is at least a possibility that the trustees might have been advised that, although there was a highly technical point which the Revenue might take by reference to the possibility of future adopted children, in practice the Revenue would be unlikely to take it. I can well imagine that the Revenue, even with full knowledge of the point, would have been content to treat the 1976 appointment as a para 15 appointment, assessing and collecting CTT at the transitional exit charge rate, but pointing out that, if there were future adoptions of children before 1989, some shares in the fund would revert to being subject to the CTT treatment of discretionary trusts. It is at least possible that the trustees, even if their advisers had thought about the abstruse point which Mr Warren raises now, would still have gone ahead with the 1976 appointment without any change to its terms.
- Therefore I do not accept either of Mr Warren's reasons for concluding that the 1976 appointment was invalid all along. Given that that is so I do not need to deal with arguments which were addressed to me about what the consequences would be if it had been invalid.
Conclusion
- For all of the reasons which I have explained at length in this judgment, my answers to the questions which I have been asked to consider are that the 1976 appointment was valid, that the 1989 deed was invalid, and that therefore the trust fund is held in four shares for Jonathan and the cousins (and their respective children) on the default trusts set out in clause 5 of the 1976 appointment.
