B e f o r e :
LORD JUSTICE STUART-SMITH
LORD JUSTICE HOFFMANN
and
LORD JUSTICE SAVILLE
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LYNDA KATHLEEN CLARKSON |
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Applicant |
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(Respondent) |
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-v- |
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DAVID CLARKSON (a bankrupt) |
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PETER DAWBER (a bankrupt) |
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PETER SMITH (a bankrupt) |
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THE TRUSTEE OF THE PROPERTY OF DAVID CLARKSON |
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THE TRUSTEE OF THE PROPERTY OF PETER DAWBER |
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THE TRUSTEE OF THE PROPERTY OF PETER SMITH |
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Respondents |
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(Appellants) |
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(Computer Aided Transcript of the Stenograph Notes of John Larking,
Chancery House, 53/64 Chancery Lane, London, WC2A 1QX. Telephone
No: 071-404 7464. Shorthand Writers to the Court.)
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MR. S. REES DAVIES (instructed by Messrs Lawrence Tucketts, Bristol) appeared on behalf of the Appellant/Respondent.
MR. M. ROBERTS (instructed by Messrs M.H. Greet & Co., Bristol)
appeared on behalf of the Respondent/Applicant.
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HTML VERSION OF JUDGMENT
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Crown Copyright ©
(R E V I S E D)
LORDJUSTICE HOFFMANN: In 1989 Property Enhancement Development Limited appeared to be a prosperous company. It was the height of the property boom. The three directors and shareholders valued the equity at £1.5 million. But they were concerned about what might happen if one of them died. The survivors might not easily be able to find the cash to buy out his interest, so they decided that each of them would take out a policy of insurance on his life for £500,000. This case is concerned with one of those policies. It was taken out by Mr. David Clarkson, and at his request issued to himself and the other two directors, Mr. Peter Dawber and Mr. Peter Smith, as trustees. The trusts upon which they held the property were as follows:
"The Trustees shall stand possessed of the Policy and the full benefit thereof and all the moneys which may become payable thereunder and the proceeds of any sale, conversion or surrender thereof and all such further property and money transferred to them (hereinafter together called 'The Trust Fund') upon such trusts for the benefit of all or such one or more of them exclusive of the other or others of the persons named in Schedule 1 in such shares and proportions and subject to such terms and limitations and with and subject to such provisions for maintenance education or advancement or for accumulation of income or for forfeiture in the event of bankruptcy or otherwise and with such discretionary trusts and powers exercisable by such persons as the Trustees being at least two in number or a trust corporation shall from time to time in their absolute discretion by deed or deeds revocable or irrevocable having due regard to the rules against perpetuities and excessive accumulations appoint PROVIDED THAT no appointment shall be made nor any power of revocation exercised on or after the second anniversary of the death of the Settlor (the date of death of the survivor of them in the case of joint settlors).
2(a) Subject as aforesaid the Trustees shall hold the Trust Fund and the income thereof from the date of this Deed in trust for the person or persons whose names are set out in Schedule 2 and if more than one in the shares there specified or if no shares are so specified then in equal shares absolutely."
The only other provision I need to read is clause 6:
"The power of appointing new or additional Trustees hereof and removing Trustees shall be exercisable by the Settlor. After the Settlor's death the power of appointing new or additional Trustees shall be exercisable by the Trustees hereof."
The persons named as the objects of the power of appointment in Schedule 1 were Mr. Clarkson's spouse, widow and children or grandchildren, together with the persons named in Schedule 2. The persons named in Schedule 2, both as objects of the power and to take in default of appointment, were Mr. Dawber and Mr. Smith.
In 1990 the property boom ended, and in 1991 the company was insolvent. On 24th June 1991 it went into administrative receivership. On 15th October 1991 the company's principal lender, the Bristol & West Building Society, made a demand for payment on each of the directors under their guarantees of the company's indebtedness. On 12th June 1992 the three trustees executed a deed appointing the proceeds of the policy to Mr. Clarkson's wife, Lynda. There was an earlier attempt at a similar appointment which was almost certainly invalid, and with which I need not be concerned.
In the course of January and February 1993 all three directors were adjudicated bankrupt. The trustees in bankruptcy of Mr. Dawber and Mr. Smith say that the appointment to Mrs. Clarkson was a "transaction at an undervalue within the meaning of section 339 of the Insolvency Act 1986." They claim that it is therefore liable to be set aside. At first sight, a transaction at an undervalue is an odd description of the appointment. Mrs. Clarkson did not acquire an interest in the policy at an undervalue. She did not give any value at all. But section 339(3)(a) gives an extended meaning to transaction at an undervalue. It says:
"For the purposes of this section and sections 341 and 342, an individual enters into a transaction with a person at an undervalue if -
(a) he makes a gift to that person or he otherwise enters into a transaction with that person on terms that provide for him to receive no consideration."
The second part of this definition does not easily fit into the circumstances of the appointment to Mrs. Clarkson. True, she gave no consideration, but this was not because of the terms of the transaction as that phrase might be ordinarily understood. The appointment in her favour was unilateral and unconditional. If it was a transaction it contained no terms as to consideration at all. It would be more natural to say that Mrs. Clarkson received a gift. The real question is, from whom did she receive the gift? It seems to me that she must have received it from her husband. It was he who took out the policy. He paid the premiums by deduction from his remuneration from the company. Afterwards he paid them himself and then, when he became bankrupt, his family kept them up on his behalf. Apart from that, no one has contributed a penny to the fund. It was Mr. Clarkson who created the settlement upon which the policy was to be held. If this is right, then the gift did not consist in the appointment to Mrs. Clarkson by the three trustees. It consisted in the creation of the settlement in 1989. The appointment was merely the exercise of a fiduciary power to select the person to whom the gift should go. It has been for centuries a principle of the law of powers that an appointment under a special power takes effect as if it had been written into the instrument creating the power. The appointee takes the property of the settlor and not that of the donee of the power. Thus, if the settlement had been made less than two years before the bankruptcy petition was presented, it would indeed have been open to attack under section 339 by Mr. Clarkson's trustee, but since it was made earlier and at a time when Mr. Clarkson was solvent, it cannot be set aside.
Mr. Rees Davies nevertheless strenuously argued that the appointment was, if not a gift by Mr. Dawber and Mr. Smith, at any rate a transaction with them on terms that Mrs. Clarkson was to give no consideration. He invited the court to give section 339 a purposive construction, which he said was to strike down transactions during the two year period before bankruptcy which diminished what would otherwise have been the bankrupt's estate. In this case, he said that the trustees could perfectly well have made an appointment in favour of Mr. Dawber and Mr. Smith and there was some, although rather inconclusive evidence, to suggest that that was what they had originally had in mind. They were within the objects of the power, and if no appointment were made they would take in default of appointment. So the appointment was a transaction which deprived their creditors of the chance of getting the money.
I am quite willing to give section 339 a purposive construction. It was intended to enable the trustee to recover for the benefit of the creditors any property which he had given away for nothing or at an undervalue during the relevant period as defined in section 341. What property did these bankrupts have at the relevant time? In the settlement they played a triple part. First, each had individually and beneficially a vested interest in that Fund in default of appointment. Second, each was, individually and beneficially, a potential object of the power. Third, Mr. Dawber and Mr. Smith and Mr. Clarkson were jointly trustees and donees of the power to appoint. The question is: are any of these interests property which they have given away? The interests in default of appointment has been defeated by the joint exercise of the power of appointment. But that does not mean that the bankrupts have given it away. It was, in its nature, an interest liable to defeasance. That is merely what has happened. Membership of the class of objects, the second interest, was never anything more than a right to consideration as a potential appointee (see Lord Reid's speech in In re Gulbenkians settlements [1970] AC 508). There is nothing to show that the bankrupts did not receive such consideration. Finally, the power of appointment itself conferred upon the bankrupts no beneficial interest in any property at all. It was a power to deal with the Fund which they held as trustees and it was vested in them in their capacity as trustees. Mr. Rees Davies said that the test for whether the bankrupts had given away their property was whether it would, on their bankruptcy, have vested in their trustees. That seems to me a reasonable approach. The interest in default of appointment would have vested but this does not help because it would have remained a defeasible interest. They might still have remained objects of the power but this also would not make any difference because being bankrupt would not entitle them to any greater consideration as potential appointees. What Mr. Rees Davies really relied upon was the power of appointment. This, he said, would have vested in the trustees in bankruptcy by virtue of section 283(4) of the Insolvency Act 1986.
Alternatively, he submitted that at common law it would not have been exercisable without the consent of the trustees. This would have enabled them to produce a situation in which the power could not be exercised and therefore the gift in default of appointment would be bound to take effect. Section 283(4) extends the meaning of property for the purposes of determining what constitutes the bankrupt's estate. Under the old law, the Court of Appeal had held in Re Mathieson [1937] 1 Ch 283 that the assets subject to a bankrupt's general power of appointment did not form part of his property for the purposes of section 42 of the Bankruptcy Act 1914. I think that even at the time this was quite a remarkable decision. Lord St. Leonards in his book on Powers, 8th edition, 1861, said:
"To take a distinction between a general power and a limitation in fee is to grasp at a shadow while the substance escapes."
But the decision no longer matters because, quite plainly, section 283(4) brings a general power into the definition of "property". It says that references to property, in relation to a bankrupt:
"include references to any power exercisable by him over or in respect of property except in so far as the power is exercisable over or in respect of property not for the time being comprised in the bankrupt's estate and ....
(b) cannot be so exercised for the benefit of the bankrupt."
Mr. Rees Davies says that in this case the power could have been exercised for the benefit of the bankrupt and therefore it formed part of his estate. I think that for two reasons this is wrong. First, the power was not exercisable "by him"; that is by either Mr. Dawber or by Mr. Smith. It was only exercisable jointly by all three of the trustees acting together. It could not be severed and divided between them like property which is beneficially jointly owned. Second, even assuming that section 283(4) brought the power within the meaning of "property" for the purposes of section 283(1), it would, in my view, be excluded by section 283(3)(a), which says that subsection (1) does not apply to property held by the bankrupt in trust for any other person.
In this case the powers were given to the trustees in their capacity as such and, in my judgment, they held them in trust for all the persons interested or potentially interested under the settlement just as much as they held the Fund itself. It is true that they were not what is commonly called trust powers, in the sense of being powers that will, in default of exercise, be exercised by the court. But they were nevertheless powers exercisable by them as trustees and that, in my judgment, was sufficient to bring them within section 283(3)(a). The concept of such a power being a part of the bankrupt's estate, which he owes a duty to his creditors not to bargain away except for adequate consideration, seems to me bizarre. A trustee who accepted a personal payment in return for the exercise of such a power would be acting in breach of trust. Mr. Rees Davies referred us to the decision of the Court of Appeal in The Governors of St. Thomas's Hospital v. Richardson, where it was decided that the legal estate in leaseholds held by a bankrupt in trust would vest in his trustee in bankruptcy in order to enable the trustee in bankruptcy to give effect to a lien upon the property which he had for expenditure for which the bankrupt personally had been liable. This decision seems to me to go no further than to say that an interest held in trust will vest in the trustee in bankruptcy so far as it is necessary for the protection of an interest which the bankrupt had beneficially. That seems to me to have no application at all to the powers of appointment which are not related to any interest held by the bankrupt beneficially. The fact that two of the bankrupts were also beneficiaries in default of appointment is, in my judgment, entirely coincidental.
As for the common law, Mr. Rees Davies was not able to refer us to any authority which said that the exercise of a fiduciary power vested in a bankrupt required the consent of his trustee. He referred us to a passage in Farwell on Powers and to In Re Cooper (1884) 27 Ch.D. 565, which decided that, when the power of a trustee to advance capital to a beneficiary in remainder is subject to the consent of the tenant for life and the tenant for life has become bankrupt, his trustee's consent is also required. This case seems to me to have nothing to do with the exercise of fiduciary powers. It concerns a right to refuse consent which had been given for the protection of the beneficial interest which vests in the trustee, namely the bankrupt's life interest.
In my judgment, this is a very simple case. Mr. Clarkson made a gift in settlement which is vested in his wife. The gift is unaffected by his subsequent bankruptcy more than two years later, and the fact that the trustees, who jointly exercised the power in favour of his wife became bankrupt less than two years afterwards, is, in my judgment, irrelevant. I would therefore dismiss the appeal.
LORDJUSTICE STUART-SMITH: I agree.
LORDJUSTICE SAVILLE: I also agree.
(Appeal dismissed with costs. Legal aid taxation)
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