Mr Justice Munby :
- These are proceedings by a wife seeking ancillary relief. In circumstances to which I shall have to return in due course, the proceedings have become needlessly complicated and, as a result, quite inordinately protracted. The consequence is that it is only in January 2007 that I am able to give judgment following a trial that commenced as long ago as December 2005.
The background
- The husband and the wife (as I shall for convenience refer to them) were born in 1942 and 1948 respectively. Their relationship began in 1982. They married on 26 October 1984. The marriage seems to have come under significant strain in 1997. They separated in 2001, though for a time continuing to live under the same roof. The wife petitioned for divorce on 22 May 2001. The decree nisi followed on 23 August 2001. The wife served her Form A on 10 July 2003. There was more than the usual amount of interlocutory skirmishing. On 18 November 2003 Pauffley J granted the wife a freezing order against the husband, continued by an order made by Bennett J on 25 November 2003. On 18 February 2005 Singer J adjourned the final hearing, which had been fixed for 28 February 2005, to 12 December 2005. The final hearing did indeed start before me on that day but, for reasons explained below, did not conclude until 10 November 2006. I now (29 January 2007) hand down judgment.
- There are no children of the marriage. Both the husband and the wife were previously married. By his first marriage the husband had two children, Simon and Zara. Simon is married to Melinda. The wife's children by her first marriage include a daughter, Jane.
- Although, as I have said, the parties married in 1984 that was before the ancillary relief proceedings arising out of the husband's first marriage had been concluded. They came to an end only on 17 December 1985 when Mr Registrar Turner gave judgment and made a final order.
- There are three family companies: HDC, CWM and FHP:
i) HDC was set up many years ago by the husband's now deceased father (he died on 16 April 1985). It owns and operates a chicken processing plant. HDC has 5,000 shares. The husband has 1,150 shares (23%), the wife has 1,149 shares (22.98%) (transferred to her by the husband on 2 December 1988) and Simon has 1 share (0.02%). The remaining 2,700 shares (54%) are held by the interveners, as the trustees of two separate trusts ("the trusts").
ii) CWM was set up in 1990 by the wife to market a fitness aid she had invented. Her case is that she has since given CWM to her daughter Jane, who is now running the business full-time, and that she no longer has any interest in it. The husband disputes this.
iii) FHP was incorporated on 4 December 2003. There are two shares, one each held by Simon and Melinda. FHP also deals in chicken.
- I must add a little detail about the trusts. Each of the trusts was created by a deed dated 9 November 1984 – that is, it will be noted, before Mr Registrar Turner had given judgment in the ancillary relief proceedings arising out of the husband's first marriage. Each of the trusts is governed by English law. One trust (which I shall refer to as the Parents' Discretionary Trust) was created by the husband's parents and holds 1,700 of the shares in HDC (34%). The other trust (which I shall refer to as Anthony's Discretionary Trust) was created by the husband's unmarried brother, Anthony, and holds the remaining 1,000 shares (20%). Subject to the fact that, in the usual way, Anthony, as settlor, is excluded from benefit under Anthony's Discretionary Trust, the beneficiaries under both trusts are the children and remoter issue of the husband's parents then living or born at any time before 9 November 2064. The beneficiaries thus include Anthony, the husband, his children (Simon and Zara) and their children and grandchildren. It is important to note, therefore, that the beneficiaries are not a closed class all of whom are ascertained and sui juris.
- Initially the trustees of the Parents' Discretionary Trust were two professionally qualified English accountants, Mr Halton and Mr Luder. The trustees of Anthony's Discretionary Trust were a Mr Pickard and a Mr Jolly. In October 1989 all four trustees retired and were replaced, as trustees of both trusts, by the husband and the wife. In 1991 the husband and the wife retired as trustees and were replaced by a trust company, Credit Suisse Trustees (Guernsey) Limited ("CSTGL") which, as its name would suggest, was based in Guernsey. In 1996 CSTGL was replaced as trustee by the interveners, who are based in Jersey. The first intervener is a trust company used as a vehicle for such purposes by the second and third interveners who are also trustees, along with the first intervener, of both trusts. The second intervener (Mr St George) and the third intervener are both professionally qualified accountants. It is to be noted that although the current trustees are based in Jersey, and are therefore personally responsible to the Jersey regulatory authorities, the trusts continue to be governed by English law and not by Jersey law.
- The matrimonial assets, apart from the wife's jewellery, two motor cars, the contents of the former matrimonial home, some money in a bank account and some quoted shares worth approximately £13,500, consist of:
i) The shares in HDC, CWM and (as the wife would have it) FHP.
ii) The former matrimonial home, a property called Drum Grange, purchased in 1993 in the names of HDC and CWM, the purchase monies having ostensibly been provided as to 75% by HDC and 25% by CWM. It has now been sold for £2,700,000.
iii) The husband's pension fund, worth £717,576.
There is also a holiday property in Antigua, purchased by the husband and the wife in 1997 for US$160,000, but owned by HDC.
The issues
- But for a number of issues raised by the wife, the case would be fairly straight-forward. It has been made much more complex because of the wife's allegations (i) that the trusts are shams – with the consequence, so the wife would say, that the husband is to be treated as owning not 1,150 (23%) of the shares in HDC but 3,850 shares (77%), (ii) that the shares in HDC held by the trusts are in any event to be treated as available to the husband in accordance with the principle in Thomas v Thomas [1995] 2 FLR 668, and (iii) that the value of HDC has been artificially reduced by the husband (a) skimming off substantial sums in cash and (b) diverting its business to FHP. To a much more limited extent the case has also been made more complex because of the husband's allegation that the wife still has an interest in CWM.
- In these circumstances the following issues arise in addition to those which would have to be considered in any claim for ancillary relief:
i) the allegation of sham in relation to the trusts;
ii) the Thomas v Thomas claim;
iii) the allegation that cash has been skimmed off from HDC;
iv) the allegation that HDC's business has been diverted to FHP;
v) the value of the shares in HDC; and
vi) the ownership of the shares in CWM.
I shall deal with them in turn.
Sham – the forensic context
- Mr Charles Howard QC, on behalf of the husband, was justifiably scathing about what he says was the muddled and confused way the allegation of sham was being put even as late as the first day of the final hearing. It would seem that the allegation finds its origin in findings made by Mr Registrar Turner in 1985. The allegation was made in terms, using the word "sham", in an affidavit the wife swore on 18 November 2003. In the wife's Form E (sworn on 10 September 2003), and in the very detailed Chronology prepared on her behalf by Mr Philip Moor QC and Mr Christopher Wood, it was said that the husband was "the de facto controller and beneficiary" of the trusts. It was further asserted in the Chronology that "the reason for placing the shares in trust was because [the husband] was in the process of divorcing from his first wife and wished to present himself as a minority shareholder in that dispute" and that "in practice" the husband "controlled those shares." In the Case Summary they prepared for the final hearing, Mr Moor and Mr Wood asserted that the husband "set out to do everything in his power to defeat his first wife's claims against him, including the creation of the off-shore trusts as an integral part of the campaign." Mr Howard's acerbic comment is that the husband did not create the trusts and that they were not initially off-shore.
- I have to confess that a careful pre-reading of all the relevant papers had nonetheless left me wholly unclear as to how exactly the case was being put by the wife. I raised this matter with Mr Moor on the first day of the hearing and indicated that I wanted written clarification of exactly how the wife was putting her case. That was provided on 15 December 2005.
- Before turning to see exactly how Mr Moor puts his case it is convenient first to survey the relevant legal landscape.
Sham – the legal context
- Because of the way the wife's case has evolved and has been argued I think it best to start with some basic principles of law.
- A number of different principles, rules or doctrines (call them what you will) may come into play if it is said that some document or transaction is not in truth entirely what it purports to be. The following list is not intended to be exhaustive, but what I have in mind would include, for example:
i) The principle that the court looks to the substance rather than the label: Street v Mountford [1985] AC 809.
ii) The approach adopted by the court when faced with a pre-ordained series of transactions or a composite transaction which includes an artificial step inserted for no commercial purpose: W T Ramsay Ltd v Inland Revenue Commissioners [1982] AC 300, Furniss v Dawson [1984] AC 474 and Craven v White [1989] AC 398.
iii) The principle that in certain circumstances the court can 'pierce the corporate veil': see most recently Mubarak v Mubarak [2001] 1 FLR 673 (not affected on this point by the decision on appeal, [2001] 1 FLR 698).
iv) The approach adopted by the court when faced with the assertion that property conveyed to another is in fact held on a resulting trust for the transferor: see, for example, Tinker v Tinker [1970] P 136.
v) The doctrine of sham as defined in Snook v London and West Riding Investments Ltd [1967] 2 QB 786 at page 802.
vi) The various statutory provisions entitling the court to set aside conveyances or other transactions entered into with intent to defeat or defraud creditors. Conceptually analogous to such provisions is the provision familiar to practitioners in this Division, section 37 of the Matrimonial Causes Act 1973, which enables the court to set aside transactions intended to prevent or reduce financial relief under the Act.
vii) The approach adopted by the matrimonial court when faced with the assertion that the "financial resources" available to a spouse within the meaning of section 25(2)(a) of the Matrimonial Causes Act 1973 include some asset which is either not the property of the spouse (for example, an expectation of future bounty from a friend or relative) or in relation to which he has less than an absolute interest (for example, the interest of the beneficiary of a discretionary trust): see Thomas v Thomas [1995] 2 FLR 668 and, most recently, Charman v Charman [2005] EWCA Civ 1606, [2006] 2 FLR 422.
- I draw attention to these various different types of case in part to make the point that conceptually they proceed on very different – and in some cases completely inconsistent – bases. There is, I suppose, no difficulty, other than possible forensic embarrassment, in pleading inconsistent cases in the alternative, but it is important to recognise that due to their analytical inconsistency many of these doctrines can operate only as alternatives. I shall return to this point below.
- I wish also to make the point that, even in the Family Division, a spouse who seeks to extend her claim for ancillary relief to assets which appear to be in the hands of someone other than her husband must identify, and by reference to established principle, some proper basis for doing so. The court cannot grant relief merely because the husband's arrangements appear to be artificial or even 'dodgy'.
- In the course of his submissions on behalf of the wife, Mr Moor referred me to Coleridge J's observation in J v V (Disclosure: Offshore Corporations) [2003] EWHC 3110 (Fam), [2004] 1 FLR 1042 at para [130]:
"these sophisticated offshore structures are very familiar nowadays to the judiciary who have to try them. They neither impress, intimidate, nor fool any one. The courts have lived with them for years."
I agree entirely with Coleridge J that the court should adopt a robust, questioning and, where appropriate, sceptical approach. As I said myself in Re W (Ex Parte Orders) [2000] 2 FLR 927 at page 938:
"the court will not allow itself to be bamboozled by husbands who put their property in the names of close relations in circumstances where, taking a realistic and fair view, it is apparent that the recipient is a bare trustee and where the answer to the real question – Whose property is it? – is that it remains the husband's property."
And I went on to refer to:
"the robustness with which the Family Division ought to deal in appropriate cases with husbands who seek to obfuscate or to hide or mask the reality behind shams, artificial devices and similar contrivances. Nor do I doubt for a moment the propriety and utility of treating as one and the same a husband and some corporate or trust structure which it is apparent is simply the alter ego or creature of the husband."
- But this does not mean, and I am sure that Coleridge J did not intend to suggest, that the court can simply ride roughshod over established principle, least of all where there are, or appear to be, third party interests involved. As I went on to comment in Re W at page 938:
"On the other hand, and as Nicholas v Nicholas [1984] FLR 285 … demonstrates, the court does not – in my judgment cannot properly – adopt this robust approach where, for example, property is held by a company in which, although the husband has a majority shareholding, the minority shareholdings are what Cumming-Bruce LJ at 287G called 'real interests' held by individuals who, as Dillon LJ put it at 292G, are not nominees but business associates of the husband."
Bodey J said much the same thing in Mubarak v Mubarak [2001] 1 FLR 673 at page 682:
"I would suggest that the Family Division can make orders directly or indirectly regarding a company's assets where (a) the husband (as I am assuming) is the owner and controller of the company concerned and (b) where there are no adverse third parties whose position or interests would be likely to be prejudiced by such an order being made. I include as third parties those with real minority interests in the company and (where relevant on the facts) creditors and directors."
- There is one other preliminary point that I wish to emphasise. In deciding whether or not, and, if so, in what manner, these principles operate in any particular case, the court will of course have regard to the particular context and to the particular factual matrix. Thus it may be easier, for example, to 'pierce the corporate veil' in the context of a small family company than in some larger-scale or more purely commercial context. Similarly, the inferences that can properly be drawn in the case of an asserted resulting trust may differ, even in a family context, depending upon the nature of the relationship between the parties; an inference appropriate in the case of a married couple may not be appropriate in the case of an unmarried couple, whilst an inference appropriate in the case of a couple (whether married or unmarried) may be wholly inappropriate as between siblings.
- In this sense, and to this limited extent, the typical case in the Family Division may differ from the typical case in (say) the Chancery Division. But what it is important to appreciate (and too often, I fear, is not appreciated at least in this Division) is that the relevant legal principles which have to be applied are precisely the same in this Division as in the other two Divisions. There is not one law of 'sham' in the Chancery Division and another law of 'sham' in the Family Division. There is only one law of 'sham', to be applied equally in all three Divisions of the High Court, just as there is but one set of principles, again equally applicable in all three Divisions, determining whether or not it is appropriate to 'pierce the corporate veil.'
- Putting the point more generally, I entirely agree with what Mr Nicholas Mostyn QC, sitting as a Deputy Judge, said in TL v ML and others (Ancillary Relief: Claim against Assets of Extended Family) [2005] EWHC 2860 (Fam), [2006] 1 FLR 1263, at para [34]. Having referred to what Lord Denning MR had said in Tebbutt v Haynes [1981] 2 All ER 238 at page 241, he continued:
"It is to be emphasised, however, that the task of the judge determining a dispute as to ownership between a spouse and a third party is, of course, completely different in nature from the familiar discretionary exercise between spouses. A dispute with a third party must be approached on exactly the same legal basis as if it were being determined in the Chancery Division."
- The Deputy Judge recorded, at para [35], the complaint of counsel in that case that the issues had never been "properly defined, pleaded or particularised" and went on to suggest, at para [36], how such issues should in future be handled by way of appropriate case management. I am sympathetic to the approach being suggested by the Deputy Judge, though I would not wish to be quite so prescriptive as he appears to be. Vigorous judicial case management in such cases is vital, but the appropriate directions to be given in any particular case must reflect the case managing judge's appraisal of how, given the forensic realities of the particular case, the issues can best be resolved in the most just, effective and expeditious manner.
- I do, however, entirely share the Deputy Judge's view that directions should normally be given for such issues to be properly pleaded by points of claim and points of defence. In the present case the muddle, confusion and ambiguities in the wife's case would have been more pitilessly exposed, and at a much earlier stage in the proceedings, had the presentation of her case been exposed to the intellectual discipline which is one of the advantages of any system of pleading. Moreover, if the wife had been required to plead her case everyone would have had a much clearer idea, and at a much earlier stage, as to exactly what she was or was not asserting and as to exactly what the husband and the interveners were or were not saying by way of defence. As it was, matters were wholly unclear even as late as the first day of the final hearing.
Sham – the nature of the wife's case
- In the present case, Mr Moor has now nailed his colours firmly to the mast. He relies upon two, and only two, of the principles or doctrines to which I have referred. First, he relies upon the doctrine of sham. Secondly, he says that this is a case where the principle in Thomas v Thomas [1995] 2 FLR 668 applies.
- True it is that in the document dated 15 December 2005 in which the wife's case is set out, the allegation is repeated that "as a matter of fact, [the husband] controls HDC and can do with it as he wishes," but it is clear, not least from the document itself, that this is intended as no more than an evocation of the principle in Thomas v Thomas, no doubt on the basis that if, in accordance with Thomas v Thomas, the shares in HDC held by the trusts are treated as being available to the husband, he will on this approach either own or have access to 77% of the shares. What is clear is that it is not being asserted by the wife that the corporate veil should be pierced – indeed, I have not been taken to any of the extensive case-law on that topic. This is an important point to which I will have to return.
- Mr Moor is, of course, entitled to put his case in this way, but it must be appreciated that the two cases he seeks to make are quite inconsistent with each other. The first proceeds explicitly on the basis that the trusts are both shams. The second proceeds on the basis that the trusts are not shams, in other words that they are genuine.
- In W T Ramsay Ltd v Inland Revenue Commissioners [1982] AC 300 at page 323, Lord Wilberforce drew a helpful distinction between the genuine and the sham:
"It is for the fact-finding [tribunal] to find whether a document, or a transaction, is genuine or a sham. In this context to say that a document or transaction is a "sham" means that while professing to be one thing, it is in fact something different. To say that a document or transaction is genuine, means that, in law, it is what it professes to be, and it does not mean anything more than that."
In that sense, most of the principles or doctrines which I have referred to above involve documents or transactions which are perfectly genuine. For example, in the first and second types of case I mentioned, the court is merely concerned to ascertain the legal nature or effect of what is accepted to be entirely genuine. So also, in a case founded on section 37 or analogous statutory provisions, the court is concerned with a document or transaction which is entirely genuine. After all, the purpose of the transferor is to do the very thing which the transaction purports to achieve, to divest himself of some asset and put it beyond the reach of his creditor or spouse (as the case may be). The presence of the statutorily defined vitiating feature merely entitles the court to set aside a transaction which is otherwise entirely genuine.
- More importantly for present purposes, a Thomas v Thomas application (for example in respect of a spouse who is the beneficiary under a discretionary trust) usually proceeds on the assumption that the trust is entirely genuine, that the trustees are conscientiously acting in that capacity and that they will exercise their fiduciary powers bona fide and in a lawful manner. As Wilson LJ said in Charman v Charman [2005] EWCA Civ 1606, [2006] 2 FLR 422, at para [12]:
"On the evidence so far assembled in the present case, as in most cases, there seems no reason to doubt that the duties of the trustee are being, and will continue to be, discharged properly. In his written argument in this court, Mr Pointer QC, on behalf of the wife, at one point referred to the possible 'unity of interest' between the husband and Codan; and in his written argument before the judge he tentatively described Codan as 'quasi-agents' of the husband. Both phrases imply that Codan is not asserting, or would not assert, the independence that its duties require of it; and, in my view, on the present evidence, it was wise of Mr Pointer in oral argument to withdraw them. A trustee – in proper 'control' of the trust – will usually be acting entirely properly if, after careful consideration of all relevant circumstances, he resolves in good faith to accede to a request by the settlor for the exercise of his power of advancement of capital, whether back to the settlor or to any other beneficiary."
Lloyd LJ made the same point at para [60]:
"Under this settlement … it is open to the trustee to appoint all or part of the capital to the settlor under cl 4(b). Moreover, there is, on the face of it, no reason to suppose that, if they were to do so, they would not be acting entirely properly as trustees and in accordance with the obligations incumbent on them as regards the exercise of discretionary powers. It is, therefore, unnecessary for the petitioner, wishing to establish that the respondent has access to the trust funds … to allege any improper conduct or attitude on the part of the trustees. It was unwise to use language which implied that such a case was made."
Mr Moor's primary case, that the trusts are shams, involves the diametrically different assertion that the trustees are not in truth acting as such but are simply the husband's stooges.
- Mr Howard submits that these two quite separate issues have become muddled in the wife's presentation of her case, that arguments pertinent to the Thomas v Thomas issue have been prayed in aid illegitimately to support the sham argument and that the reality, however Mr Moor professes to articulate her case, is that the wife is not so much contending that the trusts are shams in the legal sense as urging the court to adopt a Thomas v Thomas approach. With studied delicacy he submits that it is "regrettable" that the wife has not dropped the sham allegation but indeed placed increasing reliance upon it. Mr Christopher Wagstaffe, on behalf of the interveners, was more robust, saying that frankly the allegation ought not to have been pursued.
- I must return to Thomas v Thomas in due course. For the moment I focus on sham.
Sham – the law of sham
- What is a 'sham'? The classic definition was given by Diplock LJ in Snook v London and West Riding Investments Ltd [1967] 2 QB 786 at page 802:
"it means acts done or documents executed by the parties to the "sham" which are intended by them to give to third parties or to the court the appearance of creating between the parties legal rights and obligations different from the actual legal rights and obligations (if any) which the parties intend to create."
This accords with Lord Wilberforce's description in Ramsay at page 323 of a document or transaction as being a sham if "while professing to be one thing, it is in fact something different." Diplock LJ continued with the following passage which is at the heart of the issue in the present case:
"one thing, I think, is clear in legal principle, morality and the authorities … that for acts or documents to be a "sham," with whatever legal consequences follow from this, all the parties thereto must have a common intention that the acts or documents are not to create the legal rights and obligations which they give the appearance of creating. No unexpressed intentions of a "shammer" affect the rights of a party whom he deceived."
Diplock LJ's statement of the law, which as Mr Moor points out was cited with approval by Lord Fraser of Tullybelton in Ramsay at page 337, has always been treated as canonical.
- The most recent general analysis of the doctrine of sham was undertaken by Arden LJ (with whom Sir Martin Nourse and May LJ agreed) in Hitch and others v Stone (Inspector of Taxes) [2001] EWCA Civ 63, [2001] STC 214. Having referred to Snook she continued at paras [63]-[69]:
"[63] … It is of the essence of this type of sham transaction that the parties to a transaction intend to create one set of rights and obligations but do acts or enter into documents which they intend should give third parties, in this case the Revenue, or the court, the appearance of creating different rights and obligations. The passage from Diplock LJ's judgment … has been applied in many subsequent decisions and treated as encapsulating the legal concept of this type of sham …
[64] An inquiry as to whether an act or document is a sham requires careful analysis of the facts and the following points emerge from the authorities.
[65] First, in the case of a document, the court is not restricted to examining the four corners of the document. It may examine external evidence. This will include the parties' explanations and circumstantial evidence, such as evidence of the subsequent conduct of the parties.
[66] Second, as the passage from Snook makes clear, the test of intention is subjective. The parties must have intended to create different rights and obligations from those appearing from (say) the relevant document, and in addition they must have intended to give a false impression of those rights and obligations to third parties.
[67] Third, the fact that the act or document is uncommercial, or even artificial, does not mean that it is a sham. A distinction is to be drawn between the situation where parties make an agreement which is unfavourable to one of them, or artificial, and a situation where they intend some other arrangement to bind them. In the former situation, they intend the agreement to take effect according to its tenor. In the latter situation, the agreement is not to bind their relationship.
[68] Fourth, the fact that parties subsequently depart from an agreement does not necessarily mean that they never intended the agreement to be effective and binding. The proper conclusion to draw may be that they agreed to vary their agreement and that they have become bound by the agreement as varied …
[69] Fifth, the intention must be a common intention (see Snook)."
- The need for there to be a common intention applies not just where there is a bilateral transaction of the kind which featured in Snook and in Hitch v Stone. It applies equally to transactions such as a settlement of property or the creation of a trust. That, in my judgment, is clearly established by the decisions of Knox J in Chase Manhattan Equities Ltd v Goodman and others [1991] BCLC 897, of the Deputy Bailiff of the Royal Court of Jersey in In the Matter of the Esteem Settlement (Abacus (CI) Limited as Trustee), Grupo Torras SA and Culmer v Al Sabah and four others [2003] JRC 092, 2003 JLR 188, [2004] WTLR 1, and of Rimer J in Shalson and others v Russo and others (Mimran and another, Part 20 claimants) [2003] EWHC 1637 (Ch), [2005] Ch 281.
- In Chase Manhattan Equities Ltd v Goodman and others [1991] BCLC 897, shares in a company were registered in the name of nominees. A director of the company, as the beneficial owner of the shares, which were subject to a charge, executed a deed of gift purporting to give the shares to his cohabitee. An issue subsequently arose as to whether the gift was a sham. Having quoted Diplock LJ's remarks in Snook, Knox J said at page 921:
"Immediately before the deed of gift was executed Mr Goodman was the beneficial owner in equity, subject to the rights of Nat West Bank by way of charge, of the shares in question … On its face the transaction effected by the deed of gift was an outright gift to Mrs Fitzgerald of that beneficial interest. The deed of gift can only be a sham in my judgment if it is shown that the parties to it intended that Mr Goodman should remain the beneficial owner of the shares comprised in it."
He went on at page 923:
"I return therefore to the question whether the deed of gift was indeed a sham in the sense that neither Mr Goodman nor Mrs Fitzgerald intended it to deprive Mr Goodman of beneficial ownership or confer it upon Mrs Fitzgerald. How the parties acted after it was executed is relevant to this inquiry although it would not be relevant to any question of construction."
- The same point arose in the Royal Court of Jersey in In the Matter of the Esteem Settlement (Abacus (CI) Limited as Trustee), Grupo Torras SA and Culmer v Al Sabah and four others [2003] JRC 092, 2003 JLR 188, [2004] WTLR 1. The Deputy Bailiff set out the issue at paras [45]-[46]:
"[45] All the parties before us accepted that the doctrine of sham is capable of applying to trust deeds just as much as to contracts or conveyances of property. But there agreement ended. Abacus, supported by the defendants, asserts that, in accordance with the authorities which we have described above, the plaintiffs must prove that both Sheikh Fahad and Abacus did not intend at the time of the creation of the Settlement that Abacus should hold the assets upon the trusts set out in the trust deed.
[46] However, the plaintiffs contend that, in the case of a trust deed, there is no requirement for a common intention on the part of the settlor and the trustees that the true position should be otherwise than as set out in the trust deed. It is sufficient if the settlor alone has such an intention. They say that Diplock LJ's remarks were made in the context of a bilateral transaction such as a contract; but a trust is essentially a unilateral transaction whereby the settlor intends to transfer the beneficial interest in the assets in question."
- Having considered a number of authorities, including Snook, Chase Manhattan and Hitch v Stone, the Deputy Bailiff concluded at paras [53]-[54]:
"[53] In our judgment, in order for a trust deed to be a sham, both the settlor and the trustee must intend that the true arrangement is otherwise than as set out in the trust deed …
[54] For the above reasons we conclude that the principles laid down in Snook and Hitch v Stone are applicable to settlements where there is a settlor and a trustee. Accordingly, in order to find a sham, the court must find that both the settlor and the trustee had the intention that the true position should be otherwise than as set out in the trust deed which they both executed."
- This decision was followed by Rimer J in Shalson and others v Russo and others (Mimran and another, Part 20 claimants) [2003] EWHC 1637 (Ch), [2005] Ch 281. Having gone through Snook, Hitch v Stone and Re Esteem, Rimer J said at para [188]:
"After a careful consideration of the authorities, the Royal Court of Jersey held in In re Esteem Settlement 2003 JLR 188 … that the like principle applies to an allegedly sham settlement: both the settlor and the trustee must intend the settlement to be a sham, and they rejected the proposition that all that counts is the settlor's intention."
- He continued at para [190]:
"I respectfully regard the approach adopted by the Royal Court of Jersey in In re Esteem Settlement 2003 JLR 188 as correct. It is not only squarely in line with the guidance given by the Court of Appeal in Snook v London and West Riding Investments Ltd [1967] 2 QB 786 and Hitch v Stone [2001] STC 214, it also appears to me to be correct in principle. When a settlor creates a settlement he purports to divest himself of assets in favour of the trustee, and the trustee accepts them on the basis of the trusts of the settlement. The settlor may have an unspoken intention that the assets are in fact to be treated as his own and that the trustee will accede to his every request on demand. But unless that intention is from the outset shared by the trustee (or later becomes so shared), I fail to see how the settlement can be regarded as a sham. Once the assets are vested in the trustee, they will be held on the declared trusts, and he is entitled to regard them as so held and to ignore any demands from the settlor as to how to deal with them. I cannot understand on what basis a third party could claim, merely by reference to the unilateral intentions of the settlor, that the settlement was a sham and that the assets in fact remained the settlor's property. One might as well say that an apparently outright gift made by a donor can subsequently be held to be a sham on the basis of some unspoken intention by the donor not to part with the property in it. But if the donee accepted the gift on the footing that it was a genuine gift, the donor's undeclared intentions cannot turn an ostensibly valid disposition of his property into no disposition at all. To set that sort of case up the donee must also be shown to be a party to the alleged sham. In my judgment, in the case of a settlement executed by a settlor and a trustee, it is insufficient in considering whether or not it is a sham to look merely at the intentions of the settlor. It is essential also to look at those of the trustee."
- I respectfully agree both with Rimer J's decision and with his reasoning.
- In the present case there have been, from time to time, a number of different trustees of the trusts. The question therefore arises as to which of the trustees' intentions are relevant for this purpose. Put somewhat differently, the question arises as to whether a trust which is not a sham can subsequently become a sham and, conversely, whether a trust which is a sham can subsequently lose that character. I need to take some time to analyse this issue because, as we shall see in due course, it is in fact, in my judgment, determinative in the final analysis of the wife's claim insofar as it is based on sham.
- It seems to me that as a matter of principle a trust which is not initially a sham cannot subsequently become a sham. The reason is that elaborated by Rimer J in the passage in Shalson and others v Russo and others (Mimran and another, Part 20 claimants) [2003] EWHC 1637 (Ch), [2005] Ch 281, at para [190] which I have just set out. Once a trust has been properly constituted, typically by the vesting of the trust property in the trustee(s) and by the execution of the deed setting out the trusts upon which the trust property is to be held by the trustee(s), the property cannot lose its character as trust property save in accordance with the terms of the trust itself, for example, by being paid to or applied for the benefit of a beneficiary in accordance with the terms of the trust deed. Any other application of the trust property is simply and necessarily a breach of trust; nothing less and nothing more.
- A trustee who has bona fide accepted office as such cannot divest himself of his fiduciary obligations by his own improper acts. If therefore, a trustee who has entered into his responsibilities, and without having any intention of being party to a sham, subsequently purports, perhaps in agreement with the settlor, to treat the trust as a sham, the effect is not to create a sham where previously there was a valid trust. The only effect, even if the agreement is actually carried into execution, is to expose the trustee to a claim for breach of trust and, it may well be, to expose the settlor to a claim for knowing assistance in that breach of trust. Nor can it make any difference, where the trust has already been properly constituted, that a trustee may have entered into office – may indeed have been appointed a trustee in place of an honest trustee – for the very purpose and with the intention of treating the trust for the future as a sham. If, having been appointed trustee, he has the trust property under his control, he cannot be heard to dispute either the fact that it is trust property or the existence of his own fiduciary duty.
- The only way, as it seems to me, in which a properly constituted trust which is not, ab initio, a sham could conceivably become a sham subsequently would be if all the beneficiaries were, with the requisite intention, to join together for that purpose with the trustees (see Saunders v Vautier (1841) 4 Beav 115 and In re Smith, Public Trustee v Aspinall [1928] Ch 915). But since that would require the participation of all the beneficiaries (see Berry v Geen [1938] AC 575 at page 582), and since, as I have already pointed out, not all the beneficiaries in the present case are ascertained and sui juris, the possibility cannot here arise, and I therefore say no more about it.
- I turn to consider the converse case. Can a trust which is initially a sham subsequently lose that character? I see no reason in principle why that should not be possible. The situation is best explained by an example. S has purportedly vested property in T1 as trustee of a trust which is in fact, consistently with their common intention, a sham from the outset. T1 now wishes to retire as "trustee." S, executing all the appropriate documents, purports to appoint T2 as T1's successor and to transfer the "trust property" into T2's name. Now if T2 knows that the "trust" is a sham and accepts appointment as "trustee" intending to perpetuate the sham, then nothing has changed. The "trust" was a sham whilst T1 was the "trustee" and remains a sham even though T1 has been replaced by T2. But what if T2 does not know that the "trust" was a sham, and accepts appointment believing the "trust" to be entirely genuine and intending to perform his fiduciary duties conscientiously and strictly in accordance with what he believes to be a genuine trust deed? I cannot see any reason why, in that situation, what was previously a sham should not become, even if only for the future, a genuine trust.
- On the contrary, principle argues compellingly that in such circumstances there is indeed, for the future, a valid and enforceable trust. After all, in the circumstances I have postulated, the trust property has been vested in someone who accepts that he holds the property as trustee on the trusts of a document which he believes to be a genuine instrument. He has no intention that the arrangement should be a sham. Conceptually, as it seems to me, the situation is, in reality, no different from that which was considered by Rimer J in the passage in Shalson and others v Russo and others (Mimran and another, Part 20 claimants) [2003] EWHC 1637 (Ch), [2005] Ch 281, at para [190] that I have already quoted.
- Mr Wagstaffe, who appeared before me on behalf of the interveners, and for whose lucid and compelling submissions in relation to sham I am particularly grateful, put the point quite neatly when he submitted that, even if the earlier trustee was party to a sham, a new trustee cannot become an unknowing party to the sham. Once the new trustee becomes legal owner of the trust property, provided he exercises his powers and fulfils his duties in accordance with the terms of the trust instrument, the trust cannot be regarded as a sham, no matter what may have passed before. I agree.
- In fact the point seems to have risen, albeit somewhat obliquely, in Shalson and others v Russo and others (Mimran and another, Part 20 claimants) [2003] EWHC 1637 (Ch), [2005] Ch 281, itself. It suffices to quote what Rimer J said at para [191]:
"In the present case, the settlement was in fact executed simply by Cantrust. In particular, Mr Russo was not a party to it. It took effect by way of a resettlement by Cantrust of assets held by it under the prior trusts. In creating the new settlement, Cantrust was exercising powers it regarded itself as having under those trusts, and no pleaded challenge is raised either to the validity of those trusts (it is not suggested they were shams) or to the exercise of the power to resettle their assets. Given those circumstances … I am unable to accept the proposition that the settlement created in March 1999 was a sham. If the only person executing the document which created the settlement intended it to be a genuine settlement – as Cantrust did – the acts or intentions of others cannot have made it a sham … [W]hatever may have been the private intentions of the Russo family, if Cantrust intended the settlement to be a genuine one the settlement must have resulted in the resettled assets becoming held on the trusts that Cantrust regarded itself as creating and which, on the face of it, it did create."
It will be appreciated that the issue which Rimer J was there addressing is not on all fours with the issue with which I am currently concerned, but Rimer J's analysis and decision on the point, with which I agree, seem to me to be not merely consistent with the view to which I have come but indeed to be supportive of it.
- The corollary of all this can be stated very simply. Whatever the settlor or anyone else may have intended, and whatever may have happened since it was first created, a trust will not be a sham – in my judgment cannot as a matter of law be a sham – if either
i) the original trustee(s), or
ii) the current trustee(s),
were not, because they lacked the relevant knowledge and intention, party to the sham at the time of their appointment. In the first case, the trust will never have been a sham. In the second case, the trust, even if it was previously a sham, will have become a genuine – a valid and enforceable – trust as from the date of appointment of the current trustee(s).
- There has been some debate in the authorities as to what is required to establish the requisite common intention. In Midland Bank PLC v Wyatt [1995] 1 FLR 696, the Deputy Judge, Mr David Young QC, said at page 699 that:
"a sham transaction will still remain a sham transaction even if one of the parties to it merely went along with the 'shammer' not either knowing or caring about what he or she was signing. Such a person would still be a party to the sham and could not rely on any principle of estoppel such as was the case in Snook".
Singer J said much the same thing in Minwalla v Minwalla and DM Investments SA, Midfield Management SA and CI Law Trustees Ltd [2004] EWHC 2823 (Fam), [2005] 1 FLR 771, adopting at paras [54]-[55] the following statement of principle by a commentator:
"In order for a trust to be found to be a sham, both of the parties to the establishment of the trust (that is to say the settlor and the trustees in the usual case) must intend not to act on the terms of the trust deed. Alternatively in the case where one party intends not to act on the terms of the trust deed, the other party must at least be prepared to go along with the intentions of the shammer neither knowing or caring about what they are signing or the transactions they are carrying out."
- Singer J's judgment in Minwalla gave rise to further proceedings in the Royal Court of Jersey, where the relevant trusts were located. In CI Law Trustees Limited and another v Minwalla and others [2005] JRC 099, [2006] WTLR 807, the Bailiff pointed out at para [15] that Singer J appears not to have been referred to Shalson v Russo where, as the Bailiff correctly observed, the judgment of the Deputy Bailiff in Re Esteem had been cited and been regarded, as a matter of English law, as correct in principle. The Bailiff continued:
"In re Esteem Settlement, this Court held that, in order for a trust deed to be a sham, both the settlor and the trustee must subjectively have a common intention that the trust deed is not to create the legal rights and obligations which it gives the appearance of creating; it is not sufficient that the settlor alone has such an intention. Re Esteem Settlement has been followed in MacKinnon v Regent Trust Company Limited 2004 JLR 477, a decision which was upheld by the Jersey Court of Appeal at [2005] JCA 066, [2005] WTLR 1367."
- In Re Esteem the Royal Court had in fact been referred to Wyatt. The Deputy Bailiff in Re Esteem explained matters as follows:
"[58] … In our judgment the court in Wyatt was simply confirming that a party who goes along with a sham neither knowing or caring what he is signing (ie, who is reckless) is to be taken as having the necessary intention.
[59] It follows that in our judgment, in order to succeed, the plaintiffs will need to establish that, as well as Sheikh Fahad, Abacus intended that the assets would be held upon terms otherwise than as set out in the trust deed or, alternatively, went along with Sheikh Fahad's intention to that effect without knowing or caring what it had signed, and that both parties intended to give a false impression of the position to third parties or to the court."
I agree with that analysis. What is required is a common intention, but reckless indifference will be taken to constitute the necessary intention.
- An allegation of sham is a serious matter. As Neuberger J said in National Westminster Bank plc v Jones [2001] 1 BCLC 98 at para [59]:
"there is a very strong presumption indeed that parties intend to be bound by the provisions of agreements into which they enter, and, even more, intend the agreements they enter into to take effect."
Moreover, and because as Neuberger J pointed out (see paras [40], [46] and [59]) "a degree of dishonesty is involved in a sham", it follows (see para [59]) that:
"there is a strong and natural presumption against holding a provision or a document a sham."
- Moreover, it has to be borne in mind that a finding of sham may have serious implications, not least for trustees. As the Royal Court of Jersey said in CI Law Trustees Limited and another v Minwalla and others [2005] JRC 099, [2006] WTLR 807, at para [17]:
"It is a serious matter to find that a professional trustee in Jersey has been party to a sham. It is a finding moreover which might well have adverse consequences under the statutory regime which regulates the activities of professional trustees in Jersey and which, incidentally, is absent in England and Wales."
Not surprisingly both Mr St George, and Mr Wagstaffe on his behalf and on behalf of his co-trustees, laid some emphasis on this point.
- So much for what a sham is. What is the effect of a finding that a transaction is a sham? The conventional answer is that a transaction which is a sham is simply void. As Arden LJ said in Hitch v Stone at para [87]:
"No authority has been cited to us which would suggest that a sham transaction could on its own be other than a void transaction. There being no statutory provision in point here, that consequence would in my judgment follow."
(I note for completeness that Arden LJ went on to consider the position if a third party in good faith and for valuable consideration enters into a transaction to acquire rights created by the sham transaction, saying that "He may well be able to rely on the doctrine of estoppel or be protected by the law in some other way." The point does not arise here, so I say no more about it.)
- Mr Wagstaffe submitted that the matter may not necessarily be as simple as this. He suggested that there may, at least in the context of trusts, be two different situations, which I can best illustrate by means of examples:
i) S has purportedly vested property in T as trustee of a trust, ostensibly for the benefit of B, but in fact, as both S and T have agreed, for the benefit of S – in other words, both S and T intend that S shall in reality remain the real owner of the property. That is a classic case of sham. The declaration of trust in favour of B is meaningless and has no legal effect whatsoever. It is, as Mr Wagstaffe puts it, simply a piece of paper, for neither S nor T intends that T will act on the trusts set out in the declaration of trust. A finding of sham, in such a case, simply confirms that ownership of the assets purportedly placed in trust has at all times remained with S. If the property has actually been vested in T he presumably holds it (subject to any question of illegality) on a resulting trust for S.
ii) S has purportedly vested property in T as trustee of a trust, ostensibly for the benefit of B1, but in fact, as both S and T have agreed, for the benefit of B2. In this situation, Mr Wagstaffe suggests, the transaction is not wholly devoid of legal effect. The declaration of trust setting out the ostensible terms may not be of any effect, but that does not mean, he says, that there is no enforceable arrangement between the parties at all. He suggests that in this situation the court has to determine, on the evidence, what the real terms of the transaction are and then, as I understand his argument, to give effect to it.
Mr Wagstaffe characterises the first case as one where there is no intention that any rights or obligations between the parties should be created at all; the second case as one where the parties intend that certain rights and obligations as between themselves should arise, but different from those apparent on the face of the instrument. In the first case there is no more than a resulting trust in favour of S; in the second case there is, so it is suggested, an enforceable trust for the benefit of B2.
- Now leaving altogether on one side any problems that may arise out of the operation of section 53 of the Law of Property Act 1925 and other analogous provisions, there are, as it seems to me, various difficulties standing in the way of Mr Wagstaffe's analysis; not least the decision of the Court of Appeal in Hitch v Stone. Had the point required decision in the present case I would have wanted to hear further argument. But since, on the facts as I find them, the point does not arise I need say no more about it.
- Before parting with the law, there is one final point to be made. I do not see how, considering the nature of a sham, a transaction can be a sham for one purpose but not for another. A transaction is either genuine or it is a sham. If it is genuine, then in principle the function of the court is simply to ascertain its legal nature and effect and enforce it accordingly. If it is a sham, then it is in principle ineffective, indeed void, according to Arden LJ in Hitch v Stone. There is, in my judgment, no possible middle course, no third alternative. So, for example, a transaction cannot be genuine as between a husband and the Revenue whilst being at the same a sham as between him and his wife. The point is analogous to that which arises when a husband puts the matrimonial home in the name of his wife to protect it from his creditors in the event of him becoming bankrupt. The point was put with characteristic clarity by Lord Denning MR in Tinker v Tinker [1970] P 136 at page 141:
"the husband cannot have it both ways. So he is on the horns of a dilemma. He cannot say that the house is his own and, at one and the same time, say that it is his wife's. As against his wife, he wants to say that it belongs to him. As against his creditors, that it belongs to her. That simply will not do. Either it was conveyed to her for her own use absolutely: or it was conveyed to her as trustee for her husband. It must be one or other."
I should add that the principle that a transaction is either a sham or not a sham does not prevent a document being in part a sham and in part genuine, though this is possible if, and in my judgment only if, the document reflects a transaction divisible into separate parts: see Hitch v Stone at para [85].
Sham – the wife's case on the facts
- There are a number of strands to the wife's case that the trusts are shams. They can, I think, be summarised as follows:
i) The husband's father had agreed that he should receive all the shares in HDC either in return for a payment of £80,000 – which sum was in fact used by the husband's father to acquire a property in Somerset now owned by Anthony – or (the case seemed to vary) as a simple gift.
ii) The husband decided to put the shares into the trusts "to distance himself from them in the hope that it would assist his first divorce." In this connection Mr Moor relies, for instance, upon a letter written by the husband to Mr St George on 2 March 2001:
"it was the original settlers wishes that all the shares in [HDC] would be appointed to me once the settlement with my first wife was settled … I have always felt comfortable with the shares out of harms way, it protects them from greedy wives. My wish is that all the shares in your control will end up with my son Simon upon my death. Hopefully he will also wish you to retain control knowing you would appoint them to him if he asked."
iii) The husband, both at the time the trusts were set up and ever since, has treated the shares as if they were his own. The husband "controls everything to do with" both trusts. Thus, it is said, the interveners are "passive" trustees who do not know what is going on and who look solely to the husband when they seek payment of their fees or write letters (though, as Mr Moor concedes, the majority of the letters seem to have been merely seeking payment of their fees). In particular it is said that:
a) The decision as to who should be trustees was within the husband's gift (it is said that he was even able to get the original trustees to resign in favour of himself and the wife in October 1989).
b) The husband takes the view that it is up to him to direct the trustees as to what they are to do and he assumes and expects that they will co-operate. For a long time there were no letters of wishes and the interveners were, it is said, clearly quite content to "take their instructions" from the husband. Mr Moor relies in this connection upon the following passage in the husband's letter to Mr St George of 2 March 2001:
"My wish is that all the shares in your control will end up with my son Simon upon my death. Hopefully he will also wish you to retain control knowing you would appoint them to him if he asked"
coupled with Mr St George's response in a letter dated 30 March 2001:
"there is no problem with what you have set out … I note your wishes that Simon should benefit entirely from the settlements upon your death."
c) The husband paid the trustees' fees by his own personal cheques.
d) The interveners used the husband as their channel of communication with Anthony, for example when seeking a letter of wishes from him or his agreement to their waiver of dividends (see below).
In fine, says Mr Moor, there is not one example over the last twenty years or so of any of the trustees taking any material step unprompted by the husband.
iv) The interveners have waived the trusts' share of dividends declared by HDC, "regardless", so it is said, of the interests of any of the beneficiaries (Zara for instance) who are not involved with HDC and on one occasion having obtained backdated agreement by Anthony to the waiver.
v) The husband has promoted various schemes in relation to HDC and the trusts which, so it is said, demonstrate his "complete control" of the trusts. These included (though none of them was ever implemented):
a) a proposal, set out in a letter to Anthony from CSTGL dated 18 February 1994, that CSTGL transfer all the HDC shares held by Anthony's Discretionary Trust out of the trust to Simon and Zara in equal shares (the purpose of the letter was stated as being to ascertain Anthony's views "as the creator of this trust");
b) a proposed scheme, the details of which were set out in a letter to the Inland Revenue dated 7 May 1997, which if implemented would have involved the trustees exchanging their shares in HDC for cash in the form of redeemable loan notes (Mr Moor also draws attention to the fact that this letter refers to the trusts as having been "intended for [the husband] primarily" and to the shares in HDC as being "held by trustees, in reality for him");
c) a proposed scheme, the details of which are set out in a letter dated 28 June 1999 from a company (apparently being promoted by the husband and his advisers) called WGL, under which WGL offered to acquire all the shares in HDC at a price of £500 per share to be paid in the form of 500 shares in WGL for every share in HDC (in relation to this transaction Mr Moor comments that the interveners were "so out of the loop" that on 31 January 2000 Mr St George had to write to the husband asking whether the transaction had completed).
vi) The interveners have failed to involve themselves at all, or even to show any interest, in the day to day running or management of HDC, seemingly being content to leave everything to the husband.
vii) Next, Mr Moor points, as being suggestive (of what I am not at all sure), to the fact that for many years there appear to have been no settlor's letters of wishes at all in relation to either of the trusts and that when, in 2004 (after the freezing order had been made), Anthony did eventually produce such a letter it was "extremely unsatisfactory," having been backdated to April 2002. (The allegation, as I understand it, is that the letter did not represent Anthony's true wishes but was prepared for him by the husband who thought that it would help his case.) Mr Moor also points to the fact that for years the trustees did not even have the share certificates.
viii) Finally, what is said to be the husband's "cavalier attitude to all things to do with" HDC is illustrated, so it is said, by his approach to the pension fund: rather than establish a separate fund as required by law, he has simply allowed the cash to sit in HDC bank accounts for years on end.
The relevance of this last point is not altogether clear for, as I have observed, the wife is not seeking to 'pierce the corporate veil.'
- Mr Moor submits that the wife's case is supported by Anthony's oral evidence. In support of this contention he took me to various passages in the transcript.
- In summary the wife's case is that:
i) The husband and the original trustees (Messrs Halton, Luder, Pickard and Jolly) were all "fully involved" in the sham. The "parties" to the sham were, it is said, the husband, his father, his brother (Anthony) and the four trustees. The trusts were set up "as a device" to hold the shares until after the divorce and were intended to give the court (Mr Registrar Turner) the appearance that they were genuine discretionary trusts, when in fact the shares were the husband's.
ii) If the arrangement was a sham, then not merely will there be no trust at all; the legal effect, submits Mr Moor, is that the shares were a gift to the husband.
iii) A trust that was a sham at its inception cannot become a legal entity at a later stage. It follows that the sole issue is whether the trusts were a sham at their inception.
iv) It is not therefore necessary for the wife to prove dishonesty against the interveners, who were not in any way involved in establishing the trusts. Nevertheless, the husband has behaved throughout as if the trust deeds were shams and, so Mr Moor puts it, "as though the trust structure was non-existent." Moreover, according to Mr Moor, it is clear that Mr St George "has looked to [the husband] in all respects as though [the husband] were the true owner of the shares." He adds: "Although the Jersey trustees were not parties to the original sham, they clearly took on the role on the basis that the real owner of the shares was [the husband]. They have looked to him throughout."
Sham – the opposing case
- Mr Howard, on behalf of the husband, and Mr Wagstaffe, on behalf of the interveners, make common cause in relation to the allegations of sham. Albeit from their very different perspectives, they both submit (a) that the wife's case is lacking in any factual basis and (b) that in large measure it is in any event misconceived in law. I agree with their submission on both points and, by and large, with their reasoning.
Sham – discussion
- I agree with Mr Wagstaffe that there are two fundamental legal flaws in the way in which Mr Moor puts the wife's case on sham.
- The first relates to Mr Moor's submission that if the trusts were a sham then the legal effect is that the shares were a gift to the husband. Mr Wagstaffe's submission is brutal, blunt and, in my judgment, quite plainly correct: this proposition (for which, as he points out no authority was cited) is simply wrong in law.
- As Mr Wagstaffe correctly points out, it is beyond contestation that prior to 1984 the owners of the 54% interest in HDC which is now in issue were the husband's father (as to 34%) and his brother Anthony (as to 20%). It follows logically that the wife's entire case rests on the proposition that the settlors (the father and Anthony) intended to divest themselves of those shares. As Mr Wagstaffe observes, there could be no benefit to the wife in a finding that Anthony and/or the father's estate in fact remain the true owners of the shares. So the wife's case inevitably involves the proposition that the settlors intended the original trustees to hold the shares for the benefit of a person or persons other than the settlors. Since, as a matter of fact, the shares were transferred by the settlors to the original trustees, and are now held by the interveners, the current trustees, the only issue is whether the shares are held by them on the declared trusts (as the husband and the interested parties assert) or whether they are in reality held by the trustees on some other basis – that is, as the wife has to assert (though this is not in fact how she puts her case), on a bare trust for the husband, and not as discretionary trustees for a wider class of beneficiaries.
- It seems to me that Mr Wagstaffe's analysis is plainly correct. As he correctly points out, the way in which Mr Moor puts the wife's case is not merely unsupported by authority; it does not make any legal or logical sense at all:
i) In the first place, as Mr Wagstaffe observes, it is a complete non-sequitur to suggest that if the terms of a settlement made by A for the benefit of B are in reality other than those which appear on the face of the relevant instrument, the necessary consequence is that C is the beneficial owner of the property. As Mr Wagstaffe comments, Mr Moor presents the proposition that the shares were gifted to the husband in 1984 as following, as night follows day, a conclusion that the 1984 transactions were shams. He submits, and I agree, that the consequence simply does not flow from a finding of sham.
ii) Secondly, and in any event, as Mr Wagstaffe submits, it is impossible to see how it can be said that the shares were gifted to the husband in 1984 when he never became the owner of the shares (save as a trustee much later). As Mr Wagstaffe comments, a gift involves a transfer of property with an intention on the part of the donor that the donee shall become the beneficial owner. If the shares were never transferred to the husband, how (he asks rhetorically) can it be said that they have been given to him?
- I agree with Mr Wagstaffe that the wife's case of sham, if it is to 'work' at all, has to amount to this: that the intention of the husband's father and brother and of all the original trustees (Mr Halton and Mr Luder, Mr Pickard and Mr Jolly) was that the shares were to be held by the trustees on trust for the husband. As to this, Mr Wagstaffe submits that such an intention cannot simply be assumed in such a cavalier fashion and that there is no evidence at all to support it. I shall return to the latter point below.
- The other fundamental legal flaw relates to Mr Moor's submission that a transaction which was a sham at its inception cannot subsequently become effective, with the consequence that the sole issue in the present case is whether the trusts were a sham at their inception in 1984, so that it is not necessary for the wife to prove that the interveners are privy or party to any sham. I agree with Mr Wagstaffe, for the reasons I have already set out (see paragraphs [41]-[49] above), that this is simply not the law.
- Mr Wagstaffe submits, and I agree, that the interveners were entitled, on becoming trustees, to regard the trust assets as being subject to the declared trusts as set out in the trust deeds, no matter what might have passed before in relation to the previous trustees. Indeed, he says, and again I agree, in accordance with National Westminster Bank plc v Jones [2001] 1 BCLC 98 that is what is to be presumed in the absence of evidence to the contrary. So, submits Mr Wagstaffe, and I agree, whatever did or did not happen in 1984, the wife's case on sham cannot succeed unless she can establish that the interveners, the current trustees, are privy or party to the sham, in the sense that they accepted office as trustees intending not to act in accordance with the trust deeds but instead simply to hold the shares to the husband's order.
- Mr Wagstaffe doubts, as indeed I doubt, whether Mr Moor was actually prepared to go that far. Indeed, as Mr Wagstaffe points out, the allegation was never put to Mr St George in cross-examination by Mr Moor. (And when it was put to him by Mr Howard, albeit in 'friendly' cross-examination, he rejected the suggestion and was not challenged on that evidence by Mr Moor.) Be all that as it may, Mr Wagstaffe's primary submission is that there is simply no evidence which would begin to justify such an accusation. On the contrary, he submits, the documentary evidence demonstrates that the trustees have acted properly and independently wherever circumstances required them to act at all.
- Before addressing Mr Moor's submissions in detail there are a couple of preliminary points to be made. The first reflects a submission made by Mr Howard in relation to the setting up of the trusts in 1984. There are two aspects to this:
i) In the first place, as Mr Howard pointedly observes, there is nothing illegitimate or sham-like about a settlor who creates a trust because he does not want his soon-to-be former daughter-in-law to be able to claim his assets which he is contemplating transferring to his son, her husband. It is not, as he says, a sham for a settlor, even if he is the husband, to put assets into a trust to distance himself from them in divorce proceedings. The trust itself would be perfectly legitimate albeit, if the husband was the settlor, susceptible to challenge under section 37 of the Matrimonial Causes Act 1973.
ii) Moreover, even assuming that the intention of both the husband's father and his brother was to put the shares in trust, rather than gifting them to the husband, because of worries about divorce, that of itself is of no consequence, for such a decision would not be susceptible to any application under section 37, the transactions having been effected not by the husband (who never owned the shares that were put into the trusts) but by his father and brother: see the language of section 37(2).
- The other preliminary point reflects a submission made by Mr Wagstaffe. As he correctly observed, the mere fact that a trustee complies with a request from the settlor (or, for that matter, a request from a beneficiary) to exercise his discretion in a particular way provides no basis at all for the suggestion that the trust is a sham. As Wilson LJ observed in Charman v Charman [2005] EWCA Civ 1606, [2006] 2 FLR 422, at para [12]:
"A trustee – in proper 'control' of the trust – will usually be acting entirely properly if, after careful consideration of all relevant circumstances, he resolves in good faith to accede to a request by the settlor for the exercise of his power of advancement of capital, whether back to the settlor or to any other beneficiary"
In other words, the mere fact that a trustee happens to agree with a settlor or beneficiary that a particular course of action is appropriate (whether, for example, making a loan available to a subsidiary company, advancing capital to a particular person or, as in this case, waiving a dividend) cannot without more justify the conclusion that the trustee has not exercised his independent discretion. On the contrary, submits Mr Wagstaffe, the wife's case here depends in large measure upon conduct on the part of the trustees which is, at least on the face of it, to use Wilson LJ's words, "entirely proper".
- Mr Wagstaffe accepts, as he must, that there have been times when the trustees have complied with requests from the husband, but that, he asserts, praying Mr St George's evidence in aid, was always after independent consideration by the trustees. Indeed, he is able to point to the fact that on at least one occasion (in 2004) the trustees took independent legal advice. There is, he submits, absolutely no direct evidence that the trustees have ever acted otherwise than independently, and Mr St George, in both his written and his oral evidence, specifically rejected the allegation. At least as against the current trustees – the interveners – the wife's case depends in truth, he submits, upon the inferences which she invites me to draw, inferences which, he says, I cannot possibly draw given that there is, as he would have it, a reasonable and innocent explanation for everything the trustees have done or (as the case may be) not done.
- Mr Howard adds, and I agree, that the letter from the husband to Mr St George dated 2 March 2001 and Mr St George's reply dated 30 March 2001 by which Mr Moor sets so much store are wholly consistent with the trusts being genuine and not shams and, indeed, wholly consistent with that being the understanding of both the husband and Mr St George. And the same goes, he says, and I agree, for the letter to the Inland Revenue dated 7 May 1997 similarly relied upon by Mr Moor. Moreover, as Mr Howard points out, the allegation that the trustees looked solely to the husband and used him as their channel of communication with Anthony is not entirely accurate: Anthony visited Guernsey to meet CSTGL and Simon travelled to Jersey to see Mr St George; and the letter from CSTGL dated 18 February 1994 was in fact written to Anthony.
- Thus, as Mr Wagstaffe correctly submits, the trustees' decision to waive the dividend was plainly one which the trustees were entitled to take having regard to the overall best interests of the beneficiaries: had they refused to waive the dividend, significant tax liabilities would have been created to the detriment of the HDC shares (shares in HDC being of course the only asset held by the trusts); moreover Mr St George's unchallenged evidence was that dividend monies would in any event probably have been invested in one form or another and probably not been distributed to the beneficiaries. The trustees' decision, he says, plainly fell well within the ambit of the discretion they were entitled to exercise. This example, latched upon by the wife as an instance of the trustees being under the husband's control, provides, he submits, no support whatsoever for the suggestion that the trustees are simply the husband's 'yes-men.' On the contrary, as both Mr Howard and Mr Wagstaffe point out, the proposal was put to the trustees and considered by them on the merits – and their agreement to what was proposed was not an automatic assent; Mr St George required to be persuaded that what was being proposed was indeed in the overall interests of the beneficiaries.
- In relation to the various schemes of corporate re-organisation, as Mr Wagstaffe correctly points out, the trust funds were not going to be diluted. As Mr Howard put it, all these schemes preserved the integrity of the trusts and the independence of the trustees. The trustees stood to acquire either loan notes or shares in another company in place of their holding of shares in HDC, but there is absolutely nothing to suggest that the overall value of their investment – the value of the trust funds – would not remain exactly the same. As Mr Wagstaffe put it, in circumstances where there was no particular disadvantage to the trusts, and a possible advantage to HDC, it is easy to see why the trustees were happy to agree in principle to the proposed schemes. Again, he submits, this provides no basis for the suggestion that the trusts are shams. Quite the contrary. Mr Howard points to a letter dated 28 June 1999 written to Mr St George by a Mr Jeffery (who was advising the husband at that time) in relation to the proposed acquisition of the shares by WGL "if the proposal is acceptable to you as trustees." The letter, which was copied to the husband, expressed Mr Jeffery's view that "the reconstruction will be in the best interests of [HDC] and of its shareholders (including yourselves as trustees)" and continued, "I would therefore recommend that you take up the shares in [WGL]".
- In relation to the complaint that the trustees did not involve themselves in the day-to-day running of HDC, Mr Wagstaffe points out, correctly, that as a matter of general principle, companies are run by their directors, not their shareholders, that the trustees are, moreover, entitled under the terms of the trust deeds to leave the day-to-day running of the company to HDC's management – in other words to the husband who was, and more recently to Simon who is, the managing director – and that the trustees' decision in this respect is in no way unusual. Moreover, as he also points out, the decision of the trustees has been vindicated by the fact that during the time the current trustees have been in office the value of HDC (whichever expert's view on that matter is accepted) has plainly increased in very significant measure. Again, therefore, Mr Wagstaffe submits, this suggestion provides no basis at all for drawing the inference that the trusts are shams.
- At the end of the day, submits Mr Wagstaffe, the trusts have been administered (at least during the stewardship of the present trustees) in a wholly conventional and entirely proper fashion, there is simply no evidential basis for the allegation that the trusts are a sham, and the allegation, he says, frankly ought not to have been pursued. What is quite clear, he says, is that there is no evidence to justify a finding that the current trustees are parties to a sham; and without such a finding, he submits, the wife's case on sham cannot, as a matter of law, possibly succeed.
- So far as concerns the original trustees (that is, Mr Halton and Mr Luder in relation to the one trust and Mr Pickard and Mr Jolly in relation to the other), Mr Howard submits, and I agree, that there is not a shred of evidence to justify a finding of sham, not least when the allegation is sought to be made good against no fewer than four professional men. On the contrary, he says, a letter dated 3 August 1987 written by Mr Luder to the husband and copied to Mr Halton, shows Mr Luder quite clearly regarding the trust of which he was a trustee as being genuine and not a sham: the letter, for instance, refers to the shares "presently held in trust" and distinguishes them from "your own shares" and also canvasses the possibility of the husband's "renunciation of your interest under the two Settlements." And if Mr Luder and Mr Halton were not involved in a sham then it is, he says, fanciful to suggest that Mr Pickard and Mr Jolly, the trustees of a trust set up at the very same time, were involved in a sham.
- The burden, as Mr Howard and Mr Wagstaffe point out, is on the wife to establish her case. No evidence from the original trustees as to what they intended has been adduced. The husband's father is dead. Anthony's evidence, so Mr Howard and Mr Wagstaffe would have me accept, and I agree, does not support the contention that his intention in 1984 was to gift his shares to his brother. Moreover, as Mr Howard correctly points out it was never suggested to Anthony by Mr Moor that he had been dishonest or party to a sham; when questioned by Mr Howard he affirmed that the trusts were genuine.
- In fact, the wife's case rests in large measure upon what she contends were the husband's intentions in relation to the trusts and the shares, but his intentions, whatever their evidential significance, are in the final analysis irrelevant, for the relevant intentions are those of the parties to the transaction – that is, in the case of a trust, the settlor and the trustees. As Mr Wagstaffe pithily observes, if A gives property to B, the legality of the transaction cannot be affected by C's motives. The husband was neither a settlor nor a trustee, so he was not, in this sense, one of the parties to the transaction. Mr Wagstaffe submits that the evidence simply does not begin to establish what the wife has to prove if this part of her case is to succeed. I agree.
- The reality, says Mr Howard, is that in the final analysis the wife's entire case that the trusts were shams from their inception in 1984 rests on nothing more than her own evidence that the husband's father had told her that he would make a gift of the shares to his son. Let it be assumed that the wife's evidence on this point is reliable (something Mr Howard does not accept). Let it be assumed, moreover, that what the husband's father said to the wife actually reflected his true plans and intentions (something which, again, Mr Howard does not accept – her father-in-law may have been fobbing her off or he may have subsequently changed his mind). None of this, says Mr Howard, gets the wife anywhere. Whatever the husband's father may have said to the wife, it is a wholly inadequate foundation on which to make a finding of sham against Mr Luder and Mr Halton. Moreover, it is not pertinent to anything done by Anthony or by Mr Pickard and Mr Jolly in relation to the other trust.
- So far as concerns CSTGL, Mr Howard points to a letter from CSTGL to the husband dated 4 February 1992 formally requesting repayment of a loan of £3,363.30 made to him by one of the trusts. Mr Howard also points to the letter from CSTGL dated 18 February 1994 relied on by Mr Moor as in fact demonstrating quite the reverse of what Mr Moor would have me accept. That letter, says Mr Howard, quite clearly shows that CSTGL was not treating the trusts as shams. Moreover, as Mr Howard observes, what CSTGL was actually proposing was a transfer of all the shares out of the trusts not to the husband but to Simon and Zara – something wholly inconsistent with the wife's case that there was a gift to the husband in 1984 and with her case that, the trusts being, as she alleges, shams, the shares belong and have always belonged to the husband, as indeed with her case that the shares were intended to be transferred back to him as soon as his divorce from his first wife had been finalised. In relation to the same period, Mr Howard can also point to a letter written by the husband on 23 June 1993 which, he asserts, and I agree, shows the husband himself treating the trusts as entirely valid.
- So far as concerns the present trustees – the interveners – Mr St George was clear and unequivocal in his written evidence:
"I understand that the independence of my firm and myself as trustees of the two discretionary trusts from the [A] family and specifically from [the husband] has been put in question. I wish to say on this issue that we have always acted independently of any party or beneficiary in our administration and conduct of the trust business. Where necessary we have taken our own independent advice. We have formulated our procedures taken our decisions and pursued our conduct of the trust without influence from or regard to any particular member of the [A] family or any faction in it."
And as Mr Wagstaffe correctly observed, Mr St George's oral evidence was in similar vein.
- Mr Wagstaffe submits that if I accept that account, as of course he says I should, then the wife's case on sham necessarily collapses as a matter of law and that in those circumstances I can and should summarily dismiss her case on that ground alone. He submits robustly that unless I reject Mr St George's evidence in toto the allegation that the trusts are a sham cannot possibly succeed. I agree.
- In my judgment the wife's case on sham fails for all the reasons identified by Mr Howard and Mr Wagstaffe. At the end of the day, and boiling the matter down to essentials, her case on sham fails on two quite separate grounds:
i) As a matter of fact the wife cannot make good any case of sham against the current trustees, the interveners. I have no hesitation whatever in accepting Mr St George's evidence. He was patently honest and sincere when he asserted, as I unhesitatingly accept, that he and his co-trustees have at all times acted in good faith as professional persons conscientiously performing their fiduciary duties as the trustees of the two trusts. In the light of that finding the entire case of sham necessarily collapses as a matter of law, whatever may have gone on before.
ii) But further, and in any event, the wife, for reasons which I have already explained, cannot as a matter of fact make good her case against the original trustees. The wife has not even begun to make good her case that the four original trustees were knowing parties to a sham. There is not a shred of evidence to justify a finding of sham against any of these four professional men.
As a matter of law either finding is, for reasons I have explained, fatal to the wife's case on sham. Taken together they mean that her case on sham must fail even if I am wrong in my analysis of the law in paragraphs [41]-[49] above.
- The wife's case on sham is and probably always was quite hopeless. In my judgment it should probably never have been brought. And even if it was properly brought it should not have been pursued. I cannot help thinking that it was always doomed to complete failure. Certainly, and for all the reasons given by Mr Wagstaffe, it was doomed the moment Mr St George's witness statement was filed and it became apparent that he was prepared to go into the witness box to defend himself. At that point the wife and her advisers were faced with a simple if stark choice: they could either accept Mr St George's evidence – which would have been the end of their case – or they could, if they thought they had the material to justify such an attack, have mounted a frontal attack on Mr St George's credibility and professional integrity. Understandably, Mr Moor shrank from the latter course. But a case which, as I have said, should probably never have been brought, was allowed to continue, limping on to inevitable defeat and, in the process, significantly increasing both the length and the cost of the proceedings.
Thomas v Thomas
- The classic statement of the principle is to be found in the judgment of Waite LJ in Thomas v Thomas [1995] 2 FLR 668 at page 670:
"the court is not obliged to limit its orders exclusively to resources of capital or income which are shown actually to exist. The availability of unidentified resources may, for example, be inferred from a spouse's expenditure or style of living, or from his inability or unwillingness to allow the complexity of his affairs to be penetrated with the precision necessary to ascertain his actual wealth or the degree of liquidity of his assets. Another is that where a spouse enjoys access to wealth but no absolute entitlement to it (as in the case, for example, of a beneficiary under a discretionary trust or someone who is dependent on the generosity of a relative), the court will not act in direct invasion of the rights of, or usurp the discretion exercisable by, a third party. Nor will it put upon a third party undue pressure to act in a way which will enhance the means of the maintaining spouse. This does not, however, mean that the court acts in total disregard of the potential availability of wealth from sources owned or administered by others. There will be occasions when it becomes permissible for a judge deliberately to frame his orders in a form which affords judicious encouragement to third parties to provide the maintaining spouse with the means to comply with the court's view of the justice of the case. There are bound to be instances where the boundary between improper pressure and judicious encouragement proves to be a fine one, and it will require attention to the particular circumstances of each case to see whether it has been crossed."
- Glidewell LJ in the same case summarised the relevant principles at page 678 as follows:
"(a) Where a husband can only raise further capital, or additional income, as the result of a decision made at the discretion of trustees, the court should not put improper pressure on the trustees to exercise that discretion for the benefit of the wife.
(b) The court should not, however, be 'misled by appearances'; it should 'look at the reality of the situation'.
(c) If on the balance of probability the evidence shows that, if trustees exercised their discretion to release more capital or income to a husband, the interests of the trust or of other beneficiaries would not be appreciably damaged, the court can assume that a genuine request for the exercise of such discretion would probably be met by a favourable response. In that situation if the court decides that it would be reasonable for a husband to seek to persuade trustees to release more capital or income to him to enable him to make proper financial provision for his children and his former wife, the court would not in so deciding be putting improper pressure on the trustees."
- The most recent exploration of these issues in the Court of Appeal is to be found in the judgment of Wilson LJ in Charman v Charman [2005] EWCA Civ 1606, [2006] 2 FLR 422, at paras [12]-[13]:
"[12] … Superficially the question is easily framed as being whether the trust is a financial 'resource' of the husband for the purpose of s 25(2)(a) of the Matrimonial Causes Act 1973 (the 1973 Act). But what does the word 'resource' mean in this context? In my view, when properly focused, that central question is simply whether, if the husband were to request it to advance the whole (or part) of the capital of the trust to him, the trustee would be likely to do so. In other cases the question has been formulated in terms of whether the spouse has real or effective control over the trust. At times I have myself formulated it in that way. But, unless the situation is one in which there is ground for doubting whether the trustee is properly discharging its duties or would be likely to do so, it seems to me on reflection that such a formulation is not entirely apposite …
[13] Thus in effect, albeit with one small qualification, I agree with the suggestion of Butler-Sloss LJ in this court in Browne v Browne [1989] 1 FLR 291 at 239D–E that, in this context, the question is more appropriately expressed as whether the spouse has 'immediate access to the funds' of the trust than 'effective control' over it. The qualification relates to the word 'immediate'. In that case the trial judge knew that, if he were to proceed also to order the wife to pay the husband's costs, she would be unable to comply with his orders for her swift payment of a lump sum and costs without recourse to the off-shore trusts over which he found her to have 'effective control': see 295B–C. So the question in that case was whether her access to their funds was immediate. In principle, however, in the light of s 25(2)(a) of the 1973 Act, the question is surely whether the trustee would be likely to advance the capital immediately or in the foreseeable future."
- I was also referred in this connection to the judgment which Mr Nicholas Mostyn QC, sitting as a Deputy Judge, had given a few days earlier in TL v ML and others (Ancillary Relief: Claim against Assets of Extended Family) [2005] EWHC 2860 (Fam), [2006] 1 FLR 1263. I need not refer to his judgment in any detail because in that case the Thomas v Thomas point arose not in the context of some interest under a trust but because it was being said that the husband could expect to be the recipient of bounty from his father. As the Deputy Judge helpfully pointed out at para [86], and I entirely agree:
"a clear distinction is to be drawn between, on the one hand, the position where the person being encouraged is a member of the payer's family and, on the other hand, where he is a trustee in a fiduciary relationship with the payer. In the former case, the payee has no more than a mere spes of bounty which may, at the election of the provider, reasonably or unreasonably, be withheld. In the latter case, the provider has a legal obligation to consider the beneficiary's interests. The very reason for the existence of the trust is to provide benefit for the beneficiary."
He went on to comment at para [88] that:
"If the court makes a reasonable request of trustees to make funds available to meet an ancillary relief award, then it can assume that ordinarily the trustees will accede to such a request. The same cannot be assumed of a request of a mere donor, for it is his prerogative to be unreasonable, if that is his inclination."
- The question, therefore, adopting the language used by Wilson LJ in Charman v Charman [2005] EWCA Civ 1606, [2006] 2 FLR 422, at paras [12]-[13], comes down to this: Can the wife demonstrate that, if asked, the trustees would be "likely", immediately or in the foreseeable future, to exercise their powers in favour of or in some other way for the benefit of the husband?
- In the document dated 15 December 2005 in which he summarised the wife's case, Mr Moor formulated her Thomas v Thomas claim as arising because "as a matter of fact" the husband "controls HDC and can do with it as he wishes." In further written submissions dated 29 August 2006 which he served in accordance with directions I had given on 28 July 2006, Mr Moor formulated her case under Thomas v Thomas as being that the shares held by the two trusts should be included "in full" in the schedule of the husband's assets "as being resources which he controls, has access to and can deal with as he wishes." In his final written submissions dated 18 September 2006 Mr Moor dealt with the matter in a somewhat breezy fashion, contenting himself with the submission that, if the court was not prepared to find that the trusts are shams, then the facts relied upon in support of that part of the wife's case "point inexorably to this being a Thomas/Browne/Charman situation, where the full value of the shares should be included in the matrimonial assets." The only elaboration of this was, first, Mr Moor's assertion that, although there have never been any distributions from the trusts to the husband, this is "not in the least bit surprising" because he has run HDC "in such a way as to ensure that the trustees never receive any return on the shareholding" and, secondly, his comment that the benefit the trustees confer on the husband "is to be passive and to allow him to operate the company, dispose of its assets and increase his loan account without any constraint."
- Both Mr Howard and Mr Wagstaffe accept that, in principle, "judicious encouragement" of the kind described by Waite LJ can be appropriate in a proper case. But they were properly at pains to emphasise the inherent limitations of the doctrine.
- In the first place, although the court can "encourage" it cannot compel. As Mr Wagstaffe put it, and I agree, although the court can encourage a third party to transfer an asset to a party to the marriage, if that third party disregards the court's encouragement, the court has no power under Thomas v Thomas to compel the transfer, for only property owned by a party to the marriage can be the subject of a property adjustment or other order under the Matrimonial Causes Act 1973. Thus, to take a specific example, there is no power in the court, says Mr Wagstaffe, to order the transfer to the wife of the Antigua property, which is owned by HDC. That said, the trustees would have no particular objection to the Antigua property being transferred to the wife so long as (i) such a transfer did not put HDC in difficulties – he did not suggest that it would – and, more importantly, (ii) HDC received full consideration for the transfer (possibly by way of part-exchange for the wife's shares in HDC). Likewise, says Mr Wagstaffe, in relation to HDC's 75% share in the proceeds of sale of Drum Grange. Mr Wagstaffe, in my judgment, is plainly correct on all this.
- Secondly, as Mr Howard pointed out, "judicious encouragement" must not cross the line into improper pressure. He submits that in the present case it would be inappropriate for me to give any "judicious encouragement" because it would in reality amount to improper pressure:
i) In the first place, and in contrast to most cases where encouragement has been given, there is in this case no history of distributions of any sort, capital or income, to the husband or, indeed, to anyone else. Indeed, as Mr Howard points out, referring to the letter of 4 February 1992, on one occasion when CSTGL had lent money from one of the trusts to the husband they wrote requesting repayment.
ii) Secondly, and on the assumption that the case on sham has been rejected, the husband is only one of a number of beneficiaries of family trusts set up by or at the prompting of the husband's father and for the purpose of benefiting all his (the father's) descendents. As Mr Howard put it, these trusts and the surrounding circumstances bear all the hallmarks of dynastic trusts, very different, for instance, from the trusts with which the court was concerned in Browne v Browne [1989] 1 FLR 291.
iii) Thirdly, there is in any event, Mr Howard says, no money to distribute. It would be inappropriate, he says, for the trustees to water down their majority shareholding by selling some of their shares (even if they could find a buyer), just as it would be inappropriate to encourage the trustees to 'help' the husband by agreeing to the declaration of a dividend, carrying in its train serious and undesirable tax consequences. If money is to be extracted from HDC for the wife it should be done by HDC acquiring the wife's shares. Anything else, he submits, will jeopardise the trusts one way or another. As he says, it cannot be in the interests of the trusts or the other beneficiaries for the trustees either to concede their majority control of HDC or to jeopardise HDC's liquidity at what he asserts is this critical stage in its trading history.
I agree with the general thrust of these submissions.
- Thirdly and finally, as pointed out by Mr Wagstaffe, despite the sanguine views expressed by the Deputy Judge in TL v ML and others (Ancillary Relief: Claim against Assets of Extended Family) [2005] EWHC 2860 (Fam), [2006] 1 FLR 1263, at para [88], the court must be careful not to jump too readily to the conclusion that trustees will always accede to "judicious encouragement." I think that in the circumstances it would be as well for me to set out verbatim Mr Wagstaffe's careful written submissions on the point:
"Whilst the court is of course free to give judicious encouragement to the Trustees if it concludes it is appropriate to do so on the facts of this case, the Trustees must (and do) jealously guard their independence in this respect. The court should not assume that the Trustees will automatically or inevitably exercise their discretion in any particular way simply because they are encouraged to do so by the court. By making this submission the Trustees are not indicating an intention to set their face against whatever the court may consider is the right solution as between [the husband and the wife]: they simply make it clear that they have a number of beneficiaries to consider and they will do what they think is right for the class of beneficiaries as a whole. If that requires them to disregard any judicious encouragement, then – respectfully but firmly – disregard it they will …
It is not the Trustees' intention to seek to persuade the court what they (the Trustees) would do in any particular situation. That would come dangerously close to placing a fetter on their own discretion which of course would be inconsistent with their duties as trustees. However the court should be reminded that the financial health of HDC is of paramount importance for the Trustees. The Trustees would be obliged to refuse any such request from [the husband] if the effect of exercising their discretion in [his] favour would be particularly onerous for the company and, indirectly, thereby for the beneficiaries.
In this respect the role which Simon … plays within HDC is plainly of considerable importance. When, by way of illustration, the forensic accountants Mr Walton and Miss Walker gave evidence, they were both of the view that replacing Simon … within HDC would cost the company something in the order of £100,000. Were [the husband] to make a request to the Trustees that they exercise their discretion in such a way as to enable [him] to live more comfortably with the consequences of such an order, the Trustees would inevitably have to give careful consideration to the possible repercussions for HDC itself and for the other beneficiaries. The position of Simon … would be of particular concern in view of his status as an important 'player' within HDC, a shareholder in HDC, the father of two minor beneficiaries under the 1984 settlements and a beneficiary in his own right under those settlements. The Trustees would require considerable persuasion before they complied for instance with a request which had the effect of significantly undermining his ([Simon]'s) position and it is entirely possible that they would refuse point blank a request from [the husband] that had such an effect. The Trustees therefore urge caution when the court is invited by [the wife] to conclude that the Trustees would inevitably advance capital or appoint shares to [the husband] were he to request it to do so."
- That, if I may say so, is an impeccable attitude for the trustees to be adopting – impeccable both as a statement of their duties and as a summary of the kind of considerations which they properly have to take into account in the circumstances in which they currently find themselves.
- Mr Howard, moreover, was understandably at pains to point out that the husband, although he is a beneficiary, is only one of a number of beneficiaries in a class whose numbers may yet increase and that there is at least one other beneficiary – Simon – who, not least because of his important role in HDC, has, it might be thought, a particularly pressing call on the trustees' discretion. He asserts baldly, addressing what Wilson LJ called "the central question", that if asked to advance capital or to assist the husband in some other way the trustees would be unlikely to agree.
- In the light of all the circumstances, and applying the relevant principles, I think one can fairly conclude that, if asked, and if a good case for doing so is put forward, the trustees are likely to be prepared again, as they have been in the past, to waive dividends to which they would otherwise be entitled. In other words, the trustees are likely to be prepared to facilitate, by waiving their dividends, distributions by HDC which are sensibly required either for the purpose of discharging (in whole or in part) the directors' loan accounts or for facilitating compliance with whatever order I may make against the husband. On the other hand, I do not think it likely that the trustees will be prepared to make capital distributions from the trusts for the benefit of the husband or in order to enable him to meet his obligations under any order I may make. It is, of course, possible that the trustees will be prepared to assist the husband in this way, but there is nothing in the history of the trusts thus far to suggest that they will and all the reasons marshalled by Mr Howard to suggest that they will not. For me to suggest that they should would, in my judgment, pass beyond "judicious encouragement" to improper pressure. I decline to do so.
- Before passing from this topic I should record that Mr Moor sought to rely on Coleridge J's judgment in Charman v Charman (No 2) [2006] EWHC 1879 (Fam), [2007] 1 FCR 33. As I read his judgment, Coleridge J did not seek to lay down any new principles; he merely sought to apply well-established principles to the particular facts of that rather unusual case. I would not myself differ in any respect from Coleridge J, but nothing in his judgment assists me in my task of applying those well-established principles in the particular circumstances of the case with which I am concerned.
Cash dealings in HDC
- I turn to the wife's allegation that the husband has been skimming off substantial sums in cash from HDC.
- Since this is an issue which directly engages the credibility of both the husband and the wife it is appropriate at this stage to say something about their behaviour both in the witness box and more generally in the litigation.
- Under the pressure of adversarial proceedings carried on with no little vigour on both sides, each party's allegations against the other have intensified. Both protagonists accuse the other of giving less than frank evidence – that is to put it politely – and, more generally, of various forms of litigation misconduct. Thus Mr Howard accuses the wife of being less than frank in the evidence she put before the court in support of interlocutory applications. He also accuses her of prevarication and worse in her oral evidence before me. Mr Moor for his part makes similar allegations against the husband and points, with justification, to the great difficulties the wife has had throughout much of the litigation in making the husband comply with his obligations of full and frank disclosure.
- I do not propose to rehearse in detail all the allegations and counter-allegations. What is clear is that both the husband and the wife have, at various stages in the litigation, been less – much less – than frank with each other and with the court. And there has been, in different ways and to different degrees, a certain amount of litigation misconduct on both sides. It follows that I must approach the evidence of both the wife and the husband with an appropriate degree of caution. That said, one must keep a sense of proportion. I do not think that either the husband or the wife has set out systematically to deceive the court. And the litigation misconduct is far indeed from the top end of the scale. Certainly there is nothing in any of this to justify any adjustment of the award that would otherwise be appropriate: cf, Tavoulareas v Tavoulareas [1998] 2 FLR 418 at page 426. These matters are relevant to credibility, not to outcome.
- It is common ground that, certainly in the past, HDC did much cash trading; a number of both casual and regular customers paid in cash. It is also clear that both the husband and the wife often used cash in their daily lives, and often in large amounts, when others might have paid by cheque or credit card. There is, of course, nothing unlawful or even suspicious about any of that. The question is whether the company's cash was being skimmed off without going through the books and, by implication, without being declared to the Inland Revenue (now the Revenue and Customs). The wife says that cash – and in very substantial amounts – was being skimmed off in this way. The husband denies it.
- The question is not whether there was cash dealing; there plainly was. The question is whether the cash, to the extent that HDC dealt in cash, was properly recorded in the company's books and accounts, as the husband asserts, or whether, as the wife claims, it was diverted – skimmed off – by the husband.
- The wife's case has, I think, four major strands.
- First, she suspects and believes that cash has indeed been diverted. Her belief may be genuine – I am prepared to accept that it is – but for evidence the wife has to look elsewhere. As Mr Moor very fairly accepted, she is not able to make good her case from her own first-hand knowledge. She is able, I accept, to point to various matters which, at least to a suspicious mind, might be thought consistent with diversion of cash, but none of them is conclusive; each is equally consistent with the husband's case.
- Secondly, the wife relies upon various documents she found – cash summaries and annotated cash envelopes and the like – which, she says, actually show the process by which HDC's cash receipts were diverted by the husband into his own pocket. The husband vehemently denied the allegation, describing how HDC's cash takings were taken home by him, carefully counted and recorded by him and then paid into HDC's bank account. In relation to this part of the case he was in fact able to demonstrate, even though taken by surprise, that in many of the specific instances alleged by the wife the relevant cash had in fact been paid into HDC's bank account. Between them the husband and Mr Howard were able to 'marry up' many of the documents and the specific sums of money which the wife saw as incriminating and supportive of her case with the corresponding bank statements showing that the relevant cash takings had indeed been paid into HDC's bank account. The husband was not able to carry out this exercise in relation to every transaction relied upon by the wife but this was hardly surprising given, first, the amount of time that had passed and the somewhat disorganised state of the relevant documentation and, secondly, the fact that, albeit unintentionally, as the wife would have it, the husband was in effect ambushed and had to respond, at least initially, at very short notice.
- Thirdly, the wife relies upon entries in some of HDC's ledgers seemingly showing that at one time staff were paid, at least partly, in cash. To be precise, what the ledgers which the wife relies upon actually show is that some of the cash paid into HDC by its customers – and, I might note, recorded as such in its ledgers – was used to pay wages in cash. There is, of course, nothing unlawful in paying an employee in cash rather than by cheque or BACS payment, though the practice is much less common nowadays than once upon a time. The question is whether the relevant wages payments, and these cash payments in particular, were properly recorded in HDC's books, so that, for example, proper deductions were made for PAYE and NI. The ledgers relied on by the wife do not enable one to answer that question, save inferentially, for it might be thought unlikely that cash takings intended to be diverted, even if used to pay employees in cash for the purpose of avoiding payment of PAYE and NI, would be carefully recorded in the way in which they were in ledgers which might at any time be called for and examined by HDC's auditors.
- The husband had no completely satisfactory explanation for what had happened – it was all a long time ago and he claimed no longer to have access to other company books which might have thrown some further light on this – but he denied that it showed him skimming off money for his own purposes. The clear impression I was left with having heard all the evidence on the point was that, at worst, this may have been – and I emphasise may have been; the evidence does not warrant any such finding – a tax fraud designed to save PAYE and NI. I am in fact very sceptical as to even that, for it is unlikely that the records of such a fraud would have been recorded in such carefully, indeed meticulously, maintained ledgers. And in any event, as one of the forensic accountants, Mr Roger Walton, pointed out in his evidence, such a fraud has a negligible effect on a company's profits. It is essentially neutral so far as profits are concerned, because all one is doing is to remove from the income side of the accounts an amount which, because it is going out in wages, could properly have been set off as an expense on the other side of the ledger.
- Fourthly, the wife relies upon the evidence of a former employee, a Mr G. Mr G's evidence is tainted and was, I regret to say, demonstrably unsatisfactory in certain crucial respects. Put shortly, Mr G was offered a sum of £50,000 by the wife to give evidence, that sum to be paid out of whatever the wife recovers in the litigation. Although the wife said that this was a sum which Mr G was owed by way of bonus – owed, it may be noted, by HDC and not by her – the fact is that he was being paid for his evidence, knew that he was being paid for his evidence, knew that his evidence was crucial in relation to the allegation of cash dealing, and knew perfectly well what the wife wanted to hear him saying in the witness box. That is what I find insofar as it was not in fact admitted either by the wife or by Mr G.
- Moreover, neither the wife nor, more importantly for present purposes, Mr G was at all frank in the evidence they gave as to the circumstances of the meeting in Aberdeen at which they discussed the arrangement under which he would give evidence. The truth, insofar as it emerged at all, had to be dragged out of each of them in cross-examination. I am far from satisfied that I have, even now, a frank and accurate account of their discussion.
- More generally, I found Mr G to be an unsatisfactory witness whose evidence could not necessarily be accepted at face value. Mr Moor makes the important point that in certain respects Mr G's evidence was corroborated by other evidence or could be shown by other evidence to be correct. That I accept. But the immediate question for present purposes is whether I can safely rely upon his uncorroborated evidence in relation to the 'cash' allegations. Mr Howard submits that I cannot. I have to agree. Mr Moor rightly says that the ultimate question is not whether Mr G was paid for his evidence but whether his evidence is truthful and reliable. I agree. But my assessment is that in many respects Mr G's evidence, even if not consciously false, was far from reliable. I am unable to accept his evidence in the absence of corroboration. Specifically, I am unable to accept his uncorroborated evidence relating to the 'cash' allegations.
- Quite apart from all the other deficiencies in the case the wife seeks to make against the husband, there is, as Mr Howard pointed out, a fundamental difficulty about her case. The matters of which she is able to make specific complaint all took place a long time ago – in some cases as long ago as 1989/1991 – and, more to the point, before the installation of HDC's current computerised stock control and accounting systems. Mr Walton's opinion was that, given this system, cash drawings would only be possible if there was collusive fraud – that is, fraud colluded in by the relevant members of HDC's staff – and he had found no evidence of it. I accept his evidence.
- The system was described to me by various witnesses and I was shown some of the computer print-outs. I also heard evidence from the various employees – L, W and R – who would have had to be involved in varying degrees in, or at least aware of, any such fraud. Suffice it to say that I found each of them to be an entirely honest and for the most part entirely reliable witness. None of them, I am satisfied, would have been party to or remained silent in the knowledge of any such fraud, just as I am sure that they would frankly have told me about anything 'fishy' that might have come to their attention. I bear in mind that they are all employees of HDC, and therefore in a sense beholden to the husband, but all, as I have said, were entirely honest witnesses. All or at least some of them would have known if there was anything wrong going on, as it were, right under their noses. It is clear that none of them was aware of anything out of the ordinary.
- If there has been any illicit diversion of cash it is, I am satisfied, long ago in the past. There has been no illicit diversion of cash in the recent past. Nor is there any at present.
- As Mr Wagstaffe points out, the trustees would have an interest in HDC recovering any cash that has been wrongly diverted by the husband. In this context it is of interest to note the submissions he makes on behalf of the trustees in the light of all the evidence I have now heard. He suggests that it would appear difficult to conclude that there has been significant undeclared cash trading on the basis of the evidence put before the court. He records the trustees' assessment as being that there are grave difficulties in placing any substantial weight on Mr G's evidence. He submits that I simply cannot be satisfied that Mr G's evidence was the truth, the whole truth and nothing but the truth. In contrast, he submits that I can safely rely on the evidence of L as indicating that, whatever may have happened in the past, the systems now in place at HDC make it very difficult if not impossible for any significant volume of cash trading to take place.
- The trustees' views are not, of course, determinative, and Mr Wagstaffe makes clear that the trustees will, of course, be guided in the final analysis by my findings and will then, in the light of my findings, act in whichever way seems to them to be in the best interests of the beneficiaries. But it is interesting that the trustees, who I am quite satisfied have no particular axe to grind and whose only concern is to safeguard the position of their beneficiaries, should be so singularly unimpressed with what has emerged in relation to allegations which, if they had substance, the trustees would have every interest in pursuing themselves on behalf of their beneficiaries.
- Be that as it may, the wife has, in my judgment, failed to make good her allegations.
Diversion of business from HDC to FHP
- In relation to the allegation that HDC's business has been diverted to FHP, Mr Moor identifies the two issues to be addressed: (i) was there parallel trading? and (ii) if so, what was the level of the husband's knowledge and involvement?
- That there was parallel trading, that FHP was undercutting HDC, and moreover using HDC's processing facilities to do so (and at a cost unduly advantageous to FHP), and that the effect of all this may in principle have been to divert some profit away from HDC, is pretty clear, just as it is a fair inference that the fact that FHP was established less than a month after the wife obtained the first freezing order is more than a mere coincidence. But this of itself does not take the wife very far. For unless she can demonstrate, and in my judgment she cannot, that the husband was in some way involved in or privy to what FHP was up to, the only outcome would be to leave HDC in a position where, if it was minded to, it might be able to pursue a claim against FHP – in reality against those, Simon and Melinda, responsible for its activities – assuming that is, that it could be shown that FHP did actually divert profit away from HDC.
- Although there is clear evidence showing that FHP did make a profit (though only in the year to 30 November 2004, when its net profit was £73,040; in the next year it made a loss of £36,936 and since then it has been dormant), there is no very clear evidence to show that this is profit which would otherwise have accrued to HDC, whereas on the other hand, as Mr Howard points out, HDC was paid (albeit perhaps at a somewhat depressed rate) for processing FHP's birds.
- Mr Howard submits that there is no adequate evidence to show that any significant profits ever were diverted from HDC to FHP. He submits, moreover, that even if he is wrong on that, HDC's only remedy would be to sue Simon and Melinda, a course which, all other considerations apart, is hardly an appealing prospect given the very real risk that Simon will simply walk away from HDC if it becomes too heavy-handed. Mr Howard also points to the evidence of both the forensic accountants, Mr Walton and Ms Julia Walker, agreeing that this level of profit would have no impact on the valuation of HDC, because it does not add any goodwill – a hardly surprising conclusion, as Mr Howard points out, bearing in mind that FHP traded for only two years, the second at a loss, and is now dormant. There is, as it seems to me, compelling force in these submissions.
- The fact that the start of FHP's business occurred so soon after the freezing order was obtained is highly suggestive, but not necessarily suggestive of any wrongdoing by the husband. After all, Simon, whose destiny was strongly linked with HDC but who held only one share, must have been concerned about the possible ramifications for him of the freezing order. And this is not mere speculation. Simon did not give evidence but Melinda did and, as Mr Moor pointed out, she admitted whilst giving evidence that "my intention was to get some income away from HDC." Moreover, as Mr Howard points out, there is not a shred of evidence showing that any of the money made by FHP has ever reached the husband.
- Mr Moor submits that, given his involvement in HDC's business, it is incredible that the husband did not know what was going on in relation to FHP. And he relies upon Mr G's evidence that the husband did indeed know perfectly well what was going on. But Mr G's is the only direct evidence Mr Moor is able to rely upon in support of this and, as I have already indicated, I am not able to accept his uncorroborated evidence. As Mr Wagstaffe aptly said, whatever the truth may be in relation to the parallel trading allegations, Mr G does not help to uncover it.
- As against this Mr Howard is able to rely not merely upon the denials of the husband, whose evidence on this point I accept, but also upon the evidence of Melinda and W. Melinda's evidence was that the husband was very cross when he found out about FHP. I bear in mind Mr Moor's caution to me not to rely too uncritically upon Melinda's evidence, but on this crucial point I accept her evidence. W described to me how when she had asked the husband about FHP he had replied that he did not know anything about such a customer. It was plain that she believed him when he said this. W was a manifestly truthful and reliable witness whose evidence I have no hesitation in accepting.
- I conclude in the light of all the evidence that, although there was parallel trading, the husband did not know what was going on, that there is inadequate evidence to show that whatever profit FHP made was profit that would otherwise have accrued to HDC, and that whatever profit may in fact have been lost to HDC in the past does not affect HDC's current value. Moreover, even if HDC does in principle have a cause of action either against FHP and/or against Simon and/or Melinda, it does not seem to me that there can in reality be any value in such a claim. On the contrary, the consequences for HDC were it even to think about suing Simon and Melinda would in all probability be little short of disastrous for HDC, given the centrality of Simon's role in HDC.
Value of HDC
- There has been an immense amount of evidence and argument about the valuation of HDC. In circumstances where it is accepted on both sides that, for a variety of reasons, an absolutely precise valuation is impossible, I propose to cut through most of this and focus on essentials.
- Expert evidence has been provided by Mr Shane Kirton but the crucial evidence is that of the two forensic accountants, Mr Walton and Ms Walker. They each produced a number of individual reports and then collaborated in producing four joint statements. I propose to start with their Third Joint Statement dated 8 December 2005. At that point Mr Kirton, Mr Walton and Ms Walker were agreed that on certain assumptions (including that all cash takings had been properly recorded but that there had been a diversion of profits to FHP, though not to any other entity) the future maintainable annual net profit before tax of HDC (after all costs of operation but before the costs of management services provided by the husband and Simon) was £450,000.
- In their Fourth Joint Statement dated 21 July 2006 Mr Walton and Ms Walker set out tabulations of HDC's sales, gross profit and net profit before tax for the years ended 30 June 2000-2006. In simplified form what their tables show is this (figures in £'000):
| |
Sales |
Gross profit |
Net profit |
Adjusted net profit* |
Adjusted net profit* |
| Adjusted net profit* |
Adjusted net profit* |
Adjusted net profit* |
Adjusted net profit* |
Mr Walton |
Ms Walker |
| 2000 |
7,118 |
481 |
389 |
|
|
| 2001 |
8,745 |
663 |
462 |
|
|
| 2002 |
9,913 |
558 |
442 |
|
|
| 2003 |
11,637 |
516 |
375 |
163 |
183 |
| 2004 |
11,736 |
497 |
72 |
28 |
48 |
| 2005 |
12,101 |
944 |
551 |
428 |
498 |
| 2006 |
10,693 |
193 |
58 |
(98) |
(28) |
| * Adjusted to take account of various matters including notional remuneration for the husband and Simon. The differences between Mr Walton and Ms Walker reflect different views as to the appropriate amount of this remuneration (see below). |
* Adjusted to take account of various matters including notional remuneration for the husband and Simon. The differences between Mr Walton and Ms Walker reflect different views as to the appropriate amount of this remuneration (see below). |
* Adjusted to take account of various matters including notional remuneration for the husband and Simon. The differences between Mr Walton and Ms Walker reflect different views as to the appropriate amount of this remuneration (see below). |
* Adjusted to take account of various matters including notional remuneration for the husband and Simon. The differences between Mr Walton and Ms Walker reflect different views as to the appropriate amount of this remuneration (see below). |
* Adjusted to take account of various matters including notional remuneration for the husband and Simon. The differences between Mr Walton and Ms Walker reflect different views as to the appropriate amount of this remuneration (see below). |
* Adjusted to take account of various matters including notional remuneration for the husband and Simon. The differences between Mr Walton and Ms Walker reflect different views as to the appropriate amount of this remuneration (see below). |
- In their Fourth Joint Statement Mr Walton and Ms Walker comment that based on the accounts to 30 June 2005 (not available to them when they prepared their Third Joint Statement) the net profit figure at that date of £450,000 "had most likely been understated." They made clear that they were unable to comment on the accuracy of the draft management accounts for the year to 30 June 2006 (the source of the figures set out above).
- Nonetheless in Appendix 4 to their Fourth Joint Statement, Mr Walton and Ms Walker set out their valuation of HDC (after repayment of directors' loans) in the agreed figure of £2,763,029, subject to this, that Ms Walker suggested that that figure should be increased to £4,607,346 to take account of goodwill which she valued at £1,844,317. That figure was arrived at by applying a p/e multiplier of 10 to the figure of £315,000 maintainable profit net of tax (£450,000 net profit before tax less £135,000 tax) and then deducting from the resulting figure of £3,150,000 an aggregate amount of £1,305,683, being the value of the business assets to be sold.
- It is important to appreciate that Ms Walker includes the figure of £1,844,317 for profit "as a guide only" and accepts that:
"if the 2006 draft management accounts are an accurate and complete account of the activities of [HDC] and the market conditions continue to impact negatively on [HDC's] business, then there would be no goodwill to be included in the valuation of [HDC], which would be valued on its net assets in the same way as the method of valuation adoption by [Mr Walton]."
Mr Walton summarises his approach in the Fourth Joint Statement:
"[HDC] is a going concern and despite the current trading difficulties is likely to have sufficient cash and other resources to enable it to return to a reasonable level of profitability if market conditions allow this (including dealing with the probable effects of the inevitable outbreak of Avian flu in the United Kingdom) … the value of [HDC] should therefore be assessed on the going concern value of its net assets at £2,645,459 without any addition for goodwill and also without any deduction or discount from assets from any effects of their forced realisation."
- In their Fourth Joint Statement Mr Walton and Ms Walker record that HDC had a cash balance of £2,570,000 as of 30 June 2005, which would reduce to £1,900,000 after payment of tax on the distribution of the Antigua property and repayment of the directors' overdrawn loans. They observe that HDC has no borrowings and that its land is mortgage free. They comment that HDC "will need to maintain sufficient cash resources to withstand an Avian flu outbreak and for capital investment (should such investment be necessary to trade profitably)."
- If HDC is worth £2,763,029 (Mr Walton's figure) the husband's shares, making no discount for the fact that they are a minority interest, are worth £635,497 before CGT and the wife's, on the same assumption, are worth £634,944. If HDC is worth £4,607,346 (Ms Walker's figure) the respective figures are £1,059,690 and £1,058,768.
- Mr Howard submits that two adjustments to the figure of £2,763,029 are appropriate. First, he submits that a deduction of £38,000 has to be made to take account of the tax that will be payable if the wife, as a result of my order, takes the Antigua property in specie. I do not agree for, as Mr Howard himself submits, if the wife wishes to acquire the Antigua property as part of her divorce settlement she can do so only by purchasing it from HDC (no doubt using monies paid to her as part of the divorce settlement) and on the basis, for otherwise neither HDC nor the trustees are likely to agree to such a sale, that she indemnifies HDC against the tax liability.
- Secondly, he submits that the figure for the directors' loan account balances, agreed by Mr Walton and Ms Walker in Appendix 4 to their Fourth Joint Statement in the sum of £1,890,858 (to which had to be added tax on distribution in the sum of £630,000), have increased by £227,943 (plus tax of £76,196) so that Mr Walton's net valuation figure of £2,763,029 reduces to £2,458,890. The figure of £227,943 has two components: most of it comprises monies advanced to enable the payment of litigation costs incurred by the husband and by the trustees; £40,000 represents additional drawings in the normal course. I agree with Mr Moor that it is not appropriate to make any adjustment to reflect drawings in relation to costs (see further below). But an adjustment in relation to the £40,000 (to which has to be added tax of £13,333) is appropriate, so I propose to reduce Mr Walton's net valuation figure of £2,763,029 to £2,709,695.
- I propose to proceed, therefore, on the basis that, apart from any element of goodwill, HDC is worth £2,709,695.
- The major argument has been about goodwill.
- Mr Moor submits that I must be cautious in attaching too much credence and weight to the management accounts for the year to 30 June 2006. He points out that, although the husband must have known the true position which would be revealed by the full accounts for the year to 30 June 2005 when they subsequently became available, he was silent on the matter whilst giving evidence before me in December 2005. So, he says, the husband is not to be relied upon. He questions the gloomy picture of HDC's future prospects painted by the husband. He points out that very large sums of money are being spent on plant and machinery – which must betoken some degree of confidence in HDC's future prospects and which is in any event likely, together with other initiatives being proposed by the husband, to improve both productivity and profitability. He points also to parts of the husband's own evidence recognising both that the poor results in the year to 30 June 2006 were in part due to exceptional circumstances and that trade, which has recently up-turned, is currently good and profitable. Mr Howard, for his part, submits that there is no reason for me not to take the management accounts at face value and that the up-turn in trade relied on by Mr Moor does not betoken a long-term improvement.
- Mr Moor recognises that some account has to be taken of what he accepts are, at least in part, the husband's legitimate concerns about the possible impact on HDC if avian flu arrives. But he says that nobody has a crystal ball and that there are many imponderables: we do not know if avian flu will arrive and get as far as HDC's premises; and we do not know how the Government will respond either in terms of allowing the industry (and HDC in particular) to continue rather than perhaps closing it down or in terms of any compensation that may be payable. He submits that this is all so uncertain that it would be unfair on the wife to take it into account other than in a very broad brush way.
- Mr Moor submits that in principle I should accept Ms Walker's approach in relation to goodwill. Mr Walton's approach, refusing to attribute any value at all to goodwill, is, he says, too cautious. The history of profitability, the large amounts recently spent on capital works and even the husband's rather muted optimism, all go to show, says Mr Moor, that it is wrong to ignore future maintainable earnings and goodwill.
- Mr Howard's attack on Ms Walker's approach to goodwill is two-pronged. In the first place he disputes that there is any sound basis for accepting that there is any goodwill in HDC at all. He submits that "it is hard to conceive how there could conceivably be any goodwill in this business with the spectre of Avian flu … it really makes no sense to attribute goodwill to such a threatened business … it is inconceivable in the current situation that anyone would pay £1.8 million for the goodwill of this business. The proposition is absurd because the spectre of Avian flu removes the goodwill."
- Secondly, and in any event, he submits that Ms Walker's valuation of the goodwill ignores the essential, if at present notional, remuneration costs of the husband and Simon. As he points out, both Mr Walton and Ms Walker had proceeded in their Fourth Joint Statement on the agreed basis that the profits should be further adjusted to take into account notional remuneration, though they differed as to whether this should be, as Mr Walton would say, £145,000 for the years to 30 June 2003 and 2004 and £195,000 thereafter, or, as Ms Walker would say, £125,000 throughout. As Mr Howard also points out, referring to the adjusted net profit figures which I have set out in the last two columns of the Table, Mr Walton's figures produce an average adjusted net profit over the four years of only £130,000, whilst even Ms Walker's average is only £175,250. It is therefore, he submits, quite impossible to justify a goodwill calculation based upon future maintainable earnings of £450,000, quite apart from the fact that 2006 in fact constituted a loss. Mr Moor's only reasoned response to this complaint is to point out, correctly but, in the light of my findings, irrelevantly, that Ms Walker has arrived at her valuation without including any add-back for FHP's trading or for undeclared cash takings.
- As I understand Ms Walker's methodology, as set out in Note 3 to Appendix 4 to the Fourth Joint Statement – and this after all reflects the fundamental principle that goodwill is the difference (if any) between the total value of a company assessed by capitalising its profit stream and the total value of its tangible assets –, once one has calculated the figure (in Note 3, £3,150,000) obtained by applying the appropriate p/e multiplier (in Ms Walker's view, 10) to the future maintainable earnings net of tax at 30% (in her view, £450,000 less tax of £135,000), one has to deduct the value of the business assets to be sold which, on the values she and Mr Walton have agreed, amounts, as I have said, to no less than £1,305,683. In other words, there is only any goodwill in HDC if the capitalised value of its anticipated profits exceeds £1,305,683.
- Similar calculations to those undertaken by Ms Walker (and in each case assuming future maintainable net earnings of £450,000 and a p/e multiplier of 10) show that if one takes her own average adjusted profit figure of £175,250, the resulting figure is only £1,226,750. In other words there is no goodwill. If one takes an adjusted profit figure of £255,000 (that is, £450,000 less notional remuneration costs in Mr Walton's figure of £195,000) the resulting figure is £1,785,000, producing a figure for goodwill, after deducting £1,305,683, of £479,317. The comparable figure if one takes Ms Walker's remuneration figure of £125,000 is £2,275,000 which, after deducting £1,305,683, produces a figure for goodwill of £969,317. If one takes the mid-point between Mr Walton's figure and Ms Walker's figure, ie, £160,000, the comparable figure is £2,030,000, producing a figure for goodwill of £724,317.
- All of these calculations assume that the appropriate p/e multiplier is 10. The goodwill figures of course reduce if one takes a lower p/e multiplier. Thus, for example, if one takes Ms Walker's remuneration figure of £125,000 and applies a p/e multiple of 5 the resulting figure is only £1,137,500, which being less than £1,305,683 shows that there is no good will. One can re-work the calculation the other way. Taking Mr Walton's remuneration figure of £195,000, and still assuming that the maintainable profits are £450,000, there will be no goodwill unless the appropriate p/e multiplier is at least 7.315. If one takes the mid-point remuneration figure of £160,000, but otherwise making the same assumption, there will be no goodwill unless the appropriate p/e multiplier is at least 6.432.
- These various calculations are merely intended to illustrate the sensitivity of the overall goodwill figure (if any) to the three critical assumptions which necessarily underlie every one of the calculations: the validity of the assumption that £450,000 is the appropriate figure for maintainable net profits (making no allowance for notional remuneration costs); the amount properly to be attributed to those costs; and the appropriate p/e multiplier. What, as it seems to me, the various calculations indicate, is that there will not be any very significant goodwill unless both (a) there is a significant gap between the figure for maintainable net profits (making no allowance for notional remuneration costs) and the notional remuneration costs and (b) a p/e multiple significantly higher than 5 can be justified.
- Whilst I am persuaded that Mr Walton's approach is probably too cautious I am satisfied that Ms Walker's approach is both flawed and in any event too optimistic. Doing the best I can I think that it would be right to attribute some goodwill to HDC and to assess the relevant figure as being somewhere in the region of £300,000.
- I propose, therefore, to proceed on the basis that HDC is worth £3,000,000 (ie, £2,709,695 + c £300,000 = £3,000,000).
The ownership of CWM
- Mr Moor submits that it is clear on the evidence that the wife has indeed given CWM to her daughter, Jane, that it was reasonable for her to do so – a woman of the wife's age was not best suited to be promoting a fitness aid which, as she put it in her evidence, involved bouncing around shopping centres in a leotard, the profits were declining, the business was in need of fresh impetus and ideas which Jane was able to provide and it was reasonable for the wife to be making provision for the child of her first marriage in just the same way as the husband had made provision for the children of his first marriage –, that Jane is now running the business full-time and that there really is no evidence that the wife is going to 'take up the reins' again now.
- Mr Howard says that the wife is not an honest witness and that I should not accept her evidence. He submits that the distancing of herself from CWM is a "charade", that she has merely "parked it" in her daughter's name to await the end of the proceedings, and that when the dust has settled she will indeed 'take up the reins' again. He points to the fact that the wife's daughter was brought into CWM only nine days after the divorce proceedings were commenced on 22 May 2001.
- Mr Howard says that on the wife's own admission CWM made gross profits of some £830,000 over a period of about 10 years. He submits that I should value CWM on the basis that it has a sustainable earning capacity of £80,000 per annum gross (though he had to concede that the accounts for the year to 31 May 2000, when the wife was still a sole trader, showed profits of only £24,500) and suggests that on the basis of maintainable gross profits of £80,000 CWM "probably" has a value if sold on the open market of over £1,000,000. Mr Moor describes the last submission as "remarkable" and points out that it is a figure which has no evidential foundation and which, indeed, was first mentioned in written submissions that Mr Howard delivered on 12 September 2006, well after the evidence had concluded. Mr Moor's submissions were delivered on 18 September 2006. Mr Howard's submissions in reply dated 2 November 2006 were largely silent on the subject of CWM.
- As will be apparent by now, the wife's evidence in a number of respects was neither altogether satisfactory nor convincing. But so far as concerns CWM I am not prepared to find that her evidence was other than frank and honest. I accept that she has divested herself of CWM in favour of her daughter and I cannot say that, in all the circumstances, it was unreasonable of her to do so. I recognise that it may be that her daughter will indeed, after the dust has settled, either take the wife back into the business or in some other way enable the wife to share in the profits of CWM's business. But that is no more a resource that can be taken into account in any quantified manner than the husband's hopes or expectations under the trusts. I should add that I am, in any event, wholly unpersuaded that CWM is worth anything like as much as Mr Howard would have me believe.
- Mr Howard also suggested that the wife dealt in undeclared cash when she owned and operated CWM. There is no concrete evidence to support that allegation and I accept the wife's denials.
The matrimonial assets
- Having got this far there are few remaining issues as to either the identity or the value of the matrimonial assets that have to be taken into account.
- Drum Grange, as I have said, has now been sold for £2,700,000. The net proceeds of sale are payable, it is accepted, as to 25% – £674,130 – to the wife and as to 75% to HDC. HDC's interest in the proceeds of sale has been taken into account in the valuation of HDC, as has the value of the property in Antigua. The contents of Drum Grange are worth approximately £80,000 and it is accepted that they should go to the wife. The wife has jewellery worth £23,000. The husband's pension fund, as I have said, is worth £717,576 and he has shares in a quoted company worth £13,489. The wife has a car which she values at £11,000 and the husband at £15,000. I propose to proceed on the basis of the wife's figure. The husband has a car which he bought in 2003 for £104,000 but which, according to Mr Howard, relying on Glass's guide, is worth only £47,000. The husband's car has a number plate which is said by Mr Moor to have "considerable" value; I have no evidence on the point. There is dispute about the amount which the husband may have in an account at Lloyds TSB, though it would seem not to be very large. Mr Moor submits, with the support of Ms Walker, that I should treat the husband as having additional capital of £175,000 (representing what he suggests is the aggregate value of the husband's car and number plate, the monies in the Lloyds TSB account and what is referred to as "money unreasonably removed from HDC" by the husband and Simon through extravagant drawings on their directors' loan accounts). Mr Howard rightly disputes this.
- So far as concerns the husband's interests under the trusts and the wife's expectations (if any) in relation to CWM, I propose to leave them out of the financial reckoning. If it might be going too far to say that they simply cancel each other out, any difference between any hypothetical values which could with any plausibility at all be attached to these two resources seems to me to be too speculative, and in all probability not so large, as to justify bringing it into account.
- The husband has an ongoing maintenance liability to his first wife which Mr Howard says should be treated as capitalised in the sum of £100,000 and set off against the husband's assets. Mr Moor points out that there is no evidence that the husband's first wife intends to make any such application and submits, correctly in my view, that this is an income obligation which the husband cannot deduct as though it is a capital liability.
- I take HDC to be worth £3,000,000. Mr Howard is content that I value the husband's and the wife's shares pro rata and without making any allowance for the fact that they are minority interests.
- The matrimonial assets can therefore be tabulated as follows:
| |
Husband |
Wife |
Total |
| |
|
|
|
| HDC shares |
690,000 |
689,400 |
1,379,400 |
| Less CGT (20%) |
138,000 |
137,880 |
275,880 |
| HDC shares – net |
552,000 |
551,520 |
1,103,520 |
| Drum Grange |
|
674,130 |
674,130 |
| Contents (to wife) |
|
80,000 |
80,000 |
| Jewellery |
|
23,000 |
23,000 |
| Shares |
13,489 |
|
13,489 |
| Lloyds TSB |
? |
|
? |
| Cars |
47,000 |
11,000 |
58,000 |
| Pension fund |
717,576 |
|
717,576 |
| Total |
1,330,065 |
1,339,650 |
2,669,715 |
Division of the matrimonial assets
- The wife's case is that the assets should be divided equally.
- Mr Howard takes issue to some extent with this.
- In the first place, he says that HDC was an inherited asset in existence prior to the marriage and asserts that the family regard it as a dynastic business to be passed down from generation to generation. He refers to the observations in Miller v Miller, McFarlane v McFarlane [2006] UKHL 24, [2006] 1 FLR 1186, of Lord Nicholls of Birknhead at para [20] and of Baroness Hale of Richmond at para [148], where reference was made to my own decision in P v P (Inherited Property) [2004] EWHC 1364 (Fam), [2005] 1 FLR 576. As against that, and as I pointed out in P v P (Inherited Property) [2004] EWHC 1364 (Fam), [2005] 1 FLR 576, at para [32], one must not overlook Thorpe LJ's comment in Parra v Parra [2002] EWCA Civ 1886, [2003] 1 FLR 942, at [27], that:
"As a matter of principle … judges should give considerable weight to the property arrangements made during marriage."
In the present case it was the husband himself who put the shares in HDC which she currently owns into the wife's name.
- There has been some dispute as to just how thriving HDC was when the wife first came on the scene. It does not seem to me to matter very much. HDC is (or, to be precise, the husband's and the wife's shares in HDC are) a family asset.
- Mr Howard says that the husband should be entitled to share in the increase in value of the 25% of Drum Grange which was not owned by HDC because (a) it was the matrimonial home and (b) he needs liquid capital to make a down payment on a house for himself and to buy some furniture. He seeks payment to the husband of a lump sum of £125,000 out of the 25%. He say that some departure from equality is also justified given that the wife will be receiving hard cash whereas the husband will be left with much of his wealth risk-laden and tied up in a company facing the spectre of avian flu. He makes a number of other points.
- That said, Mr Howard rightly accepts that the wife and the husband are in a broadly similar situation as regards needs, having what he says are essentially identical housing needs, though he suggests that the husband is in a weaker position than the wife, being closer (and, indeed, close) to retiring age and having had some health problems.
- This was by modern standards a longish marriage – I decline to become engaged in the furious semantic debate between counsel as to whether it qualifies as a "long" marriage – and I accept that the wife has played a full part in the marriage and is to be treated as having made an approximately equal contribution. Taking everything into account, in my judgment an equal division of the assets is called for.
- As can be seen from the Table summarising the matrimonial assets, a distribution which gives the wife (in addition to the contents of Drum Grange, her jewellery, her car and her share of the proceeds of sale of Drum Grange) a sum of money equal to the value of her shares – £689,400 gross, £551,520 net – will leave her with fractionally over 50% of the assets. (That slight excess does the husband no injustice, for the Table leaves out of account whatever amount is in his Lloyds TSB account.) That accordingly is, in principle, the order which I propose to make. It means that although the amount of the husband's pension is brought into account there will be no need for a pension-sharing order.
Implementation of the order
- It is common ground as between the husband and the wife that HDC itself should acquire the wife's shares in HDC at market value – ie, for £689,400. Subject to the concurrence of the trustees this is something that can lawfully be done, and it has the great advantage as a method of extracting money from the company that tax is effectively paid at a rate of 20% rather than the 33% which is payable on distributions.
- The wife wishes to have the Antigua property transferred into her sole name. The property in fact belongs to HDC, so, as I have said, she will, if she wishes to acquire it, have to buy it from HDC at its full market value.
- The precise method by which all this will be implemented is, no doubt, a matter for further expert assistance. No doubt there will be further consequential orders that I will need to make. But I would echo a submission made by Mr Moor to the effect that the history of this case means that my order will need to be structured in such a way as to make implementation and enforcement as simple as possible.
- I have not thus far taken into account the costs incurred by the parties. Not surprisingly these are very substantial. The wife estimates her costs as at 7 November 2006 as amounting to some £476,000 and the husband his costs as amounting to some £390,000. In addition the trustees have incurred costs amounting to some £85,000 which, even if they are not the subject of any award of costs inter partes, the trustees will plainly be entitled to recoup out of the trust fund – in other words, from HDC if no one else is prepared or ordered to pay them. How all these costs are to be borne and how the money is to be raised to enable them to be paid will also, no doubt, be a matter for further argument.
- Mr Howard says that there are liquidity difficulties. That may or may not be so. The precise nature and extent of any such difficulties will, of course, have to be evaluated in the context of the order I have indicated I propose to make and in the light of HDC's current financial circumstances. For the moment it suffices to note Mr Moor's simple submission, with which I agree, that in any event issues of liquidity go to the timing of any award rather than its quantum.
- The wife has in fact already received an advance payment of £80,350 out of the net proceeds of sale of Drum Grange. That will have to be brought into account.
A final word
- Before concluding I need to explain why this matter took so long to reach its conclusion. The case was originally fixed for eight days starting so near the end of term in Michaelmas 2005 that there were only that number of sitting days before the end of term. It seemed to me that the time estimate was almost certainly inadequate. I warned the parties that I would not be able to sit beyond the end of term or at the beginning of the next term and that if the case had to be adjourned part-heard it would almost inevitably, because of my other judicial commitments, have to be adjourned for some months at least. Counsel nonetheless decided to proceed rather than adjourning the case so that it could be re-fixed with a more realistic time estimate. The very thing I had feared would happen did happen. Term ended with the husband's evidence not yet completed and without my having heard any of the expert evidence.
- As I had feared, it was not possible to resume for many months – not in fact until July 2006. The parties had assured me that five further days would suffice. By the end of the fifth day, when Mr Howard had to leave for his pre-booked holiday, we had finished the evidence, but there had been no time for any closing submissions. I therefore gave directions providing for the lodging of written submissions over the Long Vacation. The parties understandably wanted the opportunity to make oral submissions. Because of my other judicial commitments and counsel's professional commitments it was not possible for those to be heard until November 2006, almost exactly eleven months after the trial had begun.
- The delay is most regrettable. But I am satisfied that it has not caused any injustice. I was provided with a transcript of all the evidence that had been heard in December 2005 and the provision of written submissions gave all parties the opportunity to prepare their final submissions at leisure. Those written submissions, for which I am most grateful, enormously eased the burden on me.
