2022 edition of the Chancery Guide

The 2022 edition of the Chancery Guide came into force from 29 July. This is the first new edition of the guide since 2016, and it contains substantial changes which will be discussed in the 2nd edition of the Contentious Probate Handbook, which I am planning to write next year.
See: The Chancery Guide 2022 | Courts and Tribunals Judiciary

ADR – Note:

‘10.8      The court may also stay the case or adjourn a hearing of its own motion to encourage and enable the parties to use ADR. The stay will be for a specified period and may include a date by which representatives of the parties with authority to settle and their legal advisers are required to meet, or a requirement for parties to exchange lists of neutral individuals who are available to carry out ADR and seek to agree on one. If agreement cannot be reached, the CMC can be restored for the court to facilitate agreement. Although the court may strongly recommend mediation, it cannot order that a mediation takes place and will not recommend an individual or body to facilitate ADR

10.10     Any order staying the case for ADR may (but is not required to) include an order as to the liability of the parties for the costs they incur in using or attempting to use ADR. Such order will usually be (a) costs in the case or (b) each side to bear its own costs.’

The court does have the power to order madatory JENE, see my article about JENE on the publications page at www.carlislam.co.uk.

The offshore trust that never was!

If the settlor [‘S’] attempted to transfer property [‘P’] to a trust, which legally did not belong to him, any such transfer will render the transfer and the trust invalid, because S had no authority to alienate P. Since preliminary matters such as title to P may need to be determined before the transfer, and ‘these issues are not of trust law, but of property and other law, the question of the law which governs this matter is the lex situs’ (‘Trusts And Related Tax Issues in Offshore Financial Law’, by Rose-Marie Antoine, paragraph 23.07).

Therefore, if the lex situs is England, then arguably, HMRC may challenge the validity of the transfer, and thus of the trust, as a preliminary issue in tax litigation, by seeking a declaration as to whether at the time of the purported transfer, S in fact had title to P under English property law.

A trust cannot come into existence until it has been constituted by an asset. If therefore the trust has been properly constituted and a subsequent transfer is invalid, that does not make the trust invalid.

If the first transfer is invalid, and therefore the trust was not contituted by that transfer, and a second transfer is made, and no other transfers were made, it may be possible to attack the second transfer as a sham, in which case, if the attack is successful, S remains the owner of all property transferred by him to the trustee, and the door is open to the bringing of claims against S and the trustee, for recovery of trust assets, compensation, and legal costs, see paragraph 7.8.3 of my book, the ‘Contentious Trusts Handbook.’

This potentially catastrophic litigation risk may therefore make mediation an attractive alternative to litigation.

If e.g. P is a work of art that S‘s separated wife alleges belongs to her, because S gave it to her, or that P was purchased using some of her money, then this could result in a claim for conversion, see my ‘Art Restitution Litigation in the English Court’ essay on the ‘Mediation of Art & Cultural Heritage Disputes’ page at www.carlislam.co.uk.

A claimant [‘C’] in an action for conversion does not necessarily need to show ownership of the chattel in question. C must establish that they had possession, or an immediate right to possession of P at the time of the conversion.

It therefore appears, that if S‘s separated wife brings a claim in conversion, S will end up being between a rock and hard place, because, if the claim in conversion suceeds, HMRC can apply for a declaration that the trust is invalid since the transfer was invalid. In which case P was never outside the UK tax net. Therefore if P is sold that will give rise to CGT. P may also qualify under the UK tax regime for Heritage Property. If the claim fails, HMRC may make a claim for unpaid tax (with penalties) as a result of the transfer of P to the offshore trust.

Mediation of International Trust Disputes

As the editors of the 2nd edition of ‘International Trust Disputes’ (2019) state in paragraph 17.27, ‘In trust disputes the structure of a settlement is often as important an issue as the financial terms. For example, is there to be a clean break or an ongoing trust? If an ongoing trust, how is that to be achieved and structured? These considerations are even more complex if the dispute involves a variety of trusts and beneficiaries with differing tax regimes. The advantages and disadvantages of potential routes to settlement are best considered in the calm space of the preparation phase rather than on the day of the mediation. Similarly, complex documents are best prepared subsequently. It may be helpful to have precedents available or even a draft settlement agreement if aspects of the structure can be agreed in advance.’

Where mediation is used as a process for innovative and bespoke lifetime estate and business succession planning, ideally a qualified tax adviser should be appointed to prepare an estate planning report (EPR) and a business succession planning report (BSPR).

These should be prepared after an inventory/schedule of the composition and value of the estate and family business has been prepared and before the mediator proceeds to interview each family member:
1. to confirm their acceptance of the facts set out in the inventory/schedule, so that from the outset all participants in the process are singing off the same song sheet; and
2. about what they each, want, need, prioritise and why.

In the case of an international family, their lawyers and tax advisers – appointed by the Family Office – can then engage with family members through a process of facilitated/mediated discussion to agree a holistic strategy and roadmap for practical implementation that is approved by each family member.

This may result in the drafting of a family constitution, and in the redrafting of the articles and memorandum of association of a family-owned company, a shareholders’ agreement and of an international trust deed which are no longer fit for purpose.

In contrast to the mediation of a dispute which will usually last between one and two days at the most, this process of dialogue, road mapping, and agreement, will take months, and can be accelerated if the mediator is assisted by a co-mediator.( See my article  ‘Back to the future’ – Part 2 – Mediation and Estate/Business Succession Planning. Taxation (Tolley) 08.03.2022 (to which there is a link on the ‘Publications’ page at www.carlislam.co.uk).

Can the validity of an offshore trust be challenged in the English court by HMRC seeking a determination of the applicable law?

Validity is resolved by determination of the proper, i.e. governing law. There is little case law on the choice of law rules for trusts. Determination of the proper law of a trust is an undeveloped subject. The Hague Convention on the Recognition of Trusts simplified the issue. However, there is residual uncertainty about common law rules. The modern view is that the proper law of the trust is the law chosen by the settlor, as expressed or implied in the terms of the trust. Where there is no express choice, the emerging doctrine is that the trust is governed by the law with which it is ‘most closely connected’.
Uncertainty may also surround the question of which particular aspects of a trust the term ‘proper law of the trust’ applies to. For the purposes of determining the choice of law, several distinct trust issues require consideration:
(i)          whether the trust instrument is valid according to the appropriately chosen law;
(ii)        whether the trust itself is valid;
(iii)       the validity of the transfer of the assets;
(iv)       the capacity of the settlor to create a trust; and
(v)        the administration, construction, variation and interpretation of the trust.

The question of the proper law of an offshore trust remains even in the face of an express choice of law clause. Therefore, the validity and effectiveness of a clause drafted in the 1970s, may now become contentious. It is also open to the English court to hold that the choice of offshore law offends public policy because of its hybrid and more flexible trust law features. While the general rule is to give effect to an express choice of law based upon the analogical premise of the ‘freedom to contract’, there are reservations, because it is logical to expect that such limitations for trusts will be on similar principles to those for contracts. On the conflict of law rules governing contracts, limitations are based upon the choice being:
(i)         bona fide;

(ii) legal;
(iii) not contrary to public policy;
(iv)       connected with the contract; and
(v)        meaningful.

Therefore, an offshore trust set up 50 years ago on the cheap, on standard instead of legally robust ‘bespoke’ terms, is potentially a sitting duck for a revenue authority, i.e. if the validity and applicable law of the trust can be challenged as a result of inadequate drafting. This potential line of attack is also connected to unlawful tax avoidance and tax fraud, which I will discuss in my next article for ‘Taxation’ (Tolley), which I am planning to write in 2023 entitled, ‘What is the jurisdiction of the English court where breach of fiduciary duty by a non-resident trustee amounts to unlawful tax avoidance or fraud?’

See also:

The taxation of trusts: a review – summary of responses (publishing.service.gov.uk)

Bermuda’s firewall legislation and its recent trust law reforms. | Carey Olsen

Admissibility of evidence in Tax Appeals

The FTT is not bound by the traditional mantra of statutory and common law principles of admissibility. As a general rule, all evidence is admissible, whether or not it would ordinarily be admissible in a civil court. However, overriding common law principles, e.g. protection of legal professional privilege are not curtailed by FTT r.15(2)(a) because the FT must act within the framework of the Human Rights Act. The same applies in the UT.

A Tax Appeal will often involve questions of evidence, e.g.
(i)         whether a taxpayer was carrying on a trade;
(ii)        the nature of a transaction;
(iii)       valuation of goods and services;
(iv)       whether a non-incorporated UK company was centrally managed and controlled in the UK by its directors and/or shareholders; and
(v)        whether the accounting treatment for an item of expenditure is correct.
FTT Rule 15(2) states:
‘(2) The Tribunal may— (a) admit evidence whether or not the evidence would be admissible in a civil trial in the United Kingdom; or (b) exclude evidence that would otherwise be admissible where— (i) the evidence was not provided within the time allowed by a direction or a practice direction; (ii) the evidence was otherwise provided in a manner that did not comply with a direction or a practice direction; or (iii) it would otherwise be unfair to admit the evidence.’
The legal test of admissibility is ‘relevance’, and there is a presumption that all relevant evidence should be admitted unless there are compelling reasons to the contrary, Mobile Export 365 Ltd v. Revenue and Customs Commissioners [2007] and Atlantic Electronic v. Revenue and Customs Comrs [2013].
Application of r.15(2) is the subject of guidance in HMRC v. IAC Associates [2013]. Nugee J observed, ‘… one starts with asking the question whether the evidence is admissible. It is admissible if it is relevant. It is relevant if it is potentially probative of one of the issues in the case. One then asks, notwithstanding that it is admissible evidence, whether [there] are good reasons why the court (or tribunal in this case) should nevertheless direct that it be excluded.’
In Revenue and Customs Comrs v. Atlantic Electronics Ltd [2013], one of the issues before the Court of Appeal was whether the admission of the material by the Upper Tribunal was just, fair and proportionate. Ryder LJ (with whom Arden LJ agreed) stated that:
‘HMRC wish to have [a certificate of conviction and the indictment and a note of the prosecution opening] admitted so that they can explain to the FTT the detailed background rather than merely the technical relevance of the convictions to their case. … The UT adopted the correct approach to the admission of the materials in question. It assessed whether the evidence is relevant and applied the presumption that all relevant evidence should be admitted unless there is a compelling reason to the contrary. … The prejudice to the Revenue in not being able to rely on the note of the prosecution opening is clear once the purpose of the admission of the material is analysed i.e. the dishonest and knowing participation of [X] as a contra trader.’ The UT was therefore entitled to decide to admit the disputed evidence.

Restitution of art stolen in England [‘SA’] purchased [by ‘P’] in a foreign country which recognises transactions that pass title in stolen chattels to a good faith purchaser

This is discussed in my evolving essay ‘Art Restitution Litigation in the English Court’ on the ‘Mediation of Art & Cultural Heritage Disputes’ page at www.carlislam.co.uk.

A novel legal theory occurred to me over the weekend when I started to write the essay, which runs as follows.

If P delivers the SA to a dealer [‘D‘] in London for sale, and under their contract D acquired a proprietary interest in the SA, then under the Limitation Act 1980 [‘LA’], could possession of the SA by D constitute a conversion ‘related to the theft’ of the SA which took place in England?

Under the LA, ‘Once … A bona fide purchaser acquired the chattel, and six years has run from the date of his acquisition, the owner cannot sue a person who acquires the chattel after the date of the bona fide purchaser’s acquisition, even if he is not himself a bona fide purchaser … Any conversion which follows the theft before the owner recovers possession is treated as “related to the theft” except a purchase in good faith or any acquisition subject to such a purchase; section 4(2).’ Arden J in De Preval v. Adrian Alan Ltd [1997]. ‘It does seem to be possible to identify, from that legislation, a public policy in England that time is not to run either in favour of the thief nor in favour of any transferee who is not a purchaser in good faith. The law favours the true owner of property which has been stolen, however long the period which has elapsed since the original theft.’ The City of Gotha [1998].

It therefore appears, that unless D can rebut the presumption under s.4(2) of the Limitation Act 1980 that the purchase by P was related to the theft, i.e. by proving that under English Law P had purchased the SA in good faith (for which purpose the court may take into account the factors mentioned by the judge in De Preval) , then the carve-out provided for in s.4(2) (i.e. that ‘if anyone purchases the stolen chattel in good faith neither the purchase nor any conversion following it shall be regarded as related to the theft’) is not engaged.

In other words, unless D can prove that P acquired the stolen painting in good faith in the foreign country where he purchased it, which arguably is a question to be decided by applying English Law to determine ‘good faith’, that D will fail at trial to discharge the burden of proof under s.4(2) of the Limitation Act 1980.

In which case, the first good faith purchase following the theft of the SA in England, took place when the painting was delivered by P into D’s possession in London.

Therefore, if this occurred less than six years ago, time is running under the Limitation Act for the bringing of a claim in conversion against D (who is in possession of the SA in London). 

Art & Cultural Heritage Restitution Litigation in the United States (‘US’) – Limitation periods.

US law protects the interests of the original owner of art unlike any other system of law. In the case law and statutes of many US jurisdictions, three main approaches to the question of the running of time under limitation legislation may be discerned:
(i)           an ‘actual discovery’ rule (as provided for in California);
(ii)          the ‘demand and refusal’ rule (applied by the New York courts); and
(iii)         the ‘discovery or due diligence’ rule (in most other jurisdictions).
In international property law, which governs the question of the law applicable to in rem relations, the principle of lex rei sitae, is widely recognised. According to this principle, the validity of the transfer of the tangible movable and its effect on the proprietary rights of the parties thereto and those claiming under them in respect thereof, are governed by the law of the country where the movable is at the time of the transfer (lex situs).
If the object is moved from one jurisdiction to another, this leads to a change in jurisdiction with regard to property law, with the consequence that the law of the new situs of the object is decisive concerning existing rights of possession and ownership, as well as other in rem rights. #litigation#art#law In accordance with the situs rule, the law of the new situs, also decides whether, under what conditions and with what effect rights in stolen property can be acquired.
There has been a noticeable change in US conflict laws as applied in cases over the past 15 years, signalling a gradual departure from the perceived stricture of the situs rule and toward a more flexible approach, that of the ’most significant relationship’ test.
When confronted with the possibility of a transfer under civil law, US courts have shown noticeable reluctance to apply foreign law to cases concerning stolen property.
In two cases, the landmark Menzel v. List and the De Weerth saga, the question of the transfer under foreign law was not even raised, facilitating the application of US law and ignoring the fact that both paintings had gone through Parisian galleries and had been kept there for some time prior to their subsequent transfer in New York.
In two other cases, Elicofon and Goldberg a potential transfer of title under civil law had been discussed, yet in both cases the courts in the end chose to apply the ‘most significant relationship’ test instead of the lex situs rule, thus enabling them to apply local state laws in both cases.

Mediation of Islamic Family Trust Disputes

I briefly discuss the primary advantage of Mediation over litigation in relation to these disputes in a wider article I am writing for Trusts & Trustees (OUP) – ‘Mediating Probate Trust & Tax Disputes –Challenges & Tools’, which I am on schedule to complete in August. The following is an extract:
‘Where terms of an Islamic family trust were drafted following consultation with Sharia Scholars who pronounced upon conformity with Islamic law, and the deed contains a valid and applicable English governing law clause (‘GLC’), the GLC Engages:
(i)         An ocean on potentially applicable equitable principles developed under English Law, except to the extent that any right, duty or power has been modified or lawfully excluded under the express terms of the trust, as drafted.
(ii)        Fiduciary principles under Islamic law.
Depending upon the knowledge and skill of the draftsman, this may have resulted in the creation of a lacunae between:
(a)        an applicable principle of equity under English law; and
(b)        an unstated ethical principle under Islamic law.
Islamic Law is not a unified system of law. Furthermore, the doctrinal foundations of fiduciary theory in Islamic law suffer from a paucity of analysis. As Professor Mohammad Fadel concludes in chapter 28 of the Oxford Handbook of Fiduciary Law (2019) (‘Fiduciary principles in classical Islamic law systems’), at page 543:
‘[There is] a vast body of rules in classical Islamic law that were reflective of fiduciary principles. … [An] Islamic fiduciary, above all, is supposed to be motivated by a genuine sense of moral duty and is always aware that his or her discharge of that duty is subject to divine supervision. If fiduciary duties arise as a solution to incomplete contracting, it is a unique kind of contract insofar as the fiduciary is prevented from securing his own interests. It is rather an undertaking to do one’s best in furtherance of the interests of another. This altruistic dimension of fiduciary duties in Islamic law is ultimately its most crucial feature, distinguishing it from other legal relationships.’
Therefore if the family trust dispute proceeds to litigation, a court which has jurisdiction, becomes in effect a final arbiter of the meaning and enforcement of the rights of the beneficiaries, and the duties and powers of the trustee (and of any Protector) under the terms of the Islamic Trust deed. The court will make its decision based upon the expert evidence presented about Islamic Law. Since its decision is likely to depend upon the eminence of the expert whose evidence the court prefers, the outcome of the litigation:
(i)         is uncertain; and
(ii)        may not conform with the Islamic ethics of the deceased settlor [‘S’].
Through Mediation, the participants can instead discuss and explore S’s ethics, and agree bespoke ‘ethical’ terms of settlement in a form which a court has no power to impose under English Law.’

Mediation of Probate Trust & Tax Disputes – Challenges & Tools

‘Mediation of Probate Trust & Tax Disputes – Challenges & Tools’ – This is the title of an article I am currently writing which I am aiming to submit to Trusts & Trustees (OUP) in August, for publication later this year.
Introduction – ‘In essence, mediation is a forward-looking conversation. The role of a mediator (‘M’) is to manage the process and ensure that it is conducted in accordance with the terms of the Mediation Agreement. M must also:
·       create an environment in which adversarial parties in a confrontational dispute can come out of their ‘positional’ trenches and walk towards the centre of the commercial problem that divides them; and
·       empower adversarial parties to a dispute to become participants [‘P‘s’] in a creative, bespoke and collaborative problem-solving exercise, and eventually, to walk side by side in jointly exploring and developing a commercial solution of their own design which takes into account: the facts presented in their respective position statements and agreed bundle of documents; legal merits; litigation risks; the time value of money; and the benefits (including tax benefits) of ‘doing a deal’ now, instead of incurring further legal costs by resuming trench warfare and going to trial.
This requires counter-intuitive thinking and behaviour and can result in a ‘paradigm shift’ which results in a creative solution that a court cannot impose. It therefore also requires a ‘commercial’ rather than a ‘forensic’ legal or procedural mind-set, and some imagination. The challenge for a mediator is to persuade each participant to identify (in strict confidence) what is actually at stake, i.e. to drill down to what a participant’s objectives, needs and priorities are, and why.
While it is not the function of M to speak truth to power, M can facilitate the re-framing of a dispute as an opportunity, by enabling each P think about what is important to them, so that the P‘s can agree upon a ‘methodology’ i.e. a ‘road map’ for convergence and consensus. This requires a ‘paradigm shift’, i.e. acceptance by each P that there is a better way of resolving their dispute than going to trial. The tools that M can use to engineer a sudden outbreak of common sense are the subject of this article. If you have any ideas or comments about mediation that you would like to contribute please email carl@ihtbar.com.

What is the jurisdiction of the English court where breach of fiduciary duty by a non-resident trustee amounts to unlawful tax avoidance or fraud?

Two recent cases illustrate where evidentially: (i) breach of fiduciary duty; (ii) unlawful tax avoidance; and (iii) fraud, can all potentially intersect in a trust or probate dispute. Therefore, a breach of fiduciary duty claim against a non-resident trustee can trigger a tax investigation in the UK. See:

(a)        Van Zuylen v Whiston-Dew & Anor [2021] – see my blog, ‘Investment Fund Fraud – Jurisdiction of English court’ (Google ‘Carl’s Wealth Planning blog’ and use the search box to find). Judge Nicholas Thompsell stated:– ‘[The Defendant argued] that this court had no jurisdiction as the matters in question fell to be determined by the courts of St Kitts and Nevis under the terms applicable to the [2nd] Trust. … [The] point was utterly without merit given that the Claimant has not made any claim for breach of the [2nd] Trust and has never bound herself to any foreign jurisdiction. Her principal complaints against the Defendant were based on his deceit, breach of fiduciary duty, breach of contract and breach of the general prohibition under the FSMA. In addition, I have found that the [2nd] Trust, was used by the Defendant as an instrument of deceit and as such it should be ignored. … In El Anjou, the claimant was the victim of a fraudulent share-selling scheme … The fraudulent scheme involved the transfer of money through various jurisdictions and ultimately into a London-based property development project.
(b)        Reeves v Drew [2022], a contentious probate claim in which: (i) the Claimant’s counsel sought to prove that one of the witnesses [‘W’] (an accountant) was a ‘crook by reference to a [property] transaction [where] the purchase price was misstated in order to effect a tax fraud [and submitted that W] was a crook and his evidence should not therefore be believed [which was allowed] (para 108); and (ii) Judge Michael Green stated, ‘it may necessarily follow that a finding that the deceased did not know and approve the contents carried with it the strong implication that she engineered an extraordinary fraud … it is not necessary for the defendants to prove that this was what happened and that it was fraudulent or dishonest. … The way that the [solicitor] went about the preparation of the will was … quite possibly dishonest. … There could be serious consequences for [the solicitor] as a result of my findings. But it would not be right for me to speculate on this, particularly as the defendants do not allege and do not seek to prove that there was a fraud …’ [paras 344,347,348, 407 & 408].