Financial provision claim by adult child – Miles v. Shearer [2021]

·       Statutory framework – NB s.3(1)(g) [which includes reasons for disinheriting an adult child].

·       Illot v. Blue Cross [2017] UKSC 17 – ‘There is no requirement for a moral claim as a sine qua non for all applications under the 1975 Act and Oliver J did not impose one. He meant no more, but no less, than that in the case of a claimant adult son well capable of living independently, something more than the qualifying relationship is needed to found a claim, and that in the case before him the additional something could only be a moral claim. That will be true of a number of cases. Clearly, the presence or absence of a moral claim will often be at the centre of the decision under the 1975 Act’ [Lord Hughes]; ‘the unsatisfactory state of the present law, giving as it does no guidance as to the factors to be taken into account in deciding whether an adult child is deserving or undeserving of reasonable maintenance’ [Lady Hale].

·       Miles v Shearer [2021] EWHC 1000 (Ch) – Obligations or responsibilities towards claimants at the time of T’s death? None. Claim failed.

Therefore prima facie, a claim under s.1(c) will fail if absent any other ‘moral’ claim, it is outweighed by other factors under s.3(1)(g), i.e. where the judge finds that the deceased parent did not in fact owe any obligation or responsibility to the adult child claimant at the date of his death.

The merits of each case depend up the making of a value judgement by the judge on the known facts. 

The litigation risk is that the law, gives no guidance as to the factors to be taken into account in deciding whether an adult child is deserving or undeserving of reasonable maintenance.

The unknown evidential factor is the recognition of a ‘moral’ claim,
however that is characterised, by the judge.


See also: See also: Priya-Tromans-Beware-of-issuing-‘hopeless’-Inheritance-claims-in-expectation-of-settlement.pdf (stiveschambers.co.uk)

That is why it is always better to mediate these cases rather than litigate them through the courts. 

Zoom Mediator – Contentious Probate & Trust Disputes: Zoom Mediator – Contentious Probate & Trust Disputes – Carl Islam

Statutory framework

The Inheritance (Provision for Family and Dependants) Act 1975 (the ‘Inheritance Act’) provides:

‘1     Application for financial provision from deceased’s estate.

(1)    Where after the commencement of this Act a person dies domiciled in England and Wales and is survived by any of the following persons:—

(c)    a child of the deceased;

(2)    In this Act “reasonable financial provision”—

(b)    in the case of any other application made by virtue of subsection (1) above, means such financial provision as it would be reasonable in all the circumstances of the case for the applicant to receive for his maintenance.

3      Matters to which court is to have regard in exercising powers under s. 2.

(1)    Where an application is made for an order under section 2 of this Act, the court shall, in determining whether the disposition of the deceased’s estate effected by his will or the law relating to intestacy, or the combination of his will and that law, is such as to make reasonable financial provision for the applicant and, if the court considers that reasonable financial provision has not been made, in determining whether and in what manner it shall exercise its powers under that section, have regard to the following matters, that is to say—

(a)    the financial resources and financial needs which the applicant has or is likely to have in the foreseeable future;

(b)    the financial resources and financial needs which any other applicant for an order under section 2 of this Act has or is likely to have in the foreseeable future;

(c)    the financial resources and financial needs which any beneficiary of the estate of the deceased has or is likely to have in the foreseeable future;

(d)    any obligations and responsibilities which the deceased had towards any applicant for an order under the said section 2 or towards any beneficiary of the estate of the deceased;

(e)    the size and nature of the net estate of the deceased;

(f)     any physical or mental disability of any applicant for an order under the said section 2 or any beneficiary of the estate of the deceased;

(g)    any other matter, including the conduct of the applicant or any other person, which in the circumstances of the case the court may consider relevant.

(3)    Without prejudice to the generality of paragraph (g) of subsection (1) above, where an application for an order under section 2 of this Act is made by virtue of section 1(1)(c) or 1(1)(d) of this Act, the court shall, in addition to the matters specifically mentioned in paragraphs (a) to (f) of that subsection, have regard to the manner in which the applicant was being or in which he might expect to be educated or trained, …

(5)    In considering the matters to which the court is required to have regard under this section, the court shall take into account the facts as known to the court at the date of the hearing.

(6)    In considering the financial resources of any person for the purposes of this section the court shall take into account his earning capacity and in considering the financial needs of any person for the purposes of this section the court shall take into account his financial obligations and responsibilities.

Illot v. Blue Cross [2017] UKSC

Lord Hughes stated:

’12.      The concept of “reasonable financial provision” is thus, by the closing words of section 1(1), made central to the jurisdiction to depart from the will or intestacy rules, as the case may be. … In the case of all other applicants, however, section 1(2)(b) makes clear that reasonable financial provision means such provision as it would be reasonable for the applicant to receive for maintenance.

13.          This limitation to maintenance provision represents a deliberate legislative choice and is important. Historically, when family provision was first introduced by the 1938 Act, all claims, including those of surviving unseparated spouses, were thus limited. That demonstrates the significance attached by English law to testamentary freedom. The change to the test in the case of surviving unseparated spouses was made by the 1975 Act, following a consultation and reports by the Law Commission: Law Com No 52, [1973] EWLC 52 (22 May 1973) and Law Com No 61, [1974] EWLC 61 (31 July 1974). The latter report made it clear that the recommendation was designed not to introduce, even in the case of surviving present spouses, a general power to re-write the testator’s will, but rather to bring provision for such spouses into line with the developing approach of the family court. That court had by then relatively recently acquired expanded powers to make lump sum and property adjustment orders, which were not limited to maintenance provision but increasingly recognised other factors such as the length of the marriage, the contributions to the family and so on (see section 25 Matrimonial Causes Act 1973). The mischief to which the change was directed was the risk of a surviving spouse finding herself in a worse position than if the marriage had ended by divorce rather than by death. For claims by persons other than spouses the maintenance limitation was to remain, and has done so. See in particular paras 14, 16, 19 and 24.

14.           The concept of maintenance is no doubt broad, but the distinction made by the differing paragraphs of section 1(2) shows that it cannot extend to any or every thing which it would be desirable for the claimant to have. It must import provision to meet the everyday expenses of living. In re Jennings, deceased [1994] Ch 286 was an example of a case where no need for maintenance existed. The claimant was a married adult son living with his family in comfortable circumstances, on a good income from two businesses. The proposition that it would be reasonable provision for his maintenance to pay off his mortgage was, correctly, firmly rejected – see in particular at 298F. The summary of Browne-Wilkinson J in In re Dennis, deceased [1981] 2 All ER 140 at 145-146 is helpful and has often been cited with approval:

“The applicant has to show that the will fails to make provision for his maintenance: see In re Coventry (deceased) … [1980] Ch 461. In that case both Oliver J at first instance and Goff LJ in the Court of Appeal disapproved of the decision in In re Christie (deceased) … [1979] Ch 168, in which the judge had treated maintenance as being equivalent to providing for the well-being or benefit of the applicant. The word ‘maintenance’ is not as wide as that. The court has, up until now, declined to define the exact meaning of the word ‘maintenance’ and I am certainly not going to depart from that approach. But in my judgment the word ‘maintenance’ connotes only payments which, directly or indirectly, enable the applicant in the future to discharge the cost of his daily living at whatever standard of living is appropriate to him. The provision that is to be made is to meet recurring expenses, being expenses of living of an income nature. This does not mean that the provision need be by way of income payments. The provision can be by way of a lump sum, for example, to buy a house in which the applicant can be housed, thereby relieving him pro tanto of income expenditure. Nor am I suggesting that there may not be cases in which payment of existing debts may not be appropriate as a maintenance payment; for example, to pay the debts of an applicant in order to enable a him to continue to carry on a profit-making business or profession may well be for his maintenance.”

Thus in that case a claim against a large estate by an adult son failed when it was put as a claim for a capital sum to meet the capital transfer tax payable on a sizeable gift made to the claimant by the deceased during his lifetime, which gift the former had wasted away. The judge made the assumption, perhaps generously to the claimant, that bankruptcy would be likely if such a legacy were not directed, but that did not make the suggested sum provision for maintenance; the claimant was well able to work, despite a chequered history of drifting from occupation to occupation, and even if bankrupt was well capable of maintaining himself.

15.            The level at which maintenance may be provided for is clearly flexible and falls to be assessed on the facts of each case. It is not limited to subsistence level. Nor, although maintenance is by definition the provision of income rather than capital, need it necessarily be provided for by way of periodical payments, for example under a trust. It will very often be more appropriate, as well as cheaper and more convenient for other beneficiaries and for executors, if income is provided by way of a lump sum from which both income and capital can be drawn over the years, for example on the Duxbury model familiar to family lawyers (see Duxbury v Duxbury (Note) [1992] Fam 62). Lump sum orders are expressly provided for by section 2(1)(b). There may be other cases appropriate for lump sums; the provision of a vehicle to enable the claimant to get to work might be one example and, as will be seen, the present case affords another. As Browne-Wilkinson J envisaged (obiter) in In re Dennis (above) there is no reason why the provision of housing should not be maintenance in some cases; families have for generations provided for the maintenance of relatives, and indeed for others such as former employees, by housing them. But it is necessary to remember that the statutory power is to provide for maintenance, not to confer capital on the claimant. Munby J (as he then was) rightly made this point clear in In re Myers [2004] EWHC 1944 (Fam)[2005] WTLR 851 at paras 89-90 and 99-101. He ordered, from a very large estate, provision which included housing, but he did so by way not of an outright capital sum but of a life interest in a trust fund together with power of advancement designed to cater for the possibility of care expenses in advanced old age. If housing is provided by way of maintenance, it is likely more often to be provided by such a life interest rather than by a capital sum.

16.           The condition for making an order under the 1975 Act is that the will, or the intestacy regime, as the case may be, does not “make reasonable financial provision” for the claimant (section 1(1)). Reasonable financial provision is, by section 1(2), what it is “reasonable for [the claimant] to receive”, either for maintenance or without that limitation according to the class of claimant. These are words of objective standard of financial provision, to be determined by the court. The Act does not say that the court may make an order when it judges that the deceased acted unreasonably. That too would be an objective judgment, but it would not be the one required by the Act.

17.           Nevertheless, the reasonableness of the deceased’s decisions are undoubtedly capable of being a factor for consideration within section 3(1)(g), and sometimes section 3(1)(d). Moreover, there may not always be a significant difference in outcome between applying the correct test contained in the Act, and asking the wrong question whether the deceased acted reasonably. If the will does not make reasonable financial provision for the claimant, it may often be because the deceased acted unreasonably in failing to make it. For this reason it is very easy to slip into the error of applying the wrong test. It is necessary for courts to be alert to the danger, because the two tests will by no means invariably arrive at the same answer. The deceased may have acted reasonably at the time that his will was made, but the circumstances of the claimant may have altered, for example by supervening chronic illness or incapacity, and the deceased may have been unaware of the full circumstances, or unable to make a new will in time. In re Hancock, deceased [1998] 2 FLR 346 illustrates another possibility. The deceased had acted entirely reasonably in leaving his business land to those of his children who were active in the business, but after his death part of the land acquired a development value six times its probate assessment, and, that being the case, there was a failure to make reasonable provision for another daughter who was in straitened circumstances. Thus there can be a failure to make reasonable financial provision when the deceased’s conduct cannot be said to be unreasonable. The converse situation is still clearer. The deceased may have acted unreasonably, indeed spitefully, towards a claimant, but it may not follow that his dispositions fail to make reasonable financial provision for that claimant, especially (but not only) if the latter is one whose potential claim is limited to maintenance. In In re Jennings, for example, the deceased had unreasonably failed, throughout the minority of his son, the claimant, to discharge his maintenance obligations towards him. Many might say, as indeed the trial judge did, that this failure imposed an obligation on the deceased belatedly to provide for his son. But by the time of his death many years later the son had made his own successful way in the world and stood in no need of maintenance; his claim accordingly failed, correctly, in the Court of Appeal.

18.            The right test was well set out by Oliver J in In re Coventry [1980] Ch 461 at 474-475 in a passage which has often been cited with approval since:

“It is not the purpose of the Act to provide legacies or rewards for meritorious conduct. Subject to the court’s powers under the Act and to fiscal demands, an Englishman still remains at liberty at his death to dispose of his own property in whatever way he pleases or, if he chooses to do so, to leave that disposition to be regulated by the laws of intestate succession. In order to enable the court to interfere with and reform those dispositions it must, in my judgment, be shown, not that the deceased acted unreasonably, but that, looked at objectively, his disposition or lack of disposition produces an unreasonable result in that it does not make any or any greater provision for the applicant – and that means, in the case of an applicant other than a spouse for that applicant’s maintenance. It clearly cannot be enough to say that the circumstances are such that if the deceased had made a particular provision for the applicant, that would not have been an unreasonable thing for him to do and therefore it now ought to be done. The court has no carte blanche to reform the deceased’s dispositions or those which statute makes of his estate to accord with what the court itself might have thought would be sensible if it had been in the deceased’s position.”

19.           Next, all cases which are limited to maintenance, and many others also, will turn largely upon the asserted needs of the claimant. It is important to put the matter of needs in its correct place. For current spouses and civil partners (section 1(2)(a) and (aa)), need is not the measure of reasonable provision, but if it exists will clearly be very relevant. For all other claimants, need (for maintenance rather than for anything else, and judged not by subsistence levels but by the standard appropriate to the circumstances) is a necessary but not a sufficient condition for an order. Need, plus the relevant relationship to qualify the claimant, is not always enough. In In re Coventry the passage cited above was followed almost immediately by another much-cited observation of Oliver J:

“It cannot be enough to say ‘here is a son of the deceased; he is in necessitous circumstances; there is property of the deceased which could be made available to assist him but which is not available if the deceased’s dispositions stand; therefore those dispositions do not make reasonable provision for the applicant.’ There must, as it seems to me, be established some sort of moral claim by the applicant to be maintained by the deceased or at the expense of his estate beyond the mere fact of a blood relationship, some reason why it can be said that, in the circumstances, it is unreasonable that no or no greater provision was in fact made.”

20.            Oliver J’s reference to moral claim must be understood as explained by the Court of Appeal in both In re Coventry itself and subsequently in In re Hancock, where the judge had held that there was no moral claim on the part of the claimant daughter. There is no requirement for a moral claim as a sine qua non for all applications under the 1975 Act, and Oliver J did not impose one. He meant no more, but no less, than that in the case of a claimant adult son well capable of living independently, something more than the qualifying relationship is needed to found a claim, and that in the case before him the additional something could only be a moral claim. That will be true of a number of cases. Clearly, the presence or absence of a moral claim will often be at the centre of the decision under the 1975 Act.

21.           Oliver J’s reference to necessitous circumstances not by themselves always being sufficient is illustrated by Cameron v Treasury Solicitor [1996] 2 FLR 716. The claimant was the former wife of the deceased. She had been divorced from him 19 years before his death and their matrimonial finances had been settled by a lump sum paid to her as a clean break. There had been no financial relationship between them for the next 19 years, although they had remained in touch. The fact that she was in necessitous circumstances was held not to create any obligation on him to provide for her from his estate; that there was no other claimant and his small estate passed as bona vacantia to the Crown did not alter the fact that their personal and financial relationship was long in the past. Thus cases of long estrangement may, according to the judge’s assessment of the particular facts, be an example of the proposition that needs are not always enough to justify a claim under the Act. In most cases of clean break matrimonial settlement, the family court order will these days incorporate, as often as not by consent, a direction under section 15 that neither spouse shall be entitled to make any claim under the 1975 Act from the estate of the other.

22.            Nor, if the conclusion is that reasonable financial provision has not been made, are needs necessarily the measure of the order which ought to be made. It is obvious that the competing claims of others may inhibit the practicability of wholly meeting the needs of the claimant, however reasonable. It may be less obvious, but is also true, that the circumstances of the relationship between the deceased and the claimant may affect what is the just order to make. Sometimes the relationship will have been such that the only reasonable provision is the maximum which the estate can afford; in other situations, the provision which it is reasonable to make will, because of the distance of the relationship, or perhaps because of the conduct of one or other of the parties, be to meet only part of the needs of the claimant.’

Lady Hale (with whom Lord Kerr and Lord Wilson agreed) stated:

60.   The only guidance the court is given is: (1) the threshold question is whether the estate makes reasonable financial provision for the applicant; (2) if it does not, the actual provision to be ordered is limited to what is reasonable for the claimant’s maintenance (unless the applicant is a spouse or civil partner); and (3) that in deciding both of those questions, the court has to have regard to the matters listed in section 3 (see para 11 above). These look at the actual and foreseeable financial resources and needs of the applicant, any other applicant and any beneficiary; the obligations and responsibilities of the deceased towards any applicant or beneficiary; the size and nature of the estate; any physical or mental disability of any applicant or beneficiary; and any other matter, including the conduct of the applicant or any other person, which the court may consider relevant. In the case of children, the court must also consider the manner in which the claimant has been, is being or might be expected to be educated or trained. Section 1(7) of the 1938 Act, requiring the court to have regard to any reasons given by the deceased for making or not making the dispositions in his will, has been repealed: the reasonableness or otherwise of the testator’s dispositions [and NB not T’s decision] was to be tested objectively; the Commission agreed with Michael Albery that if the testator’s reasons were “good and founded on fact” they would be relevant under “other matters”, so there was no need to mention them separately (para 3.23).

61.     As Black LJ wisely observed when this case first came before the Court of Appeal: [2011] EWCA Civ 346[2011] 2 FCR 1, para 88:

“A dispassionate study of each of the matters set out in section 3(1) will not provide the answer to the question whether the will makes reasonable financial provision for the applicant, no matter how thorough and careful it is. … [S]ection 3 provides no guidance about the relative importance to be attached to each of the relevant criteria. So between the dispassionate study and the answer to the first question lies the value judgment to which the authorities have referred. It seems to me that the jurisprudence reveals a struggle to articulate, for the benefit of the parties in the particular case and of practitioners, how that value judgment has been, or should be, made on a given set of facts.” [This is a litigation risk in an Inheritance Act Claim]

62.    How then is the court to “distinguish between the deserving and the undeserving”? It might be thought, for example, that in the case of a large estate consisting mostly of inherited property, the children ought to inherit even if they are not in need. But that would run counter to the restriction of their claims to reasonable maintenance. It would also run counter to the approach long taken in the law of inter vivos financial provision for adult children. Thus in Lord Lilford v Glynn [1979] 1 WLR 78, the judge had ordered a father, in addition to making periodical payments and providing for his daughters’ education, to make an immediate settlement upon them of £25,000 (a not inconsiderable sum in those days). The Court of Appeal held that “a father – even the richest father – ought not to be regarded as under ‘financial obligations [or] responsibilities’ to provide funds for the purpose of such settlements as are envisaged in this case on children who are under no disability and whose maintenance and education is secure” (p 85). That, of course, was a value judgment which may or may not have been based on a view that such provision ought to be “earned”. But it could be justified under the Matrimonial Causes Act 1973, because it contains age limits on the provision which may be ordered for children unless they are disabled, with the obvious aim of seeing them into adulthood and beyond that only to the end of their education. The 1975 Act contains no such age or disability related limits. So once again we are driven to ask what makes an adult child deserving or undeserving of reasonable maintenance?

63.    One factor which is not in the list, but which does feature elsewhere in family law, is the public interest in family members discharging their responsibilities towards one another so that these do not fall upon the state. In the well-known case of Hyman v Hyman [1929] AC 601, the House of Lords held that the court’s statutory powers to order a divorced husband to maintain his former wife were granted “partly in the public interest to provide a substitute for this husband’s duty of maintenance and to prevent the wife from being thrown upon the public for support” (per Lord Atkin, at p 629; see also Lord Hailsham LC, at p 608). However, while the common law recognised a husband’s duty to maintain his wife and his infant children (reluctant though it was to provide effective means of enforcing this), it did not recognise a duty to maintain adult children. Public law, similarly, has not (at most periods) imposed the intra-familial maintenance duties which are known, for example, in French law. So what, if anything, is the relevance of the fact that an applicant’s household is very largely dependent on state benefits (in this case some 75% of their income) to the threshold question, let alone to the quantification of any order to be made?

64.    For these reasons, I have every sympathy for the difficult position in which District Judge Million found himself. He was faced with the complete disinheritance of an adult child in favour of charities in which the deceased had shown little or no interest while alive. The adult child was in straitened circumstances, living in rented accommodation which was almost entirely financed by the public purse, through housing and council tax benefit. These benefits were means-tested by reference to income and to capital and would be lost if there were capital of more than £16,000. The family lived within its modest means, but these too were largely derived from the public purse, the husband’s meagre earnings being supplemented by tax credit, child tax credit and child benefit. Apart from child benefit, these were means-tested, but by reference only to income and not capital. The household goods were old and dilapidated – the family could do with another car, some furniture and carpets and white goods, and had never had a holiday, so it might be regarded as reasonable to spend money on these and thus quite quickly reduce a capital sum to below £16,000 without incurring penalties. On the other hand, mother and daughter had been estranged since the daughter left home to live with and then marry her husband, of whom the mother disapproved, three attempts at reconciliation having failed. The mother had left a letter explaining why she had disinherited her daughter, which the district judge did not find wholly “founded on truth”.

65.    So what was he to do? A respectable case could be made for at least three very different solutions:

(1)     He might have declined to make any order at all. The applicant was self-sufficient, albeit largely dependent on public funds, and had been so for many years. She had no expectation of inheriting anything from her mother. She had not looked after her mother. She had not contributed to the acquisition of her mother’s wealth. Rather than giving her mother pleasure, she had been a sad disappointment to her. The law has not, or not yet, recognised a public interest in expecting or obliging parents to support their adult children so as to save the public money. Thus it is not surprising that Eleanor King J regarded this as the reasonable result: [2009] EWHC 3114 (Fam)[2010] 1 FLR 1613. The Court of Appeal allowed the appeal on the basis that the District Judge had not erred in law and the exercise of his discretion had not been plainly wrong, so Eleanor King J should not have interfered. But Sir Nicholas Wall P commented that (as Wilson LJ had observed when giving permission to appeal) had the District Judge dismissed the claim “I doubt very much whether the appellant would have secured reversal of that dismissal on appeal” (para 59).

(2)    He might have decided to make an order which would have the dual benefits of giving the applicant what she most needed and saving the public purse the most moneyThat is in effect what the Court of Appeal did, by ordering the estate to pay enough money to enable her to buy the rented home which the housing association was willing to sell to her and a further lump sum to draw down as she saw fit. Housing is undoubtedly one of the first things that anyone needs for her maintenance, along with food and fuel. This was benefits-efficient from her point of view, because it preserved the family’s claims to means-tested income benefitsIt was benefits-efficient from the public’s point of view, because it saved the substantial sums payable in housing benefit. She would lose the benefit of the landlord’s repairing obligations, but how valuable this would be is a matter of speculation. It is difficult to reconcile the grant of an absolute interest in real property with the concept of reasonable provision for maintenance: buying the house and settling it upon her for life with reversion to the estate would be more compatible with that. But the court envisaged her being able to use the capital to provide herself with an income to meet her living costs in future.

(3)     He might have done what in fact he did for the reasons he did. He reasoned that an income of £4,000 per year would provide her with her “share” of the household’s tax credit entitlement and capitalised this in a rough and ready way, taking into account some future limited earning potential, at £50,000. He did not expressly consider, and was not presented with the information to enable him to consider, the effect that this would have on the family’s benefit entitlements, and in particular the fact that they would lose their entitlement to housing benefit until their capital was reduced below £16,000.

66.              Some might think that the best choice was between options (1) and (2). Option (1) was not, however, open to the Court of Appeal this time round and is not open to this Court now. The case for option (2) is that, if it is reasonable for the applicant to receive some support, it is reasonable for that support to be meaningful to her and her family, as well as to the public purse. Securing her accommodation is more meaningful than proving her with a capital sum which will be of little use unless she is able properly to reduce it within a relatively short time. This is not to down-play the public interest in charitable giving and the importance of legacies in the funding of charitable activities. But just as the applicant had no expectation of a legacy, neither did the charities. However, the greater the weight attached to testamentary freedom, the smaller the provision which might be thought reasonable in an unusual case such as this. It is, as Black LJ observed, a value judgment. The District Judge did not make his order on the express basis that it would enable the applicant to buy much needed household goods and have a family holiday, but that will be its beneficial effect. Hence I agree with Lord Hughes that it was entirely open to him to make the order that he did, and just as it should not have been disturbed first time round it should not have been disturbed this time either. I have written this judgment only to demonstrate what, in my view, is the unsatisfactory state of the present law, giving as it does no guidance as to the factors to be taken into account in deciding whether an adult child is deserving or undeserving of reasonable maintenance. I regret that the Law Commission did not reconsider the fundamental principles underlying such claims when last they dealt with this topic in 2011.’

Miles v Shearer [2021] – Sir Julian Flaux, Chancellor of the High Court

The Chancellor stated:

76.  The statutory framework thus involves two questions: (1) has there been a failure to make reasonable financial provision and, if so, (2) what order ought to be made? However, there is in most cases, including this one, a very large degree of overlap between the two questions, not least because, in setting out the factors to be considered by the Court, section 3(1) of the 1975 Act makes them applicable equally to both questions. The correct approach is set out by Lord Hughes JSC giving the leading judgment in the Supreme Court in Ilott v Mitson (No 2) [2017] UKSC 17[2018] AC 545 at [23]-[24]:

“23. It has become conventional to treat the consideration of a claim under the 1975 Act as a two-stage process, viz (1) has there been a failure to make reasonable financial provision and if so (2) what order ought to be made? That approach is founded to an extent on the terms of the Act, for it addresses the two questions successively in, first, section 1(1) and 1(2) and, second, section 2 . In In re Coventry [1980] Ch 461, 487 Goff LJ referred to these as distinct questions, and indeed described the first as one of value judgment and the second as one of discretion. However, there is in most cases a very large degree of overlap between the two stages. Although section 2 does not in terms enjoin the court, if it has determined that the will or intestacy does not make reasonable financial provision for the claimant, to tailor its order to what is in all the circumstances reasonable, this is clearly the objective. Section 3(1) of the Act, in introducing the factors to be considered by the court, makes them applicable equally to both stages. Thus the two questions will usually become: (1) did the will/intestacy make reasonable financial provision for the claimant and (2) if not, what reasonable financial provision ought now to be made for him?

24. There may be some cases in which it will be convenient to separate these questions, particularly if there is an issue whether there was any occasion for the deceased to make any provision for the claimant. But in many cases, exactly the same conclusions will both answer the question whether reasonable financial provision has been made for the claimant and identify what that financial provision should be. In particular, questions arising from the relationship between the deceased and the claimant, questions relating to the needs of the claimant, and issues concerning the competing claims of others, are all equally applicable to both matters. The Act plainly requires a broad-brush approach from the judge to very variable personal and family circumstances. There can be nothing wrong, in such cases, with the judge simply setting out the facts as he finds them and then addressing both questions arising under the Act without repeating them…”

77.   The 1975 Act provides in section 1(2) that reasonable financial provision is what it is “reasonable for [the applicant] to receive”, in this instance for maintenance. As Lord Hughes noted at [16] of Ilott these are words of objective standard to be determined by the Court. He cautioned at [17] that, asking whether the deceased acted reasonably is to ask the wrong question under the Act:

 “Nevertheless, the reasonableness of the deceased’s decisions are undoubtedly capable of being a factor for consideration within section 3(1)(g), and sometimes section 3(1)(d). Moreover, there may not always be a significant difference in outcome between applying the correct test contained in the Act, and asking the wrong question whether the deceased acted reasonably. If the will does not make reasonable financial provision for the claimant, it may often be because the deceased acted unreasonably in failing to make it. For this reason it is very easy to slip into the error of applying the wrong test. It is necessary for courts to be alert to the danger, because the two tests will by no means invariably arrive at the same answer. The deceased may have acted reasonably at the time that his will was made, but the circumstances of the claimant may have altered, for example by supervening chronic illness or incapacity, and the deceased may have been unaware of the full circumstances, or unable to make a new will in time.”

78.   Although all cases under the 1975 Act turn on their own facts, it is of significance that, in cases other than those of spouses or civil partners, reasonable financial provision is limited to such provision as it would be reasonable for the applicant to receive for maintenance. The significance of this limitation was emphasised by Lord Hughes JSC in [13]-[14] of Ilott:

“13. This limitation to maintenance provision represents a deliberate legislative choice and is important. Historically, when family provision was first introduced by the 1938 Act, all claims, including those of surviving unseparated spouses, were thus limited. That demonstrates the significance attached by English law to testamentary freedom. The change to the test in the case of surviving unseparated spouses was made by the 1975 Act, following a consultation and reports by the Law Commission…[He then noted the mischief to which the change in the law recommended by the Law Commission was directed] The mischief to which the change was directed was the risk of a surviving spouse finding herself in a worse position than if the marriage had ended by divorce rather than by death. For claims by persons other than spouses the maintenance limitation was to remain, and has done so.

14. The concept of maintenance is no doubt broad, but the distinction made by the differing paragraphs of section 1(2) shows that it cannot extend to any or every thing which it would be desirable for the claimant to have. It must import provision to meet the everyday expenses of living.”

79.   Lord Hughes then went on to cite the summary of Browne-Wilkinson J in In re Dennis, decd [1981] 2 All ER 140, 145-146, which, as he says: “is helpful and has often been cited with approval”:

“The applicant has to show that the will fails to make provision for his maintenance: see In re Coventry [1980] Ch 461. In that case both Oliver J at first instance and Goff LJ in the Court of Appeal disapproved of the decision in In re Christie [1979] Ch 168, in which the judge had treated maintenance as being equivalent to providing for the well-being or benefit of the applicant. The word ‘maintenance’ is not as wide as that. The court has, up until now, declined to define the exact meaning of the word ‘maintenance’ and I am certainly not going to depart from that approach. But in my judgment the word ‘maintenance’ connotes only payments which, directly or indirectly, enable the applicant in the future to discharge the cost of his daily living at whatever standard of living is appropriate to him. The provision that is to be made is to meet recurring expenses, being expenses of living of an income nature. This does not mean that the provision need be by way of income payments. The provision can be by way of a lump sum, for example, to buy a house in which the applicant can be housed, thereby relieving him pro tanto of income expenditure. Nor am I suggesting that there may not be cases in which payment of existing debts may not be appropriate as a maintenance payment; for example, to pay the debts of an applicant in order to enable him to continue to carry on a profit-making business or profession may well be for his maintenance.”

80.   The claimants are both adult children of the deceased, who had lived their own lives and made their own lifestyle decisions without any further financial assistance from Tony [the deceased Testator] after the gifts in 2008. Contrary to [Counsel’s] submissions, what is “appropriate” in their cases is not comparable with what was appropriate in the case of a partner who had shared the life of the deceased, as in the case of Negus v Bauhouse [2008] EWCA Civ 1002 ….

82.   In my judgment the crucial distinction between a case of a cohabitee like Negus and the present case is that, in that case, the deceased was maintaining the claimant in the relevant expensive lifestyle at the time of his death, whereas here neither claimant was maintained in any sense by her father for the best part of ten years before his death. Contrary to what [Counsel] seemed to be suggesting, it is not a question of a different maintenance standard being applicable to the two types of case, but of how the standard is applied in widely differing factual situations.

96.   In all the circumstances, I do not consider that either claimant can demonstrate needs for maintenance which they cannot meet, if necessary by adjustment to their lifestyle as I have indicated. However, even if they could demonstrate such needs, for reasons developed below, I consider that these are outweighed by other factors under section 3(1)(d) and (g).

102  There is no legal obligation on a parent to maintain an adult child as there is for a child under 18. Section 3(1)(d) is concerned with obligations and responsibilities which the deceased had immediately before death, not in the past. This was made clear by the decision of the Court of Appeal in In re Jennings decd. [1994] Ch 286. In that case a middle-aged adult child sought an order for provision of a lump sum towards repayment of his mortgage against the estate of his father, who had neglected to maintain him throughout his childhood. The decision of the judge to award the lump sum on the basis that section 3(1)(d) could be construed as including legal obligations and responsibilities which the deceased had but failed to discharge when the applicant was a child, was reversed on appeal.

103  At 296D-E Nourse LJ said:

“In my respectful opinion that is an impossible construction of section 3(1)(d). While it is true that it requires regard to be had to obligations and responsibilities which the deceased “had,” that cannot mean “had at any time in the past.” At all events as a general rule, that provision can only refer to obligations and responsibilities which the deceased had immediately before his death. An Act intended to facilitate the making of reasonable financial provision cannot have been intended to revive defunct obligations and responsibilities as a basis for making it. Nor, if they do not fall within a specific provision such as section 3(1)(d), can they be prayed in aid under a general provision such as section 3(1)(g).

104. Likewise, at 300E-G, Henry LJ said:

“[The judge] held that the obligations under section 3(1)(d) need not exist at the time of death. In my judgment that was wrong as a matter of law. The deceased’s freedom of action to dispose of his property must be judged at the time of death, and it is only his then current obligations and responsibilities that must be taken into account. Some undischarged responsibilities from the past may still be current – for instance a child of the deceased might have given up a university place to nurse the deceased through his long last illness and now wish to go to take up that place. The moral obligation there would be both current and clear. But where the undischarged responsibility does not amount to an obligation present at the date of death, the statute does not require it to be taken into account.”

105. It follows that, under section 3(1)(d), the question is what if any obligations or responsibilities did Tony have towards either claimant at the time of his death in 2017. [Counsel] submitted that the answer was none. He had made the gifts to them in 2008 to buy flats and made it clear at that time that they could expect no more financial assistance. On their own case, they both asked for further financial assistance thereafter which he refused. He refused to help Juliet over her first divorce by buying out Steve. It was her mother who helped financially. Lauretta, at least through her mother, seems to have sought similar financial assistance with her divorce in 2016, but Tony again refused. As [Counsel] put it, by the time of his death, whatever obligations he had taken on in the past to bail the claimants out of their financial difficulties were defunct.

107.      [Counsel] relied upon what the judge concluded at [187]: “I do not consider that, objectively, Mary owed an obligation or responsibility to Hetty arising out of her role as quasi-parent to do more than give Hetty a sound financial start in life, which she did.” She also relied upon the fact that, in the section of his judgment headed “The value judgment” dealing with the question whether, viewed objectively, the deceased’s will failed to make reasonable provision for the applicant’s maintenance, the judge referred, at [200] to [201], to the adult child’s claim in In re Dennis and commented on the striking similarity between that case and the situation of the applicant before him. In my judgment, the most that can be drawn from Baynes v Hedger. in the case of an adult child such as each of the claimants, is that, in considering the factor under section 3(1)(d), the court should consider to what extent, at the time of death, the deceased had assumed responsibility for the maintenance of the relevant applicant. If the deceased has disclaimed responsibility, as Tony did in this case, that must be a relevant factual consideration militating against Tony having any obligations and responsibilities towards the claimants at the time of his death. On the basis of the decision of the Court of Appeal in In re Jennings, any obligations or responsibilities he may have had towards them when they were teenagers or in their early twenties are irrelevant.

111. As is clear from the findings I have made, I have concluded that Tony did not have any obligations or responsibilities towards either of the claimants at the time of his death for a number of reasons, which can be summarised as follows:

(1)    Whilst the claimants may well have enjoyed an affluent lifestyle until they were in their early twenties, when their parents divorced, they were not entitled to expect that standard of living indefinitely, nor did they in fact do so, given that, as I have held, the lifestyle choices they both made in terms of marriage and family were not dependent upon their father’s financial support at the time or contingent upon his financial support in the future. The issue, as In re Jennings makes clear, is what obligations and responsibilities Tony had towards either of them at the time of his death, not any obligations or responsibilities he may have assumed towards them up until his divorce from their mother some ten years earlier.

(2)    Tony had made generous provision for both claimants with the gift of money in 2008 which they were able to invest in property. He made it clear at that time that they could not expect any further financial assistance from him (which he repeated in his letter of 30 May 2008 to Lauretta). He maintained that position consistently, declining to assist them financially with their respective divorces. As I have said, that disclaimer of responsibility militates against his having any obligations or responsibilities towards either claimant at the time of his death.

(3)    Since I am not prepared to draw an adverse inference against Pamela or conclude that she lied when she denied revoking the mirror will, this is not a case, unlike In re Goodchild, where the deceased was under some moral obligation to either claimant at the time of his death. Lauretta was in any event not a beneficiary under either of the wills and the entitlement of Juliet and her children does not arise until Pamela’s death. No entitlement arose on Tony’s death.’

Investment Fund Fraud – Jurisdiction of English court

For a highly instructive and recent investment fraud case involving offshore vehicles, see: Van Zuylen v Whiston-Dew & Anor [2021] EWHC 2219 (Ch) (04 August 2021).

Van Zuylen v Whiston-Dew & Anor [2021] EWHC 2219 (Ch) (04 August 2021) (bailii.org)

See also:

See also:

‘Mediation of Fiduciary Disputes In Islamic Banking And Finance’

Mediation of Fiduciary Disputes In Islamic Banking And Finance | LinkedIn

Islamic Trusts’: Islamic Trusts | LinkedIn

Trusts Litigation after Brexit’Trust Litigation after BREXIT | Carl’s Wealth Planning Blog

‘Carl Islam – Certified Mediator’Carl Islam – Certified Mediator | LinkedIn

Van Zuylen v Whiston-Dew & Anor [2021]

CONTENTIOUS TRUSTS: EWHC allows investor to recover trust’s assets as remedy for fraud losses

Baroness Jacqueline Van Zuylen has won her claim against investment advisor Rodney Whiston-Dew for the return of GBP2.1 million she entrusted to him in 2011 but which he placed in various trusts and companies for his own use. She has traced some of the money to a charge held by a trust against land in Essex that the England and Wales High Court (EWHC) has now agreed can be regarded as the fruits of Whiston-Dew’s disposal of her money. Whiston-Dew, who is currently serving prison time for another fraud, unsuccessfully argued that he acted properly and honestly, that he is protected by the trust’s corporate veil and that the matter should have been determined by the courts of St Kitts and Nevis (Van Zuylen v Whiston-Dew and GBT Trust, 2021 EWHC 2219 Ch).’ STEP Industry News 05.08.2021.

‘In 2011, the Claimant, Baroness Jacqueline Van Zuylen made a decision that she now deeply regrets. She entrusted over £2.1 million – effectively her entire fortune – to the stewardship of the First Defendant, Mr Rodney Whiston-Dew. Less than half of this money has been returned to her and, with one exception, she has little idea of what has happened to the rest of it. The exception is that some of it (in her submission) is currently represented by advances made on the security of identified land in Essex. By means of this case she is now seeking to make recovery of her losses against the First Defendant and against the Second Defendant, a company incorporated in the Seychelles, now called GBT Global Limited, which I will refer to as “GBT”. Since 12 April 2018, after the events giving rise to claims in this action, GBT has been separately owned and controlled by Mr John Davis. Prior to this GBT was within the ownership and control of the First Defendant and was the vehicle that he used for dealing with the monies entrusted by the Claimant. …

The Claimant has a number of options in how she chooses to use her remedies in relation to the Relevant Charge.

In Re Hallett’s Estate; Knatchbull v Hallett (1880) 13 Ch D 696, Sir George Jessel MR acknowledged that where an asset was acquired exclusively with trust money, the beneficiary could either assert equitable ownership of the asset or enforce a lien or charge over it to recover the trust money. This principle was affirmed (and clarified in relation to its application to mixed assets) by Lord Millett in Foskett v McKeown [2001] 1 AC 102 (HL), 127. The Claimant has asked for the former remedy, although in view of my further findings below, I will give her an opportunity to consider whether this is the remedy that she seeks. …

A third defence that the First Defendant has attempted to raise was based on the proposition 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 Azure Trust. The First Defendant raised this challenge to the court’s authority very late in the proceedings and it was dismissed at a previous hearing. As well as being raised late, the point was utterly without merit given that the Claimant has not made any claim for breach of the Azure Trust and has never bound herself to any foreign jurisdiction. Her principal complaints against the First 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 purported second Azure Trust, was used by the First Defendant as an instrument of deceit and as such it should be ignored.

In view of her success with these multiple causes of action, there are a number of ways in which the Claimant could claim for the remainder of loss. She can recover her loss from the First Defendant or from GBT or partly from each of them. Of course, she cannot recover her loss more than once.

In terms of quantifying the Claimant’s loss, her loss includes the difference between the monies that she entrusted to the First Defendant and GBT and the amount or value that she has received back from them.’

Extracts from the judgment of Mr Nicholas Thompsell sitting as a Deputy Judge of the High Court.

Legal Analysis – Further extracts from the judgment

‘(A) The overarching case

The Claimant, in her amended Particulars of Claim, has sought redress under a number of different headings. The Claimant’s overarching case is that she has been the victim of what Mr Dale describes as a “fraudulent scam” and which I would characterise as being most likely a form of Ponzi scheme.

[A Ponzi scheme is a form of fraud that lures investors and pays profits to earlier investors with funds from more recent investors. The scheme leads victims to believe that profits are coming from legitimate business activity, and they remain unaware that other investors are the source of funds].

Mr Dale put it very simply. She was deceived. She paid over her money, not as a gift, and wants it and its fruits to the extent that they are traceable, or compensation for being denied the ability to profit from its investment.

The First Defendant’s general response is that the monies were vested into the Azure Trust and that the Azure Trust did invest the Claimant’s money mainly by making loans against property as was envisaged.

I do not accept the First Defendant’s case on this. I do not consider that the Azure Trust was ever properly constituted. I consider that the evidence from the ledger accounts, and the inability of the First Defendant to produce any documentation for the various secured loans that he says were made, are not compatible with the contention that these arrangements were properly operated in the interests of the Claimant.

A large element of the First Defendant’s defence has involved his seeking to distance himself by claiming that the money went into one or other of the Azure Trusts that were created and accordingly that it is subject to the jurisdiction of a foreign court. The latter point is entirely without merit.

The First Defendant claims that he has never benefited from the personal receipt of the Claimant’s money, but it is clear that acting through GBT (which at the time was entirely his creature and was his instrument for wrongdoing) he did arrange for various unexplained payments to be made, at least some of which appear to have benefited companies or trusts associated with him, and he operated with no regard to conflicts of interest.

I have found that the second defendant, GBT, received the Claimant’s money. GBT accepts that, to the extent it did receive funds from the Claimant, and still holds them in a manner that they are identifiable as the Claimant’s funds, they are held on trust for the Claimant. The extent to which GBT is also the proper target of the other heads of claim was not much discussed during the course of the trial, but I will consider it below.

The Claimant, in her amended Particulars of Claim, sought redress under a number of different headings. These included various remedies available under the Financial Services and Markets Act 2000 (“FSMA”), under the tort of deceit, in contract, for breach of trust, for breach of fiduciary duty and in restitution. These claims, insofar as they were actively pursued into the trial, are considered further below.

(B) Deceit

The head of claim which Mr Dale was most keen to emphasise during the trial was that based on the tort of deceit. In the context of what may be the imminent bankruptcy of the First Defendant, as has been discussed above, Mr Dale was aware that, unlike some other heads of claim, this head of claim may continue to be enforceable after the end of any period of bankruptcy.

To make a claim in deceit a claimant must establish that the defendant: (a) made a representation, (b) that was false, (c) knowing it was false, not believing in its truth or not caring whether it was true or false, (d) intending it to be relied on; and that (e) the claimant relied on it, thereby suffering loss.

(a) Was there a representation?

It has been said that “fraud must be distinctly alleged and as distinctly proved”. It is important that the false representation relied upon is identified.

Perhaps, on the basis that it was obvious on the facts put in front of the court, Mr Dale did not spend very much time itemising the particular false representations that were relied on for the purposes of this claim, but when pressed on the point Mr Dale cited the express representations made at the money would be looked after within the Azure Trust by FLT acting as a trustee. The very act of setting up formal trust arrangements with a professional trustee company implied that the investments would be operated in a normal business-like manner. Even if this was not expressly said, there would have been a clear implication that FLT would have stewardship of the money, ensuring that uninvested monies were being held in bank accounts under its control, and that monies invested would be properly secured, for example by ensuring that there was proper documentation of any loan made and that any security would be held by the trustee or by a responsible nominee for the trustee. Furthermore, the involvement of a professional trustee implied that investment decisions would be made by reference solely to the interests of the beneficiaries and not so as to benefit anyone else involved and that conflicts of interest would be avoided, or at least, appropriately managed in accordance with the provisions of the trust deed and applicable law.

I have no doubt that these representations were made. To the extent (if any) that they were not made expressly, they were implied. It is established law that implied representations can form the basis of an action for deceit. Also, where there is a fiduciary relationship relation between the parties (as would have been the case here since the First Defendant was making arrangements as agent on behalf of the Claimant) the fiduciary may be under a duty to reveal information so that non-disclosure would be capable of amounting to a fraud at common law (see for example Conlon v Simms (1986) 18 H.L.R.219). This point is particularly relevant to the First Defendant’s failure to inform the Claimant about the refusal of FLT to act as trustee, leading to the first Azure Trust never being constituted and its purported replacement with a new Azure Trust where GBT would be trustee.

These representations were made by the First Defendant at or before the time that the Claimant started to send money. They were not, however, made by GBT, which remained unknown to the Claimant at this point. Even at a later point, the court has not been directed to any specific representation made by GBT that is said to form the basis of an action for deceit.

Of course, there is a distinction between a statement and a promise about the future. This opens the possibility that the First Defendant could argue that, at the time he started his business relationship with the Claimant, he genuinely intended to set up proper trust arrangements operating on the basis described above, and so the statement was either a promise about the future (which cannot form the basis of an action for deceit) or at most a true representation as to his current intentions.

There are two objections to such an argument.

The first is that, viewing the pattern of conduct I consider it far more likely than not that the First Defendant never intended the original Azure Trust to be set up on a proper and above board basis. If he had meant to do this, he would have ensured, or at least attempted, the transfer of the Claimant’s funds to FLT and would have made arrangements for him or GBT to be given some official standing in relation to the management of these investments. He would not have misrepresented to the Claimant that she was a protector in relation to the Azure Trust. When the trust arrangements with FLT failed, he would have honestly discussed this with the Claimant and obtained her consent to setting up GBT as a replacement trustee. He would have also made better efforts for GBT to be properly constituted as a trustee, for example arranging some form of succession from FLT and by appointing the Claimant as its principal beneficiary.

Furthermore, had the initial Azure Trust arrangements been honestly conducted, he would not have regarded himself as being empowered to determine what payments should be made by the Trust. He would also have taken proper steps in relation to the custody of the assets, the documentation of loan terms and the holding of any security.

The second objection is that as the matter progressed there would have been continuing representations in this regard. The Claimant says that she had understood that FLT remained the Trustee throughout the period in which she was making the investments. Whilst it is possible that she did at some point become aware that GBT rather than FLT was purporting to act as trustee, given that she did see and sign documents referring to GBT as trustee, I do not believe that she was ever given a clear explanation that there had been a change of trustee and the implications of this. Even if she thought that at some stage GBT had become the trustee she would still have relied on a continuing implied representation that there would at least be an attempt to run matters run on a proper business-like basis by a trustee who would be making investment decisions for her benefit and taking the appropriate steps to secure her investments. It is clear from the facts as I have found them above that this did not happen, rendering such continuing representations false.

(b) Was the representation false?

It will be clear from my description of the arrangements that the arrangements that were made in no way matched the express or implied representations I describe above.

(c) Did the First Defendant know the representation to be false?

The First Defendant (with many years’ experience as a solicitor operating in the field of international trusts) must have understood what he told the Claimant and what were the implications of this and must have clearly understood that the way that he was arranging for the Claimant’s monies to be dealt with did not meet the position as he had represented it.

His various dealings with the Claimant indicate that he continued to seek to provide false reassurance that everything was in order through such devices as getting her to sign letters suggesting that she was the “protector” of the Azure Trust when he knew that she was not, and a letter of wishes which he had no intention of observing; by producing from time to time statements suggesting that her investments were going well. He made payments to her knowing that she would have assumed that they came from the Azure Trust but which in fact seem to have in some cases to have been funded by transfers from ledgers held by other clients of GBT.

The Claimant gave evidence that the First Defendant was adroit in controlling the meetings that he had with her so that the time spent with her was mostly wasted in small talk and any business element was left to be hurried at the end of the meeting so that she was not left with time to consider what was said or any document that was put in front of her. The fact that the First Defendant did not provide written explanations for her to keep is also consistent with an intention to deceive.

(d) Did the First Defendant rely on the representation and thereby suffer loss?

It is clear that the Claimant acted in the way that the First Defendant intended for her to do. She sent her money to the solicitors’ accounts controlled by GBT. It is fair to conclude, and I do conclude, that she was doing so in reliance on these representations. I have given consideration to the possibility that the Claimant’s naïveté in financial matters was such that she would have sent the money to GBT even if plainly told that there was to be no proper trust arrangement put in place for her but I find this unlikely.

Judged on the figures that were placed before the court, it is equally clear that the Claimant has suffered loss as a result of her reliance on these representations. There is a large shortfall between the money that she has received back and the money which she put into the control of the First Defendant. As well as losing money, she has lost the prospect of a commercial return on that money over a lengthy period.

It is, of course, possible that, even if the arrangements had been operated in accordance with the terms that had been represented to her, that she might have lost money. That is a risk that any investor takes. However, on the basis of the express or implied representations made to her she was not expecting to have the additional risk that her monies would not be properly accounted for. Neither could she have expected that, where investments were made, they would not be properly protected by means of loan agreements or security, or that the trustee that she was told would be operating the fund would not do so and instead another company, with no credentials would act as trustee would do so (and would do so otherwise than on the basis of any appointment from FLT, the person represented as being the trustee who would have custody of her funds.

The arrangements were not as falsely represented, and she has suffered as a result.

It is just possible that these losses could be largely mitigated if the Relevant Charge is transferred to her and yields a substantial profit. Nevertheless, as things stand at present the Claimant has suffered a loss and the court should look for a suitable remedy for this.

I conclude, therefore, that a remedy for deceit is available to the Claimant against the First Defendant, but not against the Second Defendant.

(C) Breach of Fiduciary Duty

The Claimant has also claimed a remedy for breach of fiduciary duty. Again not much time was spent discussing the elements of this cause of action during the course of the trial. The Claimant’s submissions in this regard are largely those set out in the skeleton arguments produced in relation to the opening of the trial.

In their skeleton argument, Mr Dale and Mr Benson reminded me of the nature of a fiduciary. A fiduciary is someone who has undertaken to act for or on behalf of another in a particular matter in circumstances which give rise to a relationship of trust and confidence. The distinguishing obligation of a fiduciary is a duty of loyalty: a fiduciary must act in good faith, must not profit out of his trust, and may not act for his own benefit for that of a third person without the informed consent of his principal. Counsel referred me in this regard to Bristol and West Building Society v Motthew [1998] Ch 1, 18, per Millet LJ. Additionally, a person exercising a fiduciary power must not exercise it “for a purpose, or with an intention, beyond the scope of or not justified by the instrument creating the power” as was said in Vatcher v Paull [1915] 1 A.C. 372 (PC), 378, by Lord Parker.

The First Defendant clearly took on a role as acting as agent for the Claimant. He received the Claimant’s money into a bank account controlled by him via his company GBT. The Claimant reposed trust and confidence in him as her adviser. He took on the direction of the investment (or at least the disposition) of that money. He purported to deal with FLT and with others on behalf of the Claimant.

I am reminded by counsel for the Claimant that an agent owes a fiduciary duty to his principal (see for example, FHR European Ventures LLP v Cedar Capital Partners LLC [2014] UKSC 45, [5], per Lord Neuberger). Certainly (in the absence of contractual provision to the contrary), an arrangement according to which an investment manager is given exclusive control over the assets of another gives rise to fiduciary duties (for which see SPL Private Finance (PF1) IC Ltd v Arch Financial Products LLP [2014] EWHC 4268 (Comm), [174], per Walker J).

I accept that the First Defendant should be regarded as a fiduciary and held to the duties applicable to a fiduciary.

The case put forward by the Claimant is that the First Defendant breached his personal fiduciary duties by the way in which he dealt with the Claimant’s monies. Instead of arranging for these to be held on an independent trust with proper supervision, as he said that he would, he kept control of those monies himself. The use to which these monies was put has never been properly explained. Nevertheless, there is enough information within the ledgers, as discussed above, for the court to conclude that these monies were not being used in a way to benefit the Claimant and in making the types of documented, secured investment that she had expected, but rather were used for his own purposes, which may have included accommodating other clients and which appear to have included transactions for his own benefit.

I consider that this case is made out. The First Defendant was in breach of his fiduciary duties and that the Claimant has suffered loss as a result.

Except insofar as a trustee may be considered to be a type of fiduciary, or at least to have fiduciary obligations, I do not think that any case has been made that GBT was acting as a fiduciary. I consider GBT’s liabilities as trustee below.

(D) Breach of the general prohibition under the FSMA

(a) The general prohibition

The Financial Services and Markets Act 2000 (the “FSMA”) includes provisions prohibiting a person from carrying out, or purporting to carry out, a regulated activity unless that person is an authorised or exempt person. This restriction is referred to as the “general prohibition”. The regulated activities to which the general prohibition applies are defined in section 22 FSMA. Under section 22 FSMA, a regulated activity is one which is specified for the purposes of the FSMA and is carried on by way of the business.

The Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (as amended) (the “RAO”) specifies various activities, which as a result become regulated activities for the purposes of the general prohibition. The Claimant, in her amended Particulars of Claim, identified various of these specified activities which she alleged the First Defendant to have undertaken.

Two of the types of activity that were originally pleaded on behalf of the Claimant were those of “accepting deposits” and of “safeguarding and administering investments”. However those arguments were not pursued at trial and I do not consider them further.

Mr Dale did, however, make a case for redress based on two further activities specified within the RAO.

(b) Managing investments

The first of these was that of managing investments. Article 37 RAO provides as follows:

“37. Managing investments

Managing assets belonging to another person, in circumstances involving the exercise of discretion, is a specified kind of activity if—

(a) the assets consist of or include any investment which is a security, structured deposit or a contractually based investment; or

(b) the arrangements for their management are such that the assets may consist of or include such investments, and either the assets have at any time since 29th April 1988 done so, or the arrangements have at any time (whether before or after that date) been held out as arrangements under which the assets would do so.

The Claimant’s case here was that the First Defendant, through GBT or otherwise, was in broad terms managing, or at least purporting to manage, the Claimant’s investments.

It may be objected that these investments did not comprise any of the types of assets listed in paragraph (a) of article 37 RAO on the basis that the investment remit was such as to avoid shares and similar securities. The assets were held either as balances on a solicitor’s account or were unsecured loans or loans charged on property.

In answer to this objection, Mr Dale makes the case that nevertheless under the arrangements agreed with the First Defendant, the First Defendant was to have an extremely broad discretion in selecting assets including assets which could have been of the type specified in part (a) of Article 37, and furthermore that at least one of the investments purchased was a shareholding (the investment in Future Properties Limited).

I will accept, therefore, that the First Defendant was managing himself or via GBT, or was purporting to manage the investment of assets that consisted of or included, or may have consisted of or have included investments of the types specified in article 37(a) RAO.

Usually article 37 RAO will not apply when property is being managed by a trustee because the assets are not assets belonging to another person – the assets are in the legal ownership of the trustee. This will usually mean that the trustee (and any director of the trustee who actually undertakes the activities on behalf of the trustee) will not fall within article 37.

I do not consider that in this case that argument is available to the First Defendant or the Second Defendant. First, even on the First Defendant’s own case that the arrangements were originally made under the auspices of the first Azure Trust, any activity undertaken by the First Defendant or GBT cannot have been made by them as owners in any sense of the assets before GBT purported itself to become a trustee. Secondly, it is my finding that the defendants cannot rely on the terms of the Azure Trust as being applicable. To the extent that GBT was holding any assets it was doing so under a bare trust and the position of a bare trustee is not sufficient to say for the purposes of article 37 RAO that the shares “belong” to the trustee so that the bare trustee is entitled to manage them.

The RAO contains various exclusions (listed at article 39 RAO) which could apply in certain circumstances but none of them are relevant to the circumstances under consideration here. Neither do I consider that there is any argument that the First Defendant and/or GBT were not acting by way of business when they were managing, or purporting to manage, the Claimant’s investments.

Breach of the general prohibition is a criminal offence. I am not sure that I have had sufficient information and argument to conclude to the standards required by the criminal law that the First Defendant and/or GBT committed this criminal offence. It may be that the Financial Conduct Authority will wish to look into this point. However, I consider that on the standard applicable in this civil case, that of the balance of probabilities, the case is made out that the First Defendant and the Second Defendant were in breach of the general prohibition either by managing investments on behalf of the Claimant or purporting to do so without being authorised or exempt to allow them to do this.

(c) Advising on investments

Article 53 RAO specifies the following activity (which therefore becomes a regulated activity if carried on by way of business):

53. Advising on investments

Advising a person is a specified kind of activity if the advice is—

(a) given to the person in his capacity as an investor or potential investor, or in his capacity as agent for an investor or a potential investor; and

(b) advice on the merits of his doing any of the following (whether as principal or agent)—

(i) buying, selling, subscribing for, exchanging, redeeming, holding or underwriting a particular investment which is a security, structured deposit or a relevant investment, or

(ii) exercising or not exercising any right conferred by such an investment to buy, sell, subscribe for, exchange or redeem such an investment.”

The specific act that the Claimant alleges that the First Defendant undertook which falls within this specified activity was when he advised her to cash in her existing investments in order to invest her money with him. There is no doubt that these existing investments included investments falling within article 53(b)(i).

The evidence that the First Defendant advised the Claimant to cash in her investments derives from the Claimant’s witness statement and oral evidence. She said in her witness statement that:

“RWD persuaded me that he would be able to invest all of my savings on my behalf in such a way as to protect my capital and provide a monthly income for life. He said the property was much better than stocks or the share market, “especially on islands like England”. He said that he would be looking after my money. He was very convincing, and I trusted him completely”.

The Claimant elaborated on this statement during her oral evidence. She was clear that she had specifically been advised by the First Defendant that her existing investments were not appropriate for her needs and that she should sell them in order to allow him to provide better investments.

As Mr Dale points out, if this is correct, the arrangements are very similar to those that were dealt with by the court in the recent case of Adams v Options UK Personal Pensions LLP [2021] EWCA Civ 474, where the Court of Appeal (at paragraph 75) approved a dictum by Henderson J that, in drawing the line between what amounted to providing information what amounted to advice that “any element of comparison or evaluation or persuasion is likely to cross the dividing line“.

The First Defendant does not really deal with this issue in his formal defence. However, in his first witness statement he discusses these meetings, mainly in the context of how he says he was instructed to set up trust arrangements. The relevant extracts from his witness statement relating to investment advice include the following:

“During the course of meetings to discuss and determine the strategy to be engaged with regard to the proposed litigation in Guernsey the claimant requested me to review the performance of her IFA, Financial Relationships LLP. The claimant complained that, whereas Rothschild’s Trust had performed badly enough, Financial Relationships LLP had overseen far greater losses. She complained that she had experienced continual difficulties in being able to secure sufficient payments to enable her to sustain her lifestyle. She instructed me to consider taking action against all them to recover losses.

The claimant asked me to advise her [if] what was left of the Rothschild and Financial Relationships funds could be invested to recover capital and yield sufficient to meet her lifestyle requirements. She was adamant that she wanted to avoid the share market and its uncertainties. Bank deposits were out of the question as annual returns were modest to the point of nominal.…

The claimant was adamant that she wished to change the basis of the Financial Relationships LLP investments and to seek opportunities to replace them and secure greater returns for the ultimate benefit of the claimant on a tax beneficial basis.…

The claimant took time to consider her options and ultimately reverted with instructions to proceed…”

The First Defendant, therefore, appears to have accepted that he reviewed her existing investments, although he says that this was in the context of advising whether there might be a case for litigation against her advisers. He also appears to accept that he was asked to advise on how the funds currently held by his advisers could be invested and he does not suggest that he refused to provide such advice. Whilst he indicates that the impetus for changing investments came from the Claimant, rather than from him, his explanation is not inconsistent with the Claimant’s explanation that he, in the context of having reviewed her existing portfolio, advised her that she could do better by investing in property.

It is important also to the context here that it is clear that the advice that the First Defendant is said to have given cannot be regarded as generic advice. It related to the specific investments in a portfolio that he had reviewed.

Mr Dale, quite properly, discharged his duties to the court by pointing out various exclusions to the application of article 53 RAO that are set out elsewhere within the RAO. These are listed at article 55 RAO.

Of these exclusions, the only one that might fall into consideration in this case is the exclusion at article 67 which applies where advice is given in the course of carrying on any professional business which does not otherwise consist of the carrying on of regulated activities in the United Kingdom. Under article 67(2) RAO, this exclusion does not apply if the activity in question is remunerated separately from the other services but there is no evidence or suggestion that this was the case.

However, in my view this exclusion does not apply here. For this exclusion to apply, it must be the case that the activities “may reasonably be regarded as a necessary part of other services provided in the course of that other profession or business“. I cannot see how it would be a necessary part of any other business carried on by the First Defendant that he should provide investment advice to the Claimant of the type given here. The proper course for him if he had been asked to advise the Claimant on whether she should sell her existing investments was for him to say that he was not authorised to provide investment advice and that she should discuss the matter with a qualified investment adviser. There is no suggestion in the evidence before the court that this is what he did.

Once again, I am not sure that I have had sufficient information and argument to conclude to the standards required by the criminal law that the First Defendant was breaching the general prohibition, and I will leave it to Financial Conduct Authority to consider whether it wishes to look into this point. However, I consider that on the standard of balance of probabilities applicable in this civil case the case is made out that the First Defendant was in breach of the general prohibition by advising or purporting to advise her to sell her existing investment portfolio without being authorised or exempt to provide that advice. For completeness, I will mention again that I do not consider that there is any argument that the First Defendant when doing this was not acting by way of business.

(d) The civil consequences of breach of the general prohibition

The civil law consequences that flow from a breach of the general prohibition are set out in section 26 FSMA. This provides as follows:

“26. Agreements made by unauthorised persons.

(1) An agreement made by a person in the course of carrying on a regulated activity in contravention of the general prohibition is unenforceable against the other party.

(2) The other party is entitled to recover–

(a) any money or other property paid or transferred by him under the agreement; and

(b) compensation for any loss sustained by him as a result of having parted with it.

(3) “Agreement” means an agreement–

(a) made after this section comes into force; and

(b) the making or performance of which constitutes, or is part of, the regulated activity in question.

(4) This section does not apply if the regulated activity is accepting deposits.”

Accordingly, section 26 provides a separate means of recourse for the Claimant entitling her to recover any property that she has transferred and compensation for any loss she has sustained to having parted with her property.

(E) Breach of contract and rescission

The Claimant in her amended Particulars of Claim has also claimed a remedy in contract and in relation to the rescission of that contract. Very little time was spent discussing these causes of action during the course of the trial as Mr Dale on behalf of the Claimant preferred to concentrate on questions of fraudulent conduct, breach of trust, breach of duty and deceit. The Claimant’s submissions in this regard were largely confined to those set out in the skeleton arguments produced in relation to the opening of the trial.

As a result, no time was spent at trial analysing the formation or terms of any contract between the Claimant and the First Defendant. I do not think it has ever been alleged that there was a contract between the Claimant and GBT.

It may well be that a case can be made out in contract and in relation to the rescission of that contract, but that case was not sufficiently explored at trial for me to reach any meaningful decision about the matter, nor do I need to, in view of what I have found in relation to some of the other causes of action pleaded. Accordingly, I will not make any determination on this question.

(F) Restitution

A further claim made in the Claimant’s amended Particulars of Claim was a right to restitution on the grounds of unjust enrichment. Again this point was not pursued in any detail at trial and, given what I find in relation to other matters there is no need for me to make any finding in relation to this.

(G) Breach of Trust

(a) Who held assets on trust?

As noted above, for various reasons I agree with the contention made on behalf of the Claimant that the funds were never held on the terms of the so-called Azure Trust. That purported trust was an instrument of fraud and any purported transfers to it were void, with the result the purported trustee held any funds received on constructive or resulting trust for the Claimant.

The Claimant goes further and argues that, because GBT was the First Defendant’s creature and nominee, its receipt of money can be treated as the First Defendant’s receipt of money following Prest v Petrodel Resources Ltd [2013] UKSC 34 and its analysis of Gencor ACP Ltd v Dalby [2000] 2 BCLC 734 (which I deal with in more detail below).

I do not agree that these cases can be read as having this effect. It is one thing to say that, where a wholly owned company is used for the purposes of carrying out a fraud, the use of a company does not afford a defence to its owner for his own wrongdoing. It is another to seek to reassign who should be regarded as the legal owner of the property in question. The First Defendant was never an owner of the assets held by GBT and in the absence of an ownership interest it is difficult to see how he could be regarded as a trustee. He may have brought about a breach of trust by GBT, and may be liable for doing that, but it is not correct to regard him as the person holding assets on trust for the Claimant.

I do accept, however, that GBT, insofar as it held assets deriving from the Claimant was doing so as a bare trustee.

It is clear that in transferring funds into the control of GBT the Claimant was not intending to gift them to GBT, or to the First Defendant, and it must be the case that GBT held such funds as it received upon trust from the moment of their receipt into a solicitors’ account controlled by it.

(b) The nature of the trust

The precise legal analysis for the classification of this trust is not particularly important in this context. Given the Claimant’s lack of awareness about GBT it seems unlikely that the funds were being received by GBT under the terms of an express trust. The facts better fit an analysis that the arrangements be analysed as having given rise to a constructive trust or a resulting trust.

There are various ways in which a constructive trust could be said to have arisen. As noted by Lord Browne-Wilkinson in Westdeutsche Landesbank Girozentrale v Islington L.B.C. [1996] AC 669 (HL), 715, if money is paid to someone by mistake and he knows of the mistake but retains the money, he is a constructive trustee of the money for the payer.

Similarly, if a transfer is induced by a fraudulent misrepresentation, the transferee will hold the transferred funds on trust for the transferor once the transaction is rescinded, as was found in National Crime Agency v Robb [2015] Ch 520. That case is also authority for the proposition that a constructive trust will also arise where the contract begins as a legitimate transaction but is later affected by supervening fraud.

However, the principle that a constructive trust will arise only at the point of rescission is subject to an exception where the transfer is not merely induced by fraud but is itself nothing more than an instrument of fraud, as explained in Global Currency Exchange Network Ltd v Osage 1 Ltd [2019] EWHC 1375 (Comm). In that case Andrew Henshaw QC, sitting as a deputy judge of the High Court said (at [41] onwards):

“Lewin on Trusts, para 7-031 states as an exception to this principle that the rules relating to rescission are not requisite “where a contract is not merely induced by fraudulent misrepresentation but is itself the instrument of fraud and no more than a vehicle for obtaining money by false pretences”. GCEN relies on this exception. It argues that there is a real foundation for believing that Osage was operating a Ponzi scheme. If so, then investors would still own the Funds in equity without the need to rescind their investment contracts: the contract would have been merely a dishonest device to obtain money for which “it is meaningless to impose a requirement for the fraudster to be notified as ‘rescission'”: Halley v Law Society [2003] WTLR 845, para 48. The situation would be “not simply a case of a valid contract being induced by fraud; but that the fraud so infected the whole transaction that it had no legal effect at all”, i e where “The ‘agreements’ were fictitious contracts … merely part of an elaborate charade (or mechanism) by which the loser was persuaded to part with his money”: ibid, para 45. On that basis, the position would be “akin to theft” with the result that the Funds would be immediately traceable by investors: Westdeutsche Landesbank Girozentrale v Islington London Borough Council [1996] AC 669, 705C–D, 715H

Given what I have found in relation to deceit, and to the non-applicability of the terms of the Azure Trust, the description given here seems highly apposite to me and I think that GBT should be regarded as having held the funds throughout as a constructive trustee under an immediately effective constructive trust.

However the effect is little different if the arrangements are instead classified as giving rise to a resulting trust.

As explained in one of the leading works on trust law, Lewin on Trusts, (20th Edition at paragraph 8-002), a resulting trust arises by operation of law if a person makes a disposition of property upon trust but no trusts are effectively declared, or if the trusts that are declared failed to exhaust the beneficial interest.

If I am wrong that the arrangements gave rise to a constructive trust, then I see a strong argument that GBT was holding the assets on a resulting trust.

Either way, GBT should be regarded as holding these assets on bare trust and should be regarded as subject to the duties of trustee.

(d) Consequences of finding a trust

GBT has, rightly, not placed any reliance on the so-called Azure Trust and has accepted that the money transferred by the Claimant to it was held on a bare trust. It follows that GBT must account for this receipt and the fruits and that the Claimant is entitled to call for the money and an account at will.

GBT accepts that, to the extent it did receive funds from the Claimant, and still holds them in a manner such that they are identifiable as the Claimant’s funds, they are held on trust for the Claimant (although it does not accept that it is still holding any such funds). However, GBT, under the stewardship of Mr Davis, has been concerned to give due consideration to any other creditors. In this, I think Mr Davis has been operating quite properly. Mr Davis and his firm can be criticised for their original involvement in allowing the First Defendant to use the firm’s client account as if it were a bank account. They will need to account for their actions in this regard to the SRA and may well suffer regulatory sanctions as a result. However, my impression has been that since taking over GBT, Mr Davis has been doing his very best to act fairly in the interests of all of those who have a claim against GBT.

Mr Dale has asserted that GBT must be regarded as acting as a bare trustee of any asset that is holding on behalf of the Claimant. I agree. If this were the only money that GBT had received that was held on trust for anybody, then it would be right that returning the money subject to the trust would take precedence over the claims of any other creditors of GBT. However, GBT denies that it is still holding any of the Claimant’s money and also it seems highly unlikely that the Claimant’s money was the only money that had been held on trust by GBT. It seems likely from what the court has seen in the various ledgers that the Claimant is not the only victim of this Ponzi-like arrangement and that others too may well claim that GBT is holding their funds on a bare trust.

The casual way in which monies were transferred from one client of GBT to another makes it extremely difficult, if not impossible, to determine how far any particular balance or asset that GBT may have held at any point should be regarded as representing funds derived from one client of GBT or another. Where funds that were held on trust become mixed with other funds held on a different trust, and the total remaining is less than the amount needed to meet claims of all beneficiaries, then the funds remaining available will need to be shared amongst all those who have a valid equitable claim.

To the extent that GBT has received the trust funds and has not accounted for them, then Mr Dale is correct in his argument that GBT cannot deny an obligation to return money because it has parted with it or mingled it, in breach of trust. However that obligation to account is an unsecured claim (except to the extent that it might be secured by a lien over the Relevant Charge, as explained below). If, as I expect will prove to be the case, GBT does not have the assets to meet all of the claims that will be made against it, it will need to go into some form of insolvency proceedings. Its liquidator or administrator will have a hugely difficult task in working out what are the valid claims made against GBT and on what trusts any assets remaining to be held by GBT are held. The Claimant’s claim will need to take its place alongside other unsecured claims – behind secured claims and after repayment of any segregated funds that are substantiated to have been held on trust for others. In anticipating this likely outcome, I can understand Mr Davis’s caution about GBT paying or transferring assets to the Claimant ahead of other potential claimants without the sanction of a court order to justify this.

(H) Tracing into the Essex Land

(a) The Claimant’s tracing claim

The Claimant claims that she should be entitled to trace her monies into the charge over the Essex Land which I have defined at paragraph 115(d) above as the “Relevant Charge”.

During the trial the court heard that the existence of this charge, and of other charges over the property, are being disputed in a separate action. I have seen the Particulars of Claim in relation to that action. This alleges further frauds on behalf of the First Defendant. It is not proper for me to comment on that action and I have been invited on behalf of the Claimant to ignore both this action, and any other purported charges over the same property for these purposes, and concentrate solely on the proposition that has been put to me that this particular charge (for whatever it is worth and on the assumption that it validly exists) is traceable as an asset of the Claimant. I am content to approach the matter on this basis.

(b) The nature of tracing

Tracing trust property or property subject to a fiduciary relationship is a well-established process which may be applied where funds or assets are transferred in breach of trust or fiduciary duty. It is based on the legal theory that the beneficial interest in the property will persist unless it is transferred to a bona fide purchaser of the legal estate without notice or until the beneficial interest is overreached. The beneficiary may claim a proprietary remedy to vindicate his beneficial interest provided that he can follow his property or trace into its proceeds.

In tracing trust money through bank accounts, the courts may encounter evidential difficulties, but this does not necessarily operate as a bar to prevent the tracing remedy being successfully pursued. This is explained in Lewin on Trusts as follows:

“Evidential difficulties may arise, however, particularly where a number of bank accounts are involved, some of which may be abroad and banking records are incomplete or not available. In such cases the court may be prepared to draw the inference that a payment into one account is attributable to a previous payment out of another account and therefore traceable where the two payments are of a similar though not identical amount and the time gap between them is reasonably short.”

One of the principal cases cited in Lewin as demonstrating the court’s willingness to draw the appropriate inferences is El Anjou v Dollar Land Holdings Plc [1993] 3 All E.R. 717, 734–736.

In El Anjou, the claimant was the victim of a fraudulent share-selling scheme perpetrated by three Canadians. The fraudulent scheme involved the transfer of money through various jurisdictions and ultimately into a London-based property development project. The first defendant in that case was not itself involved in the fraud. The claimant faced various evidential difficulties. There was no direct evidence linking the funds received into the ultimate recipient’s account to the funds the claimant had previously transferred. The claimant had transferred $1,600,000 but the funds ultimately received were only $1,541,432 and the funds were ultimately received 20 days after the claimant’s transfer.

Nonetheless, the Millett J held that the claimant could trace into the ultimate recipient’s account. He placed particular emphasis on the fact that there was “no evidence that the Canadians had any substantial funds available to them which did not represent proceeds of the fraud” (735F) and said, at 735H-736A:

“The victims of a fraud can follow their money in equity through bank accounts where it has been mixed with other moneys because equity treats the money in such accounts as charged with the repayment of their money. If the money in an account subject to such a charge is afterwards paid out of the account and into a number of different accounts, the victims can claim a similar charge over each of the recipient accounts. They are not bound to choose between them. Whatever may be the position as between the victims inter se, as against the wrongdoer his victims are not required to appropriate debits to credits in order to identify the particular account into which their money has been paid. Equity’s power to charge a mixed fund with the repayment of trust moneys (a power not shared by the common law) enables the claimants to follow the money, not because it is theirs, but because it is derived from a fund which is treated as if it were subject to a charge in their favour.”’

Mediation of Will, Inheritance, Probate, and Trust disputes

As a practising Barrister I specialise in Will, Inheritance, Probate, and Trust disputes.

I passed the Mediator training course provided by the Bar Council 30.07.2021, with a score of 96% on the exam. In order to become a member of the Society of Mediators (i.e. as a panel member), then within 12 months, I need to complete three observations of a Zoom mediation involving any mediator. To cut my teeth and gain flying hours, from October, I will volunteer for internet County Court Mediations in relation to: will; probate; trust; property; business; and contract disputes.

Until I have completed all of my observations I can hold myself out as a qualified non-panel Mediator. My ambition is to become a panel member of the Society of Mediators in London, which I am working towards. Completing the course is only the first step in a long journey to develop skills as a mediator – learning first by watching and then by doing, and I will not be doing any mediations until I have become a panel member with the Society of Mediators.

As a a matter of policy and choice, I will only act as a Mediator if the value of a dispute is within the limit of my PI cover which I increased in 2021. My target market is disputes below £2 million.

Anecdotally, I had the great privilege of meeting with the late Professor Roger Fisher for two hours in his study at Harvard Law School during an academic visit from King’s College London in 2002, and his parting advice was,

‘Appreciate their point of view:

  • understand it – it’s very important to appreciate the way they see it,
  • even if you don’t agree, say that it merits serious consideration, don’t say that they are wrong.

Appreciate their self-esteem.

Acknowledge that the other person has been heard.

Be prepared to argue their case better than they can before you answer it.’

By the end of the Bar Council Mediator Training Course, I understood the wisdom that Professor Fisher (co-author of ‘Getting to Yes’ and a founding Father of principled negotiation) had imparted to me.

The secret or acme of mediation is authenticity, empathy, and active listening (without making matters worse!), which develops trust and enables the Mediator to create a safe space into which the participants feel empowered to enter and start a conversation that can lead to a solution of their own design and making, i.e. to a ‘deal’ that they own. This requires counter-intuitive thinking and behaviour, and is a lot harder to actually do than you might think.

The art and metier of Facilitative Mediation can be used to solve almost any kind of dispute, and does not require any legal, economic, business, social, political, or diplomatic knowledge and subject-matter expertise/experience by the Mediator. What it requires is skill in managing a process.

At the end of our meeting Professor Fisher went up to his bookshelf and handed me a copy of his book ‘Beyond Machiavelli’ which he inscribed, ‘To Carl – Another set of ideas!’

It is one of my greatest treasures.

Meanwhile, I would like to take this opportunity to thank Jonathan Dingle and all of his colleagues at the Faculty for delivering the challenging, exhausting and brilliant course they put us all through this week, which involved 14 hour work a day. I can now sleep for a few hours!

While my primary focus is on mediation of will, inheritance, probate, and trust disputes, after I have completed my Art Law Diploma (which I am aiming to complete by July 2022), I also plan to develop the ‘facilitative’ Mediation of Art and Cultural Heritage Disputes as a niche practice area, and to write and talk about the subject.

Mediation is the norm in both Art and Cultural Heritage Disputes, see the ‘Mediation of Art & Cultural Heritage Disputes’ page of my website:

Mediation of Art & Cultural Heritage Disputes – Carl Islam

As Judith B. Prowda observes in her leading text book, ‘Visual Art And The Law’ (2013) at page 240,

Creative solutions may be obtained in mediation by exploring each party’s interests, including non-monetary concerns. Mediation may result in a more satisfying outcome for the parties than a court decision, which is limited to the matter before it, not in enabling options for the parties.’

For more information about my future Mediation services please visit: www.carlislam.co.uk

See also my blogs:

The English court can order mediation where a party does not consent – The English court can order mediation where a party does not consent | Carl’s Wealth Planning Blog

The English court can order mediation where a party does not consent

Civil litigants in England and Wales can lawfully be compelled to use alternative dispute resolution (ADR), according to a new report by the Civil Justice Council (CJC).

Mandatory (alternative) dispute resolution is lawful and should be encouraged: Mandatory (alternative) dispute resolution is lawful and should be encouraged | Courts and Tribunals Judiciary

See also:

Compulsory ADR: Civil-Justice-Council-Compulsory-ADR-report-1.pdf (judiciary.uk)

A move towards compulsory ADR? (newlawjournal.co.uk)

“Parties should be encouraged to accept mediation, for example by imposing sanctions on those who refuse to enter into it, the report advocates. It suggests sanctions could be ‘to prevent the claim or defence continuing, either by making the commencement of proceedings conditional on entering ADR, or empowering the court to strike out a claim/defence if a party fails to comply with a compulsory ADR order at a later stage in the proceedings.’ It adds that any strike-out could be set aside if there was a valid reason for non-compliance.

Evaluative appraisals in the form of early neutral evaluations and financial dispute resolution (FDR) hearings in the Family Court would be candidates for compulsory mediation, the report indicates. FDR is already a standard and compulsory part of the procedure to be followed when a party makes an application for a financial remedy under Part 9 of the Family Procedure Rules 2010, and usually takes place following the first directions hearing. Both parties must attend the FDR unless the court orders otherwise.

‘ADR should no longer be viewed as an “alternative” but as an integral part of the dispute resolution process,’ commented Vos. ‘That process should focus on “resolution” rather than “dispute”. This report opens the door to a significant shift towards earlier resolution.’”

Extract from STEP Industry News 15.07.2021.

Therefore, if an application is made for JENE to be followed by Chancery FDR/Mediation, the court can grant the application without the consent of an opposing party. Since ADR is to be encouraged, a party should not be penalised for making an application if the application has merit.

This is timely, as I am training to qualify as a Civil Mediator in 9 days time.

For more information please visit ‘Will Trust & Probate Disputes’ – https://newsite.carlislam.co.uk/contentious-probate

and,

www.ihtbar.com – ‘Mediation of Art & Cultural heritage Disputes’

See also my article published in Trusts & Trustees – ‘Judicial ENE – The new normal’ on the publications page at www.ihtbar.com

In the Article I argued: 

‘By analogy, following Lomax (supra) can the court order a Chancery FDR without consent, i.e. after imposing a JENE? Arguably, yes, because:

i. CPR, r.3.1(2)(m) does not expressly exclude FDR—what it does is to illustrate the application of the underlying principle by reference to ‘Early Neutral Evaluation’;

ii. the issue that was before Mrs Justice Parker in the

High Court in Lomax,6 was whether the court had the power to order either ‘an Early Neutral Evaluation Hearing (‘ENE’) or Financial Dispute Resolution Hearing (and by extension give directions for it) in the absence of consent pursuant to amended Civil Procedure Rule (CPR) 3.1(2)(m.)’;

iii. at paragraph 111 of her judgment, Mrs Justice Parker concluded, ‘on the finest of fine balances’ that she could not order either, and that this conclusion ‘may well be wrong, and overly cautious’;

iv. Mrs Justice Parker further observed that: ‘FDR cannot be considered just a sub-species of ENE’ (paragraph 118); and ‘the current Rules are insufficiently precise in their formulation for me either to conclude, or be confident that the Rule makers intended . . . that the term ENE in the amended Rule is intended to govern FDR as well’ (paragraph 119);

v. the learned judge urged, ‘the Rules committee (a) to clarify whether ENE is to be considered compulsory and (b) to give consideration to providing a clear route to compulsory FDR in appropriate civil proceedings a prime example in my view being Inheritance Act litigation. The arguments for the court having power to do so are strong and the experience in the Family Division of court-controlled intervention presents a very favourable picture’;

vi. in Lomax (supra), Lord Justice Moylan stated:

Looking at the issue more generally, as I have already described, the great value of a judge providing parties with an early neutral evaluation in a case has been very well demonstrated in financial remedy cases. Further, the benefits referred to above have been demonstrated not only in cases where the parties are willing to seek to resolve their dispute by agreement and are, therefore, willing to engage in an FDR. In my experience and that, I would suggest, of every other judge who has been involved in financial remedy cases, the benefits have also been demonstrated frequently in cases in which the parties are resistant or even hostile to the suggestion that their dispute might be resolved by agreement and equally resistant to the listing of an FDR. As Norris J said in Bradley v Heslin [2014] EWHC 3267 (Ch):

‘24. I think it is no longer enough to leave the parties the opportunity to mediate and to warn of costs consequences if the opportunity is not taken. In boundary and neighbour disputes the opportunities are not being taken and the warnings are not being heeded, and those embroiled in them need saving from themselves.’

(Paragraph 29) . . .

If the intention had been to require the parties to consent, it would have been very easy to make this clear by expressly providing for this. In my view, the absence of any such express requirement is a powerful indication that consent is not required (Paragraph 30); and vii. while the comments made by Lord Justice Moylan in paragraphs 14 and 29 of his judgment, were made obiter, in paragraph 32 of his judgment, the learned judge found, ‘In conclusion, I see no reason to imply into subparagraph (m) any limitation on the court’s power to order an ENE hearing to the effect that the agreement or consent of the parties is required’, therefore his conclusion about the meaning and scope of CPR, r.3.1(2)(m) is an integral part of the ratio in Lomax, and by analogy applies to FDR.

The stage is therefore set, for either a test case, or the Rules committee to clarify whether FDR (including Chancery FDR) can be ordered without consent.

The author argues that on a wide interpretation of CPR, r.3.1(2)(m), and subject to compliance with any other procedural requirement, for example, where the interests of minor and unborn beneficiaries are involved, that the court has the power to make any direction ‘for the purpose of managing the case and furthering the overriding objective’ that it sees fit to order.’ 

Review of my book in Trusts & Trustees (Oxford University Press)

A review of my book the ‘Contentious Trusts Handbook – Practice and Precedents’ published by the Law Society in July 2020 has been published in the current edition of Trusts & Trustees by Oxford University Press (08.06.2021):

https://academic.oup.com/tandt/advance-article/doi/10.1093/tandt/ttab015/6295144?guestAccessKey=8284bd51-4496-4454-ab8c-999ca62b9d56

The Review was written by Jacob Meagher, and I would like to take this opportunity to thank him for undertaking and writing this review.

J. J. Meagher Review of Carl Islam Contentious Trusts Handbook: Practice and Precedents (Law Society, London, 2020)

‘There are a few key texts often found within easy reach of every contentious trusts or estates practitioner, be they barrister or solicitor. Often you will find the Chancery Guide, a copy of Lewin or Snell (depending on one’s preference), usually a book on Drafting Trusts and Will Trusts (perhaps by Kessler QC), then one of the texts on the laws of probate, and a copy of the White Book. In terms of the actual practice of and preparation for the contentious area of Chancery litigation, specifically practice and precedents one would then turn to Chancery Practice and Procedure or Chancery Litigation Handbook, published by Jordans in 2001 and 2005.1 Now, a much needed and updated text has been commissioned by the Law Society and authored by barrister Mr Carl Islam of 1 Essex Court, Contentious Trusts Handbook: Practice and Precedents.2 This soon to be indispensable new work is sure to be staple not only for the preparation of contentious matters, but also for those who wish to pre-empt and ward-off problems arising in the administration of trusts and the relationship with beneficiaries and the courts supervisory jurisdiction.

As explained by Toby Graham, who provides the forward to this work, the publication of Mr Islam’s text reflects the fact that the risk of trustees, beneficiaries and their advisors ending up in court is ever on the rise. Of necessity “[t]his handbook provides the busy practitioner with a practical overview of themes that are commonly encountered. It will guide them through every stage of proceedings, from pre-action action protocols through discovery to settlement and trial”.3 What is perhaps even more valuable, is that the work provides the tools to head-off and anticipate potential contentious proceedings as well as to litigate and manage them, thus this work proves itself to be both a guide in times of crisis and gives the non-contentious private client practitioner the benefit of hindsight before the event. Examples of this forward-thinking analysis can be found at various stages throughout the text, which sets out in plain language the equitable principles and the leading cases which may be cited in reliance to further your cause. This handbook can also be used as a guide for trustees to take action (or to take pause) but also to draft from the included CD of precedents.

The chapter on Claims4 covers areas which other texts do not, and is exceedingly thorough in its coverage and application. For example, under the heading ‘Declaration of a Beneficial Interest in Property’5 the author considers the various constructive trust claims and how they can be made out—this is a results focused text. Equally useful, and under the discussion of a claim for removal of trustee appears the heading ‘Trap for the unwary’ along with the warning that “removal [of a trustee] does not automatically ensure that the trust property will be vested in the remaining and any new trustees”.6

The chapters on Equitable Remedies, Litigation, Costs, ADR and Settlement, are particularly relevant to private client and contentious trust practitioners as they place those subjects within the context of trust and Chancery practice—something which general texts do not. That is, “The particular features of trusts can make it difficult to analyse whether privilege attaches to any given communication”,7 those features are then analysed along with a discussion of Dawson-Damer v. Taylor Wessing LLP. Costs are always a factor of concern, to both trustee clients, and or beneficiaries in distress, the work clearly outlines the cost implications to all parties in the context of a trust dispute and it is useful to see the cost implications of Beddoe orders spelt out clearly along with reference to the accompanying precedent.8

For some this text will hold value in its specialised precedents which for the purposes of this area of practice are in my mind superior to more general works on precedents and pleadings.9 These stretch from Beddoe application, Calderback offers (equitable compensation), all the way to a Confidential note to the mediator, Particulars of Claim for: Breach of Trust, Tracing, Breach of Fiduciary Duty, Accessory Liability, as well as TOLATA applications. The work also includes specialist notes by experts Pandora Mather-Less on Art and heritage assets and the duties of trustees, Hector Robinson QC on Trust litigation in the Cayman Islands, and A meditator’s view by Anthony Trace QC.

Mr Islam concludes his preface by observing that “[t]he bridge that fuses the traditional technical skill set of company and commercial lawyers with that of trust lawyers (who in solicitors’ firms used to live in separate boxes) is, however, a relatively recent phenomenon outside of the Chancery Bar.” The author hopes that his text will be of value to all “who need to apply first principles when confronted with complex and novel facts that engage the ‘super-highway’ of equitable remedies and principles, when proceedings are issued” or contemplated.10 I can indeed confirm that his Contentious Trusts Handbook fits that description and is sure to be a staple text found within easy reach of every Equity and Trusts practitioner.’

Footnotes

  1. Chancery Litigation Handbook (2005, Jordans, London); Chancery Practice and Procedures (2001, Jordans, London).

2. (Law Society, London, 2020) – available for £100, CD of precedents included.

3. Ibid., xiii

4. Chapter 7.

5. 115.

6. At 7.6.10: the author goes onto explain the deed requirements under the TA 1925 s40(1).

7. 208.

8. At 11.2.3 per Green v Astor [2003] EWHC 1857 (Ch).

9. Included in hard copy in the Appendices and also included on CD.

10. xv.

Jacob J. Meagher is a barrister and academic, a Partner at Aria Grace Law and a Lecturer in Law at the University of Brighton. Specialising in contentious chancery matters, banking & finance, and governance he is a TEP, FGP, MCIArb, Ch MCSI, Ch ALIBF, Ch MCBI. Jacob also mediates and arbitrates civil and commercial disputes and can be contacted professionally at jacob.meagher@aria-grace.com or academically at j.j.meagher@brighton.ac.uk

Mediation Strategies

In late July I am undertaking the Bar Council Mediator Foundation course. Successful completion results in:

  • Certification as a Society of Mediators recognised mediator;
  • Accreditation as a Civil Mediation Council civil and commercial mediator; and
  • Recognition by the Chartered Institute of Arbitrators.

For Mediation Strategies I have specifically designed for Probate, Trust and Court of Protection disputes, see:

Misfeasance in public office

Under English Law, the elements of the criminal offence of misfeasance in public office are:

  • a public officer acting as such; 
  • wilfully neglects to perform his duty and/or wilfully misconducts himself
  • to such a degree as to amount to an abuse of the public’s trust in the office holder; 
  • without reasonable excuse or justification.

Attorney General’s Reference No 3 of 2003 [2004] EWCA Crim 868.

See, ‘Misconduct in Public Office’:

Misconduct in Public Office | The Crown Prosecution Service (cps.gov.uk)

Misfeasance therefore occurs where there is an individual failure, i.e. by a civil servant or minister.

Can it also occur where there is a systemic failure with the actual knowledge of an individual, i.e. by acquiescence?

Arguably Yes, if the duty breached is also a fiduciary duty, see my article;

‘Breach of Fiduciary Duty Claims and the Quiet Fiduciary Thesis’ published in Trusts & Trustees by Oxford University Press, February 2019:

Abstract:

https://academic.oup.com

Article:

https://academic.oup.com

In which case a criminal conviction can result in a civil claim, or vice-versa.

In the case of a systemic failure, the bridge is a finding of ‘negligence’ by an individual with the acquiescence of another individual, which results in the systemic failure, i.e. breach of a duty of care that causes a recoverable loss.

‘It is almost a truism that “public offices” are “public trusts”. The notion that public officers act as agents or trustees – both fiduciary offices – for subject-beneficiaries was common in Greco-Roman political thinking, in English political philosophy, and in American political theory at the founding. These fiduciary concepts are well developed in private law. The Law of trusts arose to ensure that those with discretionary power over the legal and practical interests of beneficiaries would exercise that power in ways that ensure appropriate exercises of discretion. Likewise, public law norms seek to constrain uses of the discretionary power inherent in public offices. In both public and private law, the central normative fiduciary principles are that the fiduciary should not abuse her power and that beneficiaries interests should guide the fiduciaries deliberation and action in specific ways.’ Fiduciary Principles and Public Offices by Ethan J Lieb and Stephen R. Galoob, Chapter 16 of the Oxford Handbook of Fiduciary Law (2019).

Has the time come to put this proposition to the test in court in England?

At the core of much of positive fiduciary law is the prohibition on fiduciaries making decisions under conditions of a conflict of interest. The no conflict rule is one proscription to which all fiduciaries whether private or public are bound.

‘For fiduciary political theorists, the principle of loyalty fundamentally requires that public officials avoid betraying their beneficiaries. This requirement has several implications that captured the imagination of fiduciary political theorists. … Public officials should not engage in corruption or self-dealing. … In private law settings, the duty of care is important because of the beneficiaries’ vulnerability and the difficulty of monitoring the fiduciaries actions. The beneficiaries fate relies on the fiduciary’s efforts. These efforts can change not only how the beneficiary fares but also what she is permitted or required to do. The duty of care arises because the normative significance of the fiduciaries actions invites the possibility of domination and violation of the beneficiaries independence. … For example, a fiduciary who acts recklessly (say, unnecessarily or irrationally risking the interests of the principal) violates the principle of care, regardless of whether this risk is eventuated. In assessing politics, the principle of care holds that decision-makers should act in ways that advance the public good and should not unnecessarily or unjustifiably risk it.’ Fiduciary Principles and Public Offices by Ethan J Lieb and Stephen R. Galoob, Chapter 16 of the Oxford Handbook of Fiduciary Law (2019).

Poverty charity intentionally abused for criminal purposes by two of its trustees


Two former trustees of a charity set up to help people living in poverty in Afghanistan intentionally abused the charity for criminal purposes, the Charity Commission has concluded.

In a report published today, the regulator finds that two former trustees of Afghan Poverty Relief mismanaged the charity and stole hundreds of thousands of pounds intended for those the charity was established to help. They were ordered by the courts to repay over £400,000 to the charity.

The inquiry opened in 2011, following a referral from the Metropolitan Police, to investigate concerns about the charity’s governance and management, and specifically to examine the charity’s finances. The regulator was concerned about transactions between the two trustees and the charity and that it appeared the charity was being misused for personal gain.

During its investigation, the regulator analysed the charity’s bank accounts, as well as personal and business accounts associated with two of the charity’s former trustees. It found that during the 4 years to 2011, over £254k was withdrawn from the charity’s accounts, and over £215k was paid into personal and business accounts linked to two of the charity’s former trustees.

As part of its investigation, the Commission found that the charity’s trustees failed to keep adequate records; it found, for example, that many of the receipts and records it scrutinised were undated, and that it was not possible to reconcile donations recorded as having been received by the charity with deposits into the charity’s accounts.

One trustee was also found to have breached an order of the Commission, including not to accept donations from members of the public on behalf of the charity.

The Commission supported the Metropolitan Police’s investigation and this information, alongside witness statements provided to the courts by Charity Commission officials, helped secure the conviction of the two trustees in 2014. One trustee was found guilty of theft and sentenced to 5 years; the other was found guilty of one count of theft and four counts of fraud and sentenced to 3 years in prison. As a result, both are disqualified from serving as charity trustees or from holding an office or employment in a charity with senior management functions.

In 2014, and following the former trustees’ convictions, the Commission appointed an interim manager (IM) to identify the charity’s assets and liabilities, represent the charity during confiscation proceedings brought by the police following the trustees’ convictions and to determine the charity’s future.

The IM has wound the charity up, transferring remaining assets to another charity for the purposes of funding an orphanage in Ghazni, Afghanistan, which had previously been supported by the charity.

Tim Hopkins, Assistant Director of Investigations and Inquiries at the Charity Commission, said:

Charity represents the best of human characteristics – that’s why the behaviour and conduct of those involved in charities matters. This charity was set up to support vulnerable and disadvantaged people, including orphans in Afghanistan. Instead of ensuring donations received by the charity were applied for charitable purposes, two of its then trustees abused and exploited it for criminal purposes. In doing so, they committed criminal offences, breached charity law and exhibited behaviours which fell far below the legal and public expectations of how trustees should behave.

I am pleased that our investigation has helped bring those individuals to justice, and that, together with the Police and the interim manager, we have ensured significant sums, that would otherwise have been lost, were returned to charity”.

The Commission acknowledges the long-running nature of the inquiry. This results from complexities experienced by the IM in transferring the charity’s remaining assets, and then winding the charity up.

The full inquiry report is available on gov.uk.

See: Poverty charity ‘intentionally abused for criminal purposes’ by two of its trustees, investigation finds – GOV.UK (www.gov.uk)

Proving breach by taking an account

As a general rule the High Court has jurisdiction to enforce the observance or redress breaches of all trusts, charitable as well as private. The jurisdiction in the case of charities is more extensive than in the case of private trusts, where the trust is charitable, the court has jurisdiction not only to enforce it and to redress all breaches, but also, in certain circumstances, to make schemes for the administration of the charity and to alter or modify the trust to a greater or less degree by virtue of the cy-pres doctrine.’ (Halsbury’s Charity Law (2020), paragraph 10.23).

Thus, if it is established that the stated objects of a charitable gift fail, either:

·       the property can be applied cy-pres; or

·       the whole gift fails, giving rise to a resulting trust in favour of the donor.

The duties of trustees of charitable trusts do not differ in principle from those of non-charitable trustees. Their primary duty is to execute the trust in accordance with its terms, and with the general law, in the interests of the intended beneficiaries, i.e. the ‘objects’ of the charitable trust. See HMG Guidance – The essential trustee: what you need to know, what you need to do:

The essential trustee: what you need to know, what you need to do – GOV.UK (www.gov.uk)

Charity trustees who use trust money for their own purposes, or for purposes not in accordance with the trust, or who negligently allow others to misappropriate it, are strictly liable to make good any deficiency or loss, and the court is severe with trustees who willfully, corruptly or negligently misapply trust property.

It is a breach of trust for trustees to divert a charitable fund given for one object to another not contemplated by the Donor.

The assets owned by a charity cannot be used to indemnify a person injured by a breach of trust committed by a trustee of the charity.

A threatened application of charity property for non-charitable purposes may be restrained by injunction.

With the exception of exempt charities and charitable companies, charity trustees must ensure that accounting records are kept which are sufficient to explain all of the charity’s transactions, and which are such as to:

·       disclose at any time, with reasonable accuracy, the financial position of the charity at that time; and

·       enable the trustees to ensure that where any annual statements of account are prepared by them, those statements comply with the statutory requirements.

The primary personal equitable remedies available in relation to breach of fiduciary duty are:

·       rescission;

·       equitable compensation;

·       an account of funds;

·       an account of profits; and

·       injunctions.

In contrast to proprietary remedies, personal remedies operate against the person of the defendant wrongdoer irrespective of whether he retained property that may have been the subject of the claim.

Taking an account is simply a process that can be employed in order to assess the state of the trust fund. In this respect, the taking of an account can enforce the trustees’ primary duty to provide information … and keep accurate accounts of the trust. All express trustees owe a primary duty to account for their administration of the trust fund, including all receipts, investments, and distributions. Taking an account may lead to the enforcement of primary or secondary obligations. When an account is taken, two principal problems may be revealed: the trustees may have misappropriated assets from the trust fund, for example by making unauthorised investments; or alternatively, the trustees may have breached their duty in failing appropriately to safeguard the value of the fund, which will be the case, for example, where they have negligently failed to diversify the types of assets held by the trust. In the first situation, a

[claimant]

might falsify the unauthorised disbursement; in the second, the account might be surcharged to bring its value up to the appropriate level. Significantly, the trustee will be liable to compensate the trust fund from their own resources whether the account is falsified or surcharged.’

(Davies, Paul and Graham Virgo (2019). Equity & Trusts – Text, Cases And Materials. Third edition. Oxford University Press, p.806).

‘Where the beneficiary complains that the trustee has misapplied trust money, he falsifies the account, that is to say, he asks for the disbursement to be disallowed. If, for example, the trustee lays out trust money in an unauthorised investment which falls in value, the beneficiary will falsify the account by asking the Court to disallow both the disbursement and the corresponding asset on the other side of the account. The unauthorised investment will then be treated as having been bought with the trustee’s own money and on his own behalf. He will be required to account to the trust estate for the full amount of the disbursement – not for the amount of the loss. That is what is meant by saying that the trustee is liable to restore the trust property; and why common law rules of causation and remoteness of damage are out of place … Where the beneficiary elects to falsify the account, the unauthorised investment is not shown as an asset, the disbursement is disallowed, and the trustee is accountable in every respect as if he had not disbursed the money. He is liable to restore the money to the trust estate; as notionally restored it remains subject to all the trust’s powers and provisions of the trust as if it had never been dispersed; and the account is taken accordingly. …

If the beneficiary is dissatisfied with the way in which the trustee has carried out his trust – if, for example, he considers that the trustee has negligently failed to obtain all that he should have done for the benefit of the trust estate, then he may surcharge the account. He does this by requiring the account to be taken on the footing of wilful default. In this context “wilful default” bears a special and unusual meaning: it means merely lack of ordinary prudence or due diligence. The trustee is made to account not only for what he has in fact received, but also for what he might with due diligence have received. Since the trustee is, in effect, charged with negligence, and the amount by which the account is surcharged is measured by the loss occasioned by his want of skill and care, the analogy with common law damages for negligence is almost exact. Although he is a fiduciary, his duty of care is not a fiduciary duty. In this context it must be right to adopt the common law rules of causation and remoteness of damage to their fullest extent. The trustee’s liability is enforced in the course of taking the trust account rather than by an action for damages, but the obligation of skill and care is identical to the common law duty of care.’ ‘(‘Equity’s Place in the Law of Commerce’ by Lord Millett, (1998) 114 LQR 214, 225-7).

As a general rule accounts are to be taken against the trustees from the date at which the misapplication commenced. Where the misapplication has been innocent, accounts are usually directed from the commencement of the action. However, they may also be ordered from;

·       the date at which notice was given to the trustees questioning the propriety of the application; or

·       the date of the decree declaring the application improper.

Where a charity trustee uses trust funds for trading purposes, he is accountable to the charity for any profit made, or for interest at the rate of 5%.

Since the decision of the House of Lords in Sempra Metals Ltd v. IRC [2007] UKHL 34, the Court has had the power to make an award of compound interest where that is necessary to achieve full restitution.

‘Questions relating to charities may be compromised and the terms of the compromise confirmed by the court. Trustees for charities have power to compromise claims under the Trustee Act 1925. In addition, a compromise may be approved by the Charity Commission under the Charities Act 2011. Where the Attorney General is a party to any legal proceedings affecting a charity, no compromise can be enforced without his sanction. The Attorney General is a necessary party to all charity proceedings, other than any commenced by the Charity Commission, and must be joined as a defendant if he is not a claimant. In proceedings, other than charity proceedings, which concerned the interests of the charity, the Attorney General, if not the claimant, should generally be made a defendant. … Thus where proceedings are necessary to test the validity of an alleged charitable gift, even where the class to benefit is a foreign community, or to determine whether a claim to the benefit of a charity is properly founded, or to enforce the execution of a charitable purpose or to remedy abuse or misapplication of charitable funds, or to administer a charity, the Attorney General is generally a necessary party, and is normally the proper claimant. He represents the beneficial interest, in other words the objects, of the charity. Even if all the subscribers to a charitable fund are made claimants, a claim for the regulation of the charity is defective unless the Attorney General is also a party.’

(Halsbury’s Charity Law (2020), paragraphs 11.13 and 11.15).

A small unregistered charity (see s.275 Charities Act 2011) must comply with Charity Law and is subject to the regulatory powers of the Charity Commission. Therefore, the jurisdiction of the High Court applies with equal vigour.

Expiry of limitation period in midnight deadline cases

‘The UK Supreme Court unanimously dismissed an appeal in the ‘midnight deadline’ case of In Matthew & Ors v Sedman & Ors [2021], in which the current trustees of a will trust are suing its former professional trustees for failing to lodge a compensation claim against a third party before the bar date had expired. ‘The case turned on whether a complete undivided day following the expiry of the six-year statutory time limit for actions founded on tort should be included when calculating the limitation period’. (STEP UK News Digest 24.05.2021).

Lord Stephens  (with whom Lord Hodge, Lady Arden, Lord Sales and Lord Burrows agreed) stated:

14.   The relevant limitation periods are set out in materially identical terms in the Limitation Act 1980 for each of the causes of action in these proceedings. Section 2 provides a time limit for actions founded on tort: “An action founded on tort shall not be brought after the expiration of six years from the date on which the cause of action accrued”. Section 5 makes provision for a time limit for actions founded on simple contract: “An action founded on simple contract shall not be brought after the expiration of six years from the date on which the cause of action accrued”. Finally, section 21 makes provision for a time limit for actions in respect of trust property. It is common ground that the relevant time limit is contained in subsection (3) which, in so far as material, provides that “an action by a beneficiary … in respect of any breach of trust, …, shall not be brought after the expiration of six years from the date on which the right of action accrued” (emphasis added to each).

47.     I consider that the reason for the general rule which directs that the day of accrual of the cause of action should be excluded from the reckoning of time is that the law rejects a fraction of a day. The justification for that rule is straightforward; it is intended to prevent part of a day being counted as a whole day for the purposes of limitation, thereby prejudicing the claimant and interfering with the time periods stipulated in the Limitation Act 1980. However, in this case it was, in my opinion correctly, submitted that in a midnight deadline case even if the cause of action accrued at the very start of the day following midnight, that day was a complete undivided day. I consider that it would impermissibly transcend practical reality if the stroke of midnight or some infinitesimal division of a second after midnight, led to the conclusion that the concept of an undivided day was no longer appropriate. In that sense this would not only be impermissible metaphysics but also, in this context, such a minimum period of time does not cross the threshold as capable of being recognised by the law. Whether the issue is framed in terms of metaphysics, which the common law eschews, or of the principle that the law does not concern itself with trifling matters, the conclusion is the same: realistically, there is no fraction of a day. That being so, the justification in relation to fractions of a day does not apply in a midnight deadline case. During oral submissions Mr Cousins QC, in answer to an enquiry from Lady Arden seeking to identify the rational justification for excluding a whole indivisible day from the calculation of the reckoning of time, sought to do so based on continuing the application of the rule, as he submitted it had been understood since the 18th century, so that in relation to something as important as limitation there should be continuity of interpretation. I reject the premise to that submission. As I have indicated there is no long-standing authority which excluded a whole indivisible day. Furthermore, I consider that the premise is undermined by the decision of Channell J in Gelmini. So, I reject this argument as a sufficient justification for excluding a whole day from the reckoning of time in a midnight deadline case. Rather, I prefer to consider the impact of holding that a full undivided day in a midnight deadline case is to be excluded from the reckoning of time. If that day were excluded from the computation of time then the limitation period would be six years and one complete day. I consider that would unduly distort the six-year limitation period laid down by Parliament and would prejudice the defendant by lengthening the statutory limitation period by a complete day.

48.     I also consider that the impact of excluding 3 June 2011 can be seen by applying the criteria suggested in Radcliffe of imagining a limitation period of one day. If in this case 3 June 2011 were excluded from the computation and if the limitation period were a single day, then the impact would be to allow two complete days within which to commence an action (see para 36 above).

49.     I consider that Gelmini is an exception to the general rule so that any part of a day (but not a whole day) happening after the cause of action accrues is excluded from the calculation of the limitation period for the purposes of the provisions of the Limitation Act with which this appeal is concerned. The 3 June 2011 was a whole day so that it should be included in the computation of the limitation period.

Matthew & Ors v Sedman & Ors [2021] UKSC 19 (21 May 2021) (bailii.org)

Pleading Fraud/Dishonesty, Striking Out & JENE

Pleading Fraud/Dishonesty

The function of pleadings is to give the party opposite sufficient notice of the case which is being made against him.

There are two distinct and separate rules that apply to pleading allegations of fraud/dishonesty. The allegations must be both:

(i) clearly pleaded; and

(ii) particularised.

If a pleading is ‘equivocal’, i.e. it permits an innocent explanation, it is bad in law, because it is not open to the trial judge to make a finding of fraud.

In Mullarkey & Ors v Broad & Anor[2007] EWHC 3400 (Ch), Mr Justice Lewison stated the primary rules as follows: 

Pleading and proving intentional wrongdoing

41.   In Belmont Finance Corporation Ltd. v. Williams Furniture Ltd. [1979] Ch. 250, at 268 Buckley L.J. said:

An allegation of dishonesty must be pleaded clearly and with particularity. That is laid down by the rules and it is a well-recognised rule of practice. This does not import that the word ‘fraud’ or the word ‘dishonesty’ must be necessarily used. The facts alleged may sufficiently demonstrate that dishonesty is allegedly involved, but where the facts are complicated this may not be so clear, and in such a case it is incumbent upon the pleader to make it clear when dishonesty is alleged. If he uses language which is equivocal, rendering it doubtful whether he is in fact relying on the alleged dishonesty of the transaction, this will be fatalthe allegation of its dishonest nature will not have been pleaded with sufficient clarity.” …

43.   In Paragon Finance plc v D B Thakerar & Co he said on the question of pleading:

“It is well established that fraud must be distinctly alleged and distinctly proved, and that if the facts pleaded are consistent with innocence it is not open to the court to find fraud.”’

Striking Out

The court can strike out a Defence under CPR, r.3.4(2)(a) – if it ‘discloses no reasonable grounds for defending the claim’

The legal test for striking out a statement of case for non-compliance with these special pleading rules (which is a power the court may exercise at a CMC of its own initiative), was stated by Sir Julian Flaux (who is now Chancellor of the High Court) in JSC Bank of Moscow v. Kekhman and others [2015]: JSC Bank of Moscow v Kekhman & Ors [2015] EWHC 3073 (Comm) (29 October 2015) (bailii.org) at [20]

The correct test is whether or not, on the basis of the primary facts pleaded, an inference of dishonesty is more likely than one of innocence or negligence. As Lord Millett put it, there must be some fact “which tilts the balance and justifies an inference of dishonesty”At the interlocutory stage, when the court is considering whether the plea of fraud is a proper one or whether to strike it out, the court is not concerned with whether the evidence at trial will or will not establish fraud but only with whether facts are pleaded which would justify the plea of fraud. If the plea is justified, then the case must go forward to trial and assessment of whether the evidence justifies the inference is a matter for the trial judge.’

If a Defendant [‘D‘] (whose Defence is based upon an allegation of e.g. deceit by the Claimant), has refused to reply to specific allegations in the Particulars of Claim, and instead pleaded a ‘bare‘ or ‘blanket’ denial, it follows that:

(i) D is deemed under CPR, r.16.5(5) to have admitted the facts to which he has failed to reply; and

(ii) the Defence may be struck out under CPR, r.3.4(2)(a), because D has failed to plead a complete defence to the Claim, by failing to advance an affirmative case.

Blackstone’s Civil Practice 2021, at para 33.7‘a defence may be struck out if it consists of a bare denial or otherwise fails to set out a coherent statement of facts, or if the facts set out, even if true, do not amount in law to a defence to the claim. Many institutional defendants have been in the habit of filing short defences making blanket denials without stating any positive case. These defences ought to be a thing of the past.’ 

The approach of the court

The power to strike out is exercised sparingly. An alternative strategy is to apply for JENE (see below).

In Three Rivers District Council v. Governor and Company of The Bank of England [2001] UKHL 16, Lord Hope of Craighead stated:

‘106. … the overriding objective of dealing with cases justly includes dealing with them in a proportionate manner, expeditiously, fairly and without undue expense… each case is entitled only to an appropriate share of the court’s resources. Account has to be taken of the need to allot resources to other cases. … The most important principle of all is that which requires that each case be dealt with justlyIt may well be that the claimants, on whom the onus lies, will face difficulties in presenting their case. They must face the fact that each and every allegation of bad faith will be examined rigorously. A trial in this case will be lengthy and it will be expensive. There is only so much that astute case management can do to reduce the burdens on the parties and on the court. Nevertheless it would only be right for the claim to be struck out if it has no real prospect of succeeding at trialI do not think that one should be influenced in the application of this test by the length or expense of the litigation that is in prospect. Justice should be even-handed, whether the case be simple or whether it be complex. It is plain that the situation in which the claimants find themselves was not of their own making, nor are they to be blamed for the volume and complexity of the facts that must be investigatedI would hold that justice requires that the claimants be given an opportunity to present their case at trial so that its merits may be assessed in the light of the evidence.

    107. I have taken one other factor into account. The decision which your Lordships are being asked by the Bank to take is to give summary judgment in its favour on the entire claimIt would only be right to strike out the whole claim if it could be said of every part of it that it has no real prospect of succeeding. … I think that that is too big a step to take on the available material. Conversely, I consider that if one part of the claim is to go to trial it would be unreasonable to divide the history up and strike out other parts of it. A great deal of time and money has now been expended in the examination of the preliminary issues, and I think that this exercise must now be brought to an end. I would reject the Bank’s application for summary judgment.

Lord Hutton further stated:

113. The Court of Appeal (Auld LJ dissenting) upheld the decision of Clarke J and delivering the joint judgment of himself and Robert Walker LJ, Hirst LJ stated [2000] 2 WLR 15, 101F:

“… The tort alleged is a tort of dishonesty, and the plaintiffs’ claim must be rigorously assessed on their pleaded case and the evidential material shown to be available to support it.”

In his dissenting judgment, at p 180F, Auld LJ stated:

“As the authorities to which Hirst and Robert Walker LJJ have referred indicate, it is normally only in clear and obvious cases that a court should strike out a claim as incapable of proof at the interlocutory stage and before full discoveryIn cases, such as this, of great legal and factual complexity, it requires a justified confidence that the plaintiffs’ case is and will remain incapable of proof and most exceptional circumstances to justify stifling it at an early stage. For the reasons that I have given, I do not consider that the court can be confident that all the evidence material to Clark J’s conclusion about the Bank’s state of knowledge has been gathered in or, which is as important, properly tested.”

    117. The 1999 White Book stated at 18/19/10 with reference to r 19(1)(a):

A reasonable cause of action means a cause of action with some chance of success when only the allegations in the pleading are considered (per Lord Pearson in Drummond-Jackson v British Medical Association [1970] 1 WLR 688; [1970] 1 All ER 1094, CA). So long as the statement of claim or the particulars (Davey v Bentinck [1893] 1 QB 185) disclose some cause of action, or raise some question fit to be decided by a judge or a jury, the mere fact that the case is weak, and not likely to succeed, is no ground for striking it out (Moore v Lawson (1915) 31 TLR 418, CA; Wenlock v Moloney [1965] 1 WLR 1238; [1965] 2 All ER 871, CA); “

Therefore if a plaintiff would be entitled to judgment if he were successful in proving the matters alleged in his pleadings, the statement of claim could not be struck out under rule 19(1)(a) on the ground that he had no prospect of adducing evidence to prove the matters which he alleged. …

    118. In the present case when Clarke J struck out the action he did so on the ground that even with all the proposed re-re-amendments the plaintiffs’ claim was bound to fail and that in those circumstances it would be an abuse of the process or vexatious or oppressive to allow the action to proceed (see paragraph 6 and 7 at p 172 of his third judgment).

    119. The applications before Clarke J and the Court of Appeal were governed by the Rules of the Supreme Court but those Rules have now been replaced by the Civil Procedure Rules. I think that rule 3.4 (2)(a) of the new Rules corresponds in a broad way to Ord 18, r 19(1)(a) and rule 3.4 (2)(b) and rule 24.2 (a)(i) correspond in a broad way to Ord 18, r 19(1)(b) and (d). Rule 3.4(2) provides:

The court may strike out a statement of case if it appears to the court—

(a) that the statement of case discloses no reasonable grounds for bringing or defending the claim;

(b) that the statement of case is an abuse of the court’s process or is otherwise likely to obstruct the just disposal of the proceedings;”

Rule 24.2(a)(i) provides:

The court may give summary judgment against a claimant or defendant on the whole of a claim or on a particular issue if—

(a) it considers that—

(i) that claimant has no real prospect of succeeding on the claim or issue. … 

    122. Bad faith is an essential element in the tort of misfeasance. In accordance with a well established rule it is necessary that bad faith (or dishonesty – the term used in some authorities) should be clearly pleaded. In Davy v Garrett (1878) 7 Ch D 473, 489 Thesiger LJ said:

“There is another still stronger objection to this statement of claim. The plaintiffs say that fraud is intended to be alleged, yet it contains no charge of fraud. In the Common Law Courts no rule was more clearly settled than that fraud must be distinctly alleged and as distinctly proved, and that it was not allowable to leave fraud to be inferred from the facts. It is said that a different rule prevailed in the Court of Chancery. I think that this cannot be correct. It may not be necessary in all cases to use the word ‘fraud’ – indeed in one of the most ordinary cases it is not necessary. An allegation that the defendant made to the plaintiff representations on which he intended the plaintiff to act, which representations were untrue, and known to the defendant to be untrue, is sufficient. The word ‘fraud’ is not used, but two expressions are used pointing at the state of mind of the defendant – that he intended the representations to be acted upon, and that he knew them to be untrue. It appears to me that a plaintiff is bound to show distinctly that he means to allege fraud. In the present case facts are alleged from which fraud might be inferred, but they are consistent with innocence. They were innocent acts in themselves, and it is not to be presumed that they were done with a fraudulent intention.”

I would observe that the last two sentences in this passage have to be read together with the sentence which immediately precedes them.

In Belmont Finance Corporation Ltd v Williams Furniture Ltd [1979] Ch D 250, 268 A-C Buckley LJ stated:

“In the present case, do the facts alleged in the statement of claim suffice to bring home to the defendants or any of them a charge that (a) the object of the alleged conspiracy was a dishonest one; and (b) that they actually knew, or must be taken to have known, that it was so?

“An allegation of dishonesty must be pleaded clearly and with particularity. That is laid down by the rules and it is a well-recognised rule of practice. This does not import that the word ‘fraud’ or the word ‘dishonesty’ must necessarily be used: see Davy v Garrett, 7 Ch D 473, 489, per Thesiger LJ. The facts alleged may sufficiently demonstrate that dishonesty is allegedly involved, but where the facts are complicated this may not be so clear, and in such a case it is incumbent upon the pleader to make it clear when dishonesty is alleged. If he uses language which is equivocal, rendering it doubtful whether he is in fact relying on the alleged dishonesty of the transaction, this will be fatal; the allegation of its dishonest nature will not have been pleaded with sufficient clarity.”

    124. In Armitage v Nurse [1998] Ch 241, 256G Millett LJ said:

“It is not necessary to use the word ‘fraud’ or ‘dishonesty’ if the facts which make the conduct complained of fraudulent are pleaded; but, if the facts pleaded are consistent with innocence, then it is not open to the court to find fraud.”

Later in his judgment at p 259G the learned Lord Justice said:

“I am of opinion that, as at present drawn, the amended statement of claim does not allege dishonesty or any breach of trust for which the trustees are not absolved from liability by clause 15.”

In Taylor v Midland Bank Trust Co Ltd (unreported, 21 July) 1999 Buxton LJ referred to the first observation of Millett LJ at p 256G and said:

“That, however, was an observation about pleading, not about substance. If (unlike the pleader in our case) the claim does not expressly allege dishonesty, but stands on facts alone, those facts on their face will meet the requirement of a specific allegation of dishonesty only if they can bear no other meaning.”

But in the present case, unlike in Armitage v Nurse, the pleader does expressly allege bad faith because paragraph 37 pleads that “the motives of the Bank in acting as pleaded above were improper and unlawful and in the premises the Bank acted in bad faith” and the paragraph sets out particulars in support of that allegation. In my opinion those particulars are not consistent with mere negligence.

    125. I further consider that if a plaintiff clearly alleges dishonesty or bad faith and gives particulars, the statement of claim cannot be struck out under rule 3.4(2)(a) because the facts he pleads as giving rise to an inference of dishonesty or bad faith may at the trial, after a full investigation of the circumstances, be held not to constitute proof of that state of mind. If a defendant applies to strike out an action on the ground that the plaintiff has no prospect of adducing evidence at the trial to establish the case which he pleads the application should be brought under rule 3.4(2)(b) or rule 24.2(a)(1).’ 

JENE

If D refuses to mediate, then as part of his/her active case-management role, i.e. inherent judicial function, a procedural judge at a CMC, has the power to order a JENE. This does not require an application where the proposal is made in the Claimant’s Proposed Directions, or the procedural judge grants leave to the parties to make representations about JENE. I submit, that even in the County Court, JENE is arguably beneficial, proportionate and will involve a sensible use of the the court’s resources, where a case has been allocated to the Multi Track, i.e. because of the complexity of the: legal; procedural; and evidential issues in the case and consequently the length of the trial. That is because a JENE judge can reality-test the actual litigation risks that will confront the parties at trial, resulting in a re-calibration by each party of their litigation risk calculus, which should focus their minds and those of their legal advisors, upon settlement, rather than going to war. Hopefully, cooler minds will then prevail! See my article:

 ‘Judicial-ENE and the New Normal’published by Trusts & Trustees (Oxford University Press), 14 December 2020 on the ‘Publications’ page at www.ihtbar.com

 Recent authorities about pleading fraud/dishonesty

See Civil Fraud – Law, Practice & Procedure, edited by Thomas Grant QC and David Mumford QC (2018), published by Sweet & Maxwell, paragraphs 1-008 to 1-017 [The Decision to Allege Fraud].

Recent cases include:

1.        McEaney and Other v. Ulster Bank Ireland Ltd and others [2015]: McEneaney & Ors v Ulster Bank Ireland Ltd & Anor [2015] EWHC 3173 (Comm) (09 November 2015) (bailii.org)

‘It is an ingredient of a claim in fraud that the person making the false representation intended his statement to be understood by the representee in the sense in which it was false (see Cassa di Risparmio della Repubblica di San Marino SpA v Barclays Bank Ltd, [2011] EWHC 484 (Comm) at para 221) and, as it used to be put, there must be “moral obliquity”: (per Lindley LJ in Angus v Clifford, [1891] 2 Ch 449, 468, and see Maple Leaf Macro Volatility Master Fund v Rouvroy, [2009] EWHC 257 (Comm) at para 327). That was not originally alleged.’ Mr Justice Andrew Smith at para 54.

2.        JSC Bank of Moscow v. Kekhman and others [2015]: JSC Bank of Moscow v Kekhman & Ors [2015] EWHC 3073 (Comm) (29 October 2015) (bailii.org)

‘2.     CPR 3.4(2) gives the court power to strike out a statement of case which discloses no reasonable grounds for bringing or defending a claim or a statement of case which is an abuse of process. Where, on the material before the court, there are disputed issues of fact, the court should not strike out a claim unless certain it is bound to fail: see per Peter Gibson LJ at [22] in Colin Richards & Co v Hughes [2004] EWCA Civ 226. The test is similar but not identical to that for summary judgment where the court will not grant summary judgment, here in favour of a defendant, unless the claim has no real prospect of success. It is well established that where it is clear that there are disputed issues of fact between the parties, the court should not engage in a mini-trial of the merits at an interlocutory stage …

14.            However, Mr Swainston QC for Mr Kekhman submits that in a case where fraud is alleged (as is the case with both the original conspiracy plea and the proposed plea of fraudulent misrepresentation) there is an anterior question as to whether fraud is properly pleaded at all, in other words whether the requirements imposed by the rules of Court and as a matter of law in respect of pleading fraud have been satisfied. In that context, Mr Swainston QC relies upon the principles as to the pleading of fraud restated by the House of Lords in Three Rivers District Council v Bank of England[2001] UKHL 16[2003] 2 AC 1.

15.            At [55]-[56], Lord Hope of Craighead stated the principles as follows:

“As the Earl of Halsbury LC said in Bullivant v Attorney General for Victoria [1901] AC 196, 202, where it is intended that there be an allegation that a fraud has been committed, you must allege it and you must prove it. We are concerned at this stage with what must be alleged. A party is not entitled to a finding of fraud if the pleader does not allege fraud directly and the facts on which he relies are equivocalSo too with dishonesty. If there is no specific allegation of dishonesty, it is not open to the court to make a finding to that effect if the facts pleaded are consistent with conduct which is not dishonest such as negligence. As Millett LJ said in Armitage v Nurse [1998] Ch 241, 256G, it is not necessary to use the word “fraud” or “dishonesty” if the facts which make the conduct fraudulent are pleaded. But this will not do if language used is equivocal: Belmont Finance Corporation Ltd v Williams Furniture Ltd [1979] Ch 250, 268 per Buckley LJ. In that case it was unclear from the pleadings whether dishonesty was being alleged. As the facts referred to might have inferred dishonesty but were consistent with innocence, it was not to be presumed that the defendant had been dishonest. Of course, the allegation of fraud, dishonesty or bad faith must be supported by particulars. The other party is entitled to notice of the particulars on which the allegation is based. If they are not capable of supporting the allegation, the allegation itself may be struck out. But it is not a proper ground for striking out the allegation that the particulars may be found, after trial, to amount not to fraud, dishonesty or bad faith but to negligence. …

 16.      At [160] Lord Hobhouse stated:

Where an allegation of dishonesty is being made as part of the cause of action of the plaintiff, there is no reason why the rule should not apply that the plaintiff must have a proper basis for making an allegation of dishonesty in his pleadingThe hope that something may turn up during the cross-examination of a witness at the trial does not suffice. It is of course different if the admissible material available discloses a reasonable prima facie case which the other party will have to answer at the trial.”

17.      The fullest statement of the relevant principles upon which Mr Swainston QC relied is that of Lord Millett from [184] onwards:

184.  It is well established that fraud or dishonesty (and the same must go for the present tort) must be distinctly alleged and as distinctly proved; that it must be sufficiently particularised; and that it is not sufficiently particularised if the facts pleaded are consistent with innocence: see Kerr on Fraud and Mistake 7th ed (1952), p 644; Davy v Garrett (1878) 7 Ch D 473, 489; Bullivant v Attorney Genera; for Victoria [1901] AC 196; Armitage v Nurse [1998] Ch 241, 256. This means that a plaintiff who alleges dishonesty must plead the facts, matters and circumstances relied on to show that the defendant was dishonest and not merely negligent, and that facts, matters and circumstances which are consistent with negligence do not do so.

185.  It is important to appreciate that there are two principles in playThe first is a matter of pleadingThe function of pleadings is to give the party opposite sufficient notice of the case which is being made against him. If the pleader means “dishonestly” or “fraudulently”, it may not be enough to say “wilfully” or “recklessly”. Such language is equivocal. …

186.  The second principle, which is quite distinct, is that an allegation of fraud or dishonesty must be sufficiently particularised, and that particulars of facts which are consistent with honesty are not sufficientThis is only partly a matter of pleading. It is also a matter of substance. As I have said, the defendant is entitled to know the case he has to meet. But since dishonesty is usually a matter of inference from primary facts, this involves knowing not only that he is alleged to have acted dishonestly, but also the primary facts which will be relied upon at trial to justify the inference. At trial the court will not normally allow proof of primary facts which have not been pleaded, and will not do so in a case of fraudIt is not open to the court to infer dishonesty from facts which have not been pleaded, or from facts which have been pleaded but are consistent with honestyThere must be some fact which tilts the balance and justifies an inference of dishonesty, and this fact must be both pleaded and proved.”

20.      … The correct test is whether or not, on the basis of the primary facts pleaded, an inference of dishonesty is more likely than one of innocence or negligence. As Lord Millett put it, there must be some fact “which tilts the balance and justifies an inference of dishonesty”. At the interlocutory stage, when the court is considering whether the plea of fraud is a proper one or whether to strike it out, the court is not concerned with whether the evidence at trial will or will not establish fraud but only with whether facts are pleaded which would justify the plea of fraud. If the plea is justified, then the case must go forward to trial and assessment of whether the evidence justifies the inference is a matter for the trial judge. This is made absolutely clear in the passage from Lord Hope’s speech at [55]-[56] which I quoted above.

The Honourable Mr Justice Flaux (who is now Chancellor), at [12] –[23].