ALL THAT IS NOT GIVEN IS LOST GIFTS TO TRUSTEES AND UNDERLYING COMPANIES

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1 ALL THAT IS NOT GIVEN IS LOST GIFTS TO TRUSTEES AND UNDERLYING COMPANIES YVETTE A. WALLACE

2 PROBLEMS WITH GIFTS TO TRUSTEES AND UNDERLYING COMPANIES Petrodel v Prest the problems which can arise when gifts are not properly documented risk that many assets which are thought to be held beneficially by an underlying company are actually held on resulting trust for the donor How things should be done properly

3 Outright gift- Gifts to trustees AREAS Gifts to underlying companies Capacity to make a gift Avoiding a resulting trust Conflict of Laws Non est factum/unconscionable bargain/unconscionable procurement

4 CREATION AND PERFECTION OF GIFTS

5 To create a valid gift there must be:- 1. An intention to donate (animus donandi) coupled with the capacity to make the gift; 2. Certainty of subject matter and objects; 3. Acceptance of the gift by the donee; and 4. A sufficient act of delivery or transfer so as to transfer the gift in the correct manner. The type of transfer which is suitable is dependent upon the type of property being transferred.

6 + + Capacity + Acceptance + = Delivery/Transfer

7 Common Law Inter Vivos Test Relativity whether the person concerned is capable of understanding what he does by executing the deed in question when its general purport has been fully explained to him Mental Capacity Act UK, CI, BVI. essentially concerned with the jurisdiction of the Court of Protection to deal with welfare issues concerning living persons who suffer mental incapacity the MCA s definition of capacity appears to be in line with common law tests and the MCA does not replace them

8 Delivery or Transfer If a gift is not transferred in the correct manner then it may fail for want of perfection. If the gift fails for want of perfection, the property would revert to the donor on a resulting trust. The method of transfer will differ depending on the nature of the gift given but the bottom line appear to be that the donor must have done all that he could to cause the gift to be transferred.

R died intestate Company entered into Members Voluntary Liquidation Dispute arose as to

9 Kaye and Others v Zeital and Another R incorporated a Company- R handed blank share transfer form without transferee name Failed to hand share certificate with blank form R died intestate Company entered into Members Voluntary Liquidation Dispute arose as to ownership of the company shares Whether gift to deceased s partner failed for imperfection

Court s Findings R had not done all that was within his power to transfer the share, as no share certificate had been provided to S and this was a requirement for registration, which was specifically

10 Court s Findings R had not done all that was within his power to transfer the share, as no share certificate had been provided to S and this was a requirement for registration, which was specifically within his control and not hers. He could have procured the company or the legal owner of the share to restore the company and replace the certificate that the first and second defendants as administrators of R s estate were entitled to the beneficial interest in the second share and the estate was thus entitled to the proceeds associated with that share.

11 Failure Notwithstanding Sufficiency of Transfer or Delivery Even where on its face, the gift has been properly transferred or delivered; there are certain instances where the gift may still fail or be set side: gifts to trustees gifts to underlying companies.

12 GIFTS TO TRUSTEES

In Kaki and another v Kaki [2015] EWHC 3692 (Ch) a wealthy businessman with property interests in various parts of the world including the UK Leased Property in London held by 4 children for the

13 In Kaki and another v Kaki [2015] EWHC 3692 (Ch) a wealthy businessman with property interests in various parts of the world including the UK Leased Property in London held by 4 children for the benefit of all 9. Lease extended. Letter written to Bank and Solicitors that all 9 were to be beneficiaries. Purchase price paid but Declaration of Trust not executed by Claimant, 1 of 4 proposed trustees. Claimant contends that was not the intention of his father.

Court s Findings Even though no Declaration of Trust was actually signed in 1991 on the same terms as the 1975 Declaration as was clearly intended, on the evidence the Court found that the terms and

14 Court s Findings Even though no Declaration of Trust was actually signed in 1991 on the same terms as the 1975 Declaration as was clearly intended, on the evidence the Court found that the terms and effect of the Declaration of Trust were still operative, stating that the trustees cannot escape their duties and obligations as trustees for each of Sheikh Kaki's nine children by the refusal of some of them to sign an express declaration of trust in circumstances when they knew that this was what Sheikh Kaki intended.

15 GIFT TO UNDERLYING COMPANIES

Prest v Petrodel Resources Ltd Divorce settlement First instance order that the husband pay the wife a lump sum of GBP17.5 million. the husband failed to make the payment.

16 Prest v Petrodel Resources Ltd Divorce settlement First instance order that the husband pay the wife a lump sum of GBP17.5 million. the husband failed to make the payment. found the husband to be the effective owner of those properties Judge ordered the companies (in which the husband had a controlling interest) to transfer 7 London properties to the wife in part satisfaction of the order.

17 The companies appealed this order on the basis that the Family Court had no jurisdiction to make it because although it was correct that the husband controlled the companies, they were separate legal entities and it was the companies that owned the properties not the husband. The wife appealed this decision to the Supreme Court. She won her appeal and the order of first Instance Court was reinstated.

18 The Supreme Court considered three options: whether the Matrimonial Causes Act 1973 allowed them to redistribute the property on the basis that the husband was 'entitled' and thereby to pierce the corporate veil in order to do so; whether the Petrodel companies were nuptial settlements; and whether the properties were held on trust by the companies for the husband.

19 #(3) led the Supreme Court to decide in the wife s favour. J had left this option open, having not made any finding on the point (save that the matrimonial home was held on trust for the husband as it has a special significance for the Family Court). The properties had been bought with the husband s money, not the companies. It was also based on the husband s conduct during the proceedings and the fact that this allowed the Supreme Court to make adverse inferences and come to this conclusion given that the defective character of the material is almost entirely due to his persistent obstruction and mendacity

20 MA v SK [2015] EWHC 887 (Fam) The case of MA v SK is an example of the failure of a gift of the matrimonial home to an underlying company as part of tax structure arrangement. Divorce- High Value Assets- This case demonstrates that the fact that the Property was gifted to a Company was not sufficient to defeat the wife s claim The Company was used by the Husband as a nominee company. The Husband was the beneficial owner of Company and consequently the Property. As such, the Property was available for use in a financial provision order on divorce because it was considered to be held on resulting trust to the donor.

21 HOW TO PREVENT FORMATION OF A RESULTING TRUST

22 Prest v Petrodel Resources Ltd & Others Illustrates the problems which can arise when gifts are not properly created and documented. The appeal arose out of proceedings for ancillary relief following divorce. key issue for determination was whether the Court could satisfy Mrs. Prest s divorce settlement by making an order for the transfer of property to her from companies which were owned and controlled solely by her former husband.

Piercing the Corporate Veil The judge at first instance it stated that the assets of the companies were the husband s property because he treated them as such and he was also positioned to procure

23 Piercing the Corporate Veil The judge at first instance it stated that the assets of the companies were the husband s property because he treated them as such and he was also positioned to procure disposal of the assets. The Court disagreed stating, The judge was not entitled to order the companies' assets to be transferred to the wife in satisfaction of the lump sum order simply by virtue of statute. The words of statute are not to be interpreted in a manner which is contrary to the system of law.

Beneficial ownership - Resulting Trust The only basis on which the companies can be ordered to convey the seven disputed properties to the wife is that they belong beneficially to the husband, by

24 Beneficial ownership - Resulting Trust The only basis on which the companies can be ordered to convey the seven disputed properties to the wife is that they belong beneficially to the husband, by virtue of the particular circumstances in which the properties came to be vested in them. Lord Sumption Whether assets legally vested in a company are beneficially owned by its controller is a highly fact-specific issue. In many, perhaps most cases, the occupation of the company's property as the matrimonial home of its controller will not be easily justified in the company's interest, especially if it is gratuitous. The intention will normally be that the spouse in control of the company intends to retain a degree of control over the matrimonial home which is not consistent with the company's beneficial ownership

Individuals and companies would do well to take legal advice at an early stage Make sure that

25 So What is the effect of Prest? Set up and document a paper trail. Properly document initial set up Maintenance and running of the corporate or trust structures Individuals and companies would do well to take legal advice at an early stage Make sure that appropriate documentation is prepared and executed to avoid problems later on. This includes trust deeds or Declaration of Trust.

26 CONFLICT OF LAWS

27 Conflict of laws issues can have a serious effect on the functioning and interpretation of the provisions of a trust. It is important that the law governing the trust is clear so that parties know and understand the law that will govern the operation of the trust. Exclusive jurisdiction clauses have presented particular challenges in trust law

long running case from Jersey Court of Appeal Trust established in 1987;multiple changes in

28 Crociani and Others (Appellants) v Crociani and others (Respondents) & Princess Camilla de Bourbon des Deux Siciles (Intervener). long running case from Jersey Court of Appeal Trust established in 1987;multiple changes in trustees. Proper law was considered to be Jersey. Feb 2012 change of trustee and proper law to be Mauritanian law. Aug 2012 changed again to Jersey trust

29 The Court had to make the determination of the following issues, namely: (i) (ii) Whether the effect of cl 12 is to bestow exclusive jurisdiction on the courts of Mauritius, and; If so, the appropriateness of permitting the Proceedings to continue in Jersey.

The Privy Council One would expect to see a specific reference to the courts of the country, as opposed to referring to the country only in the exclusive jurisdiction clause. E.g. a forum could be a court, but it could also be a place for any purpose.

30 The Privy Council One would expect to see a specific reference to the courts of the country, as opposed to referring to the country only in the exclusive jurisdiction clause. E.g. a forum could be a court, but it could also be a place for any purpose. Administration is used to refer to the function of a court but is also used to refer to the functioning of a trust. Taking into consideration the terms of clause 12 (7) the interpretation favoured by the Court produces a more consistent result; as the alternative interpretation inevitably means that a trustee could reinstate the first proper law of the trust (Bahamian Law), whilst the court of another jurisdiction would have exclusive jurisdiction, which seems untenable..

31 In Donohue v Armco Ltd [2001] UKHL 64 Lord Bingham said:- If contracting parties agree to give a particular court exclusive jurisdiction to rule on claims between those parties, and a claim falling within the scope of the agreement is made in proceedings in a forum other than that which the parties have agreed, the English court will ordinarily exercise its discretion... to secure compliance with the contractual bargain, unless the party suing in the noncontractual forum (the burden being on him) can show strong reasons for suing in that forum..but the general rule is clear: where parties have bound themselves by an exclusive jurisdiction clause effect should ordinarily be given to that obligation in the absence of strong reasons for departing from it. Whether a party can show strong reasons, sufficient to displace the other party's prima facie entitlement to enforce the contractual bargain, will depend on all the facts and circumstances of the particular case.

32 Exclusive Jurisdiction Clauses in Trust Deeds It should be easier for a beneficiary to resist the enforcement of an exclusive jurisdiction clause in a trust deed than for a contracting party to resist the enforcement of such a clause in a contract. The weight to be given to an exclusive jurisdiction clause in a trust deed is less than that to be given to that in a contract; or the strength of the case that needs to be made to avoid the enforcement of such a clause is less great where there is a trust deed. Whilst it is true that a beneficiary who wishes to take advantage of a trust can anticipate that they must be bound by the terms of the trust; it is not the same order of commitment as that of a contracting party. As distinct from contracts the courts have an inherent jurisdiction to supervise the administration of trusts, primarily to protect the interest of beneficiaries

33 OTHER CONSIDERATIONS

34 Unconscionable Bargain Non Est Factum Unconscionable Procurement

35 Conclusion Recent decisions have flirted with the idea that persons with some form of control over the trust or other structure may be treated as if they were beneficially entitled to its assets. consistent with the respect for ordinary legal principles enjoined by Prest v Petrodel Resources Ltd. Still some room for clarification. Prest principles stand.

1. The English Court s power to vary a settlement is found in section 24(1)(c) Matrimonial Causes Act 1973:

Chancery Bar Association Conference 2016 Offshore Trusts and English Divorces Notes Nuptial Settlement 1. The English Court s power to vary a settlement is found in section 24(1)(c) Matrimonial Causes