BAYER & ANOR v BALKIN & ANOR
Judges:Cohen J
Court:
Supreme Court of New South Wales
Cohen J
The plaintiffs, Mr Martin Bayer and Mr David Peck, commenced these proceedings by summons. By consent order pleadings were filed. The statement of claim alleges that the plaintiffs were the trustees of a settlement created by deed dated 13 March 1968. The defendants, Mrs Balkin and Mrs Blumberg, and their sister, Mrs Smirin, were the beneficiaries of the trust. The plaintiffs claim that in the performance of their trust they incurred a liability to pay and did pay on behalf of the trust amounts of £164,777.50 and £2,580.80 for Capital Transfer Tax in respect of the sale of a property in London. They further stated that Mrs Smirin had paid one-third of the amount but the defendants have wrongfully refused to make any payment by way of reimbursement.
There were a number of amended defences filed and they raise various matters, most of which were not argued at the hearing. There is however a denial of liability to pay the money. If there is liability to pay anything, it is said that it should not include interest which was paid by the plaintiffs. A cross-claim was filed alleging that the plaintiffs, who are solicitors, owed to the defendants a duty of care to ensure that the extent of their entitlement under the trust would, so far as legally possible, not be reduced by the payment of tax or duty and were obliged to advise the defendants of how that possible duty could be avoided or minimised. In failing to do this the defendants were guilty of negligence and were liable to pay damages.
Mr Bayer, the first plaintiff, was admitted as a solicitor in England and Wales in 1964. He is also a member of the New York Bar and an advocate of the Supreme Court of the Republic of South Africa. For many years he had had a close personal friendship with Mrs Clara Urquhart and her brother, Fritz Rosenberg. Mrs Urquhart was South African by birth and had spent much of her time in that country but also lived in Italy and Switzerland. She came to live in the United Kingdom in about 1955. She had
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what was described as a substantial income which she received from business interests in South Africa and Swaziland. She owned no property in nor received any income from the United Kingdom.In 1968 Mrs Urquhart suffered a heart attack and required hospital treatment. Fritz Rosenberg told Mr Bayer that he wanted to buy a home in London for Mrs Urquhart to live in and he later gave Mr Bayer instructions to set up a trust which could provide Mrs Urquhart with a home in London during her lifetime. Mr Bayer was asked to be a trustee with Mr Rosenberg, and because of his close friendship with the family he agreed to do so. Mr Rosenberg wanted the trust to be as simple as possible and at the same time he wished to avoid the imposition of tax or death duties on his estate arising out of it. Mr Bayer said that Mr Rosenberg did not want to establish a trust outside England. Accordingly a simple form of trust was established. The deed which was executed on 13 March 1968 provided that the trustee should stand possessed of the investments set out in the schedule, being a sum of £30,000, upon trust and that the trustees could invest that money in any investments authorised under the deed with power to vary or transpose them. There were wide powers of investment given by cl 2 of the deed. These included the purchase of shares, securities, land or buildings wherever situated, and whether involving liabilities or producing income or not. In this regard the trustees were given an absolute discretion as if they were the owners beneficially entitled to the funds.
The trustees were required to hold the investment upon trust to pay the income to Mrs Urquhart during her life and after her death to pay the capital to such persons as Mr Rosenberg should appoint, or failing appointment to his children. Those children are the defendants and Mrs Smirin. There was a power to change or vary any investments forming part of the trust fund and there was also power to permit any beneficiary to reside in any dwelling house which may be subject to the trust. By cl 5 it was provided that every discretion or power conferred on the trustees was to be absolute and uncontrolled and that no trustee should be held liable for any loss or damage as the result of his concurring or refusing or failing to concur in any exercise of any discretion or power.
The fund of £30,000 was provided by Mr Rosenberg and it was used in the purchase of the flat at London House, Avenue Road, London. After that purchase Mrs Urquhart lived in the flat until her death in February 1986. In 1976 Mr Rosenberg died and Mr Bayer appointed Mr Peck, one of his partners, to be the second trustee.
In July 1986 the plaintiffs as trustees entered into a contract for the sale of the flat for the sum of £320,000. Mr Bayer said that he asked another partner, Mr Le Chat, to attend to the conveyancing matters. He asked Mr Le Chat to obtain counsel's opinion as to tax liability of the trustees with respect to the sale and in particular to have regard to capital gains tax. Shortly after this Mr Bayer travelled to the United States on business and there he suffered a heart attack. He returned to London but was confined to bed until late August 1986. He said that he had to reduce his work activities and delegated much of his work to other members of the firm. He remained under medical supervision until the end of that year. After he returned to work he spoke to Mr Le Chat who told him that he had obtained counsel's advice and that there was no tax liability.
Mr Bayer said that he did not read the instructions given to counsel but he read the opinion which had been received and which concluded by saying that the gain on the disposal of the flat would be exempt from capital gains tax and not liable to any other tax. As the result of this, Mr Bayer did not give further consideration to the question of tax and he said that he did not turn his mind to the possibility that Capital Transfer Tax (CTT) might apply to the transaction. When the sale was completed the nett figure of £304,000 was distributed equally to the three beneficiaries. There were no assets remaining in the trust after that distribution. Mr Bayer said that he made the distribution in his belief that the trustees were obliged to make the payments to the three beneficiaries and because he believed there were no liabilities which were required to be discharged.
In 1989 as the result of discussions with the solicitors for the executor of Mrs Urquhart's estate, it became apparent to Mr Bayer that there might be CTT implications associated with the sale of the flat. He and the solicitors then entered into correspondence with the Inland Revenue. Before this had occurred, Mr
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Bayer wrote to the defendants on 4 July 1989 and told them of the likelihood of CTT being payable. He sought an indemnity from them and enclosed a form of indemnity for their execution and return. This resulted in a denial by the defendants that tax was payable and other matters were dealt with in correspondence which I do not need to refer to in detail. There was no further correspondence after November 1989; the defendants declined to given any indemnity as requested. Later in that month Mr Bayer obtained advice from counsel as to the liability for CTT and he was advised that there would be such a liability.Further correspondence between Inland Revenue and Mr Bayer continued from December 1989 to September 1990. Finally, on 8 August 1990, Mr Bayer wrote to the defendants, referring to earlier correspondence and stating that he could no longer delay making a return. He said that unless he received a reply concerning an indemnity within 14 days, proceedings would be taken to protect the position of the trustees. On 2 October 1990 the plaintiffs lodged a CTT declaration, and at the same time they paid on account of tax an amount of £45,000. This had been received from Mrs Smirin as her contribution to the anticipated tax. An assessment was received on 26 September 1991 showing an amount of £ 116,800 due as tax and £47,977 due as interest to that date. Credit was given for the £45,000 previously paid. A subsequent assessment of interest up to the date of payment was received and this was for an amount £2580-80. The balance due of £122,358 was paid by the plaintiffs in March 1992. In due course these proceedings commenced.
The plaintiffs claim a right to recover from the defendants as beneficiaries who took the benefit of the trust. It was accepted by the parties that in respect of this claim the law is that of England, to the extent that it may differ from the law of New South Wales. The plaintiffs relied upon principles established in the judgment of the Privy Council in
Hardoon v Belilios [1901] AC 118. In that case the plaintiff held shares in trust for the defendant. The plaintiff paid calls made on the shares and sought to recover the amount paid from the defendant. It was held that he was entitled to be indemnified by the beneficiary. Lord Lindley, delivering the judgment of the Judicial Committee, said at 123:
``The plainest principles of justice require that the cetsui que trust who gets all the benefit of the property should bear its burden unless he can show some good reason why his trustee should bear them himself. The obligation is equitable and not legal, and the legal decisions negativing it, unless there is some contract or custom imposing the obligation, are wholly irrelevant and beside the mark.''
He there went on to refer to the possible situation of trust property being settled on tenants for life or children, giving a right of the trustee to be indemnified out of the trust estate in respect of any liabilities incurred by him. Having considered that situation he continued at 124:
``But where the only cestui que trust is a person sui juris, the right of the trustee to indemnity by him against liabilities incurred by the trustee by his retention of the trust property has never been limited to the trust property; it extends further, and imposes upon the cestui que trust a personal obligation enforceable in equity to indemnify his trustee. This is no new principle but is as old as trusts themselves.''
The judgment then referred to some of the earlier authorities in support of these principles and it was stated at 125 that it is not necessary that the beneficiary should have requested the trustee to incur the liability. It is sufficient if he has done so within the scope of his trust and for the benefit of the beneficiary.
These principles have been followed in England and in this country since 1901. They were not really disputed by counsel for the defendants. There was no claim that the right to be indemnified applies only where there is a single beneficiary, as has been suggested in some texts. The reference in the judgment in Hardoon's case to the only cestui que trust was in contrast to the situation where a number of persons may be entitled to different interests under the trust. Hardoon's case was only dealing with one person and it was not necessary to expand the principle so as to state specifically that where there is more than one beneficiary, each of them is bound to indemnify the trustee. In
Matthews v Ruggles-Brise [1911] 1 Ch 194, trustees for a lease of premises used in a partnership were held to have a right of indemnity against each of the partners. There was a further element in that case that there had
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been an implied request by the partners for the trustees to incur liability. It was made clear however that the claim could be made against all of the persons having the benefit of the trust but that each would be liable only for his proportionate share of the outlay by the trustee.In
JW Broomhead (Vic) Pty Ltd (In liq) v JW Broomhead Pty Ltd & Ors [1985] VR 891, McGarvie J considered the earlier authorities and concluded that on principle a trustee has a right of indemnity against all of the beneficiaries if there are more than one. He considered, as do I, that Hardoon's case did not seek to restrict the principles to a situation where there was only one beneficiary. In my opinion there would be no logic in seeking to do so and the quotation above from the judgment of Lord Lindley would seem to confirm this. It is certainly treated as being the law in England, as evidenced by Underhill's Law of Trusts and Trustees 14th Ed p 699, where Broomhead's case is referred to. There is a similar reference in Pettit Equity and the Law of Trusts 6th Ed p 411, where Broomhead's case is again referred to without any disagreement. See also an article by Dr RA Hughes in 64 Australian Law Journal 567. In my opinion the law in England is that a trustee has a right to recover from all beneficiaries money which he has expended in respect of the trust property to which those beneficiaries are entitled.
The defence, in its third amended form, put in issue the liability of the plaintiffs to pay CTT, but this was not pressed in submissions. Similarly, the defence claimed that the plaintiffs were seeking to recover a foreign fiscal tax, which would be unenforceable. This defence was also not relied upon. The only issue on the claim of the plaintiffs was whether in these circumstances the principles in Hardoon's case apply. I was referred to a passage in the judgment in that case appearing at 127, in the following words:
``It is quite unnecessary to consider in this case the difficulties which would arise if these shares were held by the plaintiff on trust for tenants for life, or for infants, or upon special trusts limiting the right to indemnity. In those cases there is no beneficiary who can be justly expected or required personally to indemnify the trustee against the whole of the burdens incident to his legal ownership; and the trustee accepts the trust knowing that under such circumstances and in the absence of special contract his right to indemnity cannot extend beyond the trust estate, ie, beyond the respective interests of his cestuis que trustent.''
It was submitted that in the trust established here there were successive interests in that Mrs Urquhart had a life interest with the reversion passing to the defendants and their sister. It was said that equity only seeks to assist in a claim where there is one interest and not when there are successive estates of a different nature. Where there are successive estates there cannot be a proper apportionment and therefore there is no right of indemnity. It was also suggested that it might be arguable that the estate of Mrs Urquhart could become liable for contribution and that it would be wrong to disregard the interest which she had for eighteen years. The Court should look at the whole trust and not merely the situation at the time when expenditure was incurred.
In my opinion the distinction which was being drawn in the passage quoted from the judgment in Hardoon's case was between the situation where a beneficiary has an absolute equitable ownership in the trust property and the other situation where there is only an interest limited in time, such as that of a tenant for life, or an interest which limits the capacity of the beneficiary to disclaim the trust interest or could make that beneficiary liable for a debt. This would be the position which would occur where a beneficiary is an infant. Dr Hughes, in the article to which I referred earlier, sought to define more clearly what the distinction is between the right to claim against a beneficiary who has an equitable right to the assets and one who has only a life interest. He noted that there may be circumstances where liabilities incurred during the life tenancy should be recoverable because they were of an income nature. At p 578 he pointed out that the decisions make no reference to vested interests as opposed to others. He continued ``consistent with what has been suggested before as to the absence of a stated rationale, the best conclusion may be simply that anything other than an absolute beneficial interest will not carry the onus of personal indemnity except in those cases where it is possible to rely on an explicit request by the beneficiary to incur a given liability''.
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It seems that the judgment in Hardoon's case was intending to give a right of indemnity against those beneficiaries who have an absolutely vested interest. Where there is only a limited interest there will be difficulties in assessing the extent of the liability, if any, which the person with the limited interest might owe to the trustee. Thus, if there had been a substantial capital expenditure incurred by the trustee during the lifetime of Mrs Urquhart it would not have been possible to make a claim against her personally and it may have been that there was a right to claim against the beneficiaries who took the reversion. Whilst the assets are still in existence, however, there would be a right of indemnity against those assets. This was made clear at the foot of p 123 of the judgment in Hardoon's case.
That is not the position which the trustees faced upon the death of Mrs Urquhart. Neither she nor her estate continued to have any interest in the trust. As there had been no nomination by Mr Rosenberg of any person to have an interest in the trust after the death of Mrs Urquhart, the only persons having that interest were the defendants and their sister. The trustees, immediately upon Mrs Urquhart's death, held those assets in trust for those persons. It is true that it was the death of Mr Urquhart which attracted the tax, but it was payable not by her estate but by the trustees. As one of the advices given by English counsel pointed out, the tax became payable not on the sale of the flat but on the death of the life tenant. When that sale took place, the proceeds of it were held by the trustees for the three sisters. They alone had the benefit of the trust and accordingly it was they who, upon receiving the proceeds of sale, were liable to indemnify the trustees for the expenditure incurred relating to those trust assets.
There was a further submission put on behalf of the defendants that this trust was not of the type to which earlier cases relating to indemnity had referred. It was said that the reported cases dealt with business or commercial types of trust and not to domestic ones. In my view there is no distinction to be drawn. Equitable principles do not apply to commercial situations any more than they do to private or domestic ones. The right of indemnity is an equitable one and it exists without any regard to whether the circumstances are of a commercial or a private nature.
It therefore seems clear that, at least in relation to the tax payable, the plaintiffs have a right of recovery as to one-third of that tax from each of the defendants. The fact that payment of the proceeds of sale was made with an implied representation that tax would not later be sought could have led to a claim of estoppel, if the defendants established that in reliance upon that representation they had acted to their detriment. This was claimed to be the position in one of the earlier defences but in the last defence filed that claim was deleted.
A trustee is only entitled to be indemnified for a liability properly incurred by him within the terms of the trust. He cannot claim an indemnity for expenses which he incurred as a result of his own fault or arising out of a breach of trust. The failure to pay CTT was the result of a mistake made by the plaintiffs, or at least a member of the firm in which they were partners. This was freely accepted by Mr Bayer. They are accordingly not entitled to recover from the beneficiaries the interest which was charged as a result of the delay caused by that mistake. The claim to an indemnity for any tax which might be payable was first made on 4 July 1989, over three years after the death of Mrs Urquhart. It appears from the tax assessment that interest was charged from 1 September 1986.
It was submitted for the plaintiffs that the defendants should pay interest at least from the date of the request for an indemnity. That submission assumed that it was the failure by the defendants to give that indemnity which caused interest to continue to run. Certainly there was a delay between the making of that request and the lodgement of a CTT declaration of a little over a year, but this cannot be wholly attributed to a lack of written indemnity. When the tax was assessed it was eventually paid by the plaintiffs. They could have done this much earlier if they had wished, but they no doubt wanted to make sure that they would be repaid. The fact is, however, that at all times they had been personally liable to pay the tax, whether they had a written indemnity or not.
If the plaintiffs had not overlooked the liability for CTT, then the tax could have been paid upon the receipt of the proceeds of sale of the flat, which appears to have occurred on 10 October 1986. Although an assessment would not have issued immediately, the appropriate rates of tax were known, as appears from the
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letter of 4 July 1989, and payment could have been made on the lodging of the necessary documents with the Capital Taxes Office. This would have prevented interest running, although there may have been a short period from 1 September which would have attracted interest. At the rate of 6 per cent (shown on the assessment as the rate of interest then payable) there would have been interest for the period of 1 September to 10 October of £768.Apart from that amount, interest became payable because no payment of tax was made, apart from the amount of £45,000 contributed by Mrs Smirin. Until the assessment on 26 September 1991, no actual contribution was sought from the defendants. On 27 September a copy of the assessment was sent to the defendants by a partner of Mr Bayer, with a request for payment. From that date until payment by the plaintiffs, further interest of £ 2580-80 accrued.
As most of the interest became payable as a result of the failure by the trustees to make the payment of tax from the proceeds of sale, it could not be said that the payment of that interest resulted from a liability properly incurred in the conduct of the trust. The delay due to the defendants' failure to given an indemnity may have caused further interest to run, but that additional interest could have been avoided by the payment of tax by the trustees. I except from that statement the amount of £768 which would have been payable even if the tax had been paid on the day of the completion of the sale of the flat. Further, the additional interest of £2580-80 became payable only because of the failure of the defendants to accept liability for their share of the tax. It is true that what was sought from them was a sum including interest, but a copy of the assessment was sent, and this showed the separate figures for tax and interest. In my opinion the defendants were responsible for the trustees having to pay the additional interest after notice of the assessment and should be required to repay it. By failing to agree to pay their share of the tax, the defendants impliedly required the trustees to pay the interest up to date of payment of tax and should be liable to repay that amount.
Accordingly each of the defendants is liable, on the plaintiffs' claim, to pay one-third of the tax of £116,800 and the interest of £768. They are also each liable to pay one-half of £ 2580-80. This totals £40479-73.
I turn now to the cross-claim. It is alleged that the plaintiffs were negligent as solicitors in failing to advise as to the appropriate means of reducing or minimising the incidence of capital transfer tax. Although it was not specifically pleaded, it was submitted that they had a duty to advise the defendants as beneficiaries in the trust of what the legal position was in relation to those steps.
In 1975, estate duty in the United Kingdom was replaced by capital transfer tax under the Finance Act 1975. That provided amongst other matters that where property comprised in a settlement is situated outside the United Kingdom it is excluded from tax unless the settlor was domiciled in the United Kingdom at the time of the making of the settlement. It is acknowledged that Mr Rosenberg was domiciled outside the United Kingdom. Evidence was given on affidavit by Mr Dilger, a solicitor of over thirty years standing who has developed an expertise in tax matters. He has held various positions in committees of the Law Society relating to taxes and revenue law. His evidence was that after the coming into force of the Finance Act 1975 (and the substituted Capital Transfer Tax Act 1984) it became possible to transfer the assets of trusts to tax haven countries or areas. These included the Channel Islands. He said that in the circumstances of this trust, steps could have been taken to transfer the flat to the ownership of a company incorporated in, say, one of the Channel Islands or the Isle of Man. This would involve the appointment of directors of that company who were resident in that tax-free area, and the shares in the company would be issued to the trustees. He said that the result would be that the flat would not be owned by a resident of the United Kingdom and the only property of the trust would be the shares in the overseas company. As a result, notwithstanding the life tenancy, the property would not be liable for the payment of CTT upon the death of that life tenant. There would be no transfer by the trustee within the United Kingdom. The overseas company could then sell the flat and the shares would be re-valued so as to equal the amount of the proceeds of sale. There would be a distribution to the trustees who would then hold funds in the United Kingdom which could be paid to the beneficiaries. Mr Dilger said that
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this was a common device practiced after 1975. He agreed that when the flat had a comparatively low value it may not have been practical from a financial point of view to carry out this scheme because of the cost of transfer of the property and the continuing running costs, but that as its value rose, the costs would be justified.It is on the basis of this evidence that the defendants claim that the plaintiffs as solicitors should have known of this method of avoiding CTT and should have taken advantage of the position by carrying out a scheme such as was suggested by Mr Dilger. It was not claimed that as trustees they failed to take such a course and this no doubt was prompted by the provisions of cl 5 of the deed which gave complete immunity to the trustees in their exercising or failing to exercise a discretion or power.
In answer to this evidence an affidavit was sworn by Mr Goodfellow, a member of the Bar of England and Wales. He did not give any indication of the extent of his experience in tax matters but I note that he gave his address as Pump Court Tax Chambers which were described in an affidavit in reply by Mr Dilger as being eminent tax chambers in London. Mr Goodfellow was admitted in 1983. He considered that there were a number of risks attached to carrying out the type of scheme proposed by Mr Dilger. One of the matters which would be taken into consideration by Internal Revenue when looking at a scheme such as this is whether the life tenant might be regarded as having contributed to the settlement, either by the injection of funds or by capital improvements to the principal asset. Another matter to be considered is the extent of control of the company. If it could be regarded as being controlled by a resident of the United Kingdom then it may not be regarded as an offshore company. Mr Goodfellow was also of the view that unless the provisions of the relevant Act were fully complied with there could be difficulties because there would be an attraction of capital gains tax. He referred to a number of other matters which in his opinion made the proposal a somewhat risky one. These included the need for the introduction of annual funds for the running of the company. If they were provided by the life tenant, she might be regarded as having an interest in the property.
I have not set out all of these arguments in detail. Much of what was said by Mr Goodfellow was in turn refuted by Mr Dilger in an affidavit in reply. He agreed that it would not have been appropriate for Mrs Urquhart to have contributed to the expenses of running the company or to any capital improvement of the flat. He also agreed that there should not be any control of the company by Mrs Urquhart or by the trustees. If these matters could be overcome he considered that the scheme would have been an appropriate way of avoiding tax. As to the raising of annual funds, he put forward the proposition that this could have been done by means of the trustees borrowing money against the security of the flat.
In addition to these matters Mr Bayer gave evidence as to his knowledge and consideration of the type of scheme suggested by Mr Dilger. He said that he had considered the effect of the Finance Act in the course of his professional activities. He specifically considered the position of this trust and decided that he would not recommend its being moved offshore. The main reason was his concern about the possible effect on Mrs Urquhart's financial position. In 1975 Inland Revenue had been investigating the state of Mrs Urquhart's domicile for the purpose of considering her liability for income tax. All of her assets were overseas and they and other family interests provided the whole of her income, which was apparently quite substantial. If she were found to be domiciled in the United Kingdom then she would have to pay tax at a high rate on the whole of her income and this would have reduced it considerably. In October 1975 Mr Bayer drafted a letter which was sent by Mrs Urquhart's accountants to the Chief Inspector of Taxes. That was quite lengthy and it set out details of Mrs Urquhart's history of travel between South Africa, Switzerland, the United Kingdom and elsewhere. It pointed out difficulties which she had had in returning to South Africa because of the refusal of the authorities in that country to grant her a visa, notwithstanding that she was born there. It also referred to her brother having bought a flat for her to live in. There was no mention of the trust or the life interest. The matter was obviously one of some delicacy because Mrs Urquhart had been living in England since about 1953 or 1955 and there was a strong presumption that she would have acquired domicile in that country. Emphasis was laid on the fact that she continued her intention to return to South
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Africa and not to make England her permanent home.As a result of the representations made in the letter, Inland Revenue accepted that Mrs Urquhart's domicile was not in the United Kingdom. It was however indicated that the matter would be reviewed after some years. Mr Bayer said that he was concerned that if it were found by Inland Revenue that the property where Mrs Urquhart lived was the subject of the trust and that it had been sold to an offshore company, then this may well have stirred a further investigation as to the circumstances or her right to live in the flat and may have given evidence of the permanence of her English residence. Mr Bayer said that he thought that it was highly likely that it would be decided that Mrs Urquhart's domicile was in England and he thought that the less investigation that was directed to her living arrangements, the better it would be for her future purposes. There was in fact a further review of domicile in 1982, although it appears that this was not very extensive, and the position was not changed.
Mr Bayer agreed that he did not consult the other beneficiaries about the possible re- location of the ownership of the flat to an offshore company. He said that he considered Mrs Urquhart's interest to be paramount because the whole purpose of the trust as proposed by Mr Rosenberg had been to provide a home for Mrs Urquhart. Therefore it was important that, if possible, she should not be found to be liable for a high rate of income tax on her overseas income. He said that in other circumstances he might have advised a transfer of the property to an offshore company but that he did not think that this appropriate in these circumstances. It should be noted that the question of domicile was important not only in respect of income tax but in respect of tax or duty which would be payable on Mrs Urquhart's death. If she were domiciled in the United Kingdom on her death then this would have involved the payment of a high rate of tax on the value of all of her assets, wherever situated. Her estate, according to an advice of counsel in evidence, was valued at over 1 million and was all held overseas. A high rate of tax on that amount would have reduced considerably the amount payable to the beneficiaries. The ultimate beneficiaries, subject to earlier interests, are the defendants and their sister.
In addition to the matters concerning Mr Urquhart's income tax, Mr Bayer was also concerned at the expense of having the property owned and controlled outside the United Kingdom. He said that the fees would amount to between £500 and £750 per year, although this may have been less during the 1970's. Mr Dilger had referred to the costs and considered that they were somewhat less than these amounts. Mrs Blumberg in an affidavit said that she would have been prepared to pay the expenses if she had known that by her doing so CTT may have been avoided.
It was submitted that Mr Bayer was mistaken when he said that he had considered and rejected the prospect of sending the trust offshore. I accept his evidence; there was nothing to suggest that he was being other than truthful. I concluded that as a longstanding friend of Mrs Urquhart he had been concerned to protect her interests, and in particular that he had taken all possible steps to avoid a finding that she was domiciled in the United Kingdom. An indication of the importance of this to Mrs Urquhart is shown in a card which she sent to Mr Bayer after the acceptance by Inland Revenue in 1982 of her domicile abroad. She expressed great relief and gratitude for all that Mr Bayer had done in protecting her interests.
I find it difficult in the circumstances to decide whether Mr Dilger or Mr Goodfellow is to be preferred in the expressing of views as to the likely effect of the proposed scheme. Neither was cross-examined and each of them appears to have a degree of expertise in the field of revenue law. Certainly Mr Dilger has been involved in that aspect of the law for a much longer time and he has had practical experience in carrying out exercises of this nature. Nevertheless, I cannot brush aside expressions of opinion from counsel who is also experienced in this aspect of the law. He is of the view that there would have been risks involved in putting forward a scheme such as that which was proposed.
I should perhaps deal briefly with some of the matters which have arisen from the opinions expressed. There was evidence given by Mr Bayer of Mrs Urquhart having contributed to improvements to her flat. These were not of a major nature and consisted mainly of the replacing of some panelling and other improvements of a like nature. She also contributed to the sinking fund of the building
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in which the flat was situated. There were no details given of these contributions but they were payments which were levied upon flat owners in order to provide for maintenance and repair, and the upkeep of the fabric. These payments no doubt did retain, if not improve, the capital value of the building. It is not clear from the evidence whether they would have been regarded as contributions to the capital of the trust. They no doubt improved or retained the value of the whole building but I am not aware as to how payments of this nature would be regarded by Inland Revenue in the UK.There was a further matter which concerned me and which was not referred to in the evidence of either Mr Dilger or Goodfellow. It appears that if the effective control of the company were not in the appropriate Channel Island but remained in England, then the company may not be regarded as being a non- resident. This would mean, if the scheme were to be adopted, that although the trustees held all of the shares in the company they would not be able to control its affairs or activities. That control would remain with the directors who would no doubt be professional directors or bank officers. In effect, the trustees would not be entitled through their shareholding to direct how the company should operate in respect of the flat. I would have thought that this could amount to a failure by the trustees to exercise their duties under the trust. To hand over the whole of the control of the flat would be effectively to hand over control of the trust property. Although in a technical sense that property would consist only of shares, in practical terms the intention of the trust was to provide an adequate home for Mrs Urquhart, and the trustees had a duty to see that that intention was properly carried out. If the directors had complete control, then the trustees would not be able to make any decision or seek to influence the decision as to what might happen to the flat if something of significance were to arise. I would have thought that this was a matter which trustees would have to take into account before agreeing to hand over complete control of the flat.
The first question to consider is the nature of the duty of care and then to see whether there has been a breach. The plaintiffs are sued not as trustees but as solicitors. It is said that they owed a duty to the trust and to its beneficiaries. There had been a retainer of Mr Bayer by Mr Rosenberg and it was said that there would have been a continued retainer by implication. No legal fees were paid, except for specific matters such as conveyancing, but this would not affect the duty of a solicitor. Mr Dilger had said that he would expect that a solicitor who was also a trustee should have a continuing consideration of the trust, at least every few years. If that duty was as a solicitor then it would seem to involve advising the trustee as to possible benefits which might properly and legally be available to avoid expense to the trust of future high taxation.
It may once have been considered that it was the duty of citizens and residents of a country to make their proper contribution to the revenue so as to enable the government to run the country for the benefit of its inhabitants. It now seems to be accepted, with the imposition of high rates of tax upon those who are most able to contribute to that revenue, that there is a duty on persons such as accountants and solicitors to advise their clients how they can avoid, as far as possible, making what the government regards as a proper contribution. That duty to advise has not been contested in these proceedings.
If a solicitor with a continuing responsibility towards a trust of this nature is not also the trustee, then his or her duty may be to inform the trustees of the legal position in respect of the availability of avoiding future tax such as CTT. This would require advice as to the means of carrying out such a project by transferring the assets to a tax free-area. The legal advantages or disadvantages would have to be put forward but thereafter the solicitor would have discharged his obligations as long as he had dealt with all relevant matters. It would then be up to the trustees to consider the advice and decide within their discretion what action they might take. If the trustees considered the facts and the advice and decided to take no further action then there would be no breach of duty on the part of the solicitor.
What then is the position when the trustee and the solicitor are the same person? How are the duties relating to each capacity to be considered? It seems to me that, having taken into consideration, as Mr Bayer did, the relevant statutory provisions, and having made himself aware of the procedures available to avoid the future payment of CTT, he had satisfied the duties imposed upon him as a solicitor. Thereafter, the question of whether he
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should take those steps was one for him and his co-trustee to consider in the exercise of their discretion in the conduct of the trust. In effect, assuming that they had duties owing as solicitors, the plaintiffs had a dual capacity, but the acts required of them were of a different nature. As solicitors, their duty was to consider, and if necessary research, the law which provided for steps which would allow avoidance of tax. They would then, notionally, advise themselves of what the law permitted the trustees to do in those circumstances. Putting on their trustees' hats, they had to consider what was in the best interest of the trust as a whole, bearing in mind that they were obliged to treat all beneficiaries equally and not to favour one over the other. If they failed to do this then their breach would be of their duty as trustees and not as solicitors. There is no claim here against the plaintiffs as trustees.As Mr Bayer had in fact considered the legal position and had, as it were, advised himself of it in his capacity as trustee, he fulfilled the duties cast upon him as a solicitor towards the trust. His co-plaintiff has not taken any part, it would seem, other than to agree with and accept the acts of Mr Bayer. The question which arises is whether the duty of the plaintiffs as solicitors extended not only to themselves as trustees but also to the beneficiaries. As I have indicated, it was claimed that the plaintiffs should have notified the defendants of the opportunities afforded by the change in legislation so that they would be able to express a view as to the moving of the assets of the trust offshore.
In considering whether there is a duty of care by solicitors to the beneficiaries of a trust it seems that again it is necessary to apply English law in the period from about 1977 to 1986. I have not found any English authority, nor have I been referred to any by counsel, which deals specifically to the duty of care owed by a solicitor to the beneficiary of a trust. There have been cases involving the liability of solicitors to persons who should have been beneficiaries under a will. In
Ross v Caunters [1980] Ch 297 Sir Robert Megarry found that a solicitor owed a duty of care to a person who was named as a beneficiary in a will but who lost that benefit because her husband was a witness to the execution of the will and the solicitor had failed to advise the testator of this possibility. The question of liability was based upon the proximity principle established in Donoghue v Stevenson and a claim of liability based upon a negligent mis-statement following
Hedley Byrne & Co Limited v Heller & Partners Limited [1964] AC 465 was rejected. It was considered that there had not been a relevant mis-statement and that the principle of proximity was more appropriate.
The reasoning in this decision was not followed in New South Wales in
Minister Administering the Environmental Planning and Assessment Act 1979 v San Sebastian Pty Ltd & Ors [1983] 2 NSWLR 268 at 299, a decision which was affirmed by the High Court of Australia ((1986) 162 CLR 340). It was said that there could not be a claim for economic loss based upon a breach under the Donoghue v Stevenson principles. In
BT Australia Ltd & Anor v Raine & Horne Pty Ltd [1983] 3 NSWLR 221, Wootten J found that a valuer who had been negligent in valuing trust property was liable to a beneficiary and in coming to this conclusion he considered that there was a duty of care under the Hedley Byrne principle.
These decisions would not necessarily represent the law in England up to 1986. The same could be said for the decision of High Court in
Hawkins v Clayton & Ors (1987-1988) 164 CLR 539. In that case the majority of the Court held that solicitors who retained for safe keeping the will of a client were liable in damages to the plaintiff, the executor named in the will, because they had not informed him of the will's existence. Deane J at 581 said that there may well be circumstances where a failure by solicitors to inform a beneficiary of the will would constitute an actionable breach of the duty of the care but it was not necessary to decide that question. Although this decision would not be binding on an English Court it would be regarded as of a persuasive nature, although of course it was decided two years after the death of Mrs Urquhart.
Hawkins v Clayton was recently referred to in a decision of the House of Lords which again looked at the question of the liability of a solicitor to a person who would have taken under a will were it not for the solicitor's negligence. In
White v Jones [1995] 2 WLR 187, it was decided by a majority that there was a breach of duty to persons to whom the estate would have passed if the solicitors had properly carried out the instructions of the deceased. Lord Goff and Lord Browne-Wilkinson relied
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upon an extension of negligence based upon Hedley Byrne and not on the basis of proximity as had been supported in Ross v Caunters.As by 1980 in England, a solicitor could be liable to a person named as a beneficiary in a will, it seems likely, but not certain, that it would be found that a solicitor had a duty of care to a beneficiary in a trust which he was advising, in certain circumstances. On that basis, the duty owed by the plaintiffs to the defendants, where the plaintiffs were also the trustees, was to advise them of the benefits and possible disadvantages, if any, which might arise from undertaking a transfer of the flat to an offshore company with a resultant saving in CTT, if that move were successful. It would also involve the giving of advice of the risks involved, as envisaged by Mr Goodfellow and the possible attraction of capital gains tax. Mr Bayer accepts that he did not tell the defendants or the other beneficiaries of the effect of the statutory changes in 1975 or thereafter. The question is whether that failure could amount to negligence from which any damages could flow.
I am not satisfied from the evidence that in a trust of this nature, quite apart from Mrs Urquhart's potential problems concerning her domicile, it would have been beneficial to the trust as a whole to have undertaken the proposed scheme. The evidence of the experts leaves some doubt. I am in no position to gauge whether the proposal would have been successful if, for example, the trustees had sought to retain control of the trust by requiring the flat to be maintained or dealt with in a manner which the trustees considered proper. Similarly, it is not clear whether the money spent by Mrs Urquhart on the flat or her contributions to the sinking fund would have been regarded by the tax authorities as payments for capital improvements.
Secondly, the advice would have had to be that the possible course of action could endanger Mrs Urquhart's retention of her domicile outside of the United Kingdom and would thus greatly increase the income tax payable by her. The plaintiffs would no doubt have also had to advise that once the domicile in the United Kingdom was established this would have a significant effect on Mrs Urquhart's estate upon her death, with serious consequences for the three residual beneficiaries. Assuming that the plaintiffs, in their capacity as solicitors, had advised the defendants of the statutory provisions and had told them of the possible advantages and disadvantages, the defendants could only have expressed a view to the plaintiffs in their capacity as trustees as to the course which the defendants thought the trustees should take. It is not known what Mrs Urquhart would have considered to be an appropriate course but if her reaction to the decision of Inland Revenue in 1982 is any indication, it might be assumed that she would have preferred to retain her domicile and not taken the risk of losing it by stirring up a more detailed investigation. Similarly, the likely views of Mrs Smirin are unknown.
It seems that the failure to advise the defendants of what might be done in the trust was the only matter which could be regarded as a breach of any duty which might be owed to them by solicitors for the trust. The making of the decision not to transfer the trust property was that of the plaintiffs as trustees and it was not part of the requirements of their duty as solicitors. Any failure to transfer the flat was the result of a decision as trustees.
If I am wrong in this analysis and the duty of a solicitor and trustee is a more onerous one, requiring that person not only to advise but also to act in carrying out the trust without negligence, then I do not see that the situation is any different. I am not satisfied in those circumstances that the plaintiffs were negligent. In the cross-claim the acts said to amount to failure by the plaintiffs to exercise properly their duty of care were not ensuring that the trust did not become liable for CTT or, alternatively, not taking steps to minimise that liability. As I have indicated, it was submitted in addresses that there was a failure to obtain the views of the defendants or the other beneficiaries.
This takes one back to the question whether in their dual capacity, the plaintiffs were bound to take these steps which Mr Dilger regarded as appropriate. I do not need to repeat the differing views on the question of whether this was beneficial to the trust. Even adding the duties of the plaintiffs as solicitors to those which they had as trustees, it seems that the concern of Mr Bayer is a matter which has to be given considerable weight. It was submitted for the defendants that the problem as to Mr Urquhart's domicile would not have been affected by the transfer of the flat to the company in the
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Channel Islands as this was merely a change of ownership. That was not the point raised by Mr Bayer. He, no doubt with knowledge of the great interest of Inland Revenue in investigating residents who claimed domicile abroad, was anxious to take no step which might cause that investigation to widen. His caution was shown in the letter which he drafted in 1975 which, it would seem, carefully omitted any reference to the trust or to Mr Urquhart's life interest. I assume that a reference to that life interest in a flat in London would have alerted the taxation officials to her having a permanent home in the United Kingdom. The knowledge of that fact, for all that is known, may have suggested to those officials a further basis for her having acquired a domicile of choice in England. In my opinion that was a legitimate reason for Mr Bayer in deciding not to take the step of transferring the flat. He also had in mind that when the trust was created Mr Rosenberg as settlor had rejected the idea of establishing it in a tax-free area. If that reason was a good one, it should not be said that he was negligent in not carrying out the transfer. He had to balance the benefits to the defendants and Mrs Smirin in seeking to reduce future CTT against the potential burden to Mrs Urquhart of having to pay heavy income tax for the rest of her life.Taking these matters into account I am not satisfied that, assuming a duty by the plaintiffs to the defendants as solicitors for the trust, they were in breach of that duty. Even if there were, there could be no damage suffered because the final decision as to what was to be done in the control of the trust was in the hands of the plaintiffs in their capacity as trustees and not as solicitors. For these reasons I consider that the cross-claim should be dismissed.
By s 94 of the Supreme Court Act, the Court may order interest to be paid for the whole or any part of the period from the date when the cause of action arose until the date when judgment takes effect. The cause of action arose when payment of tax was made on what seems to be 26 March 1992. A letter of demand was sent on 22 April. I consider that interest should run from the date of payment.
I order that each of the defendants pay to the plaintiffs the sum of £40,479-73 (British pounds) together with interest pursuant to s 94 of the Supreme Court Act from 26 March 1992 at the rates and for the periods set out in Schedule J to the Supreme Court Rules.
I order that the cross-claim be dismissed.
I order that the defendants pay the costs of the plaintiffs of the claim and the cross-claim.
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