De Vigier v Inland Revenue Commissioners

[1964] 2 All ER 907

---

(Decision by: Lord Upjohn)

De Vigier
vInland Revenue Commissioners

Court:

Judges: Lord Reid
Lord Evershed
Lord Guest
Lord Pearce
Lord Upjohn

Subject References:

Hearing date: 2, 3, 8 June 1964
Judgment date: 6 July 1964

---

Decision by:
Lord Upjohn

My Lords, on 24 January 1952, the appellant executed a settlement in favour of two named children then in comparatively early infancy. The trustees were his wife, Mrs de Vigier, and his solicitor, Mr Simmonds. He settled certain patent rights and licences made thereunder, which then constituted the trust fund, and the settlement contained the widest possible power of investment in any investments as though the trustees were absolute owners. The trusts declared by the settlement were in a familiar form, that is to say, the two children respectively acquired vested interests in the trust fund on respectively attaining the age of twenty-five years, and, until they attained the age of twenty-one, the trustees had a discretion to apply the income or any part thereof in the maintenance of the children and subject thereto they were directed to accumulate it.

The appellant was a director of Acrow (Engineers) Ltd which I shall call "Acrow", and shortly after the execution of the settlement certain preference shares in Acrow were transferred to the trustees, and by 1957 when the material events occurred the trustees had apparently invested substantial sums from accumulated income in Acrow ordinary shares. In the autumn of 1957 the trustees entered into a number of transactions. It is quite clear that they did so because Acrow were making a rights issue of shares and the trustees, probably having some inside knowledge, very sensibly desired to take advantage of this rights issue. The facts have been set out at length in the Case Stated by the Special Commissioners and the judgment of Wilberforce J and in the Court of Appeal, and I do not propose to recite them in any detail here. Suffice it to say that in August, 1957, the trustees purchased from Mrs de Vigier some Acrow shares. In September, 1957, they subscribed for new shares in Acrow Ltd which, as holders of ordinary shares, they were entitled to do and in early October, 1957, they purchased further Acrow shares on The Stock Exchange, London. For these purposes they had to find nearly £6,600, but unfortunately at this time the trustees' bank account was in credit to the sum only of £140, so in September and at the beginning of October Mrs de Vigier advanced sums aggregating £7,000 which she paid to the trustees' banking account and out of which they discharged their obligations just mentioned. Later on, in May and August respectively, 1958, the trustees drew cheques for £2,500 and £4,500 in favour of Mrs de Vigier thereby repaying to her the money she had paid in the previous autumn.

That seemed a very sensible transaction. They were acquiring authorised shares and the propriety of their action could not be challenged, although it is possible that they were not in fact authorised to purchase additional shares on borrowed money. But that is a minor point. No one has suggested that the beneficiaries have thereby suffered any loss. Having regard to s 10(4) and s 16 of the Trustee Act, 1925, they were entitled to borrow money to subscribe for the new shares to which they were entitled as holders of existing shares.

It would surprise anyone not expert in income tax matters to learn that this seemingly sensible capital transaction, obviously designed to overcome the temporary lack of cash in the trustees' bank account, has in fact attracted an additional assessment of surtax upon the appellant in the sum of £12,174, that being the grossed-up sum which after the deduction of income tax at the standard rate for the year would amount to £7,000. This, however, comes about because s 408 of the Income Tax Act, 1952 (re-enacting the substance of similar legislation in the years 1936 and 1938) (See Finance Act, 1936, s 21, and Finance Act, 1938, s 40, and Sch 3, Pt 3 paras 1, 3) provides, omitting immaterial words

"(1) Any capital sum paid directly or indirectly in any ... year of assessment by the trustees of a settlement ... to the settlor shall-

-(a) to the extent to which the amount of that sum falls within the amount of income available up to the end of that year, be treated for all the purposes of this Act as the income of the settlor for that year.

"(7) ... in this section 'capital sum' means-

-(i) any sum paid by way of loan or repayment of a loan ... ".

The section concludes with these fatal words--"references to sums paid to the settlor include references to sums paid to the wife ... of the settlor".

So it is said that there was a loan made by Mrs de Vigier to the trustees in 1957, and in 1958 there was a repayment of that loan within that section; as she is the wife of the settlor he is accordingly liable to surtax thereon. That is the sole question before your lordships. The Special Commissioners decided that the sums made available to the trustees were not loans in the ordinary meaning of that word and that the repayment of those advances was not repayment of the loans. This decision was reversed by Wilberforce J who held that the Crown's contention was right, and he was upheld unanimously in the Court of Appeal. Before your lordships, counsel for the appellant advanced three main propositions. His first proposition was that if a trustee lends money to himself and his co-trustee his duty and his interest would conflict, and, founding on the famous observations of Lord Cranworth LC in Aberdeen Ry Co v Blaikie Bros . ((1854), 1 Macq 461, at p 471), he submitted that any such contract would be void ab initio and a nullity. Counsel later abandoned this proposition for, as many subsequent authorities have made clear, the contract between a trustee and one with whom he is in a fiduciary relationship is not void but voidable.

His second main point was that it was ultra vires for the trustees to enter into these engagements (save as to the subscription for new shares) and, therefore, no contract could be implied. Counsel again rightly abandoned this startling submission, for the doctrine of ultra vires is one which has been developed entirely as a result of the juridical concept of the limited capacity of corporations and has no application whatever to the activities of individuals. An individual who commits a breach of trust is sued for breach of trust. If any doctrine of ultra vires was applicable then there would have been no room for the doctrine of purchaser for value without notice.

His third point was that in any event in fact there was no contract between Mrs de Vigier and the trustees or between her and her co-trustee. She was repaid because in equity she had a right of indemnity to be reimbursed the money she advanced, and he relied strongly on Re Pumfrey, Worcester City and County Banking Co Ltd v Blick . The argument proceeds that there being no contract there could not therefore be any contract of lending, no loan and no repayment of any loan, so s 408 of the Income Tax Act, 1952, did not apply.

No one gave evidence in this case. The appellant, his solicitor or his wife could have done so had they chosen, but they did not do so. I make no criticism for them for that, but in the circumstances, before considering the submissions of law which I have outlined, it is necessary to draw inferences from the known facts.

Where a trustee makes a payment of money into the trustees' account it may be a matter of some difficulty in some cases to know whether he is making an advance on the terms that he is to be repaid, or whether he is making a gift to the trust. It must all depend on the purposes for which the payment is made and all the other circumstances of the case. Fortunately in this case I think there can be no possible doubt as to the purpose of the payments of the £7,000 into the trustees' banking account by Mrs de Vigier. Quite plainly it was because the trustees were anxious to take advantage of the forthcoming rights issue of Acrow, but unfortunately the trustees' banking account at that time only had £140 in credit. So Mrs de Vigier paid that money to the trustees' banking account in order that the transactions that I have briefly summarised might be carried out. Quite plainly she made this payment on the terms that she was to be repaid, and she was repaid, as it must be assumed, out of the surplus income of the trust fund that became available later. Counsel for the appellant does not shrink from this, and he accepts at once that the proper inference is that Mrs de Vigier's payment to the trustees' banking account was on the terms that she would be repaid later on out of the trust fund, but he insists that there was no contract. I for my part am quite unable to see why there was no contract between Mrs de Vigier and her co-trustee when it is admittedly proper to infer that when she made the advance it was on terms that she was to be repaid out of the trust fund. No one has suggested that Mr Simmonds was making himself personally liable to repay the sum or any part thereof. I accept at once that there was no contract of loan whereby Mrs de Vigier looked to herself and her co-trustee to repay the loan. She looked entirely to reimbursement from the trust fund. The relevance of the case of Re Pumfrey is that in those circumstances equity will assist her to recover the money that she has advanced. That was a case similar in many respects to the present one. The trustees for sale were requested by the tenant for life and her husband to purchase a house. The trust fund was short of the desired purchase money by some £449. The tenant for life's husband promised to find it, but he failed, and so one of the trustees, his uncle, out of the goodness of his heart, provided the money, which he did by borrowing from a bank, who had full notice of the purpose for which the money was required. They could not plead successfully that they were purchasers for value without notice. The husband of the tenant for life failed entirely to pay, and so the bank attempted to foreclose on the estate of the trustee uncle, who had by that time died. Kay J held that the bank stood in the shoes of the trustee, no higher, but that the trustee in those circumstances was entitled to a lien on the trust fund for the amount of his advance. That was plainly right. That principle is applicable here and shows that, though Mrs de Vigier has no action for debt against herself and her co-trustee (which would have been impossible before 1926 in any event) she is entitled to reimbursement out of surplus income of the trust fund by proceedings in equity.

The mere fact, however, that under the old forms of pleading, in the circumstances of this case, an action of debt for return of a loan would not lie, does not prevent the transaction being properly described as a loan. Thus in Mathew v Blackmore a trustee borrowed a sum of money from another for the purposes of his trust on the terms that he should not be personally liable, but that the person who had paid the money should look only to the trust funds to be reimbursed. The action for debt failed, but nevertheless it is quite plain from the judgments that it was treated as a loan to be repaid out of the trust funds.

The ultimate question to be decided is whether the transaction which I have described is properly described as one of loan when Mrs de Vigier advanced the money and of repayment of the loan when she received it back. On this matter I do not see how it is possible to entertain any doubt. It matters not how one describes the transaction. Mrs de Vigier made an advance of money to the trustees on the terms that she should be repaid out of the trust fund, and that seems to me not merely colloquially, but as an accurate use of legal language, to be properly described as a loan and repayment of a loan, so that however hard it may seem s 408 of the Income Tax Act, 1952, is applicable.

I would dismiss this appeal with costs.