R

• Jurisdiction: Jersey
• Court: Royal Court
• Judge: Sir Philip Bailhache,Jurats Clapham,Liddiard,Bailhache, Commr. and Jurats Clapham and Liddiard
• Judgment Date: 21 June 2011
• Neutral Citation: [2011] JRC 117
• Date: 21 June 2011

[2011] JRC 117

ROYAL COURT

(Samedi)

Before:

Sir Philip Bailhache, Kt., Commissioner and Jurats Clapham and Liddiard.

In the Matter of the Representation of R

And In The Matter Of The S Trust Established On 3 April 1997

And In The Matter Of Article 51 Of The Trusts (Jersey) Law 1984 (As Amended)

Advocate R. J. MacRae for the Representor.

Advocate E. C. G. Bennett for B Limited, the Trustee.

Authorities

Service of Process Rules 1994.

Dicey, Morris and Collins on the Conflict of Laws, 14th edition, 2006.

HMRC v Gresh (2009–10) GLR 239.

Re Seaton Trustees Limited [2009] JLR N 15.

Re Seaton Trustees Limited [2009] JRC 050.

Pitt v Holt and Futter v Futter [2011] EWCA Civ.197.

In the matter of L [2011] JRC 085.

Re the A Trust [2009] JLR 447.

In re First Conferences Limited 2003 Employee Benefit Trust [2010] JRC 055A.

In re the Lochmore Trust [2010] JRC 068.

Gibbon v Mitchell [1990] 1 WLR 1304.

Ogilvie v Allen (1889) 15 TLR 294.

JP v Atlas Trust Company (Jersey) Limited [2008] JRC 159.

Kleinwort Benson Limited v Lincoln City Council [1999] 2 AC 349.

Re Glubb [1901] 1 Ch 354.

Abram Steamship Co v Westville Shipping Co [1923] AC 773.

THE COMMISSIONER:

Introduction

1 This is a representation brought by R (“the representor”) as de facto settlor of the S Trust (“the Trust”), which is a discretionary trust established by declaration of trust by B Limited on 3 ^rd April 1997. The representor seeks orders that the transfer of assets by her to B Limited is voidable at her instance on the ground of mistake, and that subsequent transfers of assets from the Trust to three new trusts established in the USA (“the New Trusts”) are similarly voidable at her instance. On 19 ^th April 2011, the Court announced that it would make those orders. Our reasons are set out below.

2 The background to the application appears from an affidavit sworn by the representor and may be stated as follows. On 3 ^rd April 1997, the representor transferred to B Limited, a company incorporated in Jersey, a number of shares in a French company called C. Subsequently, B Limited (to which we will hereafter refer as “the trustee”) settled the shares on trust in its capacity of trustee of the Trust. The beneficiaries of the Trust have been, since the execution of a Deed of Exclusion by the trustee on 31 ^st December 2007, the representor's children and grandchildren and any future issue. The settlement of these shares resulted from advice given by Norton Rose, a leading firm of London solicitors. The representor had sought advice on tax planning issues relating to her holding of shares in a family company called D, established by her grandfather and another. D is an international trading company with its headquarters in France. The representor's holding in D was held by C. The advice of Norton Rose was that if the representor gifted all her C shares to a UK discretionary trust, no UK Inheritance Tax (“IHT”) would be payable because 100% business property relief would apply to the gift of the shares. In fact, that advice was wrong.

3 The representor was at the time of the transfer to the Trust deemed to be domiciled in England, and an immediate charge to IHT arose in the sum of £1,943,689, including interest. That liability was met by the representor. Subsequently, she instituted proceedings against Norton Rose which were apparently compromised on terms that have not been disclosed.

4 The representor's difficulties were not however confined to IHT. At the time of the creation of the Trust, no consideration was given to the position of the principal beneficiaries who were, and still are, resident in the USA. They are US citizens and therefore US taxpayers. Distributions of accumulated income from the Trust to beneficiaries who are US taxpayers would be subject to the onerous tax rules which apply to US beneficiaries receiving distributions from foreign non-grantor trusts such as the Trust. At worst, it appears that the potential effect of those rules would be to impose a tax charge of up to 100% of the value of the distribution. That is the advice of David Stein, a US tax lawyer and a partner of Withers Bergman LLP. His view is that the US federal income tax rules in relation to non-US trusts with US beneficiaries are notoriously arcane and “ often produce unexpected or counter-intuitive results”. The representor was advised of none of this at the material time.

5 The representor has deposed that, if she had appreciated that the creation of the Trust would give rise to immediate charges to IHT and to the adverse tax treatment in the USA of the US resident beneficiaries, she would not have transferred the C shares to the trustee, nor directed the trustee to declare a trust over the shares. In simple terms, but for the misleading and/or inadequate legal advice that she received, the representor would not have taken those steps. Instead, she would either have taken no steps at all, or would have moved to Switzerland, as indeed she subsequently did, and made other arrangements.

6 In April 2001, the representor sought advice from tax counsel in England as to whether it was possible to rescind the transfer of the C shares to the Trust, and as to the fiscal consequences of any such rescission. The US tax consequences were not at that stage considered. The representor was advised that, on the basis of the law as it then stood in England, such an application would probably fail, and merely add to the costs incurred in pursuing an action against her former legal advisers. On the basis of that advice, she took no action in 2001.

7 In 2007, the New Trusts were established by the representor in accordance with the laws of the State of Delaware in the USA. They were the F Trust, the G Trust, and the H Trust. The representor was named as the grantor of the New Trusts on the basis that she was the source of the S Trust Funds. In February 2008, substantial funds were transferred by the trustee of the Trust to the trustees of the New Trusts. The beneficiaries of the New Trusts are the representor's children and their issue. No other distributions from the Trust have been made since its creation.

8 The transfer of funds from the Trust to the New Trusts did not give rise to any further liability to IHT. Both the Trust and the New Trusts remain within the IHT net, and a 10 year anniversary charge and tax charges on distribution apply to all the trusts.

9 The representor has moved to Switzerland, where she is now permanently resident. She lost her deemed UK domicile status on 6 ^th April 2011, having been non-resident in the UK for three full tax years.

10 If the representor obtained a declaration that the trust was voidable at her instance, counsel submitted that this would impact upon the New Trusts in that they were funded by assets transferred from the Trust. The assets, being subject to an equity in favour of the representor entitling her to undo the transaction, and not being in the hands of good faith purchasers for value, remained subject to that equity in the hands of the trustees of the New Trusts. The representor accordingly sought a further declaration that the New Trusts were similarly voidable at her instance.

Jurisdiction and applicable law

11 It is clear that the Court has jurisdiction to hear the representor's application. The principal respondent to the representation is a trust company incorporated and resident in Jersey and is amenable to the Court's jurisdiction. The beneficiaries of the Trust are necessary or proper parties who can be served out of the jurisdiction under the Service of Process Rules 1994.

12 What is perhaps not quite so clear is what law should be applied to the transfer by the representor of the trust assets to the trustee. The answer to that question is important, because the proper law of the transfer will govern the issue of whether the transfer may be declared voidable on the ground of mistake.

13 There are two main contenders in the ring. At the time when the transfer was made, the representor was resident and domiciled for tax purposes in England. English law is therefore one protagonist. The transfer was made to a company registered in Jersey which subsequently declared a trust of that property governed by English law. The Trust is administered in Jersey. The law of Jersey is accordingly the other contender. It is true that the property transferred was shares in a company registered in France, but we do not think that that fact alone is sufficient to advance the cause of French law as a third possibility. The law governing the transfer is either English law or Jersey law.

14 The most relevant rule of Jersey private international law (as in England) is the rule for restitutionary obligations. The rhetorical question is – with which jurisdiction does the restitutionary obligation have the closest and most real connection? Counsel for the representor drew our attention to a passage from Dicey, Morris and Collins on the Conflict of Laws, 14 ^th edition, 2006, a work which has often been treated as authoritative in this Court. Rule 230 at paragraph 34R – 001 provides:-

“Rule 230-

The obligation to restore the benefit of an enrichment obtained at another person's expense is governed by the proper law of the obligation .

The proper law of the obligation is (semble) determined as follows:

If the obligation arises in connection with a contract, its proper law is the law applicable to the contract;

If it arises in connection with a transaction concerning an immovable (land), its proper law is the law of the country where the immovable is situated (lex situs);

If it arises in any other circumstances, its proper law is the law of the country where the enrichment occurs.”

Counsel submitted that the question for the Court was where the enrichment occurred, and he contended that it occurred in Jersey. Not only did the...