Mr Caldicott is the son of the late Mrs Yvonne Caldicott, who died in November 2012. He, his wife and his adult son brought a claim against his sister, Mrs Pearson, and her co-executor Mrs Walker, as trustees of a discretionary will trust declared by their mother’s will. The beneficiaries of the trust were a closed class composed of the claimants and Mrs Pearson. Mrs Pearson and her co-trustee are private client solicitors and are now both partners in a firm specialising in that field.
Under the terms of the will Mrs Pearson was given a 50% interest in a family company, Wyvern Securities Ltd, and 50% was given to the trustees of the trust. This structure was adopted as, at the time, Mr Caldicott was expected to be (and later was) bankrupted for a second time. The will contained no provisions excluding or modifying the self-dealing rule.
In May 2013 the trustees sold a 15% holding in Wyvern to Mrs Pearson on the basis of the probate valuation of Wyvern as a whole (ie pro-rata), so that she then held a 65% interest and the trust held a minority 35% interest. The purpose of this transaction was to provide liquid funds in the trust, that could then be loaned to Mr Caldicott on his discharge from bankruptcy, as they later were. The potential application of the self-dealing rule was recognised at the time. Counsel’s advice was taken on the point and a disclosure letter drafted.
The claimants asserted that they understood at the time of the sale it had been agreed that the trustees would have an option to repurchase the shares sold to Mrs Pearson at any time, provided Mr Caldicott repaid the loan made to him by the trustees of the bulk of the purchase money. The defendants contended that such an option had existed, even if enforceable in honour only, but was exercisable only within two years of the share sale and had lapsed before any attempt was made to exercise it. The terms of the option were not recorded in a formal document but were referred to in a ‘letter of wishes’. The claimants sought to set aside the share sale as a self-dealing purchase and also sought the removal and replacement of the defendants as trustees of the trust.
Held: ordering rescission of the sale of trust property to the trustee on terms but declining to remove the trustees
The self-dealing rule is ‘that if a trustee sells the trust property to himself, the sale is voidable by any beneficiary ex debito justitiae, however fair the transaction’. It is normally a defence for a trustee to prove that all beneficiaries gave fully informed consent to the sale. The court rejected arguments that the price paid for the shares had been or might have been too low and there was no allegation of bad faith. Nevertheless, the sale should be set aside, principally on the basis that, on the balance of probabilities, the limitation of the option to a two-year period had not been made clear to the claimants before they gave consent, and so that consent could not be regarded as having been given with the benefit of full information. There was also a question of whether the transaction, as entered into, involved any grant of option rights to the trustees, as the claimants might reasonably have expected in view of the terms of the disclosure letter.
It was not a defence that the trustees could instead have distributed the shares sold to Mrs Pearson as a beneficiary of the trust, as in substance as well as form the powers exercised were administrative not dispositive. The self-dealing rule therefore applied with full force. Although there may be exceptional cases in which relief may not be granted following breach of the self-dealing rule, this was not one of them.
A trustee exoneration clause contained in the will, excluding personal liability other than when acting or failing to act in bad faith, did not as a matter of construction provide a defence to a claim for rescission, as that remedy is a proprietary one rather than one involving personal liability for breach of trust. The clause did serve to exonerate Mrs Pearson with respect to a claim for an account of profits in respect of dividends received from the shares sold and from liability to give restitution of the dividends themselves.
Rescission was ordered on terms that Mr Caldicott would be required first to repay the loan to the trust and (as a further or alternative basis for holding that she was not liable to account for profits) that Mrs Pearson was not required to repay or account for dividends received in respect of the shares sold in the interim but was also not entitled to interest on the purchase price.
The trustees should not be removed. The key question was whether continuance of the relevant trustee in office would prevent the trust from being properly executed in the interests of the beneficiaries, taking account of the perspective of the settlor. Other than in respect of the option issue, no complaints made against the trustees had been made out. The presence of friction between the claimants and the trustees was not a sufficient basis for a decision to remove. In all the circumstances, the court did not consider that it would be appropriate to exercise its discretion to remove the trustees.JUDGMENT MRS JUSTICE FALK: Introduction  This dispute relates to a discretionary trust (the ‘Trust’) established under the will of Yvonne Caldicott, who died in November 2012. The first claimant, David Caldicott, and the first defendant, now called Pamela Pearson, are Yvonne’s children. The second claimant, Sian Caldicott, is David Caldicott’s wife, and the third …