Analysis
The claimant’s mother settled a trust by way of a trust deed dated 29 April 1985. The trust was originally a discretionary trust with the claimant and his mother as trustees and a wide class of beneficiaries. The only asset of the trust was the family home in Surrey (the property). The trust was a discretionary trust during the claimant’s mother’s lifetime, with an absolute trust in favour of the claimant on her death. By a deed dated 30 June 2008, the first defendant (the claimant’s cousin) and the second defendant (a solicitor) were appointed as trustees.
The claimant’s mother died on 29 January 2009, at which point the claimant became sole beneficiary. The defendants, however, did not distribute the net proceeds of sale of the property of £497,414.51. This was for three reasons. First, it was not until their solicitors received a letter from HMRC dated 5 March 2015 that the defendants knew that no IHT was payable. Secondly, the defendants were not able to confirm the claimant’s identification or address. Thirdly, the claimant was not willing to give the defendants an indemnity (though the defendants later accepted that the claimant was not obliged to give one).
On 16 August 2020, the claimant issued a claim form directions, a payment on account from the trust fund, and disclosure of documents, and alternatively a prospective costs order and permission to apply for further relief following review of the disclosed documents.
The defendants counterclaimed for an account to be taken of the trust fund and the amount due to be paid to the claimant to be ascertained, and directions on the matters of ascertaining the claimant’s identity and the form of indemnity they were entitled to require of him.
On 16 November 2020, Deputy Master Nurse gave permission for the counterclaim, ordered that an account be taken, and ordered an interim distribution to the claimant on condition that he serve the defendants with a copy of his passport or driving licence, documents proving his address, details of the bank account to which payment should be made, and a declaration that no one else had any claim to the trust fund and that he knew of no other pending claims. The claimant did not serve these documents and no interim payment was made.
An account was served, and the claimant served notice of objections alleging excessive legal costs, a failure to invest the trust fund, failing to make advances from the fund to him, and failing to obtain a proper price for the property. This notice was said to supersede two earlier written notices of objections. On 26 October 2021, Master Kaye directed the hearing of five preliminary issues:
- (1) which if any of the claimant’s objections to the accounts were time-barred;
- (2) whether the claimant’s challenge to the legal costs should be referred for assessment;
- (3) whether a letter from the claimant and an opinion from counsel were a defence to an allegation that the defendants should have generated additional income by investing the trust fund;
- (4) whether the defendants were in breach of trust in failing to pay the claimant the trust fund or advance sums from it and if so what loss was recoverable, and whether the defendants should be granted relief under s61 Trustee Act 1925; and
- (5) whether the defendants were in breach of trust for failing to maintain the property and present it in best condition to maximise the sale price, and if so whether they should be granted relief under s61 Trustee Act 1925.
Held:
Which of the objections were time-barred?
A cause of action for breach of trust is subject to a six-year limitation period running from the date of the breach (s21(3) Limitation Act 1980, Thorne v Heard [1894] applied). Time would run for this purpose until the claimant brought an ‘action’ as defined in s38(1) Limitation Act 1980. The claimant argued that time stopped when his claim was issued, alternatively when the trustees counterclaimed, alternatively when he filed his initial notices of objection, and alternatively when he served his final notice of objection.
An action was not brought for this purpose when the claimant issued the original claim since it contained no express or implied reference to any breach of trust.
An action was not brought for this purpose when the defendants counterclaimed because that action was not brought by the claimant and it made no claim in respect of any breach of trust.
The claimant’s notices of objection were properly interpreted as alleging breaches of trust. However they were not an ‘action’ for this purpose (Herbert Berry Associates Ltd v Inland Revenue Commissioners [1977] referred to).
The position was not affected by s23 Limitation Act 1980. While the claimant was entitled to bring an objection to the defendants’ accounts based on breach of trust, it did not follow that, when the account was finalised, the defendants would be liable to pay equitable compensation – for that to happen there needed to be a claim (Barnett v Creggy [2014] referred to).
Time had therefore not stopped running and any claim for breach of trust would be time-barred if the breach occurred more than six years before any action was eventually brought.
Should the claimant’s challenge to the defendants’ legal costs be referred for assessment?
The defendants had complied with directions to disclose all narratives or equivalent documents in their control or possession which accompanied or explained the invoices from their solicitors. Their disclosure contained sufficient details as to timing and subject matter for the claimant to identify what work they related to. The claimant, however, had failed to comply with a direction to serve further particulars of his challenge to those legal costs. Neither had the claimant sought further information or applied for further directions.
While the court had power to direct an assessment (Tim Martin Interiors Ltd v Akin Gump LLP [2012] referred to), the court declined to do so. An assessment would generate further costs and the likely outcome was limited in scope since the claimant would need to show that any payment was itself a breach of trust, and assessment would not assist in determining whether any payment fell outside the scope of the trustees’ indemnity. Even if there was a breach, the trustees might be able to rely on s61 Trustee Act 1925. The claimant’s ability to challenge the defendants’ expenditure would not be significantly if at all affected by the lack of assessment.
Did a letter from the claimant or opinion from counsel provide the defendants with a defence to the claimant’s allegation that the defendants should have generated a higher yield by investing the trust fund?
The defendants had paid the trust fund into an interest-yielding account but not made other investments. On its proper construction, the claimant had not consented to this in a letter in which he stated that no actions or payments were to be made without his written authority (Re Pauling’s Settlement Trusts [1962] referred to). It was not, however, a breach of trust since the defendants had relied on advice from counsel that they should only make risk-free investments (Butt v Kelson [1952], Marsden v Regan [1954], and Futter v Revenue and Customs [2013] referred to).
Were the defendants in breach of trust for failing to pay the trust fund or sums from it to the claimant and if so should they be granted relief under s61 Trustee Act 1925?
As trustees, the defendants were required to take such steps as were necessary to satisfy themselves that the person to whom they were distributing the trust assets was a bona fide beneficiary under the trust (Holdford v Phipps (1841) applied). It was not a breach of duty to refuse to distribute until the claimant’s identity and address had been established. While it was not necessary, the defendants had well-founded concerns about the claimant’s identity and whereabouts which went beyond a mere desire to comply with technicalities.
The defendants had also argued that they were entitled to withhold part of the fund to protect themselves against prospective and contingent liabilities. While the court did not need to decide the issue, it expressed sympathy with the contention that the defendants reasonably believed that they would be faced with allegations of breach of trust, the costs of which, if they were to defend such a claim successfully, they would be entitled to take from the trust fund. It would have been reasonable for the defendants to have taken a highly cautious approach to the amount of any interim distribution had the claimant provided proof of identity.
JUDGMENT CAROLINE SHEA KC: Background [1] The Claimant (to whom I shall refer to by his first name, James, in order to avoid confusion with the First Defendant who bears the same surname) is the beneficiary under a trust (‘the Trust’) settled by his late mother Joan Kekwick (‘Joan’) on 29 April 1985 pursuant to …Continue reading "Kekwick v Kekwick & anr [2023] WTLR 579"