In the recent case of Smith v Michelmores Trust Corporation Ltd [2021] EWHC 1425 (Ch), HHJ Matthews addresses a variety of issues relevant to trustees, executors, and discretionary beneficiaries, as well as providing helpful commentary for practitioners on matters ranging from the Public Trustee v Cooper jurisdiction [37] – [46], to the fundamental nature of a discretionary beneficiary's interest, and how disclaiming same can be navigated.
The trustees of Hope Crawshay's Will Trust sought the court's approval for making an appointment of capital to John Crawshay, a discretionary beneficiary of the Trust who was an undischarged bankrupt at the time, and who owed a significant debt to the same Estate out of which the Trust had arisen (being his mother's Estate).
Mr Crawshay had made clear his opposition to receiving this distribution, given that the funds would be immediately claimed by his trustees-in-bankruptcy, who would then use them to part-settle his debts, including those owed to the Estate. In short, he would receive no benefit from the appointment. Further, imminently before the hearing, which had been arranged at very short notice, Mr Crawshay executed a deed of disclaimer, disclaiming his discretionary interest.
Before addressing the substantive merits of the application, HHJ Matthews ruled that the proceedings had in any event not been properly constituted [30], with the other discretionary beneficiaries of the Trust not having been joined, albeit the other beneficiaries of the Will had been (which HHJ Matthews flagged for cost purposes [31]). The judgment goes into helpful detail as to the reasoning behind his ruling in this regard, with paragraphs [26]-[31] providing useful guidance for other trustees considering a CPR Part 64 application, including the following:
"[26] …Mr Crawshay, although an undischarged bankrupt, as an object of the power created by the discretionary trust in the will had in law exactly the same rights as his children and remoter issue. Moreover, there was no basis for supposing that, if he objected to the decision … they took a different view from him …. So I did not understand why, if these things made it proper to join him, they did not also make it right to join them, or at least make provision for their representation. ....
[27] I accept, of course, that, as a general rule, claimants are entitled to pursue which defendants they wish, and cannot be required to join defendants that they do not wish to sue… But this is subject to special cases for which different provision has been made by law, including by the rules of procedure. In my judgment, claims of this kind for directions, under CPR Part 64 , are different from the ordinary adversarial cases, and the rules in CPR rule 64.4 and PD 64B paragraph 4 about joinder to which I have referred, as interpreted by the judges, provide accordingly for exceptions to the general rule."
Whilst HHJ Matthews made clear that the claim not being constituted satisfactorily formed the primary reason for refusing relief, he did also embark upon a thorough consideration of the merits.
His conclusions in this regard fall into two key areas: 1) the propriety of the intended appointment by the trustees (including a comprehensive summary of what "benefit" could mean in these circumstances); and 2) the legal status of 'disclaiming' a discretionary interest.
Regarding the propriety of the intended appointment, HHJ Matthews considered the following:
- The percentage of the debt owed that would be returned to creditors, were the intended appointment made by the trustees. Considering the total owed to the Estate by Mr Crawshay, less than 11% of this debt would be repaid, given the amount of capital to be distributed. It was of relevance that the Estate was by far the largest creditor of Mr Crawshay's bankrupt estate.
- The appointment would be a 'momentous' decision, as "whatever decision was made was likely to disappoint someone, and the claimants had to balance the competing obligations arising out of the will", including as between the beneficiaries of the Will Trust, and the other beneficiaries of the Estate. It was of relevance that the First Claimant was both an executor of the Estate, so had a duty to maximise the value of the Estate (which included recovering as much as possible out of the debts owed), but was also a trustee of the Trust. The First Claimant maintained that they had 'managed' this conflict of interest.
- The claimants submitted that the proposed appointment was within their formal powers under the Trust [53]. Mr Crawshay submitted, however, "that the proposed appointment was not within the trustees' powers at all, because it was not for his benefit" [55]. HHJ Matthews considered in some detail [42-51] what "benefit" meant in circumstances where a discretionary beneficiary owes debts which the trustee wants to settle on the beneficiary's behalf but without their agreement.
- Following on from consideration of whether the appointment would be for Mr Crawshay's benefit, HHJ Matthews then considered whether – if not - it would instead constitute a fraud on the power.
HHJ Matthews concluded that:
- The First Claimant was operating under a conflict of interest, with "the decision of the trustees [being] substantially impaired by the conflict of interest under which the first claimant as trustee was labouring" [60];
- The intended appointment was of no benefit to Mr Crawshay (not even being of 'moral/ethical benefit', as had been considered in the fascinating Jersey judgment of Re Esteem Settlement 2001 JLR 7, which HHJ Matthew quoted from at length [42-51]); and
- It would accordingly be a fraud on the power for the trustee to make this appointment to Mr Crawshay [58] – [59].
He then went on to consider the legal effect and status of Mr Crawshay's deed of disclaimer. In paragraphs [63]-[74], HHJ Matthews provides a helpful summary of the common law position regarding disclaimers (and releases) of beneficial interests, including both the basis for disclaiming, and the limitations of doing so. He also provides his thoughts on whether the nature of a discretionary interest is proprietary, and to what extent, and when a purely discretionary interest becomes capable of being disclaimed.
HHJ Matthews did not consider the delay of several years between Mr Crawshay being aware of his discretionary interest, and his disclaimer of same, to be problematic, as he drew an analogy with cases where intended trustees had declined a trusteeship after many years, and concluded that "mere lapse of time without more should be no bar to a beneficiary's disclaiming his or her interest".
For those wondering if this was a fair result for the Estate, who were denied the opportunity to use the monies towards part-settlement of the legitimate debt owed, [76]-[78] of this judgment addresses this robustly. In short, this case provides a real health warning for any trustees/executors in a similar position, even where dealing with discretionary interests.
Title quote is at [64] of judgement, from Thompson v Leach (1690) 2 Vent 198, 206.