UK: Contentious Trusts Case Summaries - February 2017

Last Updated: 27 February 2017
Article by Taylor Wessing

Patrick Pettigrew & others v Edwin Edwards [2017] EWHC 8 (Ch)

This recent case provides trustees with a useful reminder of those circumstances in which a court is likely to refuse them cost relief in the form of a Beddoe Order.

The background facts to this case are as follows. The deceased died in April 2003 and her will was proved by the trustees as her executors in October 2003. The first and second trustees were the deceased's sons from her first marriage with the third trustee being the solicitor who drafted the will and a promissory note. Under the will the deceased left her residuary estate to the trustees as trustees upon trust to pay income to the life tenant (the deceased's fourth husband) for his life and, subject to specific gifts, upon trust for first and second trustees in equal shares (they were the only beneficiaries post life tenant's death). The estate was valued at approximately £500k including a promissory note signed by the life tenant to the deceased in sum of £100k. It represented a loan made by the deceased to the life tenant in relation to works at his property. It was originally intended that the deceased was to get an interest in the property but once the deceased knew she was dying this was altered to a loan. The loan was to be repaid after death. On the deceased's death she had not actually paid the whole £100k so the outstanding balance was treated as a liability of estate.

Post death and administration of the estate, the trustees sought security for the loan but none was forthcoming. They subsequently sought repayment of the loan but that was also refused. Consequently they withheld income otherwise due to the life tenant in satisfaction of the loan. In May 2016, the life tenant issued a Part 8 claim seeking directions that payments be made to him whilst the trustees filed a defence and counterclaim in relation to repayment of the loan.

The court was asked to consider whether in these circumstances the trustees could be awarded a Beddoe Order in relation to their costs for the litigation.

In his judgment Master Matthews made it very clear that the issue of Beddoe relief is very fact specific and will be determined by the facts of the specific case before it. Master Matthews also made clear that a court will be very reluctant to provide trustees with any Beddoe relief where to do so may cause injustice to the other party further down the line.

In this case, Master Matthews broke the case down into two parts. Firstly, he considered the "third party claim", namely the claim by the life tenant for the trustees' failure to pay him the income due to him. As regards this claim, the court held that it would be unjust to make a Beddoe Order as if the court subsequently found that the trustees were in breach of trust for not paying the life tenant the income due, they would be insulated from the normal costs consequences and the life tenant will in effect have been made to pay for the trustees' unsuccessful defence.

Secondly, in relation to the question of whether the promissory note formed part of the trust fund and was valid and enforceable against the life tenant, again the court held that no Beddoe relief could be claimed here either. Master Matthews held that it would also be unjust to grant Beddoe relief because if a Beddoe Order was in place and the trustees' claim against the life tenant failed in any way, the life tenant as beneficiary will still have, at least in part, paid for that unsuccessful claim. In addition, Master Matthews felt that because this litigation was being carried on for the benefit of the first and second trustees in their capacity as capital beneficiaries they could decide whether or not they wish to take the litigation risk of this claim.

As regards the third trustee in this particular dispute, the Master held that he should remain a nominal party and given that the substantive litigation is between the two capital beneficiaries and life tenant it would be unlikely that costs would be awarded against him but if they are he could seek protection under the relevant Civil Procedure Rules.

This case provides trustees with a helpful reminder that the courts will carefully assess whether the granting of any Beddoe relief is just and in the best interests of the beneficiaries and the granting of such relief is far from a certainty.

Gillan v HEC Enterprises Ltd (in administration) and Ors [2016] EWHC 3179 (Ch)

In this recent case the High Court held that administrators cannot recover the costs and expenses they incur in relation to the management and administration of trust property where their costs were incurred otherwise than for the benefit of the beneficiaries of the trust property. The administrators were also prevented from recovering their costs in circumstances where the court held that they should have consented to the continuation of pre-administration litigation in relation to the trust property.

By way of brief background, it is accepted that an insolvency office-holder may recover fees and expenses out of the assets of the insolvent estate. However trust property does not form part of the estate and an office-holder does not become the trustee of trust property. That said, an administrator may take steps to manage the affairs of the insolvent company which in some circumstance may involve the administrator taking actions in relation to trust property. It is an accepted principle that in such circumstances the court has a discretion to allow an office-holder to recover his fees incurred in realising assets for the benefit of a third party from the relevant asset realisations (known as a "Berkeley Applegate order").

Pursuant to recent case law, where a company in administration holds substantial funds on trust for clients, the administrator should apply to court for directions as to what is to be done in relation to the property and for the court to permit the administrator to administer the funds in question.

In this case, the administrators of HEC Enterprises Ltd were faced with a contentious matter, pre-administration litigation and disputes regarding the ownership of trust property and an earlier settlement agreement. The administrators sought to recover their costs from the trust property. Their costs comprised of the administrator's charges, lawyer's fees and counsel's fees incurred in dealing with various aspects of the trust property which included obtaining the recovery of misappropriated money, seeking advice as to whether certain assets were trust property, liaising with the various parties claiming an interest in the trust property, dealing with actual and/or threatened litigation and applying for a Berkeley Applegate order.

The court stated that the Berkeley Applegate principles provide that administrators will be entitled to the expenses of investigating and taking appropriate advice in respect of trust claims. However, the court distinguished this case from Berkeley Applegate primarily because much of the work done by the administrators was for the benefit of unsecured creditors of the companies instead of the trust beneficiaries themselves. The court also considered that the administrators had wasted considerable time and expense opposing the application to continue proceedings and that those costs would be covered by litigation costs principles, rather than by the Berkeley Applegate principles. As such, the administrators were not entitled to any indemnity from the companies' trust assets to cover their remuneration, costs and expenses in these circumstances.

The case serves as a cautionary warning to administrators and other insolvency office-holders when dealing with trust property and is also a useful reminder that the Berkeley Applegate principle is discretionary and will be exercised only if the costs in question are justified and incurred for the benefit of the beneficiaries of the trust property.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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