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A Blessing Undisguised

John Melville-Smith, contentious trusts and probate partner, summarises a recently reported High Court case before Mrs Justice Bacon in which he acted...

In the recently-reported case of Brown v New Quadrant Trust Corporation Ltd, Seddons – acting for the Defendant trustee - successfully defeated an injunction application by the principal beneficiary of the trust to prevent it selling an asset and, moreover, obtained the court’s positive ‘blessing’ for the sale.

The dispute centred on the trust’s shares in a company called Lifetime Home Securities Limited (‘LHS’), a company which had formerly traded in home equity releases, but now simply holds reversions in a diminishing number of remaining properties: in effect, the right to the properties following the eventual deaths of the owners.

New Quadrant decided that a sale of the shares was in the best interests of the beneficiaries: it would permit the trust to utilise capital losses which the government could move to prevent at any time, avoid the risks of a possible mis-selling investigation by the Financial Conduct Authority (FCA) into home equity release arrangements and diversify the portfolio. Further, the sole remaining director was aged 92 and wished to retire, necessitating a new FCA-approved director.

Mr Brown expressed himself “implacably opposed” to a sale and sought an injunction to restrain New Quadrant from proceeding, on the grounds that the sale would be a breach of trust and would cause loss to Mr Brown that could not be compensated for by damages.

There was no dispute that the relevant legal test on the granting of an injunction was the standard American Cyanamid test, pursuant to which the court will first consider whether there is a serious issue to be tried on the merits, and if there is, the adequacy of damages as a remedy before, finally, considering the overall balance of convenience.

There was likewise no dispute that the trust instrument gave New Quadrant the power to sell the shares. Mr Brown, however, argued that New Quadrant had taken account of irrelevant considerations, failed to take appropriate specialist advice, and failed to take sufficient account of his own wishes.

Importantly, in such applications, it is not for the court to impose its own view of the merits of a provisional decision taken by a trustee. Rather, the question is whether the decision is not one which a reasonable trustee could properly have reached.

The Court found that:

  1. New Quadrant, a professional trust corporation with considerable experience in the management of trusts, reasonably took the view that it was unnecessary to obtain additional third-party advice as to the standard investment criteria.
  1. An immediate share sale would avoid payment of capital gains tax due to the availability of offsetting losses, losses which might not remain available by the time all the properties had been sold, in what could be more than nine years’ time.
  1. New Quadrant’s view that an alternative investment of the sale proceeds would produce a higher income with which to maintain payments to Mr Brown at their current level was a reasonable one.
  1. It was manifestly reasonable for New Quadrant to have regard to the fact that the FCA had been reviewing the home equity release sector, and had identified areas of concern regarding the adequacy of advice given to consumers, as well as the fact that numerous complaints have been made to the Financial Ombudsman Service regarding equity release and similar schemes. That created a degree of risk which it was entirely proper for the trustee to consider in deciding whether to retain the shareholding.
  1. The fact that the longstanding, now sole director of LHS wished to retire and would therefore imminently have to be replaced was a material consideration.
  1. New Quadrant had taken account of both Mr Brown’s views and the family connection to the company, but reasonably considered that these factors were outweighed by other considerations.
  1. New Quadrant had reasonably chosen to market the shares with a specialist agent who acts as a broker in home equity release reversions. Whatever other means of marketing the shares there might have been, the question for the court was not whether other strategies could have been adopted, but whether the evidence suggested a serious issue to be tried as to whether the trustee’s chosen strategy was one that no reasonable trustee could have taken. It was manifestly reasonable for the trustee to market the property through a specialist agent in the way that it did.
  1. New Quadrant had valued the portfolio by taking the mid-point of the valuation range provided by Zoopla for each property, and then applied a 10% discount to account for the likely condition of the properties with their elderly occupiers, giving an adjusted total. Not only was that methodology a reasonable and proportionate approach for the trustee to adopt, but a valuation report procured by Mr Brown had produced a total valuation for the remaining properties which was strikingly close to the trustee’s adjusted valuation.
  1. As for the value of the company’s interest in these properties – less than their full capital valuations because they depended upon the life expectancy of the occupants – this had been calculated taking account of the life expectancies of the tenants using actuarial figures available from the Office of National Statistics and it had never been suggested that the calculations were flawed.

The Court therefore held that that Mr Brown had no real prospect of succeeding at trial on any of his objections and that the trustee’s reasons for taking its decision were “manifestly reasons that ordinary, reasonable and prudent trustees could take into account, and the evidence does not disclose any sustainable case that the trustee has taken account of irrelevant considerations or has failed to take account of relevant considerations.”

Mr Brown’s application having failed at the first hurdle - on the basis that there was no serious issue to be tried - it was unnecessary for the court to consider the second and third parts of the American Cyanamid test: the adequacy of damages or the balance of convenience. It is probable, however, that Mr Brown would have lost at least on the damages point: had the company been sold at an undervalue, damages would have been a perfectly adequate remedy for the trust.

That could have been that but New Quadrant, to give itself added protection, sought the formal ‘blessing’ of its decision by making a Public Trustee v Cooper application, essentially asking the court to adjudicate on a course of action proposed by it, on the grounds that, while there was no real doubt as to the nature of its powers, and it had decided how it wanted to exercise them, nonetheless the decision was “particularly momentous” – in this case, controversial – and it thus wished to obtain the blessing of the court..

The relevant principles applicable to this type of application were discussed by Vos LJ in Cotton v Earl of Cardigan. In particular, the court must be satisfied:

  1. That the trustee has in fact formed the opinion that it should act in the way for which the court’s blessing is sought, in other words that the trustee considers its proposals to be in the interests of the trust and the beneficiaries.
  1. That the opinion of the trustee is one which a reasonable body of trustees properly instructed could properly have arrived at.
  1. That the trustee’s opinion is not vitiated by any conflict of interest.
  1. That the court has been provided with full and frank disclosure of all the relevant facts and documents, so that it can be satisfied that the decision is proper and for the benefit of the trust and beneficiaries.

Here, there was no doubt as to (1) and (2) followed from the court’s decision on Mr Brown’s application. There being no conflict of interests (3) and the court having been provided with full and frank disclosure (4), it granted approval of the decision to sell the LHS shares “for the best price reasonably obtainable”

In order to read the full judgment, click here.

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