IN THE MATTER OF THE A LIMITED FURBS AND THE B EBT [2017] 21/2017

Summary

The recent case of A Limited FURBS decided in the Guernsey Royal Court provides helpful clarification on the question often faced by offshore trustees about whether to submit to the jurisdiction of a foreign court in overseas legal proceedings. This was the first Guernsey case to consider this issue, prior to which it was thought the Guernsey court would take a similar approach to that of the Jersey court.

The decision confirms that Guernsey court will usually take the same approach as the Jersey court, namely that trustees of a discretionary trust should normally resist submission to the jurisdiction of a foreign court. The case clarified, however, that in certain circumstances (for example where the trustee has limited discretion) submission may be appropriate to assist the foreign court. The facts of A Limited FURBS fell into this latter category and so the judge sanctioned the trustee’s submission to the jurisdiction of the English court in the underlying matrimonial proceedings.

The case also confirmed that trustees should be encouraged to apply to their “home” court for directions before deciding whether to submit to the jurisdiction of an overseas court.

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IFC Awards 2018 – shortlist now released

The IFC Awards 2018 has announced the finalists.  We are thrilled to have been shortlisted in Law firm of the Year – Asia.  There are many other trustees and firms who have been shortlisted across different categories.

If you wish to vote for any of the finalists, click here: https://www.citywealthmag.com/awards/ifc-awards/voting

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Filed under Hong Kong and Singapore, Private wealth and trusts, South East Asia

Cayman courts emphasise the importance of Beddoe relief and its availability in situations where a third party claim is for an amount greater than the Trust assets.

In the case of X (as Trustee of the A Trust) v Y (beneficiary of the A Trust)[1], the court reiterated the importance for Trustees of seeking Beddoe relief before commencing or defending an action. Obtaining Beddoe relief ensures that Trustees are more likely to be indemnified against any adverse costs consequences than without such relief. The court also found that interested non-beneficiary third parties should be provided with informal notice of a Beddoe application but that the interests of the beneficiaries of a Trust outweigh the interest (actual or potential) of any third party in the trust assets in assessing the Trustees’ application.

Background Facts

The Claimant in these proceedings was the Trustee of the A Trust. The Trustee was involved in English proceedings in respect of a Sale and Purchase Agreement (“SPA“) which involved a claim against a consortium of sellers (including the Trustee) in relation to (a) breach of warranty, and (b) the tort of deceit.

The breach of warranty claim related to, amongst others, failure to disclose a dispute between the Trustee and another defendant (in the English proceedings) which was ongoing at the time of the execution of the SPA. The claim for deceit arose on the basis that the defendants (in the English proceedings) allegedly made material misrepresentations to the claimant (in the English proceedings) (“Z“) that no funds had been invested in the ill-fated Madoff Funds. Z avers that such investments were made before the SPA was signed and came to its attention after the SPA was executed.

The Trustee had sought directions from the Court to defend the English proceedings.  It also sought orders permitting it to borrow funds from the C Trust (i.e. another Trust), to discharge the costs of defending the English proceedings and, pre-emptively, for an indemnity for any costs and expenses properly incurred for those purposes, which would have been ultimately reimbursed from the A Trust assets.

Beddoe Relief

The case of Re Beddoe[2] established the principle that Trustees are able to apply to the court to seek permission to commence or defend proceedings using the trust assets while also obtaining an indemnity from the Trust for any adverse cost consequences. (That indemnity can be lost if the Trustees have failed to make full disclosure of all material facts when making the application for relief.)

It is important to note Trustees who do not seek Beddoe relief are not automatically barred from recovering the costs of litigation from the Trust funds.  However, such Trustees do not have the same certainty of protection as they would if they had obtained Beddoe relief.

The importance of seeking Beddoe relief

The Cayman courts have general jurisdiction to provide relief to a trustee in relation to the management or administration of trust money under section 48 of the Trusts Law (2011 revision). The case of Re Beddoe allows for the applicability of such directions specifically on the question of engagement in litigation.

Smellie CJ re-iterated Lindley LJ’s position in Re Beddoe where he stated that “…a trustee who, without the sanction of the Court, commences an action or defends an action, unsuccessfully, does so at his own risk as regards the costs, even if he acts on counsel’s opinion” especially given the “ease and comparatively small expense with which trustees can obtain the opinion of the Chancery Division on the question whether an action should be brought or defended at the expense of the trust estate“.

Therefore, the Court found the Trustee had adopted the correct approach in this case by seeking Beddoe relief from the court before proceeding with the litigation.

Rights of non-beneficiary third parties in a Beddoe application

The Trustee had provided Z with informal notice of the Beddoe application. However, Z contested that it should have been provided with formal notice so that it could have made appropriate formal representations to the court.

Smellie CJ found that in circumstances where Z is not a beneficiary in the A Trust, it is merely a third party asserting a disputed personal claim in contract or tort against the Trustee. Therefore, Z’s claim is one which is a dispute between a third party and a Trustee in relation to liabilities assumed by the Trustee in administration of the Trust. In such circumstances there is no need for Z to be provided with formal notice of the Beddoe application. However, Smellie CJ also found that Z would be adversely affected if its claim was successful and the Trustee had defended the claim at the expense of the Trust because the costs of the defence would reduce the value of the assets against which Z would have been able to enforce its judgment. The Trustee had therefore been correct to provide Z with informal notice of the Beddoe application. The court also took into account the representations made by Z in its response letter.

Decision

Given that Z’s claim exceeded the value of A Trust, if that claim were to be undefended the A Trust would certainly be exhausted to the detriment of the beneficiaries. However, in deciding how much weight should be given to Z’s interests, Smellie CJ decided that a contingent or putative creditor in Z’s position is not capable of asserting a proprietary claim to the Trust assets, and takes the Trust Assets as it finds them at the time of the judgement. The Trustee obtained Beddoe relief in these proceedings and was allowed to defend the English proceedings and would have had an indemnity from the Trust assets for the costs reasonably incurred in defending the claim.

Conclusion

As this case illustrates, it is important for trustees to ensure that:

  1. they seek the court’s permission before bringing or defending claims in relation to the trust assets (i.e. seek Beddoe relief); and
  2. to the extent that there are third parties interested in the trust assets who would be adversely affected by the outcome of any litigation, they should be provided with informal notice of any application for Beddoe relief.

 

[1] in the Grand Court of the Cayman Islands, Financial Services Division (unreported) 15 March 2017, Smellie CJ

[2] [1893] 1 CH 547

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A severe case of the penalties

The Administrative Appeals Tribunal (AAT) has handed down its decision in Peter Sleiman Investments Pty Limited as Trustee for The Sleiman Family Trust and Commissioner of Taxation (Taxation) [2017] AATA 999 (Sleiman). The decision is a timely reminder of the various powers that the Commissioner has to impose penalties on taxpayers.

The case involved the lodgement of returns not necessary by a family trust which was undertaking a property renting business. The taxpayer submitted that it had lodged returns not necessary for numerous income years on the basis that its expenses exceeded the assessable income in each of these income years.

The Commissioner subsequently issued default assessments to the taxpayer resulting in combined taxable income of $8.04 million and a tax liability of $3.739 million for the income years in which returns not necessary were lodged. As a result, the onus of proof was on the taxpayer to substantiate its deductions or that certain amounts were non-assessable in the default assessment income years.

Unsurprisingly, the AAT found in favour of the Commissioner given that the taxpayer was unable to demonstrate the nexus of its outgoings and its passive property renting business. These deductions included 65 cars (including two cars located in a State which the family trust held no property), fitness equipment and firearms. The taxpayer was also unable to support its treatment of certain amounts as non-assessable.

Following the discovery of the tax shortfall, the Commissioner sought to impose administrative penalties on the taxpayer for failing to lodge income tax returns. The Commissioner imposed a 75% base penalty rate on the shortfall and an additional base penalty rate increase of 20% on the shortfall in the default assessment income years following the initial default assessment. The imposition of these penalties result in the taxpayer paying almost $7 million in tax and penalties on $8 million of undeclared taxable income.

In considering the penalties, the AAT concluded that the 75% administrative penalty was appropriate given the “deliberate and inexplicable” actions taken by not lodging the relevant income tax returns. The taxpayer also contended the 20% uplift should be remitted as the non-lodgement was “one single course of conduct”. However, the AAT rejected this contention and stated that this line of argument was the equivalent of:

“asserting that an armed robber who holds up a bank once a year for each of three years is engaging in just one single course of conduct and should therefore be treated more leniently”.

This case is an important reminder of the various powers that the Commissioner has under Division 274 of the Tax Administration Act 1953 to impose substantial penalties on taxpayers. Generally, the quantum of the penalty imposed will be based on the Commissioner’s view as to whether there were inadvertent errors or purposeful actions. In certain circumstances, the Commissioner is also entitled to further increase the penalty for additional indiscretions (as was the case in Sleiman).

Once the Commissioner decides to impose a penalty, the onus is on the taxpayer to provide reasoning as to why the Commissioner should remit that penalty. Factors such as compliance history, the way in which the tax shortfall is discovered and the taxpayer’s co-cooperativeness are considered by the Commissioner in choosing whether to exercise this discretion.

Based on the broad powers given to the Commissioner under Division 274, generally the only avenue to challenge any denied request for remission is for the taxpayer to refer the matter to the AAT (as was the case in Sleiman) or the Courts.

Andrew White
Andrew White
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Chris Aboud
Chris Aboud
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HKMA and PWMA in Hong Kong collaborate to develop a Treat Customers Fairly Charter for the PWM industry

On 8 June 2017, the Hong Kong Monetary Authority (HKMA) announced that it has been working together with the Private Wealth Management Association to develop a Treat Customers Fairly Charter (the Charter) to further promote a customer-centric culture in the private wealth management (PWM) industry.  The Charter is designed to complement, not change, current laws and regulations and the existing terms and conditions between banks and their customers.  It is stated to be a commitment by PWM institutions in Hong Kong to support and implement the principle of treating customers fairly.

The Charter draws reference from good practices locally and overseas and from the G20 High-Level Principles on Financial Consumer Protection.  For example, it bears resemblance to the UK FCA’s consumer outcomes, in particular principle 6 which requires a firm to pay “due regard to the interests of its customers and treat them fairly”.  It comprises five high-level principles (the TCF principles) which are supplemented by examples to illustrate how such principles may be implemented by PWM institutions. However, these examples are not comprehensive, but are stated to be illustrations to enhance understanding of the “spirit” of the TCF principles.

The HKMA expects all Authorised Institutions which operate as private banks, or which have dedicated private banking units, to follow the TCF principles.  It has stated that it expects senior management and boards of directors to ensure that their institutions and relevant staff abide by the TCF principles.  Our recent bulletin outlines further details on each principle.

If you would like to discuss the above further, please do not hesitate to contact Will Hallatt, Richard Norridge, Hannah Cassidy, Joanna Caen, or your usual Herbert Smith Freehills contact.

William Hallatt
William Hallatt
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Richard Norridge
Richard Norridge
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Hannah Cassidy
Hannah Cassidy
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Joanna Caen
Joanna Caen
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OPEN LETTERS REVEAL DISPUTE OVER THE ESTATE OF THE FORMER SINGAPOREAN PRIME MINISTER

On 23 March 2015, Lee Kuan Yew (LKY), the former Prime Minister of Singapore (and father of the current Prime Minister of Singapore, Lee Hsien Loong ("LHL")) passed away, leaving behind a will. The will included a clause concerning LKY's former home (38 Oxley Road). This clause provided that LKY's daughter (LWL) was to be granted the right to remain living at 38 Oxley Road, and upon her passing or relocation, it should be demolished (the Demolition Clause). The intention behind this will, and in particular the Demolition Clause has been questioned in two public letters in social media between LKY's three children.

Further to the two public letters, additional information has been released by the Lee family to the public through various social media postings, including questions relating to the validity of a Deed of Gift of certain family items that the younger Lee siblings (LHY and LWL) purported to make, as executors of LKY's last will and representatives of his estate, to the National Heritage Board.

The above events have culminated in LHL announcing that he will deliver a Ministerial Statement when the Singapore Parliament sits on 3 July 2017, with the lifting of the People Action Party's party whip in order for Parliament to have a full public airing of the issues. This is significant because the party whip has been lifted fewer than 10 times since 1965 when Singapore became independent.

This post explores some of the interesting questions raised by this matter in relation to private wills and gifts when public interest issues are at play.

Letter by LHY and LWL regarding demolition of 38 Oxley Road

The dispute over LKY's estate was first made public upon the release of an open letter by LHY and LWL, the joint executors and trustees of LKY's estate, on 14 June 2017. Titled, "What has happened to Lee Kuan Yew's values?" (the First Letter),  the First Letter raised concerns over the fate of 38 Oxley Road, which was left to LHL in the will. In doing so, LHY and LWL asserted that "[LKY] made clear throughout the years in public and private his wish that his home at 38 Oxley Road be demolished upon his passing" and that this was "reiterated" in his final will which was executed on 17 December 2013 (the Final Will).

The First Letter also alleged that because LHL was in a position of power over a Ministerial Committee which had been set up to consider options with respect to 38 Oxley Road, he was in a position of conflict, which also contradicted his previous undertakings that he would recuse himself from all government decisions involving the property.

Letter in reply by LHL

Following the letter by his siblings, LHL issued an open letter in reply on 15 June 2017 (the Reply), which called into question the circumstances under which the Final Will was executed by LKY.

In particular, LHL alleged that the reinsertion of both the Demolition Clause and the clause to grant all children equal shares of LKY's estate from earlier wills of LKY happened under rushed circumstances under which LKY was not properly legally advised. LHL also stated that it was LHY's wife's firm who had prepared the Final Will, which presented a conflict of interest.

Therefore, LHL stated that his father may not have known that the Demolition Clause, which was omitted from LKY's prior two wills, had been reinstated in the Final Will as it was not drawn to his attention.

Deed of Gift

In subsequent posts, LHL also released information relating to a Deed of Gift that LHY and LWL had executed in 2015 in favour of the National Heritage Board for the donation and public exhibition of significant items, with a stipulation that LKY's wish for the demolition of 38 Oxley Road (as set out in various documents) be displayed prominently at the exhibition.

However, LHY alleged that LHL had acquired the Deed of Gift from the National Heritage Board in his capacity as Prime Minister, for the purpose of issuing private objections to LHY and LWL.

Ministerial Committee

Under the Preservation of Monuments Act in Singapore, the Government has the right to preserve 38 Oxley Road as a national monument. The National Heritage Board can ask the Minister for Culture, Community and Youth to gazette the property, if it fulfils criteria such as having historic, cultural, traditional, archaeological, architectural, artistic or symbolic significance and national importance. This can be done in spite of an individual's wishes in a will regarding a property. Current national monuments in Singapore include the former City Hall and the former Tanjong Pagar Railway Station.

An internal Ministerial Committee has been set up to list the different options and implications for the actions to be taken with regard to the house, while paying attention to LKY's wishes. It has been suggested by the Deputy Prime Minister Teo Chee Hean that one option that is being studied is demolishing the house but keeping the basement dining room, where many important meetings took place. The Ministerial Committee will also be looking into how the Final Will was prepared and the roles of the people involved.

Conclusion

It is yet to be seen how the correspondence between LKY's children will develop and the effect it will have in respect to decisions over LKY's estate. The 38 Oxley Road family saga calls into question the extent to which public interest may override individual wishes in a will, and emphasises the importance of being aware of any possible conflicts in the process of drafting and executing a will. Given the complex legal issues and questions of governance involved, the development of this matter will likely have important implications on how property disputes involving important public figures in Singapore will be resolved going forward. 

Richard Norridge
Richard Norridge
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Joanna Caen
Joanna Caen
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London High Court considers trustee decision-making processes

The High Court of England and Wales has provided useful guidance for trustees generally as to the scope of their powers and the manner in which they may properly go about their decision-making processes.

These issues arose in connection with a challenge brought by British Airways against the trustees of the Airways Pension Scheme.  British Airways alleged that changes to the rules of the scheme, and the granting of discretionary increases to members' benefits, were invalid or improper and/or an abuse of the trustees' powers under the scheme.

The Court took a rigorous approach to analysing the decision-making processes of each of the relevant trustees. Morgan J considered at some length the witness evidence given by the trustees, and contemporaneous communications to check that the trustees had gone through a proper decision-making process, and had not "pre-determined" the issues in question.

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Herbert Smith Freehills awarded “Outstanding Contribution to Thought Leadership Award” at the WealthBriefing Asia Awards 2017

Herbert Smith Freehills was awarded Outstanding Contribution to Thought Leadership at the Fifth WealthBriefingAsia Awards on 1 June 2017.

Showcasing ‘best of breed’ providers in the global private banking, wealth management and trusted advisor communities, the awards were designed to recognise companies, teams and individuals which the prestigious panel of judges deemed to have ‘demonstrated innovation and excellence during 2016’.      

The Judges' comments noted: "this firm has been an active member of the Hong Kong private wealth community and made a substantial contribution of their ‘know how’ and expertise over many years.  The award is well merited."

ClearView Financial Media’s CEO, and Publisher of WealthBriefingAsia, Stephen Harris, was first to extend his congratulations to all the winners.  He said: “The firms who triumphed in these awards are all worthy winners, and I would like to extend my heartiest congratulations.  These awards were judged solely on the basis of entrants’ submissions and their response to a number of specific questions, which had to be answered focusing on the client experience, not quantitative performance metrics.  That is a unique, and I believe, compelling feature.  These awards recognise the very best operators in the private client industry, with ‘independence’, ‘integrity’ and ‘genuine insight’ the watchwords of the judging process – such that the awards truly reflect excellence in wealth management."  

Richard Norridge
Richard Norridge
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Joanna Caen
Joanna Caen
Senior Consultant
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Filed under Hong Kong and Singapore, Private wealth and trusts

“Dishonesty at its highest level and gravity” – when solicitors commit offences against client estates

This blog post will consider a number of recent cases in England where solicitors have been convicted of offences or struck off the register for misappropriating client funds from deceased estates. These shed light on the surprising levels of abuse uncovered by the Courts and the English Solicitors Regulation Authority (the “SRA”), and the zero tolerance approach taken to solicitors who seek to personally benefit from the trust placed in them by their clients.

A number of common themes run through the cases, namely that offenders have often sought to explain and justify their actions through desperation, ill health and financial hardship. Further, the solicitors in question generally practised in local firms or as sole practitioners, where clients place a high degree of trust in them due to their geographical proximity and personal familiarity. Finally, the offences appear to have taken place over a number of years, with initial abuse turning into a pattern of offending.

During its investigations the SRA asserted that it is only in exceptional circumstances that a solicitor found to have acted dishonestly will avoid being struck off the register. Explanations and mitigating circumstances advanced in the cases below were not sufficient to overcome the serious breaches committed and the need to uphold public confidence in the legal profession.   

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Filed under Estates disputes, Trust disputes

Ilott v The Blue Cross and others – testamentary freedom and financial provision for family members around the common law world

On 25 April 2017 Richard Norridge, Joanna Caen and Gareth Keillor delivered a webinar on the state of the law relating to testamentary freedom and financial provision for family members following the landmark English Supreme Court decision in Ilott v The Blue Cross and others1. The webinar also considered provision for family members in a number of other common law jurisdictions. On 17 May 2017 Richard and Joanna reprised the webinar as a live breakfast briefing session at Herbert Smith Freehills' Hong Kong office in front of an audience of bankers, accountants and others involved in trust and estate matters.

In Ilott v The Blue Cross and others the English Supreme Court set out what the correct approach is to determining an award for financial provision under English law, i.e. the Inheritance (Provision for Family and Dependants) Act 1975 (the "Act"). The judgment goes some way to clarify the law in this area by attempting to strike a balance between respecting testamentary freedom and making reasonable provision for family members and dependants who are not, or not sufficiently, provided for in the deceased's will.

Although it might be thought that the position would be similar in Hong Kong, Singapore, Australia and New Zealand, as set out below, there is in fact a wide divergence in the approach to the issue of what financial provision can justifiably be made out of the deceased's estate without disregarding the wishes of the testator or rewriting the deceased's will.

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Filed under Australia, Estates disputes, Hong Kong and Singapore, London, Private wealth and trusts