Walbrook Trustees (Jersey) Ltd & Ors v Fattal & Ors

This is an appeal by the first to third defendants (“the Fattal Parties”) against an order of Blackburne J dated 23^rd July 2009 made in administration proceedings relating to what I shall refer to as the BSL Trust.

The BSL Trust is a declaration of trust executed on 29^th June 1995 as part of a scheme to avoid capital gains tax (“CGT”) arising from a disposal of a large block of flats and commercial premises on the Marylebone Road known as Berkeley Court. This property was acquired by an English nominee company, Berkeley Court Investments Limited (“BCIL”), on behalf of a group of investors under the terms of a joint venture agreement (“the JVA”) dated 30^th January 1989.

There were essentially four interested parties to the JVA consisting of (i) Walbrook Trustees (Jersey) Limited (“Walbrook (Jersey)”) as trustee of the Delta Trust (a family trust for the benefit of members of the Dangoor family); (ii) Walbrook (Jersey) and two individual trustees as trustees of the EM Sofaer Discretionary Trust (a trust for the benefit of members of the Sofaer family); (iii) Selim Dangoor (another member of the Dangoor family) and (iv) William and Elias Fattal who are brothers.

These parties entered into the JVA with BCIL under which it agreed to complete the purchase of Berkeley Court as their nominee subject to and on the terms of the JVA or such other terms as the parties might agree. Clause 2 of the JVA contained a declaration of trust under which BCIL declared that it held Berkeley Court for the four respective interests I have mentioned as tenants in common in equal 25% shares. For this purpose the Fattal brothers held one of the quarter shares jointly.

BCIL had an authorised share capital of £10 million divided into 100,000 shares of £100 each, eight of which were issued. Two shares were transferred and registered in the names of each of the four groups of investors with the Fattal brothers being registered in respect of one share each. There was no shareholders’ agreement as such, but the JVA contained a number of provisions which governed the investment in Berkeley Court and its ultimate disposal.

The material provisions are as follows:-

There has been only one variation of the JVA. At the time it was entered into all the parties (except BCIL) signed an addendum to the agreement to the effect that notwithstanding the provisions of clause 12 of the JVA:-

“We the undersigned hereby mutually agree and undertake that notwithstanding the provisions of clause 12 of the Joint Venture Agreement dated 31^st day of January 1989 and made between us relating to Berkeley Court Baker Street London NW1:-

(i)

the transfer of a Share on the occasion of the appointment of a new Trustee of either the Delta Trust or the EM Sofaer Discretionary Trust shall not require any consent from any of the other Parties and

(ii)

both (a) William Simon Fattal and Elias Simon Fattal and (b) Selim Dangoor shall be at liberty without consent from any of the Parties to transfer the whole of their respective Shares to the Trustees of a Trust so long as the ultimate beneficiaries are themselves and/other members of their immediate family which for this purpose shall mean their respective spouses and children and their own parents and brothers or sisters.

and any transfer pursuant to (i) or (ii) above shall not be deemed to be a disposal to which clause 6 of the said Agreement applies.”

As contemplated by clause 2(ii) of the Addendum, the interests of William and Elias Fattal became held respectively by the WS Fattal Settlement and the ES Fattal Settlement whose trustees are Walbrook (Jersey) and a Cayman Islands company called Walbrook International Trust Company Limited (Witco”).

In 1995, as part of the tax scheme referred to earlier, a private company limited by guarantee (Baker Street Limited (“BSL”)) was incorporated in the Isle of Man. Its only members were and still are Walbrook (Jersey) and Witco who are the first and second claimants in these proceedings. The scheme was primarily motivated by a desire to avoid any possible charge to CGT that might arise on a disposal of Berkeley Court. Although the beneficial interests in the property were held by non-resident trustees and any gains were not then thought to be attributable to the UK beneficiaries, the concern was that a change in domicile on the part of one or more of the beneficiaries might alter the tax position in the future.

To avoid this the beneficial interests under the trust for sale in respect of Berkeley Court were to be transferred to BSL thereby taking advantage of the provisions of s.13(2) of the Taxation of Chargeable Gains Act 1992 under which the attribution of chargeable gains accruing to a non-resident company was limited to a UK resident who held “shares” in the company. The legislation has subsequently been amended to remove this limitation.

Instructions were therefore given to a firm of advocates in the Isle of Man to form a company limited by guarantee with five members who would be entitled to participate in the net assets of the company in proportions corresponding to the previous interests of the investors in Berkeley Court. For this purpose the two Fattal trusts would each be entitled to a 12½% share. The correspondence and other background documents relating to the tax scheme were not before the judge, but were made the subject of an application by Mr Steinfeld QC (for the non-Fattal Parties) and a cross application by Mr Chivers to adduce fresh evidence on the appeal. Since these applications were not opposed we made an order admitting the additional evidence. The evidence shows that advice was received from the Isle of Man lawyers that it was not possible, within the constitution of the company, to provide for the subscribers to have percentage interests in its undertaking without the company being treated as a company with share capital under the provisions of s.21(2) of the Manx Companies Act 1931. It was therefore agreed that Walbrook (Jersey) and Witco would be the original and only subscribers and that the interests of the various investors would be provided for by a declaration of trust under which the two subscribers would hold their rights as members of BSL on trust for the various trusts and for Selim Dangoor in the same proportions as those interests had been beneficially entitled to the proceeds of sale of Berkeley Court.

In accordance with this strategy, the BSL Trust was executed on 29^th June 1995 and Walbrook (Jersey) and Witco declared that they held the benefits of their membership upon trust as nominees for the four family trusts and for a BVI company called Interlands SA (“Interlands”) in the proportions I have indicated. Interlands was to hold the interest of Selim Dangoor. Clause 2 of the declaration provided:-

“That we agree to act in accordance with the written instructions of the relevant Owner concerning its proportion of membership detailed above and to deal with all the benefits of membership of the Company, including all rights to distributions and all voting rights, arising in respect of such proportion in such manner as the relevant Owner shall from time to time direct in writing.”

On 20^th October 1995 the four trusts and Selim Dangoor transferred to BSL their interests as tenants in common in Berkeley Court in consideration of a payment of £8.6 million and BCIL executed a declaration of trust stating that it holds Berkeley Court upon trust for sale for BSL absolutely. Subsequently in December of that year the shares in BCIL were transferred to BSL for their nominal value. The net result of these transfers is that the entire beneficial ownership of Berkeley Court is now vested in BSL together with control of BCIL which continues to be the registered proprietor of the property. Although it is, I think, common ground that the concentration of the parties’ respective beneficial interests in the hands of a single owner has brought to an end the trusts created by clause 2 of the JVA, the parties remain in dispute as to whether the transfers also terminated the contractual effect of its other provisions including those of clause 6 and clause 12.

This issue is primarily relevant to the transfer which took place subsequently in 1998 of the 25% interest under the BSL Trust in favour of Interlands. This was transferred from that company to Walbrook (Jersey) and to the fourth claimant (who is a director of Walbrook) as trustees of the Sharet Trust which was set up for the benefit of members of the Dangoor family. The validity of this transfer and the claim by the Fattal interests to exercise a right of pre-emption in respect of the interest transferred to the Sharet Trust is currently the subject of proceedings in the High Court which are due to come to trial early next year.

I should mention for completeness that in 2000 BSL transferred its beneficial interest in the commercial parts of Berkeley Court to a Jersey company (Baker Street 2000 Limited (“BS2K”)) whose issued shares are held by four Walbrook nominee companies for the benefit of the Delta, Sofaer, Sharet and Fattal Trusts respectively. As a consequence, the BSL Trust relates now only to the residential parts of Berkeley Court.

The proceedings which have given rise to this appeal were issued in July 2006 against the background of extensive litigation between the Fattal Parties and the other interests in relation to the management and sale of Berkeley Court. A detailed account of the history of this litigation can be found in the judgment of Blackburne J ([2009] EWHC 1446 (Ch)) at paragraphs 20-39 but, for the purposes of this appeal, I need mention only one or two matters by way of background. The first is the nature and purpose of the relief sought by the claimants in these proceedings.

The proceedings were brought by the claimants as trustees of the Fattal, Sofaer, Delta and Sharet Trusts seeking an order for the sale of Berkeley Court with directions relating to the method of sale which were designed to resolve the principal disputes between the investors about the management of the property. The claimants also sought a determination as to whether the Sharet Trust had a 25% interest in the property through the BSL Trust having regard to the issue raised about the continuing effectiveness of the JVA. The defendants (apart from BCIL) have been joined to represent the interests of the beneficiaries under the various family trusts.

The hearing before Blackburne J in June 2009 was concerned with various applications made by defendants in the action. The three principal applications were (i) an application by the Fattal Parties for the appointment of a receiver and manager over the interests of the parties in BSL, BCIL and BS2K and the interests of those companies in Berkeley Court; (ii) an application by Robert Dangoor (on behalf of the Sharet Trust) for a direction that the transfer of the Trust’s ten shares in BS2K to new trustees and the admission of the new trust company as a member of BSL would not require the consent of the other parties or be a deemed disposal under clause 6 of the JVA even if that agreement still subsists and is enforceable; and (iii) an application by the non-Fattal defendants (representing the Delta, Sofaer and Sharet Trusts) for an order requiring Walbrook (Jersey) and Witco as members of BSL and as trustees of the BSL Trust in the administration of the BSL Trust to procure the admission of two new members of BSL (Dan Management Limited and C'est La Vie Properties Limited) who would act respectively as nominees for the Sofaer and the Sharet Trusts. In addition, a direction was sought that Walbrook (Jersey) and Witco would thereupon be released from the BSL Trust and would thereafter hold their membership rights in BSL in the case of Walbrook (Jersey) for the Delta Trust and in the case of Witco for the Fattal Trusts. We are concerned on this appeal only with this third application.

The purpose and consequence of the order sought was in effect to divide the membership rights into four separate interests by appropriating to each 25% share (the Fattal interests being treated together as one share) the membership rights of one of the four members. As a consequence, the members of the company would each vote and exercise their other rights as members solely in accordance with the wishes of the interests they were appointed under the order to represent. This obviously means that any resolutions of the members would be capable of being passed by a three-quarter majority and the Fattal Trusts would not be entitled to exercise any right of veto.

The application for the order was based on the need to give effect to the provisions of clause 2 of the BSL Trust. In his witness statement in support of the application Mr Duncan Wilson, the applicants’ solicitor, stated that:-

“9.

In order properly to reflect all the trusts' interests in BSL, and now also in order to vest the assets of the Sofaer Trust and the Sharet Trust in the new trustees, the representative beneficiaries, with the approval and support of JTC, seek that Walbrook procure that new members of BSL be admitted so that BSL's membership reflects its ultimate ownership by the 4 trusts in equal shares (treating the Fattal trusts as one). The declaration of trust [ie the BSL Trust] makes clear that it was anticipated that the members of BSL will exercise their membership rights in accordance with the written instructions of each 25% owning Trust (treating the Fattal Trusts as one). The appointment of additional members so that each 25% Trust has its own nominee member removes any possible conflict from which the present nominee members suffer if the written instructions given to the nominee members by the 4 Trusts are different, and therefore allows the trust of the membership rights to operate in the way in which it was plainly intended to operate.”

It is clear that, following the transfer of their interests in Berkeley Court to BSL in October 1995, the tenancy in common of the property created by the trusts declared in the JVA came to an end. The only relevant trust instrument is now the BSL Trust. That created a bare trust of the benefits of membership of BSL for the named beneficiaries in the proportions stated. It has not been suggested by the Fattal Parties that rights of membership in a company limited by guarantee cannot be made trust property and the only issue for the judge was whether, in the execution of the trust, he should order the appointment of two new members in order to give effect to the nominee provisions contained in clauses 1 and 2 of the trust instrument. Clause 2 in terms requires the members as trustees to deal with all benefits of membership including voting rights in such manner as the beneficiaries should direct. The contention of the applicants was that this provision cannot be given effect in the event of a disagreement between the beneficiaries except by the introduction of two additional members of BSL and the division of the trust property into four separate trusts under which each of the four members would act as a nominee for a particular beneficiary.

Part 64 of the CPR enables the Court to determine any question arising in the execution of a trust or to make an order for the execution of a trust to be carried out under the direction of the Court. Mr Chivers QC (for the Fattal Parties) opposed the making of the order both before the judge and on this appeal because its effect, he submitted, would be to alter the basis upon which the BSL Trust was established: i.e. a two-member company with the members acting as trustees of the membership rights for the benefit of all the beneficiaries collectively. In agreeing to make the order sought the judge, he says, has severed the joint beneficial interests of the beneficiaries in the membership rights and has created separate trusts of the proportions of those rights. On the true construction of the declaration of trust such a step requires unanimous consent of all beneficiaries.

One of the background issues is whether the JVA continues to operate in the changed circumstances after 1995. As explained earlier, this issue remains unresolved and Blackburne J was not asked to decide it as part of the present application. He operated on the premise that the JVA may still be extant in some modified form and we are not asked to decide the question as part of this appeal. If the JVA still binds the parties, Mr Chivers does not suggest that it could have any direct application in relation to the enforcement of the BSL Trust. As the judge observed, there is little or no consistency between the two. He has to accept that the JVA applies in terms only to the management and disposal of Berkeley Court and of the interests of the parties in that property and could now, at best, govern the disposal of interests under the BSL Trust. But even when Berkeley Court remained owned by the investors directly the JVA provided in terms (in clause 3) for decisions to be taken by a majority of votes and any of the original parties to the agreement could by now have required a sale of the property under clause 5 without the consent of the others.

The JVA does not therefore assist the Fattal Parties as part of the background to the BSL Trust if the contention is that the limitations it imposes should somehow be transposed into the declaration of trust. Mr Chivers recognises this and does not put his argument in that way. He submits (perhaps paradoxically) that the judge failed to take proper account of the contention of the non-Fattal Parties that the JVA ceased to have effect after 1995. On this hypothesis the correct approach was for him to consider whether it is likely that the parties would have wished to continue in a joint venture under BSL without even the protections contained in the JVA. They should therefore be taken to have agreed to the 1995 transfers on the basis that the two members/one trust arrangement would not be altered without the consent of all beneficiaries.

I am not, I am afraid, persuaded by this argument. It has the evidential difficulty that the correspondence with the Isle of Man lawyers discloses that those responsible for the implementation of the tax scheme in 1995 in fact contemplated the need for a new and revised JVA in addition to the BSL Trust in order to regulate the rights of the beneficiaries. But my principal reason for rejecting it is that it cannot stand with the express language of clause 2. There is no requirement as such for unanimity in either clause 1 or clause 2 of the deed. As a general proposition, it is undoubtedly correct that the trustees of a fund held for a number of different beneficiaries would need to exercise their powers having regard to what was in the best interests of the beneficiaries as a whole. That would require them to take into account the views of the beneficiaries in relation to a particular proposal concerning the trust assets. But ultimately they would have to decide whether or not the proposed action would benefit the trust. No beneficiary would have a right of veto.

In this case, however, the Court and the trustees have to have regard to the express terms of the trust. The trustees act as nominees or bare trustees for the beneficiaries in respect of the latter’s interests and are required in terms to give effect to the directions which they receive. To resolve any disagreements between the beneficiaries about a particular course of action by doing nothing would be to treat the dissentient minority as having a power of veto. This seems to me (as it did to the judge) to be inconsistent with the provisions of clause 2 and, in effect, a denial of them. Blackburne J dealt with the issue of construction in this way:-

“64.

In my judgment, clause 2 of the BSL Trust is inconsistent with the Fattal parties' contention. That clause makes explicit that Walbrook Jersey and Witco, as BSL's sole members, are obliged to act on the written instructions of the relevant Owner concerning that Owner's proportion of membership "and to deal with all the benefits of membership of [BSL], including all rights to distributions and all voting rights, arising in respect of such proportion" (emphasis added) as that Owner directs in writing. Walbrook Jersey and Witco have no discretion in the matter: by clause 1 they hold the membership rights as nominees only.

65.

There is nothing to indicate that the fact that there are only two members of BSL is to ensure that the members in question can only act in any respect if all of the Owners are in agreement. If, in order to enable Walbrook Jersey and Witco to act as an Owner directs in respect of that Owner's proportion of the membership rights it is necessary to sever those rights and procure an increase in the number of members to enable this to happen, I see no reason why the court, in exercise of its jurisdiction in respect of the administration of a trust, should not so direct. By so doing the court, in my judgment, is giving effect to the terms to which, by agreeing to the 1995 restructuring, the Owners assented.”

This seems to me to be exactly right. Mr Chivers submits that the effective stalemate produced by there being only two members (which the judge recognised) confirms that the purpose of the arrangements was to prevent the trustees from acting without the unanimous consent of all beneficiaries. But I am not persuaded that one can treat the product of the arrangements as determinative of the intention of the draftsman. It is clear that the change from five to two members at the planning stage was not dictated by the considerations urged upon us by Mr Chivers and was simply designed to avoid the consequences of the Manx Companies Act and to obtain the beneficial tax treatment available under s.13(2). More to the point, a restriction to two members without consent is inconsistent with the directive in clause 2. To give effect to that provision in the circumstances which now exist the trustees need to expand the membership of the company in the manner sought.

One of the difficulties about the argument in favour of unanimity is that it has to rely on clause 2 in order to give the Fattal Parties a basis for overriding what would otherwise be a matter of discretion for the trustees. In the absence of a requirement to act in accordance with the directions of the beneficiaries they could, as I have explained, decide to press ahead with a sale of Berkeley Court as being in the best interests of the trust as a whole notwithstanding opposition from the Fattals. The existing arrangements do not give any beneficiary an express power of veto. To achieve this it would be necessary for the Fattals to rely on something in the terms of clause 2. But the difficulty for them is that those provisions require the trustees to give equal effect to the wishes of the other beneficiaries. If this impasse is to be broken it can only be done through an order such as the judge made.

Absent some express limitation contained in the trust instrument, both the Court and the trustees have power to split the fund by appropriating to the interests of each beneficiary a specific part of the trust assets. This is not a case which gives rise to any issues of valuation and a valid appropriation is binding on all beneficiaries regardless of whether they consent. These principles apply to shares in a company limited by shares (see Re Marshall [1914] 1 Ch 192) and I can see no reason in principle why they should not be made to apply to the membership rights in BSL. In making the order sought the Court is not re-writing the trust. It is executing the trusts set out in clauses 1 and 2 of the 1995 deed.

I need, for completeness, to say something about Mr Chivers’ third ground of appeal which concerns the shares in BCIL. As mentioned earlier, there has never been a shareholders’ agreement and the JVA does not deal with the transfer of these shares. It is concerned only with Berkeley Court and the interests of the parties in that property.

In 1995 the investors transferred their shares in BCIL to BSL. It is now recognised that, in order to avoid the possibility of a claim by the tenants in Berkeley Court to acquire the freehold of the property under the provisions of the Landlord and Tenant Act 1987, it would be sensible for any sale of the residential parts of the property to be effected through a sale of BCIL. Any purchaser would, of course, require a transfer of all the shares in that company.

Absent a shareholders’ agreement compelling each of the investors to transfer their shares in such circumstances, the Fattal Parties could, prior to 1995, have refused to co-operate in a sale of BCIL. This de facto power of veto will be lost, says Mr Chivers, if the membership of BSL is increased and this is a further reason why the BSL Trust should be construed as requiring unanimity amongst the beneficiaries in respect of any such increase.

Although I accept that the position of the Fattal Parties in relation to a sale of BCIL may change as a result of the order made by Blackburne J, it is difficult to see how the pre-existing position is relevant to the construction and execution of the BSL Trust. It is common ground that the JVA never applied to their position as shareholders in BCIL. The argument therefore has to be that the de facto control which they exercised over a future disposal of BCIL was somehow translated into the arrangements under the BSL Trust.

But this argument runs into much the same difficulties as the one in relation to the disposal of Berkeley Court itself. The reason why the Fattal Parties no longer have control over a sale of BCIL is because they transferred their shares to BSL. Had the shares simply formed part of the corpus of the trust with no special provisions governing their disposal, the present trustees could have decided to sell them even without the Fattals’ consent. If one looks for some restriction on that it has to be found in clause 2. But, for the reasons already given, that requires the trustees to give effect to the directions of each and every beneficiary and not merely those of the dissentient minority. Had the intention been to have preserved the requirement of unanimity in relation to the shares, one would have expected that to be spelt out in terms in the BSL Trust. The provisions of clause 2 in fact indicate the contrary and there is no other evidence to support the effect for which Mr Chivers contends.

I would therefore dismiss this appeal.

I agree.

I also agree.