Kennedy & Ors v Kennedy & Ors

In these proceedings the trustees of a settlement dated 16 December 2003 made by the first claimant, Brian George Kennedy, (“the Settlement”) seek an order to correct a mistake made in the terms of an appointment dated 1 October 2008 (“the October 2008 Appointment”).

The mistake was to provide in the October 2008 Appointment for the appointment to Mr Kennedy of certain shares in four companies (“the relevant shares”). The relief specified in the amended Particulars of Claim is (1) a declaration that the relevant shares were not appointed on the trusts of the October 2008 Appointment, or (2) an order setting aside clause 2.1(c) of the October 2008 Appointment by which the relevant shares and a cash sum were appointed to Mr Kennedy absolutely, or (c) rectification of clause 2.1(c) by the addition of words excluding the relevant shares.

I find the following facts on the basis of the evidence before the Court.

Under the terms of the Settlement, of which Mr Kennedy was originally the sole trustee, Mr Kennedy had a life interest in possession. The Settlement contained a power of appointment exercisable by the trustees in favour of Mr Kennedy himself, his children and remoter issue. In default of appointment, the capital was held on trust for his children.

Schedule 1 of the Settlement specified the settled assets. So far as relevant to the present proceedings they included shares in the following companies: Space Kitchens and Bedroom (Holdings) Limited (“SKBL”), Ever 1951 Limited (“Everest”), Celuform Limited (“Celuform”) and Patrick Properties Holdings Limited (“Patrick Properties”).

The Settlement subsequently acquired shares in Latium Building Products Limited (“Latium”).

In 2006 SKBL was refinanced. In consequence, all the Settlement’s SKBL shares were acquired by a new parent company, Space Kitchens Holdings Ltd (“Holdings”). In exchange, the Settlement acquired shares in Holdings, which were of little value, and loan notes worth about £6.82 million. The loan notes were qualifying corporate bonds for the purposes of the capital gains tax (“CGT”) legislation. The effect of the exchange was that a chargeable gain of about £700,000 was realised; the underlying CGT rate (which was only 10 per cent because of the availability of maximum business taper relief) was “banked”; and CGT at that rate on the gain would only become payable on the first of the following events: expiry of the loan note term, encashment of the loan notes, or a transfer of the loan notes.

On 4 September 2007 the shares in Everest were sold, along with other shares in Everest owned beneficially by Mr Kennedy. As a result of the sale, there came into the Settlement in place of the Everest shares cash of £42,457,679 and ordinary shares and preference shares in a company subsequently called Home Improvement Group Holdings Limited (“Home Improvement”).

By a letter dated 17 September 2007 from Mr Kennedy’s accountants, KPMG, Mr Kennedy was informed that the value of Celuform and its shares had declined dramatically since the Settlement was created. As a result the Settlement had the benefit of an unrealised loss of about £7 million.

The Finance Act 2006 (“FA 2006”) introduced a new tax regime for settled property. In order to mitigate adverse tax consequences resulting from the changes FA 2006 allowed trustees and beneficiaries, during a transitional period, to reorganise existing trusts. In particular, trustees could create a “transitional serial interest” (“TSI”), effectively permitting an interest in possession to be terminated in favour of another interest in possession and for that to be a potentially exempt transfer. That transitional period was initially due to end on 5 April 2008.

In order to take advantage of that transitional period Mr Kennedy’s professional advisers, including Mr Alan Sturrock of Addleshaw Goddard LLP, suggested in about January 2008 that Mr Kennedy might consider appointing some of the assets in the Settlement on trusts for his children and grandchildren and the remainder to himself absolutely since that would reduce any future inheritance tax liability. Mr Kennedy was in principle positive about that suggestion because he wanted to pass money to his children in a tax efficient way.

Mr Kennedy also discussed with Mr Sturrock the possibility of appointing additional trustees for the Settlement.

Mr Kennedy was subsequently informed that the April deadline for the purposes of FA 2006 had been postponed to 5 October 2008.

Mr Sturrock went into hospital for a major operation in February 2008 and was away from work for about three months. In Mr Sturrock’s absence Mr Kennedy continued to discuss issues relating to the Settlement with KPMG and without reference to Addleshaw Goddard. He decided that the £7 million Celuform losses would be used in the 2007-2008 tax year to offset the gain on the sale of the Everest shares. Pursuant to the earlier discussions with his advisers, he also decided that, subject to dispositions in favour of his children, certain assets in the Settlement would be appointed to himself but not the relevant shares, the relevant shares being the Patrick Properties shares, the Holdings loan notes, the Home Improvement preference shares and the Latium shares. He instructed KPMG accordingly. Unlike the other assets to be appointed to Mr Kennedy, the relevant shares did not qualify for holdover relief for CGT purposes and the intention of Mr Kennedy and his instructions were to retain them in the Settlement in order to avoid any CGT liability in respect of them for the foreseeable future.

In partial execution of those decisions and instructions of Mr Kennedy, on 4 April 2008 he executed a deed of appointment transferring to himself various assets in the Settlement (“the April 2008 Appointment). The schedule to the April 2008 Appointment specified the assets appointed to Mr Kennedy. They did not include the relevant shares.

As the 5 October 2008 deadline approached, Addleshaw Goddard provided Mr Kennedy with two further draft documents relating to the Settlement. One was a deed appointing Mr Kennedy’s wife, Christine, and Mr Sturrock as additional trustees of the Settlement. The other was what became the October 2008 Appointment. It provided in clause 2.1(a) for £4.75 million cash (described as “the First Appointed Fund”) to be appointed revocably on protective trusts in stated amounts for Mr Kennedy’s five children during their respective lives with trusts over. It provided in clause 2.1(b) for some of the Home Improvement preference shares (which attracted business property relief ) (described as “the Second Appointed Fund”) to be appointed revocably on discretionary trusts of income and capital in favour of a class consisting of the children and remoter issue of Mr Kennedy. It provided in clause 2.1(c) in the following terms for the remainder of the assets in the Settlement to be appointed irrevocably on trust for Mr Kennedy absolutely:

“the remainder of the Trust Fund (other than the First Appointed Fund and the Second Appointed Fund) shall henceforth be held upon trust for the Settlor absolutely and free from all the trusts powers and provisions of the Settlement”

The October 2008 Appointment also provided, pursuant to clause 10 of the Settlement, that Mr Kennedy and any spouse or civil partner for the time being of Mr Kennedy were irrevocably excluded from future benefit from the Settlement and they were declared to be excluded beneficiaries without limit of time.

Mr Sturrock brought those two engrossed deeds to Mr Kennedy’s house on 28 September 2008 and they were signed there and then by Mr and Mrs Kennedy. Mr Sturrock took them away and subsequently procured his wife, who knew Mr and Mrs Kennedy well, to sign the two deeds as a witness. He dated the deed of appointment of additional trustees 29 September 2008 and the October 2008 Appointment 1 October 2008.

The effect of clause 2.1(c) was to generate a significant CGT liability, which is said in the evidence to be approximately £650,000.

Mr Kennedy executed the October 2008 Appointment in the mistaken belief that it gave effect to his intention, which he had discussed and agreed with KPMG earlier in the year, that the relevant shares would remain in the Settlement in order to avoid any charge on them to CGT for the foreseeable future. Contrary to the instructions which he had given to KPMG in April 2008, the apparent effect of clause 2(1)(c) was to appoint to him (in addition to a substantial cash sum) the relevant shares.

For completeness, I should say that Mr Sturrock had written Mr Kennedy a letter dated 26 August 2008 in which Mr Sturrock stated that, if the opportunity was taken to vary the Settlement to create a new trust for Mr Kennedy’s children, “[t]he remainder of the trust fund could stay in trust for [Mr Kennedy] as at present, or be transferred to [him] outright” and that a transfer to him of non-cash assets might give rise to CGT “and this needs to be discussed”. The evidence is that there was in fact no discussion on that matter before the October 2008 Appointment was executed. A further letter dated 24 September 2008 was written to Mr Kennedy by Paul Davies, a senior associate with Addleshaw Goddard, in which Mr Davies summarised the contents of the document that would become the October 2008 Appointment. After describing the provisions for Mr Kennedy’s children and grandchildren, the letter stated that “[t]he remainder of the Trust fund will revert to you absolutely”. Mr Kennedy’s evidence is that he believed at the time that Mr Davies was there referring only to the cash in the Settlement.

Mrs Kennedy understood that the October 2008 Appointment was intended to be for the benefit of the children. She executed the October 2008 Appointment in the mistaken belief that it gave effect to Mr Kennedy’s intention and instructions to his professional advisers.

Mr Sturrock, who was unaware of the precise terms of the April 2008 Appointment or indeed that it had been executed, believed that Mr Kennedy wished and intended that, apart from the assets to pass to Mr Kennedy’s children and grandchildren under the TSI planning pursuant to FA 2006, all the other assets in the Settlement would pass to Mr Kennedy outright. He also believed that there were considerable CGT losses within the Settlement which would be more than adequate to preclude any possible CGT on the transfer of such assets to Mr Kennedy since he was not aware that the loss on the Celuform shares had been applied in the tax year 2007-2008 against the gain on the sale of the Everest shares. Accordingly, he executed the October 2008 Appointment in the mistaken belief that (1) the loss on the Celuform shares remained available for CGT purposes to set against any gains on the assets appointed to Mr Kennedy, and (2) the October 2008 Appointment gave effect to the intention and instructions of Mr Kennedy.

Mr Sturrock resigned as a trustee of the Settlement by a deed dated 4 November 2009.

The proceedings, which started as CPR Part 8 proceedings, are now constituted as CPR Part 7 proceedings. The claimants are Mr and Mrs Kennedy, who are the present trustees of the Settlement. The first five defendants are the children of Mr and Mrs Kennedy. The sixth and eighth defendants are Mr and Mrs Kennedy’s grandchildren, each acting by their litigation friend. The seventh defendants are The Commissioners for HM Revenue and Customs (“the Revenue”).

As I have said at the beginning of this judgment, the claim is for (1) a declaration that the relevant shares were not appointed on the trusts of the October 2008 Appointed; alternatively (2) an order setting aside clause 2.1(c) of the October 2008 Appointment; alternatively (3) rectification of the October 2008 Appointment by the addition of words excluding the relevant shares from the operation of clause 2.1(c).

None of the defendants, other than the Revenue, has served a defence. The Revenue served a defence which, in broad terms, put Mr and Mrs Kennedy to proof of many of the allegations in the Particulars of Claim. The defence also stated that it may be inferred that the matters raised in Mr Sturrock’s 26 August 2008 letter were discussed and agreed; and that it may be inferred that between 26 August 2008 and 24 September 2008 Mr Kennedy instructed Mr Sturrock that Mr Kennedy wished the remainder of the trust fund (after appointments in favour of his children and grandchildren), including the non-cash assets referred to in the 26 August 2008 letter, to be transferred to him outright. The Revenue denied that, if all three trustees of the Settlement were mistaken only as to the fiscal consequences of the October 2008 Appointment, the mistake related to the true effect or went to the root of that disposition. The Revenue further denied that Mr Kennedy was an unintended beneficiary of the October 2008 Appointment, and they put Mr and Mrs Kennedy to proof that in all the circumstances it would be unjust or unconscionable for Mr Kennedy to retain the disposition effected by clause 2.1(c) of the Settlement. The Revenue denied that Mr and Mrs Kennedy were entitled to the relief claimed.

Witness statements in support of the claimants were made by Mr Kennedy, Mrs Kennedy, Mr Sturrock and Mr Michael Walker, of KPMG.

None of Mr and Mrs Kennedy’s children or grandchildren oppose the relief sought.

The Revenue wrote a letter to the court dated 25 September 2014, in which they stated that, having reviewed the claimants’ witness statements, they were no longer of the view that it was in the public interest for the Revenue actively to defend the proceedings and that they did not intend to serve a skeleton argument or be represented at the trial.

Only the claimants appeared at the trial on 18 November 2014. They were represented by Mr Mark Herbert QC.

Mr Sturrock and Mr Walker gave evidence on oath that the contents of their respective witness statements were true.

Mr and Mrs Kennedy did not attend the trial. Mr Kennedy was abroad. No explanation was given as to why he had been unable to travel to attend court. I was told that Mrs Kennedy was not present for health reasons but no details were provided of her medical condition. I have subsequently been provided with a doctor’s letter dated 14 November 2014 stating that Dr Angela Kunz of the Lyford Cay Hospital in Nassau, New Providence, Bahamas, had recommended that Mrs Kennedy should not travel until further notice. No reasons were given for that recommendation. I was not at all impressed with what can most benignly be described as the indifference of Mr and Mrs Kennedy to the need for their attendance at court to give their evidence on oath and to answer any questions that I might have. I considered whether to adjourn the trial in order that they be present or at least that I might receive a better and more courteous explanation of why they could not attend. In the end, bearing in mind that none of the defendants had appeared at the trial to oppose the claim or to cross-examine the claimants’ witnesses as well as the increased cost and waste of resources, including judicial time, if the trial was adjourned, I decided to proceed on the basis of an undertaking by Mr Herbert that Mr and Mrs Kennedy would make affidavits in the same terms as their witness statements. They have duly made those affidavits. Another judge would have been perfectly justified in taking a more rigorous line.

It is not necessary for me to set out Mr Herbert’s clear and helpful submissions in his skeleton argument and his oral presentation. So far as necessary, I mention and address them in the following discussion.

I have already set out above my factual findings on the evidence.

I am satisfied that this is a case in which the claimants are entitled to rescission for equitable mistake. The principles applicable to rescission of a non-contractual voluntary disposition for mistake were comprehensively set out in the judgment of Lord Walker in Pitt v Holt [2013] UKSC 26, [2013] 2 AC 108, with which the other members of the Supreme Court agreed. They may be summarised as follows.

Those elements are satisfied in the present case. Each of the trustees of the Settlement executed the October 2008 Appointment under a distinct mistake. Mr Kennedy mistakenly believed that it gave effect to his instructions for the TSI planning, under which the relevant shares would not be transferred. For that reason he mistakenly believed that the October 2008 Appointment did not transfer to him the relevant shares. Mrs Kennedy mistakenly believed that the October 2008 Appointment was a tax efficient method of benefiting her children and was in accordance with the instructions given by Mr Kennedy to his legal advisers. Mr Sturrock was mistaken in believing that the October 2008 Appointment was in accordance with Mr Kennedy’s instructions for the TSI planning. He was also mistaken in thinking that there were considerable tax losses within the Settlement that would preclude any charge to CGT arising as a result of the transfer of the relevant shares.

The mistakes made by the three trustees were causative and very serious. It was a fundamental feature of the TSI planning, as instructed by Mr Kennedy and understood by his professional advisers, that the October 2008 Appointment should not give rise to a charge to CGT. Had the trustees not been mistaken they would not have executed the October 2008 Appointment with the terms it contained. In particular, they would not have executed it with clause 2.1(c) included. The effect of the inclusion of clause 2.1(c) was to deprive the other beneficiaries of the Settlement, namely (subject to any future appointment) Mr and Mrs Kennedy’s children, of the relevant assets and to diminish the value of the remaining assets in the Settlement by the amount of the substantial charge to CGT payable by the trustees of the Settlement. The seriousness of those consequences is not significantly diminished by the fact that, for various practical reasons, the trustees executed an appointment on 10 January 2012 of the Latium shares in favour of Mr Kennedy on condition that they had not already been appointed to him.

Lord Walker observed in Pitt v Holt at paragraph [135] that in some cases of artificial tax avoidance the court might think it right to refuse relief, either on the ground that such claimants, acting on supposedly expert advice, must be taken to have accepted the risk that the scheme would prove ineffective or on the ground that discretionary relief should be refused on grounds of public policy. The October 2008 Appointment was not an artificial tax avoidance arrangement or part of one. It was executed as a perfectly legitimate way of conferring benefit on Mr and Mrs Kennedy’s children and grandchildren in a tax efficient manner that was contemplated by express provisions in FA 2006.

All those matters, taken in the round, make it unconscionable in principle to leave the October 2008 Appointment uncorrected.

The first head of relief claimed in the amended Particulars of Claim is a declaration that the relevant shares “were not appointed upon the trusts of the October [2008] Appointment”. Insofar as the wording of this head of relief assumes that the mistakes made by the trustees had the consequence that the transfer of the relevant shares to Mr Kennedy was void, it is plainly misconceived. A Pitt v Holt mistake makes the voluntary disposition voidable in equity not void at law.

Mr Herbert submitted that the first head of relief should be treated as an application to set aside the transfer of the relevant shares purportedly effected by clause 2.1(c) of the October 2008 Appointment. That proposition faces the fundamental difficulty that clause 2.1(c) does not separately identify the relevant shares but effects a disposition of “the remainder of the Trust Fund”. The remainder of the trust fund included a large cash amount in addition to the relevant shares. Indeed, it is precisely because the claimants would like clause 2.1(c) to remain valid and effective as regards the disposition of the cash sum that they seek relief which strikes down clause 2.1(c) only as regards the relevant shares. That, however, can only be achieved by rectification of clause 2.1(c) by adding words excluding the relevant shares. There would otherwise be a mismatch between the unrectified wording of clause 2.1(c) and the legal effect of partial rescission of the disposition of “the remainder of the Trust Fund”. Mr Herbert cited no authority which would support such a result.

Rectification is claimed as a head of relief in the amended Particulars of Claim but the evidence does not support it. The October 2008 Appointment was a voluntary disposition by three trustees. Rectification cannot be granted unless the wording or legal effect of clause 2.1(c) did not represent their true intention. Intention must be distinguished from motive. Mr Sturrock’s intention was to include in clause 2.1(c) the wording which it actually contained. His intention was that clause 2.1(c) should have the legal effect which it had, namely to vest the whole of the remainder of the trust fund in Mr Kennedy absolutely. His mistake was in thinking that, for purely factual reasons extraneous to the document itself, clause 2.1(c) would not give rise to a charge to CGT and its inclusion would therefore be in accordance with Mr Kennedy’s wishes and instructions. That mistake is not a mistake which can found a claim for rectification.

Mr Herbert referred to Marley v Rawlings [2014] UKSC 2, [2014] 2 WLR 213. That case concerned the proper interpretation and application of section 20(1)(a) of the Administration of Justice Act 1982 to a will. It does not seem to me to throw any light on the present case or to assist the claim to rectification in these proceedings. Mr Herbert relied on certain general comments of Lord Neuberger about the great breadth of amendment that is permissible where there is a right to rectification of a document. The question in the present case, however, is a different one, namely what kind of mistake is capable of giving rise to a right to rectification.

Mr Herbert did not cite any other authority in support of the claim to rectification. Nor did he submit that the rejection by Lord Walker in Pitt v Holt of the distinction between the “effect” of a transaction and its “consequences” made by Millett J in Gibbon v Mitchell [1990]1 WLR 1304, in favour of a broader test of unconscionableness based on Lindley LJ’s judgment on Ogilivie v Littleboy 13 TLR 399, 400, was as relevant to rectification for mistake as to rescission.

Returning to rescission, I consider that the claimants are entitled to the last alternative head of relief claimed in the amended Particulars of Claim, namely an order setting aside clause 2.1(c) of the October 2008 Appointment. Mr and Mrs Kennedy and Mr Sturrock have all given evidence that, if they had been aware of their mistake, they would have omitted clause 2.1(c) from the October 2008 Appointment. That is a self-contained and severable provision in the deed. There is authority that there cannot be partial rescission of a contract; it must be set aside as a whole and not only as to part: see De Molestina v Ponton [2002] 1 LL Rep 70, 286-289 and the cases cited there. That limitation makes sense in a contractual context and as preventing the court in effect imposing a different contract to the one the parties actually made. I see no reason, however, why that limitation should apply to a self-contained and severable part of a non-contractual voluntary transaction. In such a situation the allied principle that rescission can only be granted if both sides can substantially be restored to their pre-contractual positions is irrelevant. Again, no authority was cited to me on this point one way or the other. In the absence of authority to the contrary, I can see no reason in principle why, on the facts of the present case, clause 2.1(c) should not be set aside for mistake pursuant to the principles in Pitt v Holt.

For the reason I have given above, I order that clause 2.1(c) be set aside.