Bainbridge & Anor v Bainbridge

These are the reasons for my decision in the second part of this claim, concerning land known as Harkers Hill and Fox Covert. The first part of the claim concluded with my decision, given together with oral reasons, at the hearing on 25 September 2015, to rescind (set aside) on the grounds of mistake the transfer of land known as Seamer Grange Farm to trustees of a discretionary trust created by a trust deed of 24 June 2011.

In English law, the term ‘rescission’ is used (together with cognate expressions) to denote a number of quite different legal processes. In this short judgment, however, I use it exclusively to refer to the equitable remedy available in appropriate circumstances to undo (or set aside) otherwise consensual transactions between two or more parties where there is a factor or element vitiating consent. Examples of such factors are misrepresentation, undue influence, duress and mistake. In this case I am concerned only with mistake. The English law in this area was recently and authoritatively stated by the Supreme Court in Pitt v Holt [2013] 2 AC 108.

The original claim arose in this way. The Claimants, who were father and son, farmed together in partnership. They were, or may have been, concerned about a number of matters, including possible claims from the other children of the father on his death, and a possible claim from the son’s wife on divorce. They say that their then solicitors advised them to create a discretionary trust of the land, and that they also advised that there would be no capital gains tax chargeable on the transfer of the partnership land into that trust. The solicitors were and are not party to the claim, and they have not been heard, either in the original or the amended claim. But certainly in correspondence they denied both giving the advice and liability at all.

The trust was created, with the Second Claimant, his son (the Defendant) and a partner in the firm of solicitors as the original trustees. The transfers of the partnership land to the trustees took place on 24 June 2011. Unfortunately for all concerned, capital gains tax was exigible on the transfers: more than £200,000, plus interest and possible penalties. The effect on the Claimants was described as “crushing”.

The land at Seamer Grange Farm had been in the name of the First Claimant, but appears to have been partnership property. Both Claimants (being partners in the farming partnership) made a claim to set aside the transfer into trust. As stated, the sole Defendant was the son of the Second Claimant and the grandson of the First Claimant. He was one of the trustees, and also (since the date of the trust) a partner in the farming business. He consented to the relief sought. The solicitor trustee was not however a party. Given that the former solicitors were not involved, and that the sole Defendant consented, it was necessary to be careful. I read the considerable written evidence, and also heard oral evidence from the son. The grandson was present, although not legally represented, but did not ask any questions.

Counsel for the Claimants, Laurent Sykes QC, took me to all the relevant authorities. Even though it was an unopposed claim, it was still necessary for the Court to be satisfied that the relief sought was justified: Wright v National Westminster Bank [2014] EWHC 3158 (Ch), [10]. The test for setting aside a transfer into trust on the grounds of mistake was taken from Pitt v Holt [2013] 2 AC 108. It was summarised by the Chancellor in Kennedy v Kennedy [2014] EWHC 4129 (Ch), [36], in these terms:

“(1)

There must be a distinct mistake as distinguished from mere ignorance or inadvertence or what unjust enrichment scholars call a “misprediction” relating to some possible future event. On the other hand, forgetfulness, inadvertence or ignorance can lead to a false belief or assumption which the Court will recognise as a legally relevant mistake. Accordingly, although mere ignorance, even if causative, is insufficient to found the cause of action, the Court, in carrying out its task of finding the facts, should not shrink from drawing the inference of conscious belief or tacit assumption when there is evidence to support such an inference.

(2)

A mistake may still be a relevant mistake even if it was due to carelessness on the part of the person making the voluntary disposition, unless the circumstances are such as to show that he or she deliberately ran the risk, or must be taken to have run the risk, of being wrong.

(3)

The causative mistake must be sufficiently grave as to make it unconscionable on the part of the donee to retain the property. That test will normally be satisfied only when there is a mistake either as to the legal character or nature of a transaction or as to some matter of fact or law which is basic to the transaction. The gravity of the mistake must be assessed by a close examination of the facts, including the circumstances of the mistake and its consequences for the person who made the vitiated disposition.

(4)

The injustice (or unfairness or unconscionableness) of leaving a mistaken disposition uncorrected must be evaluated objectively but with an intense focus on the facts of the particular case. The Court must consider in the round the existence of a distinct mistake, its degree of centrality to the transaction in question and the seriousness of its consequences, and make an evaluative judgment whether it would be unconscionable, or unjust, to leave the mistake uncorrected.”

At the end of the hearing I gave an extempore judgment, stating that I was satisfied on the evidence before me that there had been a distinct mistake, not just ignorance, made by both Claimants (that is, as to whether capital gains tax would be payable on the transfer), that the mistake was basic to the transaction, that the Claimants did not deliberately run the risk of being wrong, and that it would be unconscionable or unjust to leave it uncorrected. I was also satisfied that there were no effective bars to rescission. It was not for example a bar that the mistake concerned the effect of taxation, or that there would or might be a fiscal effect of any order made.

In particular, it was no bar to rescission that part of the land that had been transferred to the trust when it was set up was not in fact the subject of the original claim, so that the relief being sought at that stage was only in relation to part of the property transferred and not all of it. In that respect, I relied on the decision of the Chancellor in Kennedy v Kennedy [2014] EWHC 4129, [46], already referred to. (It is that other land which was in fact the subject of the amendments to the claim, and which now forms the second part of the claim before me.) I therefore made the order sought in relation to Seamer Grange Farm. It was sealed only on 9 November 2015. But I note that for some reason (probably an error on my part) the order bears the date of 6 November 2015, although it was actually pronounced at the hearing on 25 September 2015. The order provided that notice be given to the solicitor trustee under CPR rule 19.8A(2), so that he would be bound unless he applied to set it aside or vary it. So far as I know, he has not.

The original claim form, issued on 16 April 2015, had claimed to set aside on the grounds of mistake only the transfer of Seamer Grange Farm. But at the hearing in September 2015, I gave permission to the Claimants to re-amend the claim form and particulars of claim so as to add an additional claim to the proceedings, making similar claims to set aside two further transfers of land into the same trust, those of Harker Hill and Fox Covert. However I could not and did not deal with the amended claim there and then.

Since that hearing, there have been a number of events which should be recorded. The principal one is the death of the First Claimant, Tom Bainbridge, on 1 November 2015. He had been ill for some time, and had not been sufficiently well to be able to attend the hearing.

As a result of the death of the First Claimant, an application was made by notice dated 20 November 2015 for an order under CPR rule 19.2(4), substituting Armstrong Watson Trustees Limited, the executor of the First Claimant’s will dated 13 January 2010 (as amended by a codicil dated 21 February 2014), for him in these proceedings. The application was supported by the witness statement dated 20 November 2015 of Graham Poles, a director of Armstrong Watson Trustees Limited, and consented to by the other parties. In these circumstances there is no reason for me not to make the substitution order sought, and I do so.

A further, formal matter was that the re-amended claim form and re-amended particulars of claim were filed, to which amendments the Defendant expressly consented. This led to the next point, which was correspondence with HMRC about the amended claim. By a letter of 17 November 2015 addressed to the Court, HMRC confirmed that it did not wish to be joined to the amended claim (just as it had not wished to be joined to the original one), but set out certain views for the consideration of the Court. I will come back to these later.

Lastly, the Second Claimant made a witness statement (his third) on 14 March 2016, bringing the evidence up to date.

Now the second part of the (amended) claim, concerning the remainder of the land originally transferred, falls to be considered. I saw no need for an oral hearing, and have dealt with this on the papers, with the benefit of written submissions from Mr Sykes QC. The Defendant, of course, consents to the second part of the claim as he did to the first, and has made no submissions.

The basic facts in relation to the amended claim are essentially the same as those of the original. Harker Hill had been acquired by the Second Claimant in 1982, but by the time of the transfer belonged beneficially to the partnership. It had been transferred to the trust in 2011 with Seamer Grange Farm. Fox Covert had been acquired by the two Claimants jointly, but, by the time it was transferred to the trust in 2011 (with Seamer Grange Farm), also belonged beneficially to the partnership.

So, when Harker Hill and Fox Covert were transferred to the trust, the same operative mistake was involved, and, subject to the question which is discussed below, I am satisfied that it is appropriate to grant the relief sought in respect of this further land. I will not therefore set out my reasoning in detail, because on these points it is the same as I gave for the decision in relation to Seamer Grange Farm at the hearing last September.

The difference with the Seamer Grange land however is this. Unlike Seamer Grange, which remained subject to the trust until this claim was heard, both Harker Hill and Fox Covert were sold by the trustees on 15 February 2013, for the price of £428,000. Of the proceeds of sale, £363,000 was used on the same day to acquire 67 acres at Seamer Grange and 45 acres at Village Farm (which together I shall call ‘the new land’). The remainder (about £65,000) was largely used to pay stamp duty land tax and legal costs in the transactions described, and then to satisfy partnership liabilities.

As to the land that was sold, the Claimants accept that the purchasers of Harker Hill and Fox Covert are good faith purchasers and that there is no prospect of the Court’s making an order rescinding the purchase by those third parties. But it is argued that the new land substantially represents Harker Hill and Fox Covert, and that the Court should make an order ‘restoring’ the new land to the beneficial ownership of the owners of the original properties. On the other hand, the evidence does not permit any tracing of the balance of the proceeds of sale of £65,000 into other assets. That has gone, in paying off liabilities without a subrogatable security.

A further point arises. This relates to the tax consequences of the sale of Harker Hill and Fox Covert and the purchase of the new land, if the Court is prepared to make the order sought, ‘returning’ the new land to the previous owners of the sold land. As I have said, HMRC is not a party to this claim, and there is no issue between the Claimants and HMRC about tax that I can decide as such. If they are unable to agree on tax liabilities, the matter will have to be dealt with by the appropriate tribunal. Nevertheless some points on the general law arise for me to consider.

The traditional approach to rescission has been first to establish whether the appropriate vitiating factor is present on the facts, and then (if it is) to go on to ask whether there are any bars to rescission being granted. An important such bar has been that third parties have acquired rights of which they should not be deprived: see Tennent v City of Glasgow Bank (1879) 4 App Cas 615, 620-21. But that is a bar to rescission resulting in the rights now belonging to the third parties being restored to the Claimant. It is not a bar on other rights being so restored, if that is possible. In the present case, there is no question of (and the Claimants do not seek) the Court’s ordering the good faith purchasers of Harker Hill and Fox Covert to hand back that land, or any part of it, to its original owners or their successors.

A further point is that rescission has usually been seen as an all or nothing remedy: see egTSB v Camfield [1995] 1 WLR 430, CA. But the remedy awarded is fact sensitive, and permits what is practically just, as for example the cases of O’Sullivan v Management Agency and Music Ltd [1985] QB 428, 466-467, CA, and Cheese v Thomas [1994] 1 WLR 129, 137, CA, show. And, as stated earlier in this judgment, I held at the hearing last September that there was no reason why, in a non-contractual case at least, relief could not be sought in relation only to part of the property transferred subject to a vitiating factor and not all of it.

In the recent case of Kennedy v Kennedy [2014] EWHC 4129, [46], the Chancellor said this:

“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 the present case the transfers to the trustees of the registered estates in Seamer Grange Farm, Harker Hill and Fox Covert were all contained in separate forms TR1. Each transfer had a different transferor or transferors, because the legal ownership of each parcel was different. Each was therefore self-contained and entirely severable from the others. Each transferor could make an independent decision about whether to apply for relief from the effect of the mistake, or not.

But another way to look at rescission, particularly apposite to this case, is to see it as a foundation for a claim to other property than that which was originally transferred. In his book The Law of Tracing, OUP 1997, 365-67, Prof Lionel Smith refers to this idea as a “proprietary base by avoidance”. This can be seen in the fact that the right to rescind is an equity which attaches to the property in whosoever’s hands it may be, unless and until it comes to the hands of a good faith purchaser for value without notice. So it is binding on a donee of that property: see eg the Jersey decision in Re S Trust 2011 JLR 375, [51]. (There is a debate about whether, to take free, the purchaser needs to be of the legal interest or not, but that does not matter now.) But it is also facilitated by virtue of a process of tracing through the products of the original property.

As Prof Smith notes, there are cases of this kind going back at least as far as Small v Attwood (1832) You 407, 533-538. In that case the Court of Exchequer (on its Equity side) set aside a contract of a sale of certain iron-works by Attwood to the British Iron Company because of fraudulent misrepresentations. Lord Lyndhurst CB subsequently granted an injunction to restrain the disposal by the Defendant and his mother of stocks that had been purchased by the Defendant with the proceeds of the sale, on the basis that the plaintiffs could trace into the product of those proceeds and claim it in substitution for the original property. (The decision was subsequently overturned in the House of Lords on other grounds: (1838) 6 Cl & Fin 232.)

It is not necessary to consider the many authorities, in this jurisdiction and elsewhere, where this approach has been taken or at least discussed with apparent approval. The matter was dealt with in some detail by Rimer J in Shalson v Russo [2005] Ch 281, in the context of a consideration of whether a constructive or resulting trust arose when the Claimant was cheated by the Defendant out of his money, at [106]-[127]. I need only refer to two short passages.

At [122] the judge considered the effect of a rescission of the transaction by the Claimant, in these words:

“Rescission is an act of the parties which, when validly effected, entitles the party rescinding to be put in the position he would have been in if no contract had been entered into in the first place. It involves a giving and taking back on both sides. If it is necessary to have recourse to an action in order to implement the rescission, the Court will make such orders as are necessary to put both contracting parties into the position they were in before the contract was made. There is, however, also a line of authority supporting the proposition that, upon rescission of a contract for fraudulent misrepresentation, the beneficial title which passed to the representor under the contract revests in the representee. The representee then enjoys a sufficient proprietary title to enable him to trace, follow and recover what, by virtue of such revesting, can be regarded as having always been in equity his own property. This may be an essential means of achieving a proper restoration of the original position if the representor has in the meantime parted with the property and is ostensibly a man of straw unable to satisfy the Court's orders for restoration of the original position.”

The judge went on to discuss the various authorities cited to him, and concluded (at [127]):

“I hold, therefore, that upon the implied rescission of the loan contracts effected by the bringing of his Part 20 claim, Mr Mimran had revested in him the property in the money he advanced to Westland entitling him at least to trace it into assets into which it was subsequently applied.”

The analysis of Rimer J has been cited subsequently with apparent approval. A recent example is the decision of the Chancellor in National Crime Agency v Robb [2015] Ch 520, [40]-[46]. I am not aware of any negative comment.

Of course, it is true that the line of authorities discussed by Rimer J is concerned with rescission for misrepresentation (often fraudulent), whereas the present case is concerned instead with a mistake sufficient to justify rescission. But I do not think that this difference matters. The consequence of the rescission is the same whether it takes place because of fraudulent (or negligent) misrepresentation, or because of causative and basic unilateral mistake. The property transferred under such a mistake revests beneficially in the transferor, subject to third party rights. In a case where third party rights cannot be disturbed, there is no reason not to apply the tracing process to exchange products of the transferred property in order to find other assets to which to make a claim instead.

Mr Sykes QC in his helpful written submissions cited to me the decision of HHJ Behrens in the case of Pearce v Beverley [2013] EWHC 2627 (Ch), which, despite the neutral citation, appears to have been a case proceeding in the Leeds County Court (Chancery Business). But Judge Behrens is a senior chancery circuit judge who regularly sits as a High Court judge under s 9(1) of the Senior Courts Act 1981, and the decision is instructive. The judge held that the transfer of a house by an elderly man (who later died) to the Defendant was so tainted by undue influence as to be capable of being set aside. But the house had since been sold and the proceeds used by the Defendant to buy another. Nevertheless, the judge said:

“I hold that 23 Turn Lea was purchased with the net proceeds of sale of 1 Rose Grove and that the estate of John Pearce have a tracing remedy with the result that 23 Turn Lea is held on trust for the estate.”

In my judgment this shows that it is not only in cases of fraudulent misrepresentation that the idea of ‘proprietary base by avoidance’ and the tracing process can be prayed in aid. The principle is wide enough to cover other vitiating factors too. In my judgment it extends to cases of mistake, and it is therefore open to the Claimants in the present case to make a claim to the new land.

In their letter to the Court of 17 November 2015, HMRC say that

“[t]he position is complicated in relation to Harker Hill and Fox Coverts [sic] due to [inter alia the fact that] [p]roperty has been contributed to the settlement in differing proportions by the two Claimants and the underlying beneficial ownership and partnership position of the assets settled is unclear…”

Whilst this is a complication, in my judgment it is not difficult to deal with. In principle the original owners of Harker Hill and Fox Covert, neither being at fault, are entitled to share the beneficial ownership of the new land in proportion to the value that each of Harker Hill and Fox Covert bore to the total value of both parcels of land at the date when they were sold out of the trust and turned into proceeds of sale. As I have already said, there can be no tracing into the payment of stamp duty, legal costs and partnership liabilities.

As it happens, the death of the First Claimant is likely to have simplified matters even more. The Second Claimant was the original owner of Harker Hill, and the first and Second Claimants were the joint owners of Fox Covert. The First Claimant’s death means that the sole surviving legal owner of Fox Covert is also the Second Claimant. If the First and Second Claimants were not also beneficial joint tenants, the will of the First Claimant gives all his interest in the farming business to the Second Claimant. The evidence is that Fox Covert was and is a partnership assets, so on that basis the Second Claimant would be trustee of his interest in each parcel for the partnership, but ultimately that is a matter between the surviving partners.

I am therefore minded to grant an appropriate declaration as to the beneficial ownership of Harker Hill and Fox Covert, and I ask counsel to address me on this (either orally or in writing) when this judgment is handed down.

The second point to consider is the effect of the rescission. As I have already said, the effect of an equitable rescission for mistake is to undo the transaction from the beginning. It is thereafter treated for the purposes of the general law as if it never took place: see AC v DC [2012] EWHC 2032, [30]. Whether it has the same effect for the purposes of tax law must however depend on the true construction of the tax law in question.

This is because it is competent for Parliament to legislate so as to impose a tax burden not only if a certain act is done or an event takes place, but also if such an act is purportedly done or an act appears to take place, but thereafter the Court says that it did not because of a vitiating factor. This latter approach would obviously be rare, and would no doubt have to be the subject of express wording or at least necessary implication in the relevant legislation. The ordinary or default position would be that the tax (whatever it was) should be exigible only where the act or event is ultimately held to be valid and effective under the general law. So under the default position, if the act or event is ultimately held not to be valid and effective under the general law, it is also not treated as a taxable event either: AC v DC [2012] EWHC 2032, [31]-[41].

Here I am not aware of any special legislation. I must therefore assume that the default position applies. If that is so, then, for example, income received between the date of the transfer and the date of a revesting by virtue of rescission in the original owner should belong to the original owner and not to the purported (but now divested) owner. This is what was held to have occurred in Wright v National Westminster Bank [2014] EWHC 3158 (Ch), [25].

The various tax issues that may arise in the present case on the basis that the transfers are set aside (for example, whether the original transferors were entitled to rollover relief, on the basis that the proceeds of sale of Harker Hill and Fox Covert were invested in the new land, which is used for the purposes of the farming business) are not properly before me. They must be for the parties and HMRC (and in default of agreement the appropriate tax tribunal) to resolve.

On the other hand, as a matter of general law, there is a tension. This is because, the transfer to trustees and sale by them having occurred, one cannot be sure that the original owners would have sold then and at that price. However, the Claimants are bringing this claim to rescind, knowing that the Court will not set aside the sales on to the good faith purchasers. Therefore they can be treated as having elected to ratify (to that extent) what the trustees have done.

It seems to me, therefore, that the right way to analyse what must be considered in the present case as having occurred, once the transfers into trust are treated as never having happened, is that the original owners have retained Harker Hill and Fox Covert, but that the sales (actually by the trustees) are to be imputed to those original owners, as also is the use of the proceeds (in part) to invest in the new land, and (in part) to pay stamp duty, costs and other liabilities of the business.

As stated above, I will make an appropriate declaration giving effect to the rescission of the transfers of Harker Hill and Fox Covert. Just as in Wright v National Westminster Bank [2014] EWHC 3158 (Ch), [25], the Claimants must, as the price of that rescission, therefore give an undertaking to inform HMRC forthwith of what has happened, of the terms of this judgment, and to make any corrective returns that may be necessary. I will also include a provision for notice of the order to be given to the solicitor trustee under CPR rule 19.8A(2).

I invite counsel for the Claimants to draft and submit for my approval an appropriate order to give effect to this judgment.