13 September 2018 | Comment | Article by Nerys Clement

Transferring property to a trustee: who gains the beneficial interest?

In the recent case of Gany Holdings (PTC) and Rangoonwala v Khan and Others the Privy Council provided guidance on identifying who gains a beneficial interest in assets transferred to a trustee, and the potential consequences of failing to identify and value trust property correctly as a result.

Background

Gany was an appeal to the Privy Council of a decision by the Court of Appeal of the Eastern Caribbean Supreme Court (British Virgin Islands) concerning a discretionary trust, known as the ZVM Trust (“the trust”), settled by Mohammed Aly Rangoonwala (“MAR”) in 1982 for the benefit of his wife and children. MAR was a very successful businessman having established business interests across many countries during his lifetime. He passed away without a will in June 1998 leaving a wife and four children, including the second appellant, Asif, and one of the respondents, Zorin.

The first appellant, Gany Holdings, was the sole trustee of the trust.

At the time of MAR’s death Asif was the sole director of Gany Holdings and power under the trust to add or remove trustees passed to him. By a document executed in December 1998, some six months after MAR’s death, Gany Holdings, as trustee, purported to transfer the whole of the beneficial interest in the trust fund to Asif (“the 1998 appointment”).

In the years that followed, MAR’s daughter Zorin made repeated attempts to gain information regarding the trust’s assets and eventually issued an application seeking an order from the court that an account be given by Gany Holdings. The order was granted and Gany Holdings’s initial response was that the trust had never held any property other than an initial settlement sum of US$100. Zorin took the view that the account provided was deficient and sought additional reliefs from the court, including the setting aside of the 1998 transfer.

The decision at first instance

By the time of trial both Gany Holdings and Asif conceded that the shareholdings in a company known as ECL HK had been vested in Gany Holdings on the terms of the trust, but that the company owned no assets of significant value. In his witness evidence Asif then declared that in the mid-1990s MAR transferred all of his business assets to Asif, rather than to the trust, by placing them in Gany Holdings and providing Asif with control of the company, both as shareholder and director. The assets transferred at this time included ECL HK and three other companies, namely, ECL BVI, Schweizer and Cedilla (“the three companies”).

The judge at first instance held that Zorin had failed to show that the account given by Gany Holdings, which limited the trust’s property to the initial US$300 and the shares in ECL UK, was deficient. The judge further rejected her claim that the 1998 transfer should be set aside by reason of a misconception on the part of Gany Holdings as to the identity and value of the trust assets.

This is unsurprising given the judge’s initial conclusion that the three companies did not form part of the trust property. Gany Holdings and Asif therefore succeeded at first instance.

The decision of the Court of Appeal

Zorin appealed, and the decision was overturned. The Court of Appeal held that the judge at first instance had been wrong to conclude that the three companies were not trust assets.

Citing the case of In re Curteis’ Trusts (1872) LR 14 Eq 217, the Court of Appeal concluded that there was a rebuttable presumption in law that “property gratuitously transferred to a person or persons who were, at the time of transfer, trustees of a trust previously established by the transferor, was to be regarded as transferred subject to the terms of that trust.”

The Court directed that Gany Holdings’s account of the assets of the trust should be amended to include the shares in each of the three companies.

Asif and Gany Holdings appealed.

The decision of the Privy Council

Whilst the Council concluded that both the approach of the court at first instance and the Court of Appeal were incorrect, it dismissed the appeal. The main issues the Council considered were (i) what constituted the property of the trust when MAR died (ii) whether the 1998 transfer was voidable due to a misconception on the part of Gany Holdings as to the identity and value of the trust property and (iii) if voidable, the extent to which Asif should account for the assets transferred.

As an additional issue, the Council also considered Asif’s liability to account for any assets he received as a result of the 1998 appointment.

The first issue: what was the property of the trust when MAR died?

Lord Briggs, providing the leading judgement, concluded that the Court of Appeal was wrong to decide that the matter could be resolved by reference to any legal presumption, whether derived from the case of In re Curteis’ Trusts or otherwise.

Lord Briggs emphasised that in identifying whether a beneficial interest arises, a written declaration of such an interest will generally be decisive, regardless of any subjective intention, but in absence of this the court will look for evidence which could infer a common intention as to beneficial ownership. Where a common intention cannot be inferred, only then should the court consider any legal presumption.

The Council concluded that there was sufficient evidence, based on the information provided regarding MAR’s conduct during his lifetime, that the three companies formed part of the trust’s property.

The second issue: was the 1998 transfer voidable?

In deciding whether to set aside the 1998 transfer, Lord Briggs referred to the principles set out in the Supreme Court case of Pitt v Holt [2013] 2 AC 108, namely that:

 

  • the court’s discretion to set aside a transfer on the basis of mistake depends on whether it can be shown that the mistake amounted to, or came about as a result of, a breach of fiduciary duty;

 

 

  • if it can be shown that the mistake did, in fact, amount to a breach of fiduciary duty, the court has a flexible discretion whether to set aside the disposition; and

 

 

  • in considering whether to exercise this discretion, the question whether, if properly informed, the trustees would or might have acted differently will be relevant but not decisive.

 

The Council concluded that the earlier finding that the three companies formed part of the trust’s property necessarily meant that Gany Holdings’s directors acted under a misconception in failing to appreciate the extent of the trust property, believing as they did that it was limited to the initial settlement sum of US$300 and the shareholding in ECL HK. This mistake amounted to a serious breach of fiduciary duty by Gany Holdings, sufficient to trigger the court’s discretion to set aside the 1998 transfer.

The third issue: Asif’s liability to account

The Council concluded that, up until it was set aside, the 1998 transfer conferred upon Asif both the legal and beneficial ownership of the assets transferred. By setting aside the 1998 transfer the Council effectively transferred the beneficial ownership back to the beneficiaries of the trust. Asif was therefore required to return any property he had retained from the 1998 appointment to the trust and provide an account of any property which he no longer held in his possession.

The Council pointed out, however, that this did not impose a personal liability on Asif to compensate the trust in respect of any property received under the 1998 transfer and subsequently disposed of before the transfer was set aside.

Comment

The case is interesting in that it demonstrates a move away from the more traditional reliance by the courts on legal presumptions to a more flexible and analytical approach in identifying beneficial interests. The court was keen to point out that, in modern times, reliance on legal presumptions should be considered a last resort, and referred in particular to the “forensic tools” more readily available for ascertaining and weighing of evidence.

The case provides a fascinating example of the difficulties which can arise when making a gratuitous transfer of property to trustees and clearly illustrates the need for clarity of intention between the parties.

 

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