Guernsey Law Reports 2009-10 GLR 216
GRESH v. RBC TRUST COMPANY (GUERNSEY) LIMITED and H.M. REVENUE AND CUSTOMS
ROYAL COURT (Collas, Deputy Bailiff): May 29th, 2009
Trusts—powers and duties of trustees—exercise of discretion—no joinder of HMRC to Hastings-Bass proceedings (if UK tax liability may arise because trustee’s discretion exercised on incorrect advice)—not same issue in two different proceedings as required by Royal Court Civil Rules 2007, r.37(1)(b)(ii)—joinder not “just and convenient” if separate, unconnected issues, different systems of law govern different proceedings, or if HMRC can make submissions without joinder—joinder may result in inappropriate indirect enforcement of UK tax law
G applied to have set aside decisions to distribute trust assets made by RBC in the exercise of its discretion as a trustee.
RBC was the sole trustee of a pension trust, the purpose of which was to allow employers to provide pension schemes for their non-Guernsey resident staff, of which G was a member. RBC made decisions to distribute some of the assets to G in cash and in specie as a lump sum. As it was then realized that this method of distribution would give rise to a UK tax liability, RBC began work on a tax migration scheme for G, as part of which the lump sum distribution would have to be set aside and replaced by annual pension payments. G therefore made a Hastings-Bass application for the lump sum distribution to be declared void ab initio. The purpose of such an application was to enable the court exceptionally to interfere in a trustee’s decisions, if it could be shown that it would not have acted as it did had it (a) not taken into account considerations it should not have, or (b) failed to take into account considerations it ought to have. HMRC applied under r.37(1) of the Royal Court Civil Rules 2007 to be joined as a party to the proceedings.
HMRC submitted that (a) the requirements for joinder under r.37(1)(b)(ii) were satisfied, since its legal right to collect tax would be directly affected by the determination of the validity of the distributions, and joinder would avoid a possible duplication of proceedings as it might otherwise have to bring the issues before the Special Commissioners in the United Kingdom; (b) if it were not joined, there would be no effective defendant to G’s application—it was particularly important, not to mention useful, for the issues to be argued properly and fully, since this was the first time a Hastings-Bass application had been heard in Guernsey, and the scope of the rule was as yet unclear; (c) unfairness to G was not a
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proper basis on which to object to its joinder, but in any case no material hardship would be caused to any of the parties; (d) the joinder would be entirely consistent with the overriding objective of Part 1 of the Royal Court Civil Rules, namely, to enable courts to deal with cases justly; and (e) it would not be bound by the court’s decision if it were not joined, though it would respect the court’s decision if it were joined.
G submitted that (a) HMRC had not met the r.37(1)(b)(ii) requirements, since (b) there was no issue between HMRC and either G or RBC involved in the Hastings-Bass application, as the issues were in fact whether the Hastings-Bass principle applied in Guernsey and, if it did, whether it could be applied so as to render the distributions void ab initio—the issues were solely matters of Guernsey law between G and RBC only; (c) in other jurisdictions, it had been the practice for HMRC to decline applications to join as a party, even where the sums of money involved were far greater, and there was therefore no proper reason to allow the joinder; and (d) HMRC had been critical of the application of the Hastings-Bass principle in other jurisdictions, and if it was trying to argue for a narrower application in Guernsey, it would be indirectly enforcing a foreign revenue law, since the moneys would remain liable to UK tax. He further submitted that (e) there was no requirement that a Hastings-Bass application be defended, as the burden rested on the applicant to demonstrate the relevant legal principles and to satisfy the court on the facts of the case—here, all the material evidence had been provided and the court would therefore be able to make an informed, just decision; (f) HMRC’s intervention would add unnecessarily to the length and expense of the proceedings; and (g) HMRC’s assertion that it would not be bound if it were not joined as a party to the proceedings disregarded the notions of comity and of respecting decisions of courts of competent jurisdiction.
The amicus curiae submitted that (a) he shared G’s concerns about HMRC not considering itself bound if it were not joined; (b) HMRC was seeking indirectly to enforce a UK revenue law and this case therefore fell within the rule that courts had no jurisdiction to enforce a foreign revenue law; and (c) there was no requirement for there to be a defendant in a Hastings-Bass application, as the court was being asked to exercise its supervisory jurisdiction over trust matters and, as such, assumed an inquisitorial role.
Held, dismissing HMRC’s application:
(1) The application would be dismissed, as HMRC had failed to satisfy the requirements of r.37(1)(b)(ii) of the Royal Court Civil Rules 2007. The issue in the Hastings-Bass application, i.e. whether the distributions were made in such circumstances that they should be declared void ab initio, differed from the issue between HMRC and G or RBC, namely, whether the moneys were liable to UK income tax. Whether any tax liability would ensue from the scheme proposed was a matter of UK law which would not be determined by a Guernsey court, and HMRC therefore had no valid
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interest in being joined to the Hastings-Bass proceedings (paras. 59–65; para. 76).
(2) By applying to be joined as a party to the proceedings, HMRC was seeking indirectly to enforce a foreign revenue law (by arguing that the distributions were not to be set aside, so that their liability to UK tax would remain). Its application fell squarely within the principle barring the enforcement of such a law and would therefore be dismissed (para. 74; para. 76).
(3) It was not necessary for there to be a defendant to a Hastings-Bass application. The applicant had made full and frank disclosure of all the relevant evidence and, provided this was done, the court was able to assume an inquisitorial role and decide whether, in Guernsey law, it had the power to set the distributions aside and whether it could exercise that discretion in a given case. Although this was the first time that a Hastings-Bass application had come before a Guernsey court and HMRC had raised concerns about the scope and development of the application of the rule in the United Kingdom, it was not for the court merely to apply English law, since the law of similar jurisdictions (e.g. Jersey), as well as Guernsey’s customary and statutory laws, also had to be considered. It was possible for HMRC to make written submissions to the court on the law, including any authorities it considered relevant and how it believed they should be interpreted, without being joined as a party in Guernsey (paras. 69–73).
(4) There was no reason why the question of the validity of the distributions would have to be litigated separately before the United Kingdom Special Commissioners if HMRC were not joined as a party in these proceedings, especially when the Royal Court was of competent jurisdiction to determine that question. HMRC was not entitled to be joined to the proceedings merely by considering itself not bound if its application were dismissed—it should bear in mind the principle of comity and respect a judgment made by a foreign court of competent jurisdiction such as the Guernsey Royal Court (para. 68).
Cases cited:
(1) Ellastone Ltd., In re, Jersey Royal Ct., [2008] JRC091, June 5th, 2008, unreported, referred to.
(2) Govt. of India v. Taylor, [1955] A.C. 491; [1955] 2 W.L.R. 303; [1955] 1 All E.R. 292; (1955), 48 R. & I.T. 98; 34 A.T.C. 10, applied.
(3) Hastings-Bass (Decd.), In re, [1975] Ch. 25; [1974] 2 W.L.R. 904; [1974] 2 All E.R. 193; [1974] S.T.C. 211, considered.
(4) Sanders Lead Co. Inc. v. Entores Metal Brokers Ltd., [1984] 1 W.L.R. 452; [1984] 1 All E.R. 857; [1984] 1 Lloyd’s Rep. 276, dicta of Kerr, L.J. followed.
(5) Seaton Trustees Ltd., In re, 2009 JLR N [15]; [2009] JRC050, considered.
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(6) State of Norway’s Application (Nos. 1 & 2), In re, [1990] 1 A.C. 723; [1989] 2 W.L.R. 458; [1989] 1 All E.R. 745, distinguished.
(7) Stuart-Hutcheson v. Spread Trustee Co. Ltd., [2002] W.T.L.R. 1213; (2002), 5 ITELR 140, followed.
(8) Tetra Molectric Ltd. v. Japan Imports Ltd., [1976] F.S.R. 238; [1976] R.P.C. 541, referred to.
(9) Vandervell Trustees Ltd. v. White, [1971] A.C. 912; [1970] 3 W.L.R. 452; [1970] 3 All E.R. 16; (1970), 46 T.C. 341, referred to.
(10) Vaudin v. Hamon, [1974] A.C. 569; [1973] 3 W.L.R. 257, dicta of Lord Wilberforce applied.
S.H. Davies for the applicant;
J.P. Greenfield for the respondent;
R.I.C.E. Harris for the intervenor;
W.P.T. Nicol-Gent, Crown Advocate, as amicus curiae.
1 COLLAS, DEPUTY BAILIFF:
Introduction
Her Majesty’s Revenue & Customs (“HMRC”) has applied to be joined as a party to the application by Mr. Gresh dated March 24th, 2009 for an order setting aside decisions taken by RBC Trust Company (Guernsey) Ltd. (“RBC”), in its capacity as trustee of the Abacus Global Approved Managed Pension Trust, to distribute assets to Mr. Gresh from the Pension Trust. The decisions were taken on November 17th and 20th, 2006, and the assets were distributed on November 21st, 2006 and January 30th, 2007.
2 Mr. Gresh’s application is believed to be the first ever application to the Royal Court of Guernsey seeking to apply the principle in In re Hastings-Bass (Decd.) (3) in this jurisdiction.
3 Another first is that the application by HMRC is believed to be the first time that it has applied to intervene in and be joined to a Hastings-Bass application in a court outside the United Kingdom.
Background
4 RBC is the sole trustee of the pension fund known as the Abacus Global Approved Managed Pension Trust, the purpose of which is to enable unconnected employers to establish pension schemes (in the form
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of sub-trusts) for their non-Guernsey resident staff. Mr. Gresh was a member of the trust scheme established on or around January 1st, 1993 by Bankers Trust Company for the benefit of employees or directors in the service of that company. The name given to such scheme was the Bankers Trust International Pension Scheme.
5 The reason for the application by Mr. Gresh is summarized at paragraphs D and E of his application:
“D. The respondent [RBC] distributed the assets held under the Bankers Trust Scheme for the applicant [Mr. Gresh] in cash and in specie as a lump sum to the applicant on November 21st, 2006 and January 30th, 2007. It has since been established that the distribution of the assets in that form gives rise to a UK tax liability on the applicant. Had the respondent appreciated that fact, it would have distributed the assets in periodic (or annual) form, rather than a lump sum. The applicant and the respondent are working with their respective advisers to implement a tax migration scheme for the applicant, part of which requires the lump sum distribution to be set aside and to be replaced by annual payments of a pension.
E. The applicant accordingly seeks an order of the Royal Court in accordance with the provisions of s.69 of the Trusts (Guernsey) Law 2007 and the rule in Hastings-Bass that distribution [sic] referred to at para. D above be declared void ab initio.”
6 Mr. Gresh seeks the following orders and/or directions:
“1. An order that the distribution [sic] referred to at paragraph D be declared void ab initio; and
2. Such other orders or directions as the court shall see fit.”
7 The events giving rise to Mr. Gresh’s application are set out in some detail in an affidavit sworn by Lisa Hélène Crawford, a director of RBC, on August 15th, 2008 and in the documents exhibited thereto. It is not necessary in this judgment to go into the facts in any detail. For the purposes of this judgment, the facts are sufficiently summarized in para. D of the application, quoted above. As to the chronology, I need only to add the fact that it was at some time during 2007 that RBC became aware that the distributions to Mr. Gresh would be treated not as a pension, but as a lump sum and hence would be subject to 40% UK personal income tax under the rules for benefits received from employer-financed retirement benefit schemes.
Procedural history
8 The matter commenced with an application by RBC, which first came before the Royal Court in August 2008, when it applied to set aside the
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distributions in terms that were identical to the application now brought by Mr. Gresh. Later, in March 2009, RBC withdrew its application and Mr. Gresh took over the conduct of the matter by bringing his own application in the same terms. I will refer to the procedural history in some detail in order to explain why it has taken time for the matter to come before the court for hearing. I do not believe that any party should be held responsible for the delays and, although there have been delays, I do not believe they are of such significance that I need take them into account when deciding whether to grant HMRC’s present application.
9 On August 27th, 2008, I gave various directions, including orders that RBC’s application be served on Mr. Gresh and that notice of RBC’s application be given to Her Majesty’s Revenue & Customs in accordance with what Advocate Greenfield advised me appeared to have been a practice that had been adopted in other jurisdictions when dealing with similar applications under the Hastings-Bass principle.
10 On the return date, September 26th, 2008, there was no appearance by any party other than RBC and I directed that the substantive hearing would take place on October 7th, 2008. Later on September 26th, HMRC Solicitor’s Office contacted the Greffe and also Carey Olsen to advise that they had been instructed to represent HMRC in this matter, but that they had only received notice of the application on the day before so had not had an opportunity to appear.
11 On October 6th, HMRC’s solicitors wrote to say that leading English counsel had been instructed to draft a skeleton argument to put before the court and requested that HMRC be allowed two weeks to do so, with RBC being allowed two weeks thereafter to respond (a copy of the relevant correspondence is exhibited to the first affidavit of Simon Anthony James Hart, a senior lawyer in the Business and Property Tax and Litigation Group at HMRC Solicitor’s Office, sworn on December 12th, 2008).
12 At a hearing on October 7th, 2008, I was unsure as to whether HMRC should be allowed, or invited, to join in RBC’s application and requested assistance from the Law Officers of the Crown. Crown Advocate Nicol-Gent was instructed and has been of great assistance. His role, as clarified by him on November 28th, 2008, is that of amicus curiae.
13 At a further directions hearing on November 4th, when the amicus was not able to be present, Advocate Harris advised the court that he had been instructed on behalf of HMRC and he wished to participate at the main hearing of RBC’s application. The matter was adjourned to November 14th to enable the amicus to attend. On November 11th, Advocate Harris, on behalf of HMRC, submitted a formal application pursuant to r.37(1)(b) of the Royal Court Civil Rules 2007 to be added as a party to RBC’s application. The matter was further adjourned to November 28th, 2008, when various directions were given for exchange of skeleton
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arguments by the parties, with a view to a hearing of HMRC’s application on February 4th, 2009.
14 Revised directions were given on January 16th, 2009 because Advocate Davies had received instructions to represent Mr. Gresh in the proceedings. Before then, Mr. Gresh had not played any active part in RBC’s application. I set down HMRC’s application to be joined to RBC’s application for hearing on March 19th.
15 On March 19th, Advocate Greenfield advised the court that RBC was withdrawing its application. Advocate Davies indicated that Mr. Gresh wished to take over conduct of it. After some discussion as to the best way of proceeding with a minimum of wasted costs, it was ordered that RBC’s application be withdrawn and that Mr. Gresh submit his own application, which he duly did (dated March 24th, 2009). Mr. Gresh’s application came before the court on March 27th, 2009 and, on the same day, HMRC applied to be joined as a party to it. HMRC’s application was heard by me on the first available date, May 7th.
16 In order to save costs, the parties have, wherever possible, adopted the affidavits and skeleton arguments previously lodged in respect of RBC’s application and HMRC’s application to be joined thereto.
Rule 37 of the Royal Court Civil Rules 2007
17 HMRC’s application is brought under r.37(1)(b) of the Royal Court Civil Rules 2007, or, more specifically, under item (ii) of sub-para. (b), which provides as follows:
“37. (1) The Court may in any proceedings order that—
. . .
(b) any person—
. . .
(ii) between whom and any party to the proceedings there exists a question or issue arising out of or relating to or connected with any relief or remedy claimed in the proceedings which, in the opinion of the Court, it would be just and convenient to determine as between him and that party as well as between the parties to the proceedings,
shall be added as a party.”
18 Rule 37 is the same as r.34 of the Royal Court Civil Rules 1989, which it replaced, and r.34 was in turn based on a similar rule in the Rules of the Supreme Court, O.15, r.6(2), the relevant part of which read as follows:
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“Subject to the provisions of this rule, at any stage of the proceedings in any cause or matter the Court may on such terms as it thinks just and either of its own motion or on application—
. . .
(b) order any of the following persons to be added as a party, namely—
(ii) any person between whom and any party to the cause or matter there may exist a question or issue arising out of or relating to or connected with any relief or remedy claimed in the cause or matter which in the opinion of the Court it would be just and convenient to determine as between him and that party as well as between the parties to the cause or matter.”
19 Advocate Davies submits that O.15, r.6(2) of the Rules of the Supreme Court is broader than r.37(1)(b)(ii), as the phrase used in the sub-section is “may exist” in England, and “exists” in Guernsey. The equivalent rule in Jersey, r.6/36 of the Jersey Royal Court Rules 2004, is the same in that regard as the English rule. Advocate Harris submits that the distinction is not determinative in this case.
20 Advocate Harris explained that O.15, r.6(2)(b)(ii) of the Rules of the Supreme Court was introduced in August 1971 following the decision of the House of Lords in Vandervell Trustees Ltd. v. White (9). Buckley, L.J. explained in Tetra Molectric Ltd. v. Japan Imports Ltd. (8) ([1976] F.S.R. at 241–242) that in Vandervell it had been held, in a dispute between trustees and beneficiaries, that the Inland Revenue was not a necessary party within the terms of what became sub-para. (i) of para. (b) of sub-r. (2), so in order to widen the discretion of the court the rule was amended by adding sub-para. (ii).
21 It is interesting to understand how the rules have been amended and why they have evolved in this way, but, in my view, the history does not mean that HMRC is to be given any preferential treatment in the Guernsey courts. The language of r.37 must be given its ordinary meaning and applied as appropriate to the facts of the application by HMRC that I am now considering. My decision on HMRC’s application would be the same if the rule said “may exist” rather than “exists.”
Advocate Harris’s submissions on behalf of HMRC
22 Advocate Harris submitted that r.37 of the 2007 Rules imposes three requirements:
“There must be (1) a question or issue between HMRC and a party to the proceedings (in this case, Mr. Gresh) which (2) arises out of, is
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related to, or is connected with, any relief or remedy claimed in the proceedings, and it would (3) be just and convenient to determine that question or issue, as between HMRC and that party as well as the parties to the proceedings.”
23 He said that it is entirely clear that HMRC has an interest in the issue before the court because the distributions, if valid, would constitute taxable income in the hands of Mr. Gresh. He argued that HMRC’s legal rights to collect tax will be affected by the outcome of Mr. Gresh’s application.
24 Advocate Harris was at pains to point out that HMRC is not asking the Royal Court to determine if any UK tax is payable by Mr. Gresh, nor is it asking the court to collect any tax from him; such proceedings, he acknowledged, will have to be heard in the United Kingdom. HMRC is not conceding whether what is proposed will be effective for UK tax purposes. In HMRC’s first skeleton argument, dated December 15th, 2008, it said:
“The [Hastings-Bass] proceedings are driven entirely by the UK tax considerations of Mr. Gresh. As presently made, the distribution represents fully taxable income of Mr. Gresh. RBC has entered into complex alternative arrangements intended to provide Mr. Gresh with an equivalent distribution, to be made on terms by which UK tax will be wholly avoided. Whether these alternative arrangements will achieve this objective is another matter entirely, and HMRC expresses no view whatsoever in that regard.”
25 In Simon Hart’s second affidavit, sworn on March 10th, 2009, he further explains:
“For the sake of clarity, HMRC will accept the final decision of the Guernsey courts regarding the status of the distribution, provided that it is given the opportunity to participate in RBC’s application and make submissions on the applicability of the Hastings-Bass principle. It follows that provided that HMRC can participate in these proceedings, then, whether RBC’s application is accepted or dismissed, that will be the end of the matter as regards the status of the distribution.”
26 The validity or otherwise of the distributions made by RBC to Mr. Gresh is the subject-matter of the Hastings-Bass application and is also, Advocate Harris argued, a question or issue between HMRC and Mr. Gresh arising out of, or connected with, the relief claimed by Mr. Gresh in his application. So, he said, the first two requirements of r.37 are satisfied.
27 Advocate Harris argued that there were essentially two reasons why it is just and convenient for HMRC to be joined to Mr. Gresh’s application. First, if they are not joined, they will not be bound by the decision of the Royal Court, and the issue of the validity of the distributions will have
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to be dealt with in proceedings before the Special Commissioners, especially if either there were points of law that had not been raised before the Royal Court which HMRC might consider would have affected the decision, or if the evidence before the Royal Court had not been adequately tested in cross-examination. Thus, there would be a duplication of proceedings and a possibility of different findings being reached on the same issue.
28 HMRC also argued that in the absence of HMRC, there will be no effective defendant to Mr. Gresh’s application, which would be especially important as this is the first time the rule in In re Hastings-Bass (3) has come before the Royal Court; the scope of the jurisdiction remains contentious in the United Kingdom and needs to be carefully considered if it is to be correctly applied. Advocate Harris added that there would be no unfairness caused to any party if HMRC is joined.
29 Finally, the joinder of HMRC would be entirely consistent with the overriding objective in Part I of the 2007 Rules, namely, to deal with cases justly.
Advocate Davies’ submissions on behalf of Mr. Gresh
30 Advocate Davies argued that there is no issue or question in the proceedings between HMRC and either Mr. Gresh or RBC. The issues at stake are whether the Hastings-Bass principle (however formulated) applies in Guernsey and, if so, whether the principle should be applied in this case to render the distributions void ab initio. The issues are solely matters of Guernsey law and arise between Mr. Gresh and RBC only.
31 He argued that HMRC’s interest is in the UK tax consequences that may follow from the decision of the Royal Court—those consequences are not in issue in the proceedings. At best, HMRC’s interest in the proceedings is indirect and contingent on the orders that the Royal Court will actually make. He relied upon a judgment of Kerr, L.J. in Sanders Lead Co. Inc. v. Entores Metal Brokers (4) where, when considering the meaning of O.15, r.6(2)(b)(ii) of the English Rules, he said ([1984] 1 W.L.R. at 460):
“In my view the rule requires some interest in the would-be intervener which is in some way directly related to the subject matter of the action. A mere commercial interest in its outcome, divorced from the subject matter of the action, is not enough . . . [T]here must be some direct interest in the subject matter . . . though even in such cases the interest of the intervener must raise an existing issue and not merely a contingent one . . .” [Emphasis supplied]
32 Advocate Davies also relied upon a decision of the Royal Court of Jersey in In re Seaton Trustees Ltd. (5), a judgment handed down on
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March 19th, 2009. The Jersey court granted an application, pursuant to the Hastings-Bass principle, declaring to be of no effect two partial withdrawals made from a Canada Life bond held by a trustee and distributed to a UK-resident, but non-domiciled, beneficiary. Before the funds were withdrawn, advice had been taken from PricewaterhouseCoopers in England as to the tax consequences to the beneficiary. As I understand the facts set out in the judgment, the trustee misunderstood the tax advice when it formally resolved to withdraw the funds from Canada Life, believing a tax liability of some £100,000 would arise, whereas the income tax actually payable amounted to £1,522,300. If, instead of withdrawing funds, the trustee had surrendered the whole policy, or segments thereof, the tax liability would have been much less.
33 Regarding the involvement of HMRC, the Seaton judgment states ([2009] JRC050, at paras. 22–23):
“22. PWC wrote to HMRC on 19th August, 2008 giving notice of the possibility of this application being made and asking whether HMRC wished to make representations to the court or to appear. After further correspondence HMRC wrote to PWC on 6th February 2009 indicating that it did not intend to appear at the hearing but had written directly to the Court by letter of the same date which we have received.
23. Before commenting on the points raised by HMRC, we should make it clear that whilst we can appreciate the courtesy extended by PWC to HMRC, the latter has no interest in the application (only in the UK tax consequences that may flow from it) and therefore no locus standi upon which to seek to intervene. That being said, we are prepared to extend the same courtesy to HMRC by dealing with the points they raise in their letter . . .”
34 Advocate Davies questioned the accuracy of an affidavit sworn in connection with HMRC’s application in the matter now before me. In the affidavit of Simon Hart (of HMRC Solicitor’s Office) sworn on April 27th, 2009, he said that he had not been involved in the Jersey matter, but he understood from a colleague—
“that the decision taken to write to the Royal Court of Jersey rather than to apply to appear at the hearing before the Royal Court of Jersey was due principally to the shortage of time available to HMRC’s Solicitor’s Office in which to instruct local advocates and to prepare a case after HMRC were notified on January 23rd, 2009 of the February 12th, 2009 hearing date. Instead, the letter, dated February 6th, 2009, was sent to the Royal Court of Jersey . . . ”
35 In my view, nothing significant turns on the possible discrepancy between these two explanations as to when HMRC first learned of the
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application, or the hearing date in that matter; as I explain later, I have reached my decision without drawing assistance from the decision in the Seaton (5) judgment.
36 Advocate Davies relied upon the Jersey court’s finding that HMRC has no interest in the application—“only in the UK tax consequences that may flow from it.” Although HMRC had not argued its case before the Jersey court, Advocate Davies refuted the suggestion that the issue had not been properly considered by the court.
37 Advocate Davies submitted that there are five factors to be considered in relation to the test of whether it is just and convenient for HMRC to be joined to the proceedings. The first was Advocate Harris’s submission that the Hastings-Bass application would otherwise be undefended. Advocate Davies submitted there is no requirement for it to be defended; the burden rests with the applicant to demonstrate the relevant legal principles and to satisfy the court on the facts of the case. Mr. Gresh will rely heavily on the materials produced by RBC; in particular, on the affidavit of Lisa Crawford, which appears to contain a full and proper disclosure of the evidence, as required by the court.
38 He submitted the parties had been frank in their submissions, especially their legal submissions. In reply to a criticism by Advocate Harris, he acknowledged that the text of a speech on the subject of the Hastings-Bass principle delivered by Lord Walker had not been included with the materials, but, as a text, it was informative, rather than persuasive—as a judgment would be. There may be other similar materials or academic content which have not been produced because it would be impossible to produce them all.
39 The second factor he relied upon concerned the submission that this is the first Hastings-Bass application in Guernsey. He was critical that HMRC has declined many opportunities to participate in similar proceedings in England and elsewhere. He suspects that the motive of HMRC is to seek to argue that the Hastings-Bass principle should be interpreted more narrowly in Guernsey than elsewhere. HMRC’s Tax Bulletin, Issue 83, at 1292–1294 (2006), indicated HMRC’s views on some aspects of the principle. HMRC wrote (op. cit., at 1293 [right-hand column]):
“An interesting, but perhaps not surprising, feature of the majority of these cases is that the unintended consequence of the mistake by the trustees was a liability to tax. For this reason HMRC have [sic] been interested in this area of the law, as it develops and is shaped by the courts. In recent years it has been the usual practice of HMRC to decline invitations to be joined as a party in cases where the court is being asked to set aside a transaction in reliance on the principle. However, in Sieff v. Fox Lloyd, L.J. observed in paragraph 83 that the court’s task might be easier in some cases if HMRC did not always
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decline the invitation to take part in cases of this kind. In the light of that observation, and our increasing concern (which is shared by many commentators) that the principle as currently formulated is too wide in its scope, HMRC will now give active consideration to participating in future cases where large amounts of tax are at stake and/or where it is felt that we could make a useful contribution to the elucidation and development of the principle. We will be particularly ready to intervene in cases where there would otherwise be no party in whose interest it would be to argue against the application of the principle.”
40 Advocate Davies submitted it cannot be just and convenient to allow HMRC to come to Guernsey to argue for a narrower interpretation of the principle than applies in HMRC’s home jurisdiction. With regard to the amount of tax at stake, he pointed out that in the Seaton (5) judgment in Jersey the amount of tax involved appeared to be three times the amount concerned in Guernsey, yet HMRC declined the opportunity to intervene.
41 The third factor to which Advocate Davies drew attention was the risk of a multiplicity of proceedings. Advocate Davies regarded HMRC’s comment that it would not be bound by the decision as to the validity of the distributions if it were not allowed to participate in the hearing as being in the nature of a threat. He was surprised that HMRC should issue a threat in such a manner and that HMRC would not respect a decision reached by the Royal Court when it is clearly the court of competent jurisdiction to deal with matters arising under the trust. He criticized HMRC for being coy in not identifying what the tax consequences of the court’s decision will be and by reserving its position in the manner indicated in Mr. Hart’s affidavit.
42 The fourth factor argued was that it would be unfair for HMRC to be joined, as its intervention would add unnecessarily to the length and expense of the proceedings. For example, the proposed hearing date for the application of May 28th, 2009 would almost inevitably have to be vacated if HMRC were allowed to intervene.
43 The fifth factor was that it would be unfair on the parties, and in particular Mr. Gresh, for HMRC to be given the opportunity of indirectly enforcing what is a foreign revenue law. The substance of the intervention was to enable HMRC to preserve or establish a tax liability, so that HMRC could then collect the tax due in its own home jurisdiction. He referred to Dicey, Morris & Collins, 1 The Conflict of Laws, 14th ed., para. 5–023, at 102 (2006):
“5–023 Direct enforcement occurs where a foreign State or its nominee seeks to obtain money or property, or other relief, in reliance on the foreign rule in question. But indirect enforcement is also prohibited, for a foreign State cannot be allowed to do indirectly
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what it cannot do directly . . . Rule 3(1) relates only to enforcement, but it does not prevent recognition of a foreign law of the type in question, and it is sometimes difficult to draw the line between an issue involving merely recognition of a foreign law and indirect enforcement of it.”
He said this is plainly an example of indirect enforcement of a foreign revenue law. HMRC are seeking to influence the outcome of the application before the Guernsey court and are threatening not to be bound by the court’s decision if they are not allowed to intervene. It is distinguishable from the facts of In re State of Norway’s Application (Nos. 1 & 2) (6). HMRC’s participation in the Guernsey application would be different, and would go beyond, an application for the provision of information.
44 Advocate Davies also referred to a recent decision of the Royal Court of Jersey: In re Ellastone Ltd. (1). HMRC had asked the English solicitors acting in the matter for an adjournment whilst it considered leave to intervene. It is implicit in the judgment that the court declined to do so in reliance upon the comments at para. 5–020 and subsequent paragraphs of Dicey, Morris & Collins.
Crown Advocate Nicol-Gent’s submissions as amicus curiae
45 In his helpful submissions as amicus, Crown Advocate Nicol-Gent adopted the arguments put forward by Advocate Davies on behalf of Mr. Gresh. He submitted that HMRC are seeking to enforce indirectly UK revenue law through their participation in the Guernsey proceedings. HMRC’s application therefore falls squarely within the rule in Govt. of India v. Taylor (2). Although in In re State of Norway’s Application (6) the law was developed to permit evidence gathering for use in the home jurisdiction of the applicant, it was not analogous to the situation in the present case where HMRC is not seeking to gather information for use in proceedings elsewhere, but is seeking to influence the outcome of the case and, furthermore, to influence the development of Guernsey law as to whether it should apply the rule in Hastings-Bass (3) and, if so, how it should interpret that rule.
46 Interestingly, Crown Advocate Nicol-Gent also questioned whether In re State of Norway’s Application (6) would still be regarded as good law when governments, including the States of Guernsey, have negotiated tax exchange information agreements and there are statutory provisions in place to enforce evidence-gathering by foreign revenue collectors.
47 The amicus was concerned by the suggestion that HMRC would not consider itself to be bound by the decision of the Royal Court if it were not a party. He said that flew in the face of normal rules of comity between nations. It is also inconsistent with experience in other cases where
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Guernsey courts give recognition to the decisions of English courts and vice versa.
48 He was critical of HMRC’s apparent assumption that the Royal Court would be likely to follow English law in its interpretation of the rule in In re Hastings-Bass (3) when that is not necessarily the case as our trust law is statute-based and is not identical to English trusts law, and he mentioned, for example, the requirement of a trustee in Guernsey to act “en bon pére de famille.” Crown Advocate Nicol-Gent pointed out there was no requirement for there to be a defendant to the application. The court is being asked to exercise its supervisory jurisdiction in respect of trust matters and as such it assumes an inquisitorial role. Furthermore, the court will not grant the relief sought unless the applicant has made out a case to the satisfaction of the court.
Advocate Greenfield’s submissions on behalf of RBC
49 Having withdrawn its own Hastings-Bass application, RBC has adopted a neutral stance to Mr. Gresh’s application and has not objected to his using the affidavits and legal submissions filed by RBC in connection with the earlier application.
50 Advocate Greenfield made two observations. First, he assumed that HMRC’s position was that the Royal Court of Jersey’s judgment in Seaton (5) was wrong. Secondly, he refuted any suggestion of any fault on the part of RBC in making the distributions.
Advocate Harris’s submissions on behalf of HMRC in reply
51 Advocate Harris argued that the Seaton judgment is of no assistance to Mr. Gresh as there was no application before the Jersey Royal Court for HMRC’s joinder, and the court had heard no submissions from HMRC on the question of its joinder. Further, there does not appear to have been any discussion of the true nature of HMRC’s interest in the case, and none of the points raised or in issue in the present application by HMRC appears to have been considered. In any event, they were not fully or properly argued before the Jersey Royal Court.
52 Advocate Harris denied that there was any discrepancy between what is said in the judgment and in Mr. Hart’s affidavit as to the date on which HMRC was advised of the date of the hearing, which, he said, was only in late January—too late to participate.
53 Advocate Harris assumed it will be of assistance to the Royal Court to have a party to the proceedings who will be making competing legal submissions and testing the evidence and arguments of the other parties, especially as this is the first application in Guernsey seeking to apply the
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rule in Hastings-Bass (3) and as the scope of that rule is, to some extent, contentious.
54 He referred to the lecture or speech delivered by Lord Walker (then Sir Robert Walker) at King’s College, London on February 26th, 2002, in which he expressed some disquiet as to the manner in which the principle had been developed in the courts. Advocate Harris expressed surprise that the lecture had not been referred to by the other parties to the proceedings, especially as it is so well known and is referred to in many textbooks. He cited it in support of the proposition that there might be relevant authorities overlooked by the other parties which could be of assistance to the court in determining the scope of the principle.
55 Advocate Harris disputed Mr. Gresh’s submission that it would be unfair to him if HMRC is joined as a party. Advocate Harris submitted that it is not a proper basis on which to object to the joinder of a party.
56 As to the possibility that the joinder might cause delay in the outcome of the proceedings, Advocate Harris pointed out that two years have already elapsed since RBC became aware that there might be a problem, and more than two years have elapsed since the distribution was made. By comparison with the delays that have already occurred, any further delay resulting from the joinder of HMRC would not be significant.
57 He repeated a number of the submissions he had already made and asserted that the legal test as to whether HMRC has a sufficient interest in the application by Mr. Gresh is clearly made out. HMRC has a direct and immediate interest in the validity or otherwise of the distributions made by RBC to Mr. Gresh. The question of whether those distributions are valid or void is the very issue on which Mr. Gresh is seeking relief from the Royal Court in his application.
58 He repeated that HMRC’s legal rights to collect income tax may be affected by the outcome of Mr. Gresh’s application, but its proposed intervention does not amount to the direct or indirect enforcement of a foreign revenue statute as the concept of enforcement amounts to collection or recovery of tax, and there is no issue of that being pursued in Guernsey. Ascertaining the validity of the distributions assists in computing Mr. Gresh’s tax liability, but it does not amount to indirect enforcement.
Conclusion
59 I agree with Advocate Harris that each of the three limbs of r.37(1)(b)(ii) must be satisfied before I can grant HMRC’s application, but I am unable to agree with Advocate Harris’s submission that it is entirely clear that HMRC has an interest in the issue that is before the court in the Hastings-Bass application.
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60 Advocate Harris has carefully defined the issue as being the validity, or otherwise, of the distributions made by RBC to Mr. Gresh. I am not convinced that is the correct way of defining the issues, and I have endeavoured to clarify in my mind what the issues are.
61 My judgment is that in Mr. Gresh’s Hastings-Bass application, the issue before the court is whether RBC’s decisions to make the distributions to Mr. Gresh were made in such circumstances that the court should declare the distributions to be void ab initio. That requires the court to establish the circumstances in which the decisions were made and, in particular, to examine the information that was then available to RBC. The court will then have to decide whether, as a matter of Guernsey law, it has the power to set aside the decisions in such circumstances, and, finally, if it does have such power, it will have to decide whether to exercise its discretion to set aside the decisions in this case.
62 The parties who are directly affected by the Hastings-Bass application are RBC, Mr. Gresh as a beneficiary of the trust, and any other beneficiaries. (When RBC tabled its own Hastings-Bass application, I was satisfied that no other beneficiaries needed to be joined as parties. I have not addressed that issue with Mr. Gresh’s counsel in relation to Mr. Gresh’s application, but I will do so once I have delivered this judgment.) The issue is governed by Guernsey law and the Royal Court is the court of competent jurisdiction to deal with the issue.
63 RBC, as trustee of a Guernsey trust, is entitled to have regard to the tax consequences of any distribution it may make to a beneficiary and is entitled to administer the trust in a way that is tax efficient, in order to maximize the benefits available for a beneficiary. In doing so, it is entitled to seek assistance from the Royal Court if it so wishes. However, it is not for the Royal Court to determine the tax liability that may be incurred by a beneficiary who receives a distribution in another jurisdiction.
64 On the other hand, the issue between HMRC and Mr. Gresh is whether he has, or will have, any liability to UK income tax arising from the distributions and/or from the scheme that is now proposed. It appears that Mr. Gresh does not dispute the contention made by HMRC (in the passage from its first skeleton argument that I quoted at para. 24 above) that, at present, the distributions represent taxable income. The question whether any tax liability will arise from the scheme that is now proposed if Mr. Gresh’s Hastings-Bass application succeeds is a matter of UK law which will not be determined by the Royal Court, especially as HMRC has expressly reserved its view.
65 I have therefore concluded that the issue to be determined in the Hastings-Bass application is not the issue that is to be determined between HMRC and Mr. Gresh. Even if I am wrong and it could properly be said that the question of Mr. Gresh’s UK income tax liability arises from,
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relates to, or is connected with the subject-matter of the Hastings-Bass application, the requirements of r.37 of the 2007 Rules would not be satisfied because that question will not be determined by the Royal Court.
66 Next I have to consider whether the third requirement of r.37 is satisfied: namely, that it would be just and convenient for HMRC to be joined.
67 In reserving its view as to the tax consequences of the proposed scheme, the only concession that HMRC has made is that if it is allowed to intervene and make submissions, it will accept the decision of the Guernsey courts as to the validity or otherwise of the distributions; otherwise, it will not be bound by the Royal Court’s decision.
68 HMRC says that the question of the validity or otherwise of the distributions may have to be litigated separately, in proceedings before the Special Commissioners. I do not understand why that should be so when the Royal Court is the court of competent jurisdiction to determine that question. I am surprised that HMRC considers it will not be bound by the decision, but such an attitude does not, in my opinion, entitle it to join in the Guernsey proceedings. I accept all that Crown Advocate Nicol-Gent said about the comity between nations and the respect that courts normally have for each other’s decisions.
69 I reject HMRC’s submission that without the participation of HMRC, Mr. Gresh’s Hastings-Bass application would not be effectively defended. There has been no suggestion that RBC and Mr. Gresh have failed in their obligation to make full and frank disclosure of all relevant evidence; all the relevant evidence will therefore be before the court. The court is able to adopt an inquisitorial role if necessary. I am not aware that there are any substantial factual disputes that will have to be determined, but, if necessary, the court can ask the amicus to assist. (After this judgment has been delivered, I will discuss with counsel for Mr. Gresh and RBC whether to involve the amicus further.)
70 Advocate Harris argued that it is necessary for HMRC to intervene so as to ensure that the court correctly interprets the legal principle involved, especially as the Hastings-Bass (3) jurisdiction has developed on a piecemeal basis and also because the question of whether the distributions are void or merely voidable requires careful consideration.
71 As I have said, these issues are governed by Guernsey law, so the court will have to establish what the law of Guernsey in this area is; it will not simply be applying English law. In doing so, the starting point is to look at the law of similar jurisdictions. The Judicial Committee of the Privy Council recognized, in Vaudin v. Hamon (10) ([1974] A.C. at 581–582, per Lord Wilberforce), that legal arguments may be based on analogy with the law of similar jurisdictions and may have force if—
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“. . . the system of law to which appeal is made in general, or the relevant portion of it, is similar to that which is being considered, and then that the former has been interpreted in a manner which should call for a similar interpretation in the latter.”
72 Further, the Guernsey Court of Appeal discussed the influence of English law on our law of trusts in Stuart-Hutcheson v. Spread Trustee Co. Ltd. (7) (5 ITELR 140, at para. 20):
“That, prior to the 1989 Law, trusts had become part of Guernsey law is not in dispute; what is in issue is the extent to which the general law of trusts in England had become part of the law of Guernsey. To that question the answer is, in my judgment, to be found by a consideration of the process by which trusts came to be part of Guernsey law. They did so because settlors established trusts, whether inter vivos or by will, the validity of which was recognised and, where necessary, enforced by the Royal Court. In addition the legislature in a number of Laws recognised and adopted the notion of trusteeship. In thus importing, as it were, the English concept of a trust and trustees those concerned must be regarded as having intended to introduce the trust concept with it usual incidents, unless they were inconsistent with some provision of Guernsey customary or statute law or otherwise inapposite or inapplicable.”
Hence, English decisions interpreting the Hastings-Bass principle will be a starting point, but they will need to be considered in the light of Guernsey customary and statutory law. HMRC can make its views known to the Royal Court even if it is not joined as a party.
73 HMRC has been notified of Mr. Gresh’s application; hence, it has the opportunity, if it wishes, to make written submission on the law which the court will take into account. Advocate Harris was concerned that there may be relevant authorities not drawn to the attention of the court. The court has given notice of these proceedings to HMRC so HMRC may make its legal submissions, drawing all the authorities it seeks to rely upon to the attention of the court and arguing for whatever interpretation it seeks to urge upon the court. Again, that will be considered by the court and, if it considers it necessary, it can seek the assistance of an amicus.
74 In my view, this is a case where HMRC is seeking indirectly to enforce a foreign revenue law. Its intention appears to be to make representations on what Guernsey law is or should be in this area, and it has already stated that courts elsewhere have gone too far in their development of the principle. Further, HMRC is seeking to argue that the distributions to Mr. Gresh should not be set aside, in order to maintain the liability to UK income tax that exists at present. I therefore believe that the case comes within the principle established in Govt. of India (2) and described in the extract from Dicey, Morris & Collins quoted above.
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75 Counsel devoted many of their submissions to the Jersey decision in Seaton (5). With respect to them, I wish to say that I am comforted to see that I have reached the same conclusion as the Royal Court of Jersey found in the Seaton judgment, but whilst I take note of the Jersey decision, since it gives little or no indication of how the issue was argued in the Royal Court of Jersey (if it was argued at all) the weight that I have been able to attach to the decision is limited and I have therefore reached my findings independently of that decision.
76 I therefore dismiss the application by HMRC. If there are any applications arising from this decision, they are to be submitted in writing. I direct counsel for Mr. Gresh to list his application in the Interlocutory Court on Friday, May 22nd for further directions. I ask counsel for RBC and the amicus also to be present.
Application dismissed.
2010
Law Report
None
Guernsey Law Reports 2009-10 GLR 216