Duty bound: Hughes v Bourne

In Hughes v Bourne [2012] EWHC 2232 (Ch), Henderson J was required to consider the nature of a power of appropriation. Section 41(1) of the Administration of Estates Act 1925 gives to a personal representative the power to: “...appropriate any part of the real or personal estate, including things in action, of the deceased in the actual condition or state of investment thereof at the time of appropriation in or towards satisfaction of any legacy bequeathed by the deceased, or of any other interest or share in his property, whether settled or not, as to the personal representative may seem just and reasonable, according to the respective rights of the persons interest in the property of the deceased.”

A proviso to the sub-section requires the consent of certain person to any such appropriation. By virtue of sub-section (4), any such appropriation is binding on all interested persons whose consent is not required.

Fair share

Powers in like form are, as in this case, often conferred upon trustees. The issue before Henderson J, which arose in the context of an application by the trustees of settlement for directions that they be permitted to sell shares at a particular price and in particular proportions from specified sub-funds, turned on whether or not there had been a valid appropriation of shares to the several sub-funds.

The principal asset of the settlement was a controlling, majority holding of 19,233 (or approximately 51.23 per cent) of the issued ordinary shares in a company called NWN Media Limited (‘the company’), which published local newspapers in Wales, Chester, Shropshire and Herefordshire.

Eric Thomas (‘the settlor’) had inherited the company from his father in 1959 and, in 1961, had created the settlement by settling shares in the company upon discretionary trusts in favour of a class of objects comprising his three daughters, any future children on his (of which there were none), his remoter issue born within a specified period, and any spouse, widow or widower of the above.

The trustees were given the power to sell the shares, in common with any other trust investments, with the consent in writing of the settlor during his lifetime and thereafter at their discretion. The settlement also gave the trustees the powers of appropriation, and other incidental powers, conferred on personal representatives by section 41 of the Administration of Estates Act 1925 but without any of the consents required by that section.

On 12 July 2012, a formal offer was made by Tindle Newspapers Limited to the trustees, offering to buy as many shares as the trustees were willing to sell, provided that Tindle thereby acquired at least a 51 per cent shareholding in the company, after taking account of any other shares bought at or about the same time from other shareholders. The offer was to remain open until 30 July.

The offer price was commercially sensitive and was not disclosed in the judgment of Henderson J. The trustees were independent of the settlor’s family, had been in office for more than twenty years, had experience of the newspaper industry and held or had held office in the company. They were minded to accept the offer, which they viewed as exceptionally favourable, particularly given the decline in profits and turnover in the newspaper industry generally.

The trustees were supported in that view by one of the settlor’s daughters, Mrs Woodward, and her two adult children. They were opposed, however, by the other two daughters, Mrs Bourne and Mrs Moss, and their respective children. The trust fund was divided into three sub-funds, which were originally of equal size, and which reflected appointments made in favour of the Woodward, Bourne and Moss families respectively. There was an alleged appropriation in 1993, whereby the shares in the company had been divided roughly equally between the three sub-funds.

Common cause

The Woodward family owned, either as part of their sub-fund or through individual holdings, 8,717 shares, which they wished to sell to Tindle. However, the minimum number of shares that Tindle would need to acquire was 10,429 shares, or approximately 54 per cent of the trustees’ holding. Therefore, in order to accept the offer, the trustees would also have to sell some of the shares allegedly appropriated to the Bourne and Moss funds.

The shares allegedly appropriate to those two funds, together with individual holdings of members of the Bourne and Moss families, amounted to about 53.3 per cent of the shares. Therefore, if the Bourne and Moss families were to make common cause and were entitled to call on the trustees to transfer to them the shares contained in their respective funds, they would have a controlling interest in the company and would be able to prevent the sale of the shares to Tindle. Such a sale would, of course, convert their combined majority shareholding into a less valuable minority holding.

At a meeting to consider the future of the trust’s shareholding in the company, the trustees decided that selling the shares in the Woodward fund, together with sufficient shares in the Bourne and Moss funds to provide a majority shareholding to Tindle, was the best solution to balancing all beneficiaries’ interests.

The beneficial interests in the three funds were vested absolutely and indefeasibly because all of the beneficiaries were of full age and capacity. (The class of beneficiaries of the Woodward fund would include any further children born to Mrs Woodward but, given that she was aged sixty-eight, it was common ground that this possibility could be ignored and the class of beneficiaries could be considered closed for practical purposes.) Therefore, the question of whether the Bourne and Moss families could call for the shares apparently contained in their respective funds (and, hence, prevent a sale to Tindle) would turn on whether or not the 1993 appropriation had been valid and effective.

Seeking approval

It was held by Henderson J:

1.The trustees had not surrendered their discretion to the court but instead were asking the court to give its blessing to their proposed course of action. The application therefore fell within the second category identified by Robert Walker J in an unreported case cited by Hart J in Public Trustee v Cooper [2001] WTLR 922. In such a case, the court must be satisfied that the trustees have in fact made the decision for which approval is sought.

Second, the decision must be ‘one at which a reasonably body of trustees properly instructed as to the meaning of the relevant clause could properly have arrived’. Finally, the decision must not be vitiated by any conflict of interest. However, in the present case, there was a preliminary issue which, if determined in favour of the Bourne and Moss families, would make it impossible for the trustees to implement their decision and, hence, inappropriate for the court to grant the directions sought. The preliminary issue was whether or not the 1993 appropriation was effective, in which case the Bourne and Moss families would be absolutely entitled to ?the shares appropriated to their respective funds.

2. Before the alleged 1993 appropriation, each of the settlor’s three daughters had a life interest in a one-third share of the trust fund. This meant that each daughter had a one-third interest in the whole of the income, which was different to an interest in the whole of the income of a third of the fund. Therefore, absent an appropriation of particular assets to each of these shares, no family unit would together be absolutely entitled to any particular asset.

3. By an instrument in writing dated 26 January 1993 and described as, but not in fact, a deed, the trustees had purported to exercise the power of appropriation conferred on them by the settlement to appropriate the shares equally, or as near as equally as possible, ‘in satisfaction’ of the three shares. The instrument was endorsed by each of Mrs Woodward, Mrs Bourne and Mrs Moss in terms confirming their consent to ‘the appropriation of the trust fund of the settlement in the manner set out in this deed’.

Henderson J held that the instrument did what it purported to do. He rejected the submission made on Mrs Woodward’s behalf that the appropriation did not change the nature of her beneficial interest. It was argued that the section 41 power was limited to the transfer or allocation of assets in satisfaction of pre-existing beneficial interests, and that it was not a dispositive power that could be used to transfer beneficial interests from one asset to another.

It merely allowed a personal representative to contract with a legatee to provide a particular asset in full or partial satisfaction of the legacy. The judge rejected this submission. He did not accept that the section 41 power was confined to transactions of contractual or quasi-contractual nature. It was desirable that the power should be construed ‘in a way which promotes practical and convenient trust administration’.

Therefore, in the absence of authority to the contrary, the power was wide enough, in an appropriate case, to replace a beneficial interest in part of the whole of the income of a fund with an interest in the whole of the income of an appropriated part.

The protection for beneficiaries lay not in adopting a narrow interpretation of the scope of the power but rather in the requirements for consent imposed by the section (albeit that these were expressly removed by the terms of the settlement) and in the requirement that the appropriation had to be one that ‘may seem just and reasonable’ to the trustee, according to the beneficiaries’ respective rights. Therefore, there was no reason to doubt that there had been a valid appropriation in 1993 and, accordingly, the Moss and Bourne families were absolutely entitled to ?the shares appropriated to their respective funds.

4. Even if he were wrong in that conclusion, Henderson J held that the three life tenants, who were the only people who could have possibly been prejudiced by a change in the nature ?of their income interests, made good any deficiency in the appropriation through their signature of the instrument of appropriation.

Joseph Goldsmith is a barrister at 5 Stone Buildings