FS Capital Ltd & Ors v Adams & Ors [2025] EWCA Civ 53
The Court of Appeal has dismissed the appeals brought against Edwin Johnson J’s decision that the sale of loan assets with a book value of £410m from three Jersey-law trusts was void for an improper purpose, and that the recipient was liable to restore those assets to the trusts.
The Court of Appeal’s judgment addresses in particular:
- The threshold of knowledge applicable to the bona fide purchaser without notice defence;
- Whether the exercise of a power for an improper purpose is void or merely voidable; and
- The circumstances in which a retiring trustee will be liable for breaches of trust committed by its successor.
The c. 700 claimants, represented by Hugh Miall and James Fennemore, were beneficiaries of the three trusts, which formed part of Employer-Financed Retirement Benefit Schemes. They were also the debtors in respect of the loan assets which had been settled onto the trusts as part of loan schemes, and which were subsequently impacted by the Loan Charge.
Pinotage Trustees Sarl (“Pinotage”), a Swiss Trust Company, was appointed trustee of the trusts in January 2018 to assist with the implementation of a scheme which sought to avoid or mitigate the Loan Charge. After the scheme failed to gain traction with the beneficiaries, FS Capital Limited (“FS Capital”) was incorporated by associates of the trustee in order to purchase the loan assets from the trusts. Shortly prior to the sale, Pinotage retired as trustee in favour of a PTC controlled by the same individual.
The book value of the assets sold was over £410m. However, the consideration payable by FS Capital was just £33,000 of initial consideration for each trust, and a potential further sum capped at £392,011.31 in respect of each trust, to be payable from sums recovered from the debtor-beneficiaries by FS Capital. This capped sum was deliberately selected by the trustee to correspond only with the alleged liabilities owing to trust creditors, and not to exceed that sum, so that there would be no surplus received by the trustee to be held for the benefit of the beneficiaries, and the trusts would terminate for want of assets. The trustee never sought to obtain a valuation of the loan assets. The only trust creditors were (i) Pinotage (as trustee); and (ii) a Jersey law firm at which the director of the trustee was also a partner.
At first instance, Edwin Johnson J allowed the claims, determining that:
- The sale had been for an improper purpose, it being impermissible for the trustee to disregard the interests of the beneficiaries, notwithstanding the trustee’s argument that this was permissible on the footing that the trusts were cash-flow insolvent.
- The transaction was void in equity, rather than merely voidable, finding that a Jersey Court would follow Cloutte v Storey [1911] 1 Ch 18.
- FS Capital was not a bona fide purchaser for value without actual notice of the breach of trust, that being the applicable wording of the defence under Art. 55 of the Trusts (Jersey) Law 1984.
- FS Capital was therefore liable to restore the loan assets to the trusts. FS Capital and the former trustee, Pinotage, were both also held liable to pay equitable compensation to the extent that restoration of the assets was not possible.
The Court of Appeal dismissed the appeals of FS Capital and Pinotage, determining in particular that:
- It was not open to FS Capital to argue that it was a bona fide purchaser on the basis that its directors were unaware that the sale of the assets amounted to a breach of trust as a matter of Jersey law. Not only was that not the way their witness evidence had been presented (such that FS Capital had not established its case on the evidence), the judge had found that the directors were not satisfied that it was legitimate to disregard the interests of the beneficiaries as the trustees had. That being the case, FS Capital was aware that the transaction was “probably improper”, applying Sinclair Investments (UK) Ltd v Versailles Trade Finance Ltd [2012] Ch 453, such that it had sufficient notice of the breach of trust to preclude the bona fide purchaser defence.
- As a matter of Jersey law, the exercise of a power for an improper purpose is void, not voidable. The Court rejected FS Capital’s argument that the Jersey courts would not follow Cloutte v Storey [1911] 1 Ch 18 (a decision which has occasionally been criticised in other judgments and academic writings). The Court of Appeal determined that Cloutte was not inconsistent with prior authority, and did not conflict with principle or policy. As Males LJ put it, “although it would be open to the Supreme Court to conclude that the improper exercise of a power is voidable rather than void, that would involve jettisoning authority going back over 300 years in an area of law which has traditionally attached importance to certainty and predictability. Sometimes it is more important that the law should be certain and predictable than that it should be perfect.”
- Pinotage was liable for the breaches of trust committed by its successor trustee, the PTC. A retiring trustee will be liable for breaches of trust committed by its successor if those breaches of trust were contemplated by the retiring trustee, even if it has an innocent purpose for wishing to retire. Trustees have a duty to safeguard the trust fund, and jeopardising that safety by retiring, even for legitimate reasons, in favour of a new trustee which it contemplates will commit a breach of trust will render the retiring trustee liable for its successor’s breaches. In any event, the reason that Pinotage had resigned in favour of the PTC was so that the transaction could continue to go ahead, so it had both contemplated and intended the breach of trust.
Hugh Miall and James Fennemore, instructed by Morgan Rose Solicitors, acted for the successful respondents.
