FS Capital Ltd v Alan Adams

Hearing dates: 17 & 18 December 2024

Approved Judgment

This judgment was handed down remotely at 10.30am on 28 January 2025 by circulation to the parties or their representatives by e-mail and by release to the National Archives.

These appeals arise out of transactions (together referred to as the “Disposal”) by which FS Capital Limited, (“FS Capital”) (the Appellant in Appeal number 2289 — the “FS Capital Appeal”) purchased loan assets from three Jersey trusts (the “2011 Trust”, the “2012 Trust” and the “2014 Trust”) (together referred to as the “Trusts”). Basic consideration was paid and deferred contingent consideration was capped at a maximum of £1,176,033.93 which was the sum allegedly owed to the Trusts' creditors. The book value of the loan assets was £410 million. That figure was subsequently reduced to £279 million.

Mr Justice Edwin Johnson, in a comprehensive and careful judgment, decided, amongst other things, that the Disposal was effected for an improper purpose and, as a result, constituted a breach of the Trusts and was void in equity. He also decided that FS Capital was not a bona fide purchaser for value without notice in relation to the loan assets and that it held them subject to the beneficiaries' equitable interests and was required to reconstitute the Trusts.

The appeals raise a number of complex issues in relation to Jersey trust law. The first is whether the judge erred as a matter of Jersey law in concluding that it was only necessary to have actual knowledge of the facts which constituted the impropriety of the Disposal in order to be fixed with actual notice for the purposes of Article 55, Trusts (Jersey) Law 1984 rather than actual knowledge of those facts and knowledge that the impropriety was also a breach of trust, as a matter of Jersey law. The second issue is ancillary to the first. It is whether the judge erred in deciding that FS Capital had failed to discharge the burden of showing that it had no actual notice that the Disposal was made in breach of trust. It is said that the judge should not have resorted to the burden of proof in order to determine the matter. The third issue is whether a transaction arising from the exercise of a fiduciary power for an improper purpose is void or voidable under Jersey law. That includes the ancillary question of whether Jersey law is the same as English law in this respect or merely takes note of the position in English law when determining the question afresh. The last issue in the FS Capital Appeal proceeds on the basis that the judge should have found that the Disposal was voidable. On that basis, it is said that in the exercise of his discretion he should not have set it aside.

A further issue arises on the second appeal by Pinotage Trustees Sarl (“Pinotage”) numbered 2290 (the “Pinotage Appeal”). It is whether it was open to the judge to decide that Pinotage retired as trustee of the 2011 Trust and the 2012 Trust to facilitate a breach of trust.

Facts in outline

The background to this matter is highly complex and detailed. Reference should be made to the judgment for the full details. I shall repeat only the essential facts here.

The Trusts were in the same material terms. Each of the Trusts formed part of an Employer-Financed Retirement Benefit Scheme (“EFRBS”). EFRBSs were created by the Income Tax (Earnings and Pensions) Act 2003. They were schemes for the provision of certain benefits to employees or former employees of employers but were not registered pension schemes. In this case, the EFRBSs were used to facilitate loan schemes, pursuant to which participants would receive remuneration from their employer by way of loans, which would not be subject to income tax. The employer would generally be an umbrella company which provided employment to a number of individuals. The umbrella company would then provide the services of those individuals to the third parties for whom the individuals were working, pursuant to contracts entered into between the umbrella company and the relevant third parties. Those participating in such schemes included employees in the strict sense of the word, and contractors. The object of such schemes was to avoid tax by treating income paid to employees or contractors as loans provided through the mechanism of the relevant loan scheme.

In this case, the loan schemes were implemented by the settlors of the Trusts, as employers, loaning sums to the individuals participating in the relevant loan schemes, as employees, by way of remuneration. The beneficial interests in the rights to repayment of the loans were then settled into the Trusts, on trust for the benefit of the participants. In the case of two of the Trusts, the legal interests in the rights to repayment of the loans were also subsequently settled into the Trusts. The judge referred to the rights to repayment as “Loan Assets”.

The Loan Assets settled on the Trusts amounted to a substantial loan portfolio involving over 2,000 participants/beneficiaries. The judge referred to those participants from time to time as “the Beneficiaries”. In fact, the classes of beneficiaries under the Trusts were more widely expressed than simply the participants under the scheme.

The Loan Assets were unsecured and interest free until they fell due for payment, which was on demand. As a result, the loans did not produce a regular income to meet the costs and expenses of administering the Trusts.

The Trusts were: (1) the Anthony Doull Employer-Financed Retirement Benefit Scheme which was established on 25th November 2011 (the 2011 Trust) of which the original settlor and Protector was Anthony Doull (trading as K2 Contractor Solutions) and the original trustee was IFM Corporate Trustees Limited (“IFM”), a Jersey registered company; (2) the K2 Contractor Solutions Employer-Financed Retirement Benefit Scheme 2012 which was established on 14th May 2012 (the 2012 Trust) of which the original settlor and Protector was Lighthouse Trustees Limited (“Lighthouse”), a Jersey registered company and the original trustee was IFM; and (3) the Hyrax Resourcing Employer-Financed Retirement Benefit Scheme which was established on 25th September 2014 (the 2014 Trust) of which the original settlor and Protector was Hyrax Resourcing Limited (“HRL”), an English registered company and the original trustee was HRL Trustees Limited (“HRL Trustees”), a Jersey registered company. IFM and HRL Trustees were companies within the Praxis IFM Group (“Praxis”). HRL Trustees was dissolved on 7th June 2019.

A measure known as the “Loan Charge” was introduced in the Finance (No. 2) Act 2017. It created a new, retrospective charge to income tax of 45% on all relevant loan payments made since 1999, to be payable in one tax year (2018–2019). It applied where loans were outstanding as at 5 April 2019. As initially enacted, the Loan Charge applied to loans made on or after 6th April 1999. Those facing the Loan Charge were given a choice of settling with HMRC, paying off the loan balance, or paying the charge. These provisions were amended subsequently. Once the Loan Charge was enacted, loan schemes, including those subject to the Trusts, were no longer viable.

Pinotage was appointed as trustee of each of the Trusts on 22 January 2018. At the same time, PNG Services Limited, the Third Appellant in the Pinotage Appeal, was appointed as Protector of the 2011 and 2012 Trusts. HRL remained as Protector of the 2014 Trust. Each of the Trusts was cash-flow insolvent at the time Pinotage was appointed as trustee.

At that stage there were 2,145 Beneficiaries of the Trusts. In its circulars to Beneficiaries, Pinotage explained the effect of the Loan Charge which would take effect in April 2019, sought “know your client” information and set out the options available to Beneficiaries. They were stated as: (i) settlement with HMRC; (ii) repaying the loans on or before 5 April 2019; (iii) payment of the Loan Charge; or (iv) personal insolvency. By the end of 2018 a large number of Beneficiaries had still failed to engage with Pinotage or provide “know your client” information. Mr Reid, a solicitor whose role is explained below, considered that Pinotage had little option other than to call in the Beneficiaries' loans or sell the Loan Assets to a third party and he identified the latter as a commercial opportunity.

The full details of the subsequent dealings in relation to the Trusts are set out at [15] – [18] of the judgment and reference should be made to those paragraphs. In outline, they were as follows:

(1) In relation to the 2011 Trust:

a. on 25 June 2019 the Loan Assets were assigned by IFM to Pinotage;

b. on 30 June 2019 a company called Pinotage (PTC) Limited, a British Virgin Islands registered company, incorporated on 21 June...