Re Pauling's Settlement Trusts; Younghusband v Coutts & Company

The Judgment which I am about to read is the Judgment of the Court, which deals with and resolves all the points which have been argued except one, and in relation to that one there is, unhappily, a disagreement between the members of the Court, and on that one point we will deliver separate Judgments when I have read the Judgment of the Court

This is indeed a sorry story, and one which reflects no credit at all on any of the parties to it. When Miss Pauling, the plaintiffs' mother (and we shall refer to her throughout as "the mother") married their father (to whom we shall refer as "the Commander) she was a young lady of considerable fortune. She was marrying a naval officer who had almost no fortune at all, and by the wisdom, no doubt, of her parents, it was decided to vest her fortune in trustees of the trusts of a marriage settlement. The whole object of this transaction was to prevent the use (or rather misuse) of the lady's capital for the very purposes for which in fact it has been very largely frittered away, that is, in the ordinary living expenses of the family. Apart from a power to raise £10,000 out of the settlement (which had been exercised long before the history of this action starts) it was intended that the mother should have nothing more than the income during her life, and she was restrained from anticipating that.

In June of the year 1948 the trust funds were intact, and amounted to over £70,000. By June 1954 the Bank had raised and paid away over £29,000 from the capital of these funds in purported exercise of a power of advancement, and there was nothing whatever left to show for it. How had this melancholy event happened? it was in part due to a misunderstanding of a power of advancement contained in the settlement, which was in rather unusual form, and later on to its plain misuse, but also was largely due to the charm of manner and powers of persuasion of the Commander. The learned trial Judge has found the Bank liable to replace nearly £15,000 as having been expended in breach of trust for which they can be compelled to account. Both parties appeal.

The relevant transactions over this period of six years are many, and involve each of the four children of the marriage. Different questions arise in respect of most of these transactions, and accordingly we propose in this Judgment first to set out the basic facts, than to state our view of the legal questions that have been argued before us, and finally to deal seriatim with the facts of each advance and to apply the law accordingly

The plaintiffs, the children of the Commander and the mother, are: (1) A son, Francis, born on the 15th October, 1920; (2) A son, George, born on the 11th October, 1925; (3) A daughter, Ann (now Mrs Broadbent) born on the 24th March, 1928; (4) A son, B Anthony, born on the 15th June, 1950.

As already stated, the marriage settlement was of funds supplied entirely by the mother. The defendants, Coutts & Company (to whom we shall refer as "the Bank") have all along been the sole trustees. Apart from the special power to raise £10,000 for the mother's use which we have already mentioned, the settlement followed the usual lines of such an Instrument. The mother had the income of the trust fund for life without power of anticipation and after her death her husband was to have an annuity of £500 a year. Provision was also made for the mother to have power to appoint a life interest in half of the trust fund to any surviving husband. Subject thereto, the trust fund was to be held in trust for the children or remoter issue of the mother, whether by the intended or any future marriage, in such shares as the mother might appoint, and in default of appointment the children were to take in equal shares on attaining the age of twenty-one, or being female marrying under that age. Clause 11 of the settlement, under which the Bank purported to act in making the advances complained of, provided as follows: "It shall be lawful for the trustees at any time or times after the death of the wife or in her lifetime with her consent in writing to raise any part or parts not exceeding in the whole one-half of the then expectant or presumptive or vested share of any child or more remote issue of the wife in thesaid trust premises under the trusts hereinbefore oontained and to pay the same to him or her for his or her own absolute use or to pay or apply the same for his or her advancement or otherwise for his or her benefit in such manner as the trustees shall think fit…. ". By clause 14 power was conferred on the trustees during the life of the mother, and with her consent in writing, to lay out a sum not exceeding £10,000 in the purchase of a house as a residence for the wife, and in its decoration, repair or improvement, provided that such house was situated in England, Wales, Scotland or Ireland. Lastly, provision was made for the Bank to act as bankers in respect of the trust funds without being liable to account fox profits, and to be remunerated for their services in accordance with their published scale of fees. Messrs Charles Russell & Co. were nominated as solicitors to the trust with permission to the Bank to consult its own solicitors in any case in which it should think fit. These were Messrs Parrer & Co.

It should at this stage be stated that at all materlal times the mother had an account with the Bank. The Commander did not have any separate bank account with the Bank, but he was authorised to draw on the mother's account, and it appears that it was he who largely controlled it. During most of the time with which we are concerned this account was substantially overdrawn.

In addition to the funds subject to the settlement, the mother also enjoyed a small life interest under the will of her deceased father. There were also certain shares standing in the joint names of the Commander and his mother. Apart from these small additional sources of Income, the family were wholly dependent on the income derived from the marriage settlement. The evidence shows that the family were quite unable to adapt themselves to the changed conditions of life after the last war, and expected to continue on the scale of life suitable between the wars, with the result that the available income was always overspent so that the Commander was always hard up for money.

Now as to the questions of law involved in this appeal. First as to the true meaning and intent of the power in clause 11. This power has been accepted as containing two limbs, first a power with the consent of the mother in her lifetime to raise any part or parts not exceeding in the whole one-half of the expectant, presumptive or vested share of any child, and to pay the same to him or her for his or her absolute use, and, secondly, the more usual power to pay or apply the same for his or her advancement or otherwise for his or her benefit in such manner as the Bank might think fit. It was argued that the power contained in the first limb was wider than that in the second, although it was conoeded in both sides that in both cases the power was fiduciary

Having regard to the very wide interpretation given to the statutory power (which approximates to the second limb in Pauling's Settlement) by their Lordships' House in re ( Pllklngton 1962 volume 3 Weekly Law Reports, page 1051) we cannot see that the ambit of the first limb of the power substantially differs from that of the second limb. But, as all the advances were made in purported exercise of the first limb, we must examine the argument upon it. Being a fiduciary power, it seems to us quite clear that the power can be exercised only if it is for the benefit of the child or remoter issue to be advanced or, as was said during argument, it is thought to be "a good thing" for the advanced person to have a share of capital before his or her due time. That this must be so, we think, follows from a consideration of the fact that the parties to a settlement intend the normal trusts to take affect, and that a power of advancement be exercised only if there is some good reason for it. That good reason must be beneficial to the person to be advanced; it cannot be exercised capriciously or with some other benefit in view. The trustees, before exercising the power, have to weigh on the one side the benefit to the proposed advances, and on the other hand the rights of those who are or may hereafter become interested under the trusts of the settlement. We reject Sir Milner Holland's argument on behalf of the Bank tothe effect that an advancement can be made under the first limb which is not for the benefit of the advanced person. Furthermore, it is clear that the power under the first limb may be exercised, if the circumstances warrant it, either by making an out and out payment to the person to be advanced, or for a particular purpose specified by...