Bhatt v Bhatt & Ors [2009] EWHC 734 (Ch)

Case No HC07C03456[2009] EWHC 734 (Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Venue Royal Courts of Justice, Strand, London, WC2A 2LLDate 3 rd April 2009
Before
Mr. Martin Mann QCsitting as a Deputy Judge of the Chancery Division
MRS SHANTABEN DURGASHANKER BHATT Claimant
Between
MISS HASMITA DURGASHANKER BHATTDefendantsMISS MRUDULA DURGASHANKER BHATTDefendantsMR HITESHCHANDRA (otherwise HITESH) BHATTDefendantsMRS NIRANJANA PUROHITDefendantsMR MUKUNDRAI(otherwise MUKUND) DURGASHANKER BHATTDefendantsMRS JOSNA (OTHERWISE JYOTSNA) VYASDefendantsMR ARVINDRAI (otherwise ARVIND) DURGASHANKER BHATTDefendantsMR ASHOKKUMAR (otherwise ASHOK) DURGASHANKER BHATTDefendants
Mr. John Smart (instructed Kotecha & Co) for ClaimantMr. Peter John (instructed by Malcolm Dear Whitfield Evans) for 1 st, 2 nd and 4 th to 6 th DefendantsHearing Hearing dates: 31 st March 2009, 1 st and 3 rd April 2009
JUDGMENT
[1]The claim before the court is for a variety of equitable relief including for rectification of the registered title to 33 Shirehall Park, Hendon, London NW4 2QN (“the Property”) and rescission of a number of documents (which, where the context admits, I shall refer to as “the documents”). The documents were all entered into as part of or consequential on the same transaction whereby, in summary, the claimant (“Mrs Bhatt”) sought to make future provision for her children out of her distributable estate (consisting at the time primarily of the Property) and to mitigate the incidence of inheritance tax (“IHT”), IHT which she believed arose on her late husband’s death on 28th December 2003 and which would arise on her own death should she not execute these documents. The documents she wishes to have rescinded are a declaration of trust (“the trust deed”), a deed of variation, a notice of severance and a Transfer of the Property from her as transferor to herself and the 3rd and 4th defendants as transferees. These are all dated 12th March 2004. The 3rd defendant and 4th defendant are two of the children of Mrs Bhatt by her late husband. The other defendants are their siblings.[2]The notice of severance, which recites that Mrs Bhatt and the 3rd and 4th defendants are or will be the proprietors of the Property and that they hold the Property, “as Tenants in Common and as Trustees in accordance with a Deed of Trust signed by them”, is expressed to be for the avoidance of doubt that, “As from 28th December 2003 the Property is held by the parties hereto upon trust to sell the same and to hold the net income until sale and the net proceeds of sale in trust for themselves as Trustees in accordance with a Deed of Trust duly executed by the parties and attached herewith.” The parties were Mrs Bhatt and the 3rd and 4th defendants. Terms of the notice of severance included that the parties were to apply to the Chief Land Registrar for the entry on the Register of appropriate restrictions relating to dispositions under which capital monies arise.[3]Although a deed of trust was not physically attached to the notice of severance, the declaration of trust to which I have already alluded and defined as “the trust deed” has been treated for the purpose of the proceedings as the trust deed to which the notice of severance refers as attached thereto.[4]The trust deed, which appears to have been duly executed by Mrs Bhatt and the 3rd and 4th defendants, declares trusts for Mrs Bhatt as to 50 % of the beneficial interest in the Property and for the 3rd and 4th defendants as trustees in respect of the other 50%, which 50%, under clauses 3(i), 3(ii) and 4, is to be held during the trust period (as defined) on the terms of a discretionary sub-trust. Under the discretionary sub-trust, the 3rd and 4th defendants or their delegates have a special power of appointment among all of the defendants (exercisable in favour of one or more to the exclusion of others but nevertheless revocable during the trust period).[5]Clause 6(a) of the trust deed declares residuary trusts of this 50% to be divided between the defendants as therein mentioned. There are gifts over in clause 6(b) covering alternative situations should any of the defendants either die leaving or die without leaving children.[6]Although clause 6(a) uses language which suggests the draftsman intended this 50% to vest absolutely it is clear from the trouble he went to in incorporating the special power that it was not his intention that these should vest in possession immediately but rather that they should vest in the future subject to the exercise of the special power.[7]Clause 5 of the trust deed provides, “The trustees acknowledge and agree and declare that [the Property] is home to [Mrs Bhatt and the 1st, 2nd and 3rd defendants] and they or each of them may continue to live in the property without paying any rent but they share all the outgoings and the maintenance and upkeep of the property. Any other potential beneficiary or beneficiaries [a reference to the defendants not so mentioned] shall accept this situation and requirement.” [Parenthesis supplied][8]It is common ground that besides other effects and consequences of these components of the transaction, clause 5 amounts arguably to a potentially exempt transfer in as much as it might be regarded by the Revenue as having created interests in possession in the Property in addition to her own in favour of the 1st, 2nd and 3rd defendants whereas they had had none hitherto, with potentially disastrous tax consequences.[9]Supplementing the claims for rectification of the Register and for rescission are claims for a variety of additional and ancillary relief among which is a claim by Mrs Bhatt for an order for possession of the Property against the 1st to 4th defendants, a claim that the 3rd and 4th defendants have no rights of occupation of the Property, claims for orders under section 13(7) of the Trusts of Land and Appointment of Trustees Act 1996 and for an order for sale.[10]Be this as it may, the parties have sensibly agreed before me to resolve their differences by reference to the narrower issue whether the documents should be or should not be set aside by the court in the exercise of its equitable jurisdiction to do so on well settled grounds, and to limit the evidence for that purpose to that to which I shall refer later in this judgment.[11]The bare factual basis on which it is asserted the court should exercise the jurisdiction is that of mistake although in this case it is asserted there were a number of crucial errors for none of which Mrs Bhatt can be blamed which led her to execute the documents in the mistaken belief that she needed to do so and that they would not have particular effects and consequences.[12]It is necessary to know a little about Mrs Bhatt and her family and of some of the arrangements which she and her late husband had made prior to his death for a proper understanding of the factual matrix leading up to and supporting the claim to rescission.[13]Mrs. Bhatt was born on 18th May 1929 in Kenya. She went to school for 5 years in Uganda and was not taught English. She was taught in Gujarati. She speaks a little English. Her ability to read documents written in English is limited. If shown a document she recognises some but not all words and her understanding of sentences is often rather limited. She came to the UK in 1978 with the defendants, her late husband having come over in 1976.[14]The Property had been rented from the local council from about 1981. Mrs. Bhatt and her husband decided to buy it under the right to buy scheme in 1992. She was then aged 63. Her husband was then aged 78. The purchase was completed on 19th August 1992. The Property was purchased in their joint names.[15]The price paid was £90,000. The purchase was funded in part from funds provided by Mrs. Bhatt’s brother (£45,100). £40,000 (or thereabouts) was raised on mortgage. The 2nd and 3rd defendants acted as guarantors. The mortgage was discharged in 2003.[16]Mrs. Bhatt’s late husband had made a will in 2001 under which he left her his entire estate should she survive him by 30 days. No grant was taken out.[17]Mrs. Bhatt and her late husband were initially beneficial joint tenants but the beneficial joint tenancy had been severed by notice in 2003. That notice had been drawn up by a solicitor, Mr Saujani, a sole practitioner, in fact the very solicitor who drew up the notice of severance signed on 12th March 2004, a notice which under the circumstances was otiose. He seems to have soon forgotten the earlier one despite it being clear on the evidence that he should have been reminded of its existence in 2004 before Mrs Bhatt signed its otiose successor.[18]Mrs. Bhatt sought Mr Saujani’s advice about how to deal with her late husband’s estate in March 2004. She was the sole executrix under the will but, as she put it in her witness statement, she did not understand anything about wills.[19]According to Mrs. Bhatt, Mr. Saujani advised her to speak to a tax advisor, a Mr. Kakad, who worked for a company called Millenium Financial Solutions. There followed a meeting at the Property during the course of which Mr. Kakad advised her that she needed to take urgent steps to avoid having to pay IHT. He told her that she would have a huge tax bill and that she might have to sell the Property immediately to pay it. He said he would liaise with Mr. Saujani and get him to prepare documents which would avoid this situation. Unsurprisingly, this had worried her a great deal, so much so that she accepted the advice in its entirety. In summary, this was that she should let her late husband’s half share of the house be put in trust for her children, that she should make a new will (she told him she wanted to leave everything to the 3rd defendant) and, on his asking her who lived in the Property with her and how she wanted her late husband’s share of the Property to be divided between the defendants, that his share should be divided as provided in due course in clause 6(a) of the trust deed.[20]The upshot of this was a meeting at Mr. Saujani’s offices on 12th March 2004 when the documents were signed. The 3rd defendant and Mr. Kakad had been in attendance at this meeting which I shall say more about later in this judgment. It suffices for the moment that Mrs. Bhatt asserts that Mr. Saujani did not go through the documents with her, that she would not have signed any of them had she known that they would not have saved her IHT or if it had been explained that any tax would not have been payable immediately, that she would never have signed them if she had known that she would not be able to sell the Property and buy a new one should she ever wish to do so or that she could not decide who lived in her own house.[21]To complete the picture, I should add that in a supplemental witness statement in answer to an assertion in a witness statement provided by Mr Saujani in which he vouchsafed that Mrs. Bhatt had received written advice in the form of a ‘financial review’ from Mr. Kakad, thereby implying that the financial review should have drawn the effects and consequences of the documents sufficiently to her attention, including, in particular, that she would not be chargeable to IHT on her late husband’s death, Mrs. Bhatt informed the court that she had not received the financial review, nor could she have read it anyway because it was written in English and that in English she could only understand simple sentences incorporating familiar words.[22]In summary, Mrs. Bhatt claims she was led to make mistakes which had she known the truth would have decided her not to sign the documents. The first mistake was the belief that she needed to take steps to mitigate the incidence of IHT on her late husband’s death when she had no need to do so on account of the surviving spouse exemption. Her second mistake was the belief that IHT would be the less or avoided on her death should she execute the documents, in particular, the trust deed. Her third mistake was that she would continue to have an untrammelled right to occupy and to exercise control over the Property during her lifetime and to sell it at any time of her choosing should she wish to do so without first having to obtain anyone’s consent.[23]The juridical basis on which equity will set aside voluntary transactions for mistake is well settled. See Gibbon v. Mitchell [1990] 1 WLR 1304 in which, at page 1309, Millet J (as he then was), after concluding a detailed examination of the authorities, said this:
“In my judgment, these cases show that, wherever there is a voluntary transaction by which one party intends to confer a bounty on another, the deed will be set aside if the court is satisfied that the disponor did not intend the transaction to have the effect which it did. It will be set aside for mistake whether the mistake is a mistake of law or of fact, so long as the mistake is as to the effect of the transaction itself and not merely as to its consequences or the advantages to be gained by entering into it.”
[24]One of the authorities Millet J had examined was Phillipson v. Kerry (1863) 32 Beav. 628, where a gift was set aside on evidence that the donor had thought its effect would be the same as a will. The ratio was that the consequences of the deed had not been fully explained to her and did not carry out her intentions.[25]Lewison J had occasion to examine Gibbon v. Mitchell recently in In re Griffiths [2009] 2 WLR 394, a case in which, by three potentially exempt transfers, property had been transferred into various trusts. The transferor had died of lung cancer within three years, so all three were chargeable to IHT. The executors applied to set aside the transfers on the ground they had been made under a mistake of fact. This was the transferor’s mistaken belief at the time he executed the transfers that there was a real chance that he would survive for seven years whereas in fact at that time, unbeknown to him, his health was such that he had no real chance of surviving for that long and had he known his life expectancy he would not have made the transfers.[26]Lewison J sought to identify the operative mistake which justified the intervention of equity. Commenting on the passage cited above in Millet J’s judgment, he said this, at paragraph 23:
“23. His Lordship's distinction between the effect of the transaction and its consequences or advantages has proved a difficult one to grasp. Davis J in Anker-Petersen v Christensen [2002] WTLR 313, Lloyd LJ in Sieff v Fox [2005] 1 WLR 3811 and Mann J in Wolff v Wolff [2004] STC 1633 have all expressed that difficulty. The principal debate has been whether a mistake by an individual (as opposed to a trustee) about the fiscal consequences of entering into a transaction counts as a mistake about the effect of the transaction or a mistake about its consequences or advantages. I do not need to resolve this debate. Mr Grierson said that a mistake about the fiscal consequences of entering into a transaction was enough to bring the jurisdiction into play even in a case involving an individual rather than trustees. But even if he is right, I do not think that this helps him on the facts of this case. The initial transfer of the shares into the discretionary trust was a chargeable transfer for the purposes of inheritance tax and was intended to be a chargeable transfer. So there was no mistake about its fiscal consequences. The grant of the deferred lease was intended to be a potentially exempt transfer. That is precisely what it was. There was no mistake about the immediate tax consequences of the grant. Similarly the intended effect of the transaction consisting of the transfer of Mr Griffiths's reversionary interest in the shares was intended to be a potentially exempt transfer for the purposes of inheritance tax. Again that is precisely what it was. There was no mistake about the immediate tax consequences of that transfer either. What was unexpected was Mr Griffiths's subsequent death just over a year later. Mr Grierson accepted, as I understood it, that if Mr Griffiths had been a hale and hearty young man and had entered into all the relevant transactions but fallen under a bus the following week, his executors would not have been able to ask the court to set aside the transactions on the ground of a mistake. I think that is right. The operative mistake must, in my judgment, be a mistake which existed at the time when the transaction was entered into. The mere falsification of expectations entertained at the date of the transaction is not, in my judgment, enough.”
[27]This, with respect, is reasoning which I shall gratefully adopt in my search for the operative mistake (if any) in the present case but before I do so I should for completeness refer to other dicta in Lewison J’s judgment which are equally illuminating. These hold that a mistake about an existing or pre-existing fact if sufficiently serious is enough to bring the jurisdiction into play. The pertinent passages are in paragraphs 24 and 25, where he says this: 29. "I think she executed the deed under a mistake with regard to the existing facts, and I cannot myself see that it is material whether that mistake arose from her being misinformed as to the true state of things, or from her state of mind being such that she had not, at that moment, knowledge of the true state of things. The absence of knowledge arose from her not bearing in mind, or not appreciating, that she had already appointed to the elder daughter a moiety of the fund, and in these circumstances I feel bound to hold, and, having regard to the evidence, I am glad to be able to hold, that this deed which it is sought to rescind was executed by Lady Hood under a mistake brought about by such circumstances as entitle her to the relief she seeks." “25 It is plain in my judgment that a mistake of fact is capable of bringing the equitable jurisdiction into play. All that is required is a mistake of a sufficiently serious nature. In my judgment a mistake about an existing or pre-existing fact if sufficiently serious is enough to bring the jurisdiction into play.”[28]Lewison J then examines what needs to be shown as the consequence of the mistake, citing the well known case of Sieff v. Fox [2005] 1 WLR 3811, in particular the analysis of Lloyd LJ in that case of the rule in In re Hastings-Bass, decd [1975] Ch 25, following which, referring to the higher and lower tests appropriate where trustees act under an obligation or voluntarily respectively, he concludes, at paragraph 27:
“In a case where it is an individual disposing of his own property, it seems to me that the higher test applies. Thus the claimants must show that if Mr Griffiths had been aware of the true facts he would not have acted as he did. I should add that I do not consider that it is necessary for the claimants to show what Mr Griffiths would have done if he had not made the mistake. It is sufficient for them to show that he would not have done what he in fact did. I say this because the evidence suggests that Mr Griffiths would have done nothing and simply left his widow to inherit under his will. But that course of action would only have been effective if (as actually turned out) Mrs Griffiths survived her husband. In the course of argument Mr Grierson preferred the suggestion that Mr Griffiths would have made lifetime gifts to his wife leaving it to her to enter into the transactions recommended by the tax consultants. The difficulty with this suggestion was that there was no evidence to support it. But it shows that there were at least two possibilities available to Mr Griffiths had he not entered into the transactions into which he did in fact enter.”
[29]I respectfully agree and again gratefully adopt Lewison J’s reasoning. Thus, if there was otherwise an operative mistake, the court must nevertheless be satisfied before exercising its jurisdiction that had Mrs. Bhatt known the true facts, in particular that there was no need for a notice of severance because one was already in existence, that the trust deed would deprive her of substantive rights which she would not have wished to give up and/or might have conferred rights which she had no intention of conferring and might thereby incidentally have caused one or more potentially exempt tax charges to arise in a variety of possible scenarios which I need not expand upon in this judgment, she would not have signed the documents.[30]I shall now turn to the evidence. Mrs. Bhatt’s witness statements are in English. However, I have heard a solicitor, Nayna Kotecha, the senior partner in Kotecha & Co, the firm of solicitors which has the conduct of the claim on Mrs. Bhatt’s behalf, who informed the court that she had attended various meetings with Mrs. Bhatt and had acted as interpreter at those meetings between Mrs. Bhatt and a solicitor colleague, Mr. Clark, and counsel. I am satisfied in light of what she was able to tell me about Mrs. Bhatt’s apparent grasp of English and the making of her witness statements that the English versions of the two witness statements which she has signed are true and accurate translations of the Gujarati originals. Moreover, the defendants have not challenged Mrs. Bhatt’s evidence on this issue. Indeed, even if they had wished to so, which I understand they did not, they could hardly have done so on any pertinent point because, with the exception of the 3rd defendant, they could not have adduced relevant evidence with respect to the res gestae, that is to say, the content of the discussions and the events at the meetings with Mr. Saujani and Mr. Kakad. Mr. Kakad, has unfortunately not made a witness statement. Mr. Saujani, on the other hand, has made a witness statement (albeit he did not sign it) and has been cross-examined on it.[31]It has been submitted on behalf of Mrs. Bhatt that Mr. Saujani’s witness statement is exculpatory. I would say simply that it is bereft of information of the kind which Mr. Saujani ought reasonably to have understood would be of assistance to the court in a case of this type where a proper understanding of the circumstances in which instructions were given to a solicitor, the consideration which the solicitor gave to the instructions and the advice and explanations of documents he drafted is crucial.[32]In his witness statement, Mr. Saujani stated he advised Mrs. Bhatt to seek the advice of Mr. Kakad, and that in due course she was given advice under cover of letters addressed to her by Millenium Financial Solutions (the advice consisted of the financial review to which I have already alluded). He concluded thus:
“Subsequently to comply with her instructions to follow the Advice from Millenium for the purpose of Tax Planning: a. The Transfer of whole was prepared and approved. b. Will of Mrs. Bhatt. c. Deed of Variation to effect the Severance. d. Declaration of Trust of Joint Tenancies. e. Enduring Power of Attorney were all prepared and duly executed after they were all explained to the clients.”
[33]Mr. Saujani did not expand in cross-examination about the extent or ambit of the explanation he stated he had given ‘the clients’. He said simply that he had fully explained the documents to Mrs. Bhatt on 12th March 2004, and that he had done so again on 12th September 2004. However, it was plain given the difficulties he had answering questions about the trust deed that he would not have been capable of explaining its full impact to her. This is not an altogether surprising inference given he told the court he is neither a tax specialist nor a trust lawyer and even went so far as to admit that it was not his task to advise her. Generally, his evidence in cross-examination appeared confused and sometimes evasive. At best it was unsatisfactory.[34]On the face of things, therefore, the inference is unavoidable that Mr. Saujani gave Mrs. Bhatt little or no detailed advice at all in relation to the documents, their effects and consequences. This was despite it surely being obvious to him, as he clearly knew Mrs. Bhatt quite well, that she would not be able to gain a proper understanding of the financial review or the effects and consequences of the documents without a proper explanation in Gujarati, an explanation which Mr. Saujani did not give.[35]This was a serious omission, and fatal, on its own in light of Phillipson v. Kerry (1863) 32 Beav. 628, to the transaction effected by the documents. But the situation is even worse because it became clear in cross-examination and upon examination of documents in the trial bundle that in all probability Mrs. Bhatt never even saw either the letters from Millenium Financial Solutions or the financial review, and I so find. Mr. Kakad had actually faxed these to Mr. Saujani on Mrs. Bhatt’s instructions, as a copy of a facsimile covering sheet clearly shows.[36]Mr. Saujani made a short note of the meeting which took place on 12th March 2004 in which he records Mrs. Bhatt and the 3nd Defendant were with him for 2½ hours but the note says nothing about his explaining the documents to them, only that Mr. Kakad joined them for a while halfway through the meeting. I cannot infer from this alone that he explained the effects and consequences of the documents, and I decline to do so. He did not say anything amounting to this in his witness statement. He had not even thought to mention the earlier notice of severance made in 2003. He said in cross-examination that the new one which was made as part of the transaction that day was made for the avoidance of doubt, but it is difficult to see why that should have been necessary. There is a note in the trial bundle which Mr. Saujani made on 12th September 2004 in which he records that he explained the documents to Mrs. Bhatt and the 3rd defendant during the course of an hour long meeting. It is difficult to understand why that should have been necessary had Mrs. Bhatt gained a proper understanding of them on the earlier occasion. While, therefore, I am prepared to accept that Mr. Saujani might have given Mrs. Bhatt an explanation of some kind when she signed the documents, which would have been a perfectly natural and expected thing to do, I cannot properly, in my judgment, draw an inference that she was given a full enough explanation of the documents on that occasion for her to obtain a proper understanding of them, their effects and consequences.[37]Another concerning aspect of this affair which emerged in cross-examination was that Mr. Saujani, in drafting the documents, said he had simply followed Mr. Kakad’s advice, which is to say, he had followed the advice of an IFA who had, presumably, no legal training, and had used precedents to assist him with the drafting. A propos the trust deed, he had, he said, used a precedent but when questioned he could not recall which one, only that he, “had used something like this before”. Although on his own admission he is neither a tax specialist nor a trust lawyer, Mr. Saujani, the only lawyer to whom at the time Mrs. Bhatt could turn for advice, allowed her to embark on and to enter into a transaction solely on the basis of a legally unqualified IFA’s advice.[38]Answers to a series of questions about his drafting of the documents, amply illustrate the unsatisfactory manner of Mr. Saujani’s dealings with Mrs. Bhatt’s affairs. The following is the gist of these: “I drew them up. They are the exact implementation of the advice given by Millenium Financial Solutions. I did not need to exercise my professional skill to verify the IFA’s advice”.[39]Against this extraordinary background, it is impossible to conclude that Mr. Saujani gave Mrs. Bhatt any relevant advice which might have disabused her of her beliefs concerning the need for, the effects of and the consequences of the transaction, and I so find.[40]Mrs. Bhatt’s evidence has not been challenged by any of the defendants (only the 1st, 2nd and 4th to 6th defendants were represented at the hearing and none of the others played any part in the proceedings).[41]In the absence of obvious untruth in some material respect in Mrs. Bhatt’s evidence which would cause me to doubt her evidence, the court is entitled to find (and, there being none, I do so find) that the documents did not carry Mrs. Bhatt’s intentions or instructions accurately into effect, and that her expectations in the giving of those instructions, rather than merely as to the consequences of those instructions, were so seriously falsified in the sense Lewison J described in In re Griffiths that the documents cannot stand. The transaction as a whole must therefore be set aside, for she had unwittingly entered into a transaction which had no IHT advantages compared with the ordinary consequences of her late husband’s death, which had divested her of control over the Property during her lifetime, that had arguably conferred interests vested in possession on certain of her children which she had no desire to create during her lifetime and which rather than saving IHT had the potential to cause a charge to arise.[42]Subject to a proviso, therefore, the documents and the transaction as a whole must be set aside and the Register rectified accordingly.[43]The proviso is on account of the fact that the Revenue had a legitimate interest in the outcome of the claim but is not a party to the claim. It should therefore be given a reasonable opportunity to contest the outcome now rather than later should it be moved to do so. It will furthermore be in the parties’ interest to clear off any potential for a Revenue claim sooner rather than later. I shall therefore direct that the Revenue be given immediate, i.e., forthwith, notice of the order and that the order be not drawn up and entered should the Revenue within 28 days of today give notice of intention to contest the same.[44]I understand the parties have come to terms in relation to the remainder of the issues in the claim, on which footing I shall adjourn the trial sine die, subject to the question of costs. An alternative course, on which I shall hear the parties, would be for me to make any order the parties reasonably wish the court to make for the purpose of putting an end to the proceedings.