Clarkson v Clarkson & Ors

Where a settlor creates a settlement and trustees later exercise a special power of appointment, the gift is treated as made when the settlement was created. The appointment selects the recipient of the settlor’s property; it is not a transfer of the trustees’ property. A bankrupt trustee’s defeasible interest in default of appointment, status as a potential object, and fiduciary power of appointment do not amount to property given away by the appointment. A fiduciary power held jointly by trustees in their trustee capacity is held in trust and falls outside the bankrupt’s estate. The later bankruptcy of the trustees therefore did not make the appointment a transaction at an undervalue.

Three directors arranged life policies to fund the purchase of a deceased director’s interest in their company. One policy was settled on trust, with the directors as trustees and potential beneficiaries. After the company became insolvent, the trustees appointed the policy proceeds to Lynda Clarkson. The trustees in bankruptcy of two directors alleged that the appointment was a transaction at an undervalue under the Insolvency Act 1986.

The appeal concerned whether the appointment was a gift by the bankrupt trustees, whether their interests or fiduciary power formed part of their bankruptcy estates, and whether their consent was required at common law.

1. Appeal dismissed. The appointment was not liable to be set aside as a transaction at an undervalue. The appellants were ordered to pay the costs, subject to legal aid taxation.
2. Nature and timing of the gift. The court gave section 339 of the Insolvency Act 1986 a purposive construction directed to property given away for nothing or at an undervalue during the relevant period. The gift was made when Mr Clarkson created the settlement and funded the policy, not when the trustees later exercised the power. The appointment was a fiduciary selection of the recipient and took effect as if written into the settlement. The wife therefore received the settlor’s property, rather than property belonging to the trustees. Since the settlement was created while Mr Clarkson was solvent and more than two years before his bankruptcy, section 339 did not apply.
3. Interests of the bankrupt trustees. The directors’ interests in default of appointment were defeasible interests. Defeating them by exercising the power was not a gift of those interests. Their status as objects of the power gave them only a right to consideration as potential appointees. The power itself was held jointly in the trustees’ fiduciary capacity, was not exercisable by either bankrupt individually, and conferred no beneficial ownership.
4. Bankruptcy estate and common law. Even if the power came within the extended definition of property in section 283(4), it was excluded by section 283(3)(a) as property held in trust for persons interested or potentially interested under the settlement. A trustee who accepted personal payment for exercising such a power would breach trust. The decision in Governors of St. Thomas’s Hospital v Richardson concerned vesting of trust property to protect a beneficial lien and did not govern an unrelated fiduciary power. In Re Cooper (1884) 27 Ch.D. 565 concerned consent protecting a beneficial life interest and was likewise inapplicable.

1. Court of Appeal (Civil Division), [1994] EWCA Civ 25: dismissed the appeal with costs.
2. High Court of Justice, Chancery Division, Bristol District Registry, in bankruptcy: decision under appeal; its citation and precise order are not stated in the judgment.