Knowlden v Tehrani & Ors

An express declaration of trust is ordinarily conclusive of beneficial ownership. It may nevertheless be set aside where it was procured by fraud and formed part of a fraudulent scheme. A claimant induced by fraud to transfer property into an offshore structure may unravel the transaction and recover the property, even if the structure remains valid as between other parties.

The rule against relying on one’s own illegality does not prevent a claimant enforcing property rights where the claim can be established without relying on the unlawful conduct. A sham transfer funded with the transferee’s own money does not create a purchase-money resulting trust.

The claimant, an ophthalmic surgeon, brought claims concerning property, money and insurance policies which he alleged had been diverted or held for him by the defendants. The first defendant had been his partner, the second defendant his solicitor, the third defendant an Isle of Man company, and the fourth defendant a firm of solicitors.

The claims against the second and fourth defendants were settled. The first defendant abandoned her positive pleaded case and put the claimant to proof. The principal disputes concerned the beneficial ownership of 43 Graham Terrace and Cae Haidd Bach, together with the effect of an offshore company and trust structure which the claimant said had been procured by fraud.

1. 43 Graham Terrace. The claimant’s agreement to establish Triumph Trading and the Silver Owl Trust, and to execute the trust deed concerning the property, was induced by fraudulent representations that he and the first defendant would have equal beneficial interests. The offshore structure was therefore not binding on him. He was entitled to set aside transfers made into it and to be restored, so far as possible, to the position he would have occupied absent the fraud.
2. The conclusion did not disregard the legal reality of Triumph Trading or the Silver Owl Trust. It recognised only that the structure was not binding on the claimant because his consent to it had been fraudulently procured. The express declaration of trust was therefore not conclusive: Goodman v Gallant [1986] Fam 106 was distinguished by the fraud exception.
3. The claimant was beneficially entitled to the leasehold and freehold interests in 43 Graham Terrace. Flats 7 and 8 had been acquired with his money, held by nominees, transferred to Triumph Trading and later sold. Their proceeds were therefore beneficially his and could be applied towards the acquisition of the freehold.
4. Cae Haidd Bach. The purported sale by Triumph Trading to the first defendant was a sham. The purchase price followed a circular route from and back to Triumph Trading’s account. There was no genuine purchase and therefore no purchase-money resulting trust in favour of the claimant. He could not trace the funds into the property because they had not been genuinely applied to acquire it.
5. Illegality. Even if the claimant had dishonestly concealed his beneficial ownership of Flat 7 during divorce proceedings, he did not need to rely on that conduct. His claim could be established through his provision of the purchase money, the resulting trusts arising from the nominee ownership, the transfers to Triumph Trading and the application of the sale proceeds. The primary rule stated in Tinsley v Milligan [1994] 1 AC 340 and summarised in Tribe v Tribe [1996] Ch 107 therefore presented no obstacle.
6. The claim to 43 Graham Terrace succeeded. The claim to Cae Haidd Bach failed. Subject to minor exceptions, the remaining relief was conceded or agreed, and the parties were directed to agree a Minute of Order.

Not stated in the judgment.