Independent Trustee Services Ltd v GP Noble Trustees Ltd & Ors

Where a recipient’s defence of bona fide purchase for value without notice depends on a transaction which is later set aside for non-disclosure or another vitiating factor, the setting aside may deprive the recipient of that defence. An equitable interest in property disposed of in breach of trust continues unless the defence can be established.

Setting aside a financial provision order does not automatically re-vest legal title. Consequential transfers require further orders. Nevertheless, once the order supporting the recipient’s status has ceased to have effect, the original beneficiary may enforce its subsisting equitable title against property or traceable proceeds remaining with the recipient when notice is received. Proprietary relief does not itself establish personal liability.

Corporate trustees misappropriated approximately £52 million from occupational pension schemes. Part of those funds was traced into £1,481,920 paid to Mrs Morris in satisfaction of a financial provision order made upon the breakdown of her marriage. She received the money without notice of the breach of trust and initially qualified as a bona fide purchaser for value.

Mrs Morris subsequently obtained an order setting aside the financial provision order because of her former husband’s material non-disclosure. A renewed hearing awarded her a larger lump sum, while leaving ownership of the £1,481,920 to be decided in the Chancery proceedings.

Peter Smith J rejected the replacement trustee’s proprietary claim. The central issue on its appeal was whether Mrs Morris could continue to rely on the bona fide purchaser defence after the order under which she had given value had been set aside.

1. Appeal allowed. The pension schemes’ trustee was beneficially entitled to the traceable proceeds of the £1,481,920. Mrs Morris could not continue to rely on the bona fide purchaser defence after the financial provision order supporting that defence had been set aside.

2. Rights arising from financial provision are governed by the court’s order, not by the parties’ preceding compromise. The court exercises an independent statutory jurisdiction under the Matrimonial Causes Act 1973. Material non-disclosure deprived the court of the information required for a lawful exercise of that jurisdiction. Once the order was set aside, it could no longer determine the parties’ rights or provide the value necessary for Mrs Morris’s defence.

3. The rescission of a financial provision order does not automatically re-vest legal or beneficial title in the former spouse. The court must make any consequential orders and the relevant transfer must occur. That did not assist Mrs Morris because the trustee asserted the pension schemes’ own equitable title, rather than a title derived through Mr Morris.

4. Lloyd LJ explained that an unauthorised disposition by a trustee does not transfer the beneficiaries’ equitable interests. Those interests continue unless a recipient or successor establishes the bona fide purchaser defence. Where the transaction supplying value has been set aside before the defence is raised, that fact may be considered in deciding whether the defence remains available. On these facts the earlier order had ceased to operate, and Mrs Morris received notice of the proprietary claim before any renewed order justified her retention of the money.

5. An innocent recipient is accountable only for money or traceable proceeds remaining in the recipient’s hands when notice of the beneficial interest is received. A proprietary tracing claim does not, without more, impose retrospective personal liability. Questions concerning dissipation, tracing into current assets, an account and interest were therefore remitted to the Chancery Division.

6. The court declared the trustee beneficially entitled to the traceable proceeds, directed an interim payment of £500,000 within 21 days and remitted consequential matters for further directions. Tomlinson LJ agreed with both judgments.

1. Court of Appeal (Civil Division): Allowed the trustee’s appeal, declared it beneficially entitled to the traceable proceeds of £1,481,920, ordered an interim payment and remitted consequential matters.
2. High Court, Chancery Division: Peter Smith J rejected the trustee’s claim to the £1,481,920 on the basis that Mrs Morris remained beneficial owner free from the trustee’s prior equity. The related judgment in the Chancery proceedings was reported as [2010] EWHC 1653 (Ch).