Bainbridge & Anor v Bainbridge

Equitable rescission for mistake may be granted in respect of a severable part of a voluntary transaction. Where the original property has been transferred to good-faith purchasers, the court may trace its value into substitute property, provided the tracing evidence supports that conclusion. The principle is not confined to fraudulent misrepresentation and may apply to mistake and other vitiating factors.

Rescission operates retrospectively for general-law purposes, but its tax consequences depend on the construction of the relevant tax legislation. In the absence of special wording, the default position is that an avoided transaction is not a taxable event. Tax liabilities remain matters for the parties and HMRC, or the appropriate tribunal if agreement is impossible.

The claimants had transferred several parcels of farming land to trustees of a discretionary trust after receiving, they said, mistaken advice that no capital gains tax would arise. The court had previously rescinded the transfer of Seamer Grange Farm for mistake.

The amended claim concerned Harker Hill and Fox Covert. Those properties had been sold by the trustees to good-faith purchasers, and part of the proceeds had been used to acquire replacement land. The claimants sought rescission and a declaration reflecting beneficial ownership of the replacement land. The central issues were whether the equitable remedy could operate over a severable part of the original transaction, whether the proceeds could be traced into replacement land, and what general-law and tax consequences followed.

1. Relief granted. The court was satisfied that the same distinct, causative and basic mistake established in relation to Seamer Grange Farm applied to the transfers of Harker Hill and Fox Covert. It was unconscionable or unjust to leave the mistaken dispositions uncorrected.
2. Partial rescission. Rescission is fact-sensitive and is not invariably an all-or-nothing remedy. The three transfers were made by separate TR1 forms, concerned different legal owners and were severable. Relief could therefore be granted in respect of Harker Hill and Fox Covert without setting aside the transfer of the other land.
3. Third-party rights and tracing. The good-faith purchasers could not be required to return the land. That was not, however, a bar to restoring other rights if this was practically possible. On rescission, the transferred property revested beneficially in the transferors, subject to third-party rights, giving a proprietary base for tracing into exchange products. That principle extended beyond fraudulent misrepresentation to mistake and other vitiating factors. The replacement land could therefore be claimed in proportion to the relative values of Harker Hill and Fox Covert when sold. The untraced balance used for tax, costs and partnership liabilities could not be recovered by tracing.
4. Effect and tax. Equitable rescission for mistake treated the transfers as undone from the beginning for general-law purposes. Whether the transactions remained taxable depended on the applicable legislation. In the absence of special statutory wording, the default position was that an avoided transaction was not a taxable event. The court did not determine the parties’ tax liabilities. The claimants were required to notify HMRC and make any necessary corrective returns.
5. The court would make an appropriate declaration and directed counsel to submit a draft order. Notice was also to be given to the solicitor trustee under CPR rule 19.8A(2).