David Hamilton died in London in 2007 aged 83, leaving a substantial estate to his two children, Alan and Carolyn, in equal shares under the terms of his Will.
Due to his experiences in the run up to the start of WWII, when he was transported from Germany under the kinder transport program leaving behind his parents and elder sister, David created a Liechtenstein based foundation in the 1990’s to act as “an escape fund, should history ever repeat itself”. Importantly, the foundation was funded from the profits of the sale of his business in Hong Kong.
Whilst he was alive, David was entitled to the income and assets of the Foundation, but made provision that on his death the assets remaining were to be distributed to Alan & Carolyn, but arranged for Caroline to receive more.
Following his death, both children received a sealed envelope, detailing their entitlement and subsequently flew to Zurich to collect their inheritances. It was apparent at that time that neither knew what the other had received and Alan was keen not to divulge any information to his sister in this respect, on the basis that he believed he had received more than Carolyn and did not want her to expect him to even out their respective shares.
Following the distribution of the assets the foundation was dissolved and all was well for about five years until Alan discovered that in actual fact Carolyn had received more from the foundation than he had.
He commenced legal action, stating that the assets of the foundation should have formed part of his father’s estate and distributed equally between himself and Carolyn.
There were a number of issues involved. Whether the applicable law was England or Liechtenstein; whether the foundation was a sham; whether it was set up for the purpose of tax evasion; and whether Alan was entitled to bring the claim, given his prior behaviour.
Factual evidence was provided to the Court by the siblings, Swiss bankers, David’s accountant and two expert witnesses, a practitioner in Liechtenstein law acting for the Carolyn, and an Austrian professor of law acting for Alan.
Alan’s first argument was that David and the Foundation’s board had intended, at all material times, that the capital and income of the foundation should be treated, during David’s lifetime, as beneficially owned by him, so that David retained beneficial ownership of its assets, either because the board held them as his bare nominee or under a resulting trust. Alan alleged that English law governed the question whether his father had effectively disposed of his beneficial interest in the assets which he had transferred to the foundation.
His second argument was that the foundation had been formed to evade tax in the UK, given that his father’s intention at the time he set up the foundation was to transfer funds arising from the sale of his clothing business in Hong Kong.
The Court dismissed both of these claims on the basis that:
- It was a long-established principle that all matters concerning the constitution of a corporation were governed by the law of the place of incorporation. That being the case, the validity of a private foundation was dependant on the laws of the jurisdiction in which it was set up. It was also established that, rather than the assets of the foundation being treated as beneficially owned by David during his lifetime, the evidence indicated that David and the board had intended that the assets be treated as beneficially owned by the foundation, throughout his lifetime, but held by the board for David’s benefit, with the board’s approval. In accordance with the regulations in force at that time, David had not retained beneficial ownership of the assets, nor was there any resulting trust. Furthermore, the court found that there was no basis for finding that the foundation itself, or that the actions of David in establishing the foundation represented a sham under English law.
- On the basis of the facts presented, the Court was persuaded that David’s intent at the time of the creation of the foundation had been to provide a source of offshore wealth for himself and his family. Tax evasion had not been the main motivation. Instead it was an underlying need to provide security should the worst ever happen again.
Alan was ordered to pay Carolyn’s legal costs, in the region of £1 million, and will also have to bear his own costs of a similar amount. In addition, Carolyn was awarded indemnity costs from March 2015 to cover the last year of the proceedings as well as the trial costs.
This was mainly due to the fact that Alan amended his case to accuse his father of tax evasion and later refused an offer from Carolyn (in an effort to end the feud within the family) to walk away from the case with each bearing their own legal costs.
Mr Justice Henderson, presiding, concluded that from the point of the offer made by Carolyn, Alan’s conduct was so unreasonable that he should be penalised. In addition the judge said that
“[Alan’s] dispute with Carolyn is so bitter, and jealousy of her so corrosive, that he persuaded himself of the justice of the case, and shaped his vision and recollection of past events accordingly”.
Alan was refused permission to appeal.