Kennedy & Ors v Kennedy & Ors, Court of Appeal - Chancery Division, December 08, 2014, [2014] EWHC 4129 (Ch)

Resolution Date:December 08, 2014
Issuing Organization:Chancery Division
Actores:Kennedy & Ors v Kennedy & Ors

Case No: HC 2010 000010

Neutral Citation Number: [2014] EWHC 4129 (Ch)



Royal Courts of Justice

Strand, London, WC2A 2LL

Date: 08/12/2014

Before :


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Between :

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Mark Herbert QC (instructed by Mills & Reeve LLP) for the Claimant

The Defendants were not represented

Hearing dates: 18th NOVEMBER 2014

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The Chancellor (Sir Terence Etherton):

  1. In these proceedings the trustees of a settlement dated 16 December 2003 made by the first claimant, Brian George Kennedy, (``the Settlement'') seek an order to correct a mistake made in the terms of an appointment dated 1 October 2008 (``the October 2008 Appointment'').

  2. The mistake was to provide in the October 2008 Appointment for the appointment to Mr Kennedy of certain shares in four companies (``the relevant shares''). The relief specified in the amended Particulars of Claim is (1) a declaration that the relevant shares were not appointed on the trusts of the October 2008 Appointment, or (2) an order setting aside clause 2.1(c) of the October 2008 Appointment by which the relevant shares and a cash sum were appointed to Mr Kennedy absolutely, or (c) rectification of clause 2.1(c) by the addition of words excluding the relevant shares.

    The background

  3. I find the following facts on the basis of the evidence before the Court.

  4. Under the terms of the Settlement, of which Mr Kennedy was originally the sole trustee, Mr Kennedy had a life interest in possession. The Settlement contained a power of appointment exercisable by the trustees in favour of Mr Kennedy himself, his children and remoter issue. In default of appointment, the capital was held on trust for his children.

  5. Schedule 1 of the Settlement specified the settled assets. So far as relevant to the present proceedings they included shares in the following companies: Space Kitchens and Bedroom (Holdings) Limited (``SKBL''), Ever 1951 Limited (``Everest''), Celuform Limited (``Celuform'') and Patrick Properties Holdings Limited (``Patrick Properties'').

  6. The Settlement subsequently acquired shares in Latium Building Products Limited (``Latium'').

  7. In 2006 SKBL was refinanced. In consequence, all the Settlement's SKBL shares were acquired by a new parent company, Space Kitchens Holdings Ltd (``Holdings''). In exchange, the Settlement acquired shares in Holdings, which were of little value, and loan notes worth about £6.82 million. The loan notes were qualifying corporate bonds for the purposes of the capital gains tax (``CGT'') legislation. The effect of the exchange was that a chargeable gain of about £700,000 was realised; the underlying CGT rate (which was only 10 per cent because of the availability of maximum business taper relief) was ``banked''; and CGT at that rate on the gain would only become payable on the first of the following events: expiry of the loan note term, encashment of the loan notes, or a transfer of the loan notes.

  8. On 4 September 2007 the shares in Everest were sold, along with other shares in Everest owned beneficially by Mr Kennedy. As a result of the sale, there came into the Settlement in place of the Everest shares cash of £42,457,679 and ordinary shares and preference shares in a company subsequently called Home Improvement Group Holdings Limited (``Home Improvement'').

  9. By a letter dated 17 September 2007 from Mr Kennedy's accountants, KPMG, Mr Kennedy was informed that the value of Celuform and its shares had declined dramatically since the Settlement was created. As a result the Settlement had the benefit of an unrealised loss of about £7 million.

  10. The Finance Act 2006 (``FA 2006'') introduced a new tax regime for settled property. In order to mitigate adverse tax consequences resulting from the changes FA 2006 allowed trustees and beneficiaries, during a transitional period, to reorganise existing trusts. In particular, trustees could create a ``transitional serial interest'' (``TSI''), effectively permitting an interest in possession to be terminated in favour of another interest in possession and for that to be a potentially exempt transfer. That transitional period was initially due to end on 5 April 2008.

  11. In order to take advantage of that transitional period Mr Kennedy's professional advisers, including Mr Alan Sturrock of Addleshaw Goddard LLP, suggested in about January 2008 that Mr Kennedy might consider appointing some of the assets in the Settlement on trusts for his children and grandchildren and the remainder to himself absolutely since that would reduce any future inheritance tax liability. Mr Kennedy was in principle positive about that suggestion because he wanted to pass money to his children in a tax efficient way.

  12. Mr Kennedy also discussed with Mr Sturrock the possibility of appointing additional trustees for the Settlement.

  13. Mr Kennedy was subsequently informed that the April deadline for the purposes of FA 2006 had been postponed to 5 October 2008.

  14. Mr Sturrock went into hospital for a major operation in February 2008 and was away from work for about three months. In Mr Sturrock's absence Mr Kennedy continued to discuss issues relating to the Settlement with KPMG and without reference to Addleshaw Goddard. He decided that the £7 million Celuform losses would be used in the 2007-2008 tax year to offset the gain on the sale of the Everest shares. Pursuant to the earlier discussions with his advisers, he also decided that, subject to dispositions in favour of his children, certain assets in the Settlement would be appointed to himself but not the relevant shares, the relevant shares being the Patrick Properties shares, the Holdings loan notes, the Home Improvement preference shares and the...

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