Implied, resulting or constructive trust of shares in family company

 In Trusts

Disclaimer: LawSkills provides training for the legal industry and does not provide legal advice to members of the public. For help or guidance please seek the services of a qualified practitioner.

Shield v Shield [2014] EWCA 1136

Case Summary from LawSkills | Private Client specialist trainersThe Court of Appeal in this case were asked to decide upon the beneficial ownership of certain shares in a family company for the purpose of determining whether they were in the ownership of Mr Richard Shield on his divorce. It raises the inevitable question – how do you protect family companies on divorce?

The facts

Richard and Susan Shield were married for 43 years before separating in 2012. They are now divorced. As part of her financial relief Susan issued an application to include Richard’s 15,108 A shares in R A Shield Holdings Limited (RASH). Their son Christopher held 17,011 B shares in the company but Richard’s A shares have enhanced voting rights so Richard controls the company in general meetings. Susan held 1,660 B shares.

At first instance, as part of the financial relief claim, the Judge had to decide whether Susan and/or Richard’s shares in RASH were held on trust for Christopher. The background to this claim was that RASH group of companies had been inherited by Richard from his father and in 2002, when the company was not doing very well, Christopher moved from London to Leicester to take over the running of the company.

The LawSkills Monthly Digest

Subscribe to our comprehensive Monthly Digest for insightful feedback on Wills, Probate, Trusts, Tax and Elderly & Vulnerable client matters

Not complicated to read  |  Requires no internet searching |  Simply an informative pdf emailed to your inbox including practice points & tips

Subscribe now for monthly insightful feedback on key issues.

All for only £98 + VAT per year.

Lawskills Digest

Richard’s brother-in-law was an experienced businessman and designed a significant restructuring of the business to revive its fortunes. An accountant also became involved to address the tax implications of the restructure and this resulted in serious tax advice being obtained from counsel.

The restructuring scheme did go ahead with Revenue clearance. It meant that there had to be a new holding company, RASH, and the shareholdings were altered to provide for the Shields as above. To retain Business Property Relief for IHT on his death the shares owned by Richard were given weighted voting rights.

At the time of the restructure both Richard and Susan declared an intention to leave their shares in RASH to Christopher by Will and did so. It was an essential element of the tax saving scheme that Richard would retain beneficial ownership of his RASH shares until death and not dispose of them to Christopher.

The decision at first instance

Against this backdrop Christopher sought, as intervener in his parents’ divorce proceedings, that there was a common intention between himself and his father that he should have Richard’s shares on his death; as a result of which Christopher changed his position to his detriment in reliance on this agreement so that a common intention constructive trust or an estoppel arose.

However, the Judge made it unambiguously clear in various parts of his judgment that although it was anticipated that Christopher would receive his parents’ shares by their Wills there was no express and binding agreement about this. The specialist tax advisers at the time of the restructure emphasised that this was the basis of the clearance with HMRC and it was not possible to agree one thing with HMRC and another between themselves. Without a binding agreement between them Christopher’s claims for constructive trust or estoppel, against Richard, failed.

There was no doubt that Richard intended to make a bequest of the shares to Christopher but he was able in law and equity to freely deal with them until death because there was no contract or binding equitable promise which it would have been unconscionable of Richard to disregard.

Christopher failed to prevent his father’s shares forming part of his mother’s claim for financial relief.

On appeal

Christopher failed to persuade the Court of Appeal that the facts should be re-shaped in his favour or there should be a re-working of his case before the Court of Appeal who refused permission to appeal.

Practice points

  • This case shows that not only is tax planning important but also asset protection. The outcome of the case is that Richard’s shares could be taken into account in the divorce. This would not inevitably mean that they had to be divided equally between Richard and Susan but it would mean their value would need to be taken into account. Thus, if the shares in RASH were not going to be given, at least in part, to Susan then other assets might have to be given instead to compensate – such as a larger share in the matrimonial home.
  • Perhaps the best way forward would have been to have prevented a spouse benefitting from the shares on any divorce by making it a restriction on the transmission of shares in the articles of association.
  • Alternatively, the shares might have been held in trust to prevent a transfer of them to Mrs Shield on divorce.
  • Neither, the restriction on transmission or the holding of the shares in trust would prevent a matrimonial court taking into account their value in deciding on the financial award on divorce, but it would at least mean the shares themselves would not have been transferable.
  • The parties could have devised a nuptial agreement in which the shares in the company were to be excluded in any divorce settlement. Although not legally binding in this country as yet they are highly persuasive if both parties were properly advised when the agreement was entered into. The advantage of the nuptial agreement is that it could not only prevent transmission of the shares it could exclude the value of them from any settlement.

FREE monthly newsletter

Wills | Probate | Trusts | Tax  | Elderly & Vulnerable Client

  • Relevant learning and development opportunities
  • News, articles and LawSkills’ services
  • Communications which help you find appropriate training in your area
Recommended Posts
Pilot Trusts - the end?Gill Steel Blog pref