Bankruptcy and bare trusts

The team comments on the recent case of Thandi v Sands & Anor [2014] EWHC 2378 (Ch) in which a bankrupt party sought to protect the family assets by arguing that his property was held on a bare trust for his father.

The recent case of Thandi v Sands & Anor [2014] EWHC 2378 (Ch) has reaffirmed the court’s position on the evidential threshold which needs to be satisfied and the burden of proof if an application to establish a bare trust is to be successful.

Mr Chanan Thandi applied to the court for an order that properties legally owned by his bankrupt son, Tarlochan Singh, should be transferred to Mr Thandi on the basis that his son was holding them on a ‘bare trust’ for his father.

What is a bare trust?

I will pause here, as I can sense questions arising as to the definition of a bare trust. A bare trust is, quite simply, where the beneficiary has an immediate and absolute right to both the capital and income of the trust asset. In essence, the trust property is held in the name of one person as ‘trustee’ but they have no discretion over the asset or active duties to perform (with the exception of a bare trust for minors). The trustee effectively holds the legal title but nothing more for the benefit of another person, known as the beneficiary. Bare trusts can be express or implied.

What is an express trust?

An express trust is created by the actual intention of the settlor (that is the person who creates the trust) and in the large majority of cases, uses the word “trust”. Focus is also placed on the words and conduct of the interested parties. In cases involving property, the trust must be expressed in writing. In most instances, individuals rely on documentary evidence to point to the trust’s existence.

What is an implied trust?

An implied trust arises by operation of the law, for instance where the circumstances and conduct of the parties are such that, although no expression of a formal trust has been declared, it is clear that a bare trust exists. An example would be where one person (A) buys a home but for some reason chooses to put it in the name of another person (B), perhaps because they cannot get a mortgage in their own name. B would hold the property on an implied bare trust for A.

In the present case, Mr Thandi argued that, although the properties were owned legally by Mr Singh, equitably they were held by Mr Singh for the benefit of Mr Thandi such that, in fact, Mr Thandi was the rightful owner.

The defendants were Mr Singh’s trustees in bankruptcy who opposed the application on the basis that the properties were owned legally and equitably by Mr Singh and could therefore be used towards repaying Mr Singh’s debts.

Mr Singh was the registered owner of 16 properties purchased between the 1980s and 2003. In 2011, Mr Singh was made bankrupt.

Mr Thandi asserted that both an express and implied bare trust existed, pointing to a deed of trust executed in 2003 and assertions that he had provided the purchase money for the properties, meaning they were actually his.

The court confirmed that, in respect of any express trust, the onus is on the person asserting the trust to prove it. In essence, Mr Thandi needed to provide evidence to show that an express trust had been created.

With regard to the implied trust, the court held that the whole of the circumstances had to be looked at, to determine whether such an interest existed and the extent of such interest. For example, the type of evidence the court explained that it would consider included express words or inferences from the parties’ actions. When drawing inferences, the conduct as a whole had to be considered.

As there was no contemporaneous evidence of anything said or written at the time of the purchases the court had to make inferences from the parties’ conduct. It was looking for their actual intention as opposed to blindly accepting what they said.

Mr Thandi argued that both he and his son always thought that the properties were held for Mr Thandi and all of their subsequent dealings were based on that thought.

The court treated this evidence with caution, particularly as there was no independent corroboration. As a matter of policy, it would be worrying if the court simply accepted the evidence of parties seeking to benefit from their own words, unless fully satisfied as to their truth.

The court noted that there had been instances where the parties had lied to the court and other occasions where they had not been full and frank with their evidence. The court further noted that both Mr Thandi and Mr Singh were prepared to say anything to keep the family assets out of creditors’ hands.

As such, the court felt the most reliable evidence of their actual intention came from what could be inferred from what they had done. Although there was some evidence to suggest that Mr Thandi had substantially financed the acquisition of the properties it seems that Mr Thandi had chosen to have the properties transferred to Mr Singh, or simply purchased them in the name of Mr Singh. This, coupled with the fact that the court noted that both Mr Thandi and Mr Singh had lied or failed to be full and frank with their evidence meant that the evidence they provided did not hold much weight.

The court found that Mr Singh had treated all the properties as belonging beneficially to him. Apart from the deed of trust in 2003, some 20 years after the first purchase, there was no other evidence to show dealing with the properties other than on the basis that Mr Singh was the beneficial owner.

As such, the court held that the properties were owned legally and beneficially by Mr Singh and formed part of his bankruptcy estate. As such, they could be utilised to pay creditors.

The case demonstrates the court’s robust approach to situations where there is no express contemporaneous evidence to clarify the trust position and the scepticism it expresses when parties attempt to rely solely on self-serving evidence.

Above all else, this acts as a stark reminder to record any agreements in writing even if they are between family members. As this case proves, the family need not fall out for potential issues to arise.