Wednesday, 26th July 1995
LORD JUSTICE NOURSE: In Tinsley v. Milligan (1994) 1 AC 340 it was held by a majority of the House of Lords that where, in order to achieve an illegal purpose, property is transferred by one person into the name of another, being persons between whom the presumption of advancement does not apply, the transferor can recover the property, on the ground that he is not forced to rely on the illegality but only on the resulting trust that arose in his favour on the transfer. It is inherent in that decision that it makes no difference whether or not the illegal purpose has been carried into effect, as it clearly had been in that case. Here the question is whether, where the presumption of advancement applies, the transferor can still recover the property, on the ground that, although he is forced to rely on the illegality in order to rebut the presumption, the illegal purpose has not been carried into effect in any way.
By a writ issued in the Cardiff District Registry of the Chancery Division on 24th March 1992 the plaintiff, David Philip Tribe, sought a declaration that he was entitled to the entire beneficial interest in 459 shares in the second defendant, a company called From 42 Shop Limited ("the company"), which are currently held in the name of one of his sons,the first defendant Kim Lawrence Tribe. The plaintiff also sought ancillary relief, including an order that the first defendant should deliver up the share certificates in respect of the shares and transfer them into his name. The action came for trial before His Honour Judge Weeks QC, sitting as a judge of the Chancery Division in Cardiff, in June and December 1993. By an order made on 21st December 1993, subject to an undertaking by the plaintiff to be explained in due course, the judge granted the relief sought by him. The first defendant, to whom I will henceforth refer simply as the defendant, now appeals to this court.
Since the material facts are not now in dispute, most of them can be taken from the judge's judgment. I will state them mainly in his own words. The plaintiff, who was aged 72 at the time of the trial, has four children, the defendant being his second son. The plaintiff started business in the 1950s with his first wife selling ladies' wear to older women. After they were divorced in 1970, the plaintiff retained two of their five shops and incorporated the company to acquire and run the business. He held 499 of the 500 issued £1 ordinary shares, the remaining share being held by the company secretary. The business prospered and there were shops in Neath, Llanelli and Carmarthen.
In 1982, when the defendant was about 21, the plaintiff took him on in the business and transferred 10 shares to him as a gift, although the transfer stated that it was made in consideration of the payment of £2,500. The experiment was not a success and after a year or so the defendant left the business. His mother then set him up in business with a menswear shop, towards which the plaintiff provided £5,000 as working capital. That business also failed. Meanwhile the company's business continued to be successful. There was a net profit of £12,227 in 1985 and the balance sheet as at 31st December 1985 showed over £50,000 cash at bank and net assets worth more than £105,000.
At the beginning of 1986 the plaintiff, then aged 65, decided to retire and give the defendant another chance by effectively handing over to him the running of the company. At a general meeting held on 18th January 1986 the defendant was appointed the director of the company in place of the plaintiff, who was voted a golden handshake of £25,000 as a compensatory amount for his loss of office. The plaintiff then went on holiday in his boat. When he returned he seems to have been pleased with the defendant's progress. In about October 1986 he went to see his accountant and the company's auditor, Mr W.R. King.
Evidence of that meeting was given by Mr King in a statement admitted under the Civil Evidence Act. He said that the plaintiff informed him that he wanted to transfer some of his shares to the defendant, and that he advised the plaintiff to keep within the inheritance tax limit of £3,000 per annum. It was therefore agreed that the plaintiff would transfer to the defendant shares to the value of £6,000, taking advantage of two years' exemptions from tax, and that in subsequent years he would transfer to him further shares to the value of £3,000. Mr King stated:
"David had other children as well as Kim whom he wanted to benefit from his estate, therefore I was aware that David did not wish to transfer all of his shares over to Kim."
Mr King added that the defendant was not happy with the proposed arrangement and questioned whether a larger number of shares could not be transferred without paying inheritance tax. So Mr King took a second opinion which confirmed his own and sent a copy of the advice to the plaintiff, so as to ensure that he became aware of what the defendant had asked him to do. Apparently that letter did not reach the plaintiff, although that is not, as I understand it, a point of any significance.
Although the defendant disputed some of what Mr King said in his statement, the judge thought that his evidence was consistent with the contemporary documentation and he accepted it in preference to that of the defendant. Pursuant to his proposal, on 8th December 1986 the plaintiff transferred 30 shares to the defendant for a stated consideration of £6,000, which again was not paid, nor intended to be. That left the plaintiff with 459 shares of his own.
1986 was not such a successful year for the company. It made a trading profit of £10,000, but directors' remuneration of £10,500 and a dividend of £14,970 produced a loss of £17,790. The balance sheet as at 31st December 1986 still showed nearly £50,000 cash at bank and net assets worth £78,640. Problems were, however, looming for the company and the plaintiff. The shops at Carmarthen and Llanelli were leasehold and in poor repair. The leases were repairing leases, under each of which the tenant was the plaintiff himself. The company occupied the premises, no doubt as the plaintiff's licensee, and paid the rent direct to the landlords.
On 13th March 1987 the landlord of the Carmarthen shop served a schedule of dilapidations on the plaintiff. On 10th December 1987 the landlord of the Llanelli shop served a schedule of dilapidations on the plaintiff. Although at 31st December 1987 the company had nearly £60,000 cash at bank and would no doubt have been liable to indemnify him in respect of the dilapidations, the plaintiff was concerned at these developments. The defendant instructed surveyors and engineers to advise the company in respect of both schedules.
The plaintiff continued to be worried about the claims for dilapidations. In August 1988 he and the defendant went to see a solicitor, Mr Kevin Lane, who did not give evidence at the trial. In the same month they also went to see another partner in Mr King's firm, Mr Roger Dobson, Mr King having by then retired. The judge described the meeting with Mr Dobson as crucial and said that different accounts had been given of it. However, he preferred the version given by Mr Dobson, which substantially tallied with that given by the plaintiff.
Mr Dobson described the meeting as a routine visit between client and accountant. He said that the three of them discussed the questions of dilapidations at Carmarthen. That matter was raised by the plaintiff, who said that a large sum of money was involved. When Mr Dobson asked him whether the claim was valid, he said that it was. Mr Dobson told the plaintiff that it could have serious implications to his shareholding in the company which was his largest single asset. If the claim remained at what it was, the plaintiff would have to sell the company or dispose of his shares. Mr Dobson said that the plaintiff was horrified and asked him what could be done. He added that he could not remember the defendant's reaction, but thought that it was similar.
Mr Dobson said that little could be done. If proceedings had already been commenced, any disposition of assets by the plaintiff would be set aside if it was seen to have prejudiced the rights of the landlords. However, the plaintiff, in order to safeguard his interests, asked Mr Dobson to arrange to transfer the shares despite the advice he had given. Two avenues were discussed. The first, the acquisition of the shares by the company itself, was at that time impracticable. Mr Dobson's evidence, as recorded by the judge, continued as follows:
"The alternative was to transfer to David Tribe's four children. One was teaching, one was a pilot and away, the youngest was at university in England. Kim was to hand. It was suggested making a transfer to Kim to hold pending the settlement of the dilapidations claim. Kim was present, this was five years ago, I thought we all appreciated the plan at the time. David Tribe was shocked at first, very little he could do, and there was the possibility of setting it aside. He wanted to be seen to do something. The transfer to Kim was for a limited period only and it was the best thing he could do, despite my advice. David was aware that this would not secure him, but he wanted to do something as the company represented his life's work. It was decided to transfer to Kim as the other children were away."
On 1st September 1988 Mr Dobson's firm wrote, under his reference, to both plaintiff and defendant referring to their recent meeting with Mr Dobson. Enclosed with the letter was a transfer form which it was said required signature by the plaintiff. The letter continued:
"This effectively means that Kim will now hold 499 shares and Mrs T.A. Oxley one share.
We did investigate the possibility of the company acquiring its own shares and then transfer to the children with a loan back arrangement to Kim. However, the object of this exercise is to effect an immediate transference of your interest, whereas the company acquisition scheme would invariably require Revenue clearance and the inevitable delay this would entail.
Please let us have your cheque in the sum of £390.50 representing stamp duty on the transfer."
On 11th October 1988 the plaintiff signed a transfer of 459 shares in the company in favour of the defendant for a stated consideration of £78,030. The defendant returned the transfer to Mr Dobson with a cheque for £390.50 in respect of stamp duty. The consideration was not paid, nor was it intended to be. As the judge observed, nothing can be deduced from the fact that stamp duty was paid because Mr Dobson was unaware that a transfer to a nominee was exempt from duty, and he simply included a consideration calculated on the value of the net assets as disclosed by the company's balance sheet.
On 15th March 1989 a quotation was received for carrying out the necessary repairs at the Carmarthen shop at a lump sum price of £79,955. On 3rd October 1989 the defendant and his consulting engineer had a meeting at the Carmarthen shop with the landlords and their advisers at which the dilapidations and structural damage to the premises were discussed. In the event no repairs were carried out. On 23rd December 1991, the landlords accepted a surrender of the lease by the plaintiff in consideration of the sum of £33,000 paid to them by the company, that sum being apportioned as to £13,000 for arrears of rent and as to £20,000 for repairs.
The problem over the Llanelli shop was resolved in March 1990 by the purchase by the defendant of the reversion expectant on the determination of the lease at a price of £40,000, which he regarded as a considerable undervalue. The purchase was funded by a short term loan from the company to the defendant. On 8th November 1990 the plaintiff surrendered the lease to the defendant in consideration of his being released from all liability thereunder.
In February 1991 the defendant dispensed with Mr Dobson's services. On 2nd September 1991 Mr Dobson wrote to the plaintiff referring to a recent meeting between them and enclosing a stock transfer form. The letter stated:
"In order for us to restore the position to your satisfaction, we understand that our instructions are to arrive at a position whereby the original status quo between you and Kim is to be restored as at October 1988 with due provision thereafter for you to satisfy the annual gift exemption for inheritance purposes, by transfer of shares to Kim."
A postscript to the letter requested a copy of the last audited accounts so that the value of each share could be determined.
The defendant did not agree to retransfer the shares and on 19th March 1992 the plaintiff's solicitors wrote him a letter before action, in which it was asserted that the defendant had been holding the shares as bare trustee for the plaintiff. The solicitors said that they had advised the plaintiff that as the purpose for the trust had been satisfied he was entitled to have his shares retransferred. The writ was then issued and pleadings served. The statement of claim alleged that in or about October 1988 the plaintiff had transferred the 459 shares to the defendant in pursuance of an agreement that the defendant would hold them as trustee for the plaintiff and would redeliver them upon demand or alternatively at such time as the dispute as to the dilapidations had been resolved. It was further alleged that the dispute had been resolved in or about 23rd December 1991 (the date on which the lease of the Carmarthen shop had been surrendered to the landlords) and that the plaintiff had orally demanded redelivery of the shares at a meeting with the defendant shortly thereafter. The defence admitted the transfer but denied the agreement and relied, further, on the maxim ex turpi causa non oritur actio.
The judge preferred the evidence of the plaintiff and Mr Dobson and found that there was an agreement to hold the shares on trust for the plaintiff. In the light of Mr Dobson's evidence (see above), that must be treated as a finding of an agreement that the defendant would hold the shares on trust for the plaintiff pending the settlement of the dilapidations claim, the shares to be retransferred to the plaintiff at such time as the claim had been settled.
So, as the judge observed, the case turned on illegality. Having quoted at some length from the speech of Lord Browne- Wilkinson in Tinsley v. Milligan, at pp.371E to 372C and 376D to F, he continued:
"The legal analysis in the present case is, in my judgment, as follows: on 11th October 1988, Mr David Tribe transferred 459 shares to his son. That transfer has been duly perfected in the company's books by the registration of Mr Kim Tribe. It is open to either side to prove, and indeed it was agreed, that no consideration was paid for that transfer, despite the consideration appearing on the face of it. The transfer was therefore a voluntary transfer for no consideration. If it was between strangers, a resulting trust would arise. Since it is between father and son, the presumption of advancement applies. Unless Mr David Tribe can prove otherwise, the transfer takes effect as a gift. In order to prove otherwise, he has to lead evidence to rebut the presumption of gift. And if there was an underlying illegal purpose, he will have to give evidence of that purpose and the court will refuse to take that evidence into account on the grounds of public policy. The question therefore becomes, was there an underlying illegal purpose to the transfer of the 459 shares?"
The judge said that the plaintiff had given various accounts of the purpose of the transfer. These had included his decision to put the shares out of reach of his creditors. He had wanted to be able to say to the Carmarthen landlord that he would find it difficult to raise the money. He had wanted to say that his shares had gone. Having reviewed the plaintiff's evidence, the judge said:
"It seems to me to be plain, as it seemed to Mr Dobson, ....... that the purpose of the transfer of shares was to deceive Mr Tribe's creditors by creating an appearance that he no longer owned any shares in the company. In my judgment that was an illegal purpose within the ambit of Tinsley v. Milligan and prima facie I am bound by that case to disregard Mr David Tribe's evidence in rebuttal of the presumption and to hold that the 459 shares were a gift to his son."
Having then said that there was an established exception from the rule in cases where the illegal purpose had not been carried into effect, the judge made these important findings:
"There is no evidence that Mr David Tribe carried his illegal purpose into effect in any way. The transfer was, as far as the evidence goes, never shown to the landlords or any other creditor. The negotiations for release from the liability for dilapidations were conducted by Mr Kim Tribe alone."
He held that because the illegal purpose had not been carried into effect in any way the plaintiff was entitled to lead evidence in rebuttal of the presumption of advancement. Having accepted that evidence, the judge held that the exception applied and that the plaintiff's claim succeeded. He added:
"I reach this conclusion with some relief, because if I had had the discretion which Nicholls LJ in the Court of Appeal in Tinsley v. Milligan thought existed to make a value judgment, I would have been minded to exercise discretion in Mr David Tribe's favour. Mr Kim Tribe was, I find, a willing party to the deception, and in my judgment in his defence he was seeking to take advantage of his father's desire to protect assets for the benefit of the whole family."
I will revert to those observations at the end of this judgment.
Embodied in the judge's order was an undertaking by the plaintiff to retransfer to the defendant shares in the company to the value of £3,000 per annum in each of the tax years 1987/88 to 1992/93, save that the defendant's holding should not exceed 250 shares. That undertaking was given in order to implement the proposal agreed between the plaintiff and Mr King at their meeting in about October 1986. The material parts of the order have been stayed over the hearing of this appeal.
The rule that no court will lend its aid to a man who founds his cause of action on an immoral or illegal act has often led to seemingly unjust results. That is because, as Lord Mansfield CJ made clear when stating the rule in regard to contracts in Holman v. Johnson (1775) 1 Cowp 341, 343, it is not a principle of justice; it is a principle of policy, whose application is indiscriminate and so can lead to unfair consequences as between the parties to litigation; see per Lord Goff of Chieveley in Tinsley v. Milligan (1994) 1 AC 340, 355 B-C. But since such consequences are in general unacceptable to them, the courts have made exceptions to the rule. The exception here in point was recognised by Lord Goff at p.356F:
"In particular, an exception to the principle is to be found in cases in which the illegal purpose has not been carried into effect; but all those cases in which that exception has been recognised have proceeded on the basis that, absent those exceptional circumstances, the principle would have applied. It is not necessary to examine the nature of this exception for present purposes. It is often said to derive from Taylor v. Bowers (1876) 1 QBD 291, which was in fact a case at law. However, the exception was foreshadowed in a number of earlier cases in equity, notably Platamone v. Staple (1815) Coop. 250; Cecil v. Butcher (1821) 2 Jac. & W. 565 and Symes v. Hughes (1870) LR 9, Eq. 475; and it has since been applied in, for example, Petherpermal Chetty v. Muniandi Servai (1908) LR 35 Ind. App. 98 and Perpetual Executors and Trustees Association of Australia Ltd. v. Wright (1917) 23 CLR 185."
The exception was also recognised by Lord Browne-Wilkinson at p.374A-B:
"There was originally a difference of view as to whether a transaction entered into for an illegal purpose would be enforced at law or in equity if the party had repented of his illegal purpose before it had been put into operation, i.e. the doctrine of locus poenitentiae. It was eventually recognised both at law and in equity that if the plaintiff had repented before the illegal purpose was carried through, he could recover his property: see Taylor v. Bowers; Symes v. Hughes."
In both Tinsley v. Milligan and the present case A transferred property into the name of B with the mutual intention of concealing A's interest in the property for a fraudulent or illegal purpose. Before Tinsley v. Milligan the general rule that A could not recover the property was consistently applied irrespective of whether the presumption of advancement arose between A and B or not; see per Lord Goff at p.356B to F and the authorities there cited. But now the majority of their Lordships have made a clear distinction between the two cases. In holding that the general rule does not apply where there is no presumption of advancement, they have necessarily affirmed its application to cases where there is. Thus at p.372B-C Lord Browne-Wilkinson pointed out that, in a case where the presumption of advancement applies, in order to establish any claim, the plaintiff has himself to lead evidence sufficient to rebut the presumption of gift and in so doing will normally have to plead, and give evidence of, the underlying illegal purpose; see also at p.375C.
At the end of his judgment in the court below, Judge Weeks said:
"Finally, it is not for me to criticise their Lordships' reasoning, but with the greatest respect I find it difficult to see why the outcome in cases such as the present one should depend to such a large extent on arbitrary factors, such as whether the claim is brought by a father against a son, or a mother against a son, or a grandfather against a grandson."
I see much force in those observations. If the defendant had been his brother, grandson, nephew or son-in-law, the plaintiff would have succeeded without further enquiry. Moreover, in times when the presumption of advancement has for other purposes fallen into disfavour (see, for example, the observations of Lords Reid, Hodson and Diplock in Pettitt v. Pettitt (1970) AC 777, 793, 811 and 824) there seems to be some perversity in its elevation to a decisive status in the context of illegality. Be that as it may, we are bound by Tinsley v. Milligan for what it decided. It decided that where the presumption of advancement arises the general rule applies. It did not decide that there is no exception where the illegal purpose has not been carried into effect. If anything, it may be said to support the existence of the exception in such a case; see in particular Lord Goff's reference, at p.356H, to Wright's case (infra).
I turn then to the authorities in which the presumption of advancement has arisen, seeking primarily to establish what light they throw on the applicability of the exception. Those mainly relied on by the defendant are Gascoigne v. Gascoigne (1918) 1 KB 223, Chettiar v. Chettiar (1962) AC 294 and Tinker v. Tinker (1970) P. 136; see also McEvoy v. Belfast Banking Co. Ltd. (1934) N.I. 67 and Re Emery's Investments Trusts (1959) Ch. 410, neither of which throws light on the exception since in each the illegal purpose had been carried into effect.
In Gascoigne v. Gascoigne the plaintiff, while living with the defendant, his wife, took a lease of land and built a house on it with his own money. The county court judge's findings of fact were taken by the Divisional Court to mean that the plaintiff, with the defendant's knowledge and connivance, had concocted the scheme of putting the property in her name, while retaining the beneficial interest, for the purpose of misleading, defeating, and delaying present or future creditors; see (1918) 1 KB, at p.226. In an action by the plaintiff to recover the property, it was held that he could not rebut the presumption of advancement in favour of the defendant by setting up his own illegality and fraud. In the judgment of the court delivered by Lush J no reference was made to the carrying into effect of the illegal purpose, except to record that the plaintiff had admitted in evidence that, when called upon to pay taxes in respect of the house, he had refused, saying that it was his wife's property; see p.225.
In Chettiar v. Chettiar a similar result was arrived at in an action between father and son. In order to avoid the effect of the Malayan rubber regulations, the father transferred 40 acres of land to his son, leaving himself with less than 100 acres, so that the permissible production of his holding, indeed of both holdings, would be assessed by the local district officer and not by the assessment committee. The Privy Council inferred that the father and son had achieved their objective, in other words that the illegal purpose had been carried into effect; see (1962) AC, at p.301. Since the presumption of advancement applied in favour of the son, the father had of necessity to rely on the illegality in order to recover the 40 acres. It was held that he could not do so. But in delivering the judgment of the Board, Lord Denning said, at p.302:
"If the fraudulent purpose had not been carried out, there might well have been room for repentance and the father might have been allowed to have the land retransferred to him, as in the cases to which Mr Stabb referred, such as Davies v. Otty (1865) 35 Beav. 208 and Symes v. Hughes (1870) 9 Equity 475, to which might be added Petherpermal Chetty v. Muniandy Servai (1908) 24 TLR 462 where the subject was fully considered by their Lordships' Board. But where the fraudulent purpose has actually been effected by means of the colourable transfer, there is no room for repentance. The father has used the transfer to achieve his deceitful end and cannot go back on it."
In Tinker v. Tinker a husband bought a garage business in Cornwall and found a house nearby for his family. He decided to buy the house in his wife's name so that if his garage business was not a success, his creditors would not be able to take it. Shortly after the purchase the marriage broke up and the husband sought to recover the house from the wife. This court held that he was unable to do so. The basis of the decision appears most clearly from the judgment of Salmon LJ who, at (1970) P. 142 B-C, said:
"The burden of displacing the presumption of advancement is therefore on the husband. This burden can in many cases be displaced without much effort. It seems to me however that in this case the husband's evidence, far from displacing the presumption, has done much to reinforce it."
Having reviewed the evidence and pointed out that there would be nothing wrong in the husband's putting the property into his wife's name in order to protect it from his creditors, the learned Lord Justice continued, at p.142F:
"It seems to me to follow from the registrar's finding that he was an honest man that the husband must have intended the house should belong to his wife. That is why I say that his evidence strengthens the presumption of advancement. As far as I can see, the only possible alternative to what I have just described would be the husband dishonestly putting the house in his wife's name with the intention of himself having the beneficial interest in it, and also with the intention, when he failed in business, to go to his creditors and say quite untruthfully and dishonestly: 'I have no interest in this house. You can look at the documents, and they are plain enough to show that I have none.' The registrar negatived that dishonest frame of mind, and certainly this court would not interfere with that finding."
Neither Gascoigne v. Gascoigne nor Tinker v. Tinker casts any real light on the question whether the exception can apply to such a case. It could be said of Gascoigne v. Gascoigne that the plaintiff's admission that he had refused to pay taxes in respect of the house on the ground that it was his wife's property would in any event have prevented it from applying. Moreover, Tinker v. Tinker was a case where the husband's evidence, so far from rebutting the presumption of advancement, confirmed it. There having been no illegal purpose in the first place, the question whether such a purpose was carried into effect could hardly have arisen. In Chettiar v. Chettiar, on the other hand, the Privy Council recognised that the exception might well have applied if the fraudulent purpose had not been carried out. It is true that none of the three cases referred to in support of that view was one where the presumption of advancement arose. But that does not invalidate the view of the Privy Council, especially since before Tinsley v. Milligan the general rule was consistently applied irrespective of whether the presumption of advancement arose or not.
There is one authority in which it has been distinctly held that the exception can apply to a case where the presumption of advancement arises; see Perpetual Executors and Trustees Association of Australia Ltd. v. Wright (1917) 23 CLR 185, which does not appear to have been cited in any English case before Tinsley v. Milligan. In that case the plaintiff, in about 1906 and out of his own moneys and savings, had purchased a piece of land and erected thereon a house and premises. He said in evidence at the trial that the property had been put in his wife's name at her request, and for convenience, and not as a gift, but for the purpose of securing a home for himself and his family in the event of his failing in business. The wife died in 1915. The administrators of her estate having refused to recognise his claim to the property, the plaintiff brought an action against them claiming a declaration that he was beneficially and absolutely entitled thereto and an order that the defendants should transfer it to him.
The defendants argued that, because of the illegal purpose to defeat his creditors, the plaintiff could not set up the arrangement under which he said that the property had been put into his wife's name, and that there was therefore no evidence to rebut the presumption of advancement. The High Court of Australia rejected that argument and gave judgment for the plaintiff, on the ground that the illegal purpose had not in any respect been carried into effect.
At p.193, Barton ACJ said:
"Had there been creditors to hoodwink or, at any rate, had there been any attempt at such an act, the case would probably have been different. But, so far as we know, there were no creditors to hoodwink, and the whole thing rested on what might happen but never did happen. That such a state of things, carried no further, is not a bar to the respondent's claim to what is beneficially his own is to me apparent, and I need only mention three cases, namely, Symes v. Hughes, Taylor v. Bowers and Payne v. McDonald 6 CLR 208."
The other three members of the court, Isaacs, Gavan Duffy and Rich JJ, gave a joint judgment. At p.196, they said:
"The test appears to be, not whether the plaintiff in such a case relies on the illegal agreement, because in one sense he always does so, but whether the illegal purpose from which the plaintiff insists on retiring still rests in intention only. If either he is seeking to carry out the illegal purpose, or has already carried it out in whole or in part, then he fails."
Having then referred to Payne v. McDonald and having read at some length from the judgment of the Privy Council in Petherpermal Chetty v. Muniandi Servai LR35 Ind. App. 98, 103, they said, at p.198:
"In this case no creditors have been defrauded, the illegal purpose has never been in any respect carried into effect, and therefore the respondent was entitled to succeed, and is now entitled to a dismissal of this appeal."
On this state of the authorities I decline to hold that the exception does not apply to a case where the presumption of advancement arises but the illegal purpose has not been carried into effect in any way. Wright's case, supported by the observations of the Privy Council in Chettiar v. Chettiar, is clear authority for its application and no decision to the contrary has been cited. In the circumstances I do not propose to distinguish between law and equity, nor to become embroiled in the many irreconcilable authorities which deal with the exception in its application to executory contracts, nor even to speculate as to the significance, if any, of calling it a locus poenitentiae, a name I have avoided as tending to mislead. In a property transfer case the exception applies if the illegal purpose has not been carried into effect in any way.
I return to the facts of this case. The judge found that the illegal purpose was to deceive the plaintiff's creditors by creating an appearance that he no longer owned any shares in the company. He also found that it was not carried into effect in any way. Mr Tunkel, for the defendant, attacked the latter finding on grounds which appeared to me to confuse the purpose with the transaction. Certainly the transaction was carried into effect by the execution and registration of the transfer. But Wright's case shows that that is immaterial. It is the purpose which has to be carried into effect and that would only have happened if and when a creditor or creditors of the plaintiff had been deceived by the transaction. The judge said there was no evidence of that and clearly he did not think it appropriate to infer it. Nor is it any objection to the plaintiff's right to recover the shares that he did not demand their return until after the danger had passed and it was no longer necessary to conceal the transfer from his creditors. All that matters is that no deception was practised on them. For these reasons the judge was right to hold that the exception applied.
Mr Tunkel, who did not appear in the court below, also complained that the exception had never been pleaded by way of a reply to the defence of ex turpi causa non oritur actio and, moreover, that it had first been raised by the judge himself and then only during the closing speech of counsel for the defendant. Not surprisingly, the point was then adopted in the closing speech of counsel for the plaintiff. At that stage the point was well out in the open. But no application was made on behalf of the defendant for an adjournment or to recall witnesses. So the complaint, even if it might once have been valid, now comes too late.
I desire to add two comments. First, as to the facts. The judge said that he would have been minded to exercise his discretion, had he had one, in favour of the plaintiff. He evidently thought that the defendant had acted basely by seeking to retain for himself assets which he knew the plaintiff had desired to protect for the benefit of the whole family. In a case of this kind a view of the general merits formed by the judge who has seen and heard the parties give their evidence deserves to be treated with the greatest possible respect. Second, as to the law. If Miss Milligan was able to recover against Miss Tinsley even though she had succeeded in defrauding the Department of Social Security over a period of years, it would indeed be a cause for concern if a plaintiff who had not defrauded his creditors in any way was prevented from recovering simply because the defendant was his son. For my part, I am glad to hold that that is not the law.
I would dismiss this appeal.
LORD JUSTICE MILLETT: Mr. David Tribe transferred his shareholding in his family company to his Son for a pretended consideration which was not paid and was not intended to be paid. The transfer was, therefore, made for no consideration. If the transferee had been a nephew or a trusted stranger, the transaction would have given rise to a resulting trust. In such a case equity places the burden of proving that the transfer was intended to be by way of gift upon the transferee. If he cannot discharge that burden, he holds the shares as nominee and in trust for the transferor. Mr. Tribe, however, transferred the shares to his Son, and accordingly the transaction gave rise to the presumption of advancement. In such a case the transfer is presumed to have been intended by way of gift. The burden of proving that it was not intended as a gift lies upon the transferor.
The Judge found that Mr. Tribe did not intend to make a gift of the shares to his Son. The company represented his life's work, and his shareholding in the company was his largest asset. He had other children besides the Son to whom in the ordinary course of things he would wish to leave his property. But he faced substantial claims for dilapidations in respect of two leasehold properties which were occupied by the company but of which he was the tenant, and he was concerned that he could lose the shares. The Judge accepted his evidence that he transferred the shares to his Son as a nominee in order to conceal them from his creditors, and specifically from his two landlords, by creating the appearance that he no longer owned any shares in the company. That, of course, was an illegal purpose. Ordinarily a man who makes a gratuitous transfer of property to another for an illegal purpose is not allowed to rely on his purpose in making the transfer in order to rebut the presumption of advancement: see Tinsley v Milligan, [1994] AC 340 at p.375 where Lord Browne-Wilkinson said:
"In cases where the presumption of advancement applies, the plaintiff is faced with the presumption of gift and therefore cannot claim under a resulting trust unless and until he has rebutted that presumption of gift: for those purposes the plaintiff does have to rely on the underlying illegality and therefore fails."
The question in the present case is whether there is an exception to this principle where the transferor withdraws from the transaction before any part of the illegal purpose has been carried into effect. Unless that exception applies, Mr. Tribe's claim to recover his own shares from the Son whom he trusted to hold them as his nominee must fail.
The Judge held that there was such an exception and that it was applicable. The illegal purpose was never carried into effect. Neither of the landlords knew of Mr. Tribe's shareholding or was aware that he had disposed of it. Negotiations with the landlords were brought to a satisfactory conclusion without resorting to deception. It never became necessary.
The Judge held that, because the illegal purpose had not been carried out, Mr. Tribe was entitled to withdraw from the transaction and to rely on his evidence of the reason why he transferred the shares to his Son in order to rebut the presumption of advancement. According to the Judge he had what is called a locus poenitentiae. It is submitted on behalf the Son that the Judge was in error. First, it is said, the doctrine of the locus poenitentiae allows a party to an illegal contract to withdraw while the contract is still executory, but it has no application to a transfer of property; in such a case the illegal purpose is partly carried into effect as soon as the property is transferred. Secondly, and in the alternative, a transferor cannot rely on his illegal purpose to rebut the presumption of advancement, and it makes no difference that the illegal purpose has not been carried into effect. Thirdly, there was no true repentance in the present case. Mr. Tribe never abandoned his illegal purpose; he did not demand the return of his shares until the danger had passed and it was no longer necessary to conceal them from his creditors.
There are, in my opinion, two questions of some importance which fall for decision in the present case. The first is whether, once property has been transferred to a transferee for an illegal purpose in circumstances which give rise to the presumption of advancement, it is still open to the transferor to withdraw from the transaction before the purpose has been carried out and, having done so, give evidence of the illegal purpose in order to rebut the presumption of advancement. The second is whether, if so, it is sufficient for him to withdraw from the transaction because it is no longer necessary and without repenting of his illegal purpose. I shall deal with these two questions in turn.
1. The presumption of advancement and the locus poenitentiae.
In Tinsley v Milligan at p.370 Lord Browne-Wilkinson summarised the common law rules which govern the effect of illegality on the acquisition and enforcement of property rights in three propositions: (1) property in chattels and land can pass under a contract which is illegal and would therefore have been unenforceable as a contract; (2) a plaintiff can at law enforce property rights so acquired provided that he does not need to rely on the illegal contract for any purpose other than providing the basis of his claim to a property right; (3) it is irrelevant that the illegality of the underlying agreement was either pleaded or emerged in evidence; if the transferee has acquired legal title under the illegal contract that is enough. The decision of the majority of their Lordships in that case was that the same principles applied in equity. It is, therefore, now settled that neither at law nor in equity may a party rely on his own fraud or illegality in order to found a claim or rebut a presumption, but that the common law and equity alike will assist him to protect and enforce his property rights if he can do so without relying on the fraud or illegality. This is the primary rule.
It is, however, also settled both at law and in equity that a person who has transferred property for an illegal purpose can nevertheless recover his property provided that he withdraws from the transaction before the illegal purpose has been wholly or partly performed. This is the doctrine of the locus poenitentiae and it applies in equity as well as at law: see Symes v Hughes (1870), 9 Eq. 475 for the former and Taylor v Bowers (1876), 1 QBD for the latter. The availability of the doctrine in a restitutionary context was expressly confirmed by Lord Browne-Wilkinson in Tinsley v Milligan at p. 374.
While both principles are well established, the nature of the relationship between them is unclear. Is the doctrine of the locus poenitentiae co-extensive with and by way of general exception to the primary rule? The question in the present case is whether a plaintiff who has made a gratuitous transfer of property to a person in whose favour the presumption of advancement arises can withdraw from the transaction before the illegal purpose has been carried into effect and then recover the property by leading evidence of his illegal purpose in order to rebut the presumption. Closely connected with this question is its converse: is a plaintiff who has made such a transfer in circumstances which give rise to a resulting trust so that he has no need to rely on the illegal purpose, as in Tinsley v Milligan itself, barred from recovering if the illegal purpose has been carried out? If both questions are answered in the negative, then either the locus poenitentiae is a common law doctrine which has no counterpart in equity, or it is a contractual doctrine which has no place in the law of restitution.
It is convenient to consider first the position at common law. It is important to bear in mind that the common law starts from the opposite premise from that on which equity bases the presumption of resulting trust. In an action for money had and received, for example, whatever the relationship between the parties, the burden lies on the plaintiff to prove that the money was not paid by way of gift or pursuant to an enforceable contract. Absence of consideration is not of itself a ground of restitution: it is for the transferor to show that no gift was intended.
The leading case is Taylor v Bowers. In order to prevent his creditors seizing his goods the plaintiff transferred all his stock-in-trade to one Alcock in exchange for fictitious bills of exchange. At first instance Cockburn CJ held at p. 295 that
"Where money has been paid or goods delivered under an unlawful agreement, but there has been no further performance of it, the party paying the money or delivering the goods may repudiate the transaction, and recover back his money or goods."
The decision was affirmed in the Court of Appeal. All four members of the Court held that the plaintiff could prove his title without having to rely on the fraud. Significantly, however, Mellish LJ (with whom Baggallay LJ agreed) laid stress on the fact that the illegal purpose had not been carried out and made it clear that, even though the plaintiff did not need to rely on the illegality in order to prove title, he could not have recovered the goods if the illegal purpose had been carried out.
The case is described as controversial and criticised in Goff & Jones The Law of Restitution (4th Ed.) at p 513 partly on the ground that the contract was not wholly executory because the goods had been handed over to Alcock. But
the principle has been applied in subsequent cases and the case itself is cited without disapproval in Tinsley v Milligan. It is too late now to hold that it was an illegitimate application of a contractual doctrine to a claim for restitution. But the proposition that the plaintiff did not need to rely on the illegality could not be supported today. It is explicable only on the basis that the rule that title can pass under an illegal contract had not yet been clearly established. Nowadays we would say that Alcock (or his successor in title) did not need to rely on the illegal nature of the contract pursuant to which the goods were delivered because the title passed to him despite the illegality and want of consideration; but the plaintiff did. In order to recover the goods as goods received and held to his own use he had to show that they had not been delivered by way of gift or pursuant to an enforceable contract. This required him to show that they had been delivered pursuant to an illegal contract which he had repudiated; and he could not repudiate the contract once the illegal purpose had been wholly or partly achieved.
In Taylor v Bowers the goods were delivered for an illegal purpose but the delivery itself was not illegal. In Bowmakers Ltd. v Barnet Instruments Ltd.,[1945] KB 65 the transfers were assumed to be illegal and it was obviously too late for the transferor to invoke the locus poenitentiae. (In any case the transferor did not bring a claim in restitution but contented itself with pleading illegality as a defence to a claim in conversion). In Singh v Ali [1960] AC 167 Lord Denning, giving the opinion of the Board, confirmed the rule that title passes at law notwithstanding the illegal purpose for which the transfer was made. But he was clearly of the opinion that the transferor's claim to restitution was barred only where the illegal purpose had been carried out. He explained at p. 176:
"The reason is because the transferor, having fully achieved his unworthy end, cannot be allowed to turn round and repudiate the means by which he did it-he cannot throw over the transfer." (My emphasis).
Lord Denning clearly intended it to be understood that the converse applies: the transferor is allowed to repudiate the transfer provided that the illegal purpose has not been achieved.
This has not been displaced by anything in Tinsley v Milligan. Lord Browne-Wilkinson expressly confirmed the existence of the doctrine of the locus poenitentiae and its application in a restitutionary context; indeed, he founded part of his reasoning upon it. Moreover, it is in accordance with ordinary restitutionary principles. The fact that title has passed is no bar to a claim for restitution; on the contrary, this is the normal case. But to succeed at law it is necessary for the transferor to repudiate the transaction which gave rise to its passing, and this is what the locus poenitentiae allows him to do.
The locus poenitentiae is not therefore an exclusively contractual doctrine with no place in the law of restitution. It follows that it cannot be excluded by the mere fact that the legal ownership of the property has become lawfully vested in the transferee. It would be unfortunate if the rule in equity were different. It would constitute a further obstacle to the development of a coherent and unified law of restitution. Most of the cases in equity have been concerned with gratuitous transfers made with the intention of defrauding creditors and often for a pretended consideration. It is not easy to discern any difference in principle between a transfer of property against fictitious bills of exchange and a transfer of shares for a stated consideration which it is not intended shall be paid.
The leading cases on illegality and resulting trusts prior to Tinsley v Milligan are Curtis v Perry (1802),6 Ves. 739; Ex parte Yallop (1808),15 Ves. 60; Groves v Groves (1829) 3 Y.&J. 163; Coultwas v Swan (1870) WR 746; Symes v Hughes (1870),9 Eq.475; In re Great Britain Steamboat Co. (1884),26 ChD 616; Petherpermal Chetty v Muniandi Servai (1908) LR 35 Ind.App. 98; and Rowan v Dann (Unreported 4th. December 1991 CA). In Curtis v Perry, Ex parte Yallop and Groves v Groves the claimant failed to recover. None of these cases is of assistance on the present question. In the first two it would have been unlawful for the claimant to have any beneficial interest in the property in dispute, and the claim to such an interest arising under an implied or resulting trust necessarily failed. Groves v Groves cannot be regarded as a satisfactory case, since no consideration at all appears to have been given to the fact that the claimant did not need to rely on the illegal purpose of the transaction, and on this point the case must be taken to have been overruled by Tinsley v Milligan. Moreover, a very narrow view was taken of the doctrine of the locus poenitentiae. But it is an early example of the refusal of the Court to assist a transferor to recover his property where the illegal purpose has been carried out or where "if the crime has not been completed, the merit is not his."
In Coultas v Swan, Symes v Hughes and Rowan v Dann the property was transferred into the name of a nominee in order to put it beyond the reach of creditors (though in the first of these cases there was found to be no intent to defraud). In all three cases the transferor was permitted to recover. In none of them does it appear that any creditor was deceived. In Symes v Hughes this appears to have been the principal ground of the decision; the case would have gone the other way if a creditor had been deceived. Rowan v Dann, on the other hand, was decided at a time when Tinsley v Milligan was under appeal to the House of Lords. Scott LJ contented himself by saying that every principle of law led to the conclusion that the transferor could recover: he could claim under a resulting trust and did not need to rely on his dishonest scheme; and he could withdraw from the scheme because the illegal purpose had not been carried out. The structure of the judgment of Scott LJ suggests that he regarded these as independent principles either one of which would have sufficed, but the Court was not required to decide this and the case cannot be regarded as authority for the proposition. Woolf LJ did not refer to the fact that no creditor had been deceived.
In Re Great Britain Steamboat Co. the transferor was not allowed to recover because the illegal purpose had been partially carried out. In Petherpermal Chetty v Muniandi Servai the transferor was allowed to recover because the illegal purpose had not been carried out. That case concerned an Indian benami transaction in which the name of the apparent transferee is merely an alias for the transferor, but which bears obvious similarities to a nominee arrangement in English law. The opinion of Lord Atkinson contains a clear exposition of the law at p.102:
"The fact that A has assumed the name of B in order to cheat X can be no reason whatever why a court should assist or permit B to cheat A. But if A requires the help of the Court to get the estate back into his own possession, or to get the title into his own name, it may be very material to consider whether A has actually cheated X or not. If he has done so by means of his alias, then it has ceased to be a mere mask and has become a reality. It may then be very proper for a Court to say that it will not allow him to resume the individuality which he has once cast off in order to defraud others. If, however, he has not defrauded any one, there can be no reason why the Court should punish his intention by giving his estate away to B, whose roguery is even more complicated than his own. This appears to be the principle of the English decisions. For instance, persons have been allowed to recover property which they had assigned away, where they had intended to defraud creditors who, in fact, were never injured....But where the fraudulent or illegal purpose has actually been effected by means of the colourable grant, then the maxim applies "In pari delicto potior est conditio possidentis". The Court will help neither party. "Let the estate lie where it falls." (My emphasis).
Prior to Tinsley v Milligan no transferor had ever succeeded in recovering his property by enforcing a resulting trust where he had transferred the property for an illegal purpose and that purpose had been carried out. In Re Great Britain Steamboat Co. the transferor failed to recover for this very reason; in other cases where the transferor has succeeded he did so only because the illegal purpose had not been carried out.
In Tinsley v Milligan the parties, who both contributed to the purchase of a house, arranged for the conveyance to be taken in the name of the appellant alone but on the understanding that it was to belong to them jointly. The purpose of this arrangement was to enable the respondent to perpetrate frauds on the Department of Social Security, and over a number of years the respondent, with the connivance of the appellant, made false claims for benefit. Despite this the respondent was allowed to recover.
In his dissenting speech Lord Goff refused to draw any distinction between cases where the presumption of advancement applied and cases in which the plaintiff could rely on a resulting trust. From the authorities he derived a single principle: that if one party puts property in the name of another for a fraudulent or illegal purpose neither law nor equity will allow him to recover the property. Even if he can establish a resulting trust in his favour he cannot enforce it. Given Lord Goff's opinion that there was but one principle in play, it was natural for him to describe the doctrine of the locus poenitentiae as an exception to that principle. Since the respondent could not bring herself within the exception, he would have allowed the appeal.
This was not, however, the view of the majority. Lord Browne-Wilkinson expressly held that the rule was the same whether the plaintiff founded himself on a legal or an equitable title; he was entitled to succeed if he was not forced to rely on his own illegality, even if it emerged that the title on which he relied was acquired in the course of carrying through an illegal transaction. The respondent had established a resulting trust by showing that she had contributed to the purchase price and that there was a common understanding between her and the appellant that they should own the house equally. She had no need to allege or prove why she had allowed the house to be conveyed into the sole name of the appellant, since that fact was irrelevant to her claim.
The necessary consequence of this is that where he can rely on a resulting trust the transferor will normally be able to recover his property if the illegal purpose has not been carried out. In Tinsley v Milligan she recovered even though the illegal purpose had been carried out. It does not, however, follow that the transferor will invariably succeed in such circumstances, so that the presence or absence of a locus poenitentiae is irrelevant where the transfer gives rise to a resulting trust. A resulting trust, like the presumption of advancement, rests on a presumption which is rebuttable by evidence: see Standing v Bowring (1885), 31 Ch.D. 282, 287. The transferor does not need to allege or prove the purpose for which property was transferred into the name of the transferee; in equity he can rely on the presumption that no gift was intended. But the transferee cannot be prevented from rebutting the presumption by leading evidence of the transferor's subsequent conduct to show that it was inconsistent with any intention to retain a beneficial interest. Suppose, for example, that a man transfers property to his nephew in order to conceal it from his creditors, and suppose that he afterwards settles with his creditors on the footing that he has no interest in the property. Is it seriously suggested that he can recover the property? I think not. The transferor's own conduct would be inconsistent with the retention of any beneficial interest in the property. I can see no reason why the nephew should not give evidence of the transferor's dealings with his creditors to rebut the presumption of a resulting trust and show that a gift was intended. He would not be relying on any illegal arrangement but implicitly denying it. The transferor would have to give positive evidence of his intention to retain a beneficial interest and dishonestly conceal it from his creditors, evidence which he would not be allowed to give once the illegal purpose had been carried out.
This analysis is not, in my view, inconsistent with a passage in Lord Browne-Wilkinson's speech at p. 374 where he said:
"The equitable right, if any, must arise at the time at which the property was voluntarily transferred to the third party or purchased in the name of the third party. The existence of the equitable interest cannot depend upon events occurring after that date. Therefore if, under the principle of locus poenitentiae, the courts recognise that an equitable interest did arise out of the underlying transaction, the same must be true where the illegal purpose was carried through. The carrying out of the illegal purpose cannot, by itself, destroy the pre-existing equitable interest."
But it does not follow that subsequent conduct is necessarily irrelevant. Where the existence of an equitable interest depends upon a rebuttable presumption or inference of the transferor's intention, evidence may be given of his subsequent conduct in order to rebut the presumption or inference which would otherwise be drawn.
Tinsley v Milligan is, in my opinion, not authority for the proposition that a party who transfers property for an illegal purpose in circumstances which give rise to a resulting trust can invariably enforce the trust and recover the property even though the illegal purpose has been carried into effect. I do not accept the suggestion that cases such as Re Great Britain Steamboat Co. have been impliedly overruled or that the dicta in the many cases, including Taylor v Bowers and Singh v Ali, indicating that the result would have been otherwise if the illegal purpose had or had not been carried out, must be taken to have been overruled.
The question in the present case is the converse; whether the transferor can rebut the presumption of advancement by giving evidence of his illegal purpose so long as the illegal purpose has not been carried into effect. The leading cases on illegality and the presumption of advancement are Childers v Childers (1857), 3 K.&J. 310; Crichton v Crichton (1895), 13 R. 770; Perpetual Executors and Trustees Association of Australia Ltd. v Wright (1917), 23 CLR 185; Gascoigne v Gascoigne, [1918] 1 KB 223; McEvoy v Belfast Banking Co. Ltd. [1934] NI 67; Re Emery's Investment Trusts [1959] Ch. 410; Palaniappa Chettiar v Arunasalam Chettiar, [1962] AC 294; and Tinker v Tinker, [1970] P. 136.
The cases of McEvoy v Belfast Banking Co.Ltd. and Re Emery's Investment Trusts and the actual decision in Palaniappa Chettiar v Arunasalam Chettiar can be put on one side, since in each of them the illegal purpose was carried out. In the latter case, however, Lord Denning repeated the view which he had expressed two years earlier in Singh v Ali. He said at p. 302:
"If the fraudulent purpose had not been carried out, there might well have been room for repentance and the father might have been allowed to have the land retransferred to him as in the cases to which Mr. Stabb referred, such as Davies v Otty and Symes v Hughes, to which might be added Petherpermal Chetty v Muniany Servai where the subject was fully considered by their Lordships' Board. But where the fraudulent purpose has actually been effected by means of the colourable transfer, there is no room for repentance."
This was plainly obiter, and the force of the passage is somewhat weakened by the fact that, of the three cases which Lord Denning cited in support, two were cases of resulting trust and the other was not a case of illegality at all. But it was undoubtedly his view that both at law and in equity property transferred for an illegal purpose was recoverable provided that the illegal purpose had not been carried out.
The other cases fall into two groups. Childers v Childers and Crichton v Crichton are examples of a number of cases, mostly in the first half of the nineteenth century, in which a Father transferred property to his Son in order to qualify him for office. In all the other cases the transferor put the property in the name of his Wife or Son in order to put it out of the reach of his creditors.
In Childers v Childers the Son died shortly afterwards without being aware of the transfer and without having been appointed to the office. Sir William Page Wood V-C held that the Father could not recover the property, since he "could not be heard to say" that he intended the transfer to take effect in fraud of the law. The Vice-Chancellor expressed some initial doubt whether the Father might not have a locus poenitentiae where the object for which he had executed the deed altogether failed; but on consideration he came to the conclusion that earlier dicta to that effect could not stand. The same result was reached in Crichton v Crichton where it does not appear whether the Son was appointed to the office or not. North J. contented himself by remarking that the creation of a trust in favour of the Father would have been in fraud of the law and that the Father "could not be heard to aver" its existence. This formulation is open to criticism since the case was not concerned with the creation of a trust. If the presumption of advancement was rebutted the Father would never have parted with the beneficial interest at all; that is what is meant by saying that the property was held on a resulting trust for him. The real question was whether he "could be heard to aver" his illegal purpose in order to rebut the presumption of advancement. But while the question was mis-stated the answer was clearly in the negative.
The remaining English cases are Gascoigne v Gascoigne and Tinker v Tinker. In each case a man put property into the name of his Wife (so that the presumption of advancement applied) in order to protect it from his creditors, and then sought to recover the property from her when the marriage broke down. The two cases, however, were very different. In Gascoigne v Gascoigne the Husband was in financial difficulties and, in the words of Lush J. "concocted the scheme of putting his property in her name, while retaining the beneficial interest, for the purpose of misleading, defeating and delaying present or future creditors". Furthermore his subsequent conduct was inconsistent with the retention of a beneficial interest; when called upon to pay taxes in respect of the property, he had refused, saying that it was his Wife's property. The Husband was trying to rebut the presumption of advancement which his own conduct confirmed by setting up his own dishonest intention after he had acted on it.
In Tinker v Tinker the Husband was an honest man who bought a house intending it to be the matrimonial home and put it into his Wife's name in order to avoid any risk of its being taken by his creditors in case his business was not a success. The business was not in financial difficulty and was never in danger of becoming so. It is, of course, perfectly legitimate for a person who is solvent to make a gift of his property, particularly the matrimonial home, to his Wife in order to protect her against the possibility of future business failure. It was not, therefore, a case of illegality at all. The Husband intended to make a gift to his Wife, and claimed to recover the subject- matter of the gift only when his Wife left him.
Accordingly, the question whether a transferor can repudiate his fraudulent scheme before it is carried into effect and then give evidence of his dishonest intention in order to rebut the presumption of advancement did not fall for consideration in either of those cases. It was not considered in Gascoigne v Gascoigne, where it was arguably too late for him to do so; and it did not arise in Tinker v Tinker, where he was found to have had no dishonest intention.
In Perpetual Executors and Trustees Association of Australia Ltd. v Wright the High Court of Australia held that the fact that the purpose with which a man put property in his Wife's name as trustee for him was to defraud his creditors does not prevent him from recovering the property from her provided that the illegal purpose has not been carried into effect. The facts of the case bear a superficial resemblance to those in Tinker v Tinker, with this difference, that the Wife signed a letter declaring that she held the property in trust for her Husband. As in Tinker v Tinker, there was no evidence that the Husband had any creditors at the time he put the property in his Wife's name or afterwards during her life. This Husband's intention, however, was dishonest. The letter which he procured his Wife to sign was clear evidence that she held the property in trust for him. It was, however, part of the fraud, to be used or suppressed as circumstances required, for the Husband testified that his purpose in transferring the property to his Wife was to conceal his interest from his creditors. After the death of his Wife he brought proceedings to recover the property and succeeded.
Barton ACJ based his judgment on the fact that the Husband did not need to set up his illegal purpose in order to recover the property. The fact that the Wife was merely a trustee for her Husband was sufficiently evidenced by the letter which contained her declaration of that fact. To this extent, therefore, his judgment was a straightforward application of the primary rule as confirmed in Tinsley v Milligan. But he also laid stress on the fact that no creditor had been deceived. He cited from an earlier decision of the same Court in Payne v McDonald 6 CLR 208 at p. 211 where the Chief Justice had said:
"I doubt, indeed, very much whether the doctrine ex turpi causa non oritur actio applies at all to a case where the only illegality or impropriety alleged is an intent, not effectuated, to defeat creditors."
Barton CJ expressly stated that the case would probably have been different if any creditor had been deceived.
The other three members of the Court based their decision exclusively the fact that the illegal intention had not been carried out. They said at p. 196:
"The test appears to be, not whether the plaintiff in such a case relies on the illegal agreement, because in one sense he always does so, but whether the illegal purpose from which the plaintiff insists on retiring still rests in intention only. If either he is seeking to carry out the illegal purpose, or has already carried it out in whole or in part, then he fails."
And at p.198:
"In this case no creditors have been defrauded, the illegal purpose has never in any respect been carried into effect, and therefore the [Husband] was entitled to succeed."
There are obvious difficulties with this approach in the light of Tinsley v Milligan. The opening lines of the first passage clearly no longer represent the law of this country. But there is nothing in my opinion in Tinsley v Milligan which compels the conclusion that the second passage does not.
There is no modern case in which restitution has been denied in circumstances comparable to those of the present case where the illegal purpose has not been carried out. In Tinsley v Milligan Lord Browne-Wilkinson expressly recognised the availability of the doctrine of the locus poenitentiae in a restitutionary context, and cited Taylor v Bowers as well as Symes v Hughes without disapproval. In my opinion the weight of the authorities supports the view that a person who seeks to recover property transferred by him for an illegal purpose can lead evidence of his dishonest intention whenever it is necessary for him to do so provided that he has withdrawn from the transaction before the illegal purpose has been carried out. It is not necessary if he can rely on an express or resulting trust in his favour; but it is necessary (i) if he brings an action at law and (ii) if brings proceedings in equity and needs to rebut the presumption of advancement. The availability of the locus poenitentiae is well documented in the former case. I would not willingly adopt a rule which differentiated between the rule of the common law and that of equity in a restitutionary context. It is of course true that equity judges are fond of saying that a party "cannot be heard to say" that his purpose was dishonest, and that this approach represents a mainspring of equitable jurisprudence. A man who puts himself in a position where his interest conflicts with his duty, for example, "cannot be heard to say" that he acted in accordance with his interest; he is treated as having acted in accordance with his duty: see for example Re Biss, [1903] 2 Ch.40 and A.G. for Hong Kong v Reid, [1994] 1 AC 34. But this is a substantive rule of equity, not a merely procedural rule as the primary rule appears to be, and it does not preclude the Court from taking cognisance of an uneffectuated intention from which the party in question has resiled. I would hold that Sir William Page Wood's first thoughts in Childers v Childers are to be preferred to his second. I would also hold that there was no "inescapable dilemma" in Tinker v Tinker, where it was said that the transferor was either an honest man, in which case the property belonged to his Wife, or he would have to give evidence of his dishonesty, it being implicit that this was something which he could not do. Such statements are due to an instinctive feeling that a dishonest man should not succeed where an honest man would fail, but this is to misrepresent the effect of allowing a locus poenitentiae. The dishonest man is not treated more favourably than the honest man; provided that the illegal purpose has not been carried out they are treated in the same way. The outcome is different because their intentions were different. The honest man intended a gift; the dishonest man did not.
At heart the question for decision in the present case is one of legal policy. The primary rule which precludes the Court from lending its assistance to a man who founds his cause of action on an illegal or immoral act often leads to a denial of justice. The justification for this is that the rule is not a principle of justice but a principle of policy: see the much quoted statement of Lord Mansfield in Holman v Johnson (1775) 1 Cowp 341, 343. The doctrine of the locus poenitentiae is an exception which operates to mitigate the harshness of the primary rule. It enables the Court to do justice between the parties even though, in order to do so, it must allow a plaintiff to give evidence of his own dishonest intent. But he must have withdrawn from the transaction while his dishonesty still lay in intention only. The law draws the line once the intention has been wholly or partly carried into effect.
Seen in this light the doctrine of the locus poenitentiae, although an exception to the primary rule, is not inconsistent with the policy which underlies it. It is, of course, artificial to think that anyone would be dissuaded by the primary rule from entering into a proposed fraud, if only because such a person would be unlikely to be a studious reader of the law reports or to seek advice from a lawyer whom he has taken fully into his confidence. But if the policy which underlies the primary rule is to discourage fraud, the policy which underlies the exception must be taken to be to encourage withdrawal from a proposed fraud before it is implemented, an end which is no less desirable. And if the former objective is of such overriding importance that the primary rule must be given effect even where it leads to a denial of justice, then in my opinion the latter objective justifies the adoption of the exception where this enables justice to be done.
To my mind these considerations are even more compelling since the decision in Tinsley v Milligan. One might hesitate before allowing a novel exception to a rule of legal policy, particularly a rule based on moral principles. But the primary rule, as it has emerged from that decision, does not conform to any discernible moral principle. It is procedural in nature and depends on the adventitious location of the burden of proof in any given case. Had Mr. Tribe transferred the shares to a stranger or distant relative whom he trusted, albeit for the same dishonest purpose, it cannot be doubted that he would have succeeded in his claim. He would also have succeeded if he had given them to his Son and procured him to sign a declaration of trust in his favour. But he chose to transfer them to a Son whom he trusted to the extent of dispensing with the precaution of obtaining a declaration of trust. If that is fatal to his claim, then the greater the betrayal, the less the power of equity to give a remedy.
In my opinion the following propositions represent the present state of the law:
(1) Title to property passes both at law and in equity even if the transfer is made for an illegal purpose. The fact that title has passed to the transferee does not preclude the transferor from bringing an action for restitution.
(2) The transferor's action will fail if it would be illegal for him to retain any interest in the property.
(3) Subject to (2) the transferor can recover the property if he can do so without relying on the illegal purpose. This will normally be the case where the property was transferred without consideration in circumstances where the transferor can rely on an express declaration of trust or a resulting trust in his favour.
(4) It will almost invariably be so where the illegal purpose has not been carried out. It may be otherwise where the illegal purpose has been carried out and the transferee can rely on the transferor's conduct as inconsistent with his retention of a beneficial interest.
(5) The transferor can lead evidence of the illegal purpose whenever it is necessary for him to do so provided that he has withdrawn from the transaction before the illegal purpose has been wholly or partly carried into effect. It will be necessary for him to do so (i) if he brings an action at law or (ii) if he brings proceedings in equity and needs to rebut the presumption of advancement.
(6) The only way in which a man can protect his property from his creditors is by divesting himself of all beneficial interest in it. Evidence that he transferred the property in order to protect it from his creditors, therefore, does nothing by itself to rebut the presumption of advancement; it reinforces it. To rebut the presumption it is necessary to show that he intended to retain a beneficial interest and conceal it from his creditors.
(7) The Court should not conclude that this was his intention without compelling circumstantial evidence to this effect. The identity of the transferee and the circumstances in which the transfer was made would be highly relevant. It is unlikely that the Court would reach such a conclusion where the transfer was made in the absence of an imminent and perceived threat from known creditors.
2. The doctrine of the locus poenitentiae.
It is impossible to reconcile all the authorities on the circumstances in which a party to an illegal contract is permitted to withdraw from it. At one time he was allowed to withdraw so long as the contract had not been completely performed; but later it was held that recovery was barred once it had been partly performed (Kearley v Thompson (1890) 24 QBD 742. It is clear that he must withdraw voluntarily, and that it is not sufficient that he is forced to do so because his plan has been discovered. In Bigos v Bousted [1951] 1 All ER 92 this was (perhaps dubiously) extended to prevent withdrawal where the scheme has been frustrated by the refusal of the other party to carry out his part.
Academic articles in 71 LQR 254, 91 LQR 313 and 97 LQR 420 are required reading for anyone who attempts the difficult task of defining the precise limits of the doctrine. I would draw back from any such attempt. But I would hold that genuine repentance is not required. Justice is not a reward for merit; restitution should not be confined to the penitent. I would also hold that voluntary withdrawal from an illegal transaction when it has ceased to be needed is sufficient. It is true that this is not necessary to encourage withdrawal, but a rule to the opposite effect could lead to bizarre results. Suppose, for example, that in Bigos v Bousted exchange control had been abolished before the foreign currency was made available: it is absurd to suppose that the plaintiff should have been denied restitution. I do not agree that it was correct in Grove v Grove and similar cases for the Court to withhold its assistance from the plaintiff because "if the crime has not been completed, the merit was not his."
3. Conclusion.
On the facts found by the Judge Mr. Tribe was entitled to judgment. I would dismiss the appeal.
LORD JUSTICE OTTON: I agree.
Order:appeal dismissed with costs; by consent, injunctive relief ordered to continue by the judge in paragraph 2 of his order of 21.12.93 to remain in force until 26.10.95 or until further order by a judge of the Cardiff District Registry; leave to appeal to the House of Lords refused.
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