Re D

• Jurisdiction: Cayman Islands
• Judge: (Smellie, C.J.)
• Judgment Date: 03 August 2009
• Court: Grand Court (Cayman Islands)
• Date: 03 August 2009

Grand Court

(Smellie, C.J.)

IN THE MATTER OF D

C. McCall, Q.C. and H.G. Robinson for the guardians;

N.R.F.C. Timms and L.A. Freeman for the husband;

Mrs. S. Warnock-Smith, Q.C. and Ms. S.J. Collins for the children.

Cases cited:

(1) C. (a patient), In re, [1991] 3 All E.R. 866; [1992] 1 FLR 51; [1991] Fam. Law 521, referred to.

(2) D. (J.), In re, [1982] Ch. 237; [1982] 2 W.L.R. 373; [1982] 2 All E.R. 37, not followed.

(3) D.M.L., In re, [1965] Ch. 1133; [1965] 3 W.L.R. 740; [1965] 2 All E.R. 129, considered.

(4) L. (W.J.G.), In re, [1966] Ch. 135; [1966] 2 W.L.R. 233; [1965] 3 All E.R. 865, considered.

(5) P, In re, [2010] 2 W.L.R. 253; [2009] 2 All E.R. 1198; [2009] WTLR 651; [2009] EWHC 163 (Ch), dicta of Lewison J. applied.

Legislation construed:

Mental Health Law (1997 Revision), s.13: The relevant terms of this section are set out in para. 11.

s.14: The relevant terms of this section are set out in para. 11.

Mental Health-property and affairs of patient-powers of court-under Mental Health Law, ss. 13–14, court may make orders over specified affairs of incapacitated person if ‘desirable’ for patient or family-test of desirability builds on English approach of seeking to act in patient”s ‘best interests’ and rejects reliance on imaginary wishes during ‘lucid intervals’-to consider objective factors such as patient”s past and present wishes, especially if in writing

The applicants, two guardians of a mentally incapacitated patient, sought directions for the granting of an indemnity out of her estate.

There had been considerable disharmony within the patient”s family in relation to a family trust of which she was the primary beneficiary. A written ‘peace accord’ had, however, been reached between the family members, including the patient before her incapacitation, which involved her husband releasing his interest under the trust so that all litigation between the family members would cease. He and their daughters therefore wished to be indemnified out of her estate against any tax liability which would possibly arise as a consequence of the agreement and the relinquishing of his interest under the trust. Her court-appointed guardians sought approval from the court to enter into the agreement on behalf of the patient, pursuant to s.14(a)(ii) of the Mental Health Law (1997 Revision).

The applicants and the husband submitted that, when making an order in relation to a mentally incapacitated person under s.13 of the Mental Health Law, the court should apply the ‘lucid interval’ test, whereby the court would decide what would be in the patient”s interests by hypothetically assuming that she had become of sound mind, and therefore since she had the means from which to offer assistance the indemnity should be given on her behalf. The daughters submitted that the approach to be preferred, even without express statutory authority, was that adopted in England, with the court acting in the patient”s ‘best interests.’

Held, granting the indemnity on behalf of the patient:

When exercising its jurisdiction to act on behalf of a mentally incapacitated patient under ss. 13 and 14 of the Mental Health Law (1997 Revision) the court would determine whether what was proposed was ‘desirable’ for the patient and her family and this would involve building on the approach used by the English courts under s.4 of the Mental

Capacity Act 2005 by acting in her ‘best interests.’ The counterfactual lucid interval test was rejected and thus, rather than attributing imaginary wishes to the patient, the court would consider more objectively ascertainable factors such as the patient”s past and present wishes and feelings and, in particular, noting any written statements she had made when she had had the capacity to do so. The starting point would be that prima facie the patient would wish to provide for or benefit her immediate family and it would therefore be ‘desirable,’ in her and their best interests, that they would end their conflict and restore harmony to the family by fulfilling the accord-as she had herself, while still having capacity, expressly wished to achieve-and thus the indemnity would be given on behalf of the patient (paras. 30–37).

1 SMELLIE, C.J.: Before me is a summons brought by Mr. B and Mr. C in their capacities as two of the guardians of Mrs. D, appointed by order of the court on December 22nd, 2005, following the mental incapacitation of Mrs. D. The two guardians seek directions as to whether and, if so, what provision should be made out of the estate of Mrs. D in respect of any potential tax liabilities of Mr. D arising out of the proposed release of his contingent income interest under the family trust, and in respect of the costs of all parties of and incidental to Cause Nos. 557 of 2008 and 128 of 2009.

2 This application arises against the background of many years of disagreement and disharmony within Mrs. D”s family in relation to the family trust of which she is the primary beneficiary. This has engendered

litigation in this jurisdiction, currently in two other jurisdictions, and the threat of litigation in other places.

3 Fortunately, before incapacitation, Mrs. D became a party to what is now generally referred to within the family as a ‘peace accord’-a written memorandum between the discordant branches of the family by which it was agreed, amongst other things, that all litigation involving family members anywhere in the world must cease (hereinafter ‘the agreement’). Since a central focus of contention had been the contingent beneficial interest of Mr. D under the family trust (and its offshoots, the X and Y Trusts), the agreement provides for the modification and/or restructuring of the trusts to eliminate beneficial interests in favour of Mr. D, who is also a party to the agreement. Instead, Mr. D will be provided with an annuity.

4 Understandably, Mr. D, who is a foreign taxpayer, requires that he should be indemnified against any possible income or gift tax for which he may become liable as a consequence either of the agreement itself or of relinquishing his interests under the trusts in favour of others or, further, as the consequence of relinquishing a judgment debt against Mrs. H-one of Mrs. D”s three daughters-obtained in another jurisdiction in respect of litigation costs.

5 Mr. D has, however, taken advice from foreign tax counsel regarding the possible tax implications and believes that, at the least, he has a reasonable basis for taking the position that neither the agreement under which there are to be the exchange of interests (as only partially described above) nor any transactions forming a part of that exchange would result in his being liable for foreign income and/or gift tax. It is therefore only because of any small possibility of such liability arising that the indemnity is required.

6 It seems that under the foreign law, a transferee of a benefit may also become liable for any taxes the transferor incurs arising from the transfer. So, the daughters of Mrs. D, who, as secondary beneficiaries under the trusts, may be regarded as the transferees or beneficiaries of Mr. D”s relinquishing of his interests, could have imposed upon them a transferee liability for any taxes payable by Mr. D. Again, remote though the possibility of...