The recent English case of Re AK (Gift Application) [2014] EWHC B11 (COP) concerned a deputy, appointed to manage a child’s property and affairs, seeking guidance from the court over an application for a gift to be made from the damages award of the child to his parents.

Facts

The child, AK, was born in October 2002 and has cerebral palsy as a result of a prolonged period of hypoxia at the time of birth. Acting by his mother as his litigation friend, he sued the local NHS Trust for clinical negligence. In 2009, the High Court approved a substantial settlement of the claim on the basis that AK would receive a lump sum payment of £1,050,000, plus a series of index-linked periodical payments calculated on the basis that AK would not likely live beyond 15.

Subsequently, the Court of Protection made an order appointing a solicitor as AK’s deputy to manage his property and affairs. On 4 November 2013, the deputy applied to the court for an order to gift AK’s parents £150,000 towards the building of a property in Pakistan suitably adapted for AK’s complex needs.

The deputy gave the following evidence for the judge to consider when determining what would be in AK’s best interests:

  • AK and his family are Pakistani. Most of their family lives in Pakistan and they recently visited for approximately 4 months;
  • AK’s mother and father purchased land with the intention of building a family home near their extended family;
  • They requested £150,000 as a contribution to the property being built so it is suitably adapted for AK’s needs;
  • A gift was the more practical approach given the difficulty of obtaining receipts for all works to be carried out in Pakistan. Further, receipts would have had to be translated from Urdu to English, which would be a further unnecessary expense. It would also have been unrealistic to obtain receipts and/or invoices for every piece of expenditure in relation to the property;
  • Due to AK’s respiratory condition, he would benefit from the climate in Pakistan;
  • There would be long term financial benefits for AK as the family anticipated it would spend about 6 months per year at the property in Pakistan. Therefore, current expenditure on agency care would decrease dramatically given the availability of family support in Pakistan, and privately funded care in Pakistan was cheaper than in UK in any event.
  • Whilst the property was in the name of AK’s parents, AK would inherit the property as a beneficiary if his parents should pre-decease him;
  • AK’s life expectancy ‘does not greatly exceed 20 years of age’ and the property would allow him to experience a better quality of life.

The court invited the Official Solicitor to act as AK’s litigation friend as part of the usual procedure in any application for a substantial lifetime gift. The Official Solicitor took the view that the deputy did not properly consider all the ways in which AK might contribute to the purchase or adaptation of a home for himself and his family in Pakistan, such as by way of an investment for AK, rather than a simple gift to his parents. There was also a suggestion that the deputy should, before making any gift, obtain from AK’s parents detailed and costed proposals for the work to be undertaken and how that work is to be funded.

Law

The UK’s Court of Protection is empowered under section 18(3) of the Mental Capacity Act 2005 (the “Act“) to appoint a deputy who can take a long-term view where a child is awarded substantial compensation for personal injury or clinical negligence, and where it is unlikely the child will have the capacity to manage the award when he or she attains adulthood.

The judge considered (amongst other things) the following:

  • Section 4 of the Act, which provides a checklist of the factors that anyone doing the act or making the decision must consider when deciding what is in P’s best interests.
  • The standard clause in the deputyship order regarding the ambit of her powers as a deputy: “The deputy may (without obtaining any further authority from the court) dispose of money or property of AK by way of gift to any charity to which he made or might have been expected to make gifts and on customary occasions to persons who are related to or connected with him, provided that the value of each such gift is not unreasonable having regard to all the circumstances and, in particular, the size of the estate“.

The clause in the deputy’s order should enable deputies for property and affairs to have the same powers to make gifts as attorneys acting under a Lasting Power of Attorney or Enduring Power of Attorney. Any gift outside those parameters would have to be approved by the Court of Protection (under section 18(1)(b) of the Act). However, the judge noted that “[a]s is often the case when someone is profoundly disabled and has lacked capacity from birth, the application of the best interests’ checklist in section 4 of the Act is not always conclusive because of its strong emphasis on supported decision making and substituted judgment“.

By contrast, the closest Hong Kong equivalent to these provisions of the MCA is found in the Guardianship of Minors Ordinance (Cap. 13) (the “GMO“) and Parts IVB and IVC of the Mental Health Ordinance (Cap. 136) (the “MHO“). The GMO, along with Hong Kong common law, deal specifically with the guardianship of a mentally incapacitated person under 18, and applications for guardianship are typically made only when disputes arise. On the other hand, guardianship applications under the MHO are typically made for individuals who are 18 or above. In particular, both the GMO and MHO have similar “best interests” provisions, which are as follows:

  • Section 3(1)(a) of the GMO states that in relation to the administration of any property belonging to or held in trust for a minor or the application of the income of any such property, and in any proceedings before any court, the court shall regard the best interests of the minor as the “first and paramount consideration“. The section goes on to detail what elements the court should consider, some of which are similar to Section 4 of the Act. Further, the involvement of parents in the affairs of the child is more prevalent in Hong Kong than is provided for under the Act. The Family Court in Hong Kong has also from time to time referred to the “welfare checklist” in the English legislation, section 1(3) of the Children Act 1989, for guidance on what is in the minor’s best interests. 
  • Sections 10A, Parts IVB and IVC of the MHO, in particular, have similar language to Section 4 of the Act as well. These sections similarly empower judges, legal guardians or doctors to make decisions in the mentally incapacitated patient’s best interests.

Given the limitations of the section 4 “best interests” checklist (to which the provisions in the GMO and MHO are broadly similar) the judge, in AK’s case, adopted a “balance-sheet” approach, describing its advantages and disadvantages. In this regard, the advantages stipulated in this approach adopted many of the comments made by the deputy regarding what was in AK’s best interests, whereas the disadvantages took aboard the disadvantages highlighted by the Official Solicitor.

The judge also remarked that there needed to be caution and prudence when applying AK’s funds due to the lack of certainty over what may happen over the next few years, such as (i) AK’s parents pre-deceasing AK or becoming physically incapable of looking after him due to accident or illness, leading to an increase in the cost of his care; (ii) AK’s parents separating or divorcing; (iii) political circumstances in Pakistan; (iv) deterioration of AK’s condition which might disable him from traveling to Pakistan and thus also require a more extensive and expensive care regime; and (v) AK may also outlive his life expectancy and “need every penny he can get“. On balance, if AK’s life expectancy was only 15 as originally predicted, then “time[was] of the essence” (given AK was already 11 by the time of the hearing) and it was essential for the works to be carried out without further delay.

The judge held that it was in AK’s best interests to allow the transaction to proceed by way of an interest free loan of £150,000 to his parents, rather than as a straightforward gift. His view was that AK would be able to retain the capital as part of his estate, and that it would help to ensure his parents comply with the purpose for which the loan was intended. The loan would be repayable over 10 years at a rate of £15,000 per year. He further authorised the deputy to make annual gifts of £15,000 to AK’s parents (if there was sufficient income surplus to his requirements in each accounting period) to assist the parents in repaying the loan.

The judge distinguished the matter from Re JDS: KGS v JDS [2012] EWHC 302 COP, where the funds were improperly used to reduce the amount of inheritance tax payable, which was not a purpose for which the award to the young man was intended.

Key Points

  • The use of a “balance sheet” approach is helpful in circumstances where the checklist under section 4 of the Act is inapplicable, for example if the child is profoundly disabled and has lacked capacity since birth. If the case is followed by the courts of Hong Kong, it is possible that a similar approach may be adopted where the “best interests” of a mentally incapacitated individual is considered.  
  • The judge would consider whether the parents will actually use the gift for its intended purpose. The decision to provide a loan instead of a gift enhances the incentive to fulfil that purpose.