Protecting the patient: Remedies for fraud, abuse and misappropriation
Part two – abuse by attorneys and receivers

Financial abuse does happen and the role of the adviser may be limited to mitigating further loss to the donor’s or patient’s estate. Barrister David Rees, in his second article on financial abuse considers what the Court of Protection can do where attorneys or a receiver perpetrates abuse.

When a donor appoints someone to act as their attorney under an EPA they are placing a great degree of faith in that person. If the donor should lose capacity then, subject to the initial registration of the power with the Court of Protection, the attorney will be able to look after the donor’s property and affairs free from any supervision. In such circumstances, it is scarcely surprising that a significant proportion of EPAs involve fraud or some other form of financial abuse.

The opportunities for abuse by a receiver are somewhat less limited. They will have been chosen by the court rather than by the patient, and at a time after the patient has lost capacity (with an EPA, changing circumstances can mean that a person who was eminently suitable to act as an attorney when appointed a decade earlier, proves to be rather less appropriate to fulfil the task when the donor actually loses capacity).

Unlike attorneys, receivers are subject to supervision by the court, as they have to file regular accounts with the Public Guardianship Office. Furthermore, they do not usually have unfettered access to the patient’s capital.

In my previous article (Elderly Client Adviser, January/February 2003) I looked at some of the measures that can be taken when creating an EPA to cut down the scope for financial abuse. In this article, I focus on some of the more specific problems that can arise under attorneyships and receiverships.

Gifts by attorneys

The powers of an attorney to make gifts out of the donor’s property are subject to significant restrictions. These are to be found at section 3(5) of the Enduring Powers of Attorney Act 1985 (see below) (“the 1985 Act”).

Section 3(5) of the Enduring Powers of Attorney Act 1985

“...subject to any conditions or restrictions contained in the instrument, an attorney under an enduring power, whether general or limited may (without obtaining any consent) dispose of the property of the donor by way of gift to the following extent but no further, that is to say:

He may make gifts of a seasonal nature or at a time, or on an anniversary, of a birth or marriage, to persons (including himself) who are related to or connected with the donor;
He may make gifts to any charity to whom the donor made or might be expected to make gifts, provided that the value of each such gift is not unreasonable having regard to all the circumstances and in particular the size of the donor’s estate.”

The limitations on the attorney’s authority to make gifts are often ignored, either wilfully or simply through ignorance of the scope of an attorney’s powers.

One point frequently overlooked is that the donor cannot override the restrictions on an attorney’s authority to make gifts. An attempt by the donor to incorporate a provision in an EPA, permitting his attorney to make gifts in circumstances wider than permitted by section 3(5) would be ineffective. There is nothing to prevent a donor executing a power of attorney (in a non-enduring form), which would permit his attorney to make gifts out of his estate. However, the attorney’s authority to act under such a power would come to an end on the donor losing capacity and the power would not be capable of registration as an EPA.

Section 3(5) permits an attorney to make gifts of a seasonal nature. This would for example include Christmas, Easter or Hanukkah presents (having regard to the traditions of the community to which the donor belongs). It is, however, unlikely that the Court of Protection would accept that gifts intended to use up the donor’s annual Inheritance Tax exemption (currently £3,000) fell within this provision! Although it also permits the attorney to give presents on birthdays or on (or on the anniversary of) marriages, the Act does not allow for presents to be given on one-off occasions (such as a baptism, bar mitzvah, graduation or the passing of a driving test).

All gifts made by an attorney must also be reasonable having regards to all of the circumstances and in particular the size of the donor’s estate. There is no specific guidance as to what is or is not reasonable. In each case it is for the attorney to make a considered decision based on the type of gift in question, the nature of the donor’s relationship with the intended recipient and the size of the donor’s estate. Large gifts designed to reduce the donor’s estate for Inheritance Tax purposes cannot be made by an attorney, and such gifts will remain ineffective even if dressed up as Christmas or birthday presents.

Action before registration

The Court of Protection’s jurisdiction to supervise the actions of attorneys is subject to various limitations. All the while the donor retains capacity to manage his property and affairs, the court has no power to intervene at all. Any abuse by the attorney is a private matter between the donor and attorney. It is only once the donor is, or is becoming, by reason of mental disorder incapable of managing his property and affairs, that the Court of Protection can intervene.

Once the donor starts to become mentally incapable the attorney is under a duty to register the power with the Court of Protection. Once the duty to register has arisen, the attorney’s powers under the EPA are restricted until registration is effected so that, for example, he cannot use the power to make gifts that would otherwise be authorised under section 3(5) of the 1985 Act. One of the problems that may occur is that the attorney will simply ignore the need to register the power, and continue to manage the donor’s affairs without informing the donor’s bank or other relevant parties that the donor has now lost capacity.

Where a person becomes concerned that an attorney has failed to apply for the registration of a power once the duty to register has arisen, the best solution (if a prompt to the attorney to register the EPA does not bear fruit) is to get the matter before the Court of Protection as swiftly as possible. This can be achieved by applying for the appointment of an interim receiver under Rule 42 of the Court of Protection Rules 2001. Medical evidence will be needed in support of the application to show that the donor is a patient within the meaning of Part VII of the Mental Health Act 1983. Such an application is likely to cause the attorney to make a competing application for the registration of the EPA. The Court of Protection keeps a register of all registered EPAs, and this can be searched (by application on form EP4) if there is doubt as to whether or not a power has been registered. The fee for such a search is currently £20.

There may be cases where the duty to register the EPA has arisen (because the donor is becoming mentally incapable), but where the donor is not yet incapable by reason of mental disorder of managing his property and affairs (the threshold for the court’s intervention under the Mental Health Act 1983). In such circumstances the best approach is to make an application for the court to exercise its powers under section 8(2) of the 1985 Act, to give directions with regard to the management by the attorney of the donor’s property. Section 5 of the 1985 Act permits the court to exercise these powers, if it considers it necessary to do so and it is satisfied that the donor may be becoming mentally incapable, whether or not an application for the registration of the EPA has been made.

If the donor has appointed two or more persons to act jointly and severally as attorneys, and one of the attorneys is suspected of abuse, an application should be made for registration of the power insofar as it relates to the non-defaulting attorney(s). The court has power (under section 11 of the 1985 Act) to give effect to the registration in relation to only some of the attorneys appointed under the power. However, this would not be the case if the original appointment had been joint rather than joint and several.

Objecting to registration

There are five grounds prescribed by section 6 of the 1985 Act upon which objections to registration can be made:

That the power purported to have been created by the instrument was not valid as an EPA (for example where the instrument did not use the prescribed form or the donor lacked capacity to create the power);
That the power created by the instrument no longer subsists (for example where it has been revoked);
That the application is premature because the donor has not yet become mentally incapable;
That fraud or undue pressure was used to create the power;
That having regard to all the circumstances and in particular the attorney’s relationship to or connection with the donor, the attorney is unsuitable to be the donor’s attorney.

In each case it will be for the objectors to prove on the balance of probabilities that the ground of objection has been made out.

Where financial abuse is suspected it is ground (e) that is most likely to be relied upon. An objection based on the grounds of unsuitability is most likely to be successful if it can be shown that the attorney has been involved in financial impropriety, or there is some other factor which is likely to prevent him from carrying out the attorneyship effectively. An example would be where the donor has made a substantial gift to the attorney, and there may be grounds for challenging the validity of the gift (on the basis that the donor lacked capacity to make the gift or that it had been procured by undue influence). In such circumstances, a clear conflict of interest would arise between the donor and the attorney, and it is likely that at the very least, the court would wish to appoint a neutral third party to act as interim receiver and investigate matters.

However, evidence of past financial impropriety will not necessarily prevent the court from registering the power. In Re W (Enduring Power of Attorney) [2000] Ch 343, the attorney had decided to carry out some unauthorised Inheritance Tax planning and had made gifts of £20,000 a-piece to herself and her two siblings (who subsequently objected to the registration of the power). As discussed above, such gifts were in breach of the attorney’s powers to make gifts under section 3(5) of the 1985 Act. The attorney had made the gifts through ignorance of the terms of section 3. Although the Master refused to register the power (for this and other reasons), on appeal the judge allowed registration, although he made clear that such tax planning gifts were not within the terms of section 3(5).

After registration

Unlike a receivership, there is no need for the court to become involved in the supervision of the attorneyship once the power has been registered. However, although not often exercised, the court has power to direct an attorney to file his accounts with the court, and to provide copies to a third party (as a fiduciary the attorney is under an obligation to keep accounts of his dealings with the donor’s affairs in any event). Where the court believes that there are some grounds for considering that an attorney may be unsuitable, but does not consider that there are sufficient grounds for refusing to register the EPA, it may sometimes exercise these powers so that the attorney is placed under closer supervision than normal. Similarly where concerns are raised after an EPA has been registered, the court may (in an appropriate case) order the attorney to produce accounts. Often the court will direct that these accounts should be shown to a third party (such as a relative of the donor) who will generally be better placed than the court to notice any suspicious entries.

Removal of an attorney

The registration of an EPA can be cancelled on the same grounds upon which an objection to registration could have been sustained. Thus if it has reason to suspect that an attorney has abused his position, the court may remove him. If the defaulting attorney has been appointed with others to act jointly and severally, then the power can remain registered in respect of the other attorneys. However, where the defaulting attorney was a sole attorney or the instrument appoints the attorneys to act jointly, then the court will wish to appoint a receiver in place of the attorneyship.

Ademption of gifts

One little noted area where there is an opportunity for attorneys to abuse their position is where all or part of the donor’s property is the subject of a specific legacy under his will. Consider the situation where the attorney is the donor’s son. The donor’s will leaves his house to his daughter absolutely and residue to the attorney. If, after the power has been registered, the attorney should use his power under the EPA to sell the house, the gift to the daughter is likely to be adeemed1. This would not have happened if the sale had been by a receiver acting under the authority of the Court of Protection as section 101 of the Mental Health Act 1983 operates to prevent ademption in these circumstances and turns the gift of the house into one of the proceeds of sale.

If the intended beneficiary becomes aware of the transaction before it takes place, then he can ask the Court of Protection to prevent the sale under section 8(2) of the 1985 Act. An alternative remedy, where it is clear that the donor’s own interests require the sale to take place, would be to apply to the court for the proposed sale to be authorised under section 96 of the Mental Health Act 1983. If the sale takes place under the specific authority of the court under section 96, then section 101 will operate to prevent ademption taking place. This remedy can only be used where the donor is mentally incapable (as opposed to where the power has been registered at a time when he is becoming mentally incapable) as he will then be a patient for the purposes of the Mental Health Act 1983. Where the transaction only comes to light after it has been effected, then the appropriate remedy would be to ask the court to make a statutory will on behalf of the donor, to provide the intended donee with an alternative legacy. Again, the court would only have jurisdiction to act if it can be shown that the donor is also a patient for the purposes of the 1983 Act.

Defaulting receivers

As I have mentioned in the introduction to this article, the opportunities for receivers to abuse their positions are rather more limited than those open to attorneys.

Where there is a substantial risk that an applicant for appointment as a receiver may abuse his position, the best remedy is to prevent the appointment from being made. Notice of an application for the appointment of a receiver must be given to all relatives of a patient who have the same or nearer degree of relationship to the patient as the applicant. The objector should file a statement with the court explaining why the applicant is unsuitable to be appointed as receiver and (if he so wishes) putting forward an alternative candidate. In general the expense of two full competing applications for appointment as receivers should be avoided.

The court has power to remove a receiver at any time, and will do so if it convinced that fraud has occurred, or that there are circumstances surrounding the receivership, which require independent investigation. If necessary the court can direct the official solicitor to make an application for the removal of a receiver (Rule 11 Court of Protection Rules 2001). A statement explaining the grounds on which the application is made should accompany the application. Notification of the application will need to be given to the same relatives who would be entitled to notice on a first application for a receiver.

Reference:

In Re Viertel April 26 1996 (an unreported decision of the Supreme Court of Queensland) it was held that the sale by an attorney acting under an EPA did not adeem a specific gift of that property in the donor’s will. It seems doubtful that an English court would reach this result.

David Rees is a barrister at 5 Stone Buildings, Lincoln’s Inn (020 7242 6201). He regularly appears in the Court of Protection, was counsel in Re W (Enduring Power of Attorney) [2000] Ch 343; [2001] Ch 609 and is a contributor to the current edition of Heywood & Massey’s Court of Protection Practice (pub Sweet & Maxwell 2001).