Palumbo fails to prevent his children suing him: Bitter family feud over pounds 70m trust fund enters new phase as High Court judge dismisses application to have the case struck out

THE bitter feud over the Palumbo millions entered a new phase yesterday when Lord Palumbo lost a court action to stop two of his children from attempting to remove him as a trustee of the family fund.

James Palumbo, 30, and Annabella Adams, 32, can now continue with a High Court action alleging that Lord Palumbo, the former chairman of the Arts Council, and his second wife, Hayat, have mishandled millions of pounds from the pounds 70m trust fund, spending it on wines, works of art, vintage cars and donations to the Conservative Party.

A five-day hearing in chambers ended yesterday when Mr Justice Rattee dismissed Lord Palumbo's application to have the case struck out. Robert Hunter, a spokesman for James and Annabella, said: 'The action is continuing. The strike-out application was not successful, except in relation to two sub-paragraphs and one sentence only in a 74-paragraph statement of claim.' He said the judge had ordered that half the children's costs should be paid immediately.

After the hearing, James and Annabella left in high spirits. 'I am not allowed to say anything but you can see the way I look,' said a smiling James. His sister said: 'I cannot really say anything, but I'm glad that the first part is over.'

A friend of the pair said there were hopes that an out-of-court settlement may be reached before the family's financial affairs are dragged through the courts, but Lord Palumbo is known for his doggedness and has been reportedly hurt that his two eldest children have turned against him.

He has three children from his first marriage and three from his second. The children from the second marriage were added to the list of beneficiaries in 1992.

Annabella and James are suing Lord and Lady Palumbo and two other trustees, John Underwood, a solicitor, and Thomas Tharby, an accountant, in an attempt to recover benefits they claim were wrongly paid out of the trust.

They want Lord and Lady Palumbo removed as trustees and replaced with two or more other people. They also want a pounds 10m interest-free loan paid from the fund to Lord Palumbo to be repaid with interest.

The trust was established in 1955 by Lord Palumbo's father, Rudolph. He made millions from buying bomb-sites in the City of London after the war.

Mr Palumbo, of Onslow Gardens, Chelsea, and Mrs Adams, who lives in a rent-free cottage on her father's Bangor Manor estate near Newbury, Berkshire, alleged at an open court hearing in June that, since 1987, when their grandfather died, 'huge sums' had been paid from the trust to benefit their father.

Among the transactions being questioned by the children are the purchase of a Scottish island and two houses in France worth pounds 4.5m; pounds 9.5m in directors' payments; charitable donations of pounds 4.9m; and donations to Tory party funds of pounds 263,000.

They also allege that pounds 13m has been spent on works of art, pounds 2.5m on wine and about pounds 2m on assorted other properties and vintage cars. Lord and Lady Palumbo deny any misuse of the trust fund.

(Photograph omitted)