Equity and Trusts Law

Q&A Equity and Trusts

Mohamed Ramjohn

Equity and Trusts Lawcards 2012 - 2013

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Questions & Answers

Bonus Question

Are the distinctions between legal and equitable proprietary claims appropriate?

Discuss.

Answer Plan

Nature of proprietary claims generally.
Scope of a legal proprietary claim.
The claimant in a legal proprietary claim.
The subject matter of a legal proprietary claim.
Pre-requisites of an equitable proprietary claim.
Subject matter of an equitable proprietary claim.
Limitations regarding an equitable proprietary claim.

Answer

A proprietary claim in law or in equity is available to the beneficiary or defendant and involves a right to 'follow' or ‘trace’ the trust assets in the hands of the trustees or third parties. The claim in equity does not subsist against the bona fide transferees of the legal estate for value without notice. The remedy is ‘proprietary’ in the sense that the order is attached to specific property under the control of another or may take the form of a charging order thereby treating the claimant as a secured creditor. This is known as a claim in rem or a ‘tracing order’.

‘Following’ the assets in the hands of the defendant involves the process of identifying the same asset (but not in any substituted form, such as the proceeds of sale of the asset) as it moves from hand to hand with the effect that the claimant may attach an order on the property. On the other hand, a tracing order is a process whereby the claimant establishes and protects his title to assets in the hands of another, see Lord Millett in Foskett v McKeown [2001] 1 AC. The remedies at common law and equity are mainly ‘personal’, in the sense that they are remedies that force the defendant to do or refrain from doing something in order to compensate the claimant for the wrong suffered. But the proprietary remedy exists as a right to proceed against a particular asset in the hands of the defendant.

The proprietary remedy has a number of advantages over the personal remedy, namely:

that the effectiveness of the claimant’s action is not dependent on the solvency of the defendant. Indeed, the claimant’s action is based on an assertion of ownership of the asset in question;
that the claimant may be able to take advantage of increases in the value of the property in appropriate cases;
that, on a proprietary claim, interest accrues from the date the property was acquired by the defendant, while claims in personam carry interest only from the date of the judgment;
that the limitation periods for commencing claims are not applicable to claimants who seek to trace their property in the hands of the defendant.

A person who asserts a proprietary claim at law uses the action that is appropriate to the type of property that he claims. Thus, if he is claiming land, he will use the action for the recovery of land. He needs to show better title than the defendant and his claim is not defeated by a bona fide purchaser of the legal estate for value without notice. If the claim is for specific chattels, he will use the tortuous action for conversion under the Torts (Interference with Goods) Act 1977. This Act gives the court a discretion whether to order the specific recovery of the goods. If the claim is in respect of a chose in action, the claimant will use the action for money had and received. The legal proprietary claims will now be subject to the defence of bona fide change of position.

The common law restitutionary claim is much more restricted than the claim in equity. The approach at law is that provided that the claimant’s property is ‘identifiable’, the process of tracing may continue through any number of transformations. The form that the property takes is irrelevant, provided that the claimant shows a direct connection between his property in its original form and the property in its altered form in the hands of the defendant, see Taylor v Plumer (1815) 3 M&S 562 and Lipkin Gorman v Karpnale [1991] 3 WLR 10.

The main restriction in the common-law right to trace is that the property ceases to be ‘identifiable’ when it becomes comprised in a mixed fund or when the asset ceases to be wholly owned by the claimant, see AGIP v Jackson [1991] Ch 547. Such restrictions on legal proprietary claims are highly inconvenient, but the difficulties have been substantially alleviated by the intervention in equity.

Equity developed a more realistic approach to tracing as opposed to the common law. Equity had conceived the notion that once property was identifiable, recognition of the claimant’s right could be given by attaching the order:

• to specific property; or
• by charging the asset for the amount of the claim.

The consequences of a successful equitable proprietary claim are that the defendant will be treated as a trustee of the property in question for the claimant. The trust is often said to be a constructive trust. Alternatively, the claimant may be subrogated to the rights that a third party has against the defendant (see Boscawen v Bajwa [1996] 1 WLR 328).

The pre-requisites for a successful equitable proprietary claim were originally laid down in Re Diplock [1948] Ch 465. These are as follows:

The equitable remedy does not affect rights obtained by a bona fide transferee of the legal estate for value without notice. All equitable claims are extinguished against such persons.
Tracing will not be permitted if the result will produce inequity because ‘He who comes to equity must do equity’. Accordingly, if an innocent volunteer spends money improving his land, there can be no declaration of charge because the method of enforcing the charge would be by way of sale, thus forcing the volunteer to convert his property.

Recently, in Lipkin Gorman (a firm) v Karpnale [1991] 3 WLR 10, Lord Goff advocated a defence of bona fide change of position, which ought to be adopted in English law in respect of restitutionary claims. This defence will be developed on a case-by-case basis. The usual approach adopted by the courts was based on estoppel, which has limitations that make it unsuitable to restitutionary claims. The estoppel is based upon a representation by the claimant, whether express or implied, that the defendant is entitled to treat the money as his own. The mere payment of money under a mistake cannot, by itself, constitute a representation which will estop the payer from asserting his right to receive his payment. Further the defence of estoppel stands or falls in its entirety. The defence may not be adjusted to suit the circumstances of the case.

The defence of change of position would be available to an innocent volunteer who, after receiving the claimant’s money, has altered his position to such an extent that, having regard to all the circumstances, it would be inequitable to require him to make full restitution to the claimant, see Abou-Ramah v Abacha [2006] All ER (D) 80. On the other hand, the defence ought not to be available to a defendant who has changed his position in bad faith, that is, a defendant who spends the claimant’s money after knowledge of facts entitling the claimant to restitution. Likewise, in Cressman v Coys of Kensington [2004] EWCA 47, the Court of Appeal decided that the defence was not available to the defendant who acquired a personalised, cherished number plate by mistake and consciously disposed of it in order to avoid the claimant’s action. Similarly, the defence will not be available to a wrongdoer. In any event, the defendant is required to establish that there is a causal link between the mistaken receipt of the overpayment and the recipient's change of position, which makes it inequitable for the recipient to be required to make restitution, see Scottish Equitable plc v Derby [2001] 3 All ER 818. The mere fact that the defendant has spent the money in whole or in part, in the ordinary course of things, does not, of itself, render it inequitable that he should be called upon to repay the claimant. But if the defendant has spent the claimant’s money on a venture that would not have been undertaken but for the gift, such conduct would be capable of being construed as a change of position.

In Credit Suisse (Monaco) SA v Attar [2004] EWHC 374, the court decided that dishonesty on the part of the defendant would deprive him of the defence of change of position. Likewise, the repayment of a debt which was required to be repaid sooner or later would not afford a defence to the defendant, for in such a case there is no causal connection between the mistaken receipt and the expenditure.

Wilful blindness with regard to a windfall amount received by the defendant followed by a payment out of his account will be insufficient to support the defence, see Fea v Roberts [2005] All ER (D) 69.

The right to trace is extinguished if the claimant’s property is no longer identifiable, eg the trust monies have been spent on a dinner or a cruise or in paying off a loan. The remedy presupposes the continued existence of the claimant’s property as a separate fund or as part of a mixed fund.
It is essential that the claimant proves that the property was held by another on his behalf in a fiduciary or quasi-fiduciary capacity in order to attract the jurisdiction of equity. This fiduciary need not be the person who mixes the funds or the assets. The mixture may be effected by an innocent volunteer, as in Re Diplock (1948). This requirement of a fiduciary relationship was stretched to breaking point in Chase Manhattan Bank v Israel – British Bank [1979] 3 All ER 1025, where Goulding J decided that an overpayment to a recipient bank made the latter a fiduciary on the date of receipt of the funds. However in Westdeutsche Landesbank Girozentrale v Islington Borough Council [1996] AC 669, the House of Lords reviewed this case and decided that the fiduciary relationship arose when the recipient bank became aware of the overpayment and retained the funds. Further the requirement of a fiduciary relationship has been questioned by the House of Lords in Foskett v McKeown. Despite the view of the High Court in Bracken Partners Gutteridge [2003] EWHC 1064, to the effect that the requirement has been abolished, the better view is that it still remains as part of the law.

The repercussions of the fiduciary relationship requirement may have important consequences in commercial law with regard to reservation of title clauses, see Armour v Thyssen Edelstahlwerke AG [1991] 2 AC 339. Further, in the Westdeutsche case it was said that stolen money may be traceable in equity on the ground that property obtained by fraud is subject to a constructive trust imposed on the fraudulent party. The court in Shalson v Russo [2003] EWHC 1637, questioned this principle on the ground that the thief acquires no title to property and it is difficult to see how he can be a trustee of the property. The true owner retains the legal and equitable interests.

The nature of an equitable proprietary claim may involve funds within a bank account and other assets. The rule in Re Hallett’s Estate (1880) 13 Ch D 696, is that where a trustee or fiduciary mixes trust monies with his own:
the beneficiary is entitled in the first place to a charge on the amalgam of the fund in order to satisfy his claim;
if the trustee or fiduciary withdraws monies for his own purposes, he is deemed to draw out his own monies so that the beneficiary may claim the balance of the fund as against the trustee’s general creditors. This principle is subject to the lowest intermediate balance in the account standing to the credit of the account after the date of mixing (see Roscoe v Winder [1915] 1 Ch 62).

Where the trustee or fiduciary mixes his funds with that of the beneficiary or has purchased further property with the mixed fund, the beneficiary loses his right to elect to take the property acquired. The reason is that the property would not have been bought with the beneficiary’s money pure and simple but with the mixed fund. However, in the exercise of the exclusive jurisdiction of equity, the beneficiary would be entitled to have the property charged for the amount of the trust money (see Re Oatway [1903] 2 Ch 356).

Further, the rule in Clayton’s case (Devaynes v Noble (1816 1 Mer 529)) is to the effect that where a trustee mixes trust funds subsisting in an active current bank account belonging to two beneficiaries, the amount of the balance in the account is determined by attributing withdrawals in the order of sums paid in to the account (‘first in, first out’ (FIFO)).

The rule is applied as between beneficiaries (or innocent parties) inter se in order to ascertain:
(a) ownership of the balance of the fund; and
(b) ownership of specific items bought from funds withdrawn from the account.

The basis of the rule lies in the fact that as between the beneficiaries (or innocent parties) the ‘equities are equal’, that is, there is no need to give one beneficiary any special treatment over the other. However, the modern tendency is to distinguish Clayton in the interests of fairness and justice (see Barlow Clowes v Vaughan [1992] 4 All ER 22 and Commerzbank Aktiengesellschaft v IMB v Morgan [2004] EWHC 2771).

Note

This is a general question requiring you to evaluate the distinctions between the two types of claims.

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The Good, the Fair and the Ugly

Good essays are the gateway to top marks. New to this edition, The Good, The Fair, and The Ugly shows you the style of essay which works well in exams, as well as the simple errors that can cost you essential marks. Written by our Q&A authors, each of these interactive essay-based tutorials highlights key themes and common errors and illustrates essays of specific standards:

Whilst marking criteria will vary, as a general guide, the Good answer will be based on a general mark of a first or upper second class; the Fair answer will be based on a lower second or third class and the Ugly answer would result in a fail.

The Good

(a) Xavier is the beneficiary under a trust with trustees, Alan and Bernard who are the registered owners of 1,000 shares in Pluto Ltd, a company with an issued share capital of 2,000 shares. Xavier orally directed the trustees to hold 10 per cent of the company’s shares for the benefit of Yuri.

(b) Xavier verbally declares himself a trustee of his beneficial interest in 50 shares in Pluto Ltd for Zeus absolutely.

Podcast: the Good

(a) Section 53(1)(c) of the Law of Property Act 1925 enacts as follows, ‘A disposition of an equitable interest or trust subsisting at the time of disposition must be in writing signed by the person disposing of the same or by his agent thereunto lawfully authorised in writing or by his will”. (1) Narration of the relevant statutory provision.

Does Xavier (X) enjoy an ‘equitable interest’ under a trust (i.e. a subsisting equitable interest)? Since we are told that a trust has been set up in favour of X, it follows that his interest is enjoyed under a subsisting trust. In other words, the trust already exists with X as a beneficiary. (2) Analysis of a 'subsisting equitable interest'.

Does it matter that the interest exists in personalty? The short answer to this issue is that s 53(1)(c) of the LPA 1925 is applicable to both personal and real property. This is the position despite the definition of ‘equitable interests’ in s 205(1)(x) of the Law of Property Act 1925. The statutory definition refers to equitable interests ‘in or over land’ (i.e. in the context of land). Despite this definition, the effect of the decisions of the courts, including the House of Lords (that we will be referring to in this answer), has been that s 53(1)(c) encompasses both realty and personalty. (3) Discussion of the judicial extension of the provision to personalty.

The next issue is whether the verbal direction by X to the trustees (Alan and Bernard) requiring them to hold part of the equitable interest on trust for Yuri (Y) is void for non-compliance with s 53(1)(c) of the Law of Property Act. It is clear that the sub-section envisages that the requirement of writing is mandatory and not simply evidential. Thus, non-compliance with the sub-section will make the intended disposition void. (4) Consideration of the effect on non-compliance with the statutory provision.

Is this verbal direction by X an intended ‘disposition’ within s 53(1)(c)? A disposition for the purposes of s 53(1)(c) has been partially defined by Romer LJ in Timpson’s Executors v Yerbury in terms of four classifications. The second classification involves a direction to the trustees to hold the property on trust for another. (5) Partial definition of what constitutes a 'disposition' within s 53(1)(c) of the Law of Property Act 1925.

In Grey v IRC the House of Lords decided that an oral direction by a beneficiary to the trustees to hold shares on trust for another was void for not satisfying the requirements of the sub-section. On the facts of this problem, it would appear that X is attempting to dispose of his subsisting equitable interest in the shares in Pluto Ltd to Y by orally directing the trustee to hold on trust for Y. This seems to be on all fours with the principle in Grey v IRC and is accordingly void. Thus, Y will not acquire the contemplated interest in the property while the direction remains oral and X may retain his beneficial interest in the shares. (6) Application of the principle of law laid down in Grey v IRC.

A second point to explore is whether the direction by X to constitute a trust in favour of Y is sufficiently certain, (i.e.10 per cent of X’s holding of shares (or 100 shares) in Pluto Ltd). Has the three certainties test been satisfied on these facts? There is no difficulty with certainty of objects but the material issue concerns certainty of subject matter, in particular, trust property, as distinct from the beneficial interest. If the trust property is not certain this may have a reflex action on intention and create uncertainty as to the intention to create a trust. The test for certainty of trust property is whether the subject matter is sufficiently identified or is identifiable to such an extent that the court may attach an order on the relevant property. The oral direction concerns 10 per cent of the shares in Pluto Ltd. Would this direction satisfy the test? In Hunter v Moss the court decided that the quantification of the shares in a company (say 5 per cent of the shares) was sufficiently certain. The shares were of one type only (similar to Pluto Ltd) so that it was not difficult to ascertain which shares were intended to be the trust property. The formula for the quantification, a percentage, (as in this problem) was clear enough for the courts to be able to identify the number of trust shares. There was no need to specify the numbers on the share certificates in order to identify the trust shares. Each share was the same as any other. In Hunter, the Court of Appeal drew an analogy with dispositions under a will by reference to the quantification of part of a homogeneous whole and decided that to the same effect, a self declaration of trust of similar property will be valid. This approach was endorsed in Re Harvard Securities Ltd also in respect of stocks and shares. However, in Re London Wine Ltd, Re Staplyton and Re Goldcorp Exchange, the court required a degree of segregation of goods from the bulk. This principle has been modified by the Sale of Goods (Amendment) Act 1995. In any event, the Re London Wine line of cases is distinguishable from the Hunter v Moss type of transactions, for in the latter line of authorities the trust property comprised shares (or fungibles), as opposed to goods, the disposal of which is not subject to the Sale of Goods Act 1979. (7) Consideration of whether the direction to hold 10 per cent of Xavier's holding of shares satisfies the test for certainty of subject matter.

The effect is that in the opinion of Professor Hayton, there is an odd distinction between the application of the test for certainty of subject matter of tangible and intangible property. (8) References made to the opinions of textbook writers and academics on controversial areas of the law.

In the present case the subject matter of the intended disposition is shares (or fungibles) of the same type, and it is arguable that since the amount of the shares that the trustees are directed to hold on trust has been quantified in terms of a proportion, the trust property is certain.

(b) A declaration of trust is regarded as a ‘disposition’ in accordance with the classification of dispositions (4th classification) laid down by Romer LJ inTimpson’s Executors v Yerbury. Thus, X’s oral declaration of trust of 50 shares in Pluto Ltd in favour of Zeus (Z) prima facie fails to comply with the requirements of s 53(1)(c) of the Law of Property Act 1925(see above) and is void.

Alternatively, Professors Hayton and Pettit have argued strenuously that a declaration of trust of part of an equitable interest constitutes the creation of a new trust or sub-trust with active duties imposed on X and, therefore, does not constitute a disposition within s 53(1)(c). In other words, in order to decide whether the subsection is required to be complied with these professors subscribe to the view that a distinction is to be drawn between, on the one hand, declarations under which the declarant (X) purports to reserve to himself an active role as trustee of the derivative equitable interest established by him and, on the other hand, declarations whereby the declarant renders himself a bare trustee for others. These commentators rely on three nineteenth-century decisions to support their contention – Onslow v Wallis, Grainge v Wilberforce and Re Lashmar.

In Grainge, Chitty J said that where A holds property on trust for B and B declares himself a trustee for C, B drops out of the picture and A holds directly on trust for C. This tautological statement does not tell us whether B can effectively orally declare himself a trustee for C, which is the point in issue. In addition, this inelegant distinction between declarations within s 53(1)(c) and declarations outside the sub-section is at odds with the House of Lords decision in Oughtred v IRC. In this case the Law Lords unanimously decided that a constructive, bare trustee of an equitable interest remained ‘in the picture’ until the completion of the transfer. Moreover, the pre-1925 cases reviewing what conduct constitutes a ‘grant or assignment’ are to be viewed with suspicion in that the law was changed by the Law of Property (Amendment) Act 1924. The 1924 Act introduced the broader expression, ‘disposition’ for the first time and repealed the expressions, ‘grant or assignment’, which were included in the predecessor to s 53(1)(c) of the Law of Property Act 1925. This change in 1924 was, in turn, consolidated in the 1925 Act (see Lord Upjohn’s opinion in Grey v IRC). The effect has been that the nineteenth century cases that considered ‘grant or assignment’ are unreliable in the context of the wider expression, ‘disposition’.

The better view, advocated by Lewin and Brian Green, seems to be that a self declaration of trust of part of an equitable interest is an intended disposition and, as such, is required to comply with s 53(1)(c). The sub-section draws no distinction between dealings with equitable interests carrying beneficial rights on the one hand, and, on the other hand, dealings with equitable interests minus beneficial rights (i.e. valuable and valueless equitable rights).

Accordingly, a persuasive argument is capable of being raised that X’s oral declaration is void for non-compliance with the sub-section and Z does not acquire the interest promised by X. (9) Consideration of the controversial issue as to whether a self declaration of trust of part of an equitable interest constitutes a 'disposition' within s 53(1)(c) of the LPA 1925.

A second point to note is whether the oral intended self-declaration of trust of 50 shares from a portfolio of 1,000 shares satisfies the test for certainty of subject matter. The issue is which 50 shares in Pluto Ltd was intended to be subject to the trust. This issue was discussed fully in (a) above, where the principle in Hunter v Moss was explored to the effect that it was unnecessary to identify the shares by reference to the share certificates in order to satisfy the test for certainty of subject matter. The mere quantification of the number of shares was sufficient to satisfy the test because each share was identical to each other share in Pluto Ltd.

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The Fair

(b) Xavier verbally declares himself a trustee of his beneficial interest in 50 shares in Pluto Ltd for Zeus absolutely.

Podcast: the Fair

(a) Section 53(1)(c) of the Law of Property Act 1925enacts as follows, ‘A disposition of an equitable interest or trust subsisting at the time of disposition must be in writing signed by the person disposing of the same or by his agent thereunto lawfully authorised in writing or by his will’.(1) Narration of the relevant statutory provision.

Does X enjoy an ‘equitable interest’ under a trust (i.e. a subsisting equitable interest)? Since we are told that a trust has been set up in favour of X, it follows that his interest is enjoyed under a subsisting trust. In other words, the trust already exists with X as a beneficiary. (2) Analysis of a 'subsisting equitable interest'.

Does it matter that the interest exists in personalty? The short answer to this issue is that s 53(1)(c) of the LPA 1925 is applicable to both personal and real property. This is the position despite the definition of ‘equitable interests’ in s 205(1)(x) of the Law of Property Act 1925. The definition refers to equitable interests in the context of land. Despite this definition, the effect of the decisions of the courts, including the House of Lords (that we will be referring to in this answer), has been that s 53(1)(c) encompasses both realty and personalty. (3) Discussion of the judicial extension of the provision to personalty.

The next issue is whether the verbal direction by X to the trustees requiring them to hold part of the equitable interest on trust for Y is void for non-compliance with s 53(1)(c) of the Law of Property Act. It is clear that the sub-section envisages that the requirement of writing is mandatory and not simply evidential. Thus, non-compliance with the sub-section will make the intended disposition void. (4) Consideration of the effect on non-compliance with the statutory provision.

Is this verbal direction by X an intended ‘disposition’ within s 53(1)(c)? A disposition for the purposes of s 53(1)(c) has been partially defined by Romer LJ in Timpson’s Executors v Yerbury in terms of four classifications. The second classification involves a direction to the trustees to hold on trust for another. (5) Partial definition of what constitutes a 'disposition' within s 53(1)(c) of the Law of Property Act 1925.

In Grey v IRC the House of Lords decided that an oral direction by a beneficiary to the trustees was void for not satisfying the requirements of the sub-section. On the facts of this problem, it would appear that X is attempting to dispose of his subsisting equitable interest in the shares in Pluto Ltd to Y by orally directing the trustee to hold on trust for Y. This seems to be on all fours with the ploy in Grey v IRC and is accordingly void. Thus, Y will not acquire the contemplated interest in the property while the direction remains oral and X may retain his beneficial interest in the shares. (6) Application of the principle of law laid down in Grey v IRC.

(b) A declaration of trust is regarded as a ‘disposition’ in accordance with the classification of dispositions (4th classification) laid down by Romer LJ in Timpson’s Executors v Yerbury. Thus, X’s oral declaration of trust of 50 shares in Pluto Ltd in favour of Z prima facie fails to comply with the requirements of s 53(1)(c) of the Law of Property Act 1925(see above) and is void.

Alternatively, Professors Hayton and Pettit have argued strenuously that a declaration of trust of part of an equitable interest constitutes the creation of a new trust or sub-trust with active duties imposed on X and, therefore, does not constitute a disposition within s 53(1)(c). In other words, in order to decide whether the subsection is required to be complied with these professors subscribe to the view that a distinction is to be drawn between, on the one hand, declarations under which the declarant (X) purports to reserve to himself an active role as trustee of the derivative equitable interest established by him and, on the other hand, declarations whereby the declarant renders himself a bare trustee for others. These commentators rely on three nineteenth century decisions to support their contention – Onslow v Wallis, Grainge v Wilberforce and Re Lashmar.

In Grainge, Chitty J said where A holds property on trust for B and B declares himself a trustee for C, B drops out of the picture and A holds directly on trust for C. This tautological statement does not tell us whether B can effectively orally declare himself a trustee for C, which is the point in issue. In addition, this inelegant distinction between declarations within s53(1)(c) and declarations outside the sub-section is at odds with the House of Lords decision in Oughtred v IRC. In this case, the Law Lords unanimously decided that a constructive bare trustee of an equitable interest remained ‘in the picture’ until the completion of the transfer. Moreover, the pre-1925 cases reviewing what conduct constitutes a ‘grant or assignment’ are to be viewed with suspicion, in that the law was changed by the Law of Property (Amendment) Act 1924. The 1924 Act introduced the expression, ‘disposition’ for the first time and repealed the expressions, ‘grant or assignment’ which were included in the predecessor to s 53(1)(c) of the Law of Property Act 1925. This change in 1924 was, in turn, consolidated in the 1925 Act (see Grey v IRC). The effect has been that the nineteenth-century cases that considered ‘grant or assignment’ are unreliable in the context of the broader expression, ‘disposition’.

The better view seems to be that a self declaration of trust of part of an equitable interest is an intended disposition and is required to comply with s 53(1)(c).

Accordingly, X’s oral declaration is void and Z does not acquire the interest. (7) Consideration of the controversial issue as to whether a self declaration of trust of part of an equitable interest constitutes a 'disposition' within s 53(1)(c) of the LPA 1925.

A second point to note is whether the oral intended self declaration of trust of 50 shares from a portfolio of 1,000 shares satisfies the test for certainty of subject matter. The issue is which 50 shares in Pluto Ltd was intended to be subject to the trust. This issue was discussed fully in (a) above, where the principle in Hunter v Moss was explored to the effect that it was unnecessary to identify the shares by reference to the share certificates in order to satisfy the test for certainty of subject matter. The mere quantification of the number of shares was sufficient to satisfy the test because each share was identical to each other share in Pluto Ltd.

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The Ugly

(b) Xavier verbally declares himself a trustee of his beneficial interest in 50 shares in Pluto Ltd for Zeus absolutely.

Podcast: the Ugly

(a) This is a verbal direction by X and an intended ‘disposition’. The effect is that the transfer is unenforceable because the formal requirements for such a transfer have not been complied with. (1) Confusion and inaccurate statement of the law as to the effect of non-compliance with s 53(1)(c) of the LPA 1925. If, in the future, X were to execute a document acknowledging the directions given to the trustees the court may apply the maxim, ‘equity will not allow a statute to be used as an engine for fraud’ and enforce the direction from the date of the verbal direction. (2) Confusion as to the use of the maxim, 'equity will not allow a statute to be used as an engine for fraud'.

The fact that X does not identify the shares that are subject to the direction given to the trustees has the effect that the intended trust is void for not satisfying the test for certainty of subject matter. The test is whether the court may identify the intended trust property. Failure to clearly identify the shares will be conclusive that no trust has been created. The rule that equity will not assist a volunteer is applicable to the transaction. (3) Incorrect and vague statement of the law regarding certainty of subject matter.

Key points

No narration of the requirements of s 53(1)(c) of the LPA 1925.
No analysis of the issues involved in the question.
No attempt to state the relevant principles of law before applying these to the facts of the problem.

(b) A declaration of trust is a ‘disposition’ within the formal requirements. Thus, X’s oral self-declaration of trust of 50 shares in Pluto Ltd in favour of Z fails to comply with the formal requirements and is, therefore, void. The effect is that the declaration of trust will be too vague to constitute a valid trust. Accordingly, X may retain the shares.

A point to note is whether the oral intended self-declaration of trust of 50 shares from a portfolio of 1,000 shares satisfies the test for certainty of subject matter. The issue is which 50 shares in Pluto Ltd was intended to be subject to the trust? (4) The test for certainty of subject matter has not been stated. This issue was discussed fully in (a) above, where it was submitted that the shares are required to be identified by reference to the share certificate numbers, see Knight v Knight. (5) Incomplete answer on certainty of subject matter.

Key points

No analysis of the legal issues.
Omission to deal with whether a self declaration of trust of part of an equitable interest may constitute a disposition.

Case references
Knight v Knight (1840) 3 Beav 148
Re Goldcorp Exchange [1995] 1 AC 74
Grainge v Wilberforce (1889) 5 TLR 436
Grey v IRC [1960] AC 1
Re Harvard SEC (1997) The Times 18 July
Hunter v Moss [1994] 1 WLR 452
Re Lashmar [1891] 1 Ch 258
Re London Wine [1986] PCC 121
Onslow v Wallis (1849) 1 Mac & G 506
Oughtred v IRC [1960] AC 206
Re Staplyton [1994] 1 WLR 1181
Timpson’s Executors v Yerbury [1936] 1 KB 645

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Lawcards

Revision Checklist

Chapter 1: Equity, the nature of a trust and types of trust

What is meant by the term 'Equity'?
Why did Equity develop as a system of law separate to the Common Law?
Were the systems of Common Law and Equity fused by the Judicature Acts?
What is understood by the term 'Trust'?
Distinguish between an express trust, resulting trust and constructive trust
What is a discretionary trust?
What is a protective trust?
Distinguish between a bare power and a trust
Identify six maxims of Equity

Chapter 2: Capacity and the three certainties

Does a minor have capacity to create a valid trust?
What are the three certainties?
Why are the three certainties needed?
What are precatory words?
What is the test of certainty of objects in a fixed trust?
What is the test of certainty of objects in a discretionary trust?
What is meant by conceptual uncertainty, evidential uncertainty and administrative unworkability?
What is the effect when a trust fails for uncertainty of subject matter?
What is the effect when a trust fails for uncertainty of objects?

Chapter 3: Statutory formalities. Secret trusts

What formalities are required under s 53(1)(b) Law of Property Act 1925 when a trust of land is declared?
What formalities are required under s 53(1)(c) LPA when there is a disposition of a subsisting equitable interest?
Give examples of dispositions of subsisting equitable interests
What is the effect of non-compliance with s 53(1)(b) LPA?
What is the effect of non-compliance with s 53(1)(c) LPA?
What types of trust are exempt under s 53(2) LPA?
Secret trusts
What are the differences between a fully secret trust and a half secret trust?
When do these trusts arise?
What is the theoretical basis for upholding secret trusts?
What are the rules of communication for a fully secret trust?
How do these rules compare with those for a half secret trust?
What is the rule in Re Stead ?
Can a secret trustee take as secret beneficiary?
Can a secret beneficiary witness the will?
What happens when a fully secret trust fails?
What happens when a half secret trust fails?

Chapter 4: Completely and incompletely constituted trusts

How is a trust constituted?
Contrast Milroy v Lord with Re Rose
What is meant by the maxim 'Equity will not assist a volunteer'?
Can a beneficiary enforce an incompletely constituted trust?
What remedies exist for a beneficiary of an incompletely constituted trust (a) in equity (b) at Common Law and (c) under Statute?
What are the three exceptions to the maxim that Equity will not perfect an imperfect gift?
What is meant by the rule in Strong v Bird?
What are the requirements for a donatio mortis causa?

Chapter 5: Resulting trusts

Distinguish between an express trust and resulting trust
What is the theoretical basis of resulting trusts?
What is a presumed resulting trust?
When does the presumption of advancement apply?
When does an automatic resulting trust arise?
What is the rule in Shephard v Cartwright?
Can evidence of illegal conduct be relied on to rebut a presumption?
Distinguish between Tinsley v Milligan and Tribe v Tribe
What is a Quistclose trust?
What happens to a surplus left after the dissolution of an unincorporated association?

Chapter 6: Constructive trusts

How does a constructive trust arise?
Distinguish between a remedial and an institutional constructive trust
Give three examples of the categories of traditional constructive trusts
What is meant by a fiduciary?
When will a fiduciary be liable as constructive trustee?
When is a stranger liable as constructive trustee?
What is meant by 'recipient liability'?
What is a mutual will?
When might it be relevant to know whether a secret trust is a constructive trust?

Chapter 7: Trusts of the family home

What is meant by 'Equity follows the law' in this context?
What must the non-legal owner, who claims she has a beneficial interest in the home, prove in order to establish:
- an express trust;
- a resulting trust;
- an express common intention constructive trust;
- an inferred common intention constructive trust?
How will her beneficial interest be quantified in each of the above cases?
What is meant by proprietary estoppel?
What remedies are available under proprietary estoppel?
Who may rely on s 37 of the Matrimonial Proceedings & Property Act 1970?
What is wrong with the current law regarding trusts of the family home?
What recommendations for reform have been made by the Law Commission?

Chapter 8: Charitable trusts

What are the legal advantages of charitable status?
What are the fiscal advantages of charitable status?
Who enforces a charitable trust?
What are the three requirements for a valid charitable trust?
What are the thirteen heads of charitable purpose?
How has the public benefit requirement changed under the Charities Act 2006?
Explain the public benefit requirement in respect of the first three heads of charitable purpose
Explain what is meant by the requirement that a charitable trust must be exclusively charitable?
What is meant by the cy-pre`s doctrine?
What is meant by initial failure in respect of the cy-pre`s doctrine?
What is meant by subsequent failure in respect of the cy-pre`s doctrine?
How has statute extended the cy-pre`s doctrine?

Chapter 9: Non-charitable trusts. Trusts of imperfect obligation. Unincorporated associations

Why is a non-charitable purpose trust void?
What are the three exceptions?
What is meant by the rule against perpetuities?
What is the perpetuity period for a purpose trust?
Can charitable trusts be perpetual?
What is meant by the rule against remoteness of vesting?
What statutory perpetuity period has been recommended by the Law Commission?
What is the Denley principle?
How is an unincorporated association defined?
Why is there a problem when gifts are made to an unincorporated association?
How can a gift be made to an unincorporated association?
How is property held by an unincorporated association?
What happens to the property when an unincorporated association is dissolved?

Chapter 10: Trustees and the administration of trusts

How is an initial trustee appointed?
How are subsequent trustees appointed?
When may a trustee retire?
How is a trustee removed?
When may a trustee be remunerated?
What is meant by a trustee's fiduciary duty?
What principles must be taken into account when a trustee makes investments?
What is meant by a power of maintenance?
When may the statutory power of maintenance be exercised?
When does an interest carry the intermediate income?
What is meant by a power of advancement?
When may a statutory power of advancement be exercised?
Describe the statutory power of delegation by a trustee
Variation ot Trusts
When may the court vary a trust under its inherent jurisdiction?
When may the court sanction a variation under the Variation Act 1958?
What is meant by 'benefit' in this context?
What weight is given to the settlor's intention?

Chapter 11: Remedies for breach of trust

When does a breach of trust occur?
What is the liability of incoming and retired trustees?
What are the implications of joint liability of trustees?
What is the measure of a trustee's liability for breach of trust?
What are the defences to an action for personal liability?
How are exemption clauses in the trust instrument treated?
When is a claim statute barred?
What is the distinction between tracing and following?
What conditions must be satisfied for equitable tracing?
Discuss tracing into unmixed funds
Explain tracing when the trust fund is mixed with the trustee's funds
Discuss tracing into two trust funds which have been mixed together
Can tracing take place when trust funds have been paid to an innocent volunteer?

Chapter 12: Equitable remedies

What is an injunction?
Compare a final injunction with an interim injunction
What is the difference between a mandatory injunction and a prohibitory injunction?
What is a quia timet injunction?
Describe the general principles in granting a perpetual injunction
What are the principles laid down in American Cyanamid?
When will a freezing order be granted?
What are the main characteristics of a search order?
Describe an order for specific performance
When will such an order not be granted?

Administrator (Feminine: administratrix): The person who administers the estate of someone who had died intestate.

Beneficiary: Person for whose benefit property is held on trust.

Beneficiary Principle: For a trust to be valid there must be somebody in whose favour the court can decree performance.

Bequeath: To leave property other than freehold land by will.

Bona fide: Good faith.

Bona vacantia: Property which is not in the ownership of any person and so goes to the Crown.

Cestui que trust: term for beneficiary.

Common law: Judge-made law made by the courts of common law.

Constructive trust: Trust imposed by the courts where it would be unconscionable for the legal owner of property to assert his/her own beneficial interest and deny that of another.

Cy-près: Applying property as close as possible to the donor's original wish

Damages: Compensation paid to an injured party.

Devise: To leave freehold land by will (same as bequeath but in respect of land)

Executor (Feminine executrix): Person who administers the estate of someone who has left a will.

Express trust: Trust expressly created.

In loco parentis: In the place of the parent.

Injunction: Equitable remedy which either commands that an action be done or prevents the carrying out of an action.

Inter vivos: During the lifetime

Intestate: Dying without leaving a will

Laches: Equitable principle under which delay in claiming an equitable remedy can mean that the claim is defeated.

Locus standi: Right to bring an action

Mortis causa: On the death of

Obiter dicta: That part of a judgement which is not part of the actual reason for the decision but which can form a valuable guide in similar cases.

Pari passu: On an equal footing; proportionally.

Personalty: Personal property i.e. property other than freehold land.

Private trust: Trust for the benefit of individuals as distinct from a public trust which is for purposes.

Realty: Real property i.e. freehold land.

Rescission: Equitable remedy restoring the parties to their pre contract position.

Rectification: Equitable remedy rectifying a contract to make it accord with the intentions of the parties.

Residuary estate: Property left by will which is anything not disposed of specifically.

Resulting trust: A trust which is implied by the court which has the effect of returning property to the settler.

Settlor: Creator of an inter vivos trust.

Specific performance: Equitable remedy which commands the carrying out of contractual obligations.

Sui juris: Of full age and capacity.

Testator (Feminine Testratrix): Person who executes a will which may contain a trust.

Tracing: The process of identifying assets against which an equitable remedy may be sought

Trustee: A person who holds property in a fiduciary capacity for the benefit of another.

Trustee in bankruptcy: A person who acts on behalf of creditors.

Unjust enrichment: Means by which a defendant who has been unjustly enriched at the expense of the claimant is compelled to restore property.

Ultra vires: Beyond the powers.

Volunteer: Person who is promised property without having provided consideration.

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