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(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.
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(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.