Chapter 4: Trust Formalities
1.1 Should formalities be required?
Although many transactions involving property can be achieved orally without the need for any formalities or writing, this is not always the case. In some instances the law requires that a contract or a transaction be executed in a specified form. This is usually the case where the transaction has important implications for the parties concerned.
Imagine the following situation:
MacDonald is the owner of a farm of some 2000 acres. His neighbour, Archer, claims that in the pub last week MacDonald agreed to sell him the farm for GBP100,000, which is less than half its real value. He is therefore claiming that a contract was entered for the sale of the farm to him at the agreed price, and that the courts should force MacDonald to transfer the farm to him.
Do you think that the law should force MacDonald to transfer the farm to Archer?
Yes or No
Answer: NO
1.2 Formalities required for contracts relating to land
In order to prevent such frauds occurring Parliament intervened by enacting the Statute of Frauds 1677, which required that certain transactions must be conducted in a specified form, or supported by written evidence that they have taken place.
The Statute of Frauds 1677 has been replaced by more recent legislation. If you have already studied Land Law you will no doubt be aware that certain formalities must be observed before a contract for the sale of land will be valid and enforceable.
Read the Law of Property (Miscellaneous Provisions) Act 1989 s2(1).
Consider which of the following statements are correct:
(a) There would be no valid contract for the sale of MacDonald's farm to Archer unless the contract was made by deed.
(b) There would be no valid contract for the sale of MacDonald's farm to Archer if a written agreement did not state that the agreed price was GBP100,000.
(c) There would be no valid contract for the sale of MacDonald's farm even if he had signed a letter stating that he agreed to sell to Archer for GBP100,000.
(d) There would be no valid contract for the sale of the land if MacDonald and Archer agreed to a sale and later signed a written memorandum stating that they had reached an agreement to that effect.
Answer: C
1.3 Formalities required for contracts relating to property other than land
Contracts which relate to property other than land are not required to be in writing.
Imagine the following situation:
Amma walks into a sweetshop in order to buy a chocolate bar. She selects one and tells the shopkeeper she would like to buy it. The shopkeeper tells her it costs fifty pence. Amma gives the shopkeeper the money, takes the chocolate bar and leaves the shop.
Does a valid contract arise between Amma and the shopkeeper?
Yes or No
Answer: YES
2.0 Creating Equitable Interests - Inter Vivos Declaration of Trusts
2.1.1 Formalities required to create a valid trust
Where the owner of property wishes to create a trust, either by declaration or transfer, s53 Law of Property Act 1925 stipulates that in some circumstances the declaration must be accompanied by specified formalities.
Read this section and select from the following statements those which you think are correct:
1. Every declaration of a trust must be made in writing
2. Declarations of trust of personal property do not need any formalities
3. A declaration of a trust of land must be made in writing signed by the settlor
4. A trust of land can come into being even where there was no writing at all
5. A trust of land can be validly created by the settlor's will
6. Writing can satisfy section s53(1)(b) if it was signed by the settlor's agent
Answer: 2, 4, 5
2.1.2 Formality issues in the context of trusts
You have now seen that in a variety of contexts special formalities must be observed to effect transactions involving property. This workbook is primarily concerned with trusts and it is time to begin to consider how the law relating to formalities applies to the creation and operation of trust interests.
You should already be aware that when property is held on trust the trustees normally hold the legal title (unless the trust is of an equitable interest in property, in which case they will only hold the equitable title) and the beneficiaries enjoy the equitable or beneficial interest, which is a real form of ownership in the trust property.
If property is subject to a trust there must have been a time when it was not, and it was owned by a person who was both the legal and beneficial owner. Such a person is also known as the absolute owner of the property.
A trust is created inter vivos by an absolute owner over his property when he either declares himself trustee of it or transfers the legal title to another person who has agreed that they will hold it on trust for the intended beneficiaries. The person creating a trust in either of these ways is termed the settlor of the trust. The owner of property may also subject it to a trust by will.
Where a trust is created the ownership of the property subject to it is fundamentally altered. For example, if Damon gives his car to Murray then Damon ceases to be its owner and Murray owns the car. However if Damon declares a trust of the car for Murray he retains the legal ownership but Murray becomes the beneficial owner of the car. Damon can still deal with the car as if it were his own, but if he does so, for example by giving it to Frank, he will be guilty of a breach of trust, and Murray may be entitled to assert his equitable right to the car against Frank.
Issues of formality primarily arise in the context of trusts in two situations:
(1) declarations of trust
First, where a settlor intends to create a trust over property which is not currently subject to a trust, the declaration of trust may have to be supported by appropriate formalities. If these have not been complied with the trust may be prima facie unenforceable by the beneficiaries. They will not be entitled to assert their equitable interests in the property against the legal owner, who will be allowed to treat the property as if he was still the absolute owner.
(2) Transfers of existing trust interests
Second, where property is already subject to a trust the interests of the beneficiaries are themselves a species of property. This means that they are entitled to deal with their beneficial interests, for example by transferring them to others. Where the beneficiaries wish to dispose of their equitable interest in the property held on trust they can only do so if the appropriate formalities are observed. In the absence of such compliance any purported disposition of their equitable interest will be void and ineffective.
2.1.3 Formalities and taxation
A further issue which has proved of central importance in the interpretation of the relevant formalities provisions has been the tax implications of transactions disposing of the beneficial interest.
Any written documents which effect a transfer or disposition of the beneficial interest may attract stamp duty. This is payable at a percentage rate of the value of the interest which is transferred by the document subject to it. In many of the cases you will be studying in this workbook the beneficiaries of a trust have attempted to transfer their interests to others without using the appropriate formalities to avoid the payment of stamp duty. The Inland Revenue has then challenged the effectiveness of the alleged transaction on the grounds that the statutory formalities were not observed.
It is vital to maintain a distinction between two very important questions where beneficiaries have sought to transfer their equitable interests to others:
(1) Was the transfer effective or void?
(2) If the transfer was effective, was tax payable in the circumstances?
Confusion of these two issues will make many of the important cases harder to understand.
You are now ready to move on to consider the substantive law imposing formality requirements for the creation of trusts and the transfer of existing trust interests.
2.1.4 Oral declarations of trusts of land
MacDonald, the owner of a farm, told Archer was having a drink with his friend Archer in their local pub, the Woolpack. He told Archer that he didn't want to go on with the farm any more and that he would henceforth hold it on trust for him and that he should consider it as his own.
The next morning Archer went round to MacDonald's farm with his tractor and wanted to start ploughing the fields. Archer reminded him of what he had said the previous night. MacDonald told him that he'd "changed his mind."
Do you think MacDonald's declaration creates a valid trust in favour of Archer?
(a) Yes, a valid trust was created
(b) No, no valid trust was created
Answer: (a) YES
2.1.5 Declarations of trust of personal property
Imagine that instead of his farm MacDonald orally declared to Archer that he was going to hold his tractor on trust for him.
Would this create a valid trust that Archer could enforce even if MacDonald subsequently said that he had changed his mind?
(a) Yes, MacDonald holds the tractor on trust for Archer
(b) No, Archer has no enforceable interest in the tractor
Answer: (a) YES
The fact that no formalities are required in order to declare a trust over personal property is well illustrated by the case of Paul v Constance [1977] 1 WLR 527. In this case the issue was whether a trust of money in a bank account had been declared. The settlor did not make a written declaration of trust, but neither did he make an express oral declaration. Nevertheless, the Court of Appeal was able to find that a trust was created by virtue of his words and actions.
Read Paul v Constance and then consider at what point in the chronology the declaration of trust occurred:
(a) When Mr Constance arranged that Mrs Paul could make withdrawals from the bank account.
(b) When the joint bingo winnings were paid into the bank account.
(c) When money was withdrawn and spent jointly on Christmas presents and food.
(d) When Mr Constance said, "The money is as much yours as mine."
(e) It is not clear from the judgments at what point the declaration occurred.
Answer: (e) Not clear
In the Court of Appeal, Scarman LJ, giving the leading judgment, was unable to find the precise moment when the declaration of trust occurred and the trust came into existence. In the instant case, the precise moment of the trust's creation was not important: the issue before the court was simply whether or not a trust had arisen at all. However, the exact time of the declaration can be very important. For example, if a settlor died having set up a trust, the transaction may be liable for tax purposes if it occurred with a certain period of time before his death (see Re Rose [1952] Ch 499 and the workbook on Constitution of Trusts).
It would appear from the judgment that the phrase "the money is as much yours as mine" was sufficient to operate as a declaration of trust, when taken alongside the facts that (i) Mrs Paul could make withdrawals, (ii) the joint bingo winnings were paid into the account and (iii) money was withdrawn and spent jointly on Christmas presents and food.
However, the phrase was repeated many times by Mr Constance, and Scarman LJ was unable to pinpoint the exact moment when the declaration of trust occurred.
Answer (d) is not clear.
2.1.6 Declarations of trust proved by writing
Changing the scenario again, imagine that MacDonald wanted to declare a trust of a cottage on his farm in favour of his son Ronald. He initially made an oral declaration that he was henceforth holding the cottage on trust for Ronald. A few days later he wrote Ronald a letter in which he said:
"Remember that last week I said that I was holding the Cottage on trust for you. Well I've changed my mind and I want your brother Ramsey to have it instead."
Would Ronald be entitled to enforce a trust of the cottage in his favour?
(a) Yes, Ronald can enforce a trust of the cottage against MacDonald
(b) No, Ronald cannot enforce a trust of the cottage against MacDonald
Answer: (a) YES
Although you might initially conclude that the trust was unenforceable because the declaration was not made by writing but was purely oral, a careful reading of s53(1)(b) shows that the declaration does not need to be made in writing but only that it must be "manifested and proved by some writing."
A declaration of trust will therefore be enforceable provided that there was some written evidence to support the fact that the settlor had made it. The formalities requirement is therefore best seen as an evidential hurdle to the enforceability of the trust.
There is no need that the written evidence must have been contemporaneous with the declaration, so the mere fact that MacDonald's letter was written some time after his oral declaration does not prevent it "manifesting" or "proving" that the declaration had been made, nor does the fact that the writing disavows the desire to create the trust. The trust was effectively created when the declaration was made, and the writing provides evidence of that fact.
MacDonald cannot subsequently change his mind as the declaration of trust is irrevocable and fundamentally transforms his relationship to the property concerned.
2.1.7 Satisfying the requirement of written evidence
You should now have learnt that a declaration of trust of land or an interest in land will only be enforceable if it can be proved by some written evidence. However section 53(1)(b) is quite specific as to the type of writing that will be sufficient to justify enforcement of the trust.
Consider whether in the following circumstances there would be writing sufficient to justify the enforcement of a trust of land:
A declaration of trust contained in a deed Yes No Maybe
Answer: YES
A written declaration of trust signed by the settlor's agent Yes No Maybe
Answer: NO
Section 53(1)(b) requires the written evidence of the declaration of trust to be signed by "some person who is able to declare the trust." This will mean the settlor in most cases.
This should be contrasted with s53(1)(c) which specifically provides that for the disposition of a trust interest the signature of the settlor's "agent thereunto lawfully authorised in writing" will be sufficient.
Writing signed by the transferees of land when the settlor transfers it to them on trust
Yes No Maybe
Answer: YES is probably correct.
Provided that the memorandum contains details of all the material terms of the trust it will meet all the requirements of s53(1(b) and the trust will be enforced by the court.
There is some confusion as to whether this would create an enforceable trust.
On a strict reading of s53(1)(b) you could think that this would not create a valid enforceable trust because the writing would not have been signed by the settlor (who is also the transferor of the legal title).
However some cases, for example Gardener v Rowe (1828) 5 Russ 258 and Smith v Matthews (1861) 3 De GF & J 139, have held that a trust is enforceable if the writing evidencing the declaration was signed by the transferee of the land.
2.1.8 Trusts of land enforceable without writing
You have now examined the circumstances in which an oral declaration of a trust of land will be rendered unenforceable because of a lack of written evidence. However it is not true to say that there are no circumstances where a trust of land can validly come into existence without written evidence of an express declaration.
In which of the following situations do you think a valid trust of land would be created?
(a) A house is purchased in the name of one person with another contributing half the purchase price
(b) A trust is declared of a house worth less than GBP50,000
(c) A house owner dies leaving a letter for his brother telling him that he wants him to hold it on trust for his handicapped son
(d) A house is purchased by a man whose lover contributed a small proportion of the purchase price after he had told her to treat the house as "ours"
(e) A house owner leaves his house in his will on trust for his wife
(f) A house owner leaves his property by will to his solicitor, having previously told her that he wants her to hold the house on trust for his mistress.
Answer: (a)
In this situation there would be a validly created trust of the house because a trust interest would arise in favour of the contributor to the purchase price by way of a resulting trust. By s53(2) the section "does not affect the creation or operation of resulting, implied or constructive trusts." The trust will therefore arise and be enforceable irrespective of the absence of any writing.
An example of the creation of such a trust can be seen in Tinsley v Milligan [1993] 3 All ER 65.
2.2. The Rule of Rochefoucauld v Boustead
2.2.1 Equity will not allow a statute to be used as an instrument of fraud
In fact the scenario you have just considered happened in the very important case of Rochefoucauld v Boustead [1897] 1 Ch 196 where the plaintiff claimed that the defendant had held the mortgaged land in Ceylon on trust for her. The defendant argued that she could not enforce the trust against him because of the lack of written evidence that he had purchased it as trustee for her which was required by s7 Statute of Frauds 1677, the predecessor to the present s53(1)(b). The Court of Appeal held that despite the lack of formalities the trust could be enforced because of a general principle that the statute does not prevent the proof of a fraud. Lindley LJ, who delivered the judgement of the court, explained the application of this doctrine (at p 206):
"It is further established by a series of cases, the propriety of which cannot now be questioned, that the Statute of Frauds does not prevent the proof of a fraud; and that it is a fraud on the part of a person to whom land is conveyed as a trustee, and who knows it was so conveyed, to deny the trust and claim the land himself. Consequently, notwithstanding the statute, it is competent for a person claiming land conveyed to another to prove by parol evidence that it was so conveyed upon trust for the claimant, and that the grantee, knowing the facts, is denying the trust and relying upon the form of conveyance and the statute, in order to keep the land himself."
It should be noted that the rationale for enforcing the trust in such circumstances is that otherwise the transferee of the land would be able to enrich himself by demanding a strict application of the statutory requirements, when it is clear that he was never intended to receive the land for his own benefit. He will only be guilty of perpetrating such a "fraud" if he was aware that he was intended to hold the land as a trustee.
The general principle under which the court was willing to uphold the trust in Rochefoucauld v Boustead was the rule that:
"Equity will not allow a statute to be used as an instrument of fraud."
2.2.2 Application of the principle that equity will not allow a statute to be used as an instrument of fraud
Having seen that the court is willing, on occasion, to enforce an orally declared trust to prevent the trustee committing a fraud by denying the trust on the grounds of a lack of requisite formalities, the central question becomes when such a denial will be treated as fraudulent.
Consider the following situation:
An elderly lady owned a house absolutely. She invited a lodger to come and live with her and later transferred the ownership of the house to him, because she had come to trust in his abilities to look after her financial affairs. They orally agreed that she was to retain the beneficial ownership of the house. He then sold the house to a third party. It was subsequently claimed that the woman could not assert her continued equitable interest in the house following the transfer of the legal title to the lodger because there was no written evidence to support such an intention of a trust.
Do you think that the trust should be enforced in favour of the elderly lady in these circumstances?
(a) Yes, she should be entitled to enforce a trust against the lodger
(b) No, the lodger should own the house outright
(c) Unsure
Answer: YES
In Hodgson v Marks [1971] Ch 892 the court agreed with you and held that the elderly lady should not be prevented from asserting her trust interests against the lodger. The Court of Appeal held that the lodger could not have placed any reliance on s53(1)(b) as this would have constituted a fraud.
Alternatively, the elderly lady could rely on the fact that the transfer was voluntary to argue that a resulting trust would arise in her favour. By virtue of s53(2) no formalities are required for resulting trusts.
It would therefore appear that whenever the absolute owner of property transfers the legal title to a third party who was aware that he was intended to hold it on trust for the transferor, it would be a fraud to allow the transferee to disclaim the trust because of a lack of writing.
2.2.3 Fraud perpetrated against a third party
Although it might be clear that it would be a fraud for a transferee to deny the trust when he had orally agreed to hold the land he received on trust for the transferee, greater problems arise when the transferor has agreed to hold the land on trust for a third party beneficiary.
Consider the following situation:
A husband and wife agreed to purchase a house. The money for the purchase price was provided partly by the husband, and partly by a loan from his mother-in-law. The loan was made by the mother-in-law after the husband had told her that, although the house would be registered in his sole name, he would hold it on trust for himself and his wife. Following their divorce the issue arose as to whether the husband held the land on trust for himself and his wife in equal shares.
Which of the following solutions to this problem would you agree with?
(a) No enforceable trust at all Agree or Disagree
Answer (a): Disagree
If no trust were found in favour of either the wife or the mother-in-law the husband would be entitled to retain all the benefit for himself merely because there was no written evidence that he had agreed to hold the land on trust.
The court is therefore willing to intervene despite the lack of formalities to prevent the fraud of the husband.
(b) An enforceable trust in favour of the mother-in-law ? Agree or Disagree
Answer (b) : Agree
There are some commentators who would agree with your opinion on the grounds that a trust should not be enforced in favour of a third party and that any fraud of the transferee of the land should be prevented by enforcing an interest in favour of the person against whom the fraud was perpetrated, namely the transferee.
This view was advocated by J D Feltham in his article "Informal Trusts and Third Parties" [1987] Conv 246 where he concludes:
"Thus on balance it is submitted that, where A conveys Blackacre to B on an oral understanding between A and B that it is to be held for the benefit of C, neither precedent nor policy support the extension of the principle that equity will not allow the Statute of Frauds to be used as an instrument of fraud so as to enable C to enforce the informal trust."
In contrast T G Youdan has argued in "Informal Trusts and Third Parties: A Response" [1988] Conv 267 that authorities such as Neale v Willis (1968) 19 P & CR 836 clearly establish that the courts will allow the enforcement of an informal trust in favour of a third party.
You might wish to read these articles if you want a fuller understanding of their respective arguments.
(c) No enforceable trust for the wife because of a lack of formalities
Agree Disagree
Answer: (c): Disagree.
The courts have held that even where the beneficiary is intended to be a third party the transferor will not be allowed to deny a trust which he orally agreed to observe. Such a trust was upheld in the similar case of Neale v Willis (1968) 19 P & CR 836.
Other cases where an oral agreement to create a trust or observe an equitable interest in favour of a third party have been enforced notwithstanding the lack of formalities include Bannister v Bannister [1948] 2 All ER 133 and Binions v Evans [1972] Ch 359.
However the courts have tended to justify the enforcement of a trust in such cases on the grounds that a constructive trust has arisen which is enforceable despite the lack of any formalities
(d) An enforceable trust in favour of the wife. Agree or Disagree
Answer: (d): Agree
If no trust were found in favour of either the wife or the mother-in-law the husband would be entitled to retain all the benefit for himself merely because there was no written evidence that he had agreed to hold the land on trust. The court is therefore willing to intervene despite the lack of formalities.
However, as you will see on the next page there is some controversy as to whether the court imposes a constructive trust in such circumstances, or whether it enforces an express trust despite the lack of formalities.
2.2.4 Summary of the rule the equity will not allow a statute to be used as an instrument of fraud
Some applications of the rule that Equity will not allow s53(1)(b) to be used as an instrument of fraud can now be summarised:
(1) Where A transfers the legal title to land to B with an oral agreement that B is to hold the land on trust for A, the trust will be enforced against B despite the lack of writing.
(2) Where A transfers the legal title to B with an oral agreement that B is to hold the land on trust for C the court may enforce the trust in favour of C despite the lack of formalities.
However, it is unclear whether in the second of these two situations the court acts by imposing a constructive trust against B in favour of C, or by enforcing an expressly declared oral trust despite the lack of writing as required by s53(1)(b). This issue is discussed on the next page.
2.2.5 Does the rule in Rochefoucauld v Boustead generate a constructive trust or enforce an express trust despite the lack of the requisite formalities?
A number of modern cases, including Bannister v Bannister [1948] 2 All ER 133 have suggested that the trust which arises in favour of C is a constructive trust. The advantage of this analysis is that a constructive trust is valid and enforceable despite the absence of formalities as a consequence of s53(2) which you have already examined. The trust can therefore be justified without the need to contravene the requirements of s53(1)(b).
This approach was taken by Goff J in Re Densham [1975] 3 All ER 726 where he stated (at p 732) that to hold an agreement by B to hold on trust for C unenforceable for lack of writing was in his opinion:
"...contrary to equitable principles, because once the agreement is formed it would be unconscionable for a party to set up the statute and repudiate the agreement. Accordingly, in my judgement he or she becomes a constructive trustee of the property so far as is necessary to give effect to the agreement. That, in my judgement, was established long ago in Rochefoucauld v Boustead"
However, as you should have noticed when reading Rochefoucauld v Boustead the Court of Appeal did not impose a constructive trust in that case, but considered itself to be enforcing an express oral trust despite the fact that the Statute of Frauds rendered it prima facie unenforceable.
Does the rule in Rochefoucauld v Boustead generate a constructive trust or enforce an express trust despite the lack of the requisite formalities?
This controversy might appear to be an entirely academic, since the practical effect is that an enforceable trust arises in favour of C irrespective of whether it is characterised as an express or a constructive trust. However, it would seem more honest to describe the trust which arises as an express trust, since a constructive trust generally only arises in favour of a person who has acted to their detriment in some way, and in the case of a transfer of land by A to C with an oral agreement to hold on trust for C it is difficult to establish any detriment on the part of C which would justify the imposition of a constructive trust in their favour. For this reason Professor Pettit favours the view that an express trust is enforced despite the lack of formalities.
2.2.6 Does the rule in Rochefoucauld v Boustead generate a constructive trust or enforce an express trust despite the lack of the requisite formalities?
Even in cases where constructive trusts have been imposed in favour of C the courts have stressed that the trust does not arise merely because B has orally agreed to observe the equitable interest of C. In Ashburn Anstalt v Arnold [1989] Ch 1 the Court of Appeal stressed that the "court will not impose a constructive trust unless it is satisfied that the conscience of the estate owner is affected." This principle has been confirmed in another context by the House of Lords in Westdeutsche Landesbank Girozentrale v Islington BC [1996] AC 669.
What this means is that it is highly unlikely that a trust would be enforced against B if he had purchased land from A at full price and had orally agreed to hold it on trust for C. However, if he had purchased the land at a reduced price, or it had been transferred to him voluntarily and he had provided no consideration, a constructive trust would be imposed to prevent him retaining the whole benefit of the land in contravention of his oral agreement.
2.2.7 Does an enforceable trust of land arise from an oral declaration?
You have now seen that in some circumstances the court might be willing to enforce a trust of land despite the fact that there is no written evidence to support an express declaration.
Returning to a situation you were asked about earlier, would you consider that an enforceable trust was created if MacDonald, the owner of a farm, told Archer that he was henceforth holding it on trust for him while they were having a drink in their local pub?
(a) Yes, the declaration creates a trust in favour of Archer and he should be entitled to enforce it
(b) No, although the declaration creates a trust in favour of Archer in the absence of any other factors he should not be entitled to enforce it against MacDonald
Answer: (b)
The authorities establish that an oral declaration of trust by A in favour of B will be unenforceable against A in the absence of writing as required by s53(1)(b). In such a situation there are no grounds for enforcing a trust in favour of Archer. There is no fraud if MacDonald merely refuses to observe the trust he declared.
Archer would only have any cause for complaint if he in some way acted to his detriment on the basis of the oral declaration, thus generating a constructive trust in his favour.
A similar situation arose in Midland Bank plc v Dobson [1986] 1 FLR 171 where it was alleged that a husband held his matrimonial home on an enforceable trust in favour of his wife. The court concluded that there had been an oral common intention between the husband and wife from 1953 that the house should be jointly owned, although it was in the sole name of the husband.
Fox LJ stated that in such circumstances no enforceable trust could have arisen in her favour on the basis of the oral intention alone, and that a trust would only have arisen in her favour if she had acted to her detriment on the basis of the oral intention so as to generate a constructive trust.
2.2.8 Declarations of Trusts of Land by Will
We have seen that normally an inter vivos declaration of a trust of land must be evidenced in writing. However s53(1)(b) also provides that a valid trust of land will be created if a trust is declared by means of the settlor's will.
The requirements for a valid will can be found in s9 Wills Act 1837.
Read that section and consider in which of the following circumstances a valid trust might have been created of MacDonald's farm in favour of his Grandson (G):
(a) M died leaving a tape recording stating the farm was to be held on trust for G.
(b) M died leaving a letter stating the farm was to be held on trust for G.
(c) M died having made a will stating the farm was to be dealt with as specified in a letter in his safe. The letter said it was to be held on trust for G.
(d) M died having made a will leaving the farm to "my doctor on trust." He had previously told his doctor to transfer it to G.
Answer: (d)
In these circumstances the fact that MacDonald made clear in his will that the farm was to pass to his doctor as a trustee and not as absolute owner generates a half-secret trust. Provided that he had communicated his intention to the doctor before the will was executed, and the doctor had accepted the terms of the trust, on his death the legal title would pass to his doctor by operation of the will, and he would be obliged to hold the farm on trust for the grandson as beneficiary.
The same principle would apply if MacDonald had made no reference to the trust on the face of his will and had communicated an intention to his son that the farm be held on trust for his grandson. This would create a fully secret trust.
However, although a valid trust would probably have been created it does not arise as a trust created by the will. A number of cases (For example: Re Young [1951] Ch 344) have made clear the trust arises outside the will as a consequence of the agreement of the trustee to hold the property received under it on trust for the beneficiary whose identity was communicated to him. The will operates according to its terms to transfer the absolute ownership of the property concerned to the trustee, and only at that point does the trust come into existence in fulfilment of the express intention which had been communicated inter vivos by the testator.
If the trust was created by means of the will itself it would be difficult to justify why it should be enforced because the beneficiary was not identified within the will itself. It is therefore said that the secret trust arises outside, or dehors, the will.
The detailed rules concerning secret trusts will be included in a future edition of this workbook. In the meantime, here is a brief introduction to secret trusts.
3.1. Transfering Existing Equitable Interest
3.1.1. The Relevant Statutory Provision: Section 53(1)(c) Law of Property Act 1925
In the previous section should have seen how s53(1)(b) requires that declarations of trusts of land must be evidenced by some writing, and that in the absence of writing the trust will be unenforceable unless the court will act to enforce it despite the statute to prevent a fraud.
In this section we are going to consider the other main aspect of formalities which relates to trusts, namely s53(1)(c) Law of Property Act 1925.
Read s53(1)(c) and consider whether the following observations about the section are true or false:
(a) It only applies to trusts of land
True or False
Answer: False
Section 53(1)(c) refers to equitable interests in property, but does make any distinction between trusts of land or personal property. Unlike s53(1)(b), which only applies to declaration of trusts of land, s53(1)(c) is of universal application and will have to be satisfied whenever there is a disposition of a subsisting equitable interest.
(b) It requires a disposition of a trust interest to be evidenced in writing
True or False
Answer: False
Unlike s53(1)(b) which merely requires a declaration of a trust of land to be evidenced in writing, which may or may not be contemporaneous with the declaration, s53(1)(c) requires that any disposition of a subsisting equitable interest "must be in writing."
This means that a beneficiary cannot dispose or transfer his or her equitable interest under a trust without using a written document satisfying the requirements of s53(1)(c).
Where writing is required, it need not be in the form of a single document. In Re Danish Bacon Co Ltd [1971] WLR 248 Megarry J held that the requirement of writing would be satisfied if there were two or more documents which were connected and could be read together.
However, as will be seen through this module, this general rule is qualified to the extent that in a number of exceptional circumstances a disposition can be effected without the need for writing.
(c) It requires a disposition to be signed by the beneficiary of the equitable interest
True or False
Answer: False
Whereas s53(1)(b) requires the written evidence of a declaration of a trust of land to be signed by the settlor who declared it, s53(1)(c) explicitly permits a written disposition of a subsisting equitable interest to be signed not merely by the beneficiary entitled to it, but also by his agent.
However, the agent's authorisation to sign the disposition must have been granted by the beneficiary in writing (if inter vivos) of by will.
(d) It renders a disposition unenforceable if the requirements are not met
True or False
Answer: False
Unlike s53(1)(b), where an orally declared trust of land is not rendered void by the absence of writing but remains unenforceable, under s53(1)(c) an attempted disposition of a subsisting equitable interest which does not comply with the required formalities is void and of no effect.
This means that it will not bring about any change in the ownership of the equitable interest which was purported to have been disposed of by the beneficiary. The beneficiary will retain the equitable interest.
3.1.2. Why formalities are required to effect the disposition of subsisting equitable interests
Having read s53(1)(c) and considered some questions relating to its scope you should now be aware that it provides that dispositions of subsisting equitable interests will only be effective if they are made in writing signed by the beneficiary or his agent.
Before going on to examine how the courts have applied this section it is worth spending a few moments considering why these formality provisions have been required by the statute.
Very little judicial attention has been paid to this question, but in the important House of Lords decision in Vandervell v Inland Revenue Commissioners [1967] 2 AC 291 Lord Upjohn did identify some rationales for the requirement of writing.
Read his judgment, especially at pp 310-312, and consider which (if any) of the following he considered reasons for the requirement of writing to dispose of subsisting equitable interests:
(a) To raise revenue by imposing stamp duty on dispositions û Yes ü No
(b) To protect the beneficiaries against fraud ü Yes No
(c) To protect the trustees from uncertainty as to their duties ü Yes No
(d) To protect beneficiaries from making hasty decisions Yes ü No
(e) To provide a mechanism for the transfer of equitable trust interests û Yes ü No
Answer: (a) NO (b) YES (c) YES (d) NO (e) NO
Although other legislation may require stamp duty to be paid whenever the equitable interest in shares which are held on trust is transferred, the requirement of writing under s53(1)(c) does not have its origin in the raising or revenue.
Lord Upjohn does seem to suggest that one function of the requirement of writing is to prevent a fraud being practised against a beneficiary who enjoys the beneficial interest in property.
Imagine for example that a trustee is holding shares on trust for a sole beneficiary who is of age and legally competent. According to the rule in Saunders v Vautier the beneficiary is entitled to demand that the trustee transfers the legal title of the property he is holding on trust to him, so that the trust is brought to an end and the beneficiary becomes the absolute legal owner.
If the beneficiary's equitable interest was able to be transferred orally without further formalities it would be possible for a third party to persuade the trustee that the beneficiary had transferred the trust interest to him, and to demand the legal title as a result.
The requirement of writing which must be signed by the beneficiary or his agent makes it more difficult to commit such a fraud.
Lord Upjohn suggested that the main justification for the imposition of a requirement of writing to effect dispositions of subsisting equitable interests was to ensure that trustees were aware of the persons to whom they owed their duties. If the location of the beneficial interest was capable of changing by purely casual acts of the beneficiary the trustee could find himself believing that he was acting on behalf of a person known to him when he should have been acting for someone else.
This might be important in a number of contexts. For example under the rule in Saunders v Vautier the beneficiaries of a trust can demand a transfer of the legal estate if they are all of age and legally competent. Imagine a trust where there is a sole beneficiary who was in that position. If the beneficiary could dispose of his beneficial entitlement without formality he could more easily perpetrate a fraud on the trustee. He could orally transfer his beneficial interest to a third party, who would then become the beneficiary to whom the trustee owed his duties, but before the trustee was aware of his disposition demand a transfer of the legal title to himself. If the purely oral disposition were effective the trustee would then have committed a breach of trust if he transferred the legal title to the original beneficiary.
In some circumstances the trustees require the consent of the beneficiaries to proposed transactions, and they are protected from liability for breach if they have acted at the request or with the consent of the beneficiaries. Thus if a trustee does not know who his beneficiaries are he could find he acted without having sought the necessary consent, or think that he was protected by consents that he had obtained only to discover that he should have sought the consent of someone else.
Having said this it should be questioned whether the protection that s53(1)(c) envisaged for the trustees is as effective as Lord Upjohn would seem to suggest. Although the requirement of writing prevents the beneficiaries disposing of their beneficial interests casually, there is no requirement that a beneficiary disposing of his interest must inform the trustee that such a transaction has occurred, or to provide him with a copy of the written instrument used to effect the disposition.
Although the requirement of writing prevents the beneficiaries of a trust dealing with their equitable interests casually, this was not given by Lord Upjohn as a reason why formalities are required.
Lord Upjohn said.
However, we are of the opinion that this is in fact the most important reason for the requirement of formalities for the transfer of subsisting equitable interests behind a trust. Such an interest is a form of intangible property and as such it cannot be transferred by the mechanisms appropriate for forms of tangible property, where possession can be passed.
Other forms of intangible property require formalities to be transferred, for example copyrights which must be assigned, and shares which must be transferred by registration on the company share register. It would be unfeasible and unnecessary to maintain a register of all equitable interests behind trusts and therefore in effect s53(1)(c) requires trust interests to be assigned in writing. For more information on this reason for the requirement of formalities, see Fuller (1941) 41 Colum L Rev 799.
3.1.3. Applying s53(1)(c)
You should now be in a position to consider how s53(1)(c)applies to practical circumstances. Imagine that Tim and Tina are the trustees of 5000 shares in a private company which they hold on trust for Jack and Jill in equal shares. Both Jack and Jill are of age and legally competent.
Jack wants to transfer his interest in the trust to Harry, but does not want to bring the trust to an end. He tells Harry that he wants him to have his interest under the trust and that he should treat it as his own. He then tells the trustees that this is what he has done.
Will this be effective to transfer Jack's equitable ownership of the shares to Harry?
Yes or No
Answer: NO
Since Jack is attempting to assign his equitable interest in the shares to Harry he must comply with the requirements of s53(1)(c) and since there is no writing the purported disposition is void and of no effect. Jack retains his interest under the trust and Harry has no entitlement. Since Jack did not contract to transfer his interest Harry has no remedies available to him for Jack's failure to do so.
Such an attempted assignment without writing will be void irrespective of the nature of the type of trust under which the equitable interest subsists. For example writing would still have been required even if the trust had been a bare trust and Tim was holding the shares on trust as nominee for Jack, who was the sole beneficiary.
Although in such relatively simple examples of assignments the formality provisions of s53(1)(c) obviously apply, in a number of cases there has been extensive argument as to whether they apply to more complex transactions where a transfer of a beneficiary's interest was attempted without a direct assignment by the beneficiary himself.
3.2. Application of s.53(1)(c)
3.2.1. Directions to Trustees to Hold on New Trusts
A more complex situation than that which you have considered occurred in Grey v IRC [1960] AC 1. Start by reading the facts and order the events which took place.
H = Mr Hunter; G = Mr Grey; R = Mr Randolph; GC's = Hunter's Grandchildren
Grey v Inland Revenue Commissioners [1960] AC 1 House of Lords
Viscount Simonds, Lord Radcliffe, Lord Cohen and Lord Keith of Avonholm. Lord Reid was present at the hearing in the Appellate Committee but not at the consideration of their report.
Revenue - Stamp duty - Gifts inter vivos - Oral settlement - Settlements in favour of grandchildren - Transfer of company shares to trustees as nominees - Oral direction to trustees to hold shares on trusts of settlements - Subsequent declarations of trust by trustees - Whether voluntary dispositions liable to ad valorem duty - Finance (1909-10) Act, 1910 (10 Edw. 7 & 1 Geo. 5, c. 8), s. 74 - Law of Property Act, 1925 (15 & 16 Geo. 5, c. 20), s. 53 (1) (c).
Assignment - Equitable - "Disposition" of equitable interest required to be in writing - Meaning of "disposition" - Oral declaration by cestui que trust directing trustees to hold his interest on new trusts - Law of Property Act, 1925, s. 53 (1) (c).
Statute - Construction - Consolidating Act - Amending Acts consolidated - Principles of construction - Law of Property Act, 1925, s. 53 (1) (c).
By section 53 (1) (c) of the Law of Property Act, 1925: "a disposition of an equitable interest or trust subsisting at the time of the disposition, must be in writing signed by the person disposing of the same, or by his agent thereunto lawfully authorised in writing or by will."
In 1949 H. made five settlements, one in favour of each of his five grandchildren, and in 1950 he made a sixth settlement on his then existing and possible after-born grandchildren. The appellants were the trustees of each of these settlements. On February 1, 1955, H. transferred to the appellants, as his nominees, 18,000 ordinary GBP1 shares in a company. On February 18, 1955, H. orally and irrevocably directed the appellants thenceforth to hold the shares transferred to them on February 1, as to five blocks of 3,000 shares each on the trusts respectively of the five settlements executed in 1949 and as to 3,000 shares on the trusts of the settlement of 1950, to the intent that such direction should result in the entire exclusion of H. from all future right, title and benefit to or in the shares and the income thereof. On March 25, 1955, the appellants executed six declarations of trust which H., although not expressed to be a party thereto, executed. They were all in similar form and each recited that the appellants were the holders of 3,000 shares in the company, H.'s oral direction of February 18, the acceptance of the trust reposed in them by that oral direction and that the giving of the direction and its nature were testified by the execution by H. of the deed. The operative part of each deed declared that the appellants acknowledged and declared that they were holding the shares on the trusts of the settlement to the intent that the shares should form part of the trust fund. The six declarations of trust were assessed to ad valorem stamp duty as voluntary dispositions within section 74 of the Finance (1909-10) Act, 1910:-
Held, that the directions given by H. were dispositions by him of his equitable interest in the shares within the meaning of section 53 (1) (c) of the Act of 1925 and, because they were not made in writing, as required by that provision, they were ineffective. The word "disposition" in that provision must be given the wide meaning which it bears in normal usage.
Accordingly the declarations were rightly assessed to ad valorem stamp duty.
The Law of Property Act, 1922, and the Law of Property (Amendment) Act, 1924, profoundly altered a large part of the law of real and personal property, and the Act of 1925, though a consolidating Act, in fact consolidated Acts which were themselves amending Acts. Accordingly, no principle of construction imposed on these Acts an interpretation appropriate to a consolidating Act, and each word must be given the meaning proper to it in the context.
Decision of the Court of Appeal [1958] Ch 690; [1958] 3 WLR 45; [1958] 2 All ER 428 affirmed.
Understanding the Arguments in Grey
Now that you are familiar with the facts of Grey v IRC you can move on to consider the central questions which were at issue in the case.
(a) The equitable interest was transferred to the grandchildren by the oral directions given to the trustees.
(b) “Disposition” is given its natural meaning.
(c) The oral direction given were not a ‘disposition’ within the meaning of s. 53(1)(c)
(d) S.53(1)(c) imposes new requirements beyond those of statutory fraud.
3.2.2. Directing Trustees to Transfer Legal Estate - Directing Trustees to Transfer the Absolute Ownership of the Trust Property
You have now seen how a mere oral direction to trustees by a beneficiary that they should hold all or part of his beneficial interest for different beneficiaries is a disposition of a subsisting equitable interest and will not be effective unless there is appropriate writing.
The next major case considering whether writing is required to effect an intended transaction affecting such a subsisting equitable interest is Vandervell v IRC [1967] 2 AC 291, which was also a decision of the House of Lords.
The facts of this case are relatively complicated and concerned the attempts of Tony Vandervell, a well know industrialist, motor racing enthusiast and philanthropist of the 1950s and 1960s, to give to charity and allocate his property amongst his family whilst avoiding the penal taxation rates that were prevalent at that time.
On the next page you will be asked to reconstruct what happened in that case, so you should now read it.
Vandervell v Inland Revenue Commissioners [1967] 2 AC 291 HL
Lord Reid, Lord Pearce, Lord Upjohn, Lord Donovan and Lord Wilberforce.
Revenue - Surtax - Settlement - Gift of shares to college subject to option to purchase - Benefit of option granted to trustee company No consideration given - No direction to hold on express trust - Option held on resulting trust for settlor - Whether settlor absolutely divested himself - Whether dividends to be treated as settlor's income - Income Tax Act, 1952 (15 16 Geo. 6 1 Eliz. 2, c. 10), s. 415 (1) (2).
Assignment - Equitable - Disposition of equitable interest - Legal estate in shares held by bank as bare trustee for taxpayer - Tax payer directed bank to fill in share transfer deed in name of college - Share transfer deed executed in blank - Whether written disposition needed to transfer beneficial interest - Law of Property Act, 1925 (15 16 Geo. 5, c. 20), s. 53 (l) (c).
Trusts - Formation - Disposition to trustees - Trustee of company acting as trustee of family settlement - Transfer to company of option to purchase shares - Whether option held upon resulting trust in favour of settlor.
In 1958 the appellant decided to make a gift of GBP150,000 to the Royal College of Surgeons to found a chair of pharmacology. At that time 100,000 "A" ordinary shares in V. P. Ltd., a private company which the appellant controlled, were held by a bank as trustee by way of security for annual payments made to his former wife. On November 5, 1958, a deed of variation was executed and, on the substitution of other securities, the shares in question were released and held by the bank in trust for the appellant. It was decided that the shares should be transferred to the college and an option to purchase them for GBP5,000 should be granted to a trustee company and that dividends sufficient to provide the GBP150,000 should be declared on those shares. The trustee company was a private company, the share capital being held by the three directors of the company who were the appellant's advisers and personal friends; its principal activity was to act as trustee of a settlement made by the appellant in favour of his children. On November 14, 1958, the appellant wrote to his financial adviser stating that he had "decided to give the college the 100,000 'A' shares in V.P.Ltd. which have been released by the . . . bank . . . in exchange for the GBP25,000 received from me."
On November 19 the transfer deed of the 100,000 shares, executed in blank by the bank, and the option deed were handed by the appellant's advisers to the college's representative for sealing; these were sealed and returned to the appellant's advisers the following day. During the tax years 1958-59 and 1959-60 dividends on the shares, amounting to GBP162,500 and GBP87,500, respectively, were paid to the college. In October, 1961, the trustee company exercised its option and paid the college GBP5,000 for the shares. The appellant was assessed to surtax on the dividends on the basis that the transaction amounted to a settlement of property of which he, the settlor, had not absolutely divested himself, so that, in pursuance of Part XVIII of the Income Tax Act, 1952,n1 the dividends fell to be treated for surtax purposes as his income and not that of any other person. The special commissioners confirmed the assessments. Plowman J. and the Court of Appeal affirmed that decision.
On appeal, the Crown raised the contention (first raised in the Court of Appeal) that the appellant had never divested himself of any beneficial interest in the shares because there had been no written disposition within the meaning of section 53 (l) (c) of the Law of Property Act, 1925.n2
Held, (1) that section 53 (1) (c) of the Law of Property Act, 1925, was inapplicable since it was directed to cases where dealings with the equitable estate were divorced from the legal estate. The object of the provision was to prevent hidden oral transactions in equitable interests in fraud of those truly entitled.
and, therefore, cases where the beneficial owner of the whole beneficial estate desired and was in a position to give directions to his bare trustee to deal with the legal estate as well as the equitable estate were not within its ambit (post, pp. 311B-312B, 317E-318A).
Grey v Inland Revenue Commissioners [1960] AC 1; [1959] 3 WLR 759; [1959] 3 All ER 603, H.L. and Oughtred v Inland Revenue Commissioners [1960] AC 206; [1959] 3 WLR 898; [1959] 3 All ER 623, H.L. distinguished.
(2) (Lord Reid and Lord Donovan dissenting), that the option was vested in the trustee company as a trustee on trusts not hitherto defined, with the consequence that the beneficial interest therein remained in the appellant, the settlor. That, accordingly, as a direct result of the option and of the failure to place the beneficial interest in it securely away from him, the appellant had not divested himself absolutely of the shares which it controlled, and that, therefore, the appellant was not entitled to the benefit afforded by section 415 (l) (d) of the Income Tax Act, 1952, since the strict requirements of that section had not been satisfied (post, pp. 317A-B, 328G-329C).
3.2.3. Understanding the Issues in Vandervell
Now that you are familiar with the facts of Vandervell v IRC you can turn to consider the legal issues.
The central question was whether the dividends paid on the shares were to be treated as Tony Vandervell's income, which would render him liable to pay surtax on them. This tax liability would arise even though the shares were owned by the RCS and the dividends had been paid to them and had not been received by Vandervell himself.
Which of the statements below best summarises why the Revenue submitted that Vandervell was liable to pay tax on the dividends which had been declared:
(a) Because he still owned other shares in the company
(b) Because the RCS held the shares on resulting trust for Mr Vandervell
(c) Because Mr Vandervell had not fully divested himself of his interest in the shares transferred to the RCS
(d) Because the Vandervell Trustees Ltd held the shares on trust for Vandervell
Answer: (c)
3.2.4. Why the operation of s53(1)(c) was relevant in Vandervell
You should now have understood that the reason why Mr Vandervell was held liable to pay surtax on the dividends which had been declared on the shares transferred to the RCS was because the option which was enjoyed by Vandervell Trustees Ltd was held on resulting trust for him. However this decision was reached by a bare majority of the House, since Lord Reid and Lord Donovan concluded that there was no resulting trust on the facts and that the option was owned by Vandervell Trustees Ltd absolutely.
However we have still not considered the relevance of the case to the application of s53(1)(c) and the requirement of writing for dispositions of subsisting trust interests. The issue of formalities arose because the lack of writing by Tony Vandervell in organising and directing the transfer of the legal ownership of the shares which were held on bare trust for him by the Bank was said to be void and of no effect. The twin issues at stake in the case were explained by Lord Reid in his judgement.
Lord Upjohn described the questions at issue, namely whether writing had been required for Vandervell to dispose of his equitable interest in the shares when they were transferred to the RCS and whether there was an resulting trust of the option, as:
"two points to be considered, completely different, each in a watertight compartment."
Although only a bare majority of the House of Lords held that there was a resulting trust, it was unanimously held that there was no ground for finding the transfer of Vandervell's equitable interest in the shares to the RCS void for lack of writing.
To consider why this conclusion was reached you should carefully read the judgements of Lord Upjohn and Lord Wilberforce.
3.2.5. Why Writing was Not Required In Vandervell
Having read the judgments of Lord Upjohn and Lord Wilberforce, which of the following statements best summarises why writing was held not to be necessary for Vandervell to dispose of his beneficial interest in the shares which were held on trust for him?
(a) Vandervell involved a resulting trust but Grey concerned an express trust
(b) In Vandervell the trustee was a corporation whereas in Grey the trustees were individuals
(c) Vandervell concerned a gift to charity whereas Hunter was acting for his own interests
(d) Vandervell directed the trustees to transfer the legal ownership of the trust property to a third party whereas Hunter directed a transfer of his equitable interest only
(e) Vandervell was trying to avoid Income Tax whereas Hunter was trying to avoid stamp duty
Answer: (d)
All the judges held that in the circumstances there was no need for Vandervell to use writing to effect a transfer of his equitable in the shares to the RCS when he had orally directed the trustees to make a transfer of the absolute ownership, since the transfer of the absolute ownership would automatically carry with it the beneficial interest in the property transferred. The reasoning was briefly summarised by Lord Donovan.
Lord Upjohn and Lord Wilberforce gave more extensive reasons for this conclusion and their judgments are considered on the next page.
3.2.6. Understanding the Vandervell Judgments
You should now be aware that the central difference between Vandervell v IRC, where it was held that no written formalities were required, and Grey v IRC, where the House of Lords held that a oral direction to trustees to hold the beneficiary's interest under separate trusts, was that in Vandervell the beneficiary orally directed the trustee to transfer the legal title of the trust property to a third party who was intended to become the absolute owner of it.
The House of Lords held that in such circumstances the beneficiary does not need to use writing to revest the equitable interest in the property held on trust in the trustees so that they can transfer the absolute ownership.
Lord Upjohn emphasised that the main reason why writing was not required when the beneficiary directed a transfer of the legal title to the property was that s53(1)(c) was intended to prevent hidden oral transactions in the beneficial interest in property where the legal and equitable interests remain separated from each other. It was never the object of the section to require writing where the beneficiary intended the trustees to transfer the whole legal and beneficial estate to a third party. He summarised that the section was "directed to cases where dealings with the equitable estate are divorced from the legal estate" and that to hold the contrary would:
"make assignments unnecessarily complicated; if there had to be assignments in express terms of both legal and equitable interests that would make the section more productive of injustice than the supposed evils it was intended to prevent."
Lord Wilberforce adopted a slightly different approach. As far as he was concerned it was of central importance that it was Mr Vandervell himself who had completed the share transfer form by entering the name of the RCS as transferees which he had orally instructed the trustee to leave blank. He summarised the circumstances as follows:
"On November 14 1958 [Mr Vandervell's] solicitor received from the bank a blank transfer of the shares, executed by the bank, and the share certificate. So at this stage [Mr Vandervell] was the absolute master of the shares and only needed to insert his name as transferee in the transfer and to register it to become the full legal owner. He was also the owner in equity...The case should then be regarded as one in which [Mr Vandervell] himself has, with the intention to make a gift, put the college in a position to become the legal owner of the shares, which the college in fact became."
He held that because the college would have become the owners of he shares in equity the moment that their name was entered in the share transfer form and the form was sent to the company for the college to be registered as the legal owners following the rule in Re Rose, there was therefore no need for separate writing to transfer Vandervell's equitable interest.
3.2.7. The Vandervell Principle
Having considered the main rationales that were given for the rejection of the need for any further writing by Mr Vandervell to dispossess himself of his equitable interest in the shares transferred to the Royal College of Surgeons, do you think it would be accurate to summarise the effect of the case as follows:
Whenever a beneficiary is entitled to call for the legal title of the trust property himself no further writing will be needed to transfer his beneficial interest if he orally directs the trustees to transfer the legal title absolutely to a third party?
(a) Yes
(b) No
(c) Maybe
Answer: (a) YES
The majority view of the House of Lords (Lords Upjohn, Pearce and Donovan) was that a mere oral direction to trustees to transfer the legal title to a third party absolutely would be effective without the need for further writing by the beneficiary.
However, it should be noted that Lord Wilberforce was not so certain that this conclusion followed. His emphasis on the fact that Vandervell himself had completed the share transfer form led him to indicated that a purely oral direction to trustees to complete such a form themselves might not be sufficient:
"What the position would have been had there been an oral direction to the legal owner (viz. the bank) to transfer the shares to the college, followed by such a transfer, but without any document in writing signed by Mr Vandervell as equitable owner, is not a matter which calls for consideration here."
This would suggest that as far as Lord Wilberforce was concerned a merely oral direction to the trustees to transfer absolute ownership to a third party, where the beneficiary plays no part in the process of transfer at all, and a share transfer form is completed by the trustee alone, may yet be rendered void in so far as it purports to transfer the equitable interest in the property.
3.2.8. Does the Vandervell Principle Apply to a Direction to Transfer the Legal Title of the Trust Property to New Trustees Holding for Different Beneficiaries?
Following on from the previous question concerning the scope of the principle adopted in Vandervell v IRC, do you think that the writing would have been required if instead of directing the Bank to transfer the shares to the Royal College of Surgeons absolutely Vandervell had orally directed the Bank to transfer the shares to the Vandervell Trustees Ltd to hold them on trust for his grandchildren?
(a) Writing not required
(b) Writing required
(c) Perhaps writing required
Answer: (c)
At present there is a degree of uncertainty as to whether writing would be required or not in such circumstances.
At first sight it might be thought that in the example you are considering the circumstances are analogous to the case of Grey v IRC, since the beneficiary is seeking to transfer the beneficial interest to others. This suggests that writing should be required as the beneficiary is seeking to effect a disposition of his equitable interest in the shares.
However, as Brian Green points out in his article "Grey, Oughtred and Vandervell - a Contextual Reappraisal" there is nothing in the language of the House of Lords which would prevent an oral direction to transfer the trust property to new trustees, with a declaration that the new trustees are to hold the legal title on trust for new beneficiaries.
The problems would be particularly acute because the scope of the principles in Vandervell cannot be confined to bare trusts. Where the beneficiaries of a trust are of age and legally competent they are entitled to call for the legal title under the rule in Saunders v Vautier. They would thus direct the trustees to transfer the legal title to new trustees on trust for different beneficiaries, without the need for any writing. This circumvents the requirements of s53(1)(c) and Green concludes that this would amount to such a departure from the policy objectives of s53(1)(c) that the courts would confine the decision in Vandervell v IRC to its facts.
In defence of the application of the principles of Vandervell to such a case it should be pointed out that there would be no breach of the overriding objectives of s53(1)(c) if Lord Upjohn is correct that its prime purpose is to ensure that the trustees know who their beneficiaries are there could be no objection on this basis to a direction to transfer to new trustees for different beneficiaries. The existing trustees would know that they were no longer trustees and owed no further duties to the present beneficiary. The new trustees would know who they were holding on trust for.
For further criticism and comment on the decision in Vandervell you may want to read the following articles:
i. Battersby, "Formalities for the Disposition of Equitable Interests Under a Trust", (1979) Conv 17
ii. Jones, (1966) 24 CLJ 19
iii. Spencer, (1967) 31 Conv 175
3.3. Contracting to Transfer Equitable Interest
3.3.1. Transfer of Subsisting Equitable Interest by Constructive Trust Arising from a Contract to Transfer
You should now have fully understood the principle adopted in Vandervell v IRC and why formalities were not required. If you do not yet feel that you have understood the case and its implications you might like to go through the previous pages again.
If you feel that you have understood Vandervell v IRC it is time to move on and consider the next important case which considered the scope of application of s53(1)(c).
3.3.2. Oughtred v IRC
You should read Oughtred v IRC [1960] AC 206 carefully paying particular attention to the facts.
Oughtred v Inland Revenue Commissioners [1960] AC 206, HL
Lord Radcliffe, Lord Cohen, Lord Keith Of Avonholm, Lord Denning and Lord Jenkins.
Revenue - Stamp duty - "Conveyance or transfer on sale" - Oral agreement for sale of reversionary interest to tenant for life - Subsequent deed of transfer - Effect of oral agreement - Stamp Act, 1891 (54 55 Vict. c. 39), s. 54 - Law of Property Act, 1925 (15 16 Geo. 5, c. 20), s. 53 (1) (c).
Assignment - Equitable - "Disposition" of equitable interest required to be in writing - Oral agreement to assign equitable interest - Whether disposer constructive trustee - Law of Property Act, 1925, s. 53 (1) (c), (2).
By section 54 of the Stamp Act, 1891: "For the purposes of this Act the expression 'conveyance on sale' includes every instrument ... whereby any property, or any estate or interest in any property, upon the sale thereof is transferred to or vested in a purchaser, or any other person on his behalf or by his direction."
Schedule I imposes under the head of charge "conveyance or transfer on sale, of any property" (except as therein mentioned) ad valorem duty on "the amount or value of the consideration for the sale"; and under the head of charge "conveyance or transfer of any kind not hereinbefore described" a fixed duty of 10
Under and by virtue of a settlement dated January 1, 1924, an appointment dated June 18, 1956, and a release of the same date, a mother was tenant for life of 100,000 preference shares and 100,000 ordinary shares in a company, and her son was absolutely entitled to the shares subject to her life interest. By an oral agreement made on June 18, 1956, it was agreed between them that on June 26 he would exchange his interest under the settlement and subsequent deeds for certain shares in the same company then owned by her to the intent that her life interest in the shares subject to the settlement should be enlarged into absolute ownership thereof. On June 26, by a deed of release between the mother, the son and the trustees, the mother and son gave a release to the trustees. The release, after recital of the facts down to and including the oral agreement, recited that the trust fund, consisting of the shares, "is accordingly now held in trust for [the mother] absolutely," and that it was intended to transfer them to her. The transfer was expressed to be the consideration for the release. On the same day, by a deed made between the mother and the trustees, the shares in question were transferred to the mother, the consideration being expressed to be ten shillings:-
Held (Lord Radcliffe and Lord Cohen dissenting), that the transfer was assessable to ad valorem stamp duty. The transfer was an instrument whereby property in the shape of the settled shares or any estate or interest in that property was transferred "upon a sale thereof" to a purchaser in the person of the mother.
Per Lord Denning. By the transfer the mother acquired the son's reversionary interest as effectively as if he had conveyed it direct to her, and that was quite enough to attract stamp duty. Every conveyance or transfer by which an agreement for sale is implemented is liable to stamp duty on the value of the consideration (post, p. 233).
Per Lord Keith and Lord Jenkins. If the subject-matter of a sale is such that the full title to it can only be transferred by an instrument, then any instrument they execute by way of transfer of the property sold ranks for stamp duty purposes as a conveyance on sale notwithstanding the constructive trust in favour of the purchaser which arose on the conclusion of the contract (post, p. 241).
Semble, that on making the oral agreement on June 18, 1956, the son became a constructive trustee of his equitable reversionary interest in the settled funds for the mother, notwithstanding section 53 (1) (c) of the Law of Property Act, 1925, by virtue of section 53 (2), but that nonetheless section 53 (1) (c) applied and, accordingly, the son could not assign that equitable interest to the mother except by a disposition in writing (see per Lord Radcliffe, post, p. 227, per Lord Cohen, post, p. 230, per Lord Denning, post, p. 233).
3.3.3. Why was Stamp Duty Payable in Oughtred?
Now that you are familiar with the facts of Oughtred v IRC it is time to turn to the legal issues. The central question was whether Mrs Oughtred was liable to pay ad valorem stamp duty on the transfers executed on June 26.
Which of the following statements best summarises why the House of Lords held that stamp duty was payable on the value of the 200,000 shares transferred to Mrs Oughtred?
Because the transfers executed on 26 June were effective to transfer P's equitable interest in the shares to Mrs O as there had been no previous writing by which P had disposed of it, even though there was a constructive trust arising from the oral contract.
Because the transfer of 26 June was a "conveyance or transfer on sale" even though a constructive trust had already arisen in favour of Mrs O of the shares from the oral contract that had been entered with P.
Because the transfer of 26 June was the effective transfer of P's equitable interest in the shares to Mrs O as there was no constructive trust arising in her favour from the oral contract.
Finding the rationale for the imposition of a liability to pay stamp duty is extremely difficult. The decision was made by a bare majority, and the majority judges gave different ratios for their conclusion that stamp duty should be paid.
Although there was an important point concerning the possibility of a constructive trust arising in Mrs Oughtred's favour from the oral contract entered with Peter this was not ultimately critical to the finding of liability to stamp duty. All the judges found that there was a constructive trust but the crucial question was whether this prevented the later deed from attaching tax liability.
Lord Denning, Lord Jenkins and Lord Keith held that, irrespective of the operation of any constructive trust, the deed of 26 June was a "conveyance or transfer on sale" and therefore gave rise to liability to stamp duty under s54 Stamp Act 1891.
Lord Radcliffe and Lord Cohen dissented, holding that deed of June 26 was not a "transfer on sale" of the equitable interest in the shares because it had already effectively passed to Mrs Oughtred by means of the constructive trust.
3.3.4. Examining the Oughtred Judgments
You should now have understood that in Oughtred v IRC the majority of the House of Lords held that stamp duty was payable on the share transfers executed on 26 June. There was no dispute as to the fact that the oral contract of 18 June between Mrs Oughtred and Peter had given rise to a constructive trust. It is the nature and effect of this constructive trust which is of prime interest to us from the perspective of the formalities required under s53(1)(c) for the disposition of subsisting equitable interests.
For Mrs Oughtred it was argued that the constructive trust which arose from the oral contract meant that from that very moment the beneficial interest in the shares was enjoyed by her alone, since Peter was henceforward holding his reversionary interest for her. However the Revenue argued that there could have been no effective passing of his equitable reversionary interest to Mrs Oughtred because there had been no writing as required by s53(1)(c). Mrs Oughtred countered this contention of the Revenue by pointing to s53(2) which stipulates that constructive trusts are outside of the scope of s53(1).
Although the majority held that irrespective of the constructive trust the relevant legislation mean that the subsequent transfer was liable to stamp duty, there was some confusion as to whether a constructive trust could arisen to transfer Peter's reversionary interest to Mrs Oughtred without additional writing in compliance of s53(1)(c).
Lord Denning stated that in his opinion writing would have been required to transfer Peter's reversionary interest to his mother, but gave no justification for his conclusion.
Lord Cohen stated that irrespective of any constructive trust Peter could not assign his equitable interest to his mother without writing.
Lord Jenkins, with whom Lord Keith agreed, did not decide the point, finding that stamp duty was payable even if he assumed that no writing was required under s53(1)(c).
Lord Radcliffe alone seems to have clearly stated that the effect of the constructive trust was to transfer the reversionary interest in the shares in equity to Mrs Oughtred without the need for further writing.
3.3.5. Scope of Application of the Oughtred Principle
There has been a great deal of debate as to the application of the judgments in Oughtred v IRC and whether there is a generalised principle that subsisting equitable interests can pass under a constructive trust where there is a mere oral contract to transfer, despite the lack of writing satisfying s53(1)(c).
Subsequent cases have tended to support the view that constructive trusts arising as a result of an oral contract do effectually transfer subsisting equitable interests. In Re Holt's Settlement [1969] 1 Ch 100 Megarry J held that a specifically enforceable agreement to sell a beneficial interest under a trust passes it to the purchaser by means of a constructive trust.
The scope of the principle is also considered in the following articles:
i. G Battersby, "Formalities for the Disposition of Equitable Interests Under a Trust" [1979] Conv 17
ii. B Green, Grey, Oughtred and Vandervell - a Contextual Reappraisal (1984) 47 MLR 385
3.3.6. Recent Judicial Examination of the Oughtred Principle
Despite the confusion which has surrounded the relevant principles to be derived from the judgements in Oughtred v IRC they have been recently subject to clarification by the Court of Appeal in Neville v Wilson [1996] 3 All ER 171, a case which you should read and which directly concerns the applicability of s53(1)(c) where a constructive trust arises because of an oral contract to transfer a subsisting equitable interest.
The case concerned 120 shares in a company (U Ltd) which were held on trust by the directors of the company as nominees for a separate family company (J Ltd). In 1969, J Ltd had been struck of the register when it had become defunct. The question was as to the beneficial ownership of the shares still held by the directors. It was claimed that there had been an oral agreement in 1969 between the shareholders of J Ltd that the assets of the company should be divided amongst the shareholders rateably.
The central question was whether, if there was such an agreement, it gave rise to a constructive trust of the 120 shares in favour of the shareholders of J Ltd, and whether such an agreement was rendered void for lack of writing under s53(1)(c). If there was no such constructive trust the shares would pass to the Crown as bona vacantia.
The Court of Appeal, whose judgement was delivered by Nourse LJ, held that there was an agreement between the shareholders of J Ltd in 1969, and that a constructive trust of the shares held by the directors of U Ltd did arise in their favour, and was not invalidated by the absence of writing.
A thorough consideration was made of the judgements in Oughtred v IRC since as Nourse LJ stated:
"The simple view of the present case is that the effect of each individual agreement was to constitute the shareholder an implied or constructive trustee for the other shareholders, so that the requirement for writing contained in sub-s (1)(c) of s53 was dispensed with by sub-s (2). That was the view taken by Upjohn J at first instance and by Lord Radcliffe in the House of Lords in Oughtred v IRC. In order to see whether it is open to us to adopt it in this court, we must give careful consideration to those views and to the other speeches in the House of Lords"
Nourse LJ went on to conclude that there was nothing in the speeches of the House of Lords which would prevent the finding of a constructive trust in favour of the shareholders and that s53(1)(c) was excluded and that the subsisting equitable interest in the shares held on trust for J Ltd had passed to the shareholders in proportion to their shareholding:
"So far as it is material to the present case, what sub-s (2) says is that subs-s (1)(c) does not affect the creation or operation of implied or constructive trusts. Just as in Oughtred v IRC the son's oral agreement created a constructive trust in favour of the mother, so here each shareholder's oral or implied agreement created an implied or constructive trust in favour of the other shareholders. Why then should sub-s (2) not apply? No convincing reason was suggested in argument and none has occurred to us since. Moreover, to deny its application in this case would be to restrict the effect of the general words when no restriction is called for, and to lay the ground for fine distinctions in the future. With all the respect which is due to those who have thought to the contrary, we hold that sub-s (2) applies to an agreement such as we have in this case."
Following Neville v Wilson it seems clear that there is a general principle that where a subsisting equitable interest is the subject of an oral contract to transfer which gives rise to a constructive trust there is no need for writing satisfying s53(1)(c), since the constructive trust effects the disposition of the subsisting equitable interest.
For further discussion of the decision in Neville v Wilson and its implications you may like to read one of the following short articles:
i. R Nolan (1996) 55 CLJ 436
ii. M Thompson [1996] Conv 368
iii. G Watt [1997] Nott LJ 86
3.3.7. Applying the Oughtred Principle
Having thoroughly considered the operation of the principle attributed to Oughtred v IRC do you think that a disposition of a subsisting equitable interest would be effected without further formality in the following circumstances where a beneficiary (X) agrees to transfer his beneficial interest in the trust property to a third party (Y):
(a) X orally agrees to sell Y his equitable interest in land
û Yes ü No
(b) X orally agrees to sell Y his equitable interest in shares in a public company?
û Yes ü No
(c) X orally agrees to sell Y his equitable interest in a unique vintage car
û Yes ü No
(d) X by deed promises to assign his interest in shares in a private company to Y
û Yes ü No
(e) X orally agrees to sell Y his equitable interest in a trust of GBP100,000
û Yes ü No
Answer: No, No, Yes, No, No.
Although a contract for the sale of land, or an interest in land, is specifically enforceable and gives rise to an immediate constructive trust in favour of the purchaser of the interest, following the Law of Property (Miscellaneous Provisions) Act 1989 s2 there will be no valid contract for the sale of an interest in land unless it is made in writing in the appropriate manner.
Thus an oral agreement for the sale of an equitable interest in land will not give rise to a contract to transfer and no constructive trust will arise form the contract alone. The equitable interest in the land will therefore remain with X.
This contrasts with the position under the preceding law where a contract for the sale of an interest in land could be valid and enforceable even if it was purely oral. Where such an oral contract was valid a constructive trust did arise, as was held to be the case in DHN Food Distributors Ltd v Tower Hamlets London Borough Council [1976] 1 WLR 852.
Answer to (b) are probably correct although there remains some question whether a constructive trust arises in such circumstances.
The facts appear superficially similar to those of Oughtred v IRC but the character of the shares held on trust is an important difference.
In Oughtred v IRC and Neville v Wilson the shares concerned were in a private company and it is well established that a contract for the sale of shares in a private company is specifically enforceable and gives rise to an immediate constructive trust.
It is less clear that a contract concerning shares in a public company should have the same effect, as in the event of failure to perform the contract the purchaser can acquire substitute shares in the same company form the open market. Generally specific performance is not regarded as being available of contracts for the purchase of such shares, and this would suggest that no constructive trust would arise.
It must be admitted that in Chinn v Collins [1981] AC 533 Lord Wilberforce held a constructive trust arose even where there was a contract for the transfer of the equitable interest in shares in a public company, but Oughtred v IRC was not cited and it is submitted that the case is contrary to principle.
Since the car is unique and no market substitute will be available the contract would be specifically enforceable. It would therefore give rise to an immediate constructive trust in favour of the transferee, and would have an identical effect on the equitable ownership as was accepted by the majority in Oughtred v IRC as confirmed by the Court of Appeal in Neville v Wilson.
Although the facts appear very similar to those in Oughtred v IRC and the arrangement concerns shares in a private company, there is no possibility of specific performance because there is no contract and Y is merely a volunteer. Although Y would be able to sue X at common law for breach of the covenant (deed), and such a liability can be seen in Cannon v Hartley, equity will not grant specific performance of the promise.
Since the availability of specific performance is the essential pre-requisite of a constructive trust in such cases, X would remain the beneficiary of the trust and his equitable interest would only be transferred to Y if s53(1)(c) was satisfied.
Since money is not unique the valid oral contract would not be specifically enforceable, and no constructive trust would arise.
X's beneficial interest under the trust would only pass to Y if there was a written assignment complying with s53(1)(c).
3.4. Declaring a Sub-Trust
3.4.1. Declarations of Sub-Trusts
You have now seen how a subsisting equitable interest may be transferred by means of a constructive trust arising from a contract to transfer without the need for further formalities. A further question which has arisen in relation to the application of s53(1)(c) has been the question whether formalities are required if the beneficiary of a trust declares himself a trustee of his beneficial interest, and that he is holding it for them as the ultimate beneficiaries.
Turning back to the facts of Grey v IRC, you will remember it was held that an oral direction by the beneficiary, Mr Hunter, to trustees holding shares as nominees for him, to henceforward hold the shares on trust for his grandchildren, was ineffective to dispose of his beneficial interest in the shares because of the lack of writing in satisfaction of s53(1)(c).
Do you think that the result should have been different if, rather than directing the trustees to hold the shares for the grandchildren, Hunter had orally declared himself to be holding his beneficial interest on trust for his grandchildren?
Which of the following statements do you most agree with if these were the facts of the case?
(a) I don't think such a declaration would be possible
(b) There would be a "declaration" not a "disposition" so s53(1)(c) would not apply
(c) The substance of the transaction was a "disposition" and not a "declaration" and should be void without writing
(d) Such a declaration would have to be in writing anyway so it does not matter whether the transaction was a "declaration" or a "disposition"
Answer: Depends
(a) is a wrong answer. The equitable interest which a beneficiary enjoys under a trust is a genuine and real item of property, and there is no reason why it cannot itself be the subject matter of a trust. Such a trust is described as a sub-trust.
If Hunter were to declare himself a trustee of his beneficial interest in shares for the benefit of his own grandchildren this would create a sub-trust in favour of the grandchildren, who would become the ultimate beneficiaries of the shares.
However, the mere fact that such a sub-trust is a legitimate possibility does not address the questions as to whether or not any formalities will have to be observed, since in substance such a sub-trust may amount to a disposition of the existing beneficiaries equitable interest to the new beneficiary of the sub-trust. If the arrangement is characterised as a disposition it will fall within the ambit of s53(1)(c) and will be void and of no effect unless there is writing.
Answer (b) is a legitimate interpretation of such an arrangement. The action of Hunter does appear to be one of "declaring" that he is a trustee of his own beneficial interest for his grandchildren.
However, against this it can be argued that the substance of the transaction is a disposition, since its effects are to transfer the ultimate beneficial ownership of the shares from Hunter to the grandchildren. If the substance of the transaction is considered it may be better characterised as a disposition, in which case the formalities of s53(1)(c) would have to be observed.
If the declaration of a sub-trust by the beneficiary is always characterised as a "declaration" of trust it would provide an easy means of avoidance of the formalities of s53(1)(c) and would facilitate informal dealing with the beneficial interests in a manner that would mean that the trustees would not be aware of the identity of the ultimate beneficiaries of the trust.
For this reason the courts have indicated that they are more concerned to look at the substance of the transaction and to distinguish between a genuine declaration of a sub-trust and an declaration which is in substance designed to effect a disposition of the beneficiary's subsisting equitable interest.
How this distinction is drawn will be considered on the next page.
Answer (c) indicates that there strong reasons for characterising such a transaction as a disposition of the beneficiaries equitable interest.
Even though as a matter of form the beneficiary's action appears to constitute a declaration of a sub-trust it is better regarded as a disposition of his subsisting equitable interest in the shares since the practical effect is that Hunter would no longer be the ultimate beneficiary of the shares and that right would be enjoyed by his grandchildren. Equity has always preferred to look to the substance of a transaction rather than its form.
However there are also good arguments for characterising the transaction as a genuine declaration. If Hunter declared himself trustee of his beneficial interest in the shares for his grandchildren, the terms of the sub-trust and of the head trust would not be identical. The head trustees would be holding the shares on trust for Hunter as nominees for him. Hunter would be holding the beneficial interest on a sub-trust for his grandchildren in equal shares. The nature of the trusts and the duties of the head-trustees and Hunter as sub-trustee would be different.
There would be an even clearer case for finding a genuine declaration of a sub-trust if Hunter had declared that he was holding his beneficial interest on a discretionary trust for such of his grandchildren as he might determine in his absolute discretion. Here the whole nature of the obligations under the head trust and under the sub-trust would be different, and the transaction would be best characterised as a declaration of a sub-trust.
The law therefore takes a relatively pragmatic and sophisticated approach to the problem by differentiating between situations where a beneficiary declares himself to be holding his interest under a sub-trust and there is a genuine sub-trust created and where there is no genuine sub-trust but the transaction is in substance a disposition of his subsisting equitable interest.
The distinction between cases where there is a genuine sub-trust and where there is a disposition are discussed on the next page.
Answer (d) is certainly wrong. Although it is certainly the case that under s53(1)(b) declarations of trusts of land or interests in land have to be evidenced in writing in order to be enforceable, there is no requirement of any formalities for the declaration of a trust of personal property. Since the property held on trust for Hunter was shares no formalities would be required for him to create a valid sub-trust of his beneficial interest on behalf of his grandchildren.
The central difficulty in this situation is not as to the formalities needed for the declaration, but whether the transaction is to be characterised as a declaration of trust or as a disposition of a subsisting equitable interest. If it is characterised as a disposition of Hunter's equitable interest then it will be void and of no effect unless the declaration is made in writing, since s53(1)(c) would apply. If it is characterised as a declaration of trust, the subject matter of which is Hunter's own equitable interest in the shares, an oral declaration will be effective to create a sub-trust.
Whether a declaration of a sub-trust by a beneficiary is to be characterised as a genuine declaration or in substance a disposition of his subsisting equitable interest is discussed on the next page.
3.4.2. The Creation of Sub-Trusts
Since the beneficial interest behind a trust is a form of property there is no conceptual difficulty with the idea of the creation of a sub-trust, which might be thought of as a trust of a trust.
Theoretically if Hunter, the beneficiary of a trust of shares held on trust for him by trustees, declares a trust of his beneficial interest in favour of his grandchildren, he will henceforth be holding his interest in the shares on trust for his grandchildren, who would be the beneficiaries of the sub-trust. However the trustees of the head-trust would still retain the legal title to the shares and they would owe their duties as trustees to Hunter and not to the grandchildren.
3.4.3. Problems associated with the declaration of sub-trusts
Whilst there is no conceptual difficulty preventing the creation of sub-trusts, there are two practical difficulties which arise when such a trust is declared.
(i) duplication of trustees' functions
First, there is a great danger of duplication of trustees and excessively complicated arrangements. If the beneficiary declares a sub-trust of the whole of his interest in favour of a sub-beneficiary then the trustees will be holding the property on trust for him, and he will be holding his equitable interest on trust for the sub-beneficiary. The reality of the arrangement is that the ultimate or real ownership of the trust property has vested in the sub-beneficiary and the trusteeship of the sub-trustee as intermediary between the head-trustees and the sub-beneficiary is unnecessary.
(ii) avoidance of formalities required for policy reasons
Secondly, if the ultimate ownership of the trust property can be vested in a third person by a purely oral declaration of trust by the beneficiary so as to create a sub-trust, this provides an easy mechanism for the transfer of subsisting equitable interests without the need to comply with the requirement of writing under s53(1)(c). If the need for writing can be so easily avoided this would run counter to the policy objectives which as said to lie behind s53(1)(c), namely the prevention of hidden transactions in the equitable interest.
Because of these difficulties the law distinguishes between genuine declarations of a sub-trust by a beneficiary and those situations where there appears in form to have been a declaration of a sub-trust but in substance the beneficiary has divested himself of all interest in the trust property and there is a "disposition" in favour of a third person. If the declaration of a sub-trust by the beneficiary is characterised as in fact a "disposition" of his subsisting beneficial interest it will be void unless made in writing as required by s53(1)(c).
3.4.4. When is a declaration of sub-trust in substance a "disposition" of a subsisting equitable interest"?
The key criteria which has been adopted for distinguishing between a genuine declaration of sub-trust by a beneficiary and such a declaration which is to be regarded as a disposition is the nature of the duties that the beneficiary will have to perform as trustee under the sub-trust.
If the sub-trust would impose no duties on the sub-trustee which are different to the duties of the head-trustees the sub-trustee is regarded as having no real function to perform. Since he is an irrelevant intermediary between the head-trustees and the sub-beneficiary he is regarded as dropping out of the picture entirely, and the head-trustees hold the trust property directly for the sub-beneficiary. In effect the sub-beneficiaries are substituted for the original beneficiary of the trust rather than an additional and redundant layer of trusteeship being imposed over the property.
In contrast a genuine sub-trust will be created if the beneficiary declaring the sub-trust has active duties to perform as sub-trustee which are different from those of the head-trustees. In such a case the trusteeship of the sub-trustees is neither redundant nor irrelevant.
Therefore, if in Grey v IRC Hunter had declared a sub-trust of his interest in the shares held on trust for him in favour of a single adult grandchild, he would have had no substantive duties to perform as sub-trustee different to those of the head-trustees. He would therefore drop out of the picture entirely and the head-trustees would hold the shares on trust for for the grandchild directly. In contrast, if he declared a discretionary trust of his equitable interest in favour of whichever of his grandchildren he should in his absolute discretion decide, this would create a genuine sub-trust. His duties as trustee of the sub-trust would be essentially different to those of the head trustee, since they have no discretion as to how the equitable interest is to be allocated.
Where a beneficiary who declares a sub-trust drops out of the picture in this way the transaction is regarded as a disposition of his equitable interest and will therefore be ineffective and void if the declaration is not made in writing in satisfaction of s53(1)(c). However where a genuine sub-trust is declared there will be no need for writing under s53(1)(c), although an oral declaration of a sub-trust will be unenforceable without evidence in writing if the trust property is land or an interest in land, as s53(1)(b) will apply.
3.4.5. Does the Trustee Drop out of the Picture?
You have now seen that the law distinguishes between a genuine declaration of a sub-trust and a transaction which is in substance a disposition of a subsisting equitable interest.
Imagine that a trustee is holding 1000 shares on trust for Hunter. Consider whether the following actions would be treated as creating a genuine sub-trust or characterised as dispositions of his subsisting equitable interest:
H orally declares that...
(1) He holds his interest for the benefit of his adult grandson
(a) Disposition (b) Sub-Trust (c) Neither
Answer: (a)
As Hunter would have no duties to perform under the sub-trust distinct form those of the head trustee the effect would be that he would "drop out of the picture" and the transaction would be characterised as a disposition in substance.
As such it would be ineffective to transfer the equitable interest in the shares to his grandson unless effected in writing in satisfaction of s53(1)(c).
Hunter would therefore remain the equitable owner of the shares.
(2) He holds his interest for he benefit of his two adult grandchildren in equal shares
(a) Disposition (b) Sub-Trust (c) Neither
Answer: (b)
Because the terms of the the trust declared by Hunter are different to those of the head trust Hunter would have active duties to perform. His actions could therefore be regarded as a valid declaration of a sub-trust.
As the property subject to the trust is not land s53(1)(b) does not have to be complied with and the purely oral declaration will be effective to vest the beneficial entitlement of the shares in the grandchildren in equal shares.
(3) He holds his interest for the benefit of his mother for life
(a) Disposition (b) Sub-Trust (c) Neither
Answer: (b)
Because the terms of the the life interest declared by Hunter are different to those of the head trust Hunter would have active duties to perform. His actions could therefore be regarded as a valid declaration of a sub-trust.
As the property subject to the trust is not land s53(1)(b) does not have to be complied with and the purely oral declaration will be effective to create a life interest in favour of his mother. Hunter will therefore be obliged to apply any income derived form the trust to his mother during her lifetime.
(4) He will hold his interest for the benefit of his son if he stops smoking within two months
(a) Disposition (b) Sub-Trust (c) Neither
Answer: (c)
Hunter has done nothing here to divest himself immediately of his interest under the trust, but has merely entered into a contract.This would only have the effect of transferring the equitable interest in the shares to his son if the contract was specifically enforceable in accordance with the principles identified in Oughtred v IRC.
3.4.6. Authorities concerning the declaration of sub-trusts
You should now be familiar with the difference between a true declaration of a sub-trust and a transaction which is in form a declaration but in substance is treated as a disposition of the beneficiary's subsisting equitable interest.
However the authorities for these propositions are somewhat sparse. It is alleged that three nineteenth century cases - Onslow v Wallis (1849) 1 Mac & G 506, Re Lashmar [1891] 1 Ch 258 and Grainge v Wilberforce (1889) 5 TLR 436 - establish the principle that a sub-trustee with no active duties to perform drops out of the picture so that there is an effective disposition of the beneficial interest from the original beneficiary to the sub-beneficiary.
In Grainge v Wilberforce Chitty J stated that there was a general principle that:
"...where A was trustee for B, who was trustee for C, A held in trust for C, and must convey as C directed."
He applied this to the facts of the case to conclude that the person in the position of B should be "left out" of any dealings with the trust property. Similarly in Re Lashmar the Court of Appeal held that a sub-trustee who had no active duties to perform was irrelevant and need not be taken into account.
Most significantly this principle was given acceptance by Upjohn J in his judgement at first instance in Grey v IRC [1958] Ch 375 where he used the language of a sub-trustee "disappearing from the picture." Although the creation of a sub-trust was not at issue in the case, and his comments are therefore strictly obiter, they do add weight to the view that there is a general principle that if a beneficiary declares a sub-trust and has no active duties to perform as trustee the head-trustees will hold the trust property directly for the sub-beneficiary.
3.4.7. Criticism of the creation of sub-trusts without formality
However it has also been argued that these cases in fact provide no justification for finding that a sub-trust affecting the location of the beneficial interest can be declared without formalities, and that every situation where there is a purported declaration which affects the location of the beneficial interest should be regarded as falling within the scope of s53(1)(c), irrespective of whether or not the sub-trustee is treated as dropping out of the picture.
Brian Green suggests in his article "Grey, Oughtred and Vandervell - A Contextual Reappraisal" (1984) 47 MLR 385 (at pp395-399) that cases such as Onslow v Wallis, Re Lashmar and Grainge v Wilberforce do not justify the principle that a sub-trustee who has no active duties to perform drops out of the picture and that they are cases involving either unusual facts or where the alleged nature of the sub-trustees duties was irrelevant to the decision. Instead, relying on the older case of Head v Lord Teynham (1783) 1 Cox 57 he argues that the true principle is not that the sub-trustee drops out of the picture but that if the sub-trustee has no active duties to perform he cannot prevent the head-trustees acceding to the wishes of the sub-beneficiaries acting within the scope of the rule in Saunders v Vautier. Brian Green concludes by arguing that all cases of a declaration of a sub-trust should require writing in accordance with s53(1)(c).
3.4.8. Conclusion
It would seem that despite these counter arguments the accepted orthodoxy is that a declaration of a sub-trust of personal property will be valid without further formalities provided that the sub-trustee has active duties to perform.
In contrast, wherever such a sub-trustee drops out of the picture because he is a bare sub-trustee with no active duties to perform writing is required to effect a disposition of the beneficial interest to the sub-beneficiary.
3.5. Extinguishing an Informal Trust
3.5.1. The Extinction of Subsisting Equitable Interests
The final case that we are going to consider in detail requires us to pick up the story of Tony Vandervell and the shares which had been transferred to the Royal College of Surgeons.
I am sure that you have found some of the material in this module hard going! Unfortunately formalities is just a difficult and technical area. If you've made it this far you're doing pretty well, and I hope you have the stamina to keep going.
Just to warn you, Re Vandervell (No 2) [1974] Ch 269 is probably the hardest and least satisfactory of the cases that you have considered in this workbook.
3.5.2. Re Vandervell's Trusts (No 2)
Read the facts of Re Vandervell's Trusts (No 2) [1974] Ch 269
In re Vandervell's Trusts (No 2)
White and Others v Vandervell Trustees Ltd [1974] Ch 269; [1974] 3 All ER 205
Court of Appeal
Trusts - Resulting trust - Settlement - Settlor transferring shares to charity - Option to buy shares exercised by trustees of family settlement - Price paid out of settlement funds - Intention of trust for settlement evinced - Extinction of resulting trust by exercise of option - Whether "disposition of an equitable interest or trust" - Whether writing necessary - Whether settlor's estate estopped from denying trust for settlement - Whether material facts pleaded - Law of Property Act 1925 (15 & 16 Geo 5, c 20), ss 53 (1) (c), 205 (1) (ii) - R.S.C., Ord 18, r 7
In 1949 V, the controlling shareholder in VP Ltd., set up a trust for his children with the defendant company as trustee. In November 1958 V transferred 100,000 shares in VP Ltd. to the Royal College of Surgeons to provide GBP150,000 for a chair of pharmacology. The college granted an option to the trustee company for the transfer of the shares to that company for GBP5,000 on request within five years. V intended the trustee company to hold the option on unspecified trusts, either for his children or for employees of VP Ltd.
In October 1961, after the college had received GBP157,000 net in dividends, the trustee company exercised the option by paying GBP5,000 out of the funds of the children's settlement to the college who transferred the 100,000 shares to the trustee company. The intention of the trustee company and of V (who thereafter procured VP Ltd. to declare dividends on the shares which were added to the funds of the children's settlement) was that the shares should be held on the trusts of that settlement. The revenue claimed that V had not divested himself absolutely of his interest in the shares and was liable for surtax on the dividends on the shares paid to the children's settlement. In order to resolve any doubts V, by deed of January 19, 1965, transferred to the trustee company all or any right, title or interest which he had in the option, the shares or the dividends to be held on the trusts of the children's settlement.
V died on March 10, 1967, having by his will of January 27, 1967, appointed the plaintiffs as his executors. The revenue, on the basis that V had not divested himself of the shares until January 19, 1965, assessed his estate for surtax amounting to GBP628,229 in respect of the dividends from October 1961 to January 19, 1965. The plaintiffs claimed, inter alia, a declaration that they were entitled to all moneys received by the trustee company as dividends on the shares between October 1961 and January 19, 1965; and their appeal against the revenue assessments was stood over pending their action against the trustee company. On July 17, 1973, Megarry J. declared that the trustee company held the 100,000 shares from October 11, 1961, until January 19, 1965, in trust for V absolutely, subject only to a lien in favour of the children's settlement for the GBP5,000.
On the trustee company's appeal, it being contended for the plaintiffs, inter alia, that on the exercise of the option the beneficial interest in the shares could not be held on the trusts of the children's settlement because there had been no "disposition" which complied with section 53 (1) (c) of the Law of Property Act 1925 n1: -
Held, allowing the appeal, (1) that until October 1961 the trustee company held the option on such trusts as might thereafter be declared by the trustee company or V and as no clear trusts had been declared there was a resulting trust for V (post, pp. 319A-D, 323A-B, F-G).
Vandervell v Inland Revenue Commissioners [1967] 2 AC 291, HL(E) applied.
(2) That on the exercise of the option by the trustee company in October 1961 by the use of GBP5,000 from the children's settlement, and by the evinced intention of the company and V that the 100,000 shares should be held on trust for that settlement, the trustee company held the shares on the trusts of the children's settlement; and that neither the extinction of the resulting trust of the option which followed its exercise, nor the creation of a beneficial interest in the shares by the declaration of trust amounted to a "disposition of an equitable interest or trust" within the meaning of sections 53 (1) (c) and 205 (1) (ii) of the Law of Property Act 1925 (post, pp. 319E-G, 320A-D, 323E, 326A-C).
Dictum of Turner L.J. in Milroy v Lord (1862) 4 De GF & J 264, 274 applied.
Per curiam. If V had been alive he would have been estopped from denying the existence of the beneficial interest for the children which he had done his best to provide and his executors could be in no better position (post, pp 320H - 321B, 323E, 325F-G).
R.S.C., Ord 18, r 7, requires only the material facts to be stated in pleadings and not their legal results (post, pp 321H, 324E-F).
Per Lord Denning MR The maxim "hard cases make bad law" should be deleted from our vocabulary (post, p 322B-C).
Decision of Megarry J, post, p 273; [1973] 3 WLR 744; [1974] 1 All ER 47 reversed.
3.5.3. The decision of the Court of Appeal
You have now seen how Megarry J held that at no point did Mr Vandervell do anything which had the effect of divesting himself of his interest in the shares which the trustees held on resulting trust for him. In the course of his deliberations the potential impact of s53(1)(c) was not considered.
The Court of Appeal reached a different conclusion as to the effect of the actions of Vandervell and the trustees, finding that the purchase of the shares with money form the children's settlement and the application of the dividends to their trusts amounted to the creation of a trust of the shares in favour of the children. This was explained by Lord Denning MR and Lawton LJ.
Given this finding that the shares were held on trust for the children from the moment of the exercise of the option, the Revenue objected that Mr Vandervell had never effectively disposed of his beneficial interest in the shares because there had been no writing to that effect prior to his deed of 1965.
The Court of Appeal therefore had to consider whether writing was required by Mr Vandervell to dispose of his subsisting equitable interest, arising by a resulting trust of the option. they held that in the circumstances writing was not required.
Consider which of the following statements best represents why the Court of Appeal held that writing was not required:
(a) Vandervell was estopped from denying that the shares were held on trust for the children
(b) The trustees had declared a valid trust of the shares for the children
(c) Writing is entirely irrelevant to resulting trust interests
(d) Vandervell's equitable interest was incapable of enduring a transformation of the subject matter in which it subsisted
Answer: (c)
Although the judgements are extremely complicated, and all of the factors listed as option were to some extent raised to justify the decision that no writing was required, the fact that Vandervell's interest in the option arose by way of a resulting trust seems to have been the most important reason for the Court finding that there was no need to comply with the requirements of s53(1)(c).
Lord Denning MR and Lawton LJ both stressed that a resulting trust only arises where there is a gap in the beneficial ownership of property and that when that gap comes to be filled the resulting trust is extinguished. Therefore, when the trustees exercised the option and declared that they were holding the shares for the benefit of the children this had the effect of automatically extinguishing any rights that Vandervell enjoyed by way of resulting trust.
Although this was the prime rationale for the decision this does not imply that it has found universal favour, and it has been the subject of academic criticism. These criticisms are discussed on the next page.
3.5.4. Criticism of the decision in Re Vandervell's Trusts (No 2)
Although no doubt motivated by a degree of sympathy for Mr Vandervell and a recognition that in his tax planning he had been badly advised, the decision of Court of Appeal in Re Vandervell's Trusts (No 2) has been subjected to criticism, and it is questionable whether it is possible to elucidate a valid principle from it which would be applied to a similar case today. In the Court of Appeal itself Stephenson LJ, whilst agreeing with the judgements of Lawton LJ and Lord Denning MR, expressed his greater doubts about their conclusions.
The main criticism of the decision is that there is no justification for treating issues concerned with dispositions of a subsisting equitable interest which has arisen by way of a resulting trust any differently than dispositions of such interests arising under express trusts. The Court's argument that the resulting trust is somehow eliminated by the act of the trustee identifying new beneficiaries is spurious.
It is true to say that the original resulting trust arose because Vandervell had failed to specify who was to be the beneficial owner of the option, but the trust is only a resulting trust to the extent that it was not expressly created and this characterisation should not colour its nature for the whole of its existence. The prime duty of a trustee, whether of a bare trust or not, is to preserve the trust fund for the beneficiary, and the beneficiary's interest cannot be transferred to different beneficiaries by the mere act of the trustees without a proper assignment by the beneficiary. Otherwise a trustee would have the effective right to dispose of the beneficial interests behind the trust without reference to the beneficiary.
Imagine the situation if, instead of a resulting trust because of a failure to identify the beneficial owners of the trust property, a resulting trust was implied because a person had contributed towards the purchase price of property, for example if two friends (X & Y) purchased GBP100,000 of shares in a company in the name of X alone. Surely X cannot eliminate the beneficial half-interest of Y merely by declaring that henceforward he is to be regarded as holding the shares on trust for Z.
To conclude that interests subsisting behind resulting trusts can be disposed of without writing would also provide an easy means of evasion of the ruling in Grey v IRC, which concerned an equitable interest behind an expressly created bare trust. If a settlor were to transfer property to a nominee, without specifying a beneficiary and thus giving rise to a resulting trust in his favour, he could then transfer the equitable interest to new beneficiaries by merely orally directing the trustees to declare new trusts.
3.5.5. Academic Criticism of Re Vandervell's Trusts (No 2)
If you want to consider the criticisms that have been made of Re Vandervell's Trusts (No 2) in more detail the following articles may be helpful:
Battersby argues in his article "Formalities for the Disposition of Equitable Interests Under a Trust" [1979] Conv 17 that whenever property is held on resulting trust the beneficiary's equitable interest should not be able to be disposed of without writing, except if there was an express term of original trust granting an overriding power to the trustees to nominate new beneficiaries.
Brian Green likewise disapproves of the decision in his article "Grey, Oughtred and Vandervell - A Contextual Reappraisal" (1984) 47 MLR 385 where he argues that there is no difference between a subsisting equitable behind an express trust and one which arises by means of a resulting trust. He concludes that:
"Vandervell (No 2) is a decision addressed to, and hence likely to be confined to, its particular facts. It is improbable that the result reached by the majority of the Court of Appeal would have survived the crueller scrutiny of the House of Lords; and indeed, V's executors having obtained leave to appeal the Court of Appeal's decision, the case was settled without troubling their Lordships."
The Case of the Slippery Equity
(1975) 38 MLR 557
J W Harris
In Re Vandervell's Trusts (No 2),n1 Lord Denning MR said:
" ('Hard cases make bad law') is a maxim which is quite misleading. It should be deleted from our vocabulary. It comes to this: 'Unjust decisions make good law': whereas they do nothing of the kind. Every unjust decision is a reproach to the law or to the judge who administers it."
Now that it has been decided that there is to be no appeal from the decision of the Court of Appeal, it is worth asking what law, good or bad, the decision has made.
The late Mr Vandervell wished to supply the Royal College of Surgeons with funds for the founding of a chair in pharmacology. In 1958, he directed his bank to transfer to the College certain shares in Vandervell Products Ltd, which the bank held as his nominee. As part of the arrangement, the College granted an option over the shares to Vandervell Trustees Ltd (" the trustee company "), which was a private company formed to act as trustee in connection with other benevolent schemes of Mr Vandervell; its members were all professional advisers of Mr Vandervell.
Between 1958 and 1961, Mr Vandervell caused Vandervell Products Ltd, which he controlled, to declare dividends on the College's shares. In 1961, the trustee company exercised the option and the College transferred the shares to it. In accordance with the terms of the option, the company paid £5,000 upon its exercise to the College. This money was taken from funds which the trustee company held on the trusts of a settlement in favour of Mr Vandervell's children. Further dividends were declared on the shares between 1961 and 1965, and these were paid by the trustee company into the children's settlement funds.
Meanwhile, the Revenue claimed that Mr Vandervell had not divested himself of all interest in the shares in 1958, so that he was liable for surtax on the dividends paid to the College. When this issue was decided against him at first instance, Mr Vandervell in 1965 executed a release disclaiming all interest in the shares and dividends. The House of Lords, by a majority of three to two, upheld the claim of the Inland Revenue Commissioners to surtax on the dividends paid to the College between 1958 and 1961, on the ground that the option granted to the trustee company was held by it on a resulting trust for Mr Vandervell.n3 The majority took this view because they could find no evidence that the trustee company was intended to take the option beneficially, subject merely to a gentleman's agreement to employ it for the benefit of others; and, since no other trusts had been declared, a resulting trust for the true provider of the option, Mr Vandervell, was the "automatic" consequence. The beneficial interest in the option had to be located somewhere. n4
Mr Vandervell died in 1967. His Executors, foreseeing a further claim by the Revenue in respect of the dividends declared in favour of the trustee company between 1961 and 1965, themselves claimed repayment of them on behalf of Mr Vandervell's estate. They wished the Revenue to be joined in this action so that questions about the beneficial ownership of the shares and dividends and questions concerning consequential tax liability might be settled together. This the trustee company opposed, and were upheld in so doing by the House of Lords.n5 As a result, there could in theory be fresh litigation relating to these dividends, both because the Revenue are not bound by findings of fact made in the latest proceedings, and also because the tax legal questions were not equivalent in every respect with the property legal questions. n6
In Vandervell (No 2) the Executors' claim to the 1961-65 dividends were sustained at first instance by Megarry J, but the Court of Appeal has now settled the ownership question in favour of the trustee company. The Court of Appeal took the view that the trustee company, upon exercising the option, had, with Mr Vandervell's concurrence, declared itself trustee of the shares in favour of the children's settlement, so that thereafter Mr Vandervell could not have asserted, and his executors could not now assert, any claim to the shares or the dividends paid on them. The evidence for this finding was, first, that the trustee company had used £5,000 belonging to the children's settlement in exercising the option: secondly, a letter from the trustee company to the Revenue authorities written soon after the exercise of the option in which the trustee company described itself as trustee of the shares for the children's settlement, thirdly, the fact that the trustee company paid the dividends on the shares into the funds of the children's settlement; fourthly, the fact that Mr Vandervell knew of and approved of all these doings by the trustee company. n7
The court relied on the statement by Lord Upjohn in the first Vandervell case that the trustee company held the option “upon such trusts as (Mr Vandervell) or the trustee company should from time to time declare.” n8 They inferred, in effect, that the trustee company had vested in it a power to divest Mr Vandervell of his equitable interest in favour of any trust objects the company should specify; although it seems to have been assumed that, despite the disjunctive " or " used by Lord Upjohn, this power was exercisable only with the consent of Mr Vandervell. The surprising elements in the court's decision were, first, that it was able to find, on the facts, that this divestitive power had been exercised, and, secondly, that this exercise did not constitute a “disposition” within section 53 (1) (c) of the Law of Property Act 1925, so that it was effective without writing.
The " hard cases " maxim directs attention to mischiefs of two kinds. If the law is strained to avoid a seemingly harsh result in a particular case, the outcome may be that the decision will in future be taken to stand for a new rule which in other cases has bad consequences. Alternatively, uncertainty may be introduced into the law because it is impossible to say with any precision for what rule the decision stands as authority. The latter kind of mischief, it is submitted, is the one to which the Court of Appeal's decision gives rise.
It was the factual question which gave Stephenson LJ the greatest difficulty, though he eventually chose not to dissent. He said:
" I see . . . difficulties in the way of a limited company declaring a trust by parole or conduct and without a resolution of the board of directors . . ."
More importantly, as was pressed in argument, how could a trust be declared by persons who thought they were already trustees? It is well settled that the declaration of a trust requires no formal expression, such as " I declare myself trustee." n10 Now, in so far as it is legitimate to generalise from findings of fact, the present case could be cited as authority for the view that declaring a trust does not require a conscious dispositive animus of any kind.
It is more difficult to construe the judgments in relation to the formalities question, since they are opaque as to the shifting of the beneficial interest in the shares. What happened to the equity in the option is clear enough. It was in Mr Vandervell up to the moment the option was exercised, but thereafter it ceased to exist. The option, once exercised, ceased to be a piece of property, a chose in action, distinct from the, shares. As Lawton LJ said: " There could not be a resulting trust of a chose in action which was no more." n11
As to the equity in the shares, the court decided that before the exercise of the option it was vested in the College, afterwards in the beneficiaries of the children's settlement. How did it get there? Some part of the reasoning leading to the court's conclusion ought to answer this question, so that the case ought to stand as authority for some rule about the shifting of equities.
There would seem to be three possible routes which the beneficial interest in the shares might have taken.
First route. Perhaps the equity passed, on the exercise of the option, to Mr Vandervell and from him to the children's settlement. The strongest argument for this view derives from the juridical nature of a beneficial interest in an option. If X holds an option on trust for Y, and Y does not have at least a prima facie equitable claim to the fruits of the option, then in what sense was the option "beneficially" his in the first place? Lawton LJ, with reference to the expenditure of £5,000 from the children's settlement, cited the rule that if A uses B's money to buy property, in the absence of any evidence to show otherwise, A holds that property for the benefit of B. n12 It is difficult to see the appositeness of this rule where A is also trustee of an option over the property for C. n13
If the beneficial interest in the shares passed momentarily to Mr Vandervell, how did it move from him to the children's settlement without a " disposition "? It did so, apparently, by virtue of a declaration of trust which did not come within section 53. (1) (c). n14
In Grey v Inland Revenue Commissioners, n15 a distinction was drawn between a direction to trustees made by the beneficial owner of property that they should henceforth hold it on certain trusts, which was a " disposition " and so had to be in writing, and a " declaration of trust " which was not a " disposition " and so could be by parol. However, it is clear that, in this distinction, " declaration of trust " referred to a declaration by one who is beneficial owner of the property subjected to the trust. The present case may now be authority for the view that declarations by legal owners which have the effect of divesting X of the equity and vesting it in Y are also outside section 53 (1) (c), even if the divestitive power is exercisable only with X's consent. This would mean that the written declarations of trust which were made in Grey's case subsequently to the ineffective oral directions could have been themselves oral.
The explanation for the unwritten divesting of Mr Vandervell's equitable interest in the shares-assuming still that he momentarily had one-may, alternatively, be sought in the fact that his interest arose only by virtue of a resulting trust. Lord Denning MR said: " A resulting trust for the settlor is born and dies without any writing at all. It comes into existence whenever there is a gap in the beneficial ownership. It ceases to exist whenever that gap is filled by someone becoming beneficially entitled. As soon as the gap is filled by the creation or declaration of a valid trust, the resulting trust conies to an end." n16
Although he does not expressly mention it, Lord Denning may be taken to have been referring here to the effect of section 53 (2) of the Law of Property Act, which provides that the section " does not affect the creation or operation of resulting, implied or constructive trusts." If this is so, presumably the word "operation" in the subsection is to be interpreted as encompassing " termination." Thus the present case is authority for the following novel proposition. No disposition of an equitable interest needs to be in writing if the interest subsisted only by virtue of a resulting, implied or constructive trust, provided that that disposition brings the trust to an end. This would mean that someone in the position of the settlor in Grey's case could avoid the necessity for writing by transferring assets to persons named as trustees, avoiding declaring any trusts and relying on an automatic resulting trust to leave the beneficial interest in him; thereafter, he could make oral directions shifting the beneficial interest.
Second route. It might be argued that the beneficial interest in the shares vested, upon the exercise of the option, in the trustee company, together with the legal interest; as absolute owner, the trustee company then declared themselves trustees for the children's settlement, and so shifted the beneficial interest on. Such a declaration of trust would not require writing. As mentioned above, the majority of the House of Lords in the first Vandervell case rejected the view that the trustee company could have been intended to take the option as beneficial owner; and, as Megarry J pointed out at first instance in the present case, it is generally unsatisfactory to conceive of a trustee company being absolute owner subject only to a moral obligation to declare trusts. n17 But the strongest argument against this view of the case is that it was stressed in the judgments of the Court of Appeal that the company's declaration of trust was made with the full approval of Mr Vandervell. If the beneficial interest in the shares passed, not to him, but to the company, his approval or disapproval of anything they subsequently did with it should be irrelevant. The company, as absolute owner, could declare any trust it liked; it would not be exercising the limited power which it had over the option, to declare trusts with Mr Vandervell's approval.
Third route. The third possibility is that the beneficial interest passed directly from the College to the children's settlement. When the company, with Mr Vandervell's approval, employed money out of the children's settlement in order to exercise the option, intending that the shares so acquired should be held on the trusts of the children's settlement, they, in effect, exercised a power to nominate trust objects; in consequence, when the College transferred the shares, it divested itself of the legal interest in favour of the trustee company, and of the beneficial interest in favour of the children's settlement. On this construction, Mr Vandervell's approval of this nomination, viewed as a participation in the power to nominate, would have the effect which, it was suggested above, the mere use of the children's money could not: namely, that of warding off from Mr Vandervell the beneficial interest in the fruits of the option.
If this is the correct view, the present case would be authority for the following proposition. Where X has a contractual right to call for the conveyance of the legal and equitable interest in property from Y, and on exercising it nominates trusts over the property, then the beneficial interest may pass direct from Y to the trust objects without the need for writing. His proposition may be seen as the converse of the proposition accepted by all the members of the House of Lords in the first Vandervell case n18: that where legal and equitable interests begin divided and end united, no written " disposition " of the equitable interest is required. On the present construction of Vandervell (No 2), the equitable and legal interests began united and ended divided and again no written " disposition " of the equitable interest was required.
Lord Denning MR and Lawton LJ gave a separate reason for rejecting the Executors' claim, based on estoppel. Even if Mr Vandervell became and remained beneficial owner of the shares, he and through him his executors were estopped as against the trustee company and the beneficiaries of the children's settlement from claiming any interest in them or in the dividends paid on them because of his acquiescence in all that was done. n19 The basis for the estoppel seems to be wider than that generally required for either promissory or proprietary equitable estoppel, since it appears to have been unnecessary to show prejudice to the beneficiaries. It was throughout conceded that the children's settlement would have a lien for the £5,000 expended plus interest. Its basis seems to have been conscionability: even though he was unaware of any beneficial interest until all the dividends had been paid over, it would, apparently, have been unconscionable in Mr Vandervell to assert his claim to the shares and dividends. n20
Lord Denning MR also rejected the claim of the Executors to the dividends on what appears to be a third alternative ground, namely, that Mr Vandervell had made a perfect gift of them to the beneficiaries of the children's settlement. n21 He cited Milroy v Lord, n22 although in that case dividends had been handed over to the donee personally by the settlor himself or by his intended trustee, whereas in the present case there seems merely to have been an accounting allocation.
Neither of these alternative grounds for the rejection of the Executors' claim-nor any of the further alternatives argued at first instance n23-would have produced a satisfactory result for the parties if the first major ownership contention had not been accepted. None of them could have prevented a claim against the executors by the Revenue. As it is, despite the theoretical possibility of fresh litigation referred to above, it is likely that no such claim will be made. For that reason, a " hard case " may have been avoided; but as to what law the decision may have made, only clarification in future decisions will reveal.
posted by Maverick SM @ 10/12/2005 01:43:00 AM
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