2. Formalities Flashcards
What is the general rule regarding formality?
As a general rule, there are no requirements that a trust be created in any specific form. Equity, looking to substance rather than the form, merely requires that the settlor makes clear an intention to create a trust.
To this general rule, there are a number of exceptions where statute requires a particular form to be adopted. These are declarations of trusts of land, declarations of trust by will and ‘dispositions’ (broadly meaning transfers) of existing equitable interests.
What does the Law of Property Act 1989 provide in relation to trusts of land?
All contracts for the disposition of land, which will of course include contracts to create or transfer trust interests in land, will be void unless they are in writing signed by the parties to the contract. Any oral contract will therefore be void and of no effect.
Note that the section does not apply to the creation or operation of implied, resulting or constructive trusts.
Firstpost Homes v Johnson (1995)
Case showing that the courts have interpreted the requirements of the Law of Property Act 1989 very strictly, making the creation of contracts by the exchange of letters very difficult.
In this case, neither the vendor’s signature on a plan attached to a letter containing the contract terms, nor the typing by the purchaser of the vendor’s name on the letter, satisfied the requirements of the section. Nothing less than the writing by hand of the relevant signature on a document constituting the principal document of the contract could constitute the necessary writing for a binding contract.
United Bank of Kuwait v Sahib (1996)
The requirement of writing under s 2 of the Law of Property Act 1989 has abolished the possibility of creation of a mortgage or charge by mere deposit of title deeds.
What does the Law of Property Act 1925 s 53(1)(b) provide in relation to trusts of land?
A declaration of trust respecting any land or any interest therein must be manifested and proved by some writing signed by the person who is able to declare such trust or by his will.
Distinctions between this section and s 2 of the Law of Property Act 1989:
- The requirement here is simply that the trust should be evidenced, rather than actually be, in writing. This appears, for example, to mean that the evidence need not be in existence at the time that the trust was declared, but merely that it should be available at the time when anyone seeks to enforce the trust.
- Absence of writing will merely render the trust unenforceable rather than void and of no effect.
What does the Law of Property Act 1925 s 53(1)(c) provide in relation to dispositions of existing equitable interests?
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 his agent thereunto lawfully authorised in writing or by will.
Failure to comply with this requirement will render the purported disposition void. In other words, an oral disposition will have no effect and the equitable interest will remain with the person trying to dispose of it. If, however, the transaction does not fall within the meaning of ‘disposition’ then it can be effective, even though it is oral.
What reason does Lord Upjohn provide in Vandervell v IRC for requiring dispositions to be in writing?
The subsection was ‘to prevent hidden oral transactions in fraud of those truly entitled, and making it difficult, if not impossible, for the trustees to ascertain who are in truth the beneficiaries’.
Meaning of the term ‘disposition’
Most of the case law on the section has centered around the meaning of the term ‘disposition’. It should also be borne in mind that most of the cases also concerned various attempts to avoid or reduce tax liability, and it is perhaps not surprising therefore that the courts were reluctant to give effect to such attempts.
Section 53(1)(c) is the successor to a section of the Statute of Frauds 1677 where the equivalent phrase was ‘grants and assignments’, and clearly any direct transfer of an equitable interest will fall within that section. However, in Grey v IRC (1959), the HL rejected the argument that the meaning of ‘disposition’ should be limited to grants and assignments, preferring instead to give the word its natural meaning: a transaction whereby a beneficiary who has a beneficial interest at the beginning of the transaction no longer has it at the end of the transaction.
Grey v IRC (1959)
Mr Hunter, having established settlements for the benefit of his grandchildren, transferred to the trustees of those settlements 18,000 shares which he owned, directing the trustees to hold them on trust for himself. He then orally instructed the trustees to hold these shares for the benefit of his grandchildren. Later the trustees executed trust deeds which recited Hunter’s previous oral instructions and declared that the shares had, since the date of the instructioins, been held on trust for the grandchildren.
It must be understood that if the instructions were not a disposition within the meaning of the Act, then even though they were oral they would be effective to transfer Hunter’s interest to his grandchildren. If, however, the instructions were a disposition, then that disposition would be void for want of writing: Hunter would remain the beneficiary of the shares. At that time a document transferring the value of property in this way was subject to stamp duty ad valorem at a percentage of the value of the property transferred. By attempting to get rid of his interest orally, Hunter was hoping to avoid stamp duty. The Inland Revenue challenged this. The HL concluded that the instructions were indeed a disposition within the ordinary meaning of the word since the beneficial interest in the shares previously vested in Hunter became vested in another. The instructions were thus of no effect becuase there was no writing. The subsequent deeds were the effective disposition, being in writing, and therefore attracted stamp duty.
Where does s 53(1)(c) not apply?
When a sole owner, both legally and beneficially entitled, disposes of, for example, shares. The sole legal and equitable owner need only comply with the formalities, if any, required for transferring the legal estate.
The section also does not apply to the sole beneficial owner absolutely entitled who disposes of his interests by instructing his trustees to transfer the legal estate. In such a situation an oral transfer will be effective.
This was decided in Vandervell v IRC (1967).
Vandervell v IRC (1967)
The facts of Vandervell v IRC were that Mr Vandervell wished to endow a chair of pharmacology and to that end wished to give £150,000 to the Royal College of Surgeons. In an attempt to do this in a tax-efficient way he took the following steps. A bank held shares as nominees on a trust of which Vandervell was the sole beneficial owner. Vandervell instructed the bank to transfer the shares to the College, and instructed the College to grant to Vandervell’s trust company an option to repurchase the shares for £5,000. Once the shares were transferred to the College, dividends were declared to the amount of £145,000. The question then arose as to whether Vandervell had effectively disposed of the shares: if he had not, he would be liable to surtax on the dividends. The Revenue argued that the transfer to the College was ineffective as not complying with s 53(1)(c). This argument was rejected by the House of Lords. However, the obtaining of an option to repurchase proved fatal to Vandervell’s case.
The shares in Vandervell
Vandervell had instructed the trustees to obtain an option to repurchase the shares from the College for £5,000, and this had duly been done. For whose benefit did the trust company hold this option? The option itself have no indication on this point and the majority of the HL, following the CA, concluded, as an inference from the primary facts, that the trustees were to hold on such trusts as might be declared. As no express trust of the option had been declared, in the meantime the trustees held on resulting trust for Vandervell.
This decision was reached in 1966. Meanwhile, in 1961 the trustees had exercised the option to repurchase the shares using £5,000 from the trusts for the benefit of Vandervell’s children and the shares were duly transferred to the trustees. With Vandervell’s consent the shares were stated to be held for the children’s settlement and the Revenue was informed of this. It should be remembered that at this time no one was aware of the subtleties regarding the beneficial ownership of the option (see above - resulting trust for Vandervell). Between 1961 and 1965 dividends were declared on the shares and these were added to the funds in the children’s settlement. The Revenue argued, however, that Vandervell had still not divested himself of his interest in the shares, so, in 1965 he executed a formal deed transferring to the trustees to hold for the children’s settlement any interest that he might have in the option or the shares. Mr Vandervell died in 1967.
Re Vandervell’s Trusts (No. 2) (1974)
In this litigation the executors of Vandervell’s estate claimed the dividends. The nature of the 1961 transaction (exercise of the option) was crucial. The main issue was whether Vandervell still had an interest in the shares between 1961 and 1965. If he did, two things followed:
- First, the dividends which had been declared in those years would be his and he, or his estate, would have to pay surtax on them.
- Secondly, the dividends would form part of his estate and would be distributed under his will, which did not make provision for his children, rather than forming part of the children’s settlement. (Clearly, Vandervell had made no provision in his will for his children as he imagined that he had already done so through the settlement.)
What, then, was the nature of the transaction in 1961 when the shares were repurchased?
- If as part of that transaction there was a disposition by Vandervell of his interest under the resulting trust, within s 53(1)(c), then it would be void for lack of writing, Vandervell’s agreement being expressed orally. This would mean that Vandervell was still the beneficial owner of the shares with the consequences described above.
- If it were not a disposition, then the shares would be held by the trustees for the benefit of the children.
The CA held that it was not a disposition. Stephenson LJ was happy to agree since the decision protected the interests of the children.
Why is the CA’s judgment in Vandervell (No. 2) open to question?
As a result of the decision in Vandervell v IRC, Vandervell was the beneficiary of the option before 1961, though he may not have known it. After 1961, as a result of the decision in Re Vandervell’s Trusts (No. 2), he had no interest in the option or the shares. It is difficult to see why this is not a disposition or how it may be effectively distinguished from Grey v IRC.
For a disposition under s 53(1)(c) to arise there had to be some form of equitable property subsisting throughout the period from 1958 to 1967, and the main reasoning of the Court of Appeal was to deny this and to hold that the repurchase of the shares was a declaration of a new trust for which, of course, no writing was necessary as the property (shares) was personality. The necessary intention to create the trust was manifested by the actions of the trustees and the approval of Vandervelt.
Disclaimer of beneficial interest
A disclaimer of beneficial interest on the authority of Re Paradise Motor Co (1968) is not a disposition within s 53(1)(c). The CA held this on the ‘short ground’ that ‘a disclaimer operates by way of avoidance, and not by way of disposition’. In other words, the stepson in the case, when disclaiming shares which his stepfather had purportedly given him, was refusing a gift before he ever had it, rather than getting rid of the gift after receiving it.
Re Paradise Motor Co (1968)
Abstract: 1. A “proper instrument of transfer” within the meaning of the Companies Act 1948 s.75 is an instrument such as would attract stamp duty and is not limited to an instrument which is necessarily in complete accordance with the company’s articles of association. 2. The failure of a transferee to sign an instrument of transfer (where the articles require such signature) may in an appropriate case be a mere irregularity not going to the validity of the instrument. 3. Writing is not necessary for a disclaimer of a beneficial interest since a disclaimer is an avoidance, not a disposition within the Law of Property Act 1925 s.53 . 4. A disclaimer of an attempt to make an inter vivos gift cannot be withdrawn.
J, who was W’s stepson, went to live with W and his wife at the age of 16 having previously been in the custody of his own father. W treated J as one of his family. Having married, J set up his own home in 1948. In that year W bought 350 shares in the family business which he had founded and directed that they be put in J’s name. The company’s articles of association required inter alia that every instrument of transfer be signed by the transferee. J denied that he ever signed the instrument. On the register, however, J was recorded as being the shareholder. In 1954 J transferred 300 of these shares to W, thus retaining 50. On September 8, 1965, the liquidator of the company wrote to J asking whether he claimed to be a shareholder and stating that the register recorded J as being the holder of 50 shares. J replied that he denied being a shareholder and he later said that he wanted nothing to do with any shares. W commenced proceedings claiming that he was entitled to the 50 shares registered in J’s name. On appeal, held allowing the appeal, (1) that the fact that J did not sign the instrument of transfer was a mere irregularity and did not affect the validity of the instrument; (2) that the relationship between W and J was such as to give rise to a presumption of advancement; (3) that W had done all in his power to make an effective gift of the shares to J in 1948; but (4) that the gift had been nullified by J’s conduct which amounted to a disclaimer of the beneficial interest; and (5) that a disclaimer of an attempted gift inter vivos could not be withdrawn.
Nomination by a member of an employees’ pension fund
Employees’ pension funds allow the potential pensioner to nominate a person who shall receive any benefits should the pensioner die before receiving the benefit himself. It is doubtful whether such a nomination could be regarded as a disposition, since the pensioner is making a recovable gift of a possible future interest, rather than of one ‘subsisting at the time of the disposition’.
The same applies to the nomination of a beneficiary under a life insurance policy.
Declarations of trusts of beneficial interests
Two possible scenarios where a beneficiary declares that he is holding his beneficial interest on trust for another:
Where the sub-trust is on the same terms as the head trust it appears that the trustee-beneficiary may drop out of the picture and the trustees of the head trust then hold on trust for the sub-beneficiary. This would constitute a disposition falling within s 53(1)(c).
Where the sub-trust is different in terms from the head trust and the trustee-beneficiary has some active duties to perform (for example, if the beneficiary of the sub-trust were a minor and the income of the fund were to be accumulated), this would not appear to be a disposition. (See Grainge v Wilberforce (1889).)
However, there are strong arguments to suggest that all such declarations are in fact dispositions. (See Paul Matthews)
Grainge v Wilberforce (1889)
The case illustrates that in creating a sub-trust where the original beneficial owner retains some control over that property this is not a disposition of an equitable interest. However, if they have not control it is effectively a disposition and should comply with s53 (1) (c).
Creation of an equitable charge by deposit of title deeds
Is an oral, specifically enforceable contract a disposition within the meaning of s 53(1)(c)?
No authoritative statement on this issue.
The decision in Oughtred v IRC centred on its context.
Oughtred v IRC (1959)
This case concerns the oral disposition an existing equitable interest through a specifically enforceable contract of sale (as a result of which the vendor is holding the property on constructive trust for the purchaser) and the question of whhether this makes possible the avoidance of stamp duty.
HL rejected such a view, at least to the extent of preventing such a contract from allowing the parties to avoid stamp duty. (No authoritative judgment on the question as a whole!) The fact that there arose a constructive trust on the conclusion of the contract is immaterial.
Abstract: O., who was the tenant for life of shares under a settlement, orally agreed with her son, who was absolutely entitled in remainder, to exchange certain shares which she owned for her son’s reversionary interest. The trustees subsequently executed a transfer of the settled shares in favour of O. The Crown claimed that stamp duty ad valorem on the value of the son’s reversion was payable on the transfer on the ground that nothing passed to O. under the oral agreement. O. claimed to recover the stamp duty which he had paid.
The subject matter in question in this case was the beneficial remainder interest in some shares. After the oral contract to transfer the beneficial interest, the transferor completed certain formal written transfers, reciting that the interest in the shares had been transferred by the contract. If effective, this would have meant that the formal documents would only have been declaratory and would have transferred nothing of value, so attracting only nominal stamp duty.
The HL rejected the argument, and held that the formal documents were liable to stamp duty on the value of the shares. In the words of Lord Jenkins: ‘If the subject matter of the 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 the conveyance of sale, notwithstanding the constructive trust in favour of the purchaser which arose on the conclusion of the contract.’
Law of Property Act 1925 and implied, resulting and constructive trusts
S 2 of the LPA 1989 and s 53 of the LPA 1925 state that ‘nothing in this section shall affect the creation or operation of resulting, implied or constructive trusts’. Clearly, any suggestion that such trusts could only be created in writing would defeat their very nature, since the one is implied from the parties’ conduct while the other is imposed by the court.
This was rejected in Oughtred v IRC but accepted in Neville v Wilson.
Neville v Wilson (1996)
In Neville, certain shares in company A were held by two directors of that company on trust for company B. The CA held that in 1969 the shareholders of company B had agreed orally to liquidate company B and distribute its assets. The beneficial interest in the shares in company A was, of course, part of those assets. The effect of the liquidation agreement was that each shareholder in company B agreed to give up his interest in the whole of the assets (including the beneficial interest in the shares), in exchange for all the other shareholders similarly giving up their interests, preparatory to those assets being divided among the shareholders in proportion to their shareholding. To the extent that these agreements related to the dispositions of existing equitable interests in the shares, the court had then to consider the impact of s 53(1)(c), and of Oughtred v IRC.
Oughtred v IRC and Neville v Wilson are directly parallel with regard to the effect of the transactions. 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.
Nourse LJ: The majority decision in Oughtred had not turned on the effect of s 53(1)(c) but rather on the nature of the subsequent written transfers. In this case, s 53(1)(c) did not apply. S 53(2) literally says that s 53(1)(c) does not apply to the creation or operation of implied or constructive trusts. –> Reasonable result!
