William Garton (2015) - University of Birmingham Law School
Introduction
The formality rule under
s.53(1)(c)[1]
was originally enacted to protect trustees from fraud by seeking to regulate
the beneficiary’s (B1) power to transfer a subsisting equitable interest to
another beneficiary (B2).[2]
However the many attempts to avoid tax, payable on the written instrument by
which the property is transferred, have used the exception in s.53(2) to restricts
the scope of this formality rule to the point where its purpose has been
rendered functionally redundant and should be abolished in favour of reform.
Section 53
S.53(1)(c) applies to
dispositions of equitable interests arising under trusts when the trust is
already in force. ‘Equitable interest’ being defined in relation to existing
‘in or over land’.[3] A
disposition under s.53(1)(c) occurs if “at the commencement of a transaction a
person has a subsisting equitable interest and at the end no longer has that
interest”.[4]
The reason the legislation drafters targeted ‘subsisting equitable interests’
for protection is because evidence of their movement through written
instruments will often be the only indicator of where the right resides at any
particular time.[5]
In s.53(2) the term ‘implied
trust’ seems to add nothing to the section.[6]
Consequently I will be analysing the formality requirements in relationship to
‘the creation or operation’ of just resulting and constructive trusts.
Resulting trusts
In Re Vandervell's Trusts (No. 2)[7] Vandervell instructed the trust company
to utilise the option to repurchase to avoid surtax liability. The option was
held to be destroyed when it was exercised resulting in Vandervell’s equitable
interest in it being extinguished.[8]
Lord Denning saw the use of the children’s settlement money as evidence there
was an operative express declaration of trust[9]
which automatically extinguished Vandervell’s interest behind the resulting
trust.[10]
In his own words; “a resulting trust for the settlor is born and dies without
any writing at all”.[11]
Lawton LJ reached the same conclusion but held the exercise of the option
terminated the resulting trust as its subject-matter was extinguished.[12]
However these approaches are
difficult to justify as they generates the question of whether ‘creation or
operation’ can be seen to include ‘termination’. This is arguably the
antithesis to ‘creation’, so would have to fall under ‘operation’. However
‘operation’ signifies the “subsistence and continuing effect of such resulting
trust… for as long as it operates”, [13]
meaning ‘operations with resulting equitable interests’ are outside its meaning.
Therefore I find this an unconvincing interpretation.
There is also the criticism of
Stephenson LJ[14]
as to whether Vandervell or the trust company could have intended the
disposition of the interest, when at the time they did not know who held
beneficial interest pending the decision in Vandervell
v IRC.[15]
On this point, Green comments it would be impossible to suppose the trustee
company was exercising such power as a resulting trustee, however it was
theoretically possible for Vandervell to have formed an intent to dispose of an
interest he did not know he had.[16]
Following Re Kayford,[17]
it is possible to construct the intention through conduct, and the payment of
dividends into the children’s settlement is evidence of an intention to create
a trust.[18]
One could argue the case is confined
to its particular facts and of little consequence to wider dispositions of
equitable interests through resulting trusts. However, as Oakley argues, the
formulations of principles in the case were not restricted to options held on
resulting trust, which suggests any property held on resulting trust can avoid
s.53(1)(c) when the beneficiary directs the trustee to declare a new trust of
that property.
Constructive trusts
In Grey v IRC[19]
it was held that an oral direction by B1 to his trustee to hold the assets
for B2 amounts to a ‘disposition’. However if B1 contracts for value to dispose
of his beneficial interest in private company
shares with B2, there is no disposition of a subsisting equitable interest,
because a new equitable interest has been created through a constructive trust.
Initially the majority in Oughtred v IRC,[20]
held the equitable interest generated by a specifically enforceable contract
did not prevent the subsequent document being stampable. Thompson argues this
is because, despite the acquisition of a beneficial interest under a
constructive trust, the nature of the trust meant B1 and B2 retained their
respective beneficial interests until completion[21]
and Penner argues this was largely based on ‘principles of stamp duty law’.[22]
However the dissenting opinions
of Upjohn J at first instance and Lord Radcliffe in the House of Lords[23]
were confirmed in by the Court of Appeal in Neville
v Wilson[24]
outside the stamp duty context. It held an equitable interest in shares
could be could be transferred through a contractual constructive trust arising
on a specifically enforceable oral agreement. The contract was specifically
enforceable because the shares were private
(and thus unique, meaning the purchaser cannot acquire equivalent shares) and
as “equity treats as done that which ought to be done”,[25]
equitable title would have passed to the purchaser with legal title being held
on constructive trust by the vendor.[26]
However the reasoning might not be totally convincing, indeed there are two
interpretations taken.
The first, taken by Upjohn J,
saw constructive trusts disposing of the entire equitable interest absolutely. Grey v IRC held it was possible for B1
could declare himself trustee of an equitable interest for the benefit of B2.[27]
Upjohn J utilised this approach to hold that when B1 became constructive
trustee, the entire equitable interest was disposed.[28]
However Milne argues this position is fundamentally flawed as it “involves the
notion of a trustee without any title to the trust property”.[29]
The second approach taken by
Lord Radcliffe and supported by Green,[30]
is to see s.53(1)(c) applying at both the ‘assignment of beneficial interest’
and ‘declaration of trust’ stage which operate as ‘part-disposals’ of
subsisting equitable interests. The declaration of trust is a disposal of the
beneficial part of the hitherto subsisting equitable right.[31]
As with the part-declaration of an express trust, a partial disposition of the
equitable interest in a constructive trust case must therefore also be subject
to s.53(1)(c) and so fall under the s.53(2) restriction.
Regardless of which
interpretation you adopt, what is clear that if a constructive trust is found
the equitable interest can transfer without s.53(1)(c) formality requirements. However
because the court in Neville failed
to recognise and decide between the different approaches, it is not possible to
predict whether the courts actually used constructive trusts to effect the
disposition and will do so in the future.
Reform
The Law Commission proposed to
issue a Consultation paper in 1999 as part of its seventh programme for reform.
However the work was delayed and with the Law Commission now focusing on its
Tenth Programme for Reform[32]
it looks unlikely they will return to this issue.
In this essay I have focused on
authorisation through writing, however like Elias[33]
I would argue the legislation on wills should be retained, because neither the
wordings nor the aims of the legislation on wills is not violated by
constructive trusts.
Conclusion
Denning desired to consolidate
legal principles and move away from ‘the chancellor’s foot’. He stated “equity
was introduced to mitigate the rigour of the law”.[34]
These cases demonstrate the extreme artificiality that has developed around
s.53(1)(c) to avoid tax, that has made it arguably more technical and rigid
than the common law which it purports to mitigate. I have also demonstrated,
contrary to criticisms, these cases allow the transfer of equitable interest
utilising the s.53(2) exception to avoid the s.53(1)(c) requirement which
wholly undermines the protection of trustees. In the words of Battersby,[35]
“the complexity of the present position reflects no credit on the law and… the
time has come for a long cool look”. S.53(1)(c) is an irrational means for
regulating beneficiaries attempting to avoid tax and so I would urge the Law
Commission to review this law in this area.
Bibliography
Cases
Grey v IRC [1960]
AC 1
Oughtred v IRC [1960]
A.C. 206
Vandervell v IRC [1967]
2 AC 291
Re Vandervell's Trusts
(No. 2) [1974] Ch. 269
Re Kayford [1975]
1 WLR 279
Neville v Wilson [1996]
3 W.L.R. 460
Statutes
Statute of Frauds 1677
Law of Property Act 1925
Books
Gbolahan Elias, Explaining
Constructive Trusts (OUP, 2002)
Graham Moffat, Trusts
Law: Text and Materials (5th edn, CUP, 2009)
Ben McFarlane, The
Structure of Property Law (Hart, 2008)
Sarah Wilson, Todd
& Wilson’s Textbook on Trusts (7th edn, OUP, 2005)
James Penner, The Law
of Trusts (9th edn, OUP, 2014)
Paul Davies, Equity
& Trusts: Text, Cases and Materials (OUP, 2013)
Articles
Graham Battersby, 'Formalities for the disposition of
equitable interests under a trust' (1979) 43 Conv 17
Okeke Chukwuebuka, ‘Re Vandervell's Trust [No.2] revisited:
was Denning really wrong?’ (2013) Cov.L.J. 18(1)
Brian Green, ‘Grey, Oughtred and Vandervell: A Contextual
Reappraisal’ (1984) MLR 385
Patrick Milne, ‘Oughtred Revisited’ (1997) 113 LQR 213
Mark Thompson, ‘Mere formalities’ (1996) Conv 366
[1]
Enacted to update s.9 Statute of Frauds 1677.
[2]
Gbolahan Elias, Explaining Constructive Trusts
(OUP, 2002) 114
[3] s.205(1)(x)
LPA 1925
[4] Graham
Moffat, Trusts Law: Text and Materials
(5th edn, CUP, 2009) 135,
[5] Brian
Green, ‘Grey, Oughtred and Vandervell: A Contextual Reappraisal’ (1984) MLR 385, 386
[6] Ben
McFarlane, The Structure of Property Law
(Hart, 2008) C3.4, note 76
[7] [1974]
Ch. 269
[8] Sarah
Wilson, Todd & Wilson’s Textbook on Trusts
(7th edn, OUP, 2005) 125
[9] n(7)
319F
[10] Ibid.
320C-D
[11] Ibid.
320C
[12] Ibid.
325H, 326C
[13] n(5) 417
[14] n(7)
322, 213
[15] [1967]
2 AC 291
[16] n(5)
411
[17]
[1975] 1 WLR 279
[18]
Okeke Chukwuebuka, ‘Re Vandervell's Trust [No.2] revisited: was Denning really
wrong?’ (2013) Cov.L.J. 18(1), 2
[19] [1960]
AC 1
[20] [1960]
A.C. 206
[21] Mark
Thompson, ‘Mere formalities’ (1996) Conv 366, 371
[22] James
Penner, The Law of Trusts (9th
edn, OUP, 2014), 159
[23] Patrick
Milne, ‘Oughtred Revisited’ (1997) 113 LQR 213
[24] [1996]
3 W.L.R. 460
[25]
Paul Davies, Equity & Trusts: Text,
Cases and Materials (OUP, 2013) 18-19
[26] Ibid. 496
[27] n(19)
380-382
[28] n(20)
390-391
[29] n(23)
[30] n(5)
398
[31] Ibid. 399
[32] n(4)
135
[33]
n(2) 114
[34]
n(7) 322C
[35]
Graham Battersby, 'Formalities for the disposition of equitable interests under
a trust' (1979) 43 Conv 17, 38
