Tuesday, March 3, 2009

Declaration and Disposition

Many attempts have been made to avoid the action of s.53(1)(b) and s.53(1)(c). - Justin Santiago

The sections of the LPA 1925 refer to written evidence required in a declaration of a trust and disposition of an equitable interest respectively. The avoidance of these two sections is to avoid these two requirements in order not to pay stamp duty which is required when a beneficial interest is transfered to the beneficiaries. Anyone who wants to avoid paying stamp duty will want to avoid using a document to create or transfer a trust. Most attempts to do this have failed. The courts take a dim view of over-enthusiastic tax avoidance, and the lack of precision of the term “disposition” has allowed them to give effect to that view. Arguments about whether it is possible to come up with a way to defeat s.53 to the satisfaction of a judge are now moot - stamp duty is generally only payable on land transactions, and it's almost impossible to do anything with land these days unless it is in writing.

S53(1)(b) states that a declaration of a trust of interests in land must be manifested and proved by some writing and signed by some person who is able to declare a trust. This statue is based on S7 of the Statute of Frauds 1677 which requires written proof of a declaration of a trust. The writing must be signed by the settlor (or the testator in the case of the will). Signature by an agent is not permitted. The written requirement does not have to be on the date itself it is merely a confirmation of a declaration of trust that happened before. The trust would still operate from the date it was declared. The general view is that Section 53(1)(b) is merely an evidential requirement provided the matter came to court rather than substantive in nature. Non-compliance with the provision would merely render the trust unenforceable although it will be perfectly valid. It is possible for there to be a joinder of documents in order to fulfil the requirements of the subsection. Constructive trusts and resulting however are specifically exempted from formality requirements according to S53(2) outflanking the rule in S53(1)(b).

However the effect of S60(3) LPA 1925 which states that “In a voluntary conveyance a resulting trust for the grantor shall not be implied merely by reason that the property is not expressed to be conveyed for the use or benefit of the grantee”. This is of course contradictory to Russel LJ’s reasoning obiter in Hodgson v Marks that a trust that fails for want of formality is saved by an automatic resulting trust. This reasoning is of course false because there is nothing automatic.

In the case of Rochefoucold v Bousted, the COA held that an oral declaration could be allowed based on the equitable maxim a statute cannot be used as an instrument of fraud and the court is entitled to suspend the operation of the statutory requirement of evidence in writing. It is important to see whether there was any point of a fraud being committed and to show that the party being promised to acted to his detriment or significantly altered his position as proof that there was an oral declaration that would vest the equitable title to him. Alternatively the extended fraud theory can be invoked in order to create a half secret trust which can be allowed as an exception.

T.G. Youdan in his article "Formalities for Trusts of Land and the Doctrine in Rochefoucauld v Boustead" has argued that the third party beneficiary should be entitled to enforce the trust – whether or not the settlor is dead – under the Rochefoucauld doctrine as well as in half secret trusts.

S53(1)(c) states that disposition (not creation) of an existing equitable interest (not legal title) subsisting (must be in existence) at the time of the disposition must be in writing not merely proved by writing for it to be assigned (transferred) to third parties. The underlying policy was to :-

a. prevent fraud by prohibiting oral hidden transfers of equitable interests under trusts and
b. assist trustees by enabling them to identify the whereabouts of the equitable interest subsisting under a trust

This requirement was recognised much earlier under S9 of the Statute of Frauds 1677 which stipulated that all grants and assignments of any trust must be in writing otherwise it will be void and have no effect.

It has been established that the written requirement in S53(1)(c) LPA 1925 applies to personalty as well as to realty despite the definition of ‘equitable interests’ in s205(1)(x) of the Law of Property Act 1925 which refers to equitable interests in the context of land.

Grey v IRC is thought to be the authority for the proposition that a written document is required if the beneficiary of a trust instructs the trustees to hold the trust property for different beneficiaries. The rationale is that the divesting part of the transaction which results in the destruction of the original beneficiary’s interest must be regarded as a disposition. This is also consistent with S205 which states that a disposition includes a conveyance and conveyance includes a release.

In Vandervell v IRC where National Provincial Bank held the legal title to shares on behalf of Mr Vandervell were orally directed by Mr Vandervell to transfer the legal title of the shares to the Royal College of Surgeons and made it clear that he wanted to transfer his own beneficial interest it was held that this was a valid disposition because it was outside the S53(1)(c). Lord Upjohn in this case empasised the fact that the shares had been transferred by writing and that further writing under S53(1)(c) was therefore superfluous. The proposition was that no writing is required if the beneficiary instructs the trustees to transfer the legal title to the trust property out of the trust altogether.

If the beneficiaries assign the interests, the assignment is similar to contract and S53(1)(c) would apply

If the beneficiaries contract to assign the interests, this is not a disposition and S53(1)(c) would not apply : Oughtred v IRC. Here, shares in a trust fund were held on trust for Mrs O for life and then for her son. Mrs O held other shares of which she was the absolute owner. She agreed to transfer these to her son and he agreed to release his interest under the other shares to her. In order to do this three documents were executed: a transfer of the second shares to the son; a deed of release to the trustees who held the first shares; and a deed of transfer by the trustees of the first shares to Mrs O. Thus there was no document transferring the son’s interest to Mrs O and it was argued that no stamp duty was payable. This argument failed in the House of Lords, where it was held that the son’s equitable interest must have passed under the transfer of the legal estate by the trustees. This can be explained upon the basis that the transfer of the legal estate by the trustees amounted to a disposition of the equitable interest, which transfer would have to be in writing pursuant to Section 53 (1) (c). Later decisions suggest that an equitable interest can pass under a contract without any formality but it should be noted that the point does not appear to have been fully argued in some cases. See Re Holt’s Settlement and DHN Food Distributors Ltd v Tower Hamlets London Borough Council.

The question did arise in the recent case of Neville v Wilson where the CA decided that an informal agreement relating to the liquidation of a company and the division of the company’s equitable interest in the shares of another company was not rendered ineffective by S.53 of the Law of Property Act 1925. Each shareholder’s agreement to the liquidation created an implied or constructive trust for the other shareholders. This decision would seem to confirm that an equitable interest can pass under a contract without any formality. As soon as a contract is formed, the assignor holds the equitable interest on constructive trust for the assignee, and s.53(2) states that s.53(1) does not apply to constructive trusts. This decision endorsed the dissenting argument by Lord Radcliffe in Oughtred v IRC where he stated that a constructive trust would have to be created to prevent unjust enrichment.

In the case of a bare sub trust the beneficiary is now a mere conduit between the trustee and the sub beneficiary and therefore drops out of the picture and this is in truth a disposition and must follow S53(1)(c) as explained by Battersby and strenghtned by the operation of the rule in Grainge v Wilberforce.

Summary

1. Declaration of new trust not an outright transfer – S53(1)(c) does not apply - Re Vandervell No. 2

2. Beneficiary instructs the trustees to transfer the legal title to the trust property out of the trust altogether to a new beneficiary. The old trust collapses and the beneficiary drops out. The new beneficiary also receives the equitable interest and becomes the new settlor. S53(1)(c) does not apply – Re Vandervell

3. Change trustee – S53(1)(c) does not apply

4. Declaration of bare sub trust – S53(1)(c) applies

5. Declaration of a sub trust – S53(1)(c) does not apply because the old trust collapses and a new trust is created - Grainge v Wilberforce

6. Where an equitable interest is disclaimed – this occurred in Re Paradise Motor Co Ltd where the Court of Appeal held that a disclaimer did not amount to a disposition under Section 53 (1) (c)

7. Nomination of a beneficiary under a pension fund or a life assurance
policy. In Re Danish Bacon Co Staff Pension Fund Trusts Megarry J took the view that the nomination of a beneficiary under a staff pension fund was not a testamentary disposition and neither did it fall within the ambit of s.53(1)(c). He stated that even if it did fall within the statutory provision, the formalities could be satisfied by two connecting documents. In Gold v Hill, the first claimant was named as a beneficiary under the life assurance policy of Gilbert. The first claimant alleged that, before his departure to Nigeria, Gilbert informed him of this fact and asked him to look after Gilbert’s wife and children if anything should happen to him, Gilbert. Gilbert died and a dispute arose as to the nomination. The claimants claimed that the nomination was valid. The defendant,who was the solicitor and executor of Gilbert’s will, alleged that the nomination created an equitable interest in favour of Gilbert and the instruction to the first claimant had the effect of disposing the equitable interest contrary to s.53(1)(c) of the LPA 1925. It was decided that the nomination did not transfer or create any interest until death and it was sufficient that the nature of the trust was communicated before death. There was sufficient communication of the terms of the trust to the first claimant. Further, prior to the death of Gilbert, there was no subsisting equitable interest which could be disposed of. Accordingly, there had been no attempt to dispose of an existing equitable interest contrary to s.53(1)(c).

References

T.G. Youdan Formalities for Trusts of Land and the Doctrine in Rochefoucauld v Boustead

Graham Battersby Formalities for the disposition of equitable interests under a trust

5 comments:

  1. This breakdown of these particular cases are really useful! You were able to do it in an manner which is easy to understand yet not making it a "for dummies" explanation. Well done!

    ReplyDelete
  2. You are AWESOME. I am currently an LLB student at the Uni of London External Programme and these comments are completely on par with those given by the examiners.

    I owe you a gratitude which words cannot express.

    Once again, thank you and I hope you continue the great work.

    ReplyDelete
  3. I have been visiting various blogs for my dissertation writing research. I have found your blog to be quite useful. Keep updating your blog with valuable information... Regards

    ReplyDelete
  4. what was exactly decided in oughtred? is there any requirement of writing?

    ReplyDelete
  5. Ugo: March 26, 2013

    very good explanation, there are very few people like you in legal profession.
    You are learnared

    ReplyDelete