Financial Equity and Trust Law - Assignment Example

Topic: Equity Assignment 2006 Word limit: 3,000 words Answer parts (a), (b) and (c) below. Introduction The following three problems show controversial issues relating to trust. In the first is the application of the Quistclose trust doctrine. The second shows the application of the doctrine of Saunders v Vautier. The third problem portrays the declaration of presumptive death and order of death from the case Re Benjamin. a) Badchester Borough Council is in financial difficulties. In December 2003, Farley’s Bank entered into agreement with Badchester Borough Council to lend money at preferential interest rates in return for a down payment of one million pounds. On January 1st, the first part of the payment, £163,500,000 enters the bank account of Badchester Borough Council. On January 11th, the Council is declared bankrupt. A private company, Bin-U-Like, who were contractors of the council, are preferred creditors, and claim that the £163,500,000 is owed to them for monies unpaid by the Council. Farley’s Bank is demanding the return of the £163,500,000. At the time of the transaction, the Council was acting outside of its statutory powers to borrow money from commercial lenders. Advise Farley’s Bank. Will they be able to claim the return of the £163,500,000? At the time of the transaction, the Borough Council were acting outside of their statutory powers to borrow from commercial lenders. Before going to the advice sought by the client bank, the following must be clarified: The problem does not show whether or not Farley’s Bank (FB hereafter) is aware that Badchester Borough Council (BBC hereafter) is in financial dire straits. This question is directly related to the question of the purpose of the loan which the problem also withholds. Both issues impinge upon whether a trust relationship is created between BBC and FB and what kind, if any. The given facts of the case seem to suggest that the loan was made for the purpose of transfusion of liquid capital into the bloodstream of the defendant BBC. The fact that the forbearance was made with consideration, the down payment of one million pounds, is irrelevant to the issues. In the present problem, FB’s aim is to recover money paid over as a loan and has great chances of doing so under equity procedures of trust1. In order for liability to follow, it must first be established that the money was subject of a trust and that the defendant BBC is in breach of this trust by declaring bankruptcy the following week after the first part of the loan payment was deposited to their account. It must not be forgotten that BBC’s act of borrowing money from FB, a commercial lender, was statutorily ultra vires, irrespective of the fact of the declaration of bankruptcy. In effect, the loan was illegal for being contrary to public policy. As a further effect, the money was received by BBC in that nature of a trust with the corresponding obligation to hold and preserve the same for the lender FB. Setting aside for the moment the fact of illegality, does the fact of receipt of BBC of the subject money and the subsequent declaration of bankruptcy have the effect of a breach of trust, a dishonesty on their part, and does the money subject of the ultra vires commercial loan become the subject matter of a “Quistclose trust”. In the Quistclose2 case, it was well-established that a loan and a trust can co-exist and in which case, the trust arose out of the loan thereof. While the ingredient in Quistclose that elevated the subject loan into a trust was the intention that the money advanced was to be used for a particular purpose rather than being at the general disposal of the borrower. In the present problem, it was the illegality of the contract due to statutory proscription that elevates the loan into a trust. The loan obviously is tainted with misrepresentation on the part of BBC and aggravated by the declaration of bankruptcy made the following week. Under the facts given, a resulting trust arises because the beneficial interest remains with the lender FB and the borrower BBC merely has the power to use the lender’s money. There is no need to distinguish between a primary trust to carry out the purpose of the loan and a secondary trust by which the lender receives the beneficial interest of the loan money. The beneficial interest in the loan money never left the lender at any stage or moment in this case. There is the separation of legal and equitable titles in the process of creation of a trust.3 The equitable title created by a trust is permanent. Equitable tracing is allowed where it is necessary to make a proprietary claim against a fund, such as where the defendant is bankrupt.4 A resulting trust carries with it a connotation of the equitable interest returning to the transferor. A Quistclose trust has the nature of a “quasi-trust’ and need not satisfy the usually strict requirement of a valid traditional trust requiring ‘certainty of object5’. The trust herein does have ‘certainty of object’ and the beneficiary is the lender FB. “Certainty of subject matter” herein points to the loan money. There was certainty of intention that can be inferred from the surrounding circumstances of the case. The money loaned clearly was intended to infuse liquidity upon the defendant BBC and should have been applied thereto except that financial constraints were beyond control and remedies forcing the defendant to declare bankruptcy. The purpose for which the loan was granted delimits the power given to the borrower over the lender’s money. Even if the power was not clearly defined to enable the court to enforce it and it fails, the parties are left with a bare trust by which the borrower BBC holds the loan money in trust for the lender. The borrower is left with nothing to do except to return to the lender the legal title to the loan money. The general discussions pertaining to Quistclose trust generally revolve around the dishonesty of the resulting trustee but the bare trust theory is more favourable to the client FB in the present problem. The contractor, Bin-U-like, notwithstanding its preferred status as creditors, does not have any right or interest in the loan money because as already discussed above, beneficial interest thereto has always remained with FB, the lender. Unlike FB who is entitled to the possession of the loan money, the contractor has a mere equity, a personal right enforceable against BBC for whatever assets left other than the subject loan money. b) In 1986, a trust fund is set up to educate Jules and Jim, the children of the deceased chat show presenter Guy Smiley. The terms of the trust are as follows; 1.1Tim and Tom are to hold assets on trust for Jules and Jim. 1.2 Tim and Tom have absolute discretion to apply the income derived from the assets to the education of Jules and Jim. In 2004, Jules and Jim have finished secondary school, but neither want to continue their education, preferring to arrange a trip to travel around the world. Tim and Tom consult you. They want to know if they can use the funds in the trust to pay for Jim and Jule’s travel expenses. Tim and Tom are the appointed joint trustees while Jules and Jim are the beneficiaries of the subject Trust that may be described as follows: 1. Express because the trust provides the express power relating to the income of the assets entrusted; 3. Fixed Interest because the settler specifically identified Jules and Jim as its beneficiaries and circumscribed their benefit; and 2. Purpose because the trust is established to provide for a purpose which in this case is not public and charitable but educational. The proper resolution of the clients’ inquiry, however, requires the due consideration which of the following descriptions applies to the current trust problem: 1. Contingent where the trust or gift is contingent so long as the condition is satisfied; 2. Discretionary where the trustee is given discretion to determine how much and what of the trust property will be given to a pre-determined beneficiary or beneficiaries or class of beneficiaries. The trust instruction specifically applies the income derived from the assets to the education of the beneficiaries. The problem, however, does not reveal any other provision or power pertaining to the assets themselves so it has to be assumed that the trust was constituted solely for the purpose of the education. If the subject trust is one of contingency, the trustees are likely empowered to finance the beneficiaries’ decision to travel if the same is beneficial to them and if the travel expenses remain within the value of the income of the trust assets, for the following reasons: There being no contrary intention given in the problem, the statutory power to pay income to the contingent beneficiaries herein is implied in the subject trust by virtue of s.31 of the Trustee Act 1925, which provides that until the age of 18 the trustees have the discretion whether to apply the income of the beneficiary’s (beneficiaries’) share(s) to the capital for his (their) “maintenance, education and benefit”. Considering the absolute discretionary power of the joint trustees to the income of the trust assets in relation to the education of the beneficiaries, the power to provide Jim and Jules with income is still within the scope of the trust. Furthermore, there being no contrary intention given in the problem, the statutory power to distribute capital to the beneficiaries who have interest in the trust capital is implied in the trust by virtue of s.32 of the same statute. The trustees have the discretionary power to apply up to one half of the presumptive share of the capital of the trust fund for the advancement of the beneficiaries; in fact, all of the beneficiaries’ shares are available for the purpose. It the expenses go beyond the value of the income, the travel cannot be allowed. But when viewed as a discretionary trust, the beneficiaries do not have the right to enjoy the trust assets and the travel will not be allowed if it is not within the capacity of the income to finance. The decision of the beneficiaries to discontinue school and travel around the world may be argued to benefit the beneficiaries and the beneficiaries Tim and Tom are not in breach of trust if they would support the decision. If unconvinced and undecided, they may seek the assistance of the court to determine and decide through the proper application in the proper forum. If the subject trust is only a discretionary trust of income for the purpose of education, the trustees shall pay or apply the income of the trust fund to or for the education benefit of the beneficiaries in such shares and in such manner as the trustees shall in their absolute discretion think fit. The remaining non-distributed income becomes part of the capital and shall not be available for distribution. If the beneficiaries are the only beneficiaries of the trust, it is possible for them to agree to terminate the trust even where, considering their refusal to continue school, the settlor’s express purpose was not fulfilled, pursuant to the rule in Saunders v Vautier.6 Also under the Variation of Trusts Act 1958, the court can use its discretion to vary the terms of a trust provided the variation is for the benefit of the party making the application. Tim and Tom may consider the subject trust as a protective7 trust with the discontinuance of the beneficiaries to further schooling as a determining event and the trust shall then be held on discretionary trust for the named beneficiaries pursuant to s.33 of the Trustee Act 1925 which states that when the original trust fails, the property will be held on trust for the main beneficiary, his spouse, and children or any other person who would be entitled to the trust property or the income from it “as the trustees in their absolute discretion . . think fit.”8 The trustees themselves may also implement the rules of Saunders v Vautier and hand over the trust property to all of the beneficiaries who are all adult, all entitled to the whole of the fund themselves and all give their consent to the arrangement. c) In 1985, a group of friends, Alf, Ben and Christa decide to set up the ‘Methuselah" trust fund. They agree that each will pay into the trust fund during their lifetime, and that who ever should be the last of the three living, should claim the fund. The terms of the trust are as follows: 1.1 I, the undersigned, agree to make an annual payment into the Methuselah trust fund 1.2 The entire fund will be paid to the last member remaining alive. 1.3 No dependents or relations of the undersigned have any claim on the trust funds. The document has then been signed by Alf, Ben and Christa. In 2004, both Alf and Ben are dead. Christa has disappeared, and cannot be traced by Joey, her next of kin. The treasury solicitor is claiming that he has the only valid claim on the fund. Advise Joey. The trust fund set up by Alf, Ben and Christa in 1985 is in the nature of a mutual will inter vivos. A mutual will is defined in Stone v Hoskins [1905] as follows: Where two (or more) persons make a single will or make wills in similar form and agree that the survivors should not revoke his will or his part of the will, the one of them who dies first without having revoked his will or his part of the will does so with the promise of the survivor that the arrangement shall hold good. Under the testamentary provisions of subject mutual will, each of the friends will make annual contributions or payments to the fund and the legacy of accumulated fund will be given to the last surviving person among them. The facts of the problem merely provide that by 2004 both Alf and Ben had already died while Christa had disappeared. From the statement of the treasury solicitor, Joey, the next of kin, is the only person with a valid claim to the trust fund. It can be gleaned from the same statement that Christa must have disappeared or that notice that she was alive was had after his friends had died, from which fact and from which moment, the trust fund was already owned by Christa. In technical legal theory, what was transferred to Christa, assuming she was the survivor among the three friends, were the contributions of Alf and Ben because the contributions of Christa were hers, retaining equitable interest thereto contingent to revocation by either or both Alf and Ben of their parts of the mutual will. This distinction was made in the case of Healey v Brown [2002], where the constructive trust over the joint tenancy property does not extend to the half share of the decedent Mr. Brown, which he always owed. This is similar to the decision of the previous case on mutual will Re Goodchild [1997]. Joey is entitled to the shares of Alf and Ben only through his relative Christa. The case of University of Manitoba v Sanderson Estate [1998] forwards a different theory, where the constructive trust extended to property passing by survivorship from the first to die as well as the survivor’s property generally. In short, Joey will be entitled to the mixed monies from the three friend subject to proper declaration of presumptive death in the proper forum of Christa from whom he inherits as the surviving beneficiary of the Methuselah trust fund through a Benjamin order9. The absence of Christa for a certain period of time without notice of her whereabouts or whether she is still alive or not entitles her next of kin to ask the proper forum for the declaration of her presumptive death and the further declaration of the said relative as the sole heir surviving and entitled to the inheritance of Christa, including the subject trust fund, among her properties and monies, if any. Bibliography Moffat G., Trust Law: Texts and Materials, Butterworths Law. Pettit, Equity and the Law of Trusts, 8th edition, Butterworths, 1997. Underhill and Hayton, Law relating to Trusts and Trustees, 16th ed., Butterworths, 2002. Barclays Bank Ltd v Quistclose Investments Ltd (or Quistclose Investments Ltd v Rolls Razor Ltd) [1970] AC 567. Barlow Clowes International (in liq) v Vaughan [1992] 4 All ER 22. Healey v Brown [2002] Knight v Knight [1840] 3 Beav 148. Re Benjamin [1902] 1 Ch 723. Re Good child [1997]. Stone v Hoskins [1905] Sunders v Vautier [1841] 4 Beav 115. Westdeutsche v Islington Borough Council [1996] 2 All ER 961. Trustee Act 1925. Trustee Act 2000 Read More