Trust Law for the Prevention of Fraud - Case Study Example

Contents Contents Trust Law 2 Question 2 Question - 2 7 Bibliography 10 Trust Law Question The question pertains to the formalities of creation of Trust and more particularly to the disposition of equitable interest. The law imposes formalities for different purposes. Firstly, they are designed for the prevention of fraud since writing provides documentary evidence which make frauds more difficult and secondly, for evidential purposes, in case of a trust, writings are useful to help the parties what they intended and ensures that a trustee does not act in breach of trust.1 In case of trust of personal property no formalities are required. However, to create a trust of land the formal requirement is that they must be manifested in writing as provided by S.53(1)(b) Law of Property Act 1925. This requirement applies only to express trusts, and not to resulting, implied or constructive trusts as provided by S.53(2) Law of Property Act 1925 e.g. in “Tinsley v. Milligan”2. It should be noted, however, that S.53(1)(b) Law of Property Act 1925 does not require the declaration to be made in writing but only that it must be “manifested and proved by some writing”. The declaration should be manifested by the settlor himself and not by his agent. Caroline Lody3 in her article stated “draft Trusts (Concealment of Interests) Bill which is aimed at simplifying the law and ensuring that it is applied equally and justly through giving the court discretion to determine the effect of the illegality concerned”.4 The reason for doing this is an ancient one as provided by S.7 Statute of Frauds 1677. A beneficial interest under a trust is a right which may be disposed off by beneficiaries. Such a disposition, whether for real or personal property, must be in writing signed by the beneficiary or his agent as per S.53(1)(c) Law of Property Act 1925. In the case of “Grey v. IRC”5, there was an attempt to avoid paying stamp duty. The settlor made six settlements in favour of his grandchildren. Later he transferred shares to trustees to hold on bare trust for himself. Then he orally instructed the trustees to hold that property upon the trusts of the six settlements. Later, the trustees executed documents to confirm the oral direction. It was accepted that the trusts were validly declared but the main issue was whether they were declared by the settlors oral declaration, in which case the subsequent documents passed no beneficial interest; or whether, as the Revenue argued, the documents effected a disposition of an existing equitable interest within S.53(1)(c) Law of Property Act 1925, in which case they were subject to stamp duty. The House of Lords held that while the trustees held the shares as nominees for the settlor, the settlor owned the entire beneficial interest. When the trustees held them upon the trust of the settlements, the beneficial interest passed from the settlor to the beneficiaries under the settlement. Thus, the oral directions were a disposition and needed to be in writing. So, stamp duty was payable. Green (1984) says that this case is also authority for the proposition that an oral direction to bare trustees to transfer property to other trustees on different trusts is similarly void unless in writing. 6 In the case of “Vandervell v. IRC”, Vandervell decided to transfer shares of one of his company to a College. The shares were held by a Bank on bare trust for Vandervell. The Bank, on oral direction by Vandervell, transferred the shares absolutely to the college subject to the option that they could be repurchased for a nominal sum by another company of Vandervell. IRC claimed tax on the dividends of those shares from Vandervell on the ground that he had not completely divested himself of the beneficial interest of the property due to the option. The House of Lords held that the oral direction was valid and need not be in writing under S.53(1)(c) Law of Property Act 1925. As noted above, this case is in direct contradiction with “Grey”. According to Lord Upjohn and Lord Wilberforce writing was not required in “Vandervell” because Vandervell directed the trustees to transfer the legal ownership of the trust property to a third party whereas in “Grey”, the settlor directed a transfer of his equitable interest only. According to Lord Upjohn, the rationale for such a distinction was that that S.53(1)(c) Law of Property Act 1925 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 and that to hold the contrary would make assignments unnecessarily complicated.7 An important evaluation of “Vandervell” and resulting trust can be seen in William Swadling’s article “Explaining resulting trusts”8 In the case of “Re Vandervell (No. 2)”9, the option was exercised and, with the consent of Mr Vandervell, those shares were held on trust of the children’s settlements. After his death, the executors claimed that the shares and dividends on them were actually held on trust for Vandervells estate because Vandervell still had the beneficial interest in the option. The Court of Appeal took the view that the trustee company, upon exercising the option, had, with Vandervells consent, declared itself trustee of the shares in favour of the childrens settlement, so that thereafter 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 £5,000 to exercise the option belonged to the childrens settlement. 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 childrens settlement. Thirdly, the fact that the trustee company paid the dividends on the shares into the funds of the childrens settlement and fourthly, the fact that Mr Vandervell knew of and approved of all these doings by the trustee company. As to the question that how the beneficial interest in the shares passed from Vandervell to the childrens settlement without a “disposition”, according to JW Harris (1975), it did due to a “declaration” of trust which did not come within S.53(1)(c).10 It is pertinent to mention here the case of “Oughtred v. IRC”11, where Mrs Oughtred and her son held interests in a trust of a private company shares. According to an oral contract, to avoid stamp duties, Mrs Oughtred would acquire the entire beneficial interest in the shares, and in return she would transfer a separate block of shares to the son. Written documents of transfers were later executed in accordance with the terms of the oral agreement. IRC claimed stamp duty on the written documents. Provided a contract is specifically enforceable, a constructive trust arises as soon as the contract is entered into which passes the equitable interest to the purchaser. Contracts for sale of land are specifically enforceable if they are in writing. Contracts for personalty are specifically enforceable only if the damages would be inadequate. Thus, contracts to sell shares in a public company are not specifically enforceable as they are available in the market, as opposed to a public company. Therefore, Mrs Oughtred argued that her contract was specifically enforceable and she, by virtue of constructive trust, had already acquired the beneficial interest on the oral agreement and no value had passed by virtue of the later documents. The later documents were only a transfer of the bare legal estate and thus could not be taxed. However, the House of Lords held in favour of the IRC. But Lord Radcliffe dissented on the basis that Mrs Oughtred had become the owner in equity by virtue of the construct trust and she could have left the matter there without even executing the written assignment. This argument is compelling and this case may be reviewed as a policy decision. In the recent case of “Neville v. Wilson”12, where tax liability was not involved, the Court of Appeal held that each shareholders agreement gave rise to a constructive trust so that S.53(2) Law of Property Act 1925 applied. 13 In cases of a sub-trust, S.53(1)(c) Law of Property Act 1925 does not apply because, although the beneficiary may declare his whole beneficial interest on a sub-trust, he still retains his entire equitable title. However, this may be a disposition in certain circumstances. As in “Grainge v. Wilberforce”14, it was stated that if the beneficiary declares a bare sub-trust, i.e. “I declare to hold my life interest upon Trust for C absolutely”, then the beneficiary serves no purpose between the original trustee and the sub-beneficiary. It seems that the beneficiary “drops out of the picture” and thus is a disposition. The situation is otherwise, if he still retains some equitable interest or some active duties. Furthermore if a beneficiary surrenders his interest when he indicates that he no longer wishes to benefit from them. This is a disposition and attracts S.53(1)(c) Law of Property Act 1925. The position of bare trustee has been defined as a bare trustee is a trustee who is not necessarily a nominee and has only a limited duty, but has significant powers; is often entitled to personal indemnity;and (in rare cases) even to remuneration.15 In “IRC v. Buchanan”16, the Court of Appeal held that the exercise by a beneficiary of special power under a trust is a disposition to surrender her life interest in favour of her children. In the case when a person disclaims an interest under a trust when he refuses any beneficial interest from the outset.(“Re Paradise Motor”17)18 Question - 2 This question pertains to the constitution of a trust. A settlor may give a gift by three methods: (1) an outright transfer; (2) a transfer on trust to a trustee; or (3) a self-declaration of trust. An imperfect gift can only arise in the first two cases, and a gift would be imperfect if the transfer of title of the subject matter of the gift does not takes place from the settlors name to the trustees. There can be no possibility of an imperfect gift in the third case because no formalities of transfer of rights are necessary. In a perfect gift, beneficiaries can enforce the trust obligations against the trustee and the settlor cannot revoke a perfectly constituted trust, irrespective of the facts that beneficiaries are still volunteers. In respect of the facts it can be seen that there has been a possible outright transfer and so the possibility of an imperfect gift can be argued. The exact constitutive requirements of a trust depend upon the nature of the property forming the subject-matter. In case of unregistered land, execution of a deed is necessary, whereas, in registered land, the trustee will need to be registered as proprietor on the register of title. In case of chattels (including cash), it has to be conveyed by either deed or delivery. In case of chose in action, this depends upon the different types of chose in action. In case of shares, for example, they can only be transferred by the recording of the transfer in the company’s books by the company secretary.19 These requirements would clearly go against the claims of Esther and Hillary as nothing of this sort had been done on the facts. The general attitude of the courts is reflected by Turner LJ’s statement in the case of “Milroy v. Lord”20 “For there is no equity in this court to perfect an imperfect gift”. In that case, a settlor passed his share to his attorney to hold them on trust for the plaintiff. But the only valid transfer of the shares, registering M as owner of the shares, was never carried out. It was held that no valid trust had been created. According to Turner LJ, in order to create a valid and effectual settlement, the settlor must have done everything which, according to the nature of the property as subject-matter of the settlement, was necessary to be done in order to transfer the property. If the settlors chosen mode of donation fails, the court will not perfect the gift by allowing it to take effect by other modes. This case goes further to state that the beneficiary cannot allege in an imperfect gift that the settlor constituted to declare himself a trustee. According to “Choitram v. Pagarani”21, “Men often mean to give things to their kinsfolk, they do not often mean to constitute themselves trustees. An imperfect gift is no declaration of trust”.22 Thus, equity will not come to the aid of any person who has given no consideration for the gift. However, this rule became very rigid in practice and may sometimes run into contradiction with the basic elements of equity i.e. fairness and justice. Therefore, in order to regulate the social and economic life of the society, reforms were needed in this area and they came in the form of exceptions to this maxim. The first and most easily justified exception is that of detrimental reliance. The rationale for this is very simple, i.e. if one party knowingly encourages another to act to his detriment and later will be required to make good the expectation which he encouraged in the other party. (“Dillwyn v. Llewelyn”)23 This exception cannot be seen to apply to the facts of the current situation. The second exception is known as Donatio Mortis Causa meaning a lifetime gift which is conditional upon, and which takes effect upon, death. Thus, a “bailment” in lifetime becomes a perfect gift upon the death of the settlor. In “Cain v. Moon”24, the three essentials for this principle were laid down as: (a) the donor must have made the gift in contemplation, not necessarily in expectation, of death e.g. war, serious illness; (b) subject-matter of the gift must be delivered to the donee with the intention of parting with it. Thus, some “indicia of title” must be transferred; handing over for safe custody only will not suffice; and (c) circumstances must indicate that gift will revert back to donee if he/she survives. As long as the gift is made in contemplation of death, it matters not whether the testator dies in the particular way he expected. This doctrine has even been extended to land in the case of “Sen v. Headley”, where Mrs S had lived with a man for several years. On his death-bed he gave her the keys to a box containing the deeds to his house and told her that the house was hers. This was held as a valid donatio mortis causa. The difficulty in this case was whether the requirement of “delivery” of the gift could be applied to the case of real property. It was held that the informal delivery of title deeds is the essential “indicia” of title to unregistered land. Mrs S had her own set of keys and was effectively in control of the house.25 The exception of donation mortis causa would apply to the transfer to Hillary and Esther but there would be difficulty in respect of the registered land. As far as the transfer of shares to Hillary is concerned the conditions of Cain would be satisfied and so even if he did not die in the operation the transfer would be valid. As for the transfer of land to Esther by way of keys is concerned it can be related to the case of Sen but that was unregistered land and this is registered land and so there can be arguments from both ends, and the indicia would be argued upon, thus if keys are found to be sufficient then this would be a valid transfer otherwise not. 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