VANDERVELL v IRC

Avoidance of duty through the floatation of a private business, was the driving force behind what some might describe as a text book error in accounting procedure, and one that on this occasion, left the owner (and his trusted colleagues) feeling less than savvy.

Having already positioned himself as a controlling shareholder, the director of a vibrant engineering company took steps to create a trust company, before appointing his three friends as trustees for the purpose of two previously created trusts.

When explained that making the firm open to public investment would attract increased wealth, the appellant expressed that he was now looking to set up another trust using 100,000 shares, in order to circumvent excess taxation through estate duty after his passing. 

The initial plan was that an employee trust could serve to not only benefit his workers, but help avoid the inevitable revenue claims; however, nothing went beyond the drafting stage.

After looking further afield, the appellant then chose to secure a pharmacology chair at a nearby surgical college, and set out to establish this at a cost of £150,000, as per the terms set by the institution.

When in many instances a simple cash payment would suffice, the appellant (under advisement by one of his accountant trustees), elected to have his bank transfer the shares to the college, whereupon dividends to the amount of £150,000 would be paid over a specific period.

With consideration of the plan to go public, the trustee then advised that the best course of action would be to request that the college allow for an option to repurchase the shares for a small sum, in order to prevent any concerns by potential stock market investors when assessing the pattern of ownership.

In light of this, the college were asked for their compliance, at which point they duly acquiesced, as their interests were purely fiscal.

This led to a deed of variation comprising payment of £145,000, followed by the immediate repurchase of the 100,000 shares for a sum of £5,000; after which, the property would be held upon trust by the trust company until such time as it would be decided by the trustees to place them in a suitable trust of their choice.

When carrying out the transfer, the bank were asked to leave the transferee name space blank, while following all other legal requirements for a successful gift.

It was made expressly clear by his letter, that the appellant had relinquished any interest whatsoever in the shares, and that the trustees were to act as they saw fit.

Upon receipt of the share certificates, the college signed themselves as shareholders, and were duly added to the company register, in accordance with company laws.

When the Inland Revenue learned of this transaction, it was claimed that the appellant had failed to act outside of his settlor obligations, and that under section 415 of the Income Tax Act 1952, it was declared that any income generated under a settlement paid to another person other than the settlor, and where the settlor has not released himself of his legal and equitable interest, the money will be construed as that of the settlor and taxed accordingly.

When brought before the courts, it was first found that the appellant had acted in error, and that liability to taxation was due.; however, when appealed the outcome was much the same, and so granted leave to present before the House of Lords, the judges took steps to examine the finer points of the transaction. 

While arguments as to section 53 of the Law of Property Act 1925 rested upon written dispositions (or a lack of it in this case), the root of the matter was more about the assignation of the shares, with the intention to recoup equitable and legal title upon the final dividend sum.

This was where the appellant contested that there had been no retention of interest, but rather an alternate means of investment and transferral to his trustees.

With a fiercely divided judgment, it was found on the facts that while the construction of a repurchase option was not entirely fatal to the existence of a disposition, the absence of a named transferee meant that until such time as one appeared, the shares and any revenue attached to them, remained the property of the appellant settlor.

Therefore, the implications of section 415 of the Income Tax Act 1952 remained in effect, and any undeclared revenue was now taxable, while the House reminded the parties that:

“The grant of an option to purchase is very different from a grant of a legal estate in some real or personal property without consideration to a person nominated by the beneficial owner.”

ROYAL BRUNEI AIRLINES v TAN

Breach of trust by a third party to a trustee, is something that while frustrating at common law, becomes punishable under equity where sufficient evidence is presented.

On this occasion, the director of a travel agent privy to a fiduciary relationship with a leading airline, took it upon himself to mingle trust assets with those of his company, in order to balance the books and keep his own affairs in order.

Royal Brunei Airlines entered into an agreement with Borneo Leisure Travel on the proviso that the agent would secure bookings for both passenger and cargo flights in exchange for a commission.

In addition to this, it was decided that the now respondents were to hold the booking payments in a standalone bank account, before paying the funds to the appellants every thirty days.

Having agreed to operate under those terms, the respondent chose instead to keep the money either in his sole deposit account, or his company account, while using the capital for disbursements that profited his firm.

After six years, the appellants terminated their agreement with the respondent, and began litigation on grounds that the director himself had acted in breach of trust as a third party, and that the travel agents had also acted in breach of their duties as trustees to the airline.

The footing of the claim rested upon the long-standing statement by Lord Selbourne LC in Barnes v Addy, who stipulated that:

“[The responsibility of a trustee] may no doubt be extended in equity to others who are not properly trustees, if they are found . . . actually participating in any fraudulent conduct of the trustee to the injury of the cestui que trust. But. . . strangers are not to be made constructive trustees merely because they act as the agents of trustees in transactions within their legal powers, transactions, perhaps of which a court of equity may disapprove, unless those agents receive and become chargeable with some part of the trust property, or unless they assist with knowledge in a dishonest and fraudulent design on the part of the trustees.”

BARNES v ADDY

This translated that even though the respondent was acting outside the duties of the trustee company, he was equally liable under law for the process which the agent had dishonestly employed when using trust funds for unintended purposes.

Such a position was further strengthened by the words of Thomas J in Powell v Thompson, who stressed:

“Once a breach of trust has been committed, the commission of which has involved a third party, the question which arises is one as between the beneficiary and that third party. If the third party’s conduct has been unconscionable, then irrespective of the degree of impropriety in the trustee’s conduct, the third party is liable to be held accountable to the beneficiary as if he or she were a trustee.”

POWELL v THOMPSON

In the first instance, the court awarded in favour of the airline; yet in the Court of Appeal, the judgment was reversed on grounds that a mere breach of trust was no indication of dishonesty; and so, unless such conduct was proven, there could be no justifiable reasons for imputing dishonesty for the sake of remedy.

Having then appealed before the Privy Council, the facts were reconsidered along with the objective standards of honesty.

Here it was once again found that despite protestations of accidental misplacement of trust funds, the respondent had admitted to a breach of trust, and although he intended to repay the appellants the princely sum of $335,000, there had been sufficient knowledge shown by the respondent that his improper use of trust property was wrong, and that his actions had been critical to the travel agent’s breach of trust, therefore the original judgment was restored with costs, while the court reminded the parties that:

“The standard of what constitutes honest conduct is not subjective. Honesty is not an optional scale, with higher or lower values according to the moral standards of each individual. If a person knowingly appropriates another’s property, he will not escape a finding of dishonesty simply because he sees nothing wrong in such behaviour.”

ROCHEFOUCAULD v BOUSTEAD

Does the creation of a trust rely upon written acknowledgement, or can the verbal promises of another to act in many respects as a fiduciary, provide evidence enough of an intention to serve as a trustee?

In an unusual arrangement between a lady of nobility and her business associate, the latter was asked to purchase an estate that she might otherwise lose through the rigours of her recent divorce.

While once a thriving coffee plantation, the land in question was by all accounts operational but subject to increased crop damage; yet without the revenue historically provided, there was little chance that the appellant could continue to live within means accustomed to.

This led to her asking her colleague to secure a conveyance of the property from the mortgagees on the proviso that she would over time, reimburse him for the cost of the purchase and any additional costs incurred during the management and administration of the business. 

Although not expressly stated in any official correspondence at the time, this verbal arrangement served to create a settlor and trustee relationship that benefitted both parties, albeit with overall beneficial interest remaining in the hands of the appellant.

After a number of years, the company deteriorated into insolvency, whereupon the appellant made claim for her beneficial title to avoid any loss to creditors.

It was then argued that the mortgage had enabled the respondent full legal title to the land (upon which he had previously mortgaged out portions for personal profit), and that this deed protected any claim to the contrary.

The right was claimed in addition to the twelve years where no legal proceedings were instigated by the appellant; a delay which  was ultimately denied through the statute of limitations and the estoppel of laches.

When first heard, the judge awarded in favour of the defendant with little investigation of the collected evidence; and so, when taken to appeal, the Court was more diligent when reaching a verdict.

Having looked closely at the correspondence both before and after the initial conveyance, it became clear that while nothing had been set to paper, there was never any indication that anything less than a trust/trustee arrangement had been effected, and that the appellant’s beneficial interest was never held in question.

Adding to the fact that the respondent had acted in a clandestine manner when selling land for gain before destroying the business accounts, there was little upon which he could rely when claiming ‘reasonable’ behaviour.

With collective agreement that the appellant did have a right to claim legal title upon grounds of an express trust, the only stumbling block was the length of time in which it took her to seek remedy.

Having then explained that financial difficulties, faith in the defendant’s honesty and conflicting legal advice had dissuaded her from pursuing it in the courts, the judges concluded that there was nothing justiciable to prevent her from recovery of the estate; and so, reversed the previous judgment and awarded in her favour, while the court reminded the parties that:

“[I]t is a fraud on the part of a person to whom land is conveyed as a trustee, and who knows it was so conveyed, to deny the trust and claim the land himself.”

RE ROSE

van Dyck, Anthony; Lord Strafford (1593-1641), and His Secretary Sir Phillip Mainwaring (1589-1661); Birmingham Museums Trust; http://www.artuk.org/artworks/lord-strafford-15931641-and-his-secretary-sir-phillip-mainwaring-15891661-33207

Voluntary corporate dispositions, and the prerequisite of company procedures are inextricably linked, yet where discrepancies arise, it falls to equity to resolve the inadequacies argued, before choosing to act.

In this instance, the two gestures of a settlor were challenged by the Crown in the hope of securing estate duties post-mortem.

In 1943, an unlimited company owner took the practical steps of transferring two amounts of 10,000 shares to both his wife on the first count, and his wife and secretary on the second.

Acting under strict observation of the associated articles of memorandum, namely art.9 which read:

“[T]he company shall be entitled to treat the person “whose name appears upon the register in respect of any share” as the absolute owner thereof, and shall not be under any “obligation to recognize any trust or equity or equitable claim” to or interest in such share, whether or not it shall have “express or other notice thereof.””

And article 28, which also read:

“[T]he transferor shall be “deemed to remain the holder of such share until the name of” the transferee is entered in the register in respect thereof.” 

It was further indicated by article 29, that:

“Shares in the company shall be transferred in “the following form, or as near thereto as circumstances will “permit.”” 

On this occasion, the documentation used was fully compliant with the terms prescribed by the company articles, in that sealed written instructions meant that the husband had willingly relinquished himself of any proprietary and beneficial ownership in order for legal title to succeed; along with any liability for estate duty fees; hence, the company would only need to register the transfer before a specified date. 

For one reason or another, the registration was incomplete until two days after the exemption period; and so, a number of years after the settlor’s death, the Inland Revenue sought to recover the duties on both transfers, under the combined effects of the Customs and Inland Revenue Act 1881, the Customs and Inland Revenue Act 1888 and the Finance Act 1895.

When first heard, the judge awarded in favour of the transferees, whereupon it was appealed by the Inland Revenue Commissioners, who primarily relied upon Milroy v Lord to argue against the previous decision.

Having considered the facts of both matters, the Court refused to support the far-reaching contradiction of the appellants, who contested that as the transfer had not been successfully completed by registration within the determined period it was non-effectual; and so, represented nothing more than a promissory gesture; and yet, once completed the settlor was unable to reverse the transfer and so held the shares in death as he did in life.

While in Milroy the deed-poll constituted little more than a written instruction, the explicit nature of the instrument of transfer in this instance had made it quite clear that at the date of execution (roughly ten days before the exemption threshold lapsed), the husband had expressly ceased to hold any beneficial or proprietary interest in the shares; and that by virtue of the gift, all beneficial ownership rights were now conferred to the wife and secretary, despite the absence of legal title.

It was this minor, yet crucial technicality that distinguished itself from Milroy, and negated the position taken by the appellants when seeking payment.

Deciding in unison, the previous judgment was vehemently upheld, while the point made clear that when a settlor acts within his duties, and in as exhaustible a manner as possible, any uncertainty of legal title does not preclude the completion of a gift; and that where duty commands it, beneficial ownership is sufficient answer when legal title is peripheral to judicial determination, while reminding the parties that:

“[A]ny transaction of gift imports a donor and a donee, a disposition by the donor and receipt of the subject-matter of the disposition by the donee.”

RE RECHER’S WILL TRUSTS

As is not uncommon to the bequests of those organised enough to prepare a will, there are times when beneficiaries such as charitable organisations, evolve into larger bodies with differing names at the point of death.

And so, on this occasion the court was required to determine if the nature of the gift was such as to allow application, despite a change of identity on the part of the legatees.

By her will of May 23rd 1957, the deceased Mrs. Recher had expressed in clause 7 that upon the death of her husband, any residual funds were to be placed upon trust for a number of charities including The London and Provincial Anti-Vivisection Society, 76 Victoria Street, London SW1, and distributed in equal shares to those stated.

Upon the death of her husband in 1968, it was discovered that as of January 1st 1956, the London and Provincial Anti-Vivisection Society had become absorbed by The National Anti-Vivisection Society, who operated from 27 Palace Street, London SW1, and that amongst the terms provisional to the amalgamation it read:

“3. (i) On the appointed day every life member of L. & P. shall become an annual member of N.A.V.S. F. . . (v) Subject as aforesaid, every person becoming a member of N.A.V.S. under this provision shall be entitled to all the rights and subject to all the liabilities of the other members of the class to which he belongs.”

Which translated that at the point of Mrs. Recher’s death, all members of the London and Provincial Anti-Vivisection Society were in fact members of The National Anti-Vivisection Society, which itself was no longer a charitable institution but a limited company.

Having been presented to the court under a summons by the acting executor to Mrs. Recher, the point was raised as to whether the apportioned monies were payable to the London and Provisional Anti-Vivisection Society; or, if by virtue of the fact that the recipients had been incorporated into a larger organisation, the gift was now left to fail under common law.

Despite existing arguments to the former, it was explained in Leahy v Attorney-General for New South Wales that:

“A gift can be made to persons (including a corporation) but it cannot be made to a purpose or to an object: so also, a trust may be created for the benefit of persons as cestuis que trust but not for a purpose or object unless the purpose or object be charitable. For a purpose or object cannot sue, but, if it be charitable, the Attorney-General can sue to enforce it.”

Leahy v Attorney-General for New South Wales

Through the terms of the will it was construed by the court that the gift was one for the purposes of the London and Provisional Anti-Vivisection Society and not a limited company; and while there were a number of caveats in favour of passing the gift to the original charity, it was impossible to hold that Mrs. Recher had ever intended to benefit anybody else other than the charity expressed; therefore, the gift was to fail, while the court reminded the parties that:

“[W]here you have a gift to an unidentified institution bearing a name suggesting charitable purposes, particularly if found in the company of a number of gifts to identified charitable institutions, the court may save the unidentified gift by assuming that the testator’s bounty is not directed towards the particular institutions named by him but is directed towards a purpose.”

RE MONTAGU

Aristocracy and the burden of constructive trusteeship, are brought to bear when the misinterpretation of an appointed solicitor allows for the sale of valuables designated a place within the family trust. 

By the actions of a family re-settlement drafted in 1923 by Viscount Mandeville (the future tenth Duke of Manchester), for the purposes of himself and each successive Duke, it was stated under clause 14 that the existing trustees to the estate were required, upon death of the ninth Duke of Manchester, to compile an inventory of goods deemed inheritable by the Viscount, prior to including them into the settlement, while paragraph B further expressed they should be held:

“Upon trust after the death of the present Duke or (if and so far as may be found practicable and convenient) during his lifetime to select and make an inventory or inventories of such of the chattels hereby assigned as the trustees in their absolute discretion may consider suitable for inclusion in the settlement hereby made (which selected chattels are hereinafter called ‘the selected chattels’) and to hold the residue (if any) of the said assigned chattels in trust for Viscount Mandeville absolutely.”

After the ninth Duke’s passing, the trustees handed the Viscount a number of items with the intention that he would look to sell them; yet, he failed to compile a list of valuables for retention into the settlement for future Dukes.

When the tenth Duke died in 1977, those items remaining came into possession by his widow, the Dowager Duchess of Manchester, whereupon in 1979, the eleventh Duke of Manchester issued a writ for breach of trust by the surviving trustees of the 1923 settlement, on grounds of having delivered the property to the deceased in the knowledge of their duties under clause 14 of the 1923 settlement.

And so, by virtue of his having sold them, the tenth Duke was also held accountable as a constructive trustee, and liable for payment of the proceeds to the value of those items sold, as was his widow. It was also argued that failure to compile the list resulted in all items of value falling within the scope of the settlement, and that both repossession of those items and recompense for any property sold was due.

Heard over a lengthy ten-day hearing, judge Megarry V-C took pains to explore the definition of constructive trustees, along with the term ‘notice’, as had been claimed by the eleventh Duke.

When the chain of communication was examined, it became apparent that during the lifetime of the tenth Duke, his solicitor had written to him to explain his obligations, but in way that failed to fully embrace the limitations of the settlement, as illustrated below:

“I had a long conversation with Nicholl on Thursday last, and the trustees have agreed that the heirlooms should be released, except the pictures. Under the resettlement executed by you on 20 December 1923 there is a clause by which the trustees can in their discretion release a large quantity of heirlooms and make a new list of such articles as are to remain as heirlooms. The amount obtained for the sale of any articles will be your personal property and the proceeds of sale will not have to be considered as capital trust money.”

From this it was easily construed that the lack of legal knowledge on the part of the tenth Duke would have left him reliant upon the professional expertise of his solicitor, who on this occasion had neglected to mention that the trustees were under a lawful obligation to draft a comprehensive list prior to any passing of estate property.

This meant that prima facie, the deceased was by extension, a constructive trustee by imputation.

However, his ignorance of the facts raised strong argument for his exemption, with particular regard to the five principles of ‘knowing’ as set down by Gibson J in Baden, Delvaux and Lecuit v Société General pour Favoriser le Développement du Commerce et de l’Industrie en France SA; which included actual knowledge, wilfully shutting one’s eyes to the obvious, wilfully and recklessly failing to make honest and reasonable enquiries as to the facts, reasonable and honest knowledge of circumstances indicative of the facts and, honest and reasonable knowledge of circumstances as to cause inquiry.

While the claimants preferred to impute the knowledge of clause 14 upon the Duke, it was clear by the evidence presented, that the deceased was largely ignorant to his legal requirements, and instead wholly dependent on the instructions of his acting solicitor.

It was also noted that sections 199 and 205 (1)(xxi) of the Law of Property Act 1925 specifically exempts beneficiaries under trust from the powers of constructive notice; which left the court little recourse other than to hold that in this instance, the tenth Duke of Manchester was not liable as a constructive trustee, and therefore no action against him could be sustained, while the court reminded the parties that:

“In determining whether a constructive trust has been created, the fundamental question is whether the conscience of the recipient is bound in such a way as to justify equity in imposing a trust on him.”

RE HALLETT’S ESTATE

The tracing of funds through the principles of equity are now integral to the protection of trusts and beneficiaries; however, in the late nineteenth century things were not as clear cut.

In this matter, the discrepancies of a solicitor left both his family and a third party investor out of pocket, and forced to argue over the remaining bank balance upon his death.

Prior to his passing in 1878, Mr Henry Hughes Hallett was in the habit of investing money on behalf of private clients, whereupon he would take a commission as payment for services rendered.

In addition to this, he had an existing marriage settlement for the benefit of his wife and children to the sum of £2,300, which had been placed into his personal bank account before being used for a number of other small investments.

A Mrs Cotterill employed the deceased for general legal duties, but also to receive and invest sums of money for her eventual profit.

On this occasion, she had allowed Mr. Hallett to invest £2,692 for Russian bonds, while he himself used £2,590 of the marriage settlement trust funds to do the same.

Having taken £1,554 worth of the trust bonds for himself before depositing the remaining £1,036 worth of bonds into his bank account, Mr. Hallett proceeded to sell £450 and £2,442 of Mrs Cotterill’s bonds, and £1,036 of the trust funds, subject to his taking a commission on all three.

Following a number of other transactions, the bank balance on the date of his demise was £3,029; of which, £2,600 had been paid into a court relating to the administration of his estate.

At the point of litigation, there were claims by both the trustees for his marriage settlement for £770 and £1,554, as used for the purchase of bonds, along with that of Mrs. Cotterill for £1,708.

Previous to this case, the law surrounding recovery of funds once mixed, was not one that favoured the claimant, and in many instances the court awarded against recovery on grounds that unless the money was ear-marked, it was simply indistinguishable from that which it had joined, thus to reach into the account and take it arbitrarily was simply untenable.

This changed in the case of Pennell v Deffell; in which, the Court of Appeal held that the claim of the trustees or cestui que trusts were of greater weight than that of a creditor.

However, in the later Clayton’s Case, the Court of Appeal then held that in such instances the court would determine the first sum of money drawn out from a bank account as that belonging to the first sum paid in, therefore unless there were grounds to suspect fraud on the part of Mr. Hallett, £2,324 of the money left in the account was that of the marriage settlement, while the remaining £705 was that of Mrs. Cotterill.

In the first instance, the Judge awarded priority of claim in favour of Mrs. Cotterill, on grounds that a fiduciary relationship existed between her and the deceased; whereupon the trustees for Mr.Hallett’s estate appealed, while Mrs. Cotterill also appealed.

On this occasion, the Court of Appeal reversed the decision, awarding priority to the trustees for Mr. Hallett’s estate on the equitable grounds that when a trustee mingles assets with that of his own, he is held to withdraw that which is his property when leaving a balance behind.

This translated that whatever money Mr. Hallett had taken out prior to his death was that to which he was entitled, therefore the residual balance was that of the trustees and not one of a mere creditor.

“[W]here a trustee has mixed the money with his own, there is this distinction, that the cestui que trust, or beneficial owner, can no longer elect to take the property, because it is no longer bought with the trust-money simply and purely, but with a mixed fund. He is, however, still entitled to a charge on the property purchased, for the amount of the trust-money laid out in the purchase; and that charge is quite independent of the fact of the amount laid out by the trustee.”

RE BUCKS CONSTABULARY WIDOW’S AND ORPHANS FUND FRIENDLY SOCIETY NO.2

Variances in the formation of societal funds are capable of determining the receipt of unaccounted monies, when those organisations are dissolved through death of its members, or as part of a change in structure and administration.

In such instances, the Crown treasury will be quick to adopt the residual capital under the principle of bona vacantia, therefore the courts are required to discriminate between the powers of legislation and those of the surviving trustees/members when deciding the destination of such sums.

On this occasion, a widows and orphans trust fund had been formed for the benefit of serving county police officers, which operated under the terms of the Friendly Societies Act 1896 and was used both for loss of life and sickness of those subscribed.

In 1968, the society members agreed to wind up the fund as part of an amalgamation with a larger benevolent fund, whereupon it was decided that the £87,000 held would be used to fund ongoing annuities for those claiming under right for the sum of £35,000, and provide £40,000 to gain entry into the new fund; whereupon, the remaining £12,000 would be distributed between the surviving members, as provided for by section 49(1) of the 1896 Act, which reads:

“All property belonging to a registered society, whether acquired before or after the society is registered, shall vest in the trustees for the time being of the society, for the use and benefit of the society and the members thereof, and of all persons claiming through the members according to the rules of the society.”

Friendly Societies Act 1896

While in the event that no such preparation has been made, there was also adequate authority to suggest that:

“[I]f on the termination of a society no provision has been made by the rules for the distribution of its funds, such funds are divisible among the existing members at the time of the termination or dissolution in proportion to the amount contributed by each member for entrance fees and subscriptions, but irrespective of fines or payments made to members in accordance with the rules.”

Which prima facie, prevented the recovery of money by the Treasury, as might be expected in such instances.

In an originating summons submitted by the sole trustee to the fund, the court was asked to determine whether the £40,000 planned for payment should be held upon trust for the widows and orphans fund before being equally distributed amongst the surviving members; or as was suggested, the monies were due to the Crown under a loss of ownership through the dissolution of the fund.

Having considered the weight behind such prominent cases as re Recher’s Will Trusts and Cunnack v Edwards, Walton J concluded that unless the society had been reduced to just a single remaining member, there was little to indicate that anything less than an equal distribution between the existing members and those surviving members that had previously died, would be a suitable application of law.

Hence, the court awarded judgment accordingly, while reminding the parties that:

“[U]nless under the rules governing the association the property thereof has been wholly devoted to charity, or unless and to the extent to which the other trusts have validly been declared of such property, the persons, and the only persons, interested therein are the members.”

McPHAIL v DOULTON

Specificity within discretionary trusts is a virtual prerequisite should the settlor wish to enjoy its success; as while the courts are empowered to dispense as the creator intended, they are still subject to restrictive criteria that can often render them ineffective.

When a company owner took the liberty of constructing a trust deed for the benefit of past and present employees and their relatives and children, the duties assigned to the trustees were flexible enough to allow for common sense and equity to steer their decisions.

This was because the funds within the trust were limited, and therefore issue to selected employees was restricted on a yearly basis, with further provision for continuous investment in order to extend the lifetime of the trust.

Over twenty years after execution of the deed, and following the death of the owner, the validity of the trust was brought into question by his widow and certain family members, who having found themselves exempt from the pleasures of regular payments from the trustees, sought to challenge the terms of the instrument contained within clause 9, which read that:

“(a) The trustees shall apply the net income of the fund in making at their absolute discretion grants . . . in such amounts at such times and on such conditions (if any) as they think fit . . . (b) The trustees shall not be bound to exhaust the income of any year or other period in making such grants . . . and any income not so applied shall be . . . [placed in a bank or invested], (c) The trustees may realise any investments representing accumulations of income and apply the proceeds as though the same were income of the fund and may also . . . at any time prior to the liquidation of the fund realise any other part of the capital of the fund . . . in order to provide benefits for which the current income of the fund is insufficient.” 

On this occasion, it was argued that while the trust designated that a class of people were intended as beneficiaries, the list was wide enough to introduce uncertainty at to whether the discretion offered the trustees was construed as a power, rather than trust instructions. Andso under those circumstances, the trust had prima facie failed, and that whatever funds existed fell within the deceased’s estate. 

When heard in the Court of Chancery, the judge upheld the idea that such a power exceeded the delicate framework of a trust, and that clause 10 of the same deed indicated that the interest in the trust lay solely in the hands of the trustees; therefore any disposition of funds were in accordance with their discretion, which resulted in uncertainty as to exactly whom the beneficiaries were.

Heard again at the Court of Appeal, the original judgment was upheld, while granting leave to appeal to the House of Lords. 

Here, the issues surrounding the true intention of the settlor were given greater consideration, with particular regard to the limitations of the trust fund use, and the relatively ascertainable identity of the employees and their family members.

When looked at in context, it was apparent that the aim of the trust was one that afforded creativity of the funds after the needs of the beneficiaries were met; therefore, it could not be construed as self-serving and obstructive of the intended purpose.

Rather, it boiled down to poor drafting, that while in the immediate sense, lent to initial confusion of those unfamiliar with trusts and fiduciary duties, did not prevent the House from clarifying that the same degree of uncertainty could be removed in lieu of a perfectly functional instrument of generosity, while reminding that parties that:

“[W]here there is a trust there is a duty imposed upon the trustees who can be controlled if necessary in the exercise of their duty. Whether the trust is discretionary or not the court must be in a position to control its execution in the interests of the objects of the trust. Where there is a mere power entirely different considerations arise. The objects have no right to complain.”

GREY v IRC

The creation of trusts run closely to dispositions of interest unless properly worded and executed in accordance with English law.

In this matter, the settlor elected to draft and duly sign a declaration of trust, while orally providing the exact nature of the trusts to his trustees; and so, it was this indiscretion that caused the Inland Revenue to seek proportionate stamp duty on grounds that the gesture amounted to a disposition of property and nothing less.

Having chosen to leave consideration for his grandchildren, the settlor created six trusts on two separate occasions, each leaving 3,000 company shares per beneficiary, along with particular instructions as to their use.

When looking to officialise his request, he brought together his trustees, before instructing them as how best to manage the trusts; and so, having finalised six declarations of trust, he signed and sealed them in witness of his solicitor.

A key part of his participation was that as of the date the deeds were completed, the settlor had agreed to renounce his continued beneficial, equitable (and therefore legal) interest in the trust property, and that the trustees were now holding them on trust for the benefit of his grandchildren.

Unfortunately, section 53 (1) of the Law of Property Act 1925 reads that:

“Subject to the provisions hereinafter contained with respect to the creation of  interest in land by parol, . . . (c) 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 by his agent thereunto lawfully authorised in writing or by will.”

The question then raised, was whether by virtue of their release, the actions of the settlor and the construction of the declarations of trust, were tantamount to voluntary dispositions, that under the terms of statute, attracted stamp duty (or ad valorem duty as referred to at the time), or that by lack of written instructions as to their use, the trusts were ineffective and thus exempt from taxation?

When first heard, the judge awarded in favour of the trustees, and cited that no duty was applicable because no ‘disposition’ had been intended nor indicated, except for the choice of words used by the settlor.

Upon appeal, the Court reversed the decision and took the opposing view that despite the intentions of the settlor, the manner in which the trusts were created altered the nature of the relationship between executor and trustee; inasmuch as the settlor had granted beneficial and equitable ownership to the trustees, and could no longer see himself as a trustee of the property, until such time as the grandchildren took title upon his death.

Presented again before the House of Lords, much greater focus was placed upon the consolidation of the Law of Property Act 1924 and The Statute of Frauds, which under section 9 explained:

“[A]ll grants and assignments of any trust or confidence shall likewise be in writing, signed by the party granting or assigning the same, or by such last will or devise, or else shall likewise be utterly void and of none effect…”

Statute of Frauds

The appellants relied this time upon the terms ‘grants and assignments’ to circumvent the requirements of the Law of Property Act 1925; on grounds that because the terms of the trust had failed to take written form, the trusts were both invalid and therefore exempt from duty, and that reliance upon the term ‘disposition‘ was an overextension of the facts and a misdirection of law. 

Upon generous consideration, it was unanimously agreed that despite the intimation that the actions of the settlor were misconstrued, it was relatively easy to interpret that the renunciation of interest was equatable to a disposition, and that under those circumstances, the relevant statutory duty was owed, while the House reminded the parties that:

“[A] direction to a trustee by the equitable owner of the property prescribing new trusts upon which it is to be held is a declaration of trust but not a grant or assignment.”