BARRETT v BARRETT

Resting upon the equitable maxim ‘he who comes to equity must come with clean hands’, the clandestine collusion between two brothers falls foul, when the agreement dissolves in favour of the abetting sibling. 

After lapsing into bankruptcy, a business owner tries to circumvent the dissolution process in an attempt to save his home from repossession.

In order to achieve this, he asks that his brother purchase the property from the bankruptcy trustees, before holding the house on trust until such time that the now appellant is able to regain legal title.

While agreeing to this proposition, the respondent approaches the trustee, before securing the property through cash downpayment and mortgage redemption, prior to allowing the appellant to regain occupancy.

A second agreement followed that enabled the appellant to make contributions to the mortgage repayments, as well as investing money into the maintenance of the home; again under the pretence that the respondent held the property on trust and nothing more.

Fifteen years after the repurchase, the respondent sold the property for significant profit, placing roughly half the proceeds in trust with his sister, who then refused to pay the money back, on grounds that the respondent had breached his agreement and duty as a trustee to his brother.

At this point, the appellant issued proceedings for its recovery, before the sister part-paid the appellant and placed the remainder in the hands of the court.

This resulted in the appellant issuing proceedings for the balance held, while the respondent counter claimed to defend his position . 

Relying upon the argument of numerous trusts (express, constructive, common intention and resulting) with which to recover the sale proceeds, it was argued that by selling the home, the respondent had unlawfully profited from his position as a trustee; and that as such, the money was now owed to the appellant and enforceable through equity.

This claim was struck out in the first instance, on grounds that equity will not allow a trust created through illegality to stand, and therefore no remedy in law could exist when the appellant had requested that the respondent purchase the home in order to avoid duties brought about under section 333(2) of the Insolvency Act 1986.

When heard in the Court of Appeal, the facts were revisited with little to no effect for the appellant, despite continued multiple arguments from his representative.

While the appellant accepted that the original agreement served two aims (retention of the home and avoidance of creditor payments), the Court would not ignore the reality that the same person seeking equitable remedy, was behind the illegal concept and undertaking of, a property purchase designed to undermine and breach the legal duty owed when winding down a business.

It was then, for that very simple and yet unmistakeable reason, that the judge upheld the previous findings and flatly dismissed the appeal, while reminding the parties that:

“[E]quitable proprietary rights are to be treated in essentially the same way as legal proprietary rights and will be enforced provided that the claimant does not plead or lead evidence of the illegality.”

GISSING v GISSING

The imputation of beneficial rights to property based upon the conduct of the contending parties, has been a delicate issue for the courts for many years.

On this occasion, the lines of demarcation were drawn by the House of Lords, in order to prevent further abuses of equity and its associated maxims.

After marrying at a young age in 1935, the respondent in this appeal joined her husband in the purchase of their first home in 1951 for a sum of £2,695. The mortgage was held in sole title by her appellant husband, who contributed £500 by way of a loan, and £45 from his own savings; while the respondent paid £220 for a new lawn, household appliances and furniture.

During the time of their marriage, the mortgage was paid by the appellant, who also provided the respondent with regular weekly payments for housekeeping costs, while repaying the loan furnished him by his employer.

Prior to the purchase, the appellant had served time in the military, and after finding himself discharged following the war, the respondent secured him a position with a printing firm that she herself worked at.

While the respondent’s earnings remained at a stable £500 p.a, the appellant was successful in his endeavours, and soon established himself as director of the firm, with earnings  of around £3,000 p.a.

After twenty-five years of marriage and the raising of their son, the appellant committed adultery with a younger woman, before leaving the home and beginning a life with her.

This led to their divorce; during which, the appellant continued to pay the mortgage, loan and outgoings on their marital home, until the loss of his job and subsequent financial troubles.

Around this time, the respondent issued a summons declaring absolute ownership of the home, based upon the oral promise by the appellant that she could keep the house.

Under section 53(1) of the Law of Property Act 1925, any declaration of trust with regard to beneficial interest in property must be written; however, the courts can find the existence of such an agreement by equitable principles of resulting, implied and constructive trusts where sufficient evidence allows.

In order to establish this, the court would seek to infer through the conduct of the parties, reasonable proof that when engaging in the purchase of the home there had either been agreement as to how to apportionment of interest was to be divided, or the financial contributions made by each party for the duration of the marriage or occupancy.

In the first hearing, the court awarded that the appellant was, by extension of his financial payments and obvious legal title, the sole owner of the property, and allowed for repossession under law.

In the Court of Appeal, the decision was reversed by a majority, who held that the respondent was entitled to a fifty percent share of the home, while presented to the House of Lords, the recent outcome of Pettitt v Pettitt was taken under consideration, along with the principles of cestuis que trusts.

In Pettitt, the former wife pursued proprietary interest of the sole legal title held by her ex-husband under section 17 of the Married Woman’s Property Act 1882, on a home still subject to an outstanding mortgage.

Her contention was that having occupied the home for ten years, she was entitled to a beneficial interest due to her substantial contributions to both the deposit and subsequent repayments during the time of their marriage; whereupon the husband countered that his individual improvements to the house afforded him an equal share of the property. 

While on that occasion the judgment fell in favour of the wife, there was little with which to compare it to this case; and so, the equitable nature of trusts were explored through the conduct of the respondent.

Here it was held by majority, that while an oral declaration by the appellant suggested otherwise, there was absolutely no evidence that the respondent did, at any time, intend to contribute to the purchase of the home, or the upkeep of mortgage repayments, even when the appellant had suffered financial setbacks.

And so it was for those reasons, that suggestions of trusts of any kind were simply obiter dictum, and that for the purposes of natural justice, the appeal was upheld with costs, while the House reminded the parties that:

“Any claim to a beneficial interest in land by a person, whether spouse or stranger, in whom the legal estate in the land is not vested must be based upon the proposition that the person in whom the legal estate is vested holds it as trustee upon trust to give effect to the beneficial interest of the claimant as cestui que trust.”

BARCLAYS BANK LTD v QUISTCLOSE INVESTMENTS

Conditional lending, while perhaps overlooked during commercial and personal loans, forms the bedrock of such delicate transactions, and so should the borrower find themselves unable to apply the funds as expected, the nature of the agreement remains lawfully intact in favour of the lender.

In this matter, an insolvent debtor’s bank attempted to convert such monies into company assets at the expense of the lender, at which point the reassurance of equity intervened.

In 1964, the shareholders of a relatively successful enterprise took steps to issue dividends of around £210,000; however, upon inspection they discovered that without adequate liquidity, the payment would be impossible.

With that in mind, the company owner secured a conditional loan from the respondents, on the express condition that the funds were to be used for dividend issue only.

Once received, the owner wrote to the company bank, giving instruction to open a standalone account for the retention of the funds, while stipulating that:

“We would like to confirm the agreement reached with you this morning that this amount will only be used to meet the dividend due on July 24, 1964.”

Unfortunately, on July 17th 1964, the company entered into voluntary liquidation, whereupon the monies held remained unused, as per the instructions given at the point of receipt.

Some time later, the respondents demanded repayment of the money loaned; after which, the appellant bank argued that it had since become a corporate asset, and was therefore subject to the priorities of all associated creditors involved in the bankruptcy process.

At the point of litigation, the respondents held that the money loaned was subject to a resulting trust, and that the bank by virtue of their position, were now under a fiduciary liability as constructive trustees for the amount loaned.

In the first hearing, the judge awarded in favour of the appellants, on grounds that equitable principles did not apply when arms-length dealings fail.

Whereupon, the respondents appealed and the Court held that in matters involving third parties to a failed transaction, recovery under equity was a principle long enjoyed, and routinely evidenced through a number of judgments across hundreds of years.

Presented again to the House of Lords, the House examined the complexity of the transaction and noted that in Toovey v Milne, Abbot CJ had ruled that failure to apply the money loaned in the way originally intended, allowed for recovery of the funds during insolvency, under the principle that:

“[T]his money was advanced for a special purpose, and that being so clothed with a specific trust, no property in it passed to the assignee of the bankrupt. Then the purpose having failed, there is an implied stipulation that the money shall be repaid.”

Toovey v Milne

Here again, reference was made to the express conditions applied to the loan, as well as the statement made in the letter at the time the money was passed to the appellant bank.

It was further noted that while in circumstances where the lender agrees to loan on non-specific terms, there is an implied assumption that such funds become part of the corporate estate (albeit not entirely free of equity).

However, on this occasion there was ample testimony that the respondents had bargained with the borrowers on clear conditions, therefore the House uniformly and unreservedly held that the Appeal Court decision was to remain untouched and the bank’s appeal dismissed, while the House reminded the parties that:

“[T]he law does not permit an arrangement ” to be made by which one person agrees to advance money to another, on terms that the money is to be used exclusively to pay debts of the latter, and if, and so far as not so used, rather than becoming a general asset of the latter available to his creditors at large, is to be returned to the lender.”

TRUSTS

Originating from the latin phrase ad opus, the purpose of a trust is to provide the safe containment of assets (whether those of property or money) on condition that they will be of benefit to another party or parties.

There are many instances in which a trust can be created and it is the intention of this article that we have a look at the more common trusts used today, before explaining their application through suitable case law propositions.

Purpose Trusts

Subject to the same qualifying criteria as that of a will bequest, the terms of a valid trust require that three certainties must be readily ascertainable:

(i) The intention of the settlor
(ii) The subject matter of the trust
(iii) The identity(s) of the beneficiary(s)

The inherent problem with purpose trusts is that they are by nature, constructed so as to benefit an unlimited number of people, although often under a charitable intention.

An excellent example of a purpose trust is the one described in Re Denley, where the use of recreational ground was exclusively reserved for the current and future employees of an aircraft manufacturer; and that, despite presupposition of its failure, the judge upheld its validity on grounds that an approximation of the staff was, in the immediate sense, obtainable.

This allowance was expressed by Goff J who remarked:

“[T]here may be a purpose or object trust, the carrying out of which would benefit an individual or individuals, where that benefit is so indirect or intangible or which is otherwise so framed as not to give those persons any locus standi to apply to the court to enforce the trust, in which case the beneficiary principle would, as it seems to me, apply to invalidate the trust, quite apart from any question of uncertainty or perpetuity. Such cases can be considered if and when they arise.The present is not, in my judgment, of that character…”

Re Denley

Resulting Trusts

Ironically, resulting trusts are express trusts that by their lack of specificity, wound up benefiting the settlor, despite the very wish to relinquish title or interest.

As with the third element of a successful trust, where the identities of the beneficiaries are either remitted or withheld, the principles of equity would defer the construction of the trust to that of the settlor’s gain.

While in some instances the outcome causes little damage, there are equally those where a resulting trust inflicts financial loss, as was seen in Vandervell v IRC.

Appreciatively, there is rarely if ever, any intention to create a resulting trust; and so, the instances where they do emerge, rely upon clear conditions, as explained by Lord Millet in Air Jamaica v Charlton, when he remarked that:

“Like a constructive trust, resulting trust arises by operation of law, though unlike a constructive trust it gives effect to intention. But it arises whether or not the transferor intended to retain a beneficial interest – he almost always does not – since it responds to the absence of any intention on his part to pass beneficial interest to the recipient. It may arise even where the transferor positively wished to be part with the beneficial interest…”

Air Jamaica v Charlton

Charitable Trusts

One of the advantages of a charitable trust is that it enjoys exemption from the otherwise exactness of both beneficiary and subject; although in many cases, the charity of choice is typically named to avoid confusion within the court, or a need to invoke the cy-pres doctrine.

Another advantage is the avoidance of taxation, as charities are free from the burden of inheritance tax, capital gains tax and occupancy rates (where circumstances allow); while also outlined in s.1(1) of the Charities Act 2006, the trust beneficiaries must fall within the scope of legislation in order for the trust to succeed, and as found under s.2(2) of the 2006 Act, the possible forms such charities might take are reasonably extensive.

Constructive Trusts

Sharing a close relevance to the strictness of fiduciary duties, constructive trusts are a means of remedy where a trustee has immorally profited from another’s property through the dysfunction of their relationship.

Where evidence is found to support wrongful gain, a constructive trust is created that serves to hold the assets on trust for the now slighted settlor.

An example of this is Attorney-General of Hong Kong v Reid  , where Lord Templeman stressed that:

“As soon as the bribe was received it should have been paid or transferred instanter to the person who suffered from the breach of duty. Equity considers as done that which ought to have been done. As soon as the bribe was received, whether in cash or in kind, the false fiduciary held the bribe on a constructive trust for the person injured.”

Attorney-General of Hong Kong v Reid

Express Trusts

As with purpose trusts, an express trust is the standard form of trust, whereby the settlor makes a clear expression of his wish to create a trust, deliberately illustrates what form the trust takes (property or funds), who the beneficiaries are, takes the correct steps to transfer the property in accordance with statute and where necessary, makes it known who the acting trustees will be.

The reason for this is to facilitate court intervention in the event of contention, particularly where the settlor has since died,  leaving instructions within their final will or codicil.

Failure to demonstrate evidence of those key elements will result in a void trust, and in death, eventual lapse into the residual estate of the deceased.

An example of the exactness required for an express trust is found in Milroy v Lord, where despite having made verbal declarations as to his wish for his company shares to benefit his niece, his associate had failed to officiate the trust through the legal channels; resulting in the shares remaining on trust for himself (as would be the case in a purpose trust).

This was elaborated by Lord Justice Turner, who remarked:

“[I]n order to render a voluntary settlement valid and effectual, the settlor must have done everything which, according to the nature of the property comprised in the settlement, was necessary to be done in order to transfer the property and render the settlement binding upon him.”

Milroy v Lord

Cestuis Que Trusts

Cestui que is an abbreviated version of ‘cestui a que use le foeffment suit fait‘, which means ‘the person for whose use the foeffment was made.’

Further simplified, ‘foeffment‘ represents any grant of freehold property, therefore a cestui que trust would be those holding property upon trust for the benefit of another named individual who retains legal title; although any beneficial interest remains in the hands of the cestui que trust (or person assigned the interest).

This translates that unlike other forms of trust, the legal owner acts as a trustee, while the actual beneficiary serves as operator of the trust, much like a reversal of roles.

The result of this is that should the trustee decide to convey the property, the cestui que trust can sue for breach of duty where no permission has been granted and no profits enjoyed.

This was explained by Austin Wakeman Scott in his Columbia Law Review article ‘The Nature of the Rights of the Cestui Que Trust’ (1917), when he wrote:

“If a trustee should destroy the trust res, or should sell it to a purchaser without notice of the trust and dissipate the purchase money, the cestui que trust may maintain a suit in equity against the trustee for breach of trust, and recover a sum of money, either the value of the trust res, or the amount of profits which should have accrued if no breach had been committed.”

The Nature of the Rights of the Cestui Que Trust’ (1917)

Fixed Trusts

These are typically used where multiple beneficiaries exist, while the nature of the fixed trust is to state exact figures or quantities of benefit to each party, so as to avoid inequitable profit by those in receipt or miscalculation by the appointed trustees.

The criteria for a fixed trust was established by Jenkins LJ in Inland Revenue Commissioners v Broadway Cottages Trust, where having examined the specificity of the trust, there was insufficient evidence to obtain certainty of the beneficiaries, thus the trust failed with the reasons given that:

“[T]he trust of the capital of the settled fund for all the beneficiaries living or existing at the termination of the appointed period, and if more than one in equal shares, must be void for uncertainty, inasmuch as there can be no division in equal shares amongst a class of persons unless all the members of the class are known.”

Inland Revenue Commissioners v Broadway Cottages Trust

Secret Trusts

Undoubtedly designed to protect the identity and interest of the beneficiary(s), the settlor is able to draft and execute a secret trust that can be both observed during life, and inserted into a will under the pretence that a named beneficiary will inherit absolutely, when in fact they will act as trustees for those with the intended benefit (similar arrangements can fall under intestacy provided prior agreement was arranged by the deceased).

Similarly, there are half-secret trusts that operate beyond the terms of a will but under the duties of a trustee, this translates that the dispositions of the trustee remain unknown, although there is no uncertainty as to where the trust property resides.

The framework of secret trusts was outlined by Peter Gibson LJ in Kasperbauer v Griffith, when he said:

“[T]he authorities make plain that what is needed is: (i) an intention by the testator to create a trust, satisfying the traditional requirements of three certainties (that is it say certain language in imperative form, certain subject matter and certain objects or beneficiaries); (ii) the communication of the trust to the legatees, and (iii) acceptance of the trust by the legatee, which acceptance can take the form of acquiescence…it is an essential element that the testator must intend to subject the legatee to an obligation in favour of the intended beneficiary. That will be evidenced by appropriately imperative, as distinct form precatory language.”

Kasperbauer v Griffith

Discretionary Trusts

While operating much like a typical trust, the discretionary trust allows the trustee(s) to regulate and thus self-determine, the extent of the distribution to assigned beneficiaries.

With two differing types, the exhaustive discretionary trust provides full and complete distribution of trust assets; whereas the non-exhaustive trust allows the trustee(s) to decide how much is awarded, and to specify what, within the trust, is granted to the beneficiaries.

Statutory Trusts

Brought about through the disposition of land under co-ownership and the rules of intestacy, these trusts are designed to protect the interests of those in title.

First introduced through s.34-36 of the Law of Property Act 1925 the intervention, or at least creation of statutory trusts, was also enforced through s.33 of the Law of Administration Act 1925, before consolidation of both Acts came through the Trusts of Land and Appointment of Trustees Act 1996.

In the former instance, there is an automatic trust power to sell and retain under co-ownership, and in the latter, a power to sell through personal representative where no will was executed.

Public Trusts

There is little to explain here other than that unlike a private trust, a public trust is created by the settlor with the express intention of benefitting certain members (or sections) of the general public.

This is often achieved through the use of a charitable trust, as deemed valid through the requirements of rules required by the Charities Act 2006.

Bare (or Simple) Trusts

Perhaps the most basic of trusts, the bare or ‘simpletrust serves only to hold property or funds in favour of a beneficiary, yet with no trustee duties attached.

In this instance, the trustee is replaced with the title of nominee until transfer is required.

Special Trusts

Unlike the previous trusts, special trusts are created with prerequisite trustee instructions, albeit divided into two categories, namely ministerial and (as above) discretionary trusts.

In the former, those duties may include rent collection and administrative functions, whereas the latter affords the trustee with powers to decide how best go about his or her role.

Quistclose Trusts

Running parallel to laws of contract, the quistclose trust was brought about in Barclays Bank v Quistclose Investments Ltd; in which, the lender took steps to clarify that the money loaned was on condition of use, and held within the bank until the borrower chose to redeem the funds.

When the borrower lapsed into liquidation, the lender asserted property rights against the bank under the principle that the funds were held on trust, and that the bank was now acting as a trustee; thus circumventing the rights of other creditors, while holding the funds in safe reserve for the lender as acting settlor.

This unique approach was supported by the House of Lords, and explained well when Lord Wilberforce remarked:

“In the present case the intention to create a secondary trust for the benefit of the lender, to arise if the primary trust, to pay the dividend, could not be carried out, is clear and I can find no reason why the law should not give effect to it.”

Barclays Bank v Quistclose Investments Ltd