Legal update: equity and trusts
1 December 2002
25 September 2013
31 October 2013
10 December 2013
24 September 2013
29 July 2014
The word 'equity' tends to send shivers down the spines of law students, particularly at exam time. Unfortunately, equitable principles cannot be dispensed with the moment your studies are completed, whatever your chosen practice area.
It is not just property and trusts lawyers who need to think about equity, but also those who join banking, corporate and capital markets departments and will have to structure securitisations and repackagings, trace assets or advise the directors of a company or a partnership.
Complete or incomplete gift?
In Pennington v Waine (2002) a nephew had been told by his aunt that she was transferring 400 company shares over to him. The aunt then executed a correct stock transfer form, which she passed on to the company's auditors.
Since shareholders had to become directors in the company, the nephew filled in a 288A form giving his consent to the appointment, and was told by the auditors that he need not do anything else. The stock transfer form was never registered or even delivered to the nephew but lay on the company's file at the auditors.
The Court of Appeal upheld the trial judge's decision that a valid equitable transfer of shares had taken place. The court held that, although the principle that equity will not assist a volunteer was to be strictly adhered to, the gift became completely constituted at the time when it would have been unconscionable for the aunt to have revoked it. Furthermore, the court applied the principle of benevolent construction to the gift. Lord Justice Arden stated: "Where a court of equity is satisfied that the donor had an intention to make an immediate gift, the court will construe the words which the donor used as words effecting a gift or declaring a trust if they can fairly bear that meaning."
Perpetuities and accumulations
In September 2002, the Lord Chancellor's Department (LCD) issued a consultation paper discussing reforms to the rule against excessive accumulations, to be implemented by way of a regulatory reform order. The rule is described in the consultation paper as "a statutory rule which restricts the time for which income may validly be accumulated under a direction to accumulate. Accumulation is the process by which income is converted into capital under a power or duty to accumulate."
It is not just property and trusts lawyers who need to think about equity, but also those who join banking, corporate and capital markets departments
Many regard this as archaic. The proposals include the abolition of the rule for trusts created in the future, subject to an exception for charitable trusts restricting accumulations of income to a period of 21 years, in turn subject to the Charity Commission's discretion to permit a derogation from this limitation.
The paper also refers to the need to reform the rule against perpetuities. The Law Commission has proposed a standard period of 125 years as the perpetuity period (Law Commission Report 251 31/3/98), bringing it into line with other jurisdictions such as Jersey and the Cayman Islands. However, as the rule derives from the common law, it will require separate reform by primary Parliamentary legislation.
If a trustee commits a breach of trust, they may be personally liable for losses caused by their breach. To counter this, the modern trustee relies increasingly on exculpation or exoneration clauses in trust deeds and other methods to absolve themselves from liability.
One such method is the principle derived from the decision in Re Hastings-Bass (1975). This allows trustees to make an application to the court to set aside an act the trustees have carried out. The two essential limbs to the principle are: that the trustees should have considered the consequences of taking a particular decision; and, if the trustees had done so, they would not have acted as they did if they had known of the consequences.
If the conditions are satisfied, the action taken by the trustees will be declared void ab initio. In Abacus Trust Company (Isle of Man) v NSPCC (2001) the trustees were advised by leading counsel to sign certain documentation regarding a tax scheme only after 6 April 1998. However, the trustees were told by a solicitor to execute the documents on 3 April 1998, which had the effect of ruining the tax benefits of the scheme. The trustees said they had followed the solicitor's advice unquestioningly and would not have executed the documents on 3 April had they known of the tax consequences.
A legal relationship in which a person or persons hold property for the benefit of one or more other persons or for charitable or other accepted purposes.
A person who has a fiduciary duty to hold property for the benefit of one or more other persons or for charitable or other accepted purposes.
A limited company that acts as a trustee with other (individual or corporate) trustees.
In which trustees hold property on trust for the beneficiary absolutely.
In which trustees are directed to hold the property for beneficiaries but are given a choice, eg as to who may be a beneficiary or as to how much of the property they should receive.
A trust arising by operation of law, either where there is a rebuttable presumption that property legally owned by one person is in fact for the beneficial enjoyment of another, or where a settlor creates an express trust but the whole beneficial interest in the property is not exhausted, so that the remaining property results back to the settlor.
In which a trust arises from the intention of a person to create a trust in contrast to a trust arising by operation of law.
A trust that arises by operation of law when it is considered unjust for the legal owner of property to enjoy its benefit.
Where a donor has left property to a charity but their intention cannot be carried out, the court may apply the property in the nearest possible way, eg to another similar charity; or where a charity has been set up but its original objects cannot be fulfilled, the court may alter the objects of the charity.
The situation in which a person dishonestly assists in the breach of a trust by a trustee.
A situation in which a person receives property for their own benefit from a trustee who is acting in breach of trust, and the person knows that the property is trust property transferred in breach of trust.
The court declared the actions of the trustees void. Nevertheless, in Breadner v Granville Grossman (2001), an application to set aside a power of appointment, which had been exercised a day after the time limit for its exercise had expired, was denied. The Hastings-Bass principle could not be used to change the action of the trustees or to hold that the trustees had taken a certain action when they had, in fact, not done so. In other words, the court will not substitute its own discretion for that of the trustee.
Dishonest assistance and Quistclose trusts
In Twinsectra v Yardley (2002) a solicitor, Mr L, was acting for a client, Mr Y, in the negotiation of a 1m loan from Twinsectra. Mr L did not, however, deal directly with Twinsectra; another firm of solicitors, Sims & Company, received the loan moneys in return for an undertaking that it retained the moneys until used by Mr Y for the sole purpose of acquiring property.
On being given an assurance by Mr Y that the loan would be applied in the acquisition of property, Sims transferred the money to Mr L, who simply paid it out on Mr Y's instructions. 357,720.11 was used by Mr Y for an alternative purpose and the loan was never repaid.
Twinsectra brought an action against all the parties, including an action against Mr L for the 357,720.11, on the grounds that the payment by Sims was a breach of trust and Mr L was liable for dishonestly by assisting that breach in accordance with the decision in Royal Brunei Airlines v Tan (1995).
The trial judge found that no trust was created by the undertaking between Sims and Twinsectra, and that in any case Mr L had not been dishonest. The Court of Appeal reversed this finding. The House of Lords held that Sims did hold the loan money on trust for Twinsectra, but subject to a power to apply it by way of loan to Mr Y in accordance with the undertaking (only Lord Millett went into detail on the concept of a Quistclose trust).
Nevertheless, the House of Lords went on to hold (Lord Millett dissenting) that Mr L had not dishonestly assisted in a breach of trust. Lord Hutton stated that the correct test of dishonesty was a "combined test" (ie both objective and subjective), namely that it is necessary to establish that "the defendant's conduct was dishonest by the ordinary standards of reasonable and honest people, and that he himself realised that by those standards his conduct was dishonest". Lord Millett, on the other hand, preferred an objective standard of dishonesty in which the only subjective elements were those "relating to the defendant's knowledge, experience and attributes".
In September 2002, the Strategy Unit published a review of charities and the not-for-profit sector. The report has made numerous recommendations. Key highlights include:
The extension of charitable objects. The four current heads of charity are proposed to be extended to include health, social and community advancement, the advancement of culture, arts, heritage and amateur sport, the promotion of human rights, conflict resolution and reconciliation and the advancement of environmental protection.
Currently, charities that fall under the three heads of education, religion or relief of poverty do not need to demonstrate public benefit. The report recommends that all charities should in future demonstrate public benefit.
The Charity Commission guidelines on campaigning by charities should be relaxed so that the tone is less cautionary.
The establishment of community interest companies, so that organisations which are not charities can protect their assets from distribution to members or for private benefit.
Charities with an income greater than 1m should be obliged to declare their ethical investment policies.
The remedy of equity
Three recent cases have also highlighted the broad remedial scope of equity. In two cases similar to one another, celebrities have relied on an action for breach of confidence in a bid to prevent information about themselves being revealed by the press or to gain compensation from publications that revealed personal information. In A v B plc (2002) a married professional footballer had obtained an interim injunction against a newspaper that was revealing details of his two extra-marital relationships on the grounds that the duty of confidentiality protected facts concerning sexual relations inside marriage, and so it should be no different for relations conducted outside marriage. It was a breach of confidence for the two women to provide information about their sexual relations with the footballer with a view to publication, and it would be a further breach for the newspaper to publish the details.
The Court of Appeal highlighted the underlying tension between Articles 8 and 10 of the European Convention on Human Rights (ECHR). The Lord Chief Justice Lord Woolf set forth a list of guidelines for judges to follow when deciding such matters in the future. He stated: "A duty of confidence will arise whenever the party knows or ought to know that the other person can reasonably expect his privacy to be protected."
The Court of Appeal set aside the injunction, taking the view that this sort of relationship was at the outer limits of relationships that require the protection of the law, and that to grant an injunction would be an unjustified interference with the freedom of the press.
Similarly, in Campbell v Mirror Group (2002), Naomi Campbell complained that the newspaper had acted in breach of confidence by obtaining and publishing information relating to her treatment at Narcotics Anonymous. The Court of Appeal held that, in perspective, the publication in question was not sufficiently significant as to amount to a breach of the duty of confidence.
Finally, in Campbell v Griffin (2001), the Court of Appeal considered the doctrine of proprietary estoppel. Mr C had lodged with an elderly couple since 1978. From around 1987, the couple made assurances to Mr C that he had a home for life. Mr C used to help with cleaning and maintenance, but his role increasingly became that of a carer. Although the elderly man left Mr C a life interest in the house by a codicil to his will, his wife outlived him and took the property by survivorship. The trial judge denied the claim for an estoppel, finding that, although Mr C had been given assurances, he had not relied upon them to his detriment.
Lord Justice Walker held that Mr C had suffered and accepted detriment in his care of the couple. However, he felt that granting Mr C a life interest in the house would be disproportionate and administratively inconvenient. Relying on the court's wide discretion to satisfy an equity arising under proprietary estoppel, the court granted Mr C a charge of 35,000 over the property, realisable on its sale.
Jane Potter is an associate in the private client department of Allen & Overy