Equity & Trusts - Lecture notes 1-11 PDF

Preview

Summary

EQUITY AND TRUST Exam Notes Part A: Trust..................................................................................................................................... 2 Part A: Establishing a Trust..................................................................................................

Description

EQUITY AND TRUST Exam Notes

Part A: Trust..................................................................................................................................... 2 Part A.1: Establishing a Trust.............................................................................................................. 2 Part A.2: Duties and Powers of Trustees.......................................................................................... 5 Part A.3: Reversal of Exercise of Discretionary Dispositive/Distributive Powers...............7 Part A.4: Relief from Liability.............................................................................................................. 8

Part B: Fiduciary.......................................................................................................................... 10 Part B.1: Fiduciary Duties.................................................................................................................. 10

Part C: Liabilities and Remedies............................................................................................. 14 Part C.1: Personal Liability of Defaulting Trustee...................................................................... 14 Part C.2: Personal Liability of Defaulting Fiduciary................................................................... 20 Part C.3: Personal Liability of Third Parties................................................................................. 21 Part C.4: Proprietary Liability.......................................................................................................... 26

Part A: Trust Part A.1: Establishing a Trust 1. Declaration – Three certainties 1.1. Certainty of subject matter *NB If proportion unidentifiable, trust void or use ‘equally is equity’ Re London Wine Co (Shippers) Ltd [1986] PCC 121  Subject matter of trust must be specifically identified or segregated from bulk Hunter v Moss [1994] 1 WLR 452 (CA)  Trust of part of fungible mass (eg a shareholding) ok as long as the mass itself cleared identified and proportionate share of the mass clear White v Shortall [2006] NSWR 1379 (New South Wales Court of Appeal)  Co-ownership analysis: Entire pool of asset constitute a single indivisible trust. Each beneficiary is co-owner of the entire fund in the proportion identified  Attractive solution: Easy to dispose arguments; fair if facts difficult to ascertain Pearson v Lehman Brothers Finance SA [2011] EWCA Civ 1544, [2012] 2 BCLC 151  Co-ownership analysis endorsed: Need also to consider whether there was intention to impose a single trust over entire assets as common pool 1.2. Certainty of intention 1.2.1. Intend one to hold property for benefit of others with duty and obligation (objective assessment over substance, label inconclusive)  sufficient even settlor does not know trust is the effect Adams v Kensington Vestry (1884) 27 Ch D 394 (CA)  Fact: ‘I give, devise, and bequeath all my real and personal estate and effects to absolute use of my wife in full confidence she will do what is right as to disposal thereof between my children, either in her lifetime or by will after her decease.’  Held: Absolute gift; testator only intend to impose moral obligation to wife which is not enforceable at law Jones v Lock (1865-66) LR 1 Ch App 25 (Lord Chancellor)  Fact: Father produced cheque for £900 payable to himself and said it was gift to baby. He placed it in baby’s hand and said ‘I am going to put it away for him’  Held: No valid gift; dangerous if ‘loose conversations of this sort’ sufficient to declare trust Paul v Constance [1977] 1 WLR 527 (CA)  Fact: Deceased and his mistress won money and put all money to a bank account in sole name of the deceased. Used the money for common expenditure.  Held: Trust intended; deceased confirmed on several occasion that the money was mistress’ as much as his own 1.2.2. Certain about the sort of trust or disposition intended Fixed interest trust  Trust whereby all the interest in the asset would be fixed at the start  Certain who is to get how much Discretionary trusts  Trustee has discretion as to who in class to give and how much, but imperative that he must exercise the power Fiduciary powers

Page 2 of 35

 Holder of power has discretion as to (i) how much and who to give, and (ii) whether to exercise the power at all  Likely to have clause like ‘in default of appointment … shall appoint to beneficiaries in equal shares’  Strongly indicates power as oppose to trust because gift-over clause envisages possibility that appointment would not be made  at that time fiduciary power convert into fixed trust Bare powers  Similar to fiduciary power in having the discretion to distribute the asset to whom and how much, as well as the discretion not to exercise his power at all  Holder of power is not in a fiduciary position (ie not trustee but maybe eg wife) 1.3. Certainty of object 1.3.1. Settlor must clearly define who beneficiaries are (requirement of certainty of objects differs depending on type of disposition involved) Fixed interest trust  Complete list test: Identify all beneficiaries when come to operation (cf creation) Discretionary trusts  Old test: Complete list test [IRC v Broadway Cottages Trust 1]  New test: Sufficient if trustee could tell if any given individual was member of class; not necessary to ascertain everybody in class [McPhail v Doulton 2]  Administrative workability: If class of objects so wide cannot be considered anything like a class, trust considered administratively unworkable and void Fiduciary powers  Same ‘is or is not test’ as discretionary trust Bare powers  So long as group created sufficiently defined (a closed group – a group that actually can be defined), then it can operate  eg Football teammates, yes; good friends, no 2. Constitution and saving failed dispositions Milroy v Lord (1862) 4 GF & J 264, 45 ER 1185 (Court of Queen’s Bench)  General Principle: Three ways to dispose asset; No benevolent construction; Equity will not assist volunteer; Equity will not perfect an imperfect gift 2.1. Straight outright gift 2.1.1. See below 2.3 2.2. Trust by declaration 2.2.1. If settlor is the only trustee, generally no need to take extra steps to vest title in trustee because already with him *Exception: If trust property is land need to transfer equitable interest to beneficiary in writing [CPO s 5]

1 [1955] Ch 20 (CA) 2 [1971] AC 424 (HL) Page 3 of 35

2.2.2. If settlor is one of the trustees, no need for legal title to be vested in all trustees [T Choithram International SA v Pagarani3] T Choithram International SA v Pagarani [2001] 1 WLR 1 (PC)  ‘Although equity will not assist a volunteer, it will not strive officiously to defeat a gift’  avoid over-rigid application of Milroy v Lord  Oral declaration of gift to foundation construed as gift on trust to the foundation, as the foundation has no legal existence thus no transfer could be made to it 2.3. Third party trust 2.3.1. Formality of vesting title Land: Transfer legal title of land must be conveyed by deed [CPO, s 4] Money/Chattels: (I) Intention to gift; (II) Delivery of possession Shares (I) Sign: Donor sign instrument of transfer (II) Delivery: Deliver that signed instrument of transfer to trustee or company (III) Registration by company: Name of trustee added to register of members 2.3.2. Exception 1: Re Rose, aka Rose v IRC *Despite imperfect gift, Equity will perfect it if settlor/donor done everything in his power to transfer title to trustee/ donee Re Rose, aka Rose v IRC [1952] Ch 499 (CA)  Transfer of share accelerated and valid after signing and delivery; requirement of registration dispensed (the outstanding step is out of transferor’s control)  NB Does not apply where there is decisive intervening factor, eg transfer of share requires permission from Treasury [Re Fry] (controversial) 2.3.3. Exception 2: Pennington v Waine *Majority: If unconscionable to recall gift, deem perfected (quasi-estoppel), where unconscionability = promise to gift + detrimental reliance *Minority: Sign + Intention to take immediate effect = Equitable assignment Pennington v Waine [2002] EWCA Civ 227, [2002] 1 WLR 2075  Fact: Aunt told nephew she wanted to give him shares in a company and wanted him to become director, for which he needed to own at least one share. Share transfer form signed but not validly delivered  Majority: Unconscionability lies on nephew always been treated as director – he will be liable if did not have shares because of company regulation  gift accelerated to when become unconscionable (ie valid transfer even not signed)  Minority: Accelerate vesting to signing  Commentary: The exercise of subjective perceptions of justice and good conscience leads to lack of predictability of outcome 2.3.4. Exception 3: Covenant to settle *Valid constitution if not volunteer (ie provided valid consideration) Pullan v Koe [1913] 1 Ch 9 (Ch)  Consideration in equity include marriage consideration: Enforceable by 3 [2001] 1 WLR 1 (PC) Page 4 of 35

husband, wife, legitimate children, any issue of marriage ( cf illegitimate children, relatives) Re Cook’s Settlement Trusts [1965] Ch 902 (Ch)  Future or contingent property can be subject of immediate trust (eg property under will)  ‘equity treats as done that which ought to be done’  However, will not be valid constitution unless and until really get the property; but once receive legal title, immediately hold property on trust for beneficiary Fletcher v Fletcher (1844) 4 Hare 67, 67 ER 564 (Court of Chancery)  Covenant to transfer asset to B for benefit of C, notwithstanding physical asset not vested in B, can construe gift as the intangible promise  Gift vested  Accelerate gift: Gift perfect before actual delivery, ie when promise made  Although not overruled, unlikely to be followed  Would have saved each and every case after covenant made; inconsistent with other stream of cases 3. Legal effects of validly established express trust 3.1. Trust once made is irrevocable: Settlor no longer owns interest in property (legal interest transferred to trustee)  Parties to trust are beneficiaries and trustee; settlor drops out from scene once trust established

Part A.2: Duties and Powers of Trustees 1. Fiduciary duties (see Part B below) 2. Duty to abide by trust terms: Strict liability good faith irrelevant 3. Duty to provide trust information 3.1. Notify beneficiaries of their interests: Trustees under duty to take reasonable steps in all circumstances to inform beneficiaries of trusts favouring them 3.2. Disclose information about trust (eg letter/ memorandum of wishes) 3.2.1. Old proprietary analysis: (I) Objects can only see trust documents if have proprietary rights over them; (II) Fiduciary no duty to give reasons for exercise of discretion [Re Londonderry’s Settlement4] 3.2.2. Confidentiality analysis: Letter of wishes non-disclosable as starting point, unless best interest of all beneficiaries as a whole; cannot upset confidential relationship between trustee and settlor; also cannot reveal reason for trustee’s exercise of discretion [Hartigan Nominees Property Ltd v Rydge5; Re Rabaiotti’s Settlement6] 3.2.3. Current position: While confidentiality still important, focus also put in accountable administration of trust and best interest of beneficiary [Schmidt v Rosewood Trust Ltd7; Breakspear v Ackland8] Schmidt v Rosewood Trust Ltd [2003] UKPC 26, [2003] 2 AC 709 4 [1965] Ch 918 (CA) 5 (1992) 29 NSWR 405 6 [2000] WTLR 953 (Royal Court (Jersey)) 7 [2003] UKPC 26, [2003] 2 AC 709

8 [2008] EWHC 220 (Ch), [2009] Ch 32 Page 5 of 35

 Beneficiary’s right to seek disclosure is inherent jurisdiction to supervise and intervene trust administration; does not depend on proprietary right  Balancing approach between avenue for beneficiaries to investigate possible breach of trust vs confidentiality of trustee  Relevant factors: (I) Strength of beneficiaries’ claim, (II) Document to disclose and how (complete or redacted), (III) What safeguard to limit use of document  Strength of claim: Realistic possibility of receiving bounty from trust fund; Transmissible interest (ie given a specific part of the trust asset) vs Entitlement subject to wide discretion; not determinative but important consideration  Contingent interest probably weakest (object to trust or fiduciary power, subject to wide discretion of trustee), but not impossible to seek disclose; ultimately depend on court’s balancing exercise of judicial discretion *‘If only have theoretical possibility, probably would not have any relief’  Relevance of shelf trust: Although no direct evidence but probably that ‘beneficiary’ only nominal beneficiary  mention whether trustee can remove ‘beneficiary’ as object  point to likelihood of it receiving trust fund ( NB No concept of dummy beneficiary at law; all the same right as normal beneficiary)  Safeguard: Class of document to be disclosed; Complete or redacted disclosure; Undertakings to court; Arrangements for professional inspection etc Breakspear v Ackland [2008] EWHC 220 (Ch), [2009] Ch 32  More against disclosure than Schmidt v Rosewood Trust Ltd  Starting point is letter confidential so need not disclose unless in trustees’ view required for sound administration of trust and in interest of beneficiaries  Trustee can choose not to give reason for refusing disclosure; beneficiary needs to prove lack fairness or dishonesty on part of trustee in exercising discretion  Whether final distribution? Especially in cases where trustee ask court to sanction distribution plan (eg in Breakspear), it would only be fair to beneficiaries if they also know reason behind court’s sanction  court will be more inclined for disclosure ( cf If only interim distribution less likely) 3.2.4. Further discussion: Against disclosure: Letter should be inherently confidential: If not meant to be secret, settlor would have communicated intention in trust document For disclosure: After creation of trust settlor drops out of picture and no right to impose confidentiality requirement and fetter trust administration 3.3. Who are you advising? 3.3.1. Rejected beneficiary: ‘X may take the matter before the court for resolution’ 3.3.2. Fellow beneficiary objecting disclosure: ‘… court to restrain disclosure’ 3.3.3. Trustee: ‘… and surrender their discretion to the court’ 4. Duty of reasonable prudence in managerial/administrative functions 4.1. The flow: (I) Standard not satisfied; (II) Trustee would have acted differently if had complied with relevant standard (causation); (III) Loss arose from breach 4.2. Common law duty

Page 6 of 35

4.2.1. Amateur or gratuitous trustee: As an ordinary prudent person of business would exercise in the management of his or her own affairs [Speight v Gaunt9]  purely objective test 4.2.2. Paid professional trustee: The standard that such a professional would be expected to exhibit; take into account what specialised skill he has or holds out to have for remuneration [Bartlett v Barclays Bank Trust Co Ltd10] 4.2.3. When investing trust property: As ordinary prudent person when acting for benefit of other people for whom he or she ‘felt morally bound to provide’ [Learoyd v Whiteley11] 4.3. Statutory duty [Trustee Ordinance, s 3A] 4.3.1. The standard: Reasonable in the circumstances (objective); standard heightened if possess special knowledge and experience (subjective); Corporate or professional trustee expected to exercise special knowledge reasonably expected of him acting in such capacity *Vincent Lung: Statute only to codify standards, not to change their substance 4.3.2. Statutory duty may be excluded in instrument creating the trust between settlor and trustee  common law duty kicks in 4.3.3. Statutory duty applies to trusts created before 1 Dec 2013 unless excluded by deed (cf instrument creating the trust)

Part A.3: Reversal of Exercise of Discretionary Dispositive/Distributive Powers 1. The rule in Hastings-Bass and rule in Pitt v Holt 1.1. Old Rule in Hastings-Bass: Court would not interfere with trustee’s exercise of discretion unless clear he would have acted differently had he taken into account only relevant considerations [Re Hastings-Bass (Deceased), aka Hastings v IRC12] 1.2. Dictum given positive formulation and taken out of context in a series of cases seeking to escape unforeseen tax consequences (eg Sieff v Fox 13, Abacus Trust v Barr)  Trustees allowed to escape consequences of their actions too easily 1.3. New rule in Pitt v Holt; Futter v Futter14: Four-step test to limit scope Rule in Pitt v Holt; Futter v Futter (I) Ascertain whether has acted (i) beyond scope of power  excessive execution; or (ii) within power, but failed to consider all relevant matters (including fiscal considerations)  inadequate deliberation *If excessive execution: Void *If inadequate deliberation: Voidable if following requirements satisfied 9 (1883) 22 Ch D 828 (CA) 10 [1980] Ch 515 (Ch) 11 (1886) 33 Ch D 347 (CA) 12 [1975] Ch 25 (CA) 13 [2005] EWHC 1312 (Ch), [2005] 1 WLR 3811 14 [2013] UKSC 26, [2013] 2 AC 108 Page 7 of 35

(II) Whether amount to breach of duty to take into account all relevant considerations in good faith (distinct from any other trustee’s duties) *No test as to how serious breach need to be, but no breach if trustee relied on professional advice from apparently competent source *NB Correctness of advice irrelevant (III)Whether trustee would or might have acted differently had he been aware of the adverse consequences *Discrepancy between might and would not too much a question; most trustees would have acted differently if know they had not consider all relevant matters or considered irrelevant matters  easy hurdle to pass (IV)Equitable bars to rescission *Eg Acquiescence; Innocent third party right prejudiced; Lapse of time; Lack of clean hand; Impossibility to restore to original position 2. Doctrine of mistake 2.1. Old test: Mistake affects legal effect of transaction and not just consequence 2.2. Reformulated in Pitt v Holt; Futter v Futter 15: Exercise of discretion affected by a (i) causative (ii) mistake (iii) of sufficient gravity, so that it is unconscionable to leave the mistake uncorrected (ie rescission) Doctrine of mistake (I) Causation between exercise of power and the consequences (II) Mistake (cf forgetfulness, ignorance and inadvertent misprediction) *However, sometimes ignorance of legal/ factual matter may lead to false, positive belief or assumption which the law will recognise as mistake (III) Sufficient gravity to make it unjust or unconscionable to be left uncorrected *Relevant considerations: (I) Whether tax avoidance scheme abusive or artificial; (II) Whether trustee or beneficiary has alternative claim against others eg the expert or advisor; (III) Equitable bars to rescission *Abusive or artificial: No need illegal, not exercise in good citizenship permissible, need against social policy (eg unfair burden on taxpayer who do not avoid artificially)

Part A.4: Relief from Liability 1. Beneficiaries’ prior consent or subsequent acquiescence or release 2. Exemption clauses 2.1. Common law control [Armitage v Nurse16]: Two-step test *NB Courts reluctant to upset contractual arrangements; arguably Armitage v Nurse only apply to non-commercial trust [Citibank NA v MBIA Assurance SA17] Common law control (I) Construe the exemption clause *For example: ‘Actual fraud’ is not deceit or equitable fraud eg undue influence; only connote ‘dishonestly’, ie intend to pursue course of action either knowing 15 [2013] UKSC 26, [2013] 2 AC 108 16 [1998] Ch 241 (CA) 17 [2007] EWCA Civ 11, [2007] 1 All ER (Comm) 475 Page 8 of 35

contrary to beneficiaries’ best interests or recklessly indifferent to interests of beneficiaries, regardless whether trustee intended to benefit from conduct *Test for dishonesty: Subjective [Armitage v Nurse18]; Objective [Walker v Stones19 ]  Vincent Lung: Either way the cognitive process is same (II) Whether touch on irreducible core of obligations *That is, duty to act in good faith for the benefit of the beneficiaries *Can exempt: Liability from (i) ...