In search of perfection the Re Rose rule rationale PDF

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Conveyancer and Property Lawyer 2012

Case Comment In search of perfection: the Re Rose rule rationale Peter Luxton Subject: Equity. Other related subjects: Company law. Trusts Keywords: Defective execution; Directors; Equitable principles; Imperfect gifts; Share transfers Cases: Curtis v Pulbrook [2011] EWHC 167 (Ch); [2011] 1 B.C.L.C. 638 (Ch D) Pennington v Waine (No.1) [2002] EWCA Civ 227; [2002] 1 W.L.R. 2075 (CA (Civ Div)) Rose (Deceased), Re [1952] Ch. 499 (CA) *CONVPL 70 In Curtis v Pulbrook, 1 the court had to decide whether purported gifts of shares were perfect in equity. Briggs J.'s judgment is interesting both because of his Lordship's explanation of Pennington v Waine 2 and also because of his concern about whether the rules determining when equity will perfect an imperfect gift of shares serve any sound policy objective.

The facts The case arose out of a complex background of disputes and litigation amongst family members. The defendant, Pulbrook, had for many years been a director of, and substantial shareholder in, Farnham Royal Nurseries Ltd (FRN), and he was a trustee of three family settlements. In 2009, the beneficiaries were awarded equitable compensation against him for breach of trust,3 and they obtained an interim charging order over the 445 shares in FRN that they believed to be registered in his name and to be beneficially owned by him. Pulbrook, however, claimed that he had in 2007 given 300 of his shares in FRN to his wife, Anucha, and 14 such shares to his daughter, Alice, so that these shares could not be the subject of a final charging order.

The judgment The first issue was whether effective gifts of the shares had been made at law. Pulbrook had purported to transfer the legal title into the names of his wife and daughter respectively. However, the power to issue share certificates and to record the purported transferees as registered holders of the shares was vested in the board of directors, not in Pulbrook alone. Although the board could have delegated that power to him as managing director, it had not done so. Briggs J. therefore held the registrations void. The next issue was whether the attempted gifts, whilst ineffective at law, were perfect in equity. Briggs J. held that they were not. He referred to the three routes identified by Arden L.J. in Pennington 4 by which, “in the context of a defective voluntary transfer of shares”, the court might avoid the “rigorous application” of *CONVPL 71 the principle that equity will not perfect an imperfect gift.5 The first, according to Arden L.J., is where the donor has done everything necessary to be done by him so that the donee can complete the title without further assistance from the donor, as explained in Re Rose. 6 This had not been satisfied in the present case because, although Pulbrook had deposited his share certificates with the company's solicitors, he had not left the share transfer forms either with them or with his wife or daughter.7 The second, her Ladyship explained, is where there is detrimental reliance by the donee that may bind the conscience of the donor to justify the imposition of a constructive trust. In the present case, there was no evidence of any reliance (let alone detrimental reliance) by either Anucha or Alice. The third, Arden L.J. said, is where the court is able, through a benevolent construction, to construe a purported gift (or intended transfer to trustees) as a declaration by the donor (or settlor) of himself as trustee, as in T Choithram International SA v Pagarani. 8 In the present case, no such construction was possible, as it was clear that Pulbrook had not intended to declare himself trustee: indeed, he had done “his incompetent best” 9 to transfer both legal and beneficial title to the shares.

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As Briggs J. held that the purported gifts were imperfect, he did not need to determine the last issue: namely whether they could have been set aside under the insolvency legislation. He stated, however, that, had the gifts been perfect, he would have ordered that they be set aside,10 as he was satisfied that Pulbrook had given the shares with the substantial purpose of putting them beyond the claimants' reach.

Comment The first point of interest is that Briggs J. treated Pennington, 11 “[o]n its facts”, as a case of detrimental reliance, in that the donor's nephew had agreed to become a company director on the assumption that he had received an effective gift of qualifying shares.12 His Lordship was thereby able to fit that much criticised13 decision of the Court of Appeal within a recognised exception to the maxim that equity will not assist a volunteer, namely, proprietary estoppel. In this light, Arden L.J.'s “unconscionability” test14 is not a new (and potentially broad) exception to that maxim. This is a desirable limitation: “unconscionability” underlies (and may be an important ingredient of) many equitable doctrines, including estoppel and *CONVPL 72 the constructive trust, but it is too uncertain in meaning to be the sole criterion for equitable intervention.15 The other point of interest is that, whilst applying established principles, Briggs J. noted that he reached his conclusion: “[W]ithout any great comfort that the existing rules about the circumstances when equity will and will not perfect an apparently imperfect gift of shares serve any clearly identifiable or rational policy objective.”16 A similar concern had been expressed by Arden L.J. in Pennington. 17 Briggs J. said18 that, as there was no lack of intention on Pulbrook's part, this was not a case where Arden L.J.'s mention in Pennington 19 of a policy of permitting donors to change their minds had any application.20 It is important to clarify what is meant by an “imperfect gift”. Arden L.J. in Pennington 21 would treat a gift as imperfect if it is not effective (or not yet effective) at law; but a gift can be perfect in equity before legal title is transferred. The rule in Re Rose 22 is not an exception to the maxim “equity will not assist a volunteer” because the assistance of equity is needed only if an intended gift is imperfect in equity.23 As the donor in that case had done all that was required of him in equity to make the gift perfect (by putting the donee into the position of being able to take steps to get in the legal title), the donor became, from the moment he handed the documents to the donee, a trustee for the donee.24 This is compatible with Turner L.J.'s well-known observation in Milroy v Lord 25 that equity will not construe an imperfect transfer as a declaration of trust because, as the donor in Re Rose 26 had done everything he needed to do, the transfer was, in equity, already perfect.27 The search for a rationale for equity's involvement is therefore not principally concerned with explaining why there are exceptions to the maxim that equity will not perfect an imperfect gift: the basis for proprietary estoppel is clear, and the reason why equity will perfect an imperfect donatio mortis causa is not hard to find.28 Instead, the search is to explain why equity sometimes treats a gift as perfect *CONVPL 73 before it is complete at law. Why, in other words, does equity here not simply follow the law? The donor in Re Rose 29 intended to give shares to his wife, and to create a trust of other shares by transferring them to trustees in trust for beneficiaries who were volunteers. He completed share transfer forms and handed them with the appropriate share certificates to his wife and to the trustees respectively. The Court of Appeal held the gift perfect in equity and the trust completed constituted, in each case from the moment the respective documents were handed over. The court, however, chose to examine the issue solely with regard to the gift to the wife, treating a decision on this as one that would “necessarily involve a similar decision on the other”.30 From the delivery of the documents to his wife, the donor became a trustee for her “for the purpose of giving effect to the transfer”.31 What can for convenience be called “the Re Rose principle” is that a gift is perfect if the donor has put the donee into the position of being able to get in the legal title without the donor's further assistance. Though not expressed in Re Rose, 32 the rationale for this principle can be deduced: it is that the perfection of a gift in equity, or the complete constitution of a trust, must depend solely on the act and will of the donor or settlor.33 There is three-fold support for this rationale. First, it indicates equity's concern with relativity of property rights: equity determines, not who has a

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title good against the world, but who has the better title (in the case of a gift) as between donor and donee. Where, as in Re Rose, 34 the donor has done everything necessary to be done by him, equity considers the donee to have the better title, and so treats the gift as already perfect. Re Rose 35 is not a “gloss” on Milroy, 36 but an illustration of an approach fundamental to the nature of equity.37 Secondly, the Re Rose 38 principle provides for certainty of property rights from the outset. Were equity to follow the law, a donor in the position of the transferor in that case, before knowing whether he had thereby passed a beneficial (as well as a legal) interest, would have to wait (potentially indefinitely) for an event (registration) beyond his power. The principle precludes a gift's being perfected (or a trust's being completely constituted) by a fluke, such as the transferee's acquiring the property in another capacity outside the donor's or settlor's control.39 It similarly prevents subsequent fortuitous events from causing a gift to fail, such as the death of either donor or donee before an application for registration has been *CONVPL 74 lodged, an intended transferee's losing the share certificate or share transfer form or simply failing to apply for registration,40 a company's directors' exercising a discretion to decline registration, or a grantee's disclaiming a conveyance on trust.41 Thirdly, the principle is consonant with what most donors would expect,42 namely, that a gift of shares is made when the donor has put the donee into the position of being able to apply for registration. It must be admitted that the inferred rationale cannot account for all the cases. Re Fry 43 may perhaps be treated as turning either on the donor's having still more to do (by executing confirmatory transfers),44 or on the effect of the Defence Regulations having been to prevent equitable as well as legal title from passing without Treasury consent. The rule in Strong v Bird 45 can be justified so far as it applies to executors (these being selected by the donor-testator), but its capricious extension to administrators cannot be.46 The alternative ratio in Re Ralli's Will Trusts 47 (that the complete constitution of the trust turned on the chance that the trustee of a marriage settlement also happened to be the executor of a will trust) is also at variance with the rationale.48 Some of these cases need to be reconsidered; and, given that they turn on serendipity, that would be no bad thing. Equity delights not in whimsy.

Conclusion The decision in Curtis 49 is consistent with established principles, and Briggs J. dealt effectively with the unsatisfactory reasoning in Pennington. 50 However, his Lordship's admission in Curtis 51 that, but for the application of insolvency law, he “might have been straining to find a way in which to give effect to the attempted gifts”, could indicate a more general judicial readiness to depart from those principles when the opportunity arises. In Pennington, 52 Arden L.J.'s attempt to find a rationale for equity's involvement in this area concentrated on a donor's intention at the expense of a donor's acts 53 ; and, in Curtis, 54 Briggs J. was similarly attracted to treating perfection as dependent on intention. This approach risks *CONVPL 75 uncertainty. An intention (even a fervent desire) to give, no matter how clearly expressed and repeated, is not enough; the donor must also do everything “necessary to be done” as stated in Milroy 55 and applied by the Court of Appeal in Re Rose. 56 Recognising the judgments in Pennington 57 to be less than persuasive is no reason to reject the unspoken rationale that underlies the leading cases on perfect gifts and voluntary transfers to trustees. Peter Luxton 58 Conv. 2012, 1, 70-75

1.

Curtis v Pulbrook [2011] EWHC 167 (Ch); [2011] 1 B.C.L.C. 638.

2.

Pennington v Waine (No.1) [2002] EWCA Civ 227; [2002] 1 W.L.R. 2075.

3.

Curtis v Pulbrook [2009] EWHC 782 (Ch); [2011] W.T.L.R. 1503; also [2009] EWHC 1370 (Ch) (costs order).

4.

Pennington [2002] EWCA Civ 227; [2002] 1 W.L.R. 2075 at [55]-[61].

5.

Curtis [2011] EWHC 167 (Ch) at [43].

6.

Re Rose (Deceased) [1952] Ch. 499; [1952] 1 All E.R. 1217 CA.

7.

See Zeital v Kaye [2010] EWCA Civ 159; [2010] 2 B.C.L.C. 1 (noted G. Griffiths, “ Zeital v Kaye: doing everything

Page4 necessary--a recent manifestation of an ongoing issue” [2010] 74 Conv. 321), where the donor had handed the donee the completed share transfer form, but not the share certificate: the purported gift was similarly held imperfect. 8.

T Choithram International SA v Pagarani [2001] 1 W.L.R. 1; [2001] 2 All E.R. 492 PC; contrast Shah v Shah [2010] EWCA Civ 1408 at [20], where no benevolent construction was needed as it was clear that the shareholder intended to declare himself trustee.

9.

Curtis [2011] EWHC 167 (Ch) at [44].

10.

Under s.423 of the Insolvency Act 1986.

11.

Pennington [2002] EWCA Civ 227; [2002] 1 W.L.R. 2075.

12.

Curtis [2011] EWHC 167 (Ch) at [43].

13.

Notably by M. Halliwell, “Perfecting imperfect gifts and trusts: have we reached the end of the Chancellor's foot?” [2003] 67 Conv. 192.

14.

Pennington [2002] EWCA Civ 227; [2002] 1 W.L.R. 2075 at [63]-[66].

15.

The point is well made by Halliwell, “Perfecting imperfect gifts and trusts: have we reached the end of the Chancellor's foot?” [2003] 67 Conv. 192; see also Lord Scott's speech in Cobbe v Yeoman's Row Management Ltd [2008] UKHL 55; [2008] 1 W.L.R. 1752 at [16]-[17]. See the difficulties caused by the suggestion in BCCI (Overseas) Ltd v Akindele [2001] Ch. 437; [2000] 3 W.L.R. 1423 CA (Civ Div) that “unconscionability” should be the test for the personal liability of a third party who receives property in breach of trust.

16.

Curtis [2011] EWHC 167 (Ch) at [47].

17.

Pennington [2002] EWCA Civ 227; [2002] 1 W.L.R. 2075 at [62]: “The cases to which counsel have referred us do not reveal any, or any consistent single policy consideration behind the rule that the court will not perfect an imperfect gift.”

18.

Curtis v Pulbrook [2011] EWHC 167 (Ch) at [47].

19.

Pennington [2002] EWCA Civ 227; [2002] 1 W.L.R. 2075.

20.

Pennington [2002] EWCA Civ 227; [2002] 1 W.L.R. 2075 at [62]: “The objectives of the rule obviously include ensuring that donors do not by acting voluntarily act unwisely in a way that they may subsequently regret.”

21.

Pennington [2002] EWCA Civ 227; [2002] 1 W.L.R. 2075.

22.

Re Rose (Deceased) [1952] Ch. 499; [1952] 1 All E.R. 1217 CA.

23.

See Mascall v Mascall (1985) 50 P. & C.R. 119 at [126]; (1984) 81 L.S.G. 2218. The attempted gifts in Milroy v Lord 45 E.R. 1185; (1862) 4 De G.F. & J. 264 and in Richards v Delbridge (1874) L.R. 18 Eq. 11 were imperfect because the donor in each case had used the wrong method of transfer.

24.

Re Rose (Deceased) [1952] Ch. 499 at 510; [1952] 1 All E.R. 1217 CA.

25.

Milroy 45 E.R. 1185; (1862) 4 De G.F. & J. 264 at 274-275.

26.

Re Rose (Deceased) [1952] Ch. 499; [1952] 1 All E.R. 1217 CA.

27.

Re Rose (Deceased) [1952] Ch. 499 at 510-511; [1952] 1 All E.R. 1217 CA per Evershed M.R.

28.

It seems to rest on equity's compassion for donors contemplating death. Equity's assistance (to compel the donor's personal representatives to transfer title) is not needed if the donee's title is perfect at the donor's death (as it will be, for instance, if the subject-matter is a chattel that has been delivered to the donee). If the donee's title is otherwise imperfect, the doctrine is an exception to the maxim, e.g. as in Birch v Treasury Solicitor [1951] Ch. 298; [1950] 2 All E.R. 1198 CA (chose in action), and Sen v Headley [1991] Ch. 425; [1991] 2 W.L.R. 1308 CA (Civ Div) (land).

29.

Re Rose (Deceased) [1952] Ch. 499; [1952] 1 All E.R. 1217 CA.

30.

Re Rose (Deceased) [1952] Ch. 499 at 506; [1952] 1 All E.R. 1217 CA per Evershed M.R.

31.

Re Rose (Deceased) [1952] Ch. 499 at 510; [1952] 1 All E.R. 1217 CA per Evershed M.R.

32.

Re Rose (Deceased) [1952] Ch. 499; [1952] 1 All E.R. 1217 CA.

33.

If an intending donor hands the relevant documents to his agent, the acts of the agent are those of the donor; thus the inaction of the auditor, Pennington, in Pennington v Waine (No.1) [2002] EWCA Civ 227; [2002] 1 W.L.R. 2075, in merely putting the share transfer form into his desk, was the inaction of his principal, the intending donor.

34.

Re Rose (Deceased) [1952] Ch. 499; [1952] 1 All E.R. 1217 CA.

Page5 35.

Re Rose (Deceased) [1952] Ch. 499; [1952] 1 All E.R. 1217 CA.

36.

Milroy 45 E.R. 1185; (1862) 4 De G.F. & J. 264.

37.

For an earlier example, see Holt v Heatherfield Trust Ltd [1942] 2 K.B. 1 KBD, where it was held that a voluntary assignment of a legal chose in action made in accordance with the requirements of s.136 LPA 1925, other than the giving of notice to the debtor, was perfect in equity as between assignor and assignee (since notice could be given by someone other than the assignor).

38.

Re Rose (Deceased) [1952] Ch. 499; [1952] 1 All E.R. 1217 CA.

39.

Re Brooks Settlement Trusts [1939] Ch. 993 Ch D.

40.

A settlor may intend that the transferee should become a trustee for the beneficiary only when an application for registration has been made, and should until such time be the settlor's agent for the purpose of applying for registration. The trust would be then be completely constituted only if and when such application had been made; until such time, the settlor, as principal, could revoke his original instructions and demand that the agent return the documents to him. In these circumstances, the complete constitution of the trust would similarly lie within the act and will of the settlor. This also precludes the intended transferee's having the opportunity to commit fraud that would arise were he able to choose whether to apply for registration or not; see the argument of Hornby in the context of trusts of voluntary covenants: (1962) 78 L.Q.R. 228 (in response to Elliott (1960) 76 L.Q.R. 100).

41.

Mallott v Wilson [1903] 2 Ch. 494 Ch D.

42.

This is Evershed M.R.'s “common sense” argument in Re Rose (Deceased) [1952] Ch. 499 at 507; [1952] 1 All E.R. 1217 CA.

43.

Re Fry [1946] Ch. 312 Ch D.

44.

See Jenkins J.'s observations in Re Rose [1949] Ch. 78 at 89; [1948] 2 All E.R. 971 Ch D.

45.

Strong v Bird (1874) L.R. 18 Eq. 315.

46.

Re James [1949] Ch. 449, rightly criticised by Walton J. in Re Gonin [1979] Ch. 16 at 35; [1977] 3 W.L.R. 379 Ch D, as turning Strong (1874) L.R. 18 Eq. 315 into “somet...