Notes on Pennington v Waine (for release after seminar) PDF

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Notes on Pennington v Waine (for release after seminar)...

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Notes on Pennington v Waine1 [2002] EWCA Civ 2272 The appeal was by William and Stephen Crampton, who were presumably interested in the shares as residuary beneficiaries of Ada’s will (they were the brothers of Harold, see Hurst v Crampton at p315e).

References below are to paragraph numbers. Facts The facts are given by Arden LJ at 1-9. Legal Issues The case raised the problem of an incomplete gift. The rule in Milroy v Lord would seem applicable, and given the failure by Pennington to hand over the share transfer form to Harold or any other representative of the company the exception in Re Rose and Re Rose could not apply.

1. The judgment of Arden LJ The majority judgment of the Court of Appeal was delivered by Arden LJ. Both Clarke LJ and Schiemann LJ indicated their agreement with Arden LJ (Clarke LJ at 77, 111, and 117, Schiemann LJ at 118) although Clarke LJ also relied upon an alternative ground for his decision. Arden LJ upheld the judge’s decision on two alternative grounds: i. “a principle which animates the answer to the question whether an apparently incomplete gift is to be treated as completely constituted is that a donor will not be permitted to change his or her mind if it would be unconscionable, in the eyes of equity, vis a vis the donee to do so,” [at 64]. The factors listed, at 64, for holding that it would have been unconscionable for Ada to change her mind. Finally, at 47, we have “… if the test is one of unconscionability: (see Choithram above) it is amply satisfied in this case. It would clearly be unconscionable for Ada to revoke the gift in her life time. It was not revoked and is therefore, valid.” Note: What is not demonstrated is any detriment suffered by Harold, or any misrepresentation upon which he relied. He relied upon an assurance that he would receive a gift of 400 shares, that assurance was made in good faith. The representation that it was not necessary for him to do 1 This note is intended to explain and analysis the possible impact of Pennington v Waine. It is not intended to be a substitute for the reading the judgment. Indeed, these notes cannot be understood fully if one has not read the judgments. Consequently this document has been released after the relevant seminar.

2 Adapted from notes by G Ferris and used with his kind permission Page 1 of 3

anything in order to perfect the transfer was true, Harold could not perfect the transfer of the shares.3 Whilst Harold subsequently acted as a director of the company it was neither held that he did this in reliance upon the gift, nor that so acting was detrimental to him.

ii. “the principle that, where a gift is imperfectly constituted, the court will not hold it to operate as a declaration of trust, does not prevent the court from construing it to be a trust if that interpretation is permissible as a matter of construction, which may be a benevolent construction.” [At 61 applied at 67]. Neither of these grounds is inherently limited to shares, or other intangible property, in its formulation and potential application.

2. Clarke LJ’s alternative ground upon transfers of shares. The alternative reasoning of Clarke LJ would not seem to affect property other than shares. Clarke LJ simply construes the standard share transfer form as effecting an immediate equitable assignment of the transferor’s beneficial interest in the shares transferred: “On the face of the form, by her signature Ada thereby transferred 400 shares in the company to Harold.” At 80.

“As I see it, a potentially important question in this appeal is whether the execution of a stock transfer form can have effect as an equitable assignment …” [at 81]. “It seems to me that the signature of a donor on a stock transfer form in the statutory form used here is or should be capable, without more, of amounting to an equitable assignment. However, it does not follow that it will necessarily operate as an equitable assignment.” [At 94]. “In my opinion Ada executed a valid equitable assignment in favour of Harold by signing the form in circumstances in which she had no intention of revoking it in the future.” [At 116]. Therefore, if Clarke LJ is correct all transfers of shares by use of the standard form share transfer form operate immediately upon execution as equitable assignments unless there is some contrary intention present to prevent this occurring. All voluntary transferors of shares intend to create trusts of the shares upon the execution of the share transfer form. This follows from the words of the form being present words of transfer.

3 Except, possibly, in his capacity of Company secretary. Upon receipt of the share transfer form Harold would have been under a duty to alter the register of members, if (which was not the case) the share transfer had complied with the Company’s articles.

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3. The use made by Arden LJ of T. Choithram International SA v Pagarani [2001] 2 All ER 492. Both of the grounds relied upon by Arden LJ rest upon the speech of Lord Browne-Wilkinson in Choithram. Choithram a. Benevolent construction. The second principle (benevolent construction) was used in Choithram, as Arden LJ herself identified at 60-61, to give effect to the true intentions of T. C. Pagarani. To do this it was necessary to look through the clumsy and inappropriate expressions actually used by T. C. Pagarani and uncover this true intention. It was in this context equity was characterised as being willing to extend its aid rather than striving officiously to defeat a gift.4 The Privy Council discerned the true intention by viewing the circumstances, and the words used by T. C. Pagarani (both oral and in the documents he executed), as a whole. Whilst the correctness of the view of the facts in Choithram taken by the Privy Council may be contested, the case did not lay down any general test of unconscionability of the donor in this context. It might fairly be observed that in Choithram the intention to create a trust was undoubted, it was the method of constitution deployed that caused difficulty; in Pennington this was not the case, Ada clearly never intended to create a trust. b. Unconscionable conduct in Choithram The question of unconscionable conduct only arose after the declaration of trust in Choithram. At this point T.C. Pagarani held trust property as a sole trustee, but the intention was that the trust property be vested in several trustees. Therefore, in Choithram, a declaration of trust had been made by the donor with the intention that the donor would be one of a number of trustees and: 5 “his conscience is affected and it would be unconscionable and contrary to the principles of equity to allow such a donor to resile from his gift. In their Lordship’s view it is impossible to believe that he could validly deny that he was trustee for the purposes of the foundation in the light of all the steps that he had taken to assert that position and to assert his trusteeship. In their Lordship’s judgment in the absence of special factors where one out of a larger body of trustees had the trust property vested in him he is bound by the trust and must give effect to it by transferring the trust property into the name of all the trustees.” In this passage “gift” clearly means “declaration of trust”. If we state this result in general terms the case decided that where a trust is partially constituted, due to the trust property being vested in one of several trustees, equity will require the trustee in whom the property is vested to fully constitute the trust.

4 [2001] 2 All ER 492 at 501e. 5 [2001] 2 All ER 492 at 502b. Page 3 of 3...