EQUITY
Introduction
This essay is going to address the practical problems in the application of s53(1)(c)[E&T1] of the Law of the Property Act 1925. This states that a disposition of an equitable interest or trust subsisting at the time of the disposition, must be in writing signed by the person disposing of the same, or by his agent thereunto lawfully authorised in writing or by will[1][E&T2] . [E&T3]
This section applies whenever the beneficiary of a trust attempts to transfer his equitable interests in the property to someone else. However if the trust property is not land, in such circumstances there is no need for the declaration to be made in writing under this section. A purely oral declaration of the sub trust will be sufficient[2].Problems have occurred in the fact that there was no definition of what a disposition was, and the fact that the use of an oral declaration has been used to sidestep the legal requirement of ad valorem stamp duty which applies to a written ‘disposition’. [MS7]
Definition of a disposition
One major problem is that there was no statutory definition of “disposition” provided in the Law of Property Act 1925. This was considered and defined in Grey v Inland Revenue Commissioner [3]. On February 1, 1955, Mr Hunter transferred to the appellants, as his nominees, 18,000 ordinary £1 shares in a company to be held on bare trust. On February 18, 1955, Mr Hunter orally and irrevocably directed the appellants thenceforth to hold the shares transferred to them on February 1, under six trusts 3,000 shares each in favour of his grandchildren, to the intent that such direction should result in the entire exclusion of Mr Hunter from all future right, title and benefit to or in the shares and the income thereof. It was on March 25, 1955, the appellants executed a declaration of trust to that effect. [MS8] The question therefore arose whether the oral direction given by Mr Hunter of the 18th February was effective in the transfer of the shares. The Inland Revenue argued that this was not the case and that without writing the oral direction is void and there was no transfer of equitable interest in the shares. The appellants however argued that there had not been a ‘disposition’ within the meaning of s53(1)(c), and therefore that no written instrument would be required. In this instance the House of Lords held that ‘disposition’ it should be given its natural meaning, and as such that the oral direction had been a disposition and was infective [MS10] to transfer the equitable interests as it was in writing as specified in s3(1)(c), a valid disposition therefore only occurred on the later written declaration of trust[on the 25th March, which therefore attracted ad valorem stamp duty.
The problem arising with Section 53 (1)(c) therefore is the argument that it has not been fulfilled to its statutory purpose through case law. Lord Upjohn noted in Vandervell v IRC[4] that “the object of this section, as was the object of the old Statute of Frauds, is to prevent hidden oral transactions in equitable interests in fraud of those truly entitled, and making it difficult, if not impossible, for the trustees to ascertain who are in truth his beneficiaries.” If [MS14] this is the case, then surely, it has gone beyond its statutory powers. [MS15] The case of Grey v IRC[5] is a good example. Grey was not acting in a fraudulent manner in this case. Although he was liable to pay ad valorem stamp duty, the key issue is whether this was a necessary decision by the House of Lords. I believe, along with many other academics that this isn’t Green[6] notes that the House of Lords, in the reasoning for their decision in Grey, do not mention the policy behind the creation of the statute. He also notes that the decision in Grey does not accord with the mischief that the statute was supposed to protect. Furthermore, and more interestingly, there is no evidence to support their argument that Grey’s procedure was a ‘hidden oral transaction’[MS19] . This brings about the conclusion as to whether their reasoning was to impose tax on Grey, whether it was fraudulent or not. If this was the case, this would be a clear misuse of the Court’s powers, and a misuse of the Section. [7] This is further supported by the fact that in Grey there was no question of a hidden oral transaction as all parties where aware of the proposed change of ownership. [MS20]
The question of whether a declaration is a ‘disposition’ depends on whether the beneficiary gives away the totality of his interest or not. If he surrenders his equitable interest, thus making himself little more than a nominal owner of the interest, the view is that s.53(1)(c) should apply.
If, however, the equitable owner appears to assume an active role as trustee of his own equitable interest, it is suggested that this is the creation of a sub-trust and should be regarded as the declaration of a trust rather than the disposition of an equitable interest, so that s.53(1)(c) does not apply. As in Re Paradise Motor Co Ltd[8].
There is however exceptions to this rule which can lead to problematic application of s53(1)(c)[9]. These are beneficiary of a bare trust directs the trustees to transfer the legal title, a specifically enforceable contract for the transfer of the subsisting equitable transfer ( Oughtred v IRC, Neville v Wilson) and the extinction of a subsisting equitable interest under a resulting trust (Vandervell Trust No 2). [MS21] In these instances the courts have held that writing was not required for the transfer to occur, however it is still generally held that tax remained payable[10] (textbook)[MS22]
Exceptions
These are beneficiary of a bare trust directs the trustees to transfer the legal title.[MS23] In this instance the leading case is Vandervell v Inland Revenue Commissioner[11]. In this case the House of Lords held that s.53(1)(c) had no application to this [MS24] case, where a beneficial owner, solely entitled, directed his bare trustees with regard to the whole interest – the legal and equitable estate.
The facts of the case are Mr Vandervell (V) was the sole beneficiary of a bare trust of shares within his company Vandervell Products Ltd of which Vandervells Trustees Ltd was the trustee. V decided to make a gift of £150,000 to the Royal College of Surgeons to found a chair of pharmacology, however at this time surtax rates where extreamly high and there was no tax relief on gifts to a charity either, so V decided that to be able to save tax on this gift, the shares should thus be transferred to the college and an option to purchase them for £5,000 should be granted to a trustee company, and that dividends sufficient to provide the £150,000 to fund the chair should be declared on those shares[12].i
As the eneficiary of a bare trust he is entitled to direct the trustee to transfer the legal title to the property so no need for a separate disposition to transfer equitable title. So Vandervell and his trustees dropped out of the picture and so putting an end to the trust. It was only for the option of repurchase that retained V’s right to recover any interest in the said shares as the Royal College of Surgeons, where the outright owners in both law and equity. Although this allowed for avoidance of ad valorem stamp duty on Mr V’s equitable interests in the shares, it did not allow for avoidance of tax on the dividends declared. It was held that the option to repurchase the shares was in the absence of “an express declaration of trust held on an automatic resulting trust for Mr V himself”[13]. This was because V had failed to state who would be entitled to the equitable interest in the option. On the facts, it was clearly not the trustee company who was entitled, so the only possibility given the uncertainty of objects, was a resulting trust for the settlor who in this case was Vandervell.
There is also the exception that a specifically enforceable contract for the transfer of the subsisting equitable transfer. In Oughtred v Inland Revenue Commissioner[14], Mrs Oughtred (O) had shares in a private company that were held on trust for life for her and the remainder to her son. On 18th June O and her son entered into an oral agreement in which her son would release hi interests in the shares so that O would be wholly entitled to them, and in return she would transfer shares of which she was the absolute owner to nominees for him. A written deed was released to reflect this on the 26th of June. The question was whether ad valorem tax duty was payable on this deed, the majority of the House of Lords held it was as the written deed was a transfer on sale. O argued that this was not the case as the equitable remainder of shares had passed to Mrs O by contract to transfer, and the sons interest was held on constructive trust. The dissenting opinions of Upjohn, J and Lord Radcliffe took the view that “the oral contract had given rise to a constructive trust which affected a transfer of the remaining interests in the shares to Mrs Oughtred[15] without the need for further writing”[16]. This approach by Lord Radcliffe has been taken to be correct in subsequence cases even though in Oughtred no of the other Lordships passed opinion, cases such as Neville v Wilson and Re Holts Settlementare testament to this. And it was in Neville that the principle was established that where an oral contract to transfer results in a constructive trust, then s53(1)(c) need not be satisfied to the extent that further writing is required, due to the fact that the constructive trust alone effects the disposition of the subsisting equitable interest to the transferee.[20] However, academics have questioned the width of the scope in practice, due to the fact that oral contracts to transfer a subsisting equitable trust cannot possibly avoid statutory formalities, as the contract has to be in writing.
If a third party has the effect of extinguishing a subsisting equitable interest which has arisen under an automatic resulting trust, then there is no need for any further writing. This was evident in Re Vandervell’s Trusts (No.2 Vandervell argued that the option to repurchase was destroyed when exercised by Vandervell Trustees Ltd, and that Vandervell’s equitable interest in that option had therefore ceased to exist. He also argued that shares are purchased where new property is bought. The shares were held on a validly created new trust, and the new property was settled therefore there was no need for s53(1)(c). Their overall argument was that their transfer of shares to V’s children was a perfect gift, as Vandervell’s trustees used funds from the children’s settlements, and the trustees and Vandervell both intended for the shares to be held for the children’s settlements.
The Inland Revenue Commission took a different approach, arguing that they were entitled to charge Vandervell for surtax for the period of 1961-1965, as until then, Vandervell had not validly disposed of his interest in the property and shares in writing. “Lawton LJ ruled that the declaration of the trust of the shares in favour of the children’s settlement had the effect of extinguishing Vandervell’s interest under the resulting trust of the option. An extinction was not a disposition and therefore writing was not required.”[23] However, the Court of Appeal (or more particularly Lord Denning) took sympathy on Mr Vandervell and decided to award the case in favour of him. There were severe problems with Denning’s reasoning though, as there was no declaration of trust, no intention, in relation to Vandervell’s intention to gift of trust to the children[24]. It must also be noted that Vandervell’s trustees’ beliefs were not relevant for intention. The idea of the fact that new property had arisen was also a questionable and very debatable one. Pearce, Stevens and Barr[25] note that in Vandervell v IRC[26], Vandervell was originally unsuccessful due to the fact that he retained his interest in the shares through the option. They also go on to note that in Re Vandervell Trusts (No.2)[27] Vandervell technically bought his shares with his option that arose from another option to repurchase. They argue that it is an artificial argument to accept. I would have to agree. It is also noted that the rule applied in Re Vandervell Trusts (No.2)[28] has very limited scope, as it should only be applied to the act of the third party, not the person who holds the interest. Pearce, Stevens and Barr note that if Vandervell had tried to transfer the equitable interest himself under the resulting trust, then s 53 (1) (c) would have to have required writing in order for it to be valid.[29]
In conclusion, I take the opinion that the area of s 53 (1) (c) is riddled with problems, mostly its definition (or lack thereof) of disposition resulting in confusion and trustees having to tread very lightly to avoid the wrath of the Inland Revenue Commission. Whilst the decisions to subject to ad valorem tax may be right, they seem nonsensical in terms of policy, and seem to contradict the purpose of the Property Act 1925, which is to prevent fraud, like in Grey v IRC. The exceptions do not provide the clarity that is desired and much needed to the section, only serving to perhaps confuse and baffle even more, be it with limited scope in practice for principles or with sympathetic decisions which contradict previous judgements I am of the feeling that the Law on statutory formalities within S 53(1)(c) needs to undergo a lengthy reform process to make it more clear and to repeal some of the exceptions and make them more useful.