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S53(1)(c) LPA *Draft*

‘It is difficult to determine the situations in which s53(i)(c) applies. As a result, this provision completely subverts the purposes of having formality requirements. Shaneil Shah, LLB Candidate, King’s College London **DRAFT** In 1677 the Statue of Frauds introduced formalities into the law so that equity may take effect. However this purpose has evolved over time and Feltham proposes four distinct functions of formalities. First, the ‘cautionary’ function, requiring a donor to pause and give consideration to the transfer. Second, the ‘evidentiary’ function. As equitable interests are usually invisible, a paper trail evidencing the movement of the equitable interest is therefore needed for the trustees to know to whom they owe duties and for the beneficiaries to know their interests. Third, a ‘protective’ function, avoiding egregious situations where an oral direction attempts to effect a ‘hidden’ transaction involving an equitable interest, ‘in fraud of those truly entitled’ to it (Green, 1984). Fourth, formalities serve a channelling function which standardises transactions.. S53(i)(c) aims to fulfil the purposes of formalities by ensuring that the disposition of a subsisting equitable interest be made in signed writing by the disposer or his agent. However its adventitious application by the courts has ironically hindered the purposes of formalities from being realised. Personalty or realty? The first inconsistency of s53(i)(c) is determining whether it applies to equitable interests in personalty as well in realty. Green notes that in no case has s205(i)(x) LPA 1925 been raised. The section defines equitable interests as ‘interests… in or over land’, hinting that it applies to equitable interests in realty only. However Green raises the point that given the caveat to s205(i)(x) – ‘unless the context otherwise requires’, it is ‘strongly arguable’ that s53(i)(c) applies to dispositions of equitable interests in both realty and personalty. The definition of ‘disposition’ Secondly, whilst the meaning of ‘disposition’ is fundamental to the operation of the section, the jurisprudence has treated it with a certain conceptual ambiguity. Brian Green argues that in Grey v IRC the Lords adopted two conflicting approaches: Viscount Simond’s linguistic approach, based on the movement of the beneficial interest, and Lord Radcliffe’s, who relied upon the old Statute of Frauds definition of disposition as an “assignment or grant”. This conflicting reasoning obfuscates the situations in which the section applies. On balance, Grey is good authority that ‘disposition’ should be given its ‘ordinary and natural meaning’. It was therefore held that an oral direction from a beneficiary to a trustee to cease holding his trust property and hold the property on trust for another, was a disposition within s53(i)(c), and thus void for want of signed writing. Penner argues that this potentially covers any dealing by a beneficiary with his interest under a trust. Admittedly this approach strengthens the evidentiary and cautionary purposes of formalities, however almost too much. Its broad scope renders impossible everyday transactions, like a direction by a beneficiary to a trustee to sell his shares, by requiring such transactions to be made in signed writing. Furthermore, this definition brings Grey into conflict with Vandervell, where a ‘purposive’ interpretation of disposition was adopted. Lord Upjohn reasoned that because all parties to the transaction knew of the disposition of the subsisting equitable interest by Vandervell to the R.C.S, there was no need for signed writing. This conflict has a deleterious effect on the evidentiary and cautionary functions; beneficiaries are not pausing to give due consideration to transfers, nor is the transfer of the equitable interest evidenced. Green somewhat resolves this point by arguing that Vandervell should ‘be restrictively confined to its facts’, and thus the ‘natural’ interpretation of disposition in Grey takes precedent unless the facts of a future case match those in Vandervell. However it was also held in Grey that later writing – stating that the trustees hold the shares on trust for another – can retroactively validate an invalid oral disposition to do the same. This does injustice to the channelling function, because dispositions should be completed by the same method - without partial reliance on oral transfer. Furthermore this was decided incorrectly, as the section requires a disposition to be made ‘in writing’ not to be ‘evidenced’ in writing. The actual disposition cannot be oral then retroactively validated, it ought solely to be made in writing. Transfer of legal and equitable interests In Grey it was held that when a beneficiary directs his trustee(s) to hold on trust for a third party (‘X’) such that X gains the beneficiary’s equitable interest, the disposition of the equitable interest must be made in writing. However in Vandervell it was held that when a beneficiary directs his trustee(s) to transfer full beneficial interest to X, so that the beneficiary no longer has his equitable interest and X gains both the equitable and legal interest, this is not a disposition within the second. At first glance these seem like two different cases based on the beneficiary’s direction to their trustee(s). However, Grey in fact is far more similar to Vandervell. Firstly, from the original beneficiary’s point of view the two cases are identical; in each case the beneficiary no longer owns the equitable interest, the value of which has been transferred to X. Secondly, Green argues that Grey should be thought of as a case where the equitable interest and the legal title moved from the original beneficiary to X. According to the facts the 6 trusts set up for the grandchildren (X) were already existing before the equitable interest was transferred to them from the beneficiary (Hunter). Thus, in transferring the equitable interest, Green argues, ‘a subtle change of legal proprietorship was being worked out at the same time’. This would be clearer but-for the ‘unaltered identity of the trustees’, as once the written confirmation that the trustees were holding on trust for the grandchildren had taken place, the original bare trust including Hunter ‘had been terminated, not merely in equity but in law as well’. Hayton clarifies this, writing that ‘it was as though the trustees merged legal and equitable title’. Hunter’s direction in Grey did therefore move legal and equitable title at the same time, as in Vandervell. This brings Grey into direct conflict with Vandervell as whilst the analyses of the two cases now match, they reach opposing conclusions. This result is particularly damaging to each function of formalities as it is highly unclear to which situation the section relates and there is potential for beneficiaries to be ‘caught out’ by oral transfers which have the effect of transferring more than they purport to. The two cases can be somewhat reconciled by distinguishing Vandervell. Penner argues that because under a bare trust a beneficiary is legal owner, he can direct trustees to deal with the trust corpus as in Vandervell, and in doing so he is exercising his administrative power under the trust, not a dispositive one. Therefore Vandervell correctly falls outside of s53(i)(c) whilst the exercise of dispositive power relating to transfer of the equitable interest in Grey draws it within the scope of the section. Bare and active sub-trusts Generally, s53(i)(c) does not apply to sub-trusts; oral declarations of sub-trusts are valid. This is because whilst a declaration of sub-trust extinguishes the beneficial interest, the beneficiary doesn’t dispose of his equitable interest – s53(i)(c) applies to the latter but not the former. Hayton writes that the equitable interest ‘continues to exist in its original proprietor’. However s53(i)(c) does apply to bare sub-trusts. This is because when a beneficiary declares a bare sub-trust he ‘drops-out’ of the picture as he has no duties to perform under the trust – he is a mere conduit between the trustee and sub-beneficiary, and it would be pointless for the trustee to pay the beneficiary who would then pay the sub-beneficiary. In ‘dropping-out’, the beneficiary assigns his interest in the trust, leading to bare-trusts coming within the scope of s53(i)(c) (Onslow v Wallis; Re Lashmar; Grainge v Wilberforce). However in the case of a discretionary trust where the beneficiary retains ‘active duties’, he does not drop-out and therefore doesn’t assign his interest. Thus active-duty sub-trusts are valid without writing. However academics argue that no sub-trusts should fall within the section i.e. That bare sub-trusts should not require writing. Firstly the beneficiary under a bare sub-trust drops out due to an operation of law which collapses the trust, automatically granting the sub-beneficiary rights against the trustee – not because the beneficiary ‘disposes’ his equitable interest. Alternatively, the subbeneficiary under a bare sub-trust simply leaps over the beneficiary, taking his beneficial rights to the trustee under the Saunders v Vautier principle. This view is supported in Nelson v Greening and Sykes (CA) which rejects the bare sub-trust distinction. Therefore, there seems to be no future for sub-trusts within the scope of s53(i)(c) which further frustrates the purpose of formalities as without signed writing, a beneficiary stands to lose his interest in valuable trust property through oral direction alone. This is simply not protective enough nor does it come close to the evidentiary purpose to know who owes duties to whom. Conclusion The haphazard application of the section is testament to the court’s unwillingness to permit tax evasion schemes in Grey and Vandervell to succeed. Whilst Vandervell can be ‘confined to its facts’ and comfortably fall outside the section, distinguishing it in this way from Grey only serves to further subvert the purpose of the formalities of which it does not play a part. Furthermore, problems remain within Grey as to the retroactive validation of an oral disposition and the harmful effect on the purposes of formalities that process entails. With regards to sub-trusts – whilst they seem to fall outside the scope of s53(i)(c), it would be prudent to acknowledge Green’s argument that all sub-trusts should in fact be made in writing to give effect to formalities. It is strange that s53(i)(c) is only concerned with equitable but not beneficial interests, as the latter determine the value in the former. Shaneil Shah Koye Akoni Shaneil Shah Koye Akoni