Summary
Summary Creating express trusts
- Module
- Equity And Trusts
- Institution
- University Of Law (ULaw)
Covers step by step how a trust fund is created.
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Equity& Trusts: Unit 2: Defective Transfersand the Role of Equity
At common law, a gift or trust is void if the donor or settlor
does not transfer the property in the proper way to the
done/trustees. The common law can produce harsh results;
for example, a donor may have carried out some of the
steps to transfer the property but is killed in an accident
before completing the transfer. According to the common
law, the attempted transfer is invalid.
This was the issue in an important case in this area – Re
Rose. The issue was not whether the transfer involving a
lifetime gift had been realised, but rather, when the
beneficial interest passed, as a potential charge to tax
rested on this.
Formalities for transferring shares
CREST system- the transfer is electronic and paperless.
This system tends to cover shares in large public
companies.
Stock transfer form- The cases on defective transfers
relate to smaller companies, which generally operate
outside the CREST system. Smaller companies have share
certificates evidencing an individual's ownership of the
shares. As a result, they tend to use a stock transfer form
system. This is a short, simple form that names the
transferor and transferee, gives details of the shares being
transferred and is signed by the transferor. This, together
with the share certificate, must then be delivered to the
transferee or to the company.
- The company is obliged to keep a register of its
shareholders. The transferee does not become the new
legal owner of the shares until the company’s register has
been updated to show the transferee as the new
shareholder.
, - If a gift was intended then, upon registration the
transferee is the absolute owner of the shares.
- If on the other hand, a trust was intended then the
transferor has successfully transferred the legal title in the
shares to the transferee as trustee.
- With a trust, the transferor still needs to make a valid
declaration of trust, to state for whose benefit the shares
are being held, and what the terms of the trust are to be.
- Older, traditional cases, such as Milroy v Lord, suggested
that in order for a transfer to be validly achieved you had
to get the method of transfer absolutely right. If you were
attempting an outright gift of shares, but the transfer
process was defective, then the gift failed.
- The general rule in Equity is that "equity will not perfect
an imperfect gift".
However, the case of Re Rose relaxed the position in Equity to
some extent. In this case:
Mr Rose transferred shares to his wife. He completed the
documentation on the 30th of March and forwarded it to
the company for registration.
Registration by the company was completed on the 30th
of June. If the correct date for completion of the transfer
was the 30th of June, then tax would have been payable.
To avoid tax, the transfer would have to have been
completed before the
10th of April.
- The Court of Appeal held that, since by the 30th of March
Mr Rose had done everything that he could to effect the
transfer, this was the correct date for completion of the
transfer in equity, and so no tax was payable.
Point of no return- this idea of the transferor having done
everything they could to bring about the transfer means that
the have done everything in their power- there must be
nothing further that they could do. The transaction has
passed the point of no return and all that remains for the
transaction to be completed is the act of a third party.
,Mascall v Mascall
In the case of Mascall v Mascall, Mr Mascall wanted to
make a gift of his house to his son. He completed and
signed a transfer deed and handed it to his son. The son
had a row with his father and the father wanted the house
back. The son had not been registered at the Land
Registry, so legal title had not passed to him.
- The Court of Appeal held the father had done everything
in his power to transfer the house to his son and the
transfer was complete in equity. The son could get himself
registered. It was too late for the father to back out.
Chothram v Pagarani 2001
For a long time, the position regarding defective transfers
in Equity seemed clear. That is, until the case
of Choithram v Pagarani and then later, in the context of
lifetime gifts, in Pennington v Waine. Choithram v
Pagarani came first and was a Privy Council decision. Not
strictly binding in our jurisdiction, it does have persuasive
authority and certainly seemed to find favour with Lady
Justice Arden in the Court of Appeal in the subsequent
case of Pennington v Waine.
Both courts took the view that a perfect gift could only be
made in one of two ways:
Either there was a transfer of the asset to the donee,
accompanied by the requisite intention of the donor to
make the gift, or,
The donor declared himself to be a trustee of the property
for the donee.
If an outright gift was intended, the donor must have done
everything that was within their power to transfer the
asset to the donee. If that was not the case, then the gift
is incomplete and fails.
The lower courts held that in this case, TCP used words of
gift to the Foundation, but didn’t execute the correct
transfer forms, so he had not done all that he could to
affect the gift. They also took the view that they could not
, treat TCP’s words as a declaration of trust, as no reference
to trusts was made.
The matter was appealed to the Privy Council, where Lord
Browne-Wilkinson delivered the sole judgement.
Lord Browne-Wilkinson commented that on the face of it,
it certainly looked like a failed gift and the lowers courts
had reached an entirely understandable conclusion. But
their Lordships took a different view. He commented: “The
facts of this case are novel and raise a new point” as the
case did not really fit squarely into either of these
previously identified ways of giving.
Their Lordships seemed keen for equity to assist. Lord
Browne-Wilkinson stated: “Although equity will not aid a
volunteer, it will not strive officiously to defeat a gift”. He
observed that the case fell between the two usual
situations of giving that had been identified in the lower
courts.
Although the words “I give to X” look like words of outright
gift, in this particular context, they meant something
different. The Foundation did not have a separate legal
existence. Any property must be held by the Trustees, for
the purposes of the Foundation.
This being so, when TCP said that he was giving property
to the Foundation, what this must really mean was that he
was giving the property to the trustees to hold for the
purposes of the Foundation. Browne-Wilkinson
commented: “Although the words are apparently words of
outright gift, they are essentially words of gift on trust.”
- Choithram will only be directly relevant where there is a
similar set of facts – in other words, where a settlor is
setting up a trust, and they are to be one of several
trustees. The settlor makes the declaration of trust but
does not successfully transfer the subject matter of the
trust to all the trustees.
- Re Rose stated that only if the transferor had done all that
they could to affect the transfer would it be valid in Equity.
In Choithram, Equity requires less from the transferor -
even if they have not done all that they could, if the
position is such that their conscience is affected, then
Equity will not allow them to revoke the gift.
Strong v Bird 1874
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