The Trust Relationship

Question 1

Trust

Answer 1

An equitable duty relating to property.

Question 2

Trustee

Answer 2

The person subject to the duty. Usually the legal owner of the trust property.

Question 3

Beneficiary

Answer 3

The person to whom the duty is owed. Has an equitable proprietary interest in that property.

Question 4

Trust property

Answer 4

The property to which the duty relates

Question 5

Basic duty of the trustee

Answer 5

The trustee must hold or apply the trust property for the benefit of the beneficiary.

Question 6

Two important attributes of a trust

Answer 6

1) A trust allows the separation of the powers of the legal owner (held by trustees) from the benefits resulting from the exercise of those powers (enjoyed by the beneficiaries)
2) A trust can confer different types of rights on different beneficiaries at different times

Question 7

Commercial example of trust used today

Answer 7

The market in listed securities is underpinned by trust. Legal ownership of UK listed securities requires registration in an electronic register called CREST. Securities are registered in the name of CREST members (usually banks/financial institutions). The members are the legal owners of the securities but they generally acquire and hold them for the benefit of their clients.

Question 8

CREST structure

Answer 8

e.g.
- CREST member is registered as the legal owner (holder) of 100,000 shares issued by Tesco plc
- CREST member acquired 50,000 of those shares on behalf of a broker
- Broker acquired 10,000 of those shares on behalf of a private investor.
Legal analysis:
- CREST member holds 50,000 of the 100,000 shares on trust for the broker
- Broker holds its equitable interests in 10,000 of the 50,000 shares on trust (known as a sub-trust) for the investor
- CREST member is the legal owner but has no beneficial interest. Broker has an equitable interest but no beneficial interest. The private investor has an equitable and beneficial interest.
- ‘waterfall or chain of equitable relationships’ (SL Claimants v Tesco plc)

Question 9

Principal characteristics of a trust

Answer 9

• Trust property
• A trustee
• A duty
• Objects: usually a beneficiary but sometimes a trust purpose
• An equitable proprietary interest

Question 10

Trust property

Answer 10

• An essential requirement of a trust
• It is a ‘fundamental’ proposition of trusts law that ‘there must be identifiable trust property.’ (Lord Browne Wilkinson, Westdeutsche Landesbank Girozentrale v Islington BC)
• This is known as the subject matter of the trust.
• The question of whether there is a trust property can be contentious.

Question 11

Trust property - Mac-Jordan Construction Ltd v Brookmount Erostin Ltd

Answer 11

Defendant employed plaintiff to construct a building. They agreed the defendant would pay the plaintiff as the work progressed, retain 3% of each payment, establish a separate fund in respect of the retained sums, and hold that fund on trust for the plaintiff until the work was completed.

Issue was whether the defendant was a trustee for the plaintiff, giving the plaintiff proprietary rights over the defendant’s bank account.

Held that the defendant was not a trustee for the plaintiff.

• The defendant had not established a separate fund for the money
• The defendant had never agreed to create a trust of his own bank account; he had agreed to create a trust of a separate fund, but this had never actually been established
• So there was no trust because there was no trust property
• The defendant had breached its contractual obligation to create the fund, but this only gave rise to a personal right to sue the defendant for money.

Question 12

Types of asset

Answer 12

• Almost every asset or right can be held on trust
• ‘The scope of the trusts recognised in equity is unlimited.’ (Lord Stratchcona Steamship v Dominion Coal Company)
• Chattel - a tangible item (other than land)
• Chose in action - a right (intangible) e.g. £100 credited to a bank account is a chose in action (a debt). The account holder has the right to be paid £100 by the bank.
• A company share is another example of a chose in action

Question 13

Trustees

Answer 13

• A trust must have a trustee
• A trustee owns the trust property and has all the rights and powers of legal ownership
• A trustee must exercise those rights and powers consistent with the basic trust duty (for the benefit of the beneficiary). If they do not, they will be personally liable for breach of trust.
• The functions and duties of trustees varies, and depend on the nature of the trust they are administering
• The role of trustee is a voluntary office and typically unpaid although professional trustees are entitled to remuneration

Question 14

Trustee duties

Answer 14

• Basic duty = to hold/apply trust property for the benefit of the beneficiary
• ‘An indelible incident of trust property is that a trustee can never make use of it for his own benefit.’ (South Australian Insurance Co v Randell)

Question 15

Can a trustee be a beneficiary?

Answer 15

A trustee can be one of the beneficiaries of a trust. They will still owe duties to the other beneficiaries, so cannot simply use the trust fund for their own benefit, as this would be a breach of trust.

Question 16

Trustee - cases where held not to have a trustee and so not a trust because they could mix the trust ‘property’ with their own assets

Answer 16

Customs and Excise Commissioners v Richmond Theatre Management Ltd - A theatre company sold advance tickets for performances. The T&Cs stated that the company would hold the purchase money ‘on trust’ for the purchaser until the performance took place and would return the money if it was cancelled. There were no restrictions as to how the company could use that money. The company was not a trustee. Its ability to freely use the money for its own purposes was incompatible with a trust.

In re Bond Worth - the ability of a company to use fibres in its manufacturing process was inconsistent with the company holding fibres on trust for the unpaid seller of them. Slade J said that South Australian Insurance Co was ‘clear authority for the proposition that, where an alleged trustee has the right to mix tangible assets or moneys with his own other assets or moneys and to deal with them as he pleases, this is incompatible with the existence of a presently subsisting trust.’

Question 17

Exception to the no mixing with own assets rule

Answer 17

Re Lehman Brothers International - The ability of a broker to sell trust securities in its own account and for its own profit was not inconsistent with a trust because by the terms of its agreement, the broker was under a duty to replace any securities it sold with identical securities. The broker’s ability to sell the trust securities ‘was not, viewed in essence, as a right to swap’, fatal to the trust.

Question 18

Objects

Answer 18

• A trust must have a beneficiary for be for a permitted purpose
• It is only possible to create a trust for a permitted purpose. Charitable purposes are the principal category of permitted purpose trusts
• Most trusts will have a beneficiary/beneficiaries. A beneficiary has rights correlative to the trustee’s duties and can enforce these duties.
• A beneficiary also has an equitable proprietary interest in the trust property. This is important because it means:
  (1) The beneficiary’s rights are enforceable against third parties
  (2) The beneficiary’s rights are protected against the insolvency of the trustee

Question 19

Equitable proprietary interest

Answer 19

Lord Sumption, Akers v Samba Financial Group - a beneficiary’s interest in the trust property ‘possesses the essential hallmark of any given right in rem, namely that it is good against third parties in whose hands the property or its traceable proceeds may have come.’

• A beneficiary’s equitable proprietary interest can be enforced against third parties. However, unlike legal proprietary interests, it cannot be enforced against everyone.
• Equitable proprietary interests cannot be enforced against a purchaser of a legal interest who does not have notice of the trust. (confirmed in Westdeutsche and Akers)

Question 20

Categorisation of trusts

Answer 20

Most frequently categorised as express, resulting or constructive.

• Express trust - one which is deliberately created. The person who creates it is known as the ‘settlor.’
• Resulting and constructive trusts - arise by operation of law; imposed by the courts.

Question 21

Difference between trusts and contracts

Answer 21

• Contract is an agreement between two parties, each of whom owes obligations to the other. A creation of common law.
• Trusts are a creation of equity. An express trust arises from intention of the settlor alone. The only obligations that arise are from the trustee to the beneficiary. The trustee must be willing to act but there is no requirement for an agreement in the contractual sense. If the appointed trustee is unwilling to perform the role, they can be replaced.

Question 22

Difference between trusts and debts

Answer 22

• A debt does not relate to specific assets or funds, unlike a trust. It is merely an obligation to pay a sum of money and the debtor may use any of their resources to do this.
• The beneficiary for a trust has an equitable proprietary interest in the trust property. A creditor has a mere personal right to payment.
• Most common example of a debtor/creditor relationship is bank/customer.
• Foley v Hill - A bank is not a trustee of money deposited by its customers. It is a debtor in respect of those deposits. ‘Money, when paid into a bank, ceases altogether to be the money of the principal […] The money placed in the custody of the banker is, to all intents and purposes, the money of the banker to do with as he pleases…he is of course answerable for the amount, because he has contracted’
• A debt therefore is a different legal concept than a trust, but they are not mutually exclusive and can be combined in a single transaction e.g. a Quistclose trust

Question 23

Quistclose trust

Answer 23

Barclays Bank Ltd v Quistclose Investments:
FACTS: Quistclose Investments agreed to lend money to Rolls Razor Ltd. The parties agreed that Rolls could only use the money to pay a dividend to its shareholders and that it could not be used for any other purpose. The money was paid into an account which Rolls had opened with Barclays specifically for the deposit of the money. Before it was able to pay the dividend, Rolls was put into liquidation.
ISSUE: Whether Barclays could set off the sum credited to the account against Rolls’ indebtedness to Barclays on its other accounts.
HELD: (Lord Wilberforce) Since it was agreed that the money could only be used to pay the dividend, it was not part of Rolls’ general assets. As Rolls couldn’t pay the dividend, it had to return the money; so Rolls held the money on trust for Quistclose. He stated there was ‘no difficulty in recognising the co-existence in one transaction of legal and equitable rights and remedies’

Question 24

Clarification on Quistclose trusts - Twinsectra Ltd v Yardley

Answer 24

Twinsectra Ltd v Yardley

• It was not sufficient merely to demonstrate that money was advanced to the borrower for a particular reason in order to establish a Quistclose trust. It is necessary to demonstrate the parties’ mutual intention that the money could only be applied for the purpose AND was not at the free disposal of the borrower.
• When the lender advances the money to the borrower, the borrower holds the money on trust for the lender, with a power to use it for a specified purpose. To the extent that the borrower uses the money for that purpose, the lender’s equitable interest is extinguished and their relationship changes to that of debtor-creditor. To the extent that the borrower applies the money for any other purpose, the borrower commits a breach of trust. The lender can assert their equitable proprietary interest in the misapplied money or traceable proceeds.

Question 25

Quistclose trusts - Re Farepark Food and Gifts Ltd

Answer 25

FACTS: Farepak ran a Christmas savings scheme. It agreed with customers that in return for 11 monthly payments, it would obtain retail vouchers for customers and distribute them in November. Farepak went into administration in October.
HELD: Money paid by customers to Farepak was not subject to a Quistclose trust. ‘There is no suggestion that the money ought to have been put to one side by Farepak pending the transmutation from credited money to goods or vouchers. If there were a Quistclose trust then that obligation would have been inherent in it.’ (Mann J)

Question 26

Two features of a Quistclose trust clarified by Re Farepak Food

Answer 26

(1) The borrower’s power to apply the money is valid only if the purpose is sufficiently certain. A purpose is certain if it is possible to determine whether any given application of the money does or does not fall within it (Twinsectra). If the purpose is uncertain, the borrower cannot make any use of the money and simply holds it on trust for the lender (Twinsectra)
(2) Quistclose trusts are not restricted to loan transactions or to money. They arise in any situation where property is transferred to a person whose use of the property is restricted to a specific purpose: to any case where the property is not at the free disposal of the transferee (Ali v Dinc)

Question 27

Difference between trusts and charges

Answer 27

• Proprietary security interests secure the performance of an obligation, usually the payment of a debt. A creditor whose debt is secured is described as a ‘secured creditor.’
• A charge is the most common security interest.
• Both a beneficiary and a chargee have a proprietary interest in the trust property/the charge property
• Differences:
  (1) A beneficiary’s interest in trust property is invariably equitable. In certain circumstances, a chargor can create a legal charge over their property
  (2) A chargor can apply charged property for their own benefit e.g. a sole trader can give a bank a charge over their family home, and the trader and their family can continue to live there.
  (3) Trustee beneficiaries are entitled to the beneficial enjoyment of the entire trust property, but a chargee’s interest in charged property is co-extensive with the debt secured.
  (4) A defining characteristic of a charge (but not a trust) is a right of redemption, i.e. the chargor’s right to unencumber their charged property by paying the debt back.

Question 28

Trust v. charge case - Compaq Computer Ltd v Abercorn Group Ltd

Answer 28

FACTS: Compaq sold computer equipment to Abercorn on credit terms. Compaq’s standard conditions of sale provided that Compaq would retain legal title to the equipment until Abercorn had paid for it. Abercorn could sell equipment which it had not paid for and would hold the proceeds of such sales on trust for Compaq.
ISSUE: Whether Abercorn held the proceeds of their sales on trust for Compaq.
HELD: Abercorn was not a trustee of the proceeds. Compaq had a charge over these proceeds. ‘The rights and obligations of the parties were in reality and in substance characteristic of those of the parties to a charge and not those in a trustee/beneficiary or other fiduciary relationship.’ (Morritt J)

Question 29

Difference between trusts and agency

Answer 29

• Agency - a relationship in which the agent has authority to create legal relations between the principal and third parties
• Both trustees and agents are subject to fiduciary duties
• Unlike an agent, a trustee cannot commit a beneficiary to a contract with a third party. A trustee acts as a principal in their transactions with third parties.
• A series of cases has considered whether an agent is also a trustee of money or property received on behalf of the principal. The question must be answered by reference to the parties intentions (expressed or inferred) (Angove’s Pty Ltd v Bailey)

Question 30

Trusts v. agency - Henry v Hammond

Answer 30

FACTS: The plaintiff employed the defendant shipping agency to sell their coal. The defendant sold the coal and was paid the purchase price by purchasers.
ISSUE: Whether the defendant held the proceeds of sale on trust for the plaintiff.
HELD: The relationship between the plaintiff and the defendant was creditor and debtor, not trustee and beneficiary. ‘if the terms upon which the person receives the money are that he is bound to keep it separate…and to hand that money so kept as a separate fund to the person entitled to it, then he is a trustee’ ‘if…he is not bound to keep the money separate, but is entitled to mix it with his own money and deal with it as he pleases, and when called upon to hand over an equivalent sum of money…he is not a trustee of the money but merely a debtor.’

Question 31

Trusts v agency - Re Fleet Disposal Services Ltd

Answer 31

FACTS: Fleet had a business selling cars for car leasing companies. It paid the proceeds of sale into a separate bank account. Northern Telecom Europe (Nortel) appointed Fleet as its selling agent. Fleet agreed to pay Nortel ‘sale proceeds less [commission and agreed costs]…five days after receipt of moneys’ by separate cheques. Fleet went into liquidation.
ISSUE: whether Fleet held the proceeds of sale on trust from for Nortel
HELD: Fleet was a trustee of the proceeds of sale. This was based on 3 factors:
(1) The existence of the separate bank account, which had been communicated to Nortel
(2) The fact Fleet was Nortel’s agent for sale, a relationship in which the court will not readily infer that an agent is intended to be able to finance his business out of the principal’s property
(3) The express term relating to the short time frame for payment by separate cheques, indicating more than a mere accounting relationship

Question 32

Difference between trusts and bailment

Answer 32

• Bailment - the transfer of possession of chattels from one person to another
• A person who leaves their clothes with a dry cleaner or their car with a mechanic is a bailor and the dry cleaner and mechanic are bailees
• Three significant distinctions between a trust and bailment:
  (1) Only tangible personal property (chattels) can form the subject matter of a bailment. Any asset/right can form the subject matter of a trust
  (2) The transfer of possession of chattels to a bailee does not transfer the bailor’s title to the chattels. The transfer of assets to a trustee on trust divests a settlor of their interest in those assets.
  (3) Bailment is regulated exclusively by the common law. Unlike a beneficiary (who has an equitable interest in trust property), a bailor has a legal interest in the bailed chattels (MCC Proceeds Inc v Lehman Bros International)
• The bailor’s interest in the chattels generally survives a misapplication of the chattels by the bailee in favour of a third party, incl. a purchaser of legal interest without notice. The interest of a beneficiary does not survive a misapplication of trust property in favour of such a purchaser.

Question 33

Difference between trusts and companies

Answer 33

• Both can be used as vehicles for holding property, and there are some similarities between the roles of trustee and director (both fiduciary roles)
• Crucial difference = a trust does not have a legal personality. The trustees as legal owners of the trust property must carry out these functions.
• Concept of limited liability does not apply to the role of trustee, meaning a trustee will be personally liable for arrangements it enters into as a trustee.
• A company can however act as a trustee.

Question 34

Difference between trusts and estates

Answer 34

• A personal representative is responsible for the administration of a deceased person’s estate. There are two types:
  (1) Executors: appointed by the deceased
  (2) Administrators: appointed by the court
• A personal representative must distribute the deceased’s estate in accordance with their will or the intestacy rules.
• Similarity = one person holds property for the benefit of others
• Key distinctions (1) Unlike personal representatives, trustees frequently hold office for several years and have enduring asset management/investment functions.
  (2) Demonstrated in the case of Commissioner of Stamp Duties (Queensland) v Hugh Duncan Livingston

Question 35

Trusts v estates - Commissioner of Stamp Duties (Queensland) v Hugh Duncan Livingston

Answer 35

FACTS: Mr Livingston (deceased) gave 1/3 of his residuary estate to Mrs Coulson. His estate included land in Queensland. Mrs Coulson died shortly after Mr Livingston, before his executor had administered his estate.
ISSUE: Whether Mrs Coulson had a ‘beneficial interest’ in the land in Queensland on the date of her death
HELD: She did not. Mr Livingston’s executor had ‘full ownership’ of Mr Livingston’s estate ‘without distinction between legal and equitable interests.’ Although the executor was bound to apply the estate in accordance with the terms of the will, equity did not ‘recognise or create for [Mrs Coulson] a beneficial interest in the assets.’
- A person interested in a deceased person’s estate does not have an equitable proprietary interest in any of the estate assets. They have a personal right against the executor relating to proper administration of the estate.
- Also the authority for the fact that the full legal owner of an asset (that is not subject to a trust) does not have a legal and equitable interest in that asset. There is just one interest, the legal interest, which assumes all rights to the asset.

Question 36

Difference between trusts and gifts

Answer 36

• Modern uses for trusts often arise out of a contractual relationship, but many trusts still involve gratuitous acts by the settlor.
• A gratuitous transfer on trust can sometimes be described as a ‘gift on trust’, but an ‘outright gift’ is a more simple arrangement of just giving property from one person to another. The gift involves absolute transfer of legal ownership. There is no separate equitable interest in the property at any stage.

Question 37

The 3 Certainties

Answer 37

In order to create a valid express trust, it is necessary to comply with the rules known as the three certainties:

(1) Certainty of intention
(2) Certainty of objects
(3) Certainty of subject matter

Question 38

Certainty of intention

Answer 38

An intention to impose or assume the duty which is characteristic of a trust, i.e. a duty to hold property for, or apply it for the benefit of, a beneficiary (or purpose) (Re Williams)

Re Oldfield - A woman gave property to her daughters in her will and expressed her ‘desire’ that they should make a provision for her son. Kekewich J held that the woman had not created a trust, saying ‘a desire carries no obligation except a moral one.’

Question 39

Objective approach of the courts to certainty of intention

Answer 39

• If a person manifests an intention to impose or assume a duty which is characteristic of a trust, that person intends to create a trust. It is irrelevant whether they do actually (subjectively) intend to create a trust or whether they are even aware that such a thing exists.
• Twinsectra Ltd v Yardley - ‘subjective intentions are irrelevant. If he enters into arrangements which have the effect of creating a trust, it is not necessary that he should appreciate that they do so; it is sufficient that he intends to enter into them.’

Question 40

Ascertaining intention

Answer 40

• A person’s intention is ascertained from their words and conduct (Bellis v Challinor)
• In some situations, intention is reduced to writing (e.g. contract/will)
• The intention of a document is ascertained by identifying the meaning of the words which they have used, by reference to:
  a) Their natural and ordinary meaning
  b) Any relevant contextual features of the document
  c) The facts which were known to or assumed by the author(s) of the document when it was created
  d) Common sense

Question 41

Intention in a contractual context

Answer 41

• The parties’ intention is ascertained from the express terms of their contract and any implied terms.

Re Lehman Brothers International
FACTS: Lehman provided various brokerage services, incl. the acquisition and custody of services. It agreed to hold securities acquired for clients on trust for them. Lehman received various payments in respect of the trust securities, and Lehman and its client agreed in Clause 5.2 of their contract that (i) Lehman was to have ‘full ownership’ of payments; (ii) Lehman would use the sums received ‘in the course of its business’; and (iii) the client would ‘rank as a general creditor’ in respect of such payments. Lehman went into administration.
ISSUE: whether clients were mere creditors
HELD: Lehman held post-administration receipts on trust for clients. It was an implied term of the agreement that if Lehman was unable to carry on its business then Clause 5.2 would cease to operate. It was a further implied term that Lehman held post-administration receipts on trusts for clients whose securities generated them.

Question 42

Intention implied by words or conduct where there is no written document - Lyell v Kennedy

Answer 42

Lyell v Kennedy
FACTS: Ann Duncan owned land which was let to tenants. Kennedy collected rent on Ann’s behalf. Ann died intestate. There was a dispute about the identity of Ann’s heir and Kennedy continued to collect rent and pay it into a separate bank account. He told various people that the sum in the account belonged to Ann’s heir, however he later claimed it for himself.
HELD: Kennedy held the sum on trust for Ann’s heir. ‘A man who receives the money of another on his behalf, and places it specifically to an account with a banker ear-marked and separate from his own moneys…is…a trustee of the fund standing to credit of that account.’ ‘no express words are necessary’

Question 43

Intention implied by words or conduct where there is no written document - Re Kayford Ltd

Answer 43

FACTS: Kayford Ltd was a mail order company. Its MD Kay was concerned about its solvency and about customers who were paying for goods the company might be unable to supply. He consulted an insolvency specialist about these concerns, who advised Kay to open a separate bank account and call it the ‘Customers Trust Deposit Account’ and to pay into the account any further payments received by customers. The company went into voluntary liquidation.
HELD: The sum credited to the account was held on trust for customers.
‘The whole purpose of what was done was to ensure that the moneys remained in the beneficial ownership of those who sent them, and a trust is the obvious means of achieving this.’
(1) A trust can be created without use of the word ‘trust’
(2) Although payment into a separate account is a good indicator of intention, it is not necessary/conclusive.

Question 44

Intention implied by words or conduct where there is no written document - Paul v Constance

Answer 44

FACTS: A cohabiting couple. In 1973, Dennis Constance received a cheque for £950 and said to Doreen Paul ‘the money is as much yours as mine.’ They agreed to pay the cheque into a bank account. The bank manager advised Dennis to open the account in his sole name as they were unmarried. Dennis made enquiries of the manager to ensure that Doreen was able to draw on the account. Dennis repeated to Doreen multiple times that the sum credited to the account was as much hers as his. They paid in additional sums they had won together playing bingo.
HELD: Dennis had declared a trust of the sum credited to the account for Doreen and himself. Dennis was a simple, unsophisticated man and in ascertaining his intention, the court ‘should consider the various things that were said and done…during their time together against their own background and in their own circumstances.’ (Scarman LJ)

Question 45

Intention - use of the word ‘trust’

Answer 45

• A good indicator that a person intends to create one
• Not determinative, either by its presence or absence (Re Kayford)
• The fact a transaction is characterised by the transacting parties as a trust is not conclusive as to its nature (Modelboard Ltd v Outer Box Ltd)
• The fact a transaction is characterised as something other than a trust does not prevent it taking effect as a trust if it generates a duty characteristic of a trust (Don King Productions v Warren)

Question 46

Intention - use of the word ‘trust’ : Modelboard Ltd v Outer Box Ltd

Answer 46

FACTS: The plaintiff sold cardboard sheets to the defendant. The parties agreed that (i) the plaintiff would retain ownership of sheets delivered to the defendant until they were paid for, (ii) the defendant would pay the purchase price within 30 days of delivery, (iii) the defendant could use sheets which had not been paid for in its manufacturing process, and (iv) if the defendant sold any products incorporating sheets which had not been paid for, the defendant would hold ‘the entire proceeds thereof…in trust for the plaintiff.’
HELD: The defendant did not hold the proceeds of sale on trust, but rather the plaintiff had a charge over those proceeds. The only solution which made ‘business sense’ and was consistent with ‘commercial reality’ was that the plaintiff’s interest in the proceeds of sale only extended so far as was necessary to discharge the defendant’s payment obligation. The plaintiff’s interest in the proceeds was capable of being defeated by payment of the purchase price. This was not changed by the fact the parties used the word ‘trust.’

Question 47

Intention - use of the word ‘trust’ : Don King Productions Inc v Warren

Answer 47

FACTS: Two boxing promoters and managers formed a partnership. They assigned the partnership ‘the full benefit’ of their existing promotional and management agreements with boxers. The purported assignments however were void because agreements for personal services are unassignable.
HELD: The only way to give effect to the evident intention of the parties was by way of trust.

Question 48

Intention - vagueness

Answer 48

A trust is a duty. It is unlikely that a person intends to impose a duty if the alleged duty is so vague that the person required to discharge it is unable to identify what they are required to do.

Mussoorie Bank Ltd v Raynor - The testator gave all his property to his wife ‘feeling confident that she will act justly to our children in dividing the same when no longer required of her.’ The wife was not a trustee of the property. The indeterminate nature of both the alleged trust property and the quantum of the alleged beneficiaries’ interests demonstrated that the testator did not intend a trust at all.

Question 49

Certainty of subject matter

Answer 49

‘It is impossible to have a title to [property], when nobody knows to which [property] the title relates’ (Lord Mustill, Re Goldcorp Exchange Ltd)

Question 50

Certainty of subject matter - 2 distinct requirements

Answer 50

(1) The trust property requirement - it must be possible to identify the trust property
(2) The beneficial entitlement requirement - it must be possible to ascertain the beneficiary’s interest in the trust property

Question 51

Trust property requirement - problems commonly encountered

Answer 51

(1) A person attempts to identify the trust property by description
(2) A person attempts to create a trust of a specific number of items from a larger quantity of similar items without identifying the items to be held on trust

Question 52

Identifying subject matter by description

Answer 52

• A trust will fail for uncertainty if it is not possible to ascertain the trust property from the description.
• e.g. a person cannot create a testamentary trust of the ‘bulk’ of their residual estate because although the residual estate can be identified, it is not possible to ascertain how much of it constitutes the ‘bulk’ (Palmer v Simmonds)
• A company cannot create a trust of its ‘net assets’ because ‘net assets’ does not describe any specific property (Wilkinson v North)

Question 53

Identifying subject matter out of a larger mass

Answer 53

• Depends on the property in issue.
• Trusts of fractional interests in a mass of items presents no difficulties with certainty of subject matter, provided the mass has been clearly identified (Wilkinson) e.g. a person can create a trust of 1/5 of their diamonds. The diamonds are the trust property and the beneficiary has a 1/5 interest in each one of them.
• Re London Wine Company - Customers of a wine merchant purchased wine on the basis that the company continued to store wine in its warehouse until the customer requested delivery. The company issued ‘certificates of title’ to the customers stating the customer was the ‘sole and beneficial owner’ of the wine they had purchased. But the company did not appropriate wine from the stock to any particular contract; it simply maintained the general stock. Held that it did not hold the wine on trust for the customers, as they failed to allocate any specific wine to any specific contract, so it was not possible to identify the trust property. ‘to create a trust it must be possible to ascertain with certainty not only what the interest of the beneficiary is to be but to what property it is to attach’ (Oliver J)

Question 54

Identifying subject matter out of a larger mass - Hunter v Moss

Answer 54

FACTS: Defendant was the registered shareholder of 950 ordinary shares in a company. He declared a trust of 50 of those shares for the plaintiff but did not identify them.
HELD: There was a valid trust of 50 shares. London Wine was distinguished; as every tangible asset (wine) was discrete, its physical properties may have differed from those of seemingly identical assets, which is why it was necessary to specifically identify which tangible assets are to be held on trust. However, this has no application to intangible assets of the same type (e.g. ordinary shares in the same company), because these assets really are identical. ‘The shares were…of such a nature that each of them could satisfy the trust just as well as any other of them’

Question 55

Problems with Hunter v Moss

Answer 55

• The principal problem is that there is a subsisting trust of 20 shares for example, but it is impossible to identify the shares out of 100 shares which are held on that trust.
• Lehman Brothers, Briggs J: ‘The analysis which I have found the most persuasive is that such a trust works by creating a beneficial co-ownership share in the identified fund, rather than the conceptually much more difficult notion of seeking to identify a particular part of that fund which the beneficiary owns outright.’
• So according to Hunter, the trusts takes effect as a trust of 20 specific shares, with the remaining 80 shares unaffected, but according to Briggs in Lehman, the trust takes effect as a trust of all the shares, with the beneficiary having a 1/5 interest in every one of them.
• Briggs’ approach changes the intention of the trust, which isn’t usually allowed (London Wine, Goldcorp)
• Briggs in Lehman: ‘A trust of part of a fungible mass without the appropriation of any specific part of it for the beneficiary does not fail for uncertainty of subject matter, provided that the mass itself is sufficiently identified and provided also that the beneficiary’s proportionate share of it is not itself uncertain.’

Question 56

Beneficial entitlement requirement

Answer 56

• It must also be possible to ascertain the nature and extent of the beneficiary’s interest in the trust property. If it is not possible to do so, the trust will fail.
• e.g. If a trust provides that trustees should hold one of two trust assets, selected by X, for B, but X dies before making the selection, the trust for B fails because it is impossible to ascertain which one B is entitled to (Boyce v Boyce)
• Re Golay’s Will Trusts - A testator directed his trustees to pay a ‘reasonable income’ to the beneficiary. Ungoed-Thomas LJ held that the trust was valid. He argued that ‘reasonable income’ was an ‘objective yardstick’ and it was possible to ascertain the extent of the beneficiary’s interest. He said the court is ‘constantly involved in making…objective assessments of what is reasonable and is not to be deterred from doing so because subjective influences can never be wholly excluded.’