LA3002 Equity and Trusts

Pre-exam update 2024

The following developments should be noted:

CHAPTER 6: FORMALITIES
6.3.1 What transactions are caught
This section discusses what types of transactions fall within s.53(1)(c) Law of Property Act
1925, so that they require writing to be effective. Section 53(1)(c) requires a ‘disposition’ of
an ‘equitable interest or trust subsisting at the time’ to be in writing. In LA Micro Group
(UK) Ltd v LA Micro Group Inc [2023] EWCA Civ 214, the Court of Appeal followed Neville
Estates v Wilson and IRC v Oughtred in holding that an oral agreement to transfer an
equitable interest in shares in a private company did not require writing if it gave rise to a
constructive trust – as it was held to do in this instance. (This would require the oral
agreement to be specifically enforceable and so relates only to shares in a private
company.) Constructive trusts are exempt from the need for writing by reason of s.53(2)
LPA 1925 and if the equitable interest passed under that type of trust, as arising from a
specifically enforceable contract, it was not caught by s.53(1)(c) because of s.53(2).
Permission to appeal to the Supreme Court has been granted. In Neville and Oughtred, it
was clear that the equitable interest being transferred by the oral contract was, as is usual,
going to be held separately from the legal title after the oral agreement had taken effect:
e.g. in these two cases, A held on trust for B, and B was transferring their interest to C. In
LA Micro, the agreement was for the equitable owner (B) to transfer the equitable interest
back to the legal owner (A). Thus, the purchaser (A) would be both the legal owner and
trustee (as they always had been) and, for a moment, the equitable owner under the
constructive trust (which would in fact be a constructive sub-trust, with A holding on trust
for B who was holding on constructive sub-trust for A). This constructive sub-trust would
then ‘collapse’ and the legal owner/trustee would be the absolute owner. The Supreme
Court will be considering whether this is an accurate analysis.

CHAPTER 9: CHARITABLE PURPOSE TRUSTS

9.5 Cy-près
In Zedra Fiduciary Services (UK) Ltd v Attorney General [2023] EWCA Civ 1332, the Court
of Appeal upheld the High Court and determined that the money held (currently at £600
million) under a failed charitable trust to pay off completely the national debt (currently at
£2,200 billion) should be applied cy-près to reduce the national debt. The trustees had
hoped that a cy-près scheme would be ordered in favour of general charitable purposes
within the UK. The court held that this (reducing the national debt) was the most
appropriate way in the light of s.67 Charities Act 2011 that required a court, in approving a
cy-près scheme, to consider: the spirit of the original gift; the desirability of securing that
the property was applied for charitable purposes that were close to the original purposes;
and the need for the charity to have purposes that were suitable and effective in the light of
current social and economic circumstances.

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LA3002 Equity and Trusts Pre-exam update 2024

The case confirms that the cy-près jurisdiction does not exist to do anything charitable but
only charitable things related to the original charitable purpose.

CHAPTER 16: BREACH OF TRUST

16.4 Dishonest assistance
In Hotel Portfolio II Ltd v Ruhan [2023] EWCA Civ 1120, the Court of Appeal held that,
where a fiduciary had been held to account fully for their breach of duty, a person who had
dishonestly assisted in that breach of duty could not also be required to pay equitable
compensation. This would be double recovery for the same breach of duty. A dishonest
assister could be required to disgorge gains (which was the purpose of liability to account)
but not to pay equitable compensation (which was about loss), when that loss had already
been recovered from the person acting in breach of fiduciary duty. A dishonest assister
could of course be held liable to compensate when the person in breach could not
themselves meet the liability.

16.5 Knowing receipt

In Byers v Saudi National Bank [2023] UKSC 51, the Supreme Court has confirmed that for
a claim in knowing receipt to succeed, the claimant’s equitable interest must be in existence
immediately before receipt by defendant. Thus, where receipt by the defendant extinguishes
or overrides the equitable interest – for example, by reason of statute – then the claim in
knowing receipt cannot succeed in either its proprietary aspect or personal aspect. The
simple reason is that the alleged knowing recipient has not actually received ay property of
the claimant – that property no longer existed immediately before receipt.
The Supreme Court also made general comments about liability for knowing receipt (see the
Westlaw summary of the judgment on which the following test is based).
• The transfer of trust property by a trustee to a bona fide purchaser for value without
notice extinguished or overrode the proprietary equitable interest of the trust
beneficiary, even if the trustee in so doing acted in breach of trust.
• If the bona fide purchaser for value without notice later became aware that the
property was transferred in breach of trust, the beneficiary's proprietary equitable
interest did not revive. Nor was that interest revived when the original purchaser
transferred the property to a further transferee, who, at the time of the transfer, was
aware that there had been a breach of trust.
• The extinction or overriding of a proprietary equitable interest by the time when the
recipient received the property defeated a proprietary claim.
• Given the close link between the proprietary claim and the personal claim in knowing
receipt, it would be logically inconsistent for the law to allow the personal claim in
knowing receipt to survive where the proprietary claim had been defeated by the lack
of a continuing proprietary equitable interest. Thus, the personal claim is also
defeated in such circumstances.
• A personal claim in knowing receipt against a transferee was closely linked to a
proprietary claim for the return of the property. A personal claim in knowing receipt
came into play when the transferee, who was not a bona fide purchaser for value
without notice, no longer had the property, such as when the transferee transferred,
dissipated or destroyed the property in question and thereby prevented a proprietary
claim.

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LA3002 Equity and Trusts Pre-exam update 2024

Note also a contrast between knowing receipt and dishonest assistance. Dishonest
assistance was ancillary to the liability of the trustee and rendered the assister liable as an
accessory. Knowing receipt was significantly different. Although it was like dishonest
assistance in being linked to another's wrong, it was not a form of accessory liability and was
not an accessory wrong.

CHAPTER 17: BREACH OF FIDUCIARY DUTY

17.3 The ‘no conflict’ rule
In Recovery Partners GP Ltd v Rukhadze [2023] EWCA Civ 305, the Court of Appeal
followed Boardman v Phipps and confirmed that the liability to account for profits for
breach of fiduciary duty was a strict duty and did not depend on the fault or culpability of
the fiduciary. Moreover, a fiduciary was not entitled as of right to an allowance for skill in
securing the profit. However, an allowance for skill could be made but the ‘the ultimate
test, which was that applied by Wilberforce J in Phipps v Boardman, is whether it would be
inequitable for the beneficiaries to step in and take the benefit of the profits made by the
fiduciary without paying for the skill, labour and risk which has produced it’ [para.116]. An
allowance could be made even where there was culpability on the part of the fiduciary,
bearing in mind that one purpose of requiring a fiduciary to account for all profits obtained
in breach of fiduciary duty was to act as a deterrent to prevent breaches. Clearly, that
would be more relevant in cases of dishonesty.
Permission to appeal to the Supreme Court has been granted.

CHAPTER 18: CLAIMS BASED ON TRACING

18.2.2. ‘Proprietary’ claims
A proprietary claim is most useful where the wrongdoing trustee does not have sufficient
personal funds to meet their liability for breach of trust: hence a claim is made to property
instead. In Lapome v Kemp [2023] EWHC 1564 (Ch), an argument was made as a
preliminary point that a beneficiary could not seek a proprietary remedy against property if
there were sufficient funds in the hands of the defaulting trustee to meet the liability. That
is, that a beneficiary could not ‘cherry pick’ their remedy. Without deciding, the court said
that it would not strike out a beneficiary’s claim to property even where sufficient funds
existed. It was unclear whether a claimant could be prevented from asserting a proprietary
remedy against property even though funds were available to meet the liability for breach
of trust in full. The case law is inconsistent and academic opinion was divided.

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