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Summary

Introduction

We have seen in Chapters 10 and 12 how the determination of the courts to protect the interest of the beneficiaries in the event of trustee insolvency or misconduct was manifested in two ways in particular: (1) the separation of trust property from the insolvent's own assets; and (2) the provision of the process of equitable tracing. Thus, property held by an insolvent or bankrupt person or company in trust for another is, with one exception, not available to the liquidator or trustee in bankruptcy to meet the claims of creditors. The exception is where an insolvent trustee has outlaid its own moneys in satisfaction of the trust's liabilities. A right of indemnity arises against trust assets for such liabilities satisfied on the trust's behalf (eg, in running a business of the trust). This gives the trustee a proprietary interest in the trust assets, which may pass to a trustee in bankruptcy or liquidator for the benefit of creditors (see generally Hayton and Mitchell, pp 693–703). In certain rare circumstances it has been held that property held on trust may be available to the liquidator to cover its costs if the insolvent's other assets are insufficient (see Chapter 12, p 689). The reasoning behind the fundamental principle that the insolvent's property does not include trust property is clear enough: trust property is beneficially owned not by the insolvent or bankrupt trustee, but by the beneficiaries. Furthermore, the principle – described as ‘the cornerstone of the English law of trusts’ (Waters (1983) 21 Alta LR 395 at 402) – is not confined to express trusts, but extends also to cases of imputed trusts. The effects of this principle and its close companion, equitable tracing, are graphically summarised in the following extract from the Cork Report.

Report of Review Committee on Insolvency Law and Practice (Cmnd 8558, 1982), para 1045

Where a claimant can establish that he has an interest in property in the hands of or under the control of the insolvent which is impressed with a trust, express, implied or constructive, he is not required to rank as an unsecured creditor, but may call for the return of the trust property to which the general body of creditors have no right to resort.

Summary

Introduction

(a) The centrality of intention

When deciding how to give away property the owner of assets has a choice between outright gift or a gift in trust. Stripped to its essence, the private trust, to reiterate a point made earlier, is a gift projected on the plane of time. However, the limited functional similarity of these two forms of gift, the absolute gift and the gift in trust, must not disguise the fact that they are conceptually distinct.

M Pickard, ‘The Goodness of Giving, The Justice of Gifts and Trusts’ (1983) 33 U Toronto LJ 381

Thus there are gifts, which are Legal, and, then again, there are trusts, which are Equitable. These are two distinct arrangements, not simply two types of benefaction, although it is not clear whether we treat them as distinct because we sharply distinguish wanting to make a gift to another, on the one hand, from wanting to make a trust for another, on the other hand, or because we pay attention to the historical distinction that gifts were creatures of Law, and trusts, creatures of Equity. But distinct they are, and so we think that there are separate requirements peculiar to each …

In practice also there will usually be no difficulty in distinguishing the two forms since trusts are commonly created in writing, usually by deed, wherein the donor designates another person or group of persons as trustee(s). But neither writing nor the appointment of others as trustees is essential. There is a third method of making a gift: people can unilaterally and orally declare themselves to be trustees of property for the benefit of others. The absence of written evidence in such circumstances can lead to difficulty of interpretation in this area, particularly that of separating general intention from particular intention. By general intention is meant the intention on the part of the owner of the assets to be a benefactor of some other person(s). Although both specific modes of giving, the outright gift and the declaration of oneself as trustee, do have as a common core that generalised intention to be a benefactor, the legal system discriminates between them. It purports to ignore the common generalised intention and concentrates instead on the particular intention, whether, for instance, to be a donor of an absolute gift or to be a trustee.

Summary

Introduction

One of the first decisions to be taken by a settlor or testator creating a trust concerns the selection of the trustees. Who should be appointed: the settlor him- or herself, a family friend, a professional person – probably an accountant or solicitor – or a corporate trustee such as a trust department or trust subsidiary of a bank, or indeed some combination of these? The decision is of the greatest importance. Not only may the trustees be empowered to decide beneficial entitlement, but they will also be responsible for trust administration including preserving the value of the trust fund through effective investment. Decisions about whom to appoint assume the existence of people or organisations willing to serve as trustees. After all, people cannot be forced to become trustees of express trusts, and, if appointed, may immediately disclaim or subsequently retire (see Chapter 10). It may therefore be important that the law, in seeking to oversee the exercise of trusteeship, does not unduly discourage potential trustees.

This chapter and the next two are concerned predominantly with the benefits and burdens of trusteeship. First, this chapter focuses on the nature of trusteeship with particular reference to a possible source of tension created between, on the one hand, a concept of trusteeship rooted in moral obligation and, on the other, one which perceives trusteeship as a managerial function to be financially rewarded. In this context we concentrate in particular on the principle that trustees should not adopt a position where their personal interests, most notably in securing some financial reward for themselves, may conflict with their duties to the beneficiaries. Then, in Chapter 9 some of the significant powers and duties respectively conferred and imposed upon trustees in the management of trust property are considered. Finally, in Chapter 10 the emphasis shifts to the issue of control: can the settlor, the court or beneficiaries effectively regulate the exercise by trustees of these powers and duties? What remedies are available to beneficiaries when things go wrong? Also in Chapter 10 we discuss the statutory and common law provisions relating to appointment and removal of trustees. Discussion of this topic, variously described as technical and dull, is deferred until then because the authority to appoint and/or remove trustees can provide a key mechanism in seeking to control the trust and hold trustees accountable.

Summary

Introduction

In Chapter 1 we adopted as one introductory starting point the claim advanced by the historian and jurist F W Maitland that ‘the greatest and most distinctive achievement performed by Englishmen in the field of jurisprudence’ was ‘the development from century to century of the trust idea’ (Equity (2nd edn, 1936), p 23). Also, we observed that the pace of fiscal, commercial and social changes in the latter half of the twentieth century, together with a growing intellectual ferment about the appropriate classification of areas of private law, had put the ‘development of the trust idea’ firmly back on the agenda for both practitioners and academics. As far as coverage of development is concerned, our subsequent focus in much of the book has been to explore and to explain changes in trusts law, but with what might be described as an inward-looking perspective. It is only the trusts law of England and Wales that has been the focus of our attention, Scotland having its own distinctive trust concept and law. One proposition to emerge at several points in the book has been that we should be cautious about assuming that, although there may be some fundamental principles at work, there may not necessarily be one set of legal rules common to all express trusts (see also Getzler in (2009) 10(2) Theoretical Inquiries in Law 344). Pension fund trusts and possibly also other applications of trusts in commercial contexts perhaps stand as the most prominent illustrations of deviation from the norm, hence the temptation to refer to laws of trusts rather than trusts law.

But, it may be contended, there is a startling omission in this introspective approach. It would seem improbable that the increasing global trends in the practices of finance and business should have had no wider transnational impact on the trust idea, whether that be in terms of legal practice or academic debate. The position, of course, is that there has been an impact as even the briefest glance at publishers’ lists will confirm. (See, eg, Panico, International Trust Laws (2010); Hayton (ed), The International Trust (3rd edn, 2011); Collins et al, International Trust Disputes (2012); Smith (ed), The Worlds of the Trust (2013)).

Summary

Introduction

(a) An agenda for change

In Chapter 16 we observed that the nineteenth century had handed on a definition of charity based on the preamble to the Statute of Charitable Uses 1601, but encrusted with a luxuriant growth of case law. Despite several official and unofficial proposals during the twentieth century to reform and/or clarify the definition the legislature had until recently taken no major steps in this direction (see Colwyn Commission (Cmd 615, 1920), Pt III, s xiv; Nathan Report (Cmd 8710, 1952), paras 123–140; Final Report of the Radcliffe Commission on the Taxation of Profits and Income (Cmd 9474, 1955), ch 7; Goodman Committee Report, Charity Law and Voluntary Organisations (1976), para 23 and App I). There had been an obvious opportunity for reform at the time of the Charities Act (CA) 1960, but this statute, while repealing the 1601 preamble, left the definition itself untouched. The matter appeared to have been settled by the Conservative government in its 1989 review of the regulatory framework provided by charity law (Charities: A Framework For the Future (Cm 694, 1989). The opinion expressed in the Review was that any reformulation or attempt to give the definition statutory effect was undesirable: ‘There would appear to be few advantages in attempting a wholesale redefinition of charitable status – and many real dangers in doing so’ (para 2.17). One of those dangers was perceived to be that a statutory definition would put at risk a valuable feature of the common law definition, its flexibility. The legislation that ensued (Charities Act (CA) 1992 and CA 1993) was predominantly concerned with matters of regulation and accountability (see Chapter 18) and left the definition untouched.

The settlement adopted in the early 1990s did not still debate on the subject of charity law. Indeed, quite the contrary was the case and the debate gained added impetus in the next decade as a series of reports from think-tanks, pressure groups and committees all contributed to the maelstrom (see, eg, Knight, CENTRIS Report: Voluntary Action in the 1990s (1993); Mulgan and Landry, The Other Invisible Hand (Demos, 1996)).

Summary

Introduction

The last decade of the twentieth century witnessed a fascinating resurgence of interest in, commentary on and litigation about equitable remedies. There are many reasons for this trend that has continued unabated, but a prominent one is the presence of fraud. In litigation the aftermath of the collapses of BCCI and Asil Nadir's Polly Peck company, the Maxwell saga and mortgage fraud all made their contribution. One consequence ‘is that courts are increasingly concerned with attempts by the victims of fraud to trace their money and recover it, not from the fraudsters or their confederates, who have usually disappeared, but from those through whose hands it has passed’ (Millett QC (now Lord Millett) (1991) 107 LQR 71). Frequently, the passage of money has involved sophisticated exercises in money laundering, often through bank accounts in several countries. Put simply, money laundering is the process by which the proceeds of fraud or some other criminal activity are converted into assets that appear to have a legitimate origin, the purpose of the process being that the assets can then be retained permanently or even possibly recycled to finance further crimes. The process of tracing and the legal remedies by which the proceeds of fraud may be recovered have involved to some degree the processes and remedies provided by equity, and it is broadly within this commercial context that our study of equitable remedies is located.

But the attempts at recovery have also involved resort to common law processes and remedies. What these attempts then highlighted were some of the uncertainties and inconsistencies in our legal rules in this area: ‘There is no lack of rules; no want of authority. It is their abundance that causes the difficulty … No two judges … are agreed on the correct classifications of the various different situations that can arise, let alone on the requirements for recovery in each’ (Millett, ibid). As might be inferred from these comments, the relationship between the common law and equitable systems and the search for a coherent response to the practical problems of recovery has exercised a growing influence on academic debate and, arguably, on litigation also.

Summary

Trusts within the rules of an association

It will be seen in Chapters 16, 17 and 18 that the trust has come to play an important part in the context of not-for-profit activity that the law regards as charitable. But the trust also has an important role to play, alongside other legal concepts such as contract, in non-charitable not-for-profit activity. Numerous not-for-profit organisations are formed not as companies or any other kind of corporate body, but as unincorporated associations. In Conservative and Unionist Central Office v Burrell [1982] 1 WLR 522, Lawton LJ suggested that an unincorporated association will have the following features:

Summary

This book seeks to present the law of trusts in a different way from conventional texts. The underlying premise is that an investigation of the social and legal contexts in which trusts commonly appear, and of the functions that trusts perform within these contexts, is an essential prerequisite to a proper understanding of trusts law. Developments that have occurred in the relevant social and legal contexts since the first edition of this book have confirmed our conviction in the value of this approach. The bulk of the book is therefore divided into five parts: trusts and the preservation of family wealth (Chapters 3–10); trusts and family breakdown (Chapter 11); trusts and commerce (Chapters 12–15); trusts and non-profit activity (Chapters 16–18); and the internationalisation of trusts (Chapter 19). The last of these, which explores not just the English trust's export to other common law jurisdictions and offshore financial centres, but also civilian responses such as the Italian trusts interni and the French fiducie, is new to this edition, which also takes full account of the recent work of the Law Commission as well as statutory changes, including the Charities Act 2011, the Trusts (Capital and Income) Act 2013, and the Inheritance and Trustees’ Powers Act 2014. Important recent cases, notably Jones v Kernott, Pitt v Holt, FHR European Ventures v Cedar Capital Partners and Williams v Central Bank of Nigeria in the Supreme Court, together with an outpouring of academic literature, have all in their different ways contributed to a continuing debate about trusts law, particularly in its relationship to other areas of the common law, and the effect of these influences is evident in all five parts of the book.

As with any new edition, some compromise is inevitable when balancing the desire to retain existing materials with the need for exposition on recent developments if the book is not to increase in size unduly. Happily, the internet now offers something of a solution, and the chapter on occupational pension schemes – a significant commercial context for the trust, but sadly one infrequently taught on undergraduate courses – which featured in previous editions remains, but as an online resource available in updated form at www. cambridge.org/9781107105485. Another infrequently taught area on undergraduate courses, but one of considerable practical significance, is taxation of trusts.

Summary

Introduction

On one level this chapter is simply concerned with completing the description of the necessary requirements for creating a valid express trust. This process provides a snapshot of the present rules relating to ‘certainty of objects’ and the ‘beneficiary principle’, whilst simultaneously identifying unresolved problems and teasing out inconsistencies. But, as in other areas of law, the rules have not remained static and change here has been dramatic. Indeed, during the last four decades the courts have so turned the world of ‘certainty of objects’ upside down that ‘the forms and functions of settlements have changed to a degree which would have astonished Lord Eldon’ (Schmidt v Rosewood Trust Ltd [2003] UKPC 26, [2003] 2 AC 709 at para 34, per Lord Walker). This dynamic aspect of law-making also deserves attention. A second level of study, therefore, is to examine the shifts that have occurred and to understand the how and why of change.

However, the starting place for this study has to be traced back much further, to the decision in Morice v Bishop of Durham (1804) 9 Ves 399. There Sir W Grant summarised the court's approach as follows:

There can be no trust, over the exercise of which this Court will not assume a control; for an uncontrollable power of disposition would be ownership, and not trust. If there be a clear trust, but for uncertain objects, the property, that is the subject of the trust, is undisposed of, and the benefit of such trust must result to those, to whom the law gives the ownership in default of disposition by the former owner. But this doctrine does not hold good with regard to trusts for charity. Every other trust must have a definite object. There must be somebody, in whose favour the Court can decree performance.

This statement laid a firm foundation both for a certainty of objects requirement – the beneficiaries of a trust must be capable of being ascertained – and for its offshoot the beneficiary principle – every non-charitable trust must have a human beneficiary. It also strongly suggests that the reason for the requirements is rooted in the ability of the court to control a trust.

Summary

Introduction

The previous chapter in this commercial section of the book focused generally on the conscious use of a trust as a convenient method of achieving specific commercial objectives – thus falling within what was termed in Chapter 1 the ‘trust-twisting’ aspect of trust usage. The emphasis in this chapter shifts diametrically to the position where those engaged in some form of commercial activity may find themselves subject to fiduciary duties and, if in breach of those duties, may have imposed on them one or more of the equitable remedies, including constructive trusteeship, that the courts can call upon.

Consider the following examples of problems that might be encountered:

Summary

Introduction

A ‘trust’ in English law is in some measure the translation into legal terms of the word ‘trust’ as used in ordinary speech. Its conceptual starting point is ‘a confidence reposed in some other’ (this phrase is from the sixteenth-century legal commentaries of Lord Chief Justice Coke). The ‘confidence’ so reposed gives rise to moral obligations to which the courts, aided by the legislature, have purported to develop legal parallels. Inevitably, the moral weight given to trust and trusteeship in ordinary usage – to be ‘in breach’ of a ‘sacred trust’ is a serious matter, with repercussions possibly in the next world as well as this one – has had a significant impact on both the scope and the content of trusts law principles. There are still some contexts in which it may be difficult to say whether the word ‘trust’ is used in a legal or purely moral sense.

Yet this is by no means the whole story of trusts law. In the early twentieth century the historian and jurist F W Maitland praised the trust (see Equity (2nd edn, 1936), p 23 and Selected Historical Essays (1936), p 129); he regarded ‘the development from century to century of the trust idea’ as ‘the greatest and most distinctive achievement performed by Englishmen in the field of jurisprudence’. But this was not because the trust embodied basic ethical principles, but rather because of its versatility. It was, he said, ‘“an institute” of great elasticity and generality; as elastic, as general as contract’. The trust had in fact become a ‘lawyers’ device’, used chiefly within the domain of private property transactions and institutions, and capable of serving a wide variety of purposes. In 1934, one finds a left-wing American commentator suggesting that, whatever the merits underlying the moral principle that a trust should not be breached, the versatility of this lawyers’ device was exploited in at least one context – the preservation of private family wealth – in a manner which had little to do with ethics (Franklin (1933–34) 19 Tul LR 473 at 475):

The trust is an effort to escape from the ever-deepening and ever-recurrent crises in capitalism. It is the confession of the upper middle class – the class that has most used the trust – that the contradictions in capitalism cannot be resolved.

Property Law

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Table of statutes

13 - Trusts in commerce – II: commerce, credit and the trust

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Contents

Table of cases

4 - Creating the trust – I

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Table of abbreviations

Useful websites

Acknowledgements

8 - An introduction to trustees and trusteeship

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19 - Trusts – an international dimension

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17 - A legal definition of ‘charity’

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12 - Trusts in commerce – I: commerce and equitable remedies

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15 - Trust, contract and unincorporated associations

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Preface to the sixth edition

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5 - Creating the trust – II

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Frontmatter

14 - Trusts in commerce – III: fiduciary relationships, commerce and the trust

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Index

1 - Trusts introduced

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3 - The elements of possession

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