Download Trust and equitable charges

TRUST AND EQUITABLE
CHARGES
Lecture 10-17.12.2014
Defintion
• A trust exists when the titleholder of property is obliged to
deal with that property for the benefit of another person
Elements
the trustee — a legal person who holds a vested
legal title (or a vested equitable title) in the property,
subject to fiduciary duties;
• 2.
trust property — property in real or personal form
which is identified or ascertainable and capable of being
held on trust. The trust property can be legal or equitable
property; and
• 3.
the beneficiary (sometimes referred to as the cestui
que trust in older cases, or the object of the trust in
modern cases) — a person, or group of persons, who
hold a beneficial equitable estate in the property and on
whose behalf the trustee must act.
• 1.
Definitions
• It should be noted that the person who creates
the trust during their lifetime is usually referred to
as a settlor. Such a trust is often described as an
inter vivos trust or a settlement. When the trust
has been created in a will, the creator is the
author of the will, namely the testator (if male), or
testatrix (if female). A trust created in a will is
referred to as a post mortem trust. In this and
following chapters, the word creator will be used
as a collective term to cover both settlors and
testators/testatrixs.
Actors in the trust
• 1.
• 2.
• 3.
creator;
trustee; and
beneficiary
• The three legal actors need not always be
different legal persons. It is possible for a creator
and a trustee to be the same person, for
example, when a trust is created by declaration of
trust Similarly it is possible for a creator to be a
beneficiary, in cases where the creator instructs
the trustee to hold the property for his or her
benefit.
Actors in the trust
• A trustee might also be a beneficiary, but only in situations
where the trustee is one of a number of beneficiaries. It is
impossible to be the sole trustee and sole beneficiary
because once a person owns complete legal and
equitable estates they are said to merge together, leaving
no distinction between the legal and equitable estates
The three species of trust
• 1.
express trusts;
• 2.
resulting (implied) trusts
• 3.
constructive trusts is an equitable remedy
resembling a trust (implied trust) imposed by a court to
benefit a party that has been wrongfully deprived of its
rights due to either a person obtaining or holding legal
right to property which they should not possess due to
unjust enrichment or interference
Types of express trusts
• Fixed
• Discretionary
• Bare
Contracts and trusts
• Gosper v Sawyer (1985) 160 CLR 548 at 568–9;
58 ALR 13 at 26, Mason and Deane JJ stated:
The origins and nature of contract and trust are,
of course, quite different. There is however no
dichotomy between the two. The contractual
relationship provides one of the most common
bases for the establishment or implication and for
the definition of a trust.
Fiduciary relationships and trusts
• Trusts are a subset of fiduciary relationships and the
duties owed by trustees to their beneficiaries are fiduciary
in character
• Fiduciary duties and obligations of trust are not mutually
exclusive. A person can owe separate and co-existing
fiduciary and trustee obligations
Deceased estates and trusts
• Executors of deceased estates occupy a similar function
to trustees. Executors, like trustees, are fiduciaries.
However, an executor’s duties exist in relation to the
proper administration of the deceased’s estate
Bailments and trust
• A bailment only confers a weak possessory title on the
bailee. It does not create a trust as the bailee does not
take a vested title in the property
• Bailment is distinguished from a contract of sale or a gift
of property, as it only involves the transfer of possession
and not its ownership. To create a bailment, the bailee
must both intend to possess, and actually physically
possess, the bailable chattel. Bailment is a typical
common law concept although similar concepts exists in
civil law (Spain- Depósito).
• unlike a lease or rental, the bailee is generally not entitled
to the use of the property while it is in his possession.
Agency and trust
• An agency exists where one person (the principal)
authorises another person (the agent) to act as the
principal’s representative. The actions of an agent bind
the principal. Like bailments, agency agreements are
based in contract
Debts and trusts
• The position of creditors is therefore very different
from that of beneficiaries. Beneficiaries have
equitable interests in the property held by the
trustee. Creditors do not have an interest in their
creditor’s property. A creditor only has access to
common law remedies to pursue the debt
• The institutions of debt and trust can co-exist in
the one transaction if there is a common intention
that funds will be held for specific purposes eg
Quistclose
Debts and trusts
• Barclays Bank Ltd v Quistclose Investments Ltd
[1970] AC 567
• Rolls Razor Pty Ltd (Rolls Razor) borrowed a large
amount of money from Quistclose Investments Ltd
(Quistclose). Quistclose lent the money on the basis
that it was to be used for the specific purpose of
paying Rolls Razor’s shareholders their dividends.
Rolls Razor deposited the money in a special
account with Barclays Bank. Barclays were informed
that the money was only to be used to pay the
dividend. Before the dividend was paid Rolls Razor
went into liquidation. The bank sought to use the
money in the account to set-off the debts which were
owed to it by Rolls Razor. Quistclose sought to
retrieve the money and claimed that the bank had no
right to use the funds in a set-off.
Debts and trusts
• Lord Wilberforce found that the agreement
between Quistclose and Rolls Razor created a
primary trust for the shareholders. When that trust
could not proceed (due to Rolls Razor’s
insolvency) the loan became subject to a
secondary trust in favour of Quistclose in the
event of the money not being used for its
dedicated purpose. Finally, given that the bank
had notice of the mutual intention of the parties to
create a trust, it was bound to respect that trust
and could not use the funds to set-off debts owed
to it by Rolls Razor.
Debts and trusts
• The mutual intention of the parties can be
discerned from the language employed by the
parties, the nature of the transaction and the relevant circumstances attending the relationship
between them.
Securities and trusts
• Debts will often be secured. This means that the debtor
has agreed to give the creditor a proprietary interest in
one or more of his or her assets. Should the debtor not
pay, the creditor can realise the security by taking
possession of the secured property or by ordering that it
be sold and the proceeds be used to satisfy the debt.
Securities and trusts
• The equitable charge is very similar to a trust. An
equitable charge is a form of security that allows the
creditor (chargee) to order the sale of the property, after a
triggering event, like default of payment. The proceeds of
sale can then be used to satisfy amounts due to the
chargee
Equitable charge
• The equitable charge is similar to a trust. An equitable
charge is a form of security that allows the creditor
(chargee) to order the sale of the property, after a
triggering event, like default of payment. The proceeds of
sale can then be used to satisfy amounts due to the
chargee
Equitable charges
• An equitable charge is created when property is expressly
or constructively made liable, or specially appropriated to
the discharge of a debt without there being any intention
to transfer ownership of the property. In the event of nonpayment of the debt, the creditor’s right of realisation is by
judicial process i.e. by the appointment of a receiver or an
order for sale.
S.53 Law of Property Act 1925
• An equitable charge may be in writing (s.53(1)(c) Law of
Property Act 1925) ("LPA") but is usually created by deed.
• Section 53(1) LPA requires a disposition of an equitable
interest or trust subsisting at the time of the disposition to
be in writing signed by the person making the disposition
or by his agent or by will. An equitable charge can be
created by express intention and terms.
Kinane v Mackie-Conteh [2004] EWHC 998
(Ch) - s.53 LPA and s.2 LP(MP)A.
• Mr Kinane lent money to Mr Mackie-Conteh for a trading
venture. Mr Kinane alleged that Mr Mackie-Conteh
entered into an agreement whereby he agreed to provide
security for the loan by way of a legal charge over his
home. The facts surrounding this alleged agreement were
in dispute, but it was accepted that the agreement did not
comply with s.2 LP(MP)A. Mr Kinane tried to enforce his
security to recover the debt. He claimed that the
agreement created an equitable charge over the property
which was enforceable because it complied with s.53
(1)(c) LPA.
Kinane v Mackie-Conteh [2004…]
• Mr Mackie-Conteh claimed that the agreement did not
comply with s.53(1)(c); s.53(l)(c) presupposed there to be
an existing equitable interest in place capable of being
disposed of, which there was not in this case.
• The court held that the document was sufficient to create
an equitable charge and was enforceable because it
complied with s.53 LPA. As Fisher and Lightwood, the text
book, says "An equitable charge on land or an interest in
land must be in writing signed by the chargor or his agent.
An instrument which creates an equitable charge and
contains an agreement to create a legal mortgage, but fails
to comply with the formalities for an equitable mortgage on
land, will still create a valid equitable charge."