The Grey and Vandervell cases
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|Re Vandervell's Trusts (No 2)|
|Court||Court of Appeal|
|Decided||3 July 1974|
|Citation(s)|| Ch 269|
|Prior action(s)|| 3 WLR 744,  1 All ER 47|
|Judge(s) sitting||Lord denningMR, Stephenson LJ and Lawton LJ|
These three cases: introduction
- Grey v IRC  HL 1
- Vandervell v IRC  2 AC 291 (HL)
- Re Vandervell (no. 2)  Ch 269
are all regarded as authorities for propositions concerning the formality requirements for disposing of equitable interests (see trust formalities). These requirements were the source of a good deal of litigation, much of it involving the Inland Revenue Commissioners (IRC), because only written documents attract taxation by way of stamp duty. It is, of course, the right of every citizen to limit the amount of tax he or she pays, so mechanisms for doing business without formal documentation were very welcome when transactions like share transfers attracted stamp duty.
A great deal of ink has been spilled in the discussion of these cases and they are, I think it fair to say, subject to a good deal of criticism. The criticism is not really of the conclusions, which were almost inevitable, but of the lack of coherence of the reasoning.
This article discusses these cases in detail. However, if you have an examination tomorrow here is the essence of what you need to know:
- Grey is thought to be an authority for the proposition that a written docuement is required if the beneficiary of a trust instructs the trustees to hold the trust property for different beneficiaries.
- Vandervell is thought to be an authority for the proposition that no writing is required if the beneficiary instructs the trustees to transfer the legal title to the trust property out of the trust altogether.
- To the extent that it stands for anything at all, Vandervell no. 2 supports the view that, if an oral declaration of trust fails for uncertainty, and results in an Art, then it is not a 'disposition' if the settlor tries to restate the trust, and does not require writing.
Whether any of these cases really stand for the propositions they are said to stand for is arguable; moreover, their findings do appear to contradict one another in places. Nevertheless, the view that these cases do stand for certain propositions of law is widely accepted, and if it is widely accepted by judges, then they probably do.
Facts first, discussion after
Grey v IRC
The Settlor in Grey wished to transfer shares to trustees to benefit his six grandchildren. Such a transfer, if made in writing, would normally attract stamp duty. To avoid the use of a document, he first transferred the legal title to the trustees of his grandchildren's trust, to hold on bare trust for himself. Because the settlor retained the same benefit of the shares (originally as legal owner, now as exclusive beneficiary under the bare trust) no beneficial interest was transferred, and no stamp duty payable (in fact, a transaction of this meta attracted a nominal fee for administration, but not a proportion of the value).
He then instructed the trustees to transfer the benefit of the trust to his grandchildrens' trusts, in equal shares. He argued that this was not a 'disposition' of an equitable interest, and hence did not require a document.
The trustees in due course wrote to the Revenue, indicating that they held the shares on trust for the grandchildren. The IRC argued that the oral instruction to hold the shares for different beneficiaries amounted to a disposition, and was therefore void because it should have been in writing. They also argued that the later letter from the trustees amounted to the disposition of an equitable interest, and should therefore attract stamp duty.
The House of lords agreed on both points, and ruled that the trusts were valid and stamp duty was payable.
Vandervell v IRC
The settlor, a very wealthy man, wished to sponsor a professorship in the Royal College of Surgeons (RCS). Whether this was out of generosity, or a way to decrease his personal tax liability, is unclear; probably both were factors. The rather complicated method he chose to give effect to this plan was worked out by accountants, to reduce the amount of tax that would be payable. In essence, Vandervell instructed his bankers, who held shares in Vandervell's company on bare trust for himself, to transfer a large number of these shares to the RCS. He then had his company declare a substantial dividend, substantial enough to fund the professorship. Of course, Vandervell did not want to make the IRC a gift of a substantial holding in his company, so a condition of the transfer was that the RCS would grant to a separate trust company an option to purchase the whole stock back for a nominal sum.
The IRC argued that (1) Vandervell had made a valid transfer of the stock to the RCS, despite disposing of his equitable interest without writing, and (2) he had a beneficial interest in the option to purchase, which was extremely valuable. Consequently Vandervell had substantially increased his tax liability.
The House of lords agreed on both counts. As to (1), it was held that an instruction to transfer the legal title out of a trust completely did not amount to a disposition of an equitable interest, so s.53(1)c of the Lpa (1925) did not bite. For (2) -- and this is the really twisted thinking -- because Vandervell did not intend to make an outright gift of the benfits that would follow from the exercise of the option to purchase the company stock, he must have intended the trust company to apply those benefits for somebody else. But who? Most likely Vandervell had not though this far ahead -- his objective was to get the shares back into the hands of the trust company. But because the beneficiaries of that putative trust (of the benefits of the option) were never declared, the trust failed for lack ofcertainty of objects. Consequently, the beneficial interest came back to Vandervell as an automatic resulting trust.
Re Vandervell no. 2
Some time after his defeat in the House of lords at the hands of the IRC, Vandervell continued with his plan to get the company stock back into the hands of the trust company. He had trust company exercise the option, and buy the company shares for a nominal sum. The trustees then wrote to the Revenue stating that they now held the company shares on trust for Vandervells children. Vandervell then had dividends declared on the company shares amounting to about a million pounds.
When Vandervell died, the executors of his estate claimed that the dividends on these shares did not belong to the children's trusts, they belonged to the estate. The reason, they argued, was that Vandervell held the option to purchase the shares on resulting trust, so when the option was exercised the trust company held the shares on resulting trust for him, along with the subsequent dividends.
The executors ultimately failed in their claim, and one gets the impression that the Court of Appeal worked very hard to see that they should, despite having no compelling reason to decide against them. The one judgement that is vaguely credible is that of Lord Denning. His argument was that when the trust company exercised the option to purchase the shares, with the full approval of Vandervell -- who was still the beneficial owner of the option -- this completed the express trust that Vandervell had failed to set up the first time around.
There are a number of problems with this argument. First, the trust company did not have the power to exercise the option. If it held the option on bare trust for Vandervell -- and it must have done, because the House of lords said it did -- then only Vandervell had the power to exercise it. However, it can be argued that he did exercise it and, in so doing, created a trust of the shares with the trust company as trustee. But -- and this is the second problem -- if he did this, did he not dispose of his equitable interest? Previously he held on a resulting trust, subsequently he held nothing. Lord Denning's argument can therefore really only be supported if we conclude that Vandervell's disposal of his interest in the shares was not a disposition, and did not require writing under s.53(1)c.
WARNING: if you're reading this because you've got an exam coming up, you've read enough. The trust law examiner will not wish to read a detailed exposition of why what he wrote in his textbook makes no sense. Trust me on this.
So what are we to make of all this?. Grey is, at least, straightforward on its facts. The argument concerned whether the settlor's instructions to trustees to transfer the trust property to different trusts was a 'disposition' or not. Common sense suggests that it is, in a broad sense. After all, he started with an equitable interest, and ended up without one, and so he disposed of something. However, it could be argued that the original intention of s.53(1)c was to impose formalities on situations where one person simply assigns his equitable interest to another. It is here where the potential for fraud is greatest. In the Grey situation there is no scope for fraud, unless the trustees are in on it as well as the person claiming the interest. one way or the other, it at least does not offend the meaning of the word 'disposition' to call this settlor's actions a disposition, and the decision of the court does not seem unreasonable in the circumstances.
But what is this decision an authority for? It does not seem to be strong authority for the view that it requires writing to instruct your trustee to hold the trust property for a different beneficiary. Why? Because that isn't what happened. In Grey the settlor held under a bare trust. Then he told his trustees to transfer the legal title to the trust property into different trusts for his grandchildren. Although the trustees were the same, they were not the same trusts! Arguably, if the settlor had held under six different bare trusts, and had then instructed the trustees to hold the property on six trusts for his grandchildren, then he would simply have been asking the trustees to switch beneficiaries. But that is not what he did. So, if Grey is an authority for anything, it is an authority for the proposition that it requires writing to instruct a trustee to transfer the legal title to a different trust. Whether or not the two trusts involved have the same trustee or not, is irrelvant.
How does this decision square up with the decision in Vandervell? There, you may recall, the settlor told his trustees to transfer the legal title to shares they held on bare trust for him to the Royal College of Surgeons. This, it was held, did not require writing. Now, in Grey, the transfer of the legal title from the bare trust to the grandchildren's trust was held to require writing. So why did the transfer from the bare trust to the RCS not require writing? The only conceivable explanation is that in Grey, the transfer was to a different trust, while in Vandervell, it was an outright transfer. But was it? While the trustees did transfer the legal title to the RCS, it was hardly an outright transfer. Attached to the transfer was the condition of granting an option to purchase the shares to the trust company. So it is arguable that the shares were transferred to the RCS to hold on trust for the trust company, or else they were impressed with a Constructive Trust to prevent them taking the shares for themselves. If this line of reasoning is true, then shares were transferred from Vandervell's bare trust to trust in favour of the trust company.
So where am I leading with all this, you may be wondering? Well, either the transfer that was the subject of Vandervell was from one trust to another, or it was not. If it was, then the decision is out of line with Grey, which decided that a transfer of the legal title from one trust to another required writing. If it was an outight transfer, not a transfer between trusts, then it is still somewhat at odds with Grey, because it is hard to see why a transfer from one trust to another requires writing, while an outright transfer does not. Worse, if Vandervell does decide that a transfer of the legal title outright does not require writing, this allows exactly the kind of situation the s.53(1)c seeks to prevent. The Lords' reasoning, such as it was, was to the effect that diposing of the legal title would require a document anyway (a share transfer form, for example). So it was pointless to insist on a further document to transfer the equitable title. The problem with this reasoning is that it is only with intangible property and land that documents are usually required to effect a transfer of title. Most tangible objects are transferred by delivery.
As for Vandervell no. 2, this appears to decide that a failed express trust that rebounds to the settlor under an ART can be put right without writing, even though putting it right does constitute the disposal of an equitable interest (the settlor's interest under the ART). However, this conclusion is at least logically justifiable. After all, if one can declare a trust of personalty without writing, why should it need writing to re-declare it if the first attempt fails?
Why are these cases so complicated, and why did the courts make such a meal of them? There are a number of reasons
- First, courts don't like tax evasion, and will intepret the law in such a way as to deprive tax evaders of their gains. There is, of course, a narrow line between tax avoidance and tax evasion and, while the settlors in both these cases could not be said to be evading their taxes, they were operating very close to that line.
- Second, there are a great many ways that people can deal with their property that have no clear status in trust law. For example, when Vandervell told his trustees to transfer shares to the RCS, with an obligation to grant an option to purchase, what was he really doing, in trust law terms? Was he entering into a contract with the RCS, such that he transferred the title in return for a grant of the option to purchase? Or was he declaring a trust of the shares and the option, with the RCS as trustees and themselves and Vandervell's trust company as the beneficiaries? Or something else entirely? There is no clear answer to this -- the transaction has no clear counterpart in traditional trust law formulation.
- Finally, the courts in places appear to have overlooked some basic trust law principles. For example, if a beneficiary of a trust instructs his trustee to hold the property on trust for a different beneficiary on different terms, then this is not really an assignment of a beneficial interest from one person to another. It is the destruction of one trust and the creation of another. The fact that the same trustees manage both trusts does not mean they are the same trust -- they are different trusts with the same trustees. Commercial trust companies manage thousands of different trusts, but the don't see the trust property as one big pot that everybody shares.