An insolvency case which turned on the meaning of disposition in the context of trusts. Contains some interesting dicta on the way we think about trusts and beneficial interests as proprietary rights in particular.

Lord Mance:

’43.Sir Nicholas Browne-Wilkinson V-C said of section 436 in Bristol Airport Plc v Powdrill [1990] Ch 744, 759D, that “It is hard to think of a wider definition of property”. The case concerned a chattel lease, which it was argued gave rise only to contractual rights. The Vice-Chancellor said (p 759E-F):
“Although a chattel lease is a contract, it does not follow that no property lease is created in the chattel. The basic equitable principle is that if, under a contract, A has certain rights over property as against the legal owner, which rights are specifically enforceable in equity, A has an equitable interest in such property. I have no doubt that a court would order specific performance of a contract to lease an aircraft, since each aircraft has unique features peculiar to itself. Accordingly in my judgment the ‘lessee’ has at least an equitable right of some kind in that aircraft which falls within the statutory definition as being some ‘description of interest … arising out of, or incidental to’ that aircraft.”
44. Any equitable proprietary interest arises out of, or is incidental, to the shares. In my view, a purely personal interest in having the shares dealt with by the trustee and holding the trustee to account in accordance with the trust might equally well be said to be an “interest … arising out of, or incidental to, property”. If so, the appeal could be approached on the basis that SICL’s rights under the trust constituted relevant property within section 436, whether they were equitable proprietary or purely personal rights. In either case, the question would arise whether the transfer by Mr [A-S] of the shares to Samba constituted a “disposition” within the meaning of section 127, bearing in mind that the disposition would not affect the interests involved, unless they were overridden under Saudi Arabian law by Samba’s acquisition of the shares. However, even if it is only equitable proprietary interests that are capable of being regarded as relevant property for present purposes, the key question remains whether there was any disposition of them within the meaning of section 127.
45. I have found this a difficult issue. On the one hand, it can be said that “trust assets” have been “misappropriated”, “misapplied”, “dissipated” or, in terms of article 11(d) of the Convention, “alienated”. Such phrases can be found in academic textbooks. Thus, Snell’s Equity (33rd ed) (2015) para 30-013 reads, under the head “Misapplication”:
“Where the breach consists in a misapplication of trust assets, the first question is whether the trustee should specifically restore the assets to the trust or restore their value by making a money payment. If the trustee still has the original assets, he may effect restoration in specie by transferring them back to the trust fund. If the original assets are no longer available, then the beneficiary may elect to assert a proprietary remedy over any traceable proceeds in the hands of the trustee or a third party.”
Likewise, Swadling in Burrows, English Private Law, para 4.151 reads:

“The recipient of rights dissipated in breach of trust does not automatically step into the trustee’s shoes, inheriting the powers and duties of his transferee [sic, this should presumably be ‘transferor’]. He is only liable to restore the rights dissipated in breach of trust, either to the former trustee, or, more likely, to other persons nominated by the beneficiaries. This right of the beneficiaries to recover the trust rights is good against all transferees of rights dissipated in breach of trust bar one, the transferee of a common law right who takes in good faith, for value, and without notice, actual, implied, or constructive, of the fact of the dissipation being in breach of trust. If the transferee is such a person, compendiously known as ‘equity’s darling’, then the effect of the transfer will be to destroy the beneficiary’s right to reconveyance.”

46. SICL submits that it is misleading to regard a beneficiary as owning only the equitable interest, and that he or it is entitled to “the entirety of the interest in the relevant property”. They point out that, in other contexts, such as tax, the courts have held trust beneficiaries to be assessable to income tax on trust income on the basis that they owned the trust income: see eg Baker v Archer-Shee [1927] AC 844, Corbett v Inland Revenue Comrs [1937] 1 KB 567. Further, although the trustee remains accountable as such, a wrongful disposition by a trustee of trust assets does not give to the beneficiary as against the recipient of trust property the same rights as the beneficiary had under the trust as against the trustee. As explained by Nolan, Equitable Property (2006) 122 LQR 232, 243, 247 and 250 and by Jaffey, Explaining the Trust, above, p 383, the beneficiary has only the right to have the trust assets restored to the original trustee, or, if the trust was a bare trust to which the rule in Saunders v Vautier (1841) 4 Beav 115, applies, to himself; see also the citation from Swadling in Burrows, English Private Law, in the previous paragraph of this judgment.

47. More generally, it can be said that section 127 introduces a prima facie right to recover any property disposed of in which SICL had the legal title, subject only to a power in the court to validate the disposition by order; and that it is well established, in the light of the pari passu principle operating in insolvency, that validation will, save in exceptional circumstances, only be ordered in relation to a disposition occurring after the inception of the winding up “if there is some special circumstance which shows that the disposition in question will be (in a prospective application case) or has been (in a retrospective application case) for the benefit of the general body of unsecured creditors …”: Express Electrical Distributors Ltd v Beavis [2016] 1 WLR 4783, para 56, per Sales LJ.

48. On the other hand, SICL’s case can be said to overlook the considerable difference which exists between an unrestricted legal title to an asset, which can normally be disposed of to a third party, and a legal title in relation to which a beneficiary has trust rights, which continue to exist and be enforceable unless and until overridden by a transfer under the lex situs as recognised in Macmillan v Bishopsgate.

49.In Ayerst v C & K (Construction) Ltd [1976] AC 167, 177G-H Lord Diplock referred to the legal ownership of property subject to a trust as held by the trustee “not for his own benefit but for the benefit of the cestui que trust or beneficiaries”, but went on to say that

“Upon the creation of a trust in the strict sense as it was developed by equity the full ownership in the trust property was split into two constituent elements … the ‘legal ownership’ in the trustee, what came to be called the ‘beneficial ownership’ in the cestui que trust.”

50. The metaphor of a “division” or “split” of title needs to be approached with some caution. Swadling in Burrows, English Private Law, para 4.149, speaks of:

“the falsity of statements which talk in terms of a ‘division’ or ‘separation’ of rights when rights are held on trust, or even worse, of legal and equitable ‘titles’ existing before the creation of the trust.”

Swadling, citing Australian authority, suggests an analysis according to which an equitable interest is “not carved out of a legal estate but impressed” or “engrafted” onto it (para 4.150). Likewise, in Fiduciary Ownership and Trusts in a Comparative Context (2014) ICLQ 901, Daniel Clarry refers to the concept of “fiduciary ownership … whenever title is held by a person in respect of property that is designated for a purpose protected by law” (p 930), and suggests “a concerted effort to move away from the use of ‘dual’ or ‘split’ ownership metaphors in trusts discourse towards the fiduciary ownership of trust property in both the common and civil law traditions” (p 933). Jaffey, op cit, p 386, also notes that one of the difficulties about the proprietary approach (which he advocates) is that
“it has sometimes been understood in a way that makes it seem paradoxical. That is the ‘dual ownership’ or ‘split ownership’ approach. On this approach, it is said that both the trustee and the beneficiary are owners of the trust property, the trustee at law and the beneficiary in equity. … Considering the position overall, clearly one cannot say that the trustee and the beneficiary are both separately the owners of the trust property, at least in the ordinary sense of ownership.”

Rejecting any idea of “simultaneous allocation” of all the elements of ownership to both the trustee and the beneficiary, he however opts (p 387) for an analysis of
“distribution according to which the trustee has the right of control over the property, carrying with it the power to manage the property and to deal with it as owner vis-à-vis other parties, signified by legal title, and the beneficiary, where there is a single beneficiary, has the right to all the benefit and enjoyment of the property, which is beneficial ownership.”

51. It is unnecessary on this appeal to examine these slightly differing analyses further. What is clear, on any analysis, is that, where a trust exists, the legal and beneficial interests are distinct, and what affects the former does not necessarily affect the latter. Where an asset is held on trust, the legal title remains capable of transfer to a third party, although this undoubted disposition may be in breach of trust. But the trust rights, including the right to have the legal title held and applied in accordance with the terms of the trust, remain. They are not disposed of. They continue to be capable of enforcement unless and until the disposition of the legal title has the effect under the lex situs of the trust asset of overriding the protected trust rights. If the trust rights are overridden, it is not because they have been disposed of by virtue of the transfer of the legal title. It is because they were protected rights that were always limited and in certain circumstances capable of being overridden by virtue of a rule of law governing equitable rights, protecting in particular (under common law) bona fide third party purchasers for value (equity’s “darling” in the terms of para 4.151 in Swadling in Burrows’ English Private Law, cited in para 45 above).

52. The position was neatly summarised by Lloyd LJ in Independent Trustee Services Ltd v GP Noble Trustees Ltd [2012] EWCA Civ 195; [2013] Ch 91, para 106:
“a transferee of the legal title to property under a disposition made in breach of trust, or a successor in title to such a person, does not have the beneficial title to the property, which remains held on the original trusts, unless either the transferee, or a successor in title, was a bona fide purchaser for value without notice. The trustee acting in breach of trust can transfer the legal title, but cannot vest the beneficial interest in the property in a bona fide purchaser for value without notice, since he does not own that title and is not acting in a way which enables him, under the trust, to overreach the beneficiaries’ equitable interest. Despite that inability, the availability of the bona fide purchaser defence means that a transaction in favour of a bona fide purchaser for value without notice is as effective as it would be if he could vest the beneficial title in the purchaser. Thereafter the purchaser can deal with the asset free from any prior claim of the beneficiaries.”‘

Lord Neuberger

’61. The more difficult question is whether there is in circumstances such as the present a “disposition” of the equitable interest in the shares, assuming that Samba was a bona fide purchaser for value of the shares without notice of that interest.

62. As Lord Mance says, where a legal estate is sold to a bona fide purchaser for value without notice, any equitable interest is not transferred to the purchaser: it is overridden, or to put it more colloquially, it is lost or disappears. Lloyd LJ accurately summarised the position in Independent Trustee Services Ltd v GP Noble Trustees Ltd [2013] Ch 91, para 106, when he said that a “trustee acting in breach of trust … cannot vest the beneficial interest in the property in a bona fide purchaser for value without notice, since he does not own that title and is not acting in a way which enables him, under the trust, to overreach the beneficiaries’ equitable interest”; but, nonetheless, “the availability of the bona fide purchaser defence means that a transaction in favour of a bona fide purchaser for value without notice is as effective as it would be if he could vest the beneficial title in the purchaser”.

63. As Lord Mance also points out, where the legal owner transfers the legal estate to a bona fide purchaser for value with no notice of the beneficial interest in breach of trust, the person who owned the beneficial interest does not by any means lose all its other rights. In particular, it retains all its personal rights against the trustee, ie the party who sold the legal estate. In other words, following the transfer of the shares in this case, SICL retained its personal rights against Mr [A-S] , but (assuming Samba was a bona fide purchaser for value without notice and subject to section 127), SICL lost any proprietary rights or interest it had in the shares.

64. The fact that SICL retains its personal rights against Mr [A-S] notwithstanding the loss of its beneficial interest in the shares appears to me to be irrelevant to the issue whether section 127 applies. If a transaction would otherwise be a disposition within the section, there is no reason for disapplying the section merely because the company in question would not be deprived of its personal rights by the disposition. Similarly, the fact that an equitable interest is more precarious than a legal interest appears to me to be nothing to the point. The very purpose of section 127 is to impeach transactions which would otherwise be effective, and it seems to me to be inconsistent with that purpose to exclude from its ambit a transaction which would otherwise be lawful, and to which a particular right or interest is otherwise susceptible of being defeated.

65. There is undoubtedly a powerful argument for saying that a transfer by the legal owner of the legal estate for value in an asset to a bona fide purchaser who has no notice of the existence of an equitable interest in that asset cannot amount to a disposition of that equitable interest. As already mentioned, and as Lord Mance demonstrates, there is no question of Mr [A-S] having transferred SICL’s equitable interest in the shares to Samba: he simply transferred his legal ownership of the shares to Samba, and, on the assumption that Samba was a bona fide purchaser for value without notice, the equitable interest effectively disappeared. In those circumstances, at least on the basis of the meaning which it naturally conveys, section 127 simply does not apply: a “disposition” normally involves a disponor and a disponee, and so there has simply been no disposition. Indeed, in an Australian first instance decision, In re Mal Bower’s Macquarie Electrical Centre Pty Ltd (in liquidation) [1974] 1 NSWLR 254, 258, Street CJ in Eq expressly so stated, albeit in a very different context from the present.

66. However, it is fair to say that the word “disposition” is linguistically capable of applying to a transaction which involves the destruction or termination of an interest. Etymological analyses can fairly be said to be suspect in this sort of context, but it seems to me to involve a perfectly natural use of language to describe SICL’s interest in the shares as having been “disposed of” by the transfer of those shares to a bona fide purchaser.

67. And it is possible to claim support for such a view in relation to section 127 from respected authors. Thus, Professor Sir Roy Goode in Principles of Corporate Insolvency Law, 4th ed (2011) at para 13-127 states that “[s]ection 127 bites on beneficial ownership, not necessarily on the legal title”. And at para 13-128, he says that “[t]he word ‘disposition’ … must be given a wide meaning if the purpose of the section is to be achieved, particularly in view of the fact that there is no exception in favour of transfers for full value”; particularly relevantly for present purposes, this passage continues: “‘[d]isposition’ should therefore be considered to include not only any dealing in the company’s … assets by sale, exchange, lease, charge, gift or loan but also … any other act which in reducing or extinguishing the company’s rights in an asset, transfers value to another person”. Sir Roy then explains that on this basis “‘disposition’ includes an agreement whereby the company surrenders a lease or gives up contractual rights”. And McPherson’s Law of Company Liquidation, 3rd ed (2013), para 7-015, states that section 127 “only [applies to] property which belongs in equity to the company” and “is confined to the company’s beneficial interest in property”.

68. There is also some judicial support for the notion that “disposition” can extend to extinguishment. Thus, Wynn-Parry J said in In re Earl Leven, Inland Revenue Comrs v Williams Deacon’s Bank Ltd [1954] 1 WLR 1228, 1233, that “[t]he word ‘disposition’, taken by itself, and used in its most extended meaning, is no doubt wide enough to include the act of extinguishment”. However, he rejected such a wide interpretation of that word in the Finance Act 1940, partly because it produced “a quite unexpected result” and partly because in other sections of that Act “it is clear that where the legislature intended that … ‘disposition’ should include ‘extinguishment’, it was at pains to make express provision”. Accordingly, the extinguishment of a liability to pay insurance premiums did not amount to a “disposition” for the purposes of section 44(1) of the 1940 Act.

69. In another revenue case, Inland Revenue Comrs v Buchanan [1958] Ch 289, the Court of Appeal held that the surrender of a life interest under a will trust in favour of those people entitled in remainder operated as a “disposition” of that life interest for the purposes of sections 20 and 21 of the Finance Act 1943. At p 298, Jenkins LJ specifically rejected the argument that there was no disposition because “a surrender of a life interest destroys the interest and there is nothing left”. This again provides support for the notion that the fact that property ceases to exist as a result of a transaction does not prevent the transaction involving a “disposition” of that property. But, of course, all depends on the statutory context and how they apply to the facts of the particular case.

70. There is also a policy argument for concluding that in a case such as the present, the equitable interest is the subject of a “disposition” for the purposes of section 127, particularly bearing in mind the fact that the court has a dispensing power. The purpose of section 127 is to ensure that, at least once the winding up procedure has been started, a company’s property is retained, in particular for the purpose of being available in order to be distributed pro rata, ie fairly, among its creditors. On the face of it, at any rate, that should apply as much to property which is held for it by a third party as to property which it holds in its own name.

71. It would appear that Mr [A-S] was a bare trustee of the shares – ie the whole of the beneficial interest in the shares was vested in SICL. A transfer of the bare legal estate by the trustee to a purchaser with notice of the trust would not be caught, because he would only acquire the bare legal interest, which would normally be worth nothing, and no disposition of the company’s property would have occurred. And a transfer by the company of its equitable interest would undoubtedly be caught by section 127 as it would involve a disposition by the company of that interest. It can therefore be said to be surprising if a transfer by the trustee which involved the transferee effectively obtaining the whole of the equitable interest previously owned by the company was not caught by the section.

72. Nonetheless, I have reached the conclusion, in agreement with Lord Mance, that there is no “disposition” of an equitable interest within section 127, when there is a transfer by the legal owner of the legal estate, which is subject to that equitable interest, to a bona fide purchaser for value without notice of that equitable interest.

73. As already mentioned, the natural meaning of section 127 appears to me to carry with it the notion of a disponor transferring property to a disponee, and on that basis there was no disposition of SICL’s equitable interest in the shares in this case. Although, as explained above, there are arguments for departing from the natural meaning of section 127, I consider that they are outweighed by the arguments the other way.

74. In my view, Sir Roy Goode is right when he says that the surrender of a lease or the giving up of contractual rights by a company would be a “disposition” within section 127, as would a surrender of a life interest (and a company can no doubt have such an interest, at least if it is contingent on an individual’s life) as discussed in Buchanan. However, there are differences between a surrender (whether of a lease, contractual rights, or a life interest) and the loss of a beneficial interest on a transfer of the legal estate to a bona fide purchaser for value without notice of that interest. In the former case, the person who is the disponor is the same as the person who loses the property; whereas in the latter case the disponor is, ex hypothesi, not the person who loses the property. And, in the former case the disponee is well aware of the property which is ceasing to exist: as far as he is concerned, its extinction is the purpose of the transaction; in the latter case, the disponee is, by definition, unaware of the property which is being disposed of.’