Treating as done that which ought to be done: UK Supreme Court rules on formalities for transferring beneficial interests in shares

In LA Micro Group Inc v LA Micro Group (UK) Ltd [2024] UKSC 42, the Supreme Court considered whether a specifically-enforceable agreement to transfer the beneficial interest in a share in a private company to the legal owner of that share could be effective if not made in writing and in the absence of the formalities required by section 53(1)(c) of the Law of Property Act 1925 (“LPA 25”).

The common ground was as follows:

1. an oral agreement had been made that had satisfied the necessary conditions for a contract;
2. the agreement concerned inter alia the transfer of a beneficial interest in a share in a private company; and
3. the transferee was already the legal owner of that share.

Section 53(1)(c) of the LPA 25 provides that “a disposition of an equitable interest or trust subsisting at the time of the disposition, must be in writing signed by the person disposing of the same, or by his agent thereunto lawfully authorised in writing or by will”.

The appellants had appealed the decision of the Court of Appeal on the basis that there had been no transfer since section 53(1)(c) applied and the contract doing the transferring was not in writing.

Section 53(2) provides that section 53(1) “does not affect the creation or operation of resulting, implied or constructive trusts”.

Constructive trusts are one of the ways in which effect is given to the maxim that ‘equity treats as done that which ought to be done’.  A vendor-purchaser constructive trust (“VPCT”) arises whenever there is an agreement for the sale of property of which equity would grant specific performance, itself an equitable remedy.

The Court rejected the appellants’ argument – arguing against the existence of a VPCT – that the contract was “in substance just an agreement for the destruction of the vendor’s equitable interest, so that there is no property to be transferred upon which a VPCT could bite”.

The point had arisen on the facts since the transferor was the holder of legal title to the shares.  The Court dismissed the point to hold that – rather than being destroyed as a result of the contract – the beneficial interest was the subject of the VPCT and by that means was transferred to the transferee so as to then merge with the transferee’s existing beneficial interest and which simultaneously merged with the transferee’s legal interest.  And so legal and beneficial interest became one and whole in the hands of the transferee immediately after the VPCT was created and so “the VPCT had only a momentary existence, occupying what the appellants called a scintilla temporis”.

The appellants had launched an argument that, since the VPCT over the beneficial interest only existed for a scintilla of time prior to its merging with the legal title, the VCPT should be ignored.  There is authority for ignoring momentary events in other circumstances where their recognition would otherwise lead to perverse outcomes (such as defeating the granting of a charge by squeezing in an overriding interest in the scintilla of time between an asset being acquired and a charge being granted by the acquiror[1]).

That argument to ignore the scintilla was rejected by the Supreme Court on the basis that it produced irrational and arbitrary outcomes, principally in two respects:

1. The argument relies on the transferee also being the holder of the legal title. Why should that matter and why should the result be different if the transferee did not hold the legal title?
2. The length of time for which the VPCT exists becomes important in an arbitrary way; again, why should it matter?

Lord Briggs commented in the judgment: “Where one theory about how equity works in a particular context produces irrational consequences and fails to achieve equity’s objective in circumstances which are commercially indistinguishable from others where it does do so, that seems to me to be a telling indicator that the theory must be wrong, all the more so if the rival theory suffers from none of those defects. In the present case a conclusion that, on a sale and purchase of an equitable beneficial interest, it is irrelevant to the creation of a VPCT where the legal title lies, produces the same sensible outcome in terms of achieving equity’s purpose, and is, if at all possible, the theory to be preferred.”

In rejecting the appeal and following Neville v Wilson [1997] Ch 144, the Supreme Court found the VPCT to be doing the work required so that equity could treat as done that which ought to be done so as to perfect what had been agreed to in the oral contract and allowing for the transfer of the beneficial interest.

One further point advanced by the appellants was that section 53(1)(c) should be limited to dispositions of equitable interests in land only (i.e. real property).  You can see the point: the introductory words to section 53 include “with respect to the creation of interests in land …” but do not go on to specifically mention personal property rights (and a share is a thing in action and thus a form of personal property).

But the appellants were more than 50 years too late in making the point.

It is well established in various authorities[2] that section 53(1)(c) applies to equitable interests in personal property as well as real property.  Briggs, finishing with a flourish, comments “… if the argument had been presented in 1926, it might have enjoyed real force. … There comes a time in the life of a statutory provision when a particular construction becomes so well settled and for such a long time, that the contrary construction becomes unarguable, however attractive it might have been when the statute was originally enacted.”

What Briggs also says is that the existence of a VPCT depends “upon whether the uniqueness of the subject matter justified an order for specific performance”.  There was no argument on the facts that the shares in question and the beneficial interest in them satisfied the requirement for uniqueness.  Briggs goes on to say, however, that “shares in a quoted company, being available on the market, generally would not” and so perhaps the decision would have been different if the issuer was a public company whose shares were traded on a quoted market and in being fungible did not have the necessary quality of uniqueness.  On the facts of this case, perhaps that would lead to an arbitrary distinction since why should the point turn on whether the issuer is a private or public company?  Briggs says no more on the point.

The judgement should be required reading for corporate and trust lawyers and the judgment purports to now be the only authority in England and Wales and elsewhere in common law jurisdictions on the existence of VPCTs in these circumstances.

For those entering into negotiations as regards the transfer of interests in shares, the judgment is an object lesson in why it is important to document the bargain struck in writing and in clear terms.

This Insight piece was written by Henry Humphreys.  Do please reach out to Henry or another member of the team at HLaw if you have questions about the issues discussed or as regards corporate finance transactions generally.

All the thoughts and commentary that HLaw publishes on this website, including those set out above, are subject to the terms and conditions of use of this website.  None of the above constitutes legal advice and is not to be relied upon.  Much of the above will no doubt fall out of date and conflict with future law and practice one day.  None of the above should be relied upon.  Always seek your own independent professional advice.

Humphreys Law

[1] The appellants relied upon Abbey National Building Society v Cann [1991] 1 AC 56 and Southern Pacific Mortgages Ltd v Scott [2015] AC 385.

[2] See paragraphs 51 to 54 (inc) of the judgment.