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Alan David Cameron v M & W Mack (ESOP) Trustee Ltd (2001)

Ref.: Intention to create a trust must be certain: two cases on trusts of company shares

1. Burden of establishing a trust is on the person alleging a trust exists

In a dispute concerning the ownership split of shares in a private company, each party claimed to be the beneficiary of a trust for the other party’s shares.

The defendant set up a company in which his father, David Thexton Senior, held one per cent and was the guarantor of the company finances. The business developed. The son proposed that his father should become a 50 per cent shareholder drawing a salary equal to his own. It did not happen: David Senior only acquired 20 per cent of the shares and he never became a director. His loan to the company was secured by a debenture.

When a merger became possible David Senior agreed to sell the shares that he held to the son, David Junior, and by deed stated that his shares were held on trust for his son. He backdated the deed by nine months.

David Senior died and the widow applied in the New Zealand High Court for a declaration that the late father, despite the deed, remained the beneficial owner of the 50 per cent of the shares. The son responded with a claim that the shares held by David Senior were held in trust for him. The court soon dealt with the second item. David Senior had signed the deed shortly after agreeing to do so on the 15th January 1997, but backdated it to 31st March 1988. The deed came about as a result of discussions with the company accountant which resulted in David Senior instructing the company solicitor to prepare a trust deed. The accountant had previously been advised that the company was about to enter into a joint venture with another but no conversation took place with David Senior on this subject. Was the declaration of trust effective? No clear decision emerged.

The judge recognised that the question of the trust’s validity was complicated by the decision to pre-date the deed. He did not say why. He didn’t need to, but considered that no trust had been created. The significance of the back dating of the deed was not explained. However, no reliance was placed upon whether it was a trust or not. David Junior acknowledged that his father was entitled to be paid for the shares registered in his name and that his father had agreed to sell those shares to him for $250,000 plus the company car.

So David Junior had been entitled under contract to acquire those shares: there was no need to consider whether he was the beneficial owner of them under a trust. The judge’s comment was that if the deed was effective it would not alter the contractual obligation of David Junior to purchase David Senior’s shares. It would simply mean that the subject of the contract was legal to David Senior’s shares as opposed to legal and beneficial title.

Then there was the further question of whether David Junior held shares on trust for David Senior. The mother claimed that the proposal by David Junior that his father should become a 50 per cent shareholder gave rise to a trust and therefore David Senior owned, in equity, half the shares in the company. The mother, the plaintiff, sought a declaration that her son, David Junior, held on trust for the plaintiff 135,000 shares which, together with his registered share ownership, would make half the total.

There was considerable evidence to show that when David Senior became an employee of the company he should hold 50 per cent of the shares. The accountant had recorded, in September 1992, that David Junior acknowledged that at all times he held shares in trust for his father in respect of the excess of his own 50 per cent shareholding. David Junior, at his father’s funeral, delivered the eulogy and said that his father was a 50 per cent owner and director of the company and his father had received an equal salary to himself. The plaintiff also referred to a conversation between father and son when the son handed over a cheque to the father, where the son is alleged to have stated that he was holding 40 per cent of the shares on behalf of his parents.

David Junior’s evidence, however, was that despite the original intention, the 50 per cent shareholding and the partnership did not happen. He denied saying anything that could have led to the accountant believing that the father was entitled to half the shares.

David Senior had never held in his own name more than a few shares and to determine whether David Junior (or his other family trust) were holding the shares in trust for David Senior, depended on whether the judge could find that a trust had been created.

The judge started with a proposition that the burden of establishing that there was intention to create a trust is on the person who alleges that a trust was created (Herdegen v Federal Commissioner of Taxation). Then the principles laid down in Knight v Knight requiring the certainty of intention of the person who creates the trust, the certainty of the subject matter and the certainty as to the objects of the trust. In this case the defendants alleged that the plaintiff had failed to establish the first two of these certainties.

The judge accepted that either the father or son must have said something to the accountant which led to the statement in his memorandum. The judge, however, had a problem with the evidence from the widow that David Senior had made a statement in 1997 indicating a belief that he was entitled to 50 per cent of the shares. Making such a statement was, said the judge, inconsistent with the existence of the backdated deed referred to above. The discussions which accompanied these statements were inconclusive. The judge added that in order to create a trust there must have been either transfer of the shares or a declaration of trust by David Junior so as to bring the trust into existence. The intention on the part of David Junior was not difficult to find; it was the existence of a declaration of trust which presented the problem. There was no written document, so there needed to be evidence of the existence of such a declaration. “Equity will not assist a volunteer”, quoted the judge. A declaration of trust does not require a technical form of expression. It is a question of construction whether the words used, taking into account the surrounding circumstances, amount to a clear declaration of trust.

The manifestation of an intention to declare a trust is what is looked for (Paul v Constance [1977] 1 All ER 195). Where there are no words exhibiting the necessary intent only in exceptional circumstances is it possible to infer a declaration of trust from acts showing that a person has constituted themselves as trustee. The judge had to look at the evidence as a whole including the accountant’s memorandum. Although this records an intention that the shareholding should be 50/50 and even a recommendation that David Junior should transfer a percentage of the shares to achieve this, it never happened. There is no evidence of any conduct by David Junior in relation to the shares “that evinces an intention to deal with them so that David Senior acquires the beneficial interest in them.” In other words the intention of David Junior shown by the evidence was not unequivocally an intention to have constituted a trust.

The judge added that in the absence of consideration there would need to have been a declaration of trust each time the capital of the company was increased. On two occasions David Junior funded the shares including those allegedly held on trust out of his own money. This did not look as if David Senior was the beneficial owner of these shares.

The evidence was not sufficient to find the existence of the requisite declaration of trust each time the capital was increased. The mother submitted that David Junior received a valuable consideration for the creation of the trust of future property by his father’s continued contribution to the company. The father’s obligation to secure creditors were the same as those of the son. This would require the same evidence of intention on the part of David Junior that he regarded his father’s contribution in that light. There was no such evidence. The plaintiff failed to establish that David Junior held shares in trust for his father and the judge concluded that the beneficial ownership of the company was split in accordance with the legal ownership as evidenced by the share register.

Thexton v Thexton [2001]

2. Earmarking shares without trustees’ action not sufficient

A preliminary issue concerned whether the defendant trustees had constituted or declared itself the trustee of 52,250 shares in the claimant’s employer on trust for the claimant absolutely, or alternatively had granted the claimant an unconditional option to call for the transfer of those shares to him.

In 1997 the claimant exercised his right to forego part of the bonus and to apply it to a share bonus scheme, by “purchasing” the number of shares in the company which the amount of the foregone bonus would notionally purchase at the prevailing market price. In the same year the company decided to reward the claimant for his past and anticipated future services by asking the trustees to give him or to earmark for him for subsequent allocation, a further 52,250 shares. The trustees duly passed a resolution in which it resolved to earmark 52,250 shares to the claimant “with a view to such shares being advanced to the claimant for [his] own absolute use and benefit as and when requested by [him].

In 1999 the claimant resigned from the company in acrimonious circumstances and asked for the extra shares to be allocated to him. The trustees refused and the claimant sought an order that the trustees transfer the extra shares to him, on the basis that at all relevant times trustees held those shares on bare trust for him absolutely. The trustees disputed this and contended that the allocation of those shares was at its absolute discretion.

The court decided that the claimant had no immediate absolute entitlement to shares that had been “earmarked” for him and held in an employee benefit trust because the decision whether or not to transfer the shares to him remained at the discretion of trustees.

It should be noted that the judgment did not consider whether the trustees had exercised their discretion properly or the tax implications of the arrangements. However, the judgment is interesting for the comments made on which evidence is admissible when considering what was meant by “earmarking” shares ie, the decision was based on what was stated on the face of the scheme rules and reflected in the communication documents and evidence of what was “thought” to be meant by it (ie, an outright entitlement) by the claimant in his dealings with the company was largely inadmissible.