La Micro Group Inc orally agreed in 2010 to give up its 51 per cent beneficial interest in the two issued shares of an English company to the men who already held those shares legally. The Supreme Court held that equity treated the bargain as carried out by a vendor–purchaser constructive trust, so the lack of signed writing did not stop that interest passing and merging into their legal ownership. The appeal was dismissed.
The shares and the 2010 bargain
La Micro Group Inc, a US company owned by Mr Lyampert and Mr Frenkel, participated in a UK business run with Mr Bell. The dispute concerned beneficial ownership of the UK company’s two shares.
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By 2009 UK had two issued shares. Mr Bell held Share 1 and Mr Lyampert held Share 2. Each held his share on an express trust, as to 51 per cent for Inc and 49 per cent for Mr Bell. Because the legal owner and the beneficial owners differed, those beneficial interests were equitable interests under the trusts.
In 2010 Mr Lyampert and Mr Frenkel fell out. Mr Bell and Mr Lyampert, for themselves and for UK and Inc, made an oral agreement. They would carry on UK’s business together, split its profits equally between themselves, and Mr Lyampert would assume Inc’s substantial debt to UK, from which Inc was released. The courts below found an implied term that Share 1 would thenceforth belong to Mr Bell alone, legally and beneficially, and Share 2 to Mr Lyampert alone. Inc gave valuable consideration through the immediate release of its debt. The term was never written down.
How the dispute reached the Supreme Court
The courts below accepted that the 2010 agreement included an implied term transferring Inc’s beneficial interests. They differed over the legal basis on which an oral agreement could achieve that result. The issue in the Supreme Court was whether a vendor–purchaser constructive trust arose.
The remaining issue
A specifically enforceable agreement to sell property can give rise to a constructive trust in favour of the purchaser. The parties accepted that this could apply to the sale of a beneficial interest in shares. The disputed feature was that Mr Bell and Mr Lyampert already held legal title to their respective shares.
The difficulty was that each purchaser was already the sole legal owner and trustee. Mr Bell already had the other 49 per cent of Share 1. Under the same agreement, Mr Lyampert was acquiring Mr Bell’s 49 per cent of Share 2. Once Inc’s 51 per cent reached them, the whole beneficial interest would be concentrated in the legal owner. Equitable interests would merge into the legal title and cease to exist separately. The appellants said the bargain was therefore, in substance, an agreement to destroy Inc’s interest, leaving no property for a constructive trust to transfer.
Section 53(1)(c) of the Law of Property Act 1925 generally requires signed writing for a disposition of a subsisting equitable interest. Section 53(2), however, preserves the operation of constructive trusts. The respondents’ claim therefore depended on establishing such a trust.
Why the constructive trust still arose
Lord Briggs, with whom Lord Hodge, Lord Sales, Lord Burrows and Lord Richards agreed, held that the trust is not limited to protecting parties during an interval between contract and completion. That is its usual setting, because a conveyance or other step often remains to be taken. Here the parties thought the oral bargain itself produced the intended ownership. In law it did not, unless equity intervened, because it disposed of an existing equitable interest.
The purchasers needed protection between agreement and completion: without it, Inc might dispose of its interests elsewhere or become insolvent. That need was not removed by the purchasers’ existing legal title.
Lord Briggs treated completion as consistent with equity’s purpose, not a reason for refusing the trust. Where legal title itself must be conveyed, a constructive trust can provide only interim protection until specific performance is carried out. Where the objective is to confer a 51 per cent beneficial interest on people who already have the legal title, recognition of the trust achieves what ought to be done.
Destruction was mechanics, not substance
Later descriptions of the term as a surrender or release did not determine its substance. The businessmen were conferring Inc’s 51 per cent beneficial interest so that the two men would own UK equally. Surrender or release can mean delivery to someone else; neither word necessarily means destruction. Destruction described only what happens mechanically when a full equitable interest becomes vested in the trustee and merges in the legal title.
If one beneficial co-owner sells to the other, who already holds the legal title, the purchaser acquires what was sold. The subsequent merger of legal and beneficial ownership does not convert the transaction into a mere destruction of the seller’s interest. Lord Briggs applied the same reasoning to the shares.
It would be arbitrary if the protection a purchaser received depended on whether that purchaser already happened to hold legal title.
This does not make section 53(1)(c) pointless. Its obvious field is a gift of an equitable interest. Equity does not assist a volunteer or perfect an imperfect gift, so there is then no specifically enforceable contract and no vendor–purchaser constructive trust.
The writing requirement is not confined to land
The respondents also sought to argue, for the first time, that the writing requirement applied only to land. The Court refused permission. Long-established authority applied section 53(1)(c) to equitable interests in personal property, including shares.
Verdict: The Supreme Court unanimously dismissed the appeal. The oral agreement gave rise to a constructive trust within section 53(2); Mr Bell and Mr Lyampert became the full beneficial owners of their respective shares. The Court did not decide the wider question whether such an agreement is self-executing when the purchaser does not already hold legal title.
Source: Frenkel v LA Micro Group (UK) Ltd and others [2024] UKSC 42
