Internally irreconcilable judgments and saving a transaction by constructive trust

28/02/23

On 28 February 2023 the Court of Appeal handed down judgment in La Micro Group (UK) v LA Micro Group, Inc. This was the second appeal following the second trial in the claim.

The dispute concerned the ownership of an English company (“UK”), established in 2004 and agreed to be majority owned by a Californian company (“Inc”) (set up and owned in equal proportions by two Russian and Ukranian businessmen (“AL” and “RF”) who were also its sole directors) with the balance to be owned by a UK individual (“DB”). The registered owners of the shares in UK were DB and AL. It was found at first instance (and not appealed) that the effect of the agreement made in 2004 was that the shares in UK were held on express trust in the requisite proportions by DB and AL for DB and Inc.

In 2010, RF told DB that he wanted nothing more to do with UK. It was found at first instance that this gave rise to a proprietary estoppel whereby Inc was precluded from asserting its beneficial interest in the shares as against DB. Inc appealed that decision on the basis that the lower court’s judgment contained inconsistent and irreconcilable findings, principally on the question of DB’s reliance. The Court of Appeal allowed that appeal.

However, the Court also found that in 2010, DB and AL had impliedly agreed, on behalf of themselves and UK and Inc, that UK should thenceforth be owned 50-50 as between DB and AL. It was common ground that such an agreement would amount to a disposition of an equitable interest (namely Inc’s and DB’s) in the shares which would require writing under s. 53(1)(c) Law of Property Act 1925, unless such a transaction created a constructive (sub)trust whereby DB and Inc’s equitable interests in the shares were held on trust for DB and AL, i.e. the legal owners: s. 53(2).

The Court held that a constructive (sub)trust of the equitable interests arose pursuant to a specifically enforceable agreement that the shares would thenceforth be owned by DB and AL absolutely. It found that it did not make any difference that such a (sub)trust meant that AL and DB were both the legal and equitable owners of the property (i.e. an A-B-A structure), notwithstanding that such a trust was unsustainable in that it merged the legal and beneficial interests such that B would ‘drop out’. The effect, as noted by Males LJ, was that the constructive trust “came into existence and ceased to exist at the same moment”.

The Judgment is of note for two reasons:

1. It adds to the jurisprudence on ‘fact appeals’ on the basis of internal inconsistency.

2. More fundamentally, it appears to be the only English law authority where it has been expressly held that a bare sub-trust of a beneficial interest can be created where the beneficiary of that interest is the legal owner of the property concerned. 

The Judgment is here.