Supreme Court: Equity’s Darling and Guidance on Enforceability of Trusts where the Institution is Unknown

3 09 2017

Akers & Ors (Respondents) v Samba Financial Group (Appellant) [2017] UKSC 6 (1 February 2017)

In this appeal, Lords Neuberger, Mance, Sumption, Toulson and Collins unanimously held that a trust could be created, exist and be enforceable in relation to assets located in a jurisdiction where the law did not recognise trusts in any form. Many of the issues in earlier proceedings fell away. But nonetheless, because of the shifting focus of submissions, Lord Mance prefaced his lead judgment by describing the issues as “novel and difficult”. Proceedings were brought against Samba Financial Group (Samba) by Saad Investments Co Ltd (SICL) and its Joint Official Liquidators (the liquidators) who were appointed in winding up proceedings in the Cayman Islands which were subsequently recognised in England as a foreign main insolvency proceeding under the Cross-Border Insolvency Regulations 2006. Samba sought to stay the claim on the ground that rather than England “there exists another forum [i.e. Saudi Arabia] which is clearly and distinctly more appropriate”. Over the course of time, the ground morphed into the argument that SICL’s claim had no prospect of success and the case proceeded in the Supreme Court on that basis. Similarly, the appeal was presented to the justices on certain assumed facts. Shares valued at approximately $318m in various Saudi Arabian banks were held by Mr Al-Sanea (AS) on trust for SICL which went into liquidation by virtue of which Mr Stephen John Akers came to be one of its liquidators.

AS was the registered owner of the shares in the Saudi Arabian Securities Depositary Centre and SICL claimed that he had agreed to hold these Saudi Arabian shares at all material times on trust. Six weeks after the liquidation, in a series of six transactions, the shares were transferred by AS to Samba to discharge personal liabilities he owed them. Two other assumptions were made. Firstly, that Cayman Islands law governed the trusts. And secondly that the law of Saudi Arabia, the “lex situs” of the shares, does not recognise the institution of trust or a division between legal and proprietary interests. Saudi Arabian law does, however, recognise the institution of amaana – a kind of bailment construable as a trust – but its precise effects remained unexplored in evidence. Relying on section 127 (avoidance of property dispositions, etc) of the Insolvency Act 1986, SICL and the liquidators argued that the transfers of shares were and are void as a result of the “disposition of the company’s property … made after the commencement of the winding up”. The English law doctrine of “equity’s darling” is missing from other jurisdictions where a transfer to a third party might override beneficiaries’ rights, possibly overlooking any equitable interest at all.

Proceedings in the Lower Courts

Samba sought a stay of the proceedings on the ground of forum non conveniens, contending, inter alia, that, since Saudi Arabian law did not recognise trusts or any division between legal and beneficial interests, the claim had no prospect of success. Sir Terance Etherton C, as he then was, granted the stay.

The Court of Appeal allowed the liquidators’ appeal, holding that since Cayman Islands law recognised the division of the legal and beneficial interests in shares the trusts were arguably valid. Longmore, Kitchen and Vos LJJ held that whilst the ownership of shares was governed by the law of Saudi Arabia where the trusts were unrecognised, the beneficiary’s claim concerning the trusts could be brought in England by virtue of article 4 of the Hague Convention on the Law Applicable to Trusts and on their Recognition 1985 (the Convention) which is scheduled to the Recognition of Trusts Act 1987.

Vos LJ held that Etherton C had addressed the wrong question because of the manner in which the argument had been put to him. The question ought not to have been the one, at large, of whether English conflicts rules would generally require the ownership of shares to be determined by the lex situs, i.e. the law of Saudi Arabia where the shares are sited. Rather it should have been the specific question, but was not, of whether the alienation of the equitable interests under the declarations of trusts was excluded from the provisions of the Convention by article 4.

The Supreme Court

As in the lower courts, initial argument in the Supreme Court focused on the issue whether an equitable proprietary interest can exist in an asset sited in a jurisdiction where such a concept is unknown. The assumption was made that if SICL had an equitable proprietary interest, it had been disposed of by AS’s transfer of title in the shares to Samba.

Allowing Samba’s appeal, Supreme Court held that the transfer to Samba did not dispose of any rights belonging to SICL within the meaning of section 127 of the 1986 Act. The other justices agreed with Lord Mance’s lead judgment and Lords Neuberger, Sumption and Collins also gave separate concurring judgments of their own.

After hearing the case, the Supreme Court invited and received two sets of supplementary written submissions which focused more precisely on the fundamentally crucial question of whether there was any “disposition” within section 127 of the 1986 Act even if (i) SICL had equitable interests in the shares and/or (ii) SICL only enjoyed personal rights in respect of the shares.

(i) Lord Mance

As regards an intention to create an equitable proprietary interest, in light of the decision in Westdeutsche Landesbank Girozentrale v Islington London Borough Council [1996] AC 669, upon the establishment of a trust its beneficiary has, in equity, an enforceable proprietary interest in the trust property which binds everyone except a purchaser for value of the legal interest without notice (or “equity’s darling” who “takes free”). Applying the doctrine in Archer-Shee v Garland [1931] AC 212:

17. At common law, the nature of the interest intended to be created by a trust depends on the law governing the trust.

Therefore, the law governing the trust is determinative of the question whether the intention is to give a beneficiary an equitable proprietary interest in an asset held on trust or a mere right against the trustee to perform the functions imposed by the trust upon the trustee in respect of the use and disposal of foreign shares and income derived from them.

Macmillan Inc v Bishopsgate Investment Trust plc (No 3) [1996] 1 WLR 387 establishes that the lex situs may treat a disposition of shares to a third party as overriding any interest of the beneficiary in the shares. However, Lord Mance held that the authority did not preclude the outcome that a common law trust cannot or will not exist in respect of those shares. In Macmillan, a trust existed in relation to the shares concerned until they were disposed of under the lex situs to equity’s darling. His Lordship judged that a common law trust can also exist in relation to the Saudi Arabian shares in the present case despite the fact that Saudi Arabian law fails to recognise equitable proprietary interests and may not give any effect to a common law trust.

The relevant authorities had been reviewed in Luxe Holding Ltd v Midland Resources Holding Ltd [2010] EWHC 1908 (Ch) where Roth J observed that the “sort of trust, and thus beneficial interest” which arises on the sale of land or of shares in private companies, “arises only because the agreement is specifically enforceable” and is “in a sense, therefore, … the corollary of the remedy of specific performance” and “is not a full trust in the classic sense”. The facts were that Midland agreed to sell Luxe shares in 20 companies, 17 of which were incorporated in Russia or the Ukraine: the lex situs of the shares in the companies was there. Midland defaulted and sold the shares elsewhere.

Since English law governed original sale agreement, Roth J held that it made no difference that the shareholdings were in companies based in countries where the law did not recognise the concept of a beneficial interest. He could see no reason why equity, acting on the conscience of Midland as a proper defendant to English proceedings, cannot require that Midland held those moneys for the benefit of Luxe. Approving of the approach taken in that case, Lord Mance held that:

34. It is clear therefore, that in the eyes of English law, a trust may be created, exist and be enforceable in respect of assets located in a jurisdiction, the law of which does not recognise trusts in any form.

His Lordship’s conclusion remained unaltered by the Convention one of whose objectives is provide for the recognition of trusts in jurisdictions where the institution is not recognised. As defined in section 436 (expressions used generally) of the 1986 Act, the meaning of “property” is clearly “wide enough to embrace both equitable proprietary and purely personal interests.” Lord Mance said that the question of whether there was any “disposition” of these interests was more difficult to answer and his Lordship explained that the concept arguably extends to misappropriation of assets subject to a trust or destruction or extinction of an equitable interest in such assets. But the court went on to explain that this is not in context the natural meaning of “disposition” which in the context of section 127 is that it refers to a transfer by a disponor to a disponee of the relevant property, the beneficial interest in the present case.

Lord Mance clarified that, on any view, the legal and beneficial interests in a trust are distinct. Events affecting the legal interest do not necessarily affect the beneficial interest. Moreover, in the case of an asset held on trust, the legal title remains capable of transfer to a third party, although this undoubted disposition may be in breach of trust. However, trust rights remain and these include the right to have the legal title held and applied in accordance with the terms of the trust.

Trust rights are not disposed of and continue to be capable of enforcement. In the event that rights become overridden – or in Lord Neuberger’s formulation they are lost or disappear – this is not attributable to the transfer of the legal title. Rather, as summarised by Lloyd LJ in Independent Trustee Services Ltd v GP Noble Trustees Ltd [2012] EWCA Civ 195, 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 bona fide third party purchasers for value.

The court further clarified that section 127 of the 1986 Act enables companies in winding up to recover assets legally owned by them by treating the disposition as void (subject to the court’s power to validate the disposition). Lord Mance said that the provision is not aimed at covering, nor is apt to cover, the situation in the present case. Samba’s liability to restore the shares does not depend on section 127. Instead, given that on the basis of the assumed facts Samba gave value in the form of the discharge of AS’s debt, it turned on whether it is accountable on the basis of notice.

(ii) Lord Neuberger

His Lordship concurred with Lord Mance’s analysis of Independent Trustee Services Ltd and stated that the sale of a legal estate to equity’s darling does not result in the transfer of any equitable interest to the purchaser. Instead, such interest:

62. … is overridden, or to put it more colloquially, it is lost or disappears.

Lord Neuberger found that the word “disposition” is capable of, in some circumstances, embracing destruction or extinction of an interest, notably where there has been a surrender of a lease, contractual rights or a life interest. Moreover, policy reasons pointed to the conclusion that section 127 provides equal coverage to property held for a company by a third party as it does to property which it holds in its own name. After all, the provision aims to ensure that – upon the initiation of the winding up procedure – a company’s property is retained for it to be distributed fairly among its creditors.

Important differences exist between surrendering a lease, contractual rights, or a life interest and losing a beneficial interest on a transfer of the legal estate to equity’s darling which would make it unfair for section 127 to apply in both cases so as to render the transaction void.

Lord Neuberger distinguished a bona fide purchaser for value without notice from the case of someone taking a surrender of a lease or contractual rights from a company and held that, by definition, the former would be unaware of both the company (or at least that it had an equitable interest) and of the equitable interest.

(iii) Lord Sumption

Indeed, the wording of section 436 of the 1986 Act is “exceptionally wide”. The law relating to constructive trusts has reached a high level of development. It “reflects a careful balance between the competing interests engaged” in cases such as the present one. His Lordship said that the coherence of the law would be hampered by construing “disposition” inconsistently with the cardinal principles regulating the creation and recognition of equitable interests, founded on a very different balance of the relevant interests. Since no claim was advanced to make Samba accountable as a constructive trustee and there was no allegation of notice, as framed the proceedings failed and the appeal succeeded.

(iv) Lord Collins

His Lordship took the view, and Lord Sumption concurred, that the appeal does not raise the interesting and difficult questions on the Convention which were argued at each stage of the proceedings.

(v) Future Steps

The justices provided the parties 21 days to make submissions on the consequences of the court’s conclusions, in particular as to whether the proceedings should be stayed or struck out or remitted to the High Court with a view to possible amendment to enable them to proceed on an alternative basis.


The UK promoted the Convention with a view “to build bridges between countries of common law and countries of civil law” by assisting common law states’ to have the trusts created under their laws recognised in jurisdictions where the institution is not known.

Since the court decided the case on the basis of section 127 of 1986 Act and the justices did not find any “disposition” of SICL’s property, it was unnecessary to make a decision on the Convention’s scope and effect. Nevertheless, the court’s judgment is a reminder that a trust’s beneficiary has two main rights.

Firstly, under the terms of the trust deed, the beneficiary has the right to demand the proper administration of the trust. Secondly, as Lord Sumption explained, except for the doctrine equity’s darling, the beneficiary can enforce their “true proprietary” right over the trust property against the world at large.



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