Frenkel v LA Micro Group (UK) Ltd and others [2024] UKSC 42

The Supreme Court considered whether an oral agreement to transfer a 51% equitable interest in company shares to the legal owner created a vendor purchaser constructive trust, thereby displacing the writing requirement under section 53(1)(c) of the Law of Property Act 1925. The Court held that such a trust arose, rendering the transfer effective despite lack of writing.

Facts

LA Micro Group Inc (Inc) held a 51% beneficial interest in each of two shares in LA Micro Group (UK) Ltd (UK), with Mr Bell and Mr Lyampert being the respective legal owners holding on trust. In 2010, following a falling out between the shareholders of Inc, an oral agreement was made whereby Inc would give up its 51% beneficial interest in each share to the legal owners, with Mr Lyampert assuming liability for Inc’s debt to UK as consideration.

The courts below found that this oral agreement contained an implied term that the shares would thenceforth be held beneficially solely by their respective legal owners. Inc and Mr Frenkel later sought to challenge this transfer, arguing that section 53(1)(c) of the Law of Property Act 1925 required writing for the disposition of an equitable interest.

Issues

Principal Issue

Whether an oral agreement for the sale of an equitable interest in shares to the person who is already the sole legal owner gives rise to a vendor purchaser constructive trust (VPCT), thereby engaging section 53(2) and displacing the writing requirement of section 53(1)(c).

Secondary Issue

Whether section 53(1)(c) applies only to equitable interests in land, or extends to equitable interests in personalty such as shares.

Judgment

The Supreme Court unanimously dismissed the appeal, holding that a VPCT did arise upon the making of the 2010 Agreement.

The Vendor Purchaser Constructive Trust

Lord Briggs, delivering the judgment of the Court, explained that a VPCT typically arises on an agreement for sale of property of which equity would grant specific performance. It was common ground that an equitable interest in shares in a private company satisfied the requirement of uniqueness necessary for specific performance.

“The creation by equity of a VPCT in favour of the purchaser is not in any event dependent upon there having been intended to be, or needing to be, an interval between contract and completion.”

The Destruction Analysis

The appellants argued that since the purchaser was the legal owner, the equitable interest would be destroyed by merger rather than transferred, meaning there was no property upon which a VPCT could bite. The Court rejected this argument.

“Viewed as a matter of substance, the subject matter of the implied term was Inc’s 51% beneficial interest in each of the two issued shares in UK. The objective of the agreement was that, forthwith, that 51% beneficial interest was to become beneficially owned by each of Mr Bell and Mr Lyampert.”

Lord Briggs emphasised the distinction between substance and mechanics. The mere fact that the equitable mechanics resulted in merger did not change the substance of the transaction, which was the conferring of beneficial ownership.

“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.”

Section 53(1)(c) and Personalty

The Court refused permission to argue that section 53(1)(c) applies only to land. Lord Briggs noted that this construction had been assumed correct for over half a century, including by the House of Lords in Grey v IRC, Oughtred v IRC, and Vandervell v IRC.

“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.”

Implications

This decision clarifies that a VPCT can arise even where the practical effect is to complete the transaction immediately without any intervening period of protection, and even where the purchaser is already the legal owner of the underlying property. The Court confirmed that the principle extends to equitable interests in personalty, not merely land. The decision reinforces equity’s objective to treat as done that which ought to be done, regardless of technical mechanics involving merger of interests.

Verdict: Appeal dismissed. The oral agreement in 2010 gave rise to a vendor purchaser constructive trust which, by operation of section 53(2) of the Law of Property Act 1925, displaced the writing requirement of section 53(1)(c). Mr Bell and Mr Lyampert became the sole legal and beneficial owners of their respective shares in LA Micro Group (UK) Ltd.

Source: Frenkel v LA Micro Group (UK) Ltd and others [2024] UKSC 42