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You are here: BAILII >> Databases >> The Law Commission >> Capital and Income in Trusts: Classification and Apportionment (Consultation Paper) [2004] EWLC 175(3) (12 July 2004) URL: http://www.bailii.org/ew/other/EWLC/2004/175(3).html Cite as: [2004] EWLC 175(3) |
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PART III
EQUITABLE AND STATUTORY RULES OF APPORTIONMENT
3.1 The rules of apportionment are to be found partly in case law and partly in statute. The case law dates largely from the nineteenth century and consists of judge-made rules dictating the extent to which trustees of a fixed trust were able to maintain a balance between the interests of income and capital beneficiaries in circumstances where no balance would otherwise be struck. The statute is the Apportionment Act of 1870. In this Part, we outline the scope of these equitable and statutory rules and set out criticisms of their operation.INTRODUCTION
3.2 Whenever there is a trust for sale[1] for the benefit of persons in succession it is inevitable that some investments will favour the life tenant and others will favour the remainderman. Equity has consequently developed technical rules which seek to restore a balance between those interested in trust capital and those interested in trust income. For example, the second branch of the rule in Howe v Earl of Dartmouth [2] was originally conceived to ensure that life tenants do not receive too much income at the expense of remaindermen pending conversion of property subject to a trust for sale. The rule in Re Earl of Chesterfield's Trusts [3] is a special application of the second branch of the rule in Howe v Earl of Dartmouth. It applies where property in remainder not currently yielding income is held on a trust for sale with a power to postpone conversion. Its purpose is to tip the balance away from the remainderman back towards the life tenant.RULES GOVERNING THE APPORTIONMENT OF TRUST RECEIPTS PENDING CONVERSION OF ORIGINAL TRUST ASSETS
3.3 A trust for sale exists when a trustee is under an obligation to convert (i.e. sell) trust property. A trust for sale may require immediate conversion of the trust property or alternatively may provide the trustee with a power to postpone sale. A trust for sale may be created expressly by settlors (or testators), by statute or by implication under the first branch of the rule in Howe v Earl of Dartmouth.Trusts for sale
3.4 No precise form of words is necessary to establish an express trust for sale. It is only necessary for the settlor (or testator) to make clear that he requires the trust property to be converted and re-invested.[4]Express trusts for sale
3.5 Section 33(1) of the Administration of Estates Act 1925 imposes a trust for sale upon the real or personal estate of a person who dies intestate.[5]Statutory trusts for sale
3.6 The first branch of the rule in Howe v Earl of Dartmouth states that where residuary personal estate is held on trust for persons in succession, the executors are obliged to convert all unauthorised investments of a wasting or hazardous nature and to invest the proceeds in authorised investments. If the investments are authorised the rule in Howe v Earl of Dartmouth is inapplicable even if they are wasting or hazardous.[6] The basis of this rule is the presumed intention of the testator that the residuary beneficiaries should, broadly, "enjoy the same thing".[7] Wasting or hazardous investments have the potential to prejudice the capital beneficiary over time through a dramatic diminution in value. Conversely the income beneficiary is liable to receive an augmented level of return. 3.7 The first branch of the rule in Howe v Earl of Dartmouth does not apply to specific (as opposed to residuary) bequests (including inter vivos settlements by deed)[8] or realty.[9] There is clearly no need for its application where there is an express or statutory trust for sale. It will also be displaced if it is shown that the testator intended that there should not be a trust for sale.[10] For example, an intention that the life tenant should enjoy the actual income of the residuary estate is necessarily inconsistent with the imposition of a duty to convert the residuary estate and re-invest the proceeds of sale in authorised investments. A power to postpone sale will likewise prevent a trust for sale arising under the rule.[11] 3.8 As we have explained in Part I above,[12] the Trustee Act 2000 has given trustees a general power to invest as if absolutely beneficially entitled to the assets of the trust and so has vastly extended the range of authorised trust investments. The effect of this statutory expansion of investment powers has been significantly to restrict the circumstances in which the first branch of the rule in Howe v Earl of Dartmouth is engaged.[13] There is little doubt in our view that a new approach is now required in order to cater for the new trust investment regime introduced by the Trustee Act 2000. 3.9 The difficulties with the first branch of the rule in Howe v Earl of Dartmouth are brought into focus by the Canadian case of Re Smith.[14] In that case a settlor had transferred shares in the Imperial Oil Company (an authorised investment) to a trustee. The life tenant of the trust was the settlor's mother and the remainderman was the settlor himself (or his mother if she should survive him). Over the lifetime of the trust the shares produced a small amount of income relative to alternative investments such as bonds or mortgages. The capital value of the shares increased. The settlor responded to the trustees' enquiries about investment performance by asking them not to sell the shares and the trustees complied with this request. 3.10 The Ontario Court of Appeal upheld the first instance decision of Keith J who decided that the failure of the trustees to sell the shares and make investments which yielded a greater level of income was a breach of their duty to maintain an even hand between the income and capital beneficiaries. This was so despite the shares being authorised investments and the trust being an inter vivos settlement. This decision was also reached despite terms of the trust which gave the trustees an absolute discretion to retain the original trust property. 3.11 A possible interpretation of this decision is that it departed from the automatic exclusion of the duty of even-handedness, insofar as it relates to the original trust property, in the case of inter vivos settlements of authorised investments. The court was persuaded to impose a duty to convert the original trust property in circumstances where the first branch of the rule in Howe v Earl of Dartmouth would traditionally have been excluded. The decision apparently advocates a broader role for the duty of even-handedness in trustees' investment decisions. 3.12 There are, however, problems with this analysis. First, the judgments of Keith J and the Ontario Court of Appeal make no reference to Howe v Earl of Dartmouth.[15] Secondly, some commentators have suggested that the decision of the Supreme Court of Canada in Lottman v Stanford [16] has implicitly overruled Re Smith.[17] In Lottman, the Supreme Court refused to apply the first branch of the rule in Howe v Earl of Dartmouth to realty. On a broad interpretation, Lottman can be taken as a reaffirmation of the principle that the duty of even-handedness is excluded in the case of specific gifts at least insofar as it relates to the original trust property. McIntyre J's reasoning focussed on the traditional formulation of the first branch of the rule in Howe v Earl of Dartmouth.[18] He concluded that it would be an illegitimate act of judicial legislation to alter the scope of a rule of such long standing.[19] 3.13 We believe that the result in Re Smith is right as a matter of principle, although it cannot be reconciled with authority. We consider that a settlor should not necessarily be taken to have excluded the duty of even-handedness insofar as it is applicable to original trust property solely because the original trust property comprises authorised investments or because the settlor has created a trust of land or an inter vivos settlement. Indeed, in the case of authorised investments, the inapplicability of the first branch of the rule in Howe v Earl of Dartmouth seems to have been based originally on the assumption that authorised investments automatically maintain a fair balance between the competing interests of income and capital beneficiaries. Whilst this assumption may have been accurate in the early nineteenth century (when the very short list of authorised investments was made up of assets considered to achieve such a balance) we believe that it no longer holds true. Section 3(1) of the Trustee Act 2000 has massively enlarged the scope of trustees' investment powers. The definition of authorised investments is now wide enough to include investments which do not necessarily maintain a balance between the income and capital beneficiaries. 3.14 Furthermore the settlor may give authorised investments or specific property to be held on trust in the hope that it will maintain a balance. If, however, the original property fails to maintain a balance the settlor may expect the trustee to exercise his or her powers of sale and reinvestment to rectify the imbalance. Unless the terms of the trust exclude the duty of even-handedness (either expressly or by necessary implication) it is unrealistic to assume that the settlor has anticipated all the possible circumstances in which the original trust property might fail to achieve a balance and accepted such an outcome in those circumstances.The first branch of the rule in Howe v Earl of Dartmouth
3.15 The second branch of the rule in Howe v Earl of Dartmouth applies where property is held for persons in succession under a trust for sale and the property has not yet been converted. It provides that, up to the date of actual conversion, the life tenant is only entitled to an amount calculated by applying a specified level of interest to the estimated value of the property, rather than to the actual income that the property produces. The original rationale of this rule was to ensure that life tenants did not unfairly benefit from the high levels of income obtained from hazardous or wasting unauthorised assets at the expense of the remaindermen. 3.16 This general rule applies regardless of the circumstances under which the trust for sale arises.[20] It is immaterial whether the trust for sale is express, statutory or implied under the first branch of the rule in Howe v Earl of Dartmouth. The second branch of the rule is therefore, unlike the first branch, not limited to the residuary estates of testators. 3.17 It seems, though, that the rule is limited to personal property. It was well established, prior to 1925, that life tenants were entitled to the actual income received from freehold trust property and not the fixed amount that would arise under the second branch of the rule in Howe v Earl of Dartmouth.[21] Section 28(2) of the Law of Property Act 1925[22] made it clear that the rule was similarly inapplicable to leasehold trust property. Section 28(2) was, however, repealed by the Trusts of Land and Appointment of Trustees Act 1996[23] so it would seem that post-1996 trusts for sale of leasehold interests now fall within the scope of the general rule once again. 3.18 The rule only applies to limit the income payable to the life tenant from the original trust assets. On general principles, a trustee would be in breach of trust if the proceeds of sale of the original assets were applied to purchase further unauthorised investments, but if the trustee did so the life tenant would be entitled to the actual income the investments produced.[24] The remainderman could seek redress for any loss thereby suffered in an action against the trustees to impose personal liability for breach of trust.The second branch of the rule in Howe v Earl of Dartmouth
Issues of valuation and payment
3.19 For the purposes of calculating the interest due to the life tenant, the date of valuation of the trust fund is obviously important. Where the assets form part of the estate of a testator, they should be valued on the first anniversary of the testator's death unless the trustees have a power to postpone conversion,[25] in which case they should be valued as at the date of the testator's death.[26] The basis for this distinction is as follows. Where trustees are under a duty to sell trust assets the period of a year is taken as that in which the duty could reasonably be expected to be performed. Where trustees have a discretion to postpone conversion, however, there is no reason to assume a notional conversion at any particular time. In the absence of any better date, the value of the investments is ascertained at the date of the testator's death. 3.20 Where the assets do not form part of a testator's estate, but are the subject of an inter vivos settlement, it seems likely that the date for valuation would be the date of creation of the settlement even where there is no express power to postpone sale.[27]date of valuation
3.21 The level of interest payable to the life tenant should be a "fair equivalent"[29] of the capital value of the unauthorised investments, reflecting the expected return from investment in authorised investments of equivalent value. In the nineteenth century the interest rate applied by the courts fluctuated[30] but in every reported decision since 1920 a rate of 4 per cent has been adopted.[31]applicable interest rate[28]
3.22 In Re Fawcett,[32] Farwell J was required to consider how the income should actually be paid to the life tenant. Where the unauthorised investments yield an actual income which is greater than the "fair equivalent", no problem arises. Surplus income is added to the capital and used to purchase authorised investments. The life tenant is then entitled to the actual income of these additional authorised investments. Where the unauthorised investments fail to produce sufficient actual income to pay the "fair equivalent" to the life tenant, the shortfall cannot be made up out of capital.[33] Similarly surpluses of actual income over the fair equivalent from previous accounting periods (which is attributed to capital) cannot subsequently be apportioned to income to make up for a shortage in a later accounting period. Any shortfall can only be made up from any future surpluses of actual income over the fair equivalent or from the proceeds of the realisation of the unauthorised investments. 3.23 If the trust property comprises several different unauthorised investments the surplus or shortfall of income should be determined by taking the investments together. Individual unauthorised investments should not be treated separately.[34] In Re Fawcett, Farwell J concluded that the Apportionment Act 1870 was inapplicable to the income from unauthorised investments. All income should be treated as accruing on the day that it falls in.[35]manner of payment
3.24 The operation of the second branch of the rule in Howe v Earl of Dartmouth may be excluded expressly, by implication or by statute.Exclusion of the general rule
3.25 An express declaration to the effect that the life tenant is to take the actual income of the trust property pending conversion will, regardless of the precise wording, suffice to exclude the general rule.[36]express exclusion
3.26 Whether or not the trust instrument, in the absence of express provision, impliedly excludes the general rule raises more difficult issues of construction. It is necessary to distinguish between cases where the trust for sale is implied (under the first branch of the rule in Howe v Earl of Dartmouth) and cases where it is expressly declared. 3.27 Any power to postpone conversion is considered to be necessarily inconsistent with the implication of a trust for sale under the first branch of the rule in Howe v Earl of Dartmouth.[37] 3.28 In cases where the trust for sale is expressly declared, and trustees have a power to retain investments, or to postpone sale, the general rule will be excluded if, and only if, it can be said, on a proper construction, that the life tenant was intended to take the actual income of the trust property in the meantime. In the case of a power to postpone sale for the more convenient or advantageous realisation of the estate the second branch of the rule in Howe v Earl of Dartmouth will not be excluded[38] in the absence of additional indications that the life tenant was to take the actual income of the trust property pending conversion.[39] An "additional indication" might consist of a direction that, in the event of postponement, the life tenant is to take the actual income of the trust property pending conversion. A power to retain investments or postpone sale for the benefit of the life tenant may also have the effect of excluding the rule.[40] It is necessary, in either case, that the trustees consciously and properly exercise their power. A mere failure to sell will not constitute an exercise of a power to postpone sale.[41]implied exclusion
3.29 The real and personal estate in respect of which a person dies intestate is held on trust "with the power to sell it".[42] By section 33(5) of the Administration of Estates Act 1925:exclusion by statute
3.30 The effect of the statute is to impose a trust for sale with a power to postpone sale for the more convenient realisation of the estate, combined with a direction that, in the event of postponement, the life tenant should receive the actual income of the trust property. It was held in Re Fisher,[43] however, that the second branch of the rule in Howe v Earl of Dartmouth was applicable to determine the income payable to the life tenant pending conversion unless the trustees consciously and properly exercised the power of postponement.[44]The income (including net rents and profits of real estate and chattels real after payment of rates, taxes, rent, costs of insurance, repairs and other outgoings properly attributable to income) of so much of the real and personal estate of the deceased as may not be disposed of by his will, if any, or may not be required for administration purposes aforesaid, may, however such estate is invested, as from the death of the deceased, be treated and applied as income, and for that purpose any necessary apportionment may be made between tenant for life and remainderman.
3.31 The rule in Re Earl of Chesterfield's Trusts[45] is said to be complementary to the second branch of the rule in Howe v Earl of Dartmouth.[46] We have already seen that the rule in Howe v Earl of Dartmouth ensures that the interests of the remainderman are protected from prejudice pending the conversion of trust investments. The rule in Re Chesterfield's Trusts compensates the life tenant for the loss of present income from future property where the trustees have exercised a power to defer sale of the property in the interests of the trust as a whole.[47] 3.32 Under the rule in Re Earl of Chesterfield's Trusts the life tenant is compensated by a payment made when the future property is actually converted. The formula by which the trustees calculate the amount of that payment is complicated. They are required to calculate the sum which would, if immediately converted and invested in authorised investments on the date the trust was created, yield the amount actually realised on conversion of the future interest. In their calculations the trustees must use a fixed interest rate (currently four per cent[48]), apply compound interest to the principal at yearly intervals and deduct income tax. The sum which they determine would have been required to be invested to produce the actual future receipt is held as capital; the balance is income, payable to the life tenant. 3.33 Suppose that the trust property includes future property, such as monies payable on a life insurance policy. Although all the trust property is subject to a trust for sale, the trustees decide to exercise their power to postpone the sale in the best interests of the trust as a whole. Suppose then that the life insurance policy falls in three years later and a sum of £30,000 is paid to the trustees under the life insurance policy. Assuming a "fair equivalent" of four per cent, and leaving on one side the added complication of taking account of tax, the rule in Re Earl of Chesterfield's Trusts operates as follows:The rule in Re Earl of Chesterfield's Trusts
30,000 ... 1.043 = £26,699.89 (capital)
3.34 It appears from the obiter remarks of Simonds J in Re Woodhouse [49] that the rule in Re Earl of Chesterfield's Trusts only applies to future property which forms part of a testator's residuary estate. The reason for this is difficult to ascertain since the rationale of the rule applies equally to other trusts for sale for persons in succession which include future property not yielding income. It may be that this position (if it is indeed the position) stems from a confusion between the conditions of operation of the first branch (implied trusts for sale) and the second branch (equitable apportionment) of the rule in Howe v Earl of Dartmouth. 3.35 The rule in Re Earl of Chesterfield's Trusts can be excluded by an express declaration in the trust instrument or by necessary implication. An express statement that no reversionary (or other) property should be treated as producing income unless it actually does so will be effective. It is also established that a declaration that the life tenant is to take the whole actual income of the trust property pending conversion excludes the rule in Re Earl of Chesterfield's Trusts, as well as the second branch of the rule in Howe v Earl of Dartmouth.[50] The same problems arise in respect of express trusts for sale with powers to postpone sale as arise under the second branch of the rule in Howe v Earl of Dartmouth.[51]30,000 – 26,699.89 = £3,330.11 (income)
Criticisms of the practical operation of the rules of apportionment pending conversion of original trust assets
3.36 The apportionments required under the second branch of the rule in Howe v Earl of Dartmouth and the rule in Re Earl of Chesterfield's Trusts involve complex calculations. Where trustees obtain professional assistance in making the calculations or themselves charge for doing so the trust fund will bear the cost. The relative cost/benefit of such expenditure is often questionable given that the resulting apportionment will usually only involve relatively small sums of money. For that reason we understand that as a matter of practice many trustees adopt a "broad-brush" approach to apportionment based on, but not strictly following, the technical rules. Lay trustees attempting the calculations without professional expertise or assistance would find them very difficult.Complex calculations affecting small amounts of money
3.37 There is some uncertainty over what level of interest on the trust capital is due to the life tenant. The most recent authorities suggest a rate of four per cent per annum. Using the word "recent" in this context is, however, highly misleading because no case has been decided on the issue since 1961.[52] Investment income is highly sensitive to changing economic circumstances. This problem is accentuated following the extension of the range of authorised investments by the Trustee Act 2000. Even if the interest rate had kept up with economic developments, a fixed rate based upon the returns of investment in government stock is outdated. Despite these obvious uncertainties, trustees have not sought a modern judicial determination of the proper rate. This is most likely because the amounts of money at stake do not justify the costs of such a determination.Uncertainty over level of the "fair equivalent"
3.38 As outlined, the question of whether the rules should be excluded by necessary implication from an express power to postpone sale gives rise to subtle and difficult questions of construction. This leads to still more uncertainty in this area.Uncertainty over exclusion of the rules
3.39 As a result of these practical difficulties, well-drafted trust instruments routinely exclude both rules. Where the rules do apply it is usually by accident rather than design. Even if the rules, in principle, achieve fairness in the specific circumstances in which they operate, they are of dubious utility if settlors and/or trustees do not make use of them and, as a result, no apportionment takes place. If one accepts the importance of balancing the interests of the life tenant and remainderman it is vital that the rules of apportionment keep pace with modern trust practice.Routine exclusion of the rules in well-drafted trust instruments
3.40 It is likely that the majority of lay trustees who are not professionally advised will be wholly unaware of the rules and so will fail to make the apportionments required by them. Even when trustees are aware of the apportionment rules they may well be honoured more in the breach than in the observance.Ignorance or disregard of the rules
3.41 Changing economic circumstances have undermined the rationale of the rule in Howe v Earl of Dartmouth. Where there is an express or statutory trust for sale of shares,[53] the second branch of the rule in Howe v Earl of Dartmouth will still prescribe the level of income payable to the life tenant. 3.42 Contrary to the prevailing view in the nineteenth century, equities are, despite the recent woes of the stock market, today considered to be the best way of preserving or augmenting capital in the long term. Trust investments in shares are generally thought to operate as a hedge against inflation. The rationale of protecting the remainderman from capital depletion therefore no longer applies because investment in equities will often benefit capital over income. "As the price of [the] hedge [against inflation], investors are willing to accept a far lower income yield."[54] Share dividends are today, and have for many years been, lower than the interest payable on medium-dated fixed-interest government stock. There is little point in "limiting" the life tenant's income to a sum which is, in fact, far greater than the actual income generated by the trust property. 3.43 In the current economic climate it would perhaps be more appropriate to have a rule which shifted the balance in share investments back towards the life tenant. The traditional four per cent cap on income can work injustice against life tenants. Whilst the life tenant's income is fixed, the remainderman enjoys year-on-year growth.[55] It might, of course, be possible to persuade a court to increase the level of interest payable to the life tenant. This would, however, hardly alleviate the problem since any shortfall which cannot be paid out of the actual dividends received could only be made up when the shares are finally realised.[56]Changing economic circumstances
APPORTIONMENT OF DEBTS AND LEGACIES OF A DECEASED'S ESTATE
3.44 The rule in Allhusen v Whittell [57] applies when a testator bequeaths his residuary estate to persons in succession. It operates to apportion the debts, liabilities, legacies and other charges payable out of the residuary estate between capital and income. The rule demands that payments made to discharge the obligations of the residuary estate should be taken to consist of a combination of income and capital. The capital element is deemed to be the amount which, when added to the income accruing upon that amount between the testator's death and the payment,[58] equals the total sum owed. The income element is the income accruing upon the capital element between the testator's death and the payment.[59] 3.45 The justice of this approach is not in doubt. The life tenant's only entitlement is to the income of the residue. By definition the residue is the testator's estate net of all debts, legacies and other liabilities. Although it is impractical for the administration of the testator's estate to be accomplished immediately, it would be unfair if the life tenant were able to take the income earned in the meantime from that portion of the estate required to discharge debts, legacies and other liabilities. 3.46 The applicable rate of interest should, in theory, be calculated on the basis of the average income of the entire trust fund for each one year period.[60] Where, however, the debt or legacy in issue is not substantial it may be appropriate to make an approximate calculation of the interest rate for the whole period. This should be the net rate, after deduction of income tax.[61] 3.47 Despite references in Allhusen v Whittell to the one year period of administration of the testator's estate, it is clear that the rule applies with equal strength to payments made after the end of the "executor's year".[62] In such a case the relevant amount of income is that which is earned on the appropriate portion of capital up until the date of payment of the debt or legacy. 3.48 The rule in Allhusen v Whittell appears to be slightly more flexible than the other equitable rules of apportionment. In Re McEuen,[63] Sargant J went so far as to say that: "I do not by any means wish to lay down that this is the only method available, or that extremely elaborate and minute calculations must be gone through in every case."[64] He considered that "the actual accountancy will not be difficult so long as the true object is borne in mind".[65] Similarly in Re Poyser,[66] Parker J held that the actual method of apportionment is at the discretion of the court.[67] 3.49 The rule does not apply to contingent legacies.[68] Sums paid to discharge other contingent liabilities are, however, to be apportioned between capital and income.[69] 3.50 The rule does apply to payments of instalments of an annuity, so that they are apportioned between income and capital,[70] provided that the annuity is supported by a personal covenant of the testator.[71] 3.51 A strict application of the rule in Allhusen v Whittell will usually lead to a fair account of the respective interests of the life tenant and the remainderman, but the rule should not be applied in certain "exceptional cases" where its operation would "produce inconvenience and hardship".[72]The rule in Allhusen v Whittell
3.52 The rule may be excluded if the settlor demonstrates his or her intention to do so with sufficient clarity.[73] A standard clause excluding the second branch of the rule in Howe v Earl of Dartmouth or the rule in Re Chesterfield's Trusts will not suffice to displace the rule in Allhusen v Whittell.[74] Similarly section 33(5) of the Administration of Estates Act 1925 is insufficient. A power to postpone conversion of trust property will not exclude the rule. The rule will be excluded when the "nature of the property" or the "circumstances of the payment" make its application impossible.[75]Exclusion of the rule
3.53 The most significant criticism of the rule is that it requires complex and cumbersome calculations, which in most cases affect only small sums of money. As a result it is excluded as a matter of course in well-drafted wills.Criticism of the rule in Allhusen v Whittell
3.54 Whenever a trustee invests in loan stock there is a risk that the borrower will be unable to meet its obligations and that the security for the loan (if any) will be insufficient to make up the shortfall. A rule of apportionment is required to attribute the loss caused by the deficient security between income and capital.[76]RULES GOVERNING APPORTIONMENT OF DEFICIENT SECURITIES
3.55 The rule in Re Atkinson [77] applies when security taken by trustees for a loan that they were authorised to make is insufficient to meet both the principal and arrears of interest owed to the trust. 3.56 Trust security is security for both principal (benefiting the remainderman) and interest (benefiting the life tenant). If a security, when realised, is insufficient to satisfy the arrears of interest and the amount of outstanding principal both the income and capital beneficiaries have suffered loss from the investment. This loss should be apportioned rateably between them in proportion to the outstanding debts owed to each of them. The rule requires the sum realised from the security to be apportioned between the life tenant and the remainderman by reference to the ratio of the arrears of interest to the amount of outstanding principal.[78] 3.57 Although Re Atkinson itself concerned a mortgage it is clear that the rule of apportionment is not so limited. It applies equally, for example, to debenture stock in a company[79] and payments in respect of mortgage debentures made under a court-approved scheme of arrangement.[80] The rule in Re Atkinson does not apply until the security has actually been realised. Until this time the life tenant is ordinarily entitled to receive any income arising from the security.[81] This broad principle is, however, qualified by the decision of Warrington J in Re Coaks.[82] Sums received on a mortgage before realisation of the security should only be received by the life tenant insofar as they are necessary to meet the arrears of interest due. Any excess should be apportioned to capital. 3.58 The situation is more complicated when the security is realised following an order for foreclosure.[83] 3.59 A direction that the life tenant should not be treated as entitled to receive income when the trust property does not actually produce income is insufficient to exclude the rule in Re Atkinson.[84]Authorised security: the rule in Re Atkinson
3.60 The rule in Re Atkinson does not apply when the deficient security comprises an unauthorised investment. Romer LJ stated in Re Atkinson that:Unauthorised security: the rule in Re Bird
3.61 In Re Bird,[86] trustees, without the knowledge of the life tenant or remainderman, sold an authorised investment and invested the proceeds in an unauthorised security. The value of this security was insufficient to meet the sums due to both income and capital. The court approved and applied the principle laid down by James VC in Cox v Cox [87] that:In dealing with cases of unauthorised investment, from the very nature of the transaction one has to consider the rights of the parties at the time when the investment was made. Almost of necessity one must go back and adjust the rights as they stood at that time.[85]
3.62 Farwell J held in Re Bird that where an unauthorised security causes loss to the trust fund, that loss must be borne by income and capital rateably. The proceeds of realisation of the unauthorised investment, plus any income therefrom,[89] must be apportioned between the life tenant and the remainderman in proportion to the total income and capital that would have been received, in the same period, from an authorised investment.Neither the tenant for life nor the remainderman is to gain an advantage over the other – neither is to suffer more damage in proportion to his estate and interest than the other suffers – from the default of the obligor. The two must share the loss in the same way as they would have shared it had it occurred when they first became entitled in possession to the fund.[88]
3.63 There has been little criticism of the rules in Re Atkinson and Re Bird. The rules appear to be less complex than the other equitable rules of apportionment. Moreover, as the rules apportion the entirety of the deficient security between income and capital, the sums of money at stake are likely to be somewhat larger than under the other rules, underlining the need for such rules. In the specific circumstances in which the rules operate they broadly achieve fairness between the life tenant and remainderman. It would not, however, be consistent to retain the rules in Re Atkinson and in Re Bird simply on the basis that they are less unsatisfactory than the other rules. Although we consider that the distinction drawn between authorised and unauthorised investments can be easily justified as a matter of principle, there is no need to resort to rigid and technical rules to achieve fairness between the beneficiaries.Criticism of the rules governing apportionment of deficient securities
3.64 This Consultation Paper does not seek to give an exhaustive analysis of every situation in which no rule of apportionment exists; this would be of little value. Neither trustees nor the courts have a general discretion to do justice between the life tenant and the remainderman except when the imbalance is caused by a breach of trust.[90] Unless a technical rule of apportionment applies investment returns are therefore attributed in accordance with their primary classification. The compartmentalised approach of the present law leads to injustice in situations where apportionment might be necessary to maintain a proper balance between the life tenant and remainderman. This can be illustrated by considering two particular cases:SITUATIONS FOR WHICH NO RULE OF APPORTIONMENT EXISTS
(1) The purchase and sale of shares "cum" and "ex" dividend; and
(2) The holding of authorised investments which favour one beneficiary over another.
3.65 An important factor affecting the value of shares is the date on which a dividend is or is expected to be declared. Share prices increase when a dividend is expected in order to reflect the additional income which it is anticipated that shareholders will receive.[91] Once a dividend has been declared the value of shares falls as money has left the company and the shares are not expected to produce income in the immediate future.[92] 3.66 Shares held by trustees form the capital of the trust, and therefore the proceeds of sale should also be capital. When shares are sold cum dividend, the share price received reflects in part the additional income expected from the forthcoming dividend. If the shares are sold the life tenant will not, however, receive this income. It is therefore arguable that there should be some apportionment between capital and income. 3.67 In Scholefield v Redfern [93] Kindersley VC recognised the force of this argument[94] but held that the entire proceeds of the sale of shares should be treated as capital, regardless of whether the shares were sold cum or ex dividend.[95] His reasoning was that it would be far too complex to determine what proportion of the proceeds of sale represents the expected dividend on the shares. Moreover, if the shares were converted and re-invested in shares cum dividend, it would be necessary to give effect to the equity both ways, apportioning a part of the next dividend from income to capital. 3.68 In reaching his decision, the Vice-Chancellor distinguished the earlier case of Lord Londesborough v Somerville[96] (where the court ordered an apportionment of the proceeds of sale of trust shares) on the basis that it was decided in "very special circumstances".[97] Freman v Whitbread [98] subsequently established that mere delay in the execution of a sale and completion of a subsequent purchase does not constitute "circumstances of a special and exceptional nature".[99] Apportionment was, however, ordered in Bulkeley v Stephens[100] because the life tenant succeeded in establishing exceptional circumstances. A testator bequeathed his residuary estate, which comprised stocks in a public limited company, on trust for persons in succession. The will provided that on the death of the life tenant the shares should be distributed amongst a large class of remaindermen. The terms of the will directed that the trust would be carried out by transfer of shares to the remaindermen rather than by sale of the investments. If this had occurred the life tenant was entitled, under the will, to an apportioned part of any dividends subsequently paid upon the shares. The shares were nevertheless sold cum dividend under a court order, so as to facilitate the division of the testator's residuary estate. It was not doubted by Stirling J that the order was "properly made" but his Lordship held that special circumstances were made out because the court order was made in the absence of the legal personal representatives of the life tenant. 3.69 The court's general refusal to order apportionment in unexceptional circumstances appeared to be undermined by the decision in Re Winterstoke's Will Trusts.[101] Trustees held shares on trust for persons in succession and sold these shares cum dividend. The life tenant argued that a proportion of the proceeds representing the accrued dividend should be apportioned to income. Clauson J held that, insofar as it is reasonably possible, trustees should preserve the rights of the life tenant when they sell trust investments. This could be achieved by deferring sale until after the dividend had been declared.[102] Alternatively the shares could be sold cum dividend but a portion of the purchase price, representing the expected value of the dividend which had accrued until the date of sale, should be set aside as income, provided that the appropriate figure can be ascertained without undue difficulty. 3.70 The courts have subsequently retreated from Re Winterstoke's WT and re-established the general rule that no apportionment in favour of the life tenant should ordinarily take place. In Re Firth,[103] Farwell J distinguished Re Winterstoke's WT as a case in which "special circumstances" had been identified. Moreover, his Lordship criticised the reliance which Clauson J had placed on the proportion of the proceeds representing the expected dividend being readily ascertainable. The entitlement of the life tenant should not depend on the complexity of the calculation required to determine his or her rights. 3.71 In Hitch v Ruegg,[104] Nourse J went further and expressly disapproved the decision in Re Winterstoke's WT, stating that "the decision of Clauson J … was wrong and ought not to be followed."[105] As a general rule there is no apportionment of the proceeds of sale of shares between capital and income unless there are special and exceptional circumstances. Special and exceptional circumstances are not, however, made out by the size of the trust fund, the fact that a claim is made on behalf of the life tenant's estate or the fact that the trustees voluntarily sought the directions of the court.Purchase and sale of shares "cum" and "ex" dividend
3.72 A trustee exercising the wide powers of investment conferred by the Trustee Act 2000 must maintain a proper balance between the interests of the life tenant and the remainderman. It would be a breach of trust for a trustee systematically to select investments with high capital returns but low income yields, or vice versa. It is inevitable, however, that some individual investments will favour the remainderman and some will favour the life tenant. The crucial consideration, therefore, is whether the portfolio of trust investments, as a whole, maintains a balance between the different beneficiaries' interests.[106] 3.73 Even if a suitable portfolio is selected, it is still possible, however, for an imbalance to arise without there being any breach of trust. When selecting investments the trustee must take account of his duty to maintain a balance between the beneficiaries and, with the benefit of necessary advice, choose investments reasonably expected to keep such a balance. A trustee who does this will have discharged his duty in the selection of trust investments. Liability for breach of trust will not follow if, as a result of the inevitable uncertainty of the stock market or other factors, investment returns prove to favour one beneficiary over another. As neither the trustee nor the court have a general discretion to apportion the returns between the life tenant and the remainderman in order to rectify imbalance the life tenant or remainderman (as appropriate) will have suffered loss for which there is no recompense. 3.74 The fact that, as a result of their duty to keep a balance and the absence of a general power of apportionment, trustees are forced to take into account the expected form of returns when selecting investments also means that trustee investments may not be as productive as they otherwise could be. Instead of seeking to maximise the total returns from trust investments, trustees are concerned to ensure that the portfolio of investments provides returns in a form which will maintain a fair balance between the life tenant and remainderman. If the trustees were free to choose investments without concern for the form of returns, and could maximise total returns, the resulting benefit would be enjoyed by all those interested under the trust.Authorised investments favouring one beneficiary over another
3.75 Section 2 of the Apportionment Act 1870 (the "1870 Act") provides that:THE STATUTORY RULES OF APPORTIONMENT
3.76 The apportionment required by the 1870 Act is referred to as "time apportionment" and should be contrasted with the equitable rules of apportionment between life tenants and remaindermen. In the trusts context, the effect of section 2 is to apportion the income paid in respect of a period during which the entitlement to receive trust income changes. Rather than accruing on a particular date and being allocated to the person who is entitled to income on that date, income is deemed to accrue at a uniform rate across the entire period. Each beneficiary is entitled only to the proportion of the income which is deemed to accrue during the period of his or her entitlement. This is calculated by the product of the income received for the whole period and the proportion of that period during which each person was entitled to receive income. 3.77 There are two particular situations in which the 1870 Act is relevant to trust income. First, and most importantly, it applies to apportion income between beneficiaries who are successively entitled to trust income. Secondly, the rule in Re Joel [107] applies in relation to trusts for the maintenance out of income of a class of minors who are contingently entitled to the trust capital on attaining a specified age.All rents, annuities and dividends, and other periodical payments in the nature of income (whether reserved or made payable under an instrument in writing or otherwise) shall, like interest on money lent, be considered as accruing from day to day, and shall be apportioned in respect of time accordingly.
3.78 The most obvious situation in which section 2 of the 1870 Act applies is when one life tenant dies (or otherwise ceases to be entitled to receive income) and another life tenant or the remainderman becomes entitled to receive the trust income. As a result of section 2, the original life tenant (or his or her estate) only receives income earned during that part of the whole period which ends on the date his or her entitlement to receive income terminated. The balance is payable to the person who subsequently becomes entitled to receive the trust income.[108]Apportionment between successive beneficiaries entitled to income
3.79 Many trustees have power to apply trust income for the maintenance of a class of minors.[109] If the trustees exercise their discretion not to apply the income for the maintenance of the minors it is accumulated.[110] The settlor may also provide that the members of the class are contingently entitled, on reaching a specified age, to receive a share of the capital with the other members of the class who attain that age. In Re Joel [111] it was held that the trustees are only permitted to maintain an individual member of the class out of the income which can be apportioned to a period when they were alive (and therefore eligible to receive the benefit of income).[112] The income of the fund can only belong to those who make up the class of contingently entitled persons whilst it accrues. The birth of each new member of the class therefore effects a change of entitlement to income to which the Apportionment Act must apply in the absence of contrary provision in the trust instrument.[113] Any income so apportioned but not applied in the maintenance of the individual member should be accumulated on that member's contingent share.[114] If any member dies before obtaining a vested interest (on attaining the specified age), his contingent interest (including accumulations) should be divided as general capital between all members who have, or subsequently obtain, a vested interest.[115]The rule in Re Joel
3.80 The 1870 Act is inapplicable to any case where it is clearly and expressly provided that no apportionment is to take place.[116] In the event of any ambiguity the 1870 Act will apply. It is unlikely that any attempt to exclude the Apportionment Act in a document other than the trust instrument would be successful. A provision in a company's articles of association, for example, that any dividend shall be deemed to accrue on the same day that it is declared does not exclude apportionment.[117]Exclusion of the 1870 Act
Criticisms of the 1870 Act
3.81 Some of the problems of the 1870 Act can be illustrated by the commonly cited example of the testator who bequeaths a life interest in his residuary estate to his widow. The widow will not receive any dividends on shares in the testator's estate which are paid after his death but which accrued during his life as these receipts will be apportioned to capital (and held for the remainderman on the death of the life tenant). This often means the life tenant receives little income in the difficult period immediately following the spouse's death. As this is usually when the surviving spouse will most need resources (especially if they were financially dependent on the deceased) it is hardly likely to be a result that the testator would have intended or expected. 3.82 The requirement to apportion income under the 1870 Act imposes an onerous burden upon trustees who are obliged to make complex and difficult investigations into the precise period in respect of which each dividend has been declared. It is also unclear how trustees should treat interim dividends which are declared part of the way through an accounting period.[118]Inconvenience and unfairness caused by the rule
3.83 As a result of the above-mentioned difficulties the 1870 Act is routinely excluded in well-drafted trust instruments. There can be no justification for a rule of apportionment which applies more often by accident than design and which disadvantages settlors and testators who have inadequate legal advice.Routine exclusion of the rule
3.84 As with the other rules discussed in this Part, it is likely that many trustees are unaware of the rule or, if they are aware of it, simply ignore it.Ignorance and disregard of the rule
3.85 The rule in Re Joel [119] is of much less importance today than in the past because there are many fewer substantial family trusts. When it does apply, however, it requires the trustees to undertake complex time apportionments to determine the entitlement of each beneficiary. It is necessary to maintain separate funds in respect of each member of the class to ensure that no mistakes are made. 3.86 Difficulties may also arise when income is received after a beneficiary reaches the age of 18 or marries under that age. The portion of the income which is apportioned to the period before the beneficiary reaches the age of 18 (or marries) cannot be applied for his or her maintenance or accumulated to his or her share in the fund. The trustees' statutory powers[120] to do so end when the beneficiary attains the age of 18 or marries below that age. The "income" will therefore form part of the general capital value of the fund. 3.87 The basis of the rule in Re Joel is that individual members of the class should only receive the benefit of income which accrues during their lifetime. This is the reverse of what happens, however, when a contingently entitled beneficiary dies before obtaining a vested interest in the trust fund. The contingent share of the deceased beneficiary (including accumulations of income during his or her lifetime) becomes general capital of the fund. Members of the class who were born after the deceased beneficiary will take the benefit of accumulated income which accrued before their birth.Specific criticisms of the rule in Re Joel
Note 1 Whether the trust for sale is express, statutory or implied. See below, paras 3.3 – 3.8, for discussion of the circumstances in which a trust for sale will arise. [Back] Note 2 (1802) 7 Ves Jr 137 (Lord Eldon LC). [Back] Note 3 (1883) 24 Ch D 643 (Chitty J). [Back] Note 4 Gibson v Bott (1802) 7 Ves Jun 89 (Lord Eldon LC); Dimes v Scott (1828) 4 Russ 195 (Lord Lyndhurst LC). [Back] Note 5 This has been interpreted as conferring on trustees a power of sale subject to a power to postpone conversion: Re Fisher [1943] Ch 377 (Bennett J). [Back] Note 6 Re Gough [1957] Ch 323 (Vaisey J). [Back] Note 7 Re Van Straubenzee [1901] 2 Ch 779, 782, per Cozens-Hardy J. [Back] Note 8 Re Van Straubenzee [1901] 2 Ch 779. [Back] Note 9 It appears that the original rationale for the distinction between personal and real property was that “every devise of land, whether in particular or general terms, must of necessity be specific from this circumstance”: Howe v Earl of Dartmouth (1802) 7 Ves Jun 137, 148, per Lord Eldon LC. Since 1837, however, land has been permitted to form part of the residuary estate (Wills Act 1837, ss 3, 24). [Back] Note 10 This intention may be express or implied. The cases in this area have tended to conflate the issues of excluding an implied trust for sale and excluding the equitable apportionment rules: see below, paras 3.25 – 3.28. [Back] Note 11 Re Bates [1907] 1 Ch 22 (Kekewich J). [Back] Note 12 See above, paras 1.1 to 1.4. [Back] Note 13 No trust for sale will be implied under the first branch of the rule in Howe v Earl of Dartmouth if the relevant investments are authorised. The settlor can, however, make provision in the terms of the trust to limit the range of authorised investments and thereby increase the potential scope of the first branch of the rule in Howe v Earl of Dartmouth. [Back] Note 14 [1971] 2 OR 541, 18 DLR (3d) 405. The first branch of the rule in Howe v Earl of Dartmouth forms part of Canadian law: see D.W.M. Waters, Law of Trusts in Canada (2nd ed 1984) p 791–803. [Back] Note 15 If, however, Re Smith is viewed as separate from, as opposed to an extension of, the first branch of the rule in Howe v Earl of Dartmouth the logic of the decision is, at best, questionable. If the settlor had manifested a sufficient intention to exclude the first branch of the rule in Howe v Earl of Dartmouth (and the duty of even-handedness insofar as it relates to the original trust property) it is not clear how the duty of even-handedness can be resurrected to impose an alternative duty to convert the original trust property. The implied trust for sale under the first branch of the rule in Howe v Earl of Dartmouth is, after all, based on the same duty of even-handedness. [Back] Note 16 [1980] 1 SCR 1065, 107 DLR (3d) 28. [Back] Note 17 See, for example, Hogg, “Comment onLottman v Stanford” (1981) 5(3) Estates & Trusts Quarterly 181, 194. [Back] Note 18 On this interpretation it is odd, however, that the Supreme Court did not cite Re Smith since Lottman was itself an appeal from a decision of the Ontario Court of Appeal. [Back] Note 19 It seems that a narrower view (dealing only with the exclusion of realty) was taken in the Ontario Court of Appeal. Wilson JA had imposed a duty to convert realty arguing that in Canada land was not “the sacred cow” that it was in England and thought that no distinction should be drawn “in the current social context” between personalty and realty: Re Lottman (1978) 2 ETR 1, 14. [Back] Note 20 Gibson v Bott (1802) 7 Ves Jun 89 (Lord Eldon LC). [Back] Note 21 Casamajor v Strode (1809) 19 Ves Jr 390n; Hope v D’Hedouville [1893] 2 Ch 361 (Kekewich J). [Back] Note 22 The section reads: “Subject to any direction to the contrary in the disposition on trust for sale or in the settlement of the proceeds of sale, the net rents and profits of the land until sale, after keeping down costs of repairs and insurance and other outgoings shall be paid or applied except so far as any part thereof may be liable to be set aside as capital money under the Settled Land Act, 1925, in like manner as the income of investments representing the purchase money would be payable or applicable if a sale had been made and proceeds had been duly invested.” [Back] Note 23 Trusts of Land and Appointment of Trustees Act 1996, s 25(2) and Schedule 4. [Back] Note 24 Stroud v Gwyer (1860) 28 Beav 130 (Sir John Romilly MR); Slade v Chaine [1908] 1 Ch 522 (CA). It should be noted, however, that Buckley LJ dealt obiter with the situation where a defaulting trustee was unable to meet a judgment against him in respect of the breach of trust. He stated ([1908] 1 Ch 522, 536) that “if the trustee were not solvent the reduced amount which he was able to pay and did pay would no doubt have to be apportioned as between corpus and income.” [Back] Note 25 Re Fawcett [1940] Ch 402 (Farwell J). [Back] Note 26 Re Parry [1947] Ch 23 (Romer J). [Back] Note 27 There is no “executor’s year” applicable to inter vivos settlements. It would be possible to value the property at the end of a “reasonable period” for carrying out the duty of conversion. This would, however, lead to uncertainty since the appropriate period would have to be determined on a case-by-case basis. [Back] Note 28 The Law Commission expressly refrained from dealing with this issue in its Report on Pre-Judgment Interest on Debts and Damages (2004) Law Com No 287, para 5.49. [Back] Note 29 This term was adopted by the Trust Law Committee in their 1999 Consultation Paper on Capital and Income of Trusts. [Back] Note 30 Meyer v Simonsen (1852) 5 De G & Sm 723 (Sir James Parker VC); Brown v Gellatly (1867) 2 LR Ch App 751 (CA); Re Goodenough [1895] 2 Ch 537 (Kekewich J). [Back] Note 31 Re Beech [1920] 1 Ch 40 (Eve J); Re Fawcett [1940] Ch 402 (Farwell J); Re Parry [1947] Ch 23 (Romer J); Re Berry [1962] Ch 97 (Pennycuick J). No relevant case has been reported since 1962. [Back] Note 32 [1940] Ch 402 (Farwell J). [Back] Note 33 Ibid, 408, per Farwell J. [Back] Note 34 Ibid, 408, per Farwell J. [Back] Note 35 Ibid, 409, per Farwell J. [Back] Note 36 See, for example, Re Chancellor (1884) 26 Ch D 42 (CA); Re Crowther [1895] 2 Ch 56 (Chitty J); Re Elford [1910] 1 Ch 814 (Eve J). [Back] Note 37 Re Bates [1907] 1 Ch 22 (Kekewich J). [Back] Note 38 Re Chaytor [1905] 1 Ch 233 (Warrington J); Re Parry [1947] Ch 23 (Romer J); Re Berry [1962] Ch 97 (Pennycuick J). [Back] Note 39 Re Chancellor (1884) 26 Ch D 42 (CA). [Back] Note 40 Re Inman [1915] 1 Ch 187 (Neville J); Re Rogers [1915] 2 Ch 437 (Neville J). [Back] Note 41 Rowlls v Bebb [1900] 2 Ch 107 (CA). [Back] Note 42 Administration of Estates Act 1925, s 33(1). This section was amended by the Trusts of Land and Appointment of Trustees Act 1996, s 5 and Schedule 2, para 5. [Back] Note 43 [1943] Ch 377 (Bennett J). [Back] Note 44 This is the explanation of Re Fisher offered by Cohen J in Re Hey’s Settlement Trusts [1945] Ch 294, 315. It therefore seems that the principles formulated in the context of implied exclusion of the general rule apply. In Re Fisher [1945] Ch 377, 385 386, Bennett J stated: “In the case of a residuary bequest of personalty to trustees on trust for conversion with a power to postpone and a trust to pay the income of the subject of a bequest to a person for life with a gift over, the rule of administration formulated by Lord Eldon in Howe v Lord Dartmouth never arises.” This wide obiter statement can only be justified, however, on the basis that it refers only to the first branch of the rule. [Back] Note 45 (1883) 24 Ch D 643 (Chitty J). [Back] Note 46 Re Woodhouse [1941] Ch 332, 334–335, per Simonds J. In reality it is a specific application of the second branch of the rule in Howe v Earl of Dartmouth to property which does not yield income and which has subsequently been realised. Accordingly it only applies in the same limited range of circumstances: see above, paras 3.15 – 3.18. [Back] Note 47 It will usually be advantageous, in terms of financial value, to delay the sale of future property until if falls in. [Back] Note 48 This is the same rate as under the second branch of the rule inHowe v Earl of Dartmouth. [Back] Note 49 [1941] Ch 332, 334–335. [Back] Note 50 Re Guinness’s Settlement [1966] 1 WLR 1355, 1365, per Goff J. [Back] Note 51 Mackie v Mackie (1845) 5 Hare 70 (Sir James Wigram VC); Wilkinson v Duncan (1857) 23 Beav 469 (Sir John Romilly MR); Rowlls v Bebb [1901] 2 Ch 107 (CA); Re Guinness’s Settlement [1966] 1 WLR 1355 (Goff J). [Back] Note 52 Re Berry [1962] Ch 97 (Pennycuick J). [Back] Note 53 Most shares will now be authorised investments and hence no trust for sale will arise under the first branch of the rule inHowe v Earl of Dartmouth: Re Gough [1957] Ch 323 (Vaisey J). [Back] Note 54 Capital and Income of Trusts (1999) Trust Law Committee Consultation Paper, para 3.8. [Back] Note 55 Provided, of course, that the total return on share investments (i.e. dividends and capital value increases) is greater than the fixed rate of interest payable to the life tenant. If this is so, the capital value can, other factors being equal, expect an exponential increase from year to year. [Back] Note 56 See above, paras 3.22 – 3.23. [Back] Note 57 (1867) 4 Eq 295 (Page-Wood VC). [Back] Note 58 Re McEuen [1913] 2 Ch 704 (Sargant J). In this case Sargant J rejected an argument that the income on the relevant portion of trust capital for the entire period of the “executor’s year” should be applied to discharge the obligations, irrespective of the actual date on which the payment was made. If this argument had been accepted it would (as noted by Sargant J at 712 713) lead to the anomalous result that the life tenant could potentially receive a negative income. [Back] Note 59 Allhusen v Whittell (1867) 4 Eq 295, 303, per Page Wood VC; Corbett v Inland Revenue Commissioners [1938] 1 KB 567, 585, per Romer LJ. [Back] Note 60 Re Wills [1915] 1 Ch 769 (Sargant J). [Back] Note 61 Re Oldham (1927) 71 SJ 491 (Astbury J). [Back] Note 62 Re McEuen [1913] 2 Ch 704 (Sargant J); Re Wills [1915] 1 Ch 769 (Sargant J). [Back] Note 63 [1913] 2 Ch 704 (Sargant J). [Back] Note 65 Ibid, 717. The object in question, as with all rules of apportionment, is to ensure that a balance is maintained between the interests of the life tenant and the remainderman. [Back] Note 66 [1910] 2 Ch 444. [Back] Note 67 Ibid, 448. His Lordship approved comments to this effect by Swinfen Eady J in Re Dawson [1906] 2 Ch 211 and Re Perkins [1907] 2 Ch 596. It should be noted however that there is no reported case in which an alternative method has been employed. [Back] Note 68 Allhusen v Whittell (1867) 4 Eq 295, 303, per Page Wood VC. [Back] Note 69 Re Poyser [1910] 2 Ch 444 (Parker J); Re Shee [1934] Ch 345 (Clauson J). [Back] Note 70 Re Perkins [1907] 2 Ch 596 (Swinfen Eady J). [Back] Note 71 See Re Popham (1914) 58 SJ 673 (Joyce J), where rentcharge payments, which were not supported by a personal covenant of the testator, were borne exclusively by income. [Back] Note 72 Re Fenwick [1936] Ch 720. 723, per Farwell J. This was a case concerning contingent legacies to which the rule in Allhusen v Whittell clearly does not apply. [Back] Note 73 Re Darby [1939] Ch 905, 917, per Sir Wilfrid Greene MR; Re Wynn [1952] Ch 271, 276, per Danckwerts J. [Back] Note 74 Re Wills [1915] 1 Ch 769 (Sargant J); Re Ullswater [1952] Ch 105 (Roxburgh J). [Back] Note 75 InRe Darby, for example, a testator bequeathed his residuary estate to his daughter absolutely subject to, and charged with, such payment as should be necessary to bring the testator’s widow’s annual income up to £3,000. The daughter bequeathed her entire estate (including the testator’s residuary estate subject to the charge) on trust for persons in succession. The trustees were directed to pay the testator’s widow the sum necessary to supplement her income to £4,000 per annum. It was necessary to determine whether the payments were to be borne by income or capital. The Court of Appeal held that the rule in Allhusen v Whittell contemplates when such amounts payable become due they should be made partly out of capital and partly out of income. In the present case no payment could be made to the widow out of the trust capital without her consent. The rule in Re Perkins (see above, n 70) was inapplicable because the annuity was secured by an annual charge over the residuary estate. It was not the subject of a personal covenant to pay. The widow’s consent to receive payments out of capital was required because such payments would diminish her security. The will could not be treated as demonstrating an implied intention that payments in satisfaction of the annuity should be made in a manner in which they could not be made without the consent of the widow. The annuity was therefore payable wholly out of the income of the estate. [Back] Note 76 The rules which exist for apportioning deficient security were not considered in the 23rd Report of the Law Reform Committee, Cmnd 8733, the 1999 Trust Law Committee Consultation Paper or the 2003 Scottish Law Commission Discussion Paper. [Back] Note 77 [1904] 2 Ch 160 (CA). [Back] Note 78 If capital is expended in order to protect the security for the benefit of the trust as a whole this sum will be added to the amount of the outstanding principal for the purposes of the rule inRe Atkinson. [Back] Note 79 Re Walker’s Settlement Trusts [1936] Ch 280 (Farwell J). [Back] Note 80 Re Morris’s Will Trusts [1960] 1 WLR 1210 (Cross J). [Back] Note 81 Re Broadwood’s Settlements [1908] 1 Ch 115 (Swinfen Eady J). [Back] Note 82 [1911] 1 Ch 171. [Back] Note 83 See Law of Property Act 1925, s 31; Re Horn’s Estate [1924] 2 Ch 222 (P.O. Lawrence J). [Back] Note 84 Re Hubbuck [1896] 1 Ch 754 (CA), where the remainderman argued that such a clause should be effective to exclude the general rule as the deficient security was not actually producing any income. The Court of Appeal reasoned that the sum recovered, on realisation of the security, represented both capital and income. It could not be said, therefore, that the debt failed to produce income, and consequently the clause relied upon was inapplicable. [Back] Note 85 [1904] 2 Ch 160, 167. [Back] Note 86 [1901] 1 Ch 916 (Farwell J). [Back] Note 87 (1869) 8 Eq 343. [Back] Note 89 Although the court will take account of any income received by the life tenant, it will not order the life tenant to repay any income in excess of his or her entitlement unless the life tenant knew of the breach of trust: Re Bird [1901] 1 Ch 916, 919–920. [Back] Note 90 See above, paras 2.21 – 2.24. [Back] Note 91 Such shares are described as “cum dividend”. [Back] Note 92 Such shares are described as “ex dividend”. [Back] Note 93 (1863) 2 Drew & Sm 173. [Back] Note 95 This general rule has been affirmed and applied subsequently: Freman v Whitbread (1865) 1 Eq 276 (Kindersley VC); Bulkeley v Stephens [1896] 2 Ch 241 (Stirling J); Re Walker [1934] WN 104 (Clauson J); Re Firth [1938] Ch 517 (Farwell J); Re Henderson [1940] Ch 368 (Morton J); Hitch v Ruegg [1986] TL & P 62 (Nourse J). [Back] Note 96 (1854) 19 Beav 295 (Sir John Romilly MR). [Back] Note 97 (1863) 2 Drew & Sm 173, 183. [Back] Note 98 (1865) 1 Eq 276 (Kindersley VC). [Back] Note 99 Kindersley VC said (at 276) “[b]ut how can I treat as a special and exceptional circumstance that which is common to by far the largest proportion of cases where real estate is bought or sold under trusts of the same character as in the present case. If this is a special and exceptional case, then out of every twenty such cases, probably nineteen would have to be treated as exceptional and special cases.” [Back] Note 100 [1896] 2 Ch 241 (Stirling J). [Back] Note 101 [1938] Ch 158 (Clauson J). [Back] Note 102 Clauson J conceded that, in some situations, it may be inconvenient to defer sale until after the dividend has been declared and that it may thus be appropriate for the trustees to sell immediately. [Back] Note 103 [1938] Ch 517. [Back] Note 104 [1986] TL & P 62. [Back] Note 106 Nestlé v National Westminster Bank plc [1993] 1 WLR 1260, 1279, per Staughton LJ. [Back] Note 107 [1967] Ch 14 (Goff J). [Back] Note 108 It is, of course, possible to imagine more complex cases where the person entitled to receive trust income changes more than once during the relevant period. In this case the Apportionment Act 1870 should be applied separately in respect of each occasion on which the entitlement changes. [Back] Note 109 For example, under the powers contained in section 31(1) of the Trustee Act 1925. [Back] Note 110 Trustee Act 1925, s 31(2). [Back] Note 111 [1967] Ch 14 (Goff J). [Back] Note 112 Ibid, 26, per Goff J. [Back] Note 113 Ibid, 23-24, per Goff J. [Back] Note 114 Trustee Act 1925, s 31(2)(i). [Back] Note 115 Trustee Act 1925, s 31(2)(ii). [Back] Note 116 Apportionment Act 1870, s 7. [Back] Note 117 Re Oppenheimer [1907] 1 Ch 399 (Swinfen Eady J). [Back] Note 118 The best solution appears to be to treat the interim and final dividends as a single dividend which is paid in respect of the entire period covered by the final dividend: Gover, Capital and Income (3rd ed) p 30. [Back] Note 119 [1967] Ch 14 (Goff J). [Back] Note 120 Under the Trustee Act 1925, s 31. [Back]
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