Jack Pankhurst of our Commercial team provides a case summary of the Supreme Court judgment in Frenkel v LA Micro Group (UK) Ltd and others [2024] UKSC 42, which was handed down on 11 December 2024.
The judgment provides an important analysis of the vendor-purchaser constructive trust (“VPCT”) in the context of a beneficiary transferring – by words spoken – their equitable interest in company shares in favour of their trustee. The judgment also provides clarity on whether Section 53(1)(c) of the Law of Property Act 1925 (the “1925 Act”) prevents such a disposition.
Also of interest is the subject matter of the VPCT in this case: equitable interests in company shares.
Background
This matter concerned the ownership of shares in a UK company known as LA Micro Group (UK) (“LA UK”).
LA UK was acquired in 2004 as part of a joint venture between Mr David Bell and a Californian company known as LA Micro Group Inc. (“LA Inc”).
The ownership structure was relatively simple:
- LA Inc was owned equally by Mr Lyampert and Mr Frenkel.
- By 2009, there were two issued shares in LA UK. Each was beneficially owned as to 51% by LA Inc and as to 49% by Mr Bell. Mr Bell held the legal title to Share 1. My Lyampert held the legal title to Share 2.
- The profits of LA UK were to be split equally between LA UK and LA Inc.
There was a change in 2010. After a fall-out between Mr Lyampert and Mr Frenkel, Mr Frenkel told Mr Bell that he wanted nothing more to do with LA UK. A restructuring process followed.
Significantly, Mr Lyampert and Mr Bell also reached an oral agreement, on behalf of LA Inc and LA UK (“the 2010 Agreement”). The terms of the contract were, broadly, that:
- Mr Bell and Mr Lyampert would work together to carry on LA UK’s business;
- The profits of LA UK would thereafter be split between Mr Bell and Mr Lyampert 50/50;
- Mr Lyampert agreed to take on the debt which LA Inc owed to LA UK.
- The two issued shares in LA UK would be held as follows. Share 1 would be held by Mr Bell legally and beneficially. Share 2 would be held by Mr Lyampert legally and beneficially.
In turn, an effect of the 2010 Agreement was that LA Inc lost all its beneficial interest in the shareholdings of LA UK.
An issue then arose when Mr Frenkel, the other co-owner of La Inc, sought to go back on his statements about the UK business, and claim a share of LA UK’s profits.
Bell and LA UK sought a declaration that the effect of the 2010 Agreement was to vest the beneficial interest in LA UK’s shares in himself and Mr Lyampert. Frenkel, via LA Inc, sought to argue that the alleged ‘surrender’ of LA Inc’s equitable interest in LA UK was not in writing and, therefore, unenforceable pursuant to Section 53(1)(c) of the 1925 Act.
Crucially, following a trial in the High Court in March 2022, LA Inc and Frenkel were successful in relying on the applicability of Section 53(1)(c). However, this was overturned by the Court of Appeal, which held in 2023 that the mechanism by which Mr Frenkel gave up his interest was a VPCT. As such, Section 53(2) of the 1925 Act, which confirms that ‘this section does not affect the creation or operation of resulting, implied or constructive trusts’, applied.
There was then an appeal to the Supreme Court.
The Appellants’ case on the law
It is important to understand the Appellants’ concessions first of all.
The Appellants’ case conceded that a VPCT would have arisen following the 2010 Agreement had the purchasers of LA Inc’s equitable interest been anyone other than Mr Bell and Mr Lyampert. They accepted that:
- An equitable interest in company shares could itself be trust property;
- An agreement for the sale of those shares is specifically enforceable;
- The 2010 Agreement did provide LA Inc with consideration for the transfer (by way Mr Lyampert’s undertaking to assume liability for LA Inc’s indebtedness).
The Appellants said that the obstacle in the VPCT analysis is that LA Inc’s equitable interest did not continue to survive in the hands of either Mr Bell or Mr Lyampert after the 2010 Agreement. It was, they said, destroyed. This is because the effect of that agreement was that the legal owner of the share would in each case have complete beneficial and legal title. There is, therefore, no distinct ‘equitable title’ of which to speak.
The Supreme Court decision
The appeal was dismissed.
In the judgment of Lord Briggs (with which there was unanimous agreement), the Court noted that most VPCT cases are about contracts of sale, which require steps to be taken before completion (such as the transfer of consideration or the subject matter itself) [26].
It is this reality that has led some to describe the purpose of the VPCT as buyer protection within the period between completion and contract [28].
The ‘conceptual quirk’ in this case was that the VPCT would not merely provide a form of interim protection, because it also ‘provides all that is needed for completion of the disposal of Inc’s 51% beneficial interest in the two shares’ [30]. The reason for this lies in the nature of the disposition and the status of the intended beneficiaries. The disposition was equitable, and the intended beneficiaries were already legal owners of the shares. The effect is that there would, at some point, be a merger of legal and equitable interests in each share.
The Court ultimately declined to follow the Appellants’ VPCT analysis. In Lord Briggs’ judgment:
- ‘the fact that the VPCT had the added benefit… of delivering that for which they bargained without the need for specific performance or any other remedy is no reason for denying the availability of the VPCT, merely because it did not just provide interim protection’ [34].
- Such a benefit aligns with the underlying objective of equity – ‘to treat as done that which ought to be done’ [35].
- There is nineteenth century case law which shows that a gap between contract and completion is not required for a VPCT to arise: Rose v Watson (1864) 10 HLC 672 671, at 678 [36].
- Descriptions of the loss of LA Inc’s in LA UK as ‘surrender’ or ‘release’ do not necessarily imply destruction. It is useful to remember that the act of surrender and/or release may involve the transfer of something to another [38 – 40].
The Supreme Court also found that even if focus is placed on the ‘equitable mechanics’, the key submission on behalf of the Appellants – that a VPCT will only arise after a transfer of an equitable interest and not its destruction – was problematic. Lord Briggs approved of the Court of Appeal’s explanation of the mechanism. It was held that the merger of legal and equitable interests (which might be more akin to a ‘destruction’) had only arisen once the equitable interest in each of Shares 1 and 2 became vested in Mr Bell and Mr Lyampert.
As the consideration in this matter was immediate (the assumption of liability for LA Inc’s indebtedness), the Court appreciated that the VPCT had an unusually ‘momentary existence’, or scintilla temporis. However, this was no barrier to its recognition [43].
In light of the Supreme Court’s judgment that there was a constructive trust (albeit a momentary VPCT), Section 53(2) of the 1925 Act took effect. There was no need to comply with the writing formalities of Section 53(1)(c) of the 1925 Act.
Jack Pankhurst is a specialist commercial and chancery barrister and a trained mediator. He has experience in a range of commercial matters, including claims arising out of directors’ disputes; contracts of agency; the sale of goods and services; partnerships; joint ventures; insolvency; ‘agri-business’; and unjust enrichment. Jack also has a particular interest in, and experience of, acting in commercial disputes with an international and/or offshore focus. He is happy to assist with cases that raise questions about the conflict of laws (including governing law and jurisdiction). Find out more about Jack here
This case summary is provided for information purposes only. It is not legal advice and should not be relied upon as such. The author does not accept any responsibility for its accuracy. Businesses and individuals should seek bespoke legal advice in respect of their particular positions.