48 E N G L I S H L A W

title arises. Damages are inadequate only when the buyer cannot buy substitute securities in the market. This is usually the case when securities in a private or public but unlisted company are sold, as there is no market where such securities are freely traded. When securities are sold, an order for specific performance is unlikely to be possible because the securities will be readily available in the market.

2.4.4.5 Conclusions

Subsection 2.4.4.4 analysed the rule that the buyer acquires equitable title to securities when the sales contract underlying the transaction becomes enforceable by an order for specific performance. This happens when the sales contract is enforceable, when the claimant is ready and willing to perform, when the securities which the contract relates to are ascertained and when damages are an inadequate remedy. The conclusion of this subsection is that the buyer of listed securities is not normally able to rely on the rules on specific performance to avail herself of equitable title to the securities.

In subsection 2.4.5, the question will be addressed as to whether equitable title arises out of a contract that is not specifically enforceable in circumstances where the securities have been appropriated to the contract and the purchase price has been paid.

2.4.5 Equitable title on appropriation of securities and payment of purchase price

Some academic commentators suggest that there is a rule that equitable title to securities passes to the purchaser independently of whether the contract is enforceable by an order for specific performance. There are two different schools of thought here. Some argue that a trust arises in favour of the buyer as soon as the subject matter of the sales contract can be identified. Others write that a trust arises only if the consideration has been paid by the buyer. There is also a prominent view that neither is correct and that a trust can arise only when specific performance is available.

These three positions will now be analysed. They all fit squarely into the path adopted by English law. Even if there is disagreement on which requirements need to be satisfied to give rise to a constructive trust, all commentators stand on the basis that a trust needs to be established and the general headings of English trust law need to be satisfied for an equitable interest to arise.

Robert Pennington writes that there is a distinction between sales of specific shares and sales of shares which are not identified in the

contract.104 In the first case, the equitable title to the shares passes to the buyer at once when the contract is made. The seller holds the shares as a bare trustee for the buyer subject to a lien in the seller’s favour for any unpaid purchase price. If the contract is made for shares that are not identified in it, equitable title passes to the buyer only when the seller appropriates particular shares to the fulfilment of the contract. This usually happens when she executes and delivers the instrument of transfer to the buyer specifying the shares by number or quantity. Pennington does not qualify this proposition by pointing to a requirement for specific performance.

The authority cited by Pennington in support of this view is a dictum by Crains LJ in London, Hamburgh, and Continental Exchange Bank.105 In the passage cited, Crains LJ states as the facts that, on a certain day, the transferor sold 30 shares to the transferee, and that on the following day executed a transfer to the transferee. Crains LJ then remarks that ‘[t]here is no doubt that this transaction constituted [the transferee] . . .

in equity the owner of the shares’. This dictum does not refer to a requirement for specific performance and insofar supports Pennington’s thesis. The case, however, was about a seller enforcing a contract for the sale of partly paid shares where, as we have seen,106 an order for specific performance would normally be given also in relation to listed shares.

Similar to Pennington, Alastair Alcock suggests that an effect of the shares being specified is that ‘beneficial ownership passes to the purchaser’.107 Alcock refers to a passage from Re National Bank of Wales,108 which does not point to a requirement for specific performance. We need to note, nevertheless, that the case concerns the sale of partly paid shares, which again leads to the availability of an order for specific performance. Moreover, in that case the transferees’ names had already been registered.109 This normally results in legal title vesting in the transferee. Wood Preservations Ltd v. Prior110 also advanced in support of Alcock’s analysis, concerns the sale of 100 per cent of the shares in a company, a circumstance in which shares are not readily available in the market and in which specific performance will thus be granted. Again, the availability of specific performance was not referred to in the judgement as a decisive criterion.

104Pennington, Company Law 439.

105Ward and Henry’s Case (1867) 2 Ch App 431 at 438. 106 See p. 47.

107Alcock [23.12] in Gore-Browne on Companies. fn. 12.

108Re National Bank of Wales, Taylor, Phillips and Richard’s Case [1897] 1 Ch 298 305–306.

109[1897] 1 Ch 298 at 304 per Lindley J. 110 [1969] 1 WLR 1077 (CA).

50 E N G L I S H L A W

Pennington’s and Alcock’s analysis receives support from the rules governing sales of goods. According to Sale of Goods Act 1979 (SGA 1979, s. 18, r. 1), property passes once a sales contract is complete if the contract is for the transfer of a particular good in a deliverable state. If the contract is for unascertained or for future goods, title to the goods passes when those goods are unconditionally appropriated to the contract.111

Other commentators put forward the thesis that a constructive trust arises irrespective of the availability of specific performance if the purchase price has been paid and if the subject matter of the contract has been specified. Meagher, Gummow and Lehane write, albeit without referring to transactions concerning registered securities, that the seller becomes a trustee for the buyer when the purchase price has been paid.112 There is no mention of a requirement for the property to be identified; this requirement, however, can be inferred from the general rule requiring certainty of the subject matter of a trust.113

According to Meagher, Gammow and Lehane, prior to the payment of the purchase price a trust can arise only if the contract is enforceable by an order for specific performance. The authors, it seems, limit the availability of a constructive trust to circumstances where the purchase price has been paid because prior to payment of the purchase price the seller has an equitable lien over the property. The buyer’s interest is considered to be too weak to be classified as proprietary.

The view that an equitable interest arises in relation to contracts that cannot be enforced by an order for specific performance has been contested by Sarah Worthington.114 She refers to Tailby v. Official Receiver115 and Holroyd v. Marshall,116 which are the cases usually cited in support of the view that equitable ownership vests in the buyer irrespective of whether specific performance is available, and points out that both authorities concerned facts in which an order for specific

111SGA 1979, s. 18, r. 5.

112Meagher, Heydon and Leeming, Meagher, Gummow, and Lehane’s, Equity para. 6–055; see also Craig Rotherham, Proprietary Remedies in Context: A Study in the Judicial Redistribution of Property Rights (Oxford: Hart, 2002) 169 referring to Tailby v. Official Receiver (1888) 13 App Cas 523.

113For this, see section 7.3.

114Sarah Worthington, ‘Proprietary Remedies: The Nexus between Specific Performance and Constructive Trusts’ (1996–7) 11 Journal of Contract Law 1.

115(1888) 13 App Cas 523. 116 (1862) 10 HLC 191, 11 ER 99.

performance would normally be granted.117 Sarah Worthington’s view also can rely on the fact that the authorities cited by Pennington and Alcock, as has been pointed out above, concern cases where specific performance would normally be available.

Nevertheless we need to note that even though specific performance may have been available, none of the authorities reached their conclusions by relying on the fact that an order for specific performance was available. Moreover, Lord Macnaghten pointed out in Tailby v. Official Receiver118 that: ‘[t]he truth is that cases of equitable assignment or specific lien, where the consideration has passed, depend on the real meaning of the agreement between the parties. The difficulty, generally speaking, is to ascertain the true scope and effect of the agreement. When that is ascertained you have only to apply the principle that equity considers that done which ought to be done if that principle is applicable under the circumstances of the case. The doctrines relating to specific performance do not, I think, afford a test or measure of the rights created.’

Policy considerations favour the proposition that the buyer is deemed to have a beneficial interest in the property once consideration has been paid. The buyer who has parted with the consideration has fulfilled her obligation: it seems only fair to have her acquire an interest in the object of the sales contract in turn.

If the effect of insolvency is taken into account, the policy reasons favouring the emergence of a constructive trust in favour of the buyer become even more forceful. In the seller’s insolvency, a buyer who is left with a contractual claim will have her interest satisfied pari passu with the seller’s unsecured creditors. In contrast, a buyer who has a proprietary interest will be able to have that proprietary interest satisfied in full. If, upon payment of the purchase price, the buyer was to receive a contractual right only, the seller’s creditors would receive a windfall benefit to the buyer’s detriment. The creditors would be able to take advantage of both the purchase price which upon payment becomes part of the seller’s pool of assets, and the subject matter of the sale which would remain part of the seller’s pool of assets available to the creditors. The better view prevents such a windfall from arising

117Sarah Worthington, Proprietary Interests in Commercial Transactions (Oxford: Oxford University Press, 1996) 197–201; Worthington, ‘Proprietary Remedies 4–7.

118(1888) 13 App Cas 523 at 547–548.