Certainty of Subject Matter

A critical discussion with reference to certainty of subject matter, as to whether the court’s approach in developing the law has been overly formalistic and lacking in principle. The contention regarding insolvency and tangibles has kindled a fire in many a trust lawyer’s hearts due to the legal uncertainty it has promoted within certainty of subject matter. It will be analysed alongside two criteria – in this context formalism, meaning consistent adherence, and principle, which is a vision that must be followed; a legal bedrock. The first argument is based on the fact that the creditor hierarchy is overly formalistic as the Court strictly adheres to prescribed methods to the extent that equity suffers as a result. Secondly, the tangible-intangible debate will be analysed by how consistent courts have been in recognizing the distinction, and it will be proven that a more benevolent stance has been taken by way of intangibles rather than tangibles as the law no longer follows the Orthodox approach. This can be taken as lacking in principle, but not being overly formalistic as it produces more workable results. The preservation of the creditor hierarchy has been a consistently followed principle as seen in various judgements, and is formalistic despite not having been explicitly mentioned; we may thus argue that the underlying judgements of many cases which are masked by arguments of certainty of subject matter are really about maintaining the insolvency principle. The general principle dictates that trusts law must not trump insolvency law and it can be argued that this is the underlying decision in Re London Wine, [1986] PCC 121 where creditors of a vintner wanted to claim the bottles of wine they had bought, but this was not possible as they had not been segregated. The Orthodox Approach was also taken in Re Goldcorp Exchange Ltd  [1994] UKPC 3, where a gold bullion exchange went insolvent, but the customers who didn’t have their gold separated from the general stock were not deemed secured creditors. One may argue that these decisions although seemingly follow the general rule that failure to segregate the intended trust property would lead to a voidable trust, are actually operating to preserve the insolvency hierarchy. Upon scrutinising an inconsistent case, it may explain why the notion that those two cases are actually concerned with preserving the insolvency principle is an underlying reasoning. Hunter v Moss [1994] 1 WLR 452 concerned an employee who was entitled to 50 shares of a company, and despite the arguments that these shares were not specifically segregated, it did constitute a trust. One must consider that this is not an insolvency situation and may be concluded as being the decisive factor for the divergence in judgements. Despite not having been mentioned in this case, the judiciary have previously acknowledged the need for the preservation of this principle, ‘[the court] must be very cautious in devising equitable interests and remedies which erode the statutory scheme for distribution on insolvency. It cannot do it because of some perceived injustice arising as a consequence only of the insolvency’. Re Stapylton Fletcher Ltd (1994) 1 W.L.R. 1181 Paul Baker Q.C. at P. 1203 The Court cannot use equity to rectify an otherwise inequitable situation with the consequence of affecting the insolvency hierarchy. This may be a reason why the judge did not want to mark it down as being a distinction of preserving said principle. The fact that Courts have taken this approach but not explicitly said so means this has spurred uncertainty in the law. On the other hand, the formalism of following the strict principle of equity has provided a gloss over the law to prevent otherwise harsh outcomes. In Goldcorp, two principles were utilized in order to achieve a fair result, the ‘Pari Passu’ principle which means no advantage should be given between one unsecured creditor over another, and secondly the ‘Anti-Deprivation’ principle meaning assets shouldn’t be deprived of secured creditors so that they can fall into the hands of unsecured creditors. In Goldcorp Ibid. this was applied, and although not advantaging the consumers, it follows two principles rudimentary to insolvency law. The fewer assets there were the less secure creditors would have to claim, and as such benefiting the consumers would mean depriving the secured creditors which would also be inequitable. In the words of Blackburn J, he commented how he ‘struggle[d] very hard’ to prevent the ‘monstrous hardship of a windfall benefit to the seller’s creditors’. Likewise, in Hunter Hunter (n 3) the court may have been operating under one of the equitable maxims such as ‘he who comes to equity must come with clean hands’, so as not to render an unconscionable employer from benefiting. Due to the Sale of Goods (Amendment) Act 1995, Section 20A property now purchased by a consumer that is in a bulk still give effect to a trust by gaining a common law proprietary right in the assets. This is labelled as an exemption to the principles of trusts law to equitably aid consumers. Through this, we see that the principle of equity which may have been underlying in the judgements is not overly-formalistic, as it operates to produce fair outcomes even to the extent that judges are ‘prepared to overlook the application of the rigid rules of trusts law’ to achieve justice. Alastair Hudson ‘’Equity and Trusts’’, 7th Edition, Published by Routledge (2013), Page 126 Many academics such as Gary Watt have characterised the tangible-intangible distinction in English law as lacking in principle, Gary Watt ‘’Trusts and Equity’’, 6th edition, Published by Oxford University Press (2014), Page 85 meanwhile also not being formalistic because there is no rigidity, and as such breeds uncertainty. The core principle was that all assets had to be segregated; however, in the landmark case of Hunter, Hunter (n 3) Dillon LJ purported to distinguish this principle as applied in London Wine London Wine (n 1) by saying it concerned chattels, rather than something as intangible as shares, and although he was careful to say that there is no two different rules, Neuberger J in Re Harvard Securities [1997] EWHC Comm 371 assumed that that is what Dillon LJ must have meant. 578 Paragraph 55 However, there is no reason in principle for distinguishing between tangible and intangible property. The only reasonable explanation would be the fact that tangibles have the possibility of being physically different – such as wine becoming corked. The fact that there has been a lack in principle means that this has led to uncertainty between different case outcomes. For instance in Hunter, Hunter (n 3) shares were deemed to be intangible and needed no separation, whereas in MacJordan Construction Ltd v Brookmount Erostin Ltd, 1992] BCLC 350 money was also thought of as intangible but had to be separated. Although they are both fungibles, the difference may lie in the fact that shares have your name on it in a very specific way that money does not, although it is disputed whether shares can really be labelled as intangible since they come with a share certificate. Burn and Virgo questioned whether the fungible distinction of shares is feasible, ‘will all shares in a consolidated holding of 950 shares really be identical if an incorporated parcel of 50 happens to represent a forged gratuitous transfer?’ E. H. Burn & G. J. Virgo ‘Trusts & Trustees Cases & Materials’, 6th Edition, Published by Butterworths (2002) But this begs the question why interchangeable tangibles shouldn’t be regarded in the same way as fungible intangibles? The leading criticism to the tangible-intangible distinction was brought to the surface by White v Shortall, where Campbell J said that Dillon LJ does not ‘explain why the undoubted differences to which he points are differences that make a difference to the legal outcome’ with regard to the chattel distinction. White v Shortall [2006] NSWSC 1379 Paragraph 185 When considering this in light of the Diceyan prospect of legal formalism which in effect follows the black letter of the law, it would not take too kindly on this development as the law is not a canvas upon which there may be judicial creativity. Thus, we have seen an exception having been made to the Orthodox principle when it comes to intangible assets. It is not overly formalistic, but instead lacks in principle. It is asserted that both tangibles and intangibles need to be regarded in the same way as regards segregation of assets, or fixed rules must be put in place so as not to breed legal uncertainty between diverging cases.