This post has been contributed by Professor William Swadling, Module Convenor for Equity and Trusts.
It is sometimes said that where A holds a parcel of shares on trust for B that A has the legal title to the shares and that B has the equitable title. It is important to understand why this statement is false.
First, it is impossible to hold a title to shares; one holds the shares themselves. The word ‘title’ comes from ‘entitlement’, and the entitlement of a shareholder is (generally) to vote in the company meeting, to the payment of a dividend if a dividend is declared, and to share in the distribution of the company’s rights on its dissolution. These entitlements exist because the shares are vested in the shareholder; to say further that the shareholder has an entitlement to these entitlements is both unnecessary and confusing.
But the more egregious error is to say that the beneficiary has ‘equitable’ title (or sometimes ‘beneficial’ title). The reason this is wrong is that it creates the impression that the beneficiary has an ‘equitable’ or ‘beneficial’ version of the rights held by the trustee. In other words, the beneficiary has the same rights as the trustee, albeit that they are recognised by equity and not law, as are the rights of the trustee.
If this was right, it would mean that equitable rights could not form the subject-matter of a trust, yet the example of the sub-trust demonstrates that proposition to be false – it is not only legal rights which can be held on trust.
But worse, it is simply wrong to say that the beneficiary’s rights are an equitable analogue of those held by the trustee. A beneficiary of a trust of shares, for example, has no right to sue the company for an unpaid dividend, even in equity. The right to sue is vested in the trustee alone. The beneficiary instead has a right to call the trustee to account for his stewardship of the trust rights, a different thing altogether.
Unfortunately, this point is not always appreciated by commentators and by the courts, and in Shell UK Ltd v Total UK Ltd (2010), the Court of Appeal allowed a beneficiary of a trust of a title to an oil pipeline to sue in tort third parties who had negligently damaged the pipeline, so causing economic loss to the beneficiary.
If this decision is right, then, by the simple act of declaring a trust, a right-holder to a physical thing can increase exponentially the number of persons to whom other citizens owe duties in respect of that thing. Unfortunately, an appeal to the House of Lords was settled, and the mistake never corrected. To understand the institution of the trust, however, it is best never to speak of the beneficiary as having something called ‘equitable title’. Equitable title is a myth.