CILEx L6 Equity & Trusts Advanced — Questions and Answers
Question 1: What is the test for a 'fixed trust' as to certainty of objects?
- The complete list (ascertainability) test — it must be possible to draw up a complete list of all beneficiaries (Correct answer)
- The 'is or is not' test — it must be possible to say of any given person whether they are a member of the class
- Any trust with more than 10 beneficiaries automatically fails for uncertainty
- Certainty of objects is not required for fixed trusts if the subject matter is certain
Correct answer: The complete list (ascertainability) test — it must be possible to draw up a complete list of all beneficiaries
For a fixed trust (where each beneficiary has a set share), the complete list test applies — it must be possible to draw up a complete, exhaustive list of all beneficiaries (IRC v Broadway Cottages Trust [1955]).
Question 2: What is the test for certainty of objects for a discretionary trust (McPhail v Doulton)?
- The 'is or is not' test — it is sufficient if one can say with certainty whether any given individual is or is not a member of the class (McPhail v Doulton [1971]) (Correct answer)
- The complete list test — a full list of all potential beneficiaries is needed
- Any person must be identifiable without going to court
- There is no certainty requirement for discretionary trust objects
Correct answer: The 'is or is not' test — it is sufficient if one can say with certainty whether any given individual is or is not a member of the class (McPhail v Doulton [1971])
In McPhail v Doulton [1971] AC 424, the House of Lords held that the test for certainty of objects in a discretionary trust is the 'is or is not' test (also known as the Baden test) — it is sufficient if one can determine whether any given person is or is not within the class.
Question 3: What is a 'Quistclose trust' and how does it arise?
- A resulting trust that arises where money is paid for a specific purpose that fails, causing the money to return to the payer on resulting trust (Barclays Bank Ltd v Quistclose Investments [1970]) (Correct answer)
- A trust imposed by a court on a company in administration
- A trust created by a bank over customer deposits
- A constructive trust arising from a breach of fiduciary duty
Correct answer: A resulting trust that arises where money is paid for a specific purpose that fails, causing the money to return to the payer on resulting trust (Barclays Bank Ltd v Quistclose Investments [1970])
A Quistclose trust arises where money is paid for a specific purpose — if the purpose fails, a resulting trust returns the money to the payer. This is significant in insolvency, as the money does not form part of the payee's general estate.
Question 4: What is the 'Hastings-Bass rule' as modified by Pitt v Holt [2013]?
- Trustees' decisions may be set aside in equity if made in breach of a duty of care to take relevant matters into account, and the breach was sufficiently serious — not merely that the trustees failed to consider something (Correct answer)
- Any trustee decision made without considering all relevant factors is void
- Courts will always reverse trustee mistakes that are disadvantageous to beneficiaries
- The rule only applies where the trustees acted fraudulently
Correct answer: Trustees' decisions may be set aside in equity if made in breach of a duty of care to take relevant matters into account, and the breach was sufficiently serious — not merely that the trustees failed to consider something
In Pitt v Holt [2013] UKSC 26, the Supreme Court restated the rule: trustee decisions can only be set aside if the trustees acted in breach of a fiduciary duty (not merely a non-fiduciary duty), and the consequences of the breach are sufficiently serious.
Question 5: What are 'Saunders v Vautier rights' and can they be excluded?
- Adult, absolutely entitled beneficiaries can collapse the trust and call for the trust property — this right cannot be excluded by the trust deed (Correct answer)
- Beneficiaries can always end a trust by majority vote
- A trustee can prevent beneficiaries from ending the trust by including an exclusion clause
- The right only applies to fixed trusts with cash assets
Correct answer: Adult, absolutely entitled beneficiaries can collapse the trust and call for the trust property — this right cannot be excluded by the trust deed
Under Saunders v Vautier [1841], adult beneficiaries with full capacity who together hold the entire beneficial interest can collapse the trust. This rule cannot be excluded by the trust deed — it is a fundamental right of beneficiaries.
Question 6: What is 'dishonest assistance' as a basis for third-party liability in equity?
- Assisting in a breach of fiduciary duty with subjective dishonesty (judged by the combined objective/subjective test from Twinsectra v Yardley [2002] as modified by Barlow Clowes International v Eurotrust [2005]) (Correct answer)
- Assisting a breach of trust where the assistant was negligent
- Any involvement in a breach of fiduciary duty by a third party
- Knowing about a breach of fiduciary duty without reporting it
Correct answer: Assisting in a breach of fiduciary duty with subjective dishonesty (judged by the combined objective/subjective test from Twinsectra v Yardley [2002] as modified by Barlow Clowes International v Eurotrust [2005])
Dishonest assistance requires: (1) a breach of fiduciary duty by the principal, (2) assistance by the third party, (3) subjective dishonesty. After Twinsectra and Barlow Clowes, dishonesty requires that the assistant's conduct was dishonest by the standards of honest and reasonable people, and the assistant was aware of the elements making it dishonest.
CILEx L6 Equity & Trusts Advanced
What is the test for a 'fixed trust' as to certainty of objects?