LA3002 October ZA

Equity and Trusts (Level 6)

Wednesday 21 October 2020

You will have TWO HOURS AND 45 MINUTES in which to answer the
questions, including 15 minutes reading time. You must answer all parts of a
question unless otherwise stated.

You will have an additional 30 minutes to download the examination paper and
to upload your saved answers to the VLE; this time should be used solely for
these purposes.

You must answer THREE of the following SIX questions.

© University of London 2020

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1. “The Supreme Court of the United Kingdom took a wrong turn by holding,
in FHR European Ventures LLP v Cedar Capital Partners LLC (2014),
that a secret commission or bribe received by a fiduciary is held
beneficially for the principal.”

Discuss.

2. Frank and Geraldine are trustees of the Hazel Family Trust (‘Trust’). The
Trust was set up by Professor Augustine Hazel in January 2017 and is
a discretionary trust whose objects are Professor Hazel’s two children
and five grandchildren. Frank and Geraldine are medical scientists who
have known Professor Hazel since they were doctoral students in his
laboratory. Frank and Geraldine are now the heads of their own
laboratories.

The original subject matter of the Trust was £1m, which was paid into a
bank account set up for the trust (‘Trust Account’). The trust instrument
gives Frank and Geraldine powers of investment, including that
‘preference may be given to companies undertaking research into
innovative medical technologies’ and that the trustees ‘may be guided
by ethical considerations in making investments’. In addition, the trust
instrument allows the trustees to ‘appoint up to £50,000 to a charity or
charities of their choice’.

In March 2017, Frank and Geraldine formed the view that they should
invest some or all of the £1m rather than leaving it in the bank. They
conducted some online research into the duties of trustees, including
blogs and fact sheets produced by law firms. They also had a one-hour
consultation with an accountant in order to learn more about trustee
duties and the basics of investing. They subsequently invested £750,000
of the trust money as follows:

(1) In April 2017, they invested £250,000 in shares in a number of blue-

chip stocks (large, established companies that have a history of
strong performance). They chose these companies from reading
news reports and opinion pieces in the Financial Times. These
shares are now worth £200,000. The FTSE 100 (an index
representing the performance of the top 100 companies in the UK)
climbed slowly throughout this time.

(2) In May 2017, they invested £250,000 in a start-up that is researching

the use of artificial intelligence in diagnostic tests. They learnt about
this company when they heard one of its founders talk at a public
event. Indeed, Frank and Geraldine were so impressed with the
potential of this research that they each decided to invest £5,000 of
their own money in the start-up. Due to uncertainty over the
patentability of any tests created by the start-up, the value of the
Trust’s shares has declined to £150,000.

(3) In June 2017, they invested £250,000 in social media company,

Visage Tome. In May 2019, they sold these shares for £290,000 and

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 paid the proceeds into the Trust Account, where they remain. Frank
and Geraldine made this decision because of their concerns that
Visage Tome is systematically violating user privacy. They were
aware, when making this decision, of opinion pieces in the Financial
Times predicting that Visage Tome would be ‘the next big thing’ and
that its shares are likely to surge in value. Frank and Geraldine
concluded, however, that the privacy infractions were so serious they
could not continue with the investment. Had Frank and Geraldine
retained the shares, they would now have been worth £400,000.

In January 2020, Frank made three charitable appointments of £25,000

each from the Trust Account. He did not consult Geraldine before
making these donations.

Frank and Geraldine have heard that the objects of the trust are unhappy
with their management of the Trust. They come to you for advice in
relation to whether any of their actions, above, might expose them to
liability.

Advise Frank and Geraldine on their potential liability.

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3. In May 2014, Gladys was involved in a serious car accident. This
accident left Gladys with paraplegia, meaning that she was forced to
leave her job as a gardener. In July 2016, following litigation, Gladys was
awarded £1.3m in damages. She sought advice from her best friend
Anna, a lawyer, in relation to what to do with the money. Gladys was
very concerned to invest the bulk of it wisely, as her ongoing medical
complications limited her ability to work.

Anna suggested that Gladys might wish to set up a trust in her own
favour, as this would lower Gladys’s taxation liability and allow the
appointment of an expert trustee. Gladys thought this sounded like a
good idea. Gladys asked Scott, her accountant, whether he might like to
serve as trustee. Scott agreed, so Gladys engaged Anna to prepare a
set of trust documents. In August 2016, the trust was set up, and Gladys
transferred £1m to a bank account in the name of the trust. Since that
time, Scott has provided reports to suggest that the trust is doing well.
Unbeknownst to Gladys, the following transactions in fact took place:

(1) In November 2016, Scott transferred £500,000 of the trust funds to

his current account, which was overdrawn to the sum of £200,000
following the purchase of a vintage motor car for £400,000 in October
2016. This brought the balance of Scott’s account to £300,000.

(2) In December 2016, £300,000 was paid into Scott’s account. This
money was owed to Scott under a property settlement.

(3) In January and February 2017, there were a series of withdrawals

totalling £300,000. This money was spent on a holiday in Hawaii for
Scott, his wife and children, and some close friends.

(4) In March 2017, there was a withdrawal of £300,000, which was used
to purchase shares in Super Co. This brought the balance of Scott’s
current account to zero.

(5) In April 2017, Scott transferred the remaining £500,000 of trust

money into his current account, followed by £300,000 from another
trust for which he is trustee. Later that month, he instructed the bank
to apply £400,000 to pay off the mortgage on his house. The bank
applied the money as instructed, and the mortgage was discharged.

(6) In May 2017, £200,000 was transferred to an account held by Scott’s

brother, Mike.

(7) In June 2017, the remaining £200,000 was withdrawn as cash. It has
not been possible to determine what happened to that money.

In November 2019, Gladys decided that she wanted to give £100,000 to

her son, Daniel, a university student, but was concerned he might fritter
the money away on clothes, consumer goods and parties. Gladys again
asked her friend Anna for help. Anna advised Gladys to set up a trust in
favour of Daniel. Gladys agreed, and engaged Anna to prepare the
necessary paperwork. Unfortunately, the particular structure of the trust

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 enlivened recently introduced tax legislation of which Anna was
unaware. The result was that Gladys incurred a taxation liability of
£10,000.

Gladys became aware of Scott’s actions and the tax liability in August
2020. She comes to you for advice in relation to her options.

As at August 2020, Scott’s only assets are the car (still worth £400,000),
his house (which has gone up in value by 20 per cent since April 2017)
and the shares in Super Co (now worth £150,000). Scott is hopelessly
insolvent, with large demands being made against him by a number of
creditors. Investigations also reveal that Mike, who was completely
unaware of Scott’s actions, has spent the £200,000 on living expenses.

Advise Gladys.

4. Should the resulting trust be expanded so that it arises in a broader

range of circumstances than those recognised in the existing case law?

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5. Fatima is a journalist and author. She has written numerous best-selling
books in relation to politics and the economy, and appears regularly as
a guest on news and current affairs programmes. She is writing her will.
She has drafted the wording herself and asks you whether her draft
provisions will be legally effective and whether any revision is required.
The provisions state:

(1) ‘£500,000 to the Cunningham Estate Foundation, to be used for the

acquisition and preservation of titles in their rare books collection in
their library.’

(2) ‘Half of my shares in Pharma Corp to my nephew, Waleed; the other

half to my trustees to be distributed in such shares as they see fit to
colleagues who worked at The London Herald newspaper at the
same time as me.’

(3) ‘My share in the flat located in Swire Place, Paddington, to my niece,
Amal.’

(4) ‘The remainder of my estate to be divided equally between my

cousins.’

The Cunningham Estate is a privately-owned historic house with

grounds located in Buckinghamshire. It is open to the public throughout
the year for payment of an admission fee. The Estate maintains a library
that has an extensive collection of rare books. The library is not open to
the public but may be accessed by members of the Cunningham Estate
Society (who enjoy unlimited access to the Estate for an annual fee) and
to researchers and students upon request. Many of those who purchase
an annual membership do so to access the library.

Fatima worked at The London Herald newspaper from October 1985 to

October 1998. The HR department at The London Herald does not keep
employee records stretching back this far. However, The London Herald
does have an archive that contains all the newspapers published
throughout this period.

Fatima tells you that she obtained her share in the Swire Place flat from
her aunt, Meher. She explains that a number of years ago, Meher said
at a family dinner that she wished to transfer her share in the flat to
Fatima. The flat is registered to Yasmin, Meher’s sister (and another of
Fatima’s aunts), who holds the flat on trust for Meher and herself in equal
shares. Fatima shows you an email chain between herself, Meher and
Yasmin written not long after the dinner, in which Yasmin says, ‘It is so
generous for Meher to give you her share in the flat’, and Fatima replies,
‘Yes, I am so thankful to Aunt Meher – Love, Fatima’. Fatima has never
lived in the flat (which is occupied by Yasmin), but visits regularly.

Advise Fatima.

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6. “The courts should adopt a single test for the knowledge standard in the
receipt-based and the assistance-based limbs of third party liability.
There is no compelling justification for the current approach, in which
those two forms of liability are treated differently.”

Discuss.

END OF PAPER

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