Law of Trusts - Question 1 October 2017

Shelter Company PLC is a private construction company engaged in constructing houses or apartments
and selling them to the public. The Shelter Company purchased a land extent of 120 perches to
construct a multi-storeyed apartment in Gampaha. The Shelter Company has a financial crisis upon
the purchase of the land. Therefore, the Board of Directors of the Shelter Company passed a
resolution and invited applications for the reservation of a unit in the proposed apartment from the
public by a newspaper advertisement. Further, the Shelter Company mortgaged the land in a Finance
Company and started construction. The Shelter Company became bankrupt. The persons who had
paid the advance for the reservation of a unit argue that they are beneficiaries of such money in the
seperate account.

Discuss if a valid trust has been created in the above mentioned circumstances especially in relation to
certainity of trust property. Support your answer with reference to the provisions of the Trusts
Ordinance and decided cases. (20 marks)

The question requires us to analyse if a valid trust had been created by Shelter Company for the benefit
of the persons who had paid an advance for the reservation of a unit.

In the English case of Knight V Knight (1840) 49 ER 58 Lord Langdale had declared that, for a valid trust
to be created, three elements were necessary. These are, namely, the words employed must be couched
that, taken as a whole, they could be deemed to be imperative; the subject matter of the trust should be
certain; and the objects of the trust or persons intended to benefit from the trust should be certain. In
other words, this means that the intention of settlor should be clear and certain, the subject matter
should be certain and segregated from the rest of the property and people who are intended to benefit
should be identified with certainty.

This principle is also set out in Section 6 of the Trusts Ordinance. Section 6 states that, subject to the
provisions of Section 5 and 107, a trust is created when the author of the trust indicates with sufficient
certainity with words or acts an intention on his part to create thereby a trust, he purpose of the trust,
the beneficiaries of the trust and trust property and the settlor should validly transfer the trust property
to the trustee (unless the trust is declared by will or the settlor himself is the trustee).

In this case, therefore, for a valid trust to exist, there should be certainity as to the intention of the
settlor, the purpose of the trust, the beneficiaries of the trust, and the trust property.
The intention of the settlor to create a trust should be indicated with sufficient certainity through his
words or his acts according to Section 6(a). No formal language needs to be used and even if the words
used a precatory, a trust may arise if the intention of the settlor is sufficiently manifested.

In the case of Fernando V Jossie 58 NLR 114, it was held that 'in construing the terms of a deed, the
question is not what the parties may have intended, but what is the meaning of the words which they
have used'. LJM Cooray also has noted that though we refer to the 'intention of the settlor', it is more
accurate to speak of the settlor's 'manifestation of intention' to create a trust.

In the case at hand, there has being no agreement as such specifying a trust, therefore, we have to look
into the acts of the company to identify if there was an intention to create a trust on their part. When
the Shelter Company had gone into a financial crisis in buying the land, they had mortgaged the land to a
finance company and gone ahead with the construction. They had then invited the public to pay an
advance for the reservation of a unit and had placed such monies received in a separate account. The
money in the seperate account shows that the company had not incorporated that money for their own
use and was holding it until the completion of the units, most probably to be returned to the relevant
persons in the event of bankruptcy or any other misfortune. Thus, it can be said that the Shelter
Company had sufficient intention to create a trust in favour of the persons who made an advance
payment, in the event of bankruptcy.

Next, certainity of beneficiaries should be established [Section 6 (c)]. Certainity of beneficiaries implies
that the beneficiaries should be identifiable and the interests which the beneficiaries take should be
ascertainable.

In the case of Clough Mill V Martin [1984] 3 All ER 982, a yarn manufacturer supplied a clothes
manufacturer with yarn. The clothes manufacturers had not made the full payment for the yarn, and as
security for the repayment of such amount, the yarn manufacturer got into a contract stating that he
would retain title to the yarn until clothes were created from it and then he would also reserve rights in
such clothes created from it until he was completely paid. The clothes manufacturer subsequently went
into insolvency without having completely paid off the yarn manufacturer. The yarn manufacturer then
claimed rights to the clothes and that a trust arose in his favour in regard to such clothes. It was held
that it was not ascertainable as to which of the clothes consisted of the yarn which was paid for and
which has the yarn which was not paid for. So, the interest that he should take was not ascertainable.
Therefore, a trust did not arise in his favour.

In the case at hand, all the money that had been received as advance payments for the units had been
segregated into a seperate account. The company most probably have records of the details of the
persons who made such payments and the amounts each one paid. Thus, the beneficiaries are
identifiable, and the interests each beneficiary would take is also ascertainable.

The purpose of the trust should also be ascertainable [Section 6 (b)], and in this case, the purpose of the
money being kept in a seperate account ascertains that this money is distinguishable from the rest and
most probably is to be returned to the relavant persons.
The question here is, therefore, whether there is certainity of subject matter. The subject matter of a
trust should be defined with certainity and it should be capable of disposition. It must be property that is
transferable to the beneficiary and cannot be a beneficial interest under a subsisting trust.

There must be certainity as to property intended to be affected by the trust [Section 6 (d)]. If there is no
certainity, there can be no trust and the purported transferor is never divested of his title. There also
should be certainity as to the beneficial interest taken by each of the beneficiaries. If the beneficiaries
are uncertain, it will give rise to a resulting trust under Section 85 of the Trusts Ordinance.

In the case of Re Kayford [1975] 1 WLR 279, Kayford Ltd was a mail order business where the customers
made orders and paid for them before the goods were delivered to them. The directors of the business
were concerned about insolvency one of the reasons being if they did go into insolvency, their creditors
would take over all their assets including the money of their customers who had not received their
orders. The company was advised to open a seperate account named 'Customers' Trust Deposit Account'
where money of the customers w9ho hadn't received their goods were deposited. Once the goods were
received, the money was transferred to the company's general account. Subsequently, the business
went into insolvency and the the creditors claimed all the assets including the money in that specific
account. It was held that, the directors had made it clear by creating a seperate account titled as above,
that the money in this account was seperate from the company's general assets, thus making certain the
subject matter/ trust property of the trust. Therefore, a valid trust has been created since there is
certainity with regard to the intention, beneficiaries as well as subject matter of the trust.

The case at hand is very similar in facts to the above case. Shelter Company had also created a seperate
account for the advances paid by the beneficiaries so that in the case of insolvency, their creditors and
mortgagees would not be entitled to claim the monies paid by the beneficiaries thus ensuring the
certainity of the subject matter of the trust. The question does not state how the account had been
named, but by the fact that a seperate account had been created, it can be construed that the company
had intended it to be held on trust for the beneficiaries.

Thus, it can be concluded that a valid trust has been created in favour of the persons who made the
advance payments since all three certainties set out in Knight v Knight and the five requirements set out
in Section 6 of the Trusts Ordinance have been satisfied.

Compiled by Shamara Firdous

Final Year – Sri Lanka Law College

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