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caused English law to develop a regime where transfers of securities required the registration of the transferee’s name by the issuer and where registration provided the transferee with more certainty as to her entitlement than the delivery of the transfer documents. The legal environment prevailing when securities first emerged sent English law on a path which has had an impact on all later legal developments.

2.4 Equitable title

In the previous sections the rules governing the acquisition of legal title were analysed. The conclusion was that, provided that the seller was authorised to sell securities, legal title was transferred to the buyer upon registration of her name on the securities register. In this section, the rules governing the acquisition of equitable title to securities will be considered.

2.4.1 Equity and transfers of registered securities

From the point of view of this book, it is important to note that the rules on securities transfers are firmly embedded in the general English private law framework. England approaches securities transfers within the context of the historically determined dualistic jurisprudence of the law and equity courts. The rules on transfers of securities fit squarely into this two-headed model and evolved from the division between law and equity.

When securities first became widely used it must have stimulated legal questions that had not been considered before. The English legal system did not solve these new questions by creating a completely new set of rules, but rather took advantage of the network of rules already in place: it adapted existing legal techniques to solve new legal problems and caused English securities law to stay within the path previously adopted by English private law.

The technique used by English law in order to confer an equitable or beneficial interest on the transferee is trust law. Trust law is, as has already been noted, a body of law created by the court of equity. Trusts are created by express declaration or by law. If a trust arises in the context of a securities transfer, the transferor becomes a trustee. In that capacity, the transferor holds the securities on trust for the benefit of the transferee. The transferee is referred to as the ‘beneficiary’ of the trust: as a beneficiary, a transferee holds equitable or beneficial title.

This point can be further illustrated by reference to a dictum by Lord Diplock in Ayerst v. C&K (Construction) Ltd36: ‘The ‘‘legal ownership’’ of the trust property is in the trustee, but he holds it not for his own benefit but for the benefit of . . . beneficiaries. Upon the creation of a trust in the strict sense as it was developed by equity, the full ownership in the trust property was split into two constituent elements, which became vested in different persons: the ‘‘legal ownership’’ in the trustee, what came to be called the ‘‘beneficial ownership’’ in the cestui que trust.’37

If the requirements discussed below are met,38 a trust arises. The seller becomes a trustee for the benefit of the buyer; this causes the buyer to acquire equitable title to the securities. The seller still remains the legal owner of the securities until the buyer’s name is registered on the issuer’s register. Because the seller still has legal title to the securities, she can transfer them at law; this means that it is possible for the seller to transfer the securities to a second buyer. If the name of the second buyer is registered, the second buyer will acquire legal title to the securities.

The transfer of legal title to the second buyer, however, does not affect the rights of the first buyer. The general rule is that the first buyer’s equitable rights are as enforceable against the second buyer as they were against the seller. This is also achieved through the means of trust law: the second buyer is classified as a ‘constructive trustee’ holding the securities on trust for the first buyer in the same way as the seller was also classified as a trustee. There is only one exception to this: the second buyer is not considered to be a constructive trustee if she bought the securities in good faith and for value.

The detail of this analysis is crucial from the point of view of this book. English law approaches the parties’ proprietary rights in a somewhat cumbersome way which can be explained only by the eccentricities of the operation of the dual jurisdiction at law and in equity, respectively. One might be forgiven for asking why the rules do not simply state that, notwithstanding registration, title to the securities does not pass to a second buyer in certain circumstances unless she is a good faith buyer for value.

The answer is path-dependence. The original starting point was that a buyer whose name was registered had title to the securities. This was

36 [1976] AC 167 at 177. 37 ‘Cestui que trust’ is a synonym for ‘beneficiary’. 38 See subsections 2.4.4, 2.4.5, 2.4.6 and 2.4.7.

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considered to be harsh in certain circumstances, which will be analysed below.39 Instead of changing the rules at law, England dealt with the problem in a path-consistent fashion. The court of equity intervened. Equity cannot change law; it can only supplement it. The equity court, therefore, could not take legal title away from the second buyer, but it could subject her to a set of rights that were created in favour of the first buyer. Equity could force the second buyer to respect the first buyer’s equitable title. This is how securities transfers became to be analysed through the lens of trust law.

The rule that the second buyer is bound by the equitable rights of the first buyer developed over centuries and the instances in which the second buyer was considered to be bound by the first buyer’s equitable title were continuously expanded. In other words, the legal position of the equitable owner became stronger over time.

R. J. Smith writes,40 that the court of equity, at first, considered only that conscience dictated that the buyer (in our example, the second buyer) should be bound by the trust if she was aware of the trust (actual notice), or would have been aware of it if proper investigations had been made (constructive notice). At the beginning of the twentieth century, the circumstances in which the second buyer would be bound were extended. It was held that every transferee will be bound, unless she is a buyer without notice.41 The original basis of the enforcement, that of unconscionable conduct by the second buyer, has long since given way to the rule that everybody except the buyer of the legal estate without notice is bound.42

The current position is that a buyer who has become the equitable owner of securities is not recognised by the company as a shareholder but has priority over any other buyer except for the bona fide buyer for value. This means that when the second buyer’s name is registered, the second buyer and any subsequent transferee needs to hand over any benefits she receives to the first buyer who is the equitable owner.43 The first buyer’s claim will not be successful if the second buyer has

39See subsections 2.4.4, 2.4.5, 2.4.6 and 2.4.7.

40Smith, Property Law, 5th edn. (London: Longman, 2006) 24; see also A. P. Bell, Modern Law of Personal Property in England and Ireland (London: Butterworths, 1989) 154.

41Smith, Property Law, 5th edn. (London: Longman, 2006) 24 referring to Re Nisbet and Pott’s Contract [1906] 1 Ch 386 (CA).

42Smith, Property Law at 24.

43For a detailed analysis of the claims available to the owner in equity, see Richard Nolan, ‘Equitable Property’, 122 (2006) LQR 232–265.

acquired her title to the shares without notice of the buyer’s claim and for value. In a case of this sort, the buyer may either sue the seller in contract for damages or trace her proprietary interest into the proceeds of the second sale and assert a claim over them.44

Another important consequence of the acquisition of equitable title is that the buyer can enforce her claim against the seller’s or the second buyer’s unsecured creditors.45 This is particularly valuable in the seller’s insolvency. The equitable owner’s title may also be enforced in scenarios that do not involve the seller being insolvent. One example is that an equitable owner’s title will prevail against a creditor of the seller who has obtained a charging order on the securities after the equitable owner’s title arose.46 Another legal consequence of the transfer of equitable ownership is a change in the attribution of tax benefits.47

Before we examine the circumstances in which equitable title is vested in the buyer, we need to examine the legal nature of equitable title. It is important to determine, from the point of view of this book, whether equitable rights can be classified as proprietary.

2.4.2 Legal nature of an equitable (beneficial) interest

In England, there is debate on whether or not equitable title is a right in rem. F. W. Maitland said that equitable ownership is not a right in rem, but a right in personam because it is not enforceable against the bona fide buyer for value.48 Maitland’s view has never been uncontroversial; it has been criticised in recent academic literature and has not found favour in the courts.49

The majority of the House of Lords in Baker v. Archer-Shee,50 for example, did not adhere to the view that equitable rights are rights in personam. It held that the beneficiary was the ‘sole beneficial owner of the interest and dividends of all the securities, stocks and shares forming part of the trust fund’.51 This argument was confirmed by

44Lake v. Bayliss [1974] 1 WLR 1073.

45A. J. Oakley, Parker and Mellows: The Modern Law of Trusts, 8th edn. (London: Sweet & Maxwell, 2003) 315–316.

46Hawks v. McArthur [1951] 1 All ER 22.

47J. Sainsbury plc v. O’Connor (Inspector of Taxes) [1991] 1 WLR 963 (CA).

48F. W. Maitland, Equity – A Course of Lectures, rev. edn. J. Brunyate (Cambridge: Cambridge University Press, 1936) 106–116.

49For example, Smith, Property Law 24; P. H. Pettit, Equity and the Law of Trusts, 10th edn. (Oxford: Oxford University Press, 2006) 81–84.

50[1927] AC 844. 51 At 870 per Lord Carson.

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their Lordships four years later in Archer-Shee v. Garland and in Tinsley v.

Milligan.52

Contrary to what these cases might suggest, the controversy as to the nature of equitable rights in property is not yet settled. Some modern writers doubt whether equitable rights can be classified as purely proprietary. These writers agree with Maitland in that they find it difficult to describe a right as proprietary where it cannot be enforced against the bona fide buyer for value. Unlike Maitland, however, these writers do not classify equitable rights as personal because they can be enforced against everybody else except the bona fide buyer for value and are therefore not merely rights between contractual partners. They describe equitable rights as ‘hybrid’ or sui generis.53 Some writers refrain from labelling equitable rights altogether.54 Pettit, for example, writes that:55 ‘It may seem strange, though it is perhaps not untypical of English law, that although the trust is so highly developed an institution, it is impossible to say with assurance what is the juristic nature of the interest of a cestui que trust.’

Observing this discussion from the outsider’s perspective, it is striking that the concept of a property right receives comparatively narrow construction. An important focus of the English debate is the question of whether a right that is subject to a bona fide acquisition rule can rightfully be classified as proprietary. The difficulty is that equitable title is not good against the world at large because it is inferior to the claim of a good faith buyer for value.

This book attempts to take a comparative approach to the law of transfers of securities. When analysing equitable title through the eyes of a comparative lawyer, we need to observe that the concept of property rights has received a broader construction in jurisdictions other than England. German and Austrian law, for example, classify ownership as a right in rem despite the fact that their codes contain rules whose result is that these rights are not enforceable against a bona fide buyer for value in a large class of circumstances.56

52Archer-Shee v. Garland [1931] AC 212 per Lord Tomlin at 222; Tinsley v. Milligan [1994] 1 AC 340 per Lord Browne-Wilkinson at 371.

53See reference in Pettit, Equity and the Law of Trusts, 8th edn. (Oxford: Oxford University Press, 1997) 81–84.

54See, for example, Nolan, ‘Equitable Property’ 232–265.

55Equity and the Law of Trusts 81.

56SS. 135, 136, 883, German Civil Code (BGB); s. 365, Austrian Civil Code (ABGB); see also Arts. 9, 900, 931, 937, Swiss Civil Code; J. H. Beekhuis, ‘Civil Law’, in F. H. Lawson (ed.),

International Encyclopedia of Comparative Law, Volume VI: Property and Trust (Amsterdam: Martinus Nijhoff, 1972) 8.