Frenkel v LA Micro Group (UK) Ltd and others

The Supreme Court decided that a vendor–purchaser constructive trust (VPCT) can arise on an oral agreement for the sale of an equitable interest in shares and, where it does, section 53(2) of the Law of Property Act 1925 disapplies the formalities in section 53(1)(c) so as to give effect to the transfer. The court rejected the appellants’ argument that no VPCT could arise where the purchaser was the sole legal owner and the transfer in substance destroyed the vendor’s equitable interest by merging it into legal title.

The court held that the substance of the 2010 Agreement was the transfer of Inc’s 51% beneficial interest in each of two issued shares to the legal holders, and that the VPCT, even if only momentary, was the mechanism by which that equitable interest reached the purchaser before merging into legal title. The court also refused permission to argue for the first time that section 53(1)(c) applies only to equitable interests in land, noting long‑standing authority and practice treating section 53(1)(c) as applicable to equitable interests in personalty, including shares.

Background and parties. The dispute concerned whether an oral agreement made in 2010 (the "2010 Agreement") by La Micro Group Inc (Inc) to give up its 51% beneficial interest in each of two issued shares in La Micro Group (UK) Ltd (UK) was effective. The respondents were the legal holders of the shares, Mr Bell and Mr Lyampert. Inc alleged the oral agreement was ineffective because it lacked the signed writing required by section 53(1)(c) of the Law of Property Act 1925.

Procedural history. The matter had been litigated extensively: decisions at first instance and on appeal are recited in the judgment, including judgments of Judge Jarman in the High Court ([2021] EWHC 140 (Ch); [2022] EWHC 1304 (Ch)) and subsequent appeals to the Court of Appeal ([2023] EWCA Civ 214; reported at [2024] Ch 1), before coming to the Supreme Court.

Nature of the claim and relief sought. Inc sought a declaration that it had not surrendered its 51% beneficial interests and that the 2010 Agreement was ineffective without written disposition under section 53(1)(c). The respondents relied on the proposition that the 2010 Agreement gave rise to a vendor–purchaser constructive trust (VPCT) which, by operation of section 53(2), displaced the formalities requirement in section 53(1)(c).

Issues framed by the court. The court focussed on one concise issue: assuming a VPCT will arise on an oral agreement for the sale of an equitable interest in a share, does the fact that the purchaser is the sole legal owner (and thereby will hold the whole beneficial interest after the transaction) prevent a VPCT from arising? A subsidiary new point advanced by the respondents — that section 53(1)(c) applies only to equitable interests in land — was considered de bene esse and permission to pursue it was refused.

Reasoning and conclusions. The court accepted parties’ concessions that the 2010 Agreement was the disposition of an equitable interest within section 53(1)(c), that an equitable interest in a private company share is capable of being trust property, and that specific performance would be available because shares in a private company are unique. The court analysed the VPCT doctrine and concluded that the VPCT was the mechanism by which Inc’s 51% equitable interest vested in the purchasers; once vested, the equitable interest merged with legal title. The fact that the VPCT existed only momentarily (a scintilla temporis) did not prevent its recognition. The court rejected the appellants’ "destruction" analysis as conflating substantive effect with technical mechanics and as leading to arbitrary results. Finally, the court refused permission to argue that section 53(1)(c) is limited to land because longstanding authority and practice treat it as applying to equitable interests in personalty, including shares.

Appeal dismissed. The Supreme Court held that a vendor–purchaser constructive trust arose on the 2010 Agreement and, by virtue of section 53(2), displaced the formalities in section 53(1)(c) so as to give effect to the transfer of Inc’s 51% beneficial interests; the appellants’ argument that the VPCT could not arise because the purchasers were sole legal owners was rejected. Permission to advance a new argument that section 53(1)(c) is limited to land was refused.

The dispute began in the High Court (Judge Jarman: [2021] EWHC 140 (Ch); further trial [2022] EWHC 1304 (Ch)). On second appeal the Court of Appeal allowed the respondents’ notice that section 53(1)(c) was displaced by a VPCT ([2023] EWCA Civ 214; reported at [2024] Ch 1). The Supreme Court dismissed the appellants’ further appeal ([2024] UKSC 42).