In Frenkel v LA Micro Group (UK) Ltd & ors and LA Micro Group Inc v LA Micro Group (UK) Ltd & ors [2024] UKSC 42, the Supreme Court found that an oral agreement between the legal and beneficial owners of shares was enforceable, and created a constructive trust. This meant that the transfer of beneficial ownership to the legal owners did not need to be in writing.
LA Micro Group (UK) Ltd (UK) was set up in 2004 for a joint venture between Mr Bell and LA Micro Group Inc (INC), a Californian company, owned equally by Mr Lyampert and Mr Frenkel.
- UK had two shares, one held by Mr Bell and one by Mr Lyampert.
- These shares were held on Trust for their Beneficial owners, Mr Bell and INC, in the ratio 49:51, although profits were split equally.
- In 2010, Mr Lyampert and Mr Frenkel fell out.
- Mr Frenkel told Mr Bell that UK was Mr Bell’s business and that he wanted nothing more to do with it.
- Mr Lyampert and Mr Bell reached an agreement on a new arrangement, binding on INC as well as Mr Bell and Mr Lyampert, whereby:
- The profits of UK would be split equally between Mr Bell and Mr Lyampert (rather than INC).
- Mr Lyampert agreed to take on INC’s debt to UK.
- Mr Frenkel subsequently claimed he was owed, via INC, a share of the profits of UK.
- Following a series of decisions of the High Court and Court of Appeal (CoA), in 2023 the CoA found that INC had contractually given up its beneficial interest to UK in 2010.
- The CoA concluded that Mr Bell and Mr Lyampert, the legal owners of the shares who held them on trust, had entered into an enforceable oral agreement with the beneficiary (INC) which transferred beneficial ownership of the shares to them, and created a Constructive trust, as equity would have granted specific performance.
- The existence of this constructive trust exempted the transfer of beneficial ownership to Mr Bell and Mr Lyampert from the general requirement for a disposition of an equitable interest to be in writing, which would otherwise have been the case under the Law of Property Act 1925 (LPA 1925).
- INC and Mr Frenkel appealed to the Supreme Court.
The Supreme Court found that:
- The parties to the agreement in 2010 believed that their oral agreement was adequate to achieve their intended result, without the need for any further written transfer of INC’s beneficial interest.
- The fact that the 2010 agreement was not in writing or signed, as usually required under s.53(1)(c) LPA 1925, did not prevent that agreement from taking effect.
- The requirement for a disposition of an equitable interest to be in writing and signed does not affect the operation of a constructive trust, due to s.53(2) LPA 1925.
- The agreement made in 2010 resulted in a vendor-purchaser constructive trust as equity would have granted specific performance. As such, the transfer fell within the exception in s.53(2).
- Although the vendor-purchaser constructive trust would only have existed momentarily before beneficial and legal interests merged, this did not mean it should not be recognised.
- Had the constructive trust not existed, Mr Bell and Mr Lyampert would have each remained vulnerable to INC selling its interest in UK to a third party or becoming insolvent.
The appeal was dismissed.
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