I extend my sincere thanks to everybody who helped me with the completion of this project. I am greatly obliged to our teacher for EQUITY, TRUST & SPECIFIC RELIEF, Professor P.K Gupta who allowed us to select the fine and interesting topic for the present project and also helped with the research and compilation of necessary information for the completion of the project. I am also thankful to the Library Administration for the provision of necessary books and texts needed for the completion of this project. Finally, I would like to thank my parents, seniors and batch mates for their support.
Thanking you, AMBUJ SWAROOP {2012 BALLB 34}
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INTRODUCTION
WHAT IS EQUITY?
Plato defined that If you cannot find any other, equality is the proper basis. This maxim is also explained as equity delighted in equality, which means that as far as possible equity would put the litigating parties on an equal level so far as their rights and responsibilities are concerned. Justice Fry said, When I say equality, I do not mean equality in its simplest form, but which has been sometimes called proportionate equity. Equity is commonly said to "mitigate the rigor of common law", allowing courts to use their discretion and apply justice in accordance with natural law. In practice, modern equity is limited by substantive and procedural rules, and English and Australian legal writers tend to focus on technical aspects of equity. There are 12 "vague ethical statements", known as the Maxims of equity, that guide the application of equity, and an additional five can be added. In accounting and finance, equity is the residual claimant or interest of the most junior class of investors in assets, after all liabilities are paid; if liability exceeds assets, negative equity exists. In an accounting context, shareholders' equity (or stockholders' equity, shareholders' funds, shareholders' capital or similar terms) represents the remaining interest in the assets of a company, spread among individual shareholders of common or preferred stock; a negative shareholders' equity is often referred to as a positive shareholders' deficit. This definition is helpful in understanding the liquidation process in case of bankruptcy. At first, all the secured creditors are paid against proceeds from assets. Afterwards, a series of creditors, ranked in priority sequence, have the next claim/right on the residual proceeds. Ownership equity is the last or residual claim against assets, paid only after all other creditors are paid. In such cases where even creditors could not get enough money to pay their bills, nothing is left over to reimburse owners' equity. Thus owners' equity is reduced to zero. Ownership equity is also known as risk capital or liable capital.
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HISTORY Equity was developed two or three hundred years after the birth of the common law system to resolve disputes where damages were not a suitable remedy, and in an effort to introduce fairness into the legal system. The distinction between "law" and "equity" is an accident of history. The law courts or "courts of law" were the courts in England that enforced the king's laws in medieval times. Here the King's Judges, educated in law rather than theology, administered the universal law of the realm. This body of law evolved on the basis of previously set precedent into what is recognized as the Common law of England. However, if changes were not quick enough, or if decisions by the judges were regarded as unfair, litigants could still appeal directly to the King, who, as the sovereign, was seen as the 'fount of justice' and responsible for the just treatment of his subjects. Such filings were usually phrased in terms of throwing oneself upon the king's mercy or conscience. Eventually, the king began regularly to delegate the function of resolving such petitions to the Chancellor, an important member of the King's Council.The early Chancellors were often clergymen, acting as the King's confessor and thereby sacerdotally as keeper of the King's conscience. As a result of their theological and clerical training, Chancellors were well versed in Latin and French, as well as in classical Roman civil and canon law, which heavily influenced the development of equity.Soon the Chancery, the Crown's secretarial department, began to resemble a judicial body and became known as the "Court of Chancery". By the 15th century, the judicial power of Chancery was recognized. Equity, as a body of rules, varied from Chancellor to Chancellor, until the end of the 16th century. After the end of the 17th century, only lawyers were appointed to the office of Chancellor. One area in which the Court of Chancery assumed a vital role was the enforcement of uses, a role which the rigid framework of land law could not accommodate. This role gave rise to the basic distinction between legal and equitable interests.
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MAXIMS OF EQUITY
1 Equity sees that as done what ought to be done 2 Equity will not suffer a wrong to be without a remedy 3 Equity delights in equality 4 One who seeks equity must do equity 5 Equity aids the vigilant, not those who slumber on their rights 6 Equity imputes an intent to fulfill an obligation 7 Equity acts in personam 8 Equity abhors a forfeiture 9 Equity does not require an idle gesture 10 He who comes into equity must come with clean hands 11 Equity delights to do justice and not by halves 12 Equity follows the law
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EQUITY IS EQUALITY
Plato defined that If you cannot find any other, equality is the proper basis. This maxim is also explained as equity delighteth in equality, which means that as far as possible equity would put the litigating parties on an equal level so far as their rights and responsibilities are concerned. Justice Fry said, When I say equality, I do not mean equality in its simplest form, but which has been sometimes called proportionate equity.
APPLICATION AND CASES
Application of this maxim can be understood from the following: i) Equitys dislike for joint tenancy and presumption of tenancy-in-common ii) Equal distribution of joint funds and joint purchases iii) Contribution between co-trustees, co-sureties and co-contractors iv) Ratable distribution of legacies v) Marshalling of assets 1. Equitys dislike for joint tenancy and presumption of tenancy-in-common Equity leans against joint tenancies. Equity dislikes the joint tenancy, for in it the right of survivorship the jus accrescendi) operates i.e. the survivor of two joint tenants is entitled to the whole property, and the estate of the deceased tenant takes nothing. Where there are more than one joint tenants, on the death of one, the whole property vests in the survivors. This process continues until there is only one survivor, who then holds the land as a sole tenant. In a tenancy in common, on the other hand, the share of a deceased tenant passes not to the survivor but to those entitled under the deceaseds will or intestacy, for a tenant in common has a distinct share in the property which is his to dispose of as he wishes. In three Equity, Trust & Specific Relief Project
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instances Equity treats joint tenants at law as tenants in common of the beneficial interest, so that although at law the survivor is entitled to the whole property, in Equity he will be regarded as trustee of the deceaseds share for the benefit of those entitled under the latters will orintestacy. These instances are: (a)Where property is purchase in unequal shares Where two persons, X and Y, purchase property, providing the purchase money in unequal shares, and have the property conveyed to them as joint tenants, on the death of X, Y becomes entitled to the whole property at law, but in Equity he becomes trustee for Xs estate of the share 52 of the property proportionate to the amount advanced by X (Y being of course beneficially entitled to his own share). But where the money is advanced in equal shares, Y is entitled to the whole property both at law and in Equity, for it is presumed that when two persons advance equal amounts, they intend the jus accrescendi to operate. 1
(b) Loan on Mortgage Where two persons, X and Y, lend money to Z who then mortgages his property to them jointly,it is immaterial whether the amounts lent were equal or unequal; since the transaction is a loan, tenancy in common will be implied, so that the surviving mortgage will be a trustee for the estateof the deceased mortgagee of that part of the property which is proportionate to the sum lent bythe deceased.
(c) Partnerships It is presumed that any property acquired by partners in their business is held by them as beneficial tenants in common jus accrescendi inter mercatores locum non habet (meaning the right of survivorship has no place in business).
2. Severance of Joint Tenancy The term severance is here used to describe the process whereby a joint tenancy is convertedinto a tenancy in common. A joint tenant may convert a joint tenancy into a
1 Lake v. Gibson (1729) 1 Eq. Ca. Abr. 290. Equity, Trust & Specific Relief Project
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tenancy in common by severance. Where there is a joint tenancy both at law and in Equity (e.g. where two joint purchasers advance equal amounts), Equity will readily treat the joint tenancy as severed and thus converted into a tenancy in common, thereby excluding the right of survivorship. Any alienation of his interest by a joint tenant will bring about severance. Even an agreement to alienate suffices, provided it is made for value. 2 Alienation may be by outright sale or gift or by mortgage. In Ipaye v. Aribisala 3 , the point in issue was whether a merely equitably mortgage of his interest by a joint tenant sufficed to bring about severance. The facts were that the plaintiff and his brother were joint tenants under a settlement of land. The deed of settlement was kept in the brothers custody. After the death of the brother it was discovered that he had, without the consent of the plaintiff, deposited the deed with the defendant as security for a loan, thus creating an equitable mortgage of his (the brothers) interest in the property. The question was, did this operate to sever the joint tenancy? If the answer were in the affirmative, the brother would have become a tenant in common and the mortgage to the defendant would be a valid alienation of the brothers interest, thus entitling the defendant to retain possession of the deed. On the other hand, if there had been no severance, the right of survivorship would operate to vest the whole property in the plaintiff, both in law and Equity, and the defendant would have no right to possession of the deed. The Divisional Court adopted the latter view, but the decision was reversed by the Full Court which held that the equitable mortgage, just as a legal one, did bring about a severance, the legal joint tenancy being converted into a tenancy in common in Equity. It made no difference that the mortgage was without the knowledge or consent of the plaintiff, for one joint tenant may validly sever without the concurrence of the other. Accordingly, the defendant was entitled to possession of the deed.
3. Equal distribution of joint funds and joint purchases Whenever there is no other fair and practicable basis upon which property may be distributed amongst two or more rival claimants, the court will apply the maxim and divide the property equally between them. This may be seen in the following examples: (i) Where trustees fail to exercise a trust power, the court will divide the trust property
2 Brown v. Raindle (1796) 3 Ves. 256. 3 (1930) 10 NLR 10 Equity, Trust & Specific Relief Project
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equally amongst all the members of the class of beneficiaries, even though the trustees might have given unequal shares. (ii)Where there is a settlement including a direction (a) that the fund shall be held on trust for certain persons in unequal shares and (b) that any share which fails to vest shall accrue the other shares by way of addition, the accrue will be in equal shares and not in the proportions laid down for the original shares. (iii) Where a husband and wife divorce or separate, both having contributed to the purchase of the matrimonial home, or having operated a joint bank account, the court will not, in the absence of any contrary arrangement between the parties, inquire into what was contributed by each, but will divide the property equally between the two. 4
The rule is applicable even where husband and wife both contribute to the running of a business. 5
4. The Doctrine of Satisfaction Equity considers that if a father has more than one child, it is unlikely that he would wish to provide for one child twice over to the detriment of the others, hence the sub- maxim Equity leans against double portions founded on the present maxim. 5. Marshalling of assets The process of organizing, ranking, and distributing funds in a manner set forth by law as being the most effective way to discharge debts that are owed to various creditors.When assets and Securities are marshalled, the two-fund doctrine is frequently applied. It provides that when one claimant has two possible funds in the hands of a debtor to whom the claimant is able to resort to satisfy his or her demand, and a second claimant has an interest in only one of the funds, the second claimant can force the first to satisfy the claims out of the fund in which he or she, the second claimant, has no lien.
4 Jones v.Maynard (1951) 1 Ch. 572 5 Landsman v. Landsman (1961) 105 S.J.
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CASES
McPhail v Doulton McPhail v Doulton, also known as Re Baden's Deed Trusts is a leading English trusts law case by the House of Lords on the certainty of beneficiaries. It held that so long as any given claimant can clearly be determined to be a beneficiary, or not, a trust is valid. FACTS: Betram Baden executed a deed settling a non-charitable trust for the benefit of the staff of Matthew Hall & Co Ltd and their relatives and dependents. The objects clause provided that: The trustees shall apply the net income of the fund in making at their absolute discretion grants to or for the benefit of any of the officers and employees or ex-officers or ex- employees of the company or to any relatives or dependants of any such persons in such amounts at such times and on such conditions (if any) as they think fit. The validity of the trust was challenged, averring that the objects were insufficiently certain. JUDGEMENT: Lord Wilberforce, after noting the fact that the settlor had left his property on trust, with instructions to distribute according to the trustees' choices (and, therefore, not equally among the potential beneficiaries), stated the following: As a matter of reason, to hold that a principle of equal division applies to trusts such as the present is certainly paradoxical. Equal division is surely the last thing the settlor ever intended: equal division among all may, probably would, produce a result beneficial to none. Why suppose that the court would lend itself to a whimsical execution? and as regards authority, I do not find that the nature of the trust, and of the court's powers over trusts, calls for any such rigid rule. Equal division may be sensible and has been decreed, in cases of family trusts, for a limited class, here there is life in the maxim 'equality is equity,' but the cases provide numerous examples where this has not been so, and a different type of execution has been ordered, appropriate to the circumstances. His Lordship then went on to discuss the authority for this principle, which is compelling. As to the value of the facts, the comment above was a powerful reason for departing from the Broadway Cottages case ([1955] Ch 20), which was the basis for the strict test for certainty of object of discretionary trusts, as overruled in McPhail Equity, Trust & Specific Relief Project
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SIGNIFICANCE: Lord Wilberforce, after noting the fact that the settlor had left his property on trust, with instructions to distribute according to the trustees' choices (and, therefore, not equally among the potential beneficiaries), stated the following: As a matter of reason, to hold that a principle of equal division applies to trusts such as the present is certainly paradoxical. Equal division is surely the last thing the settlor ever intended: equal division among all may, probably would, produce a result beneficial to none. Why suppose that the court would lend itself to a whimsical execution? and as regards authority, I do not find that the nature of the trust, and of the court's powers over trusts, calls for any such rigid rule. Equal division may be sensible and has been decreed, in cases of family trusts, for a limited class, here there is life in the maxim 'equality is equity,' but the cases provide numerous examples where this has not been so, and a different type of execution has been ordered, appropriate to the circumstances. [1]
His Lordship then went on to discuss the authority for this principle, which is compelling. As to the value of the facts, the comment above was a powerful reason for departing from the Broadway Cottages case ([1955] Ch 20), which was the basis for the strict test for certainty of object of discretionary trusts, as overruled in McPhail .
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CONCLUSION
This maxim means that equity will not play favorites. For example, a receiver who has been appointed to collect the assets of a business in financial trouble must use the income to pay every creditor an equal share of what is owed to him or her. If a Pension fund loses a large amount of money through poor investment, then everyone who is entitled to benefits must suffer a fair share of the loss. Three adult children of a woman who is killed in an auto accident should share equally in any money that is recovered in a Wrongful Death action if the children are the woman's only surviving close relatives. A judge will depart from this principle only under compelling circumstances, but the rule applies only to parties who are on an equal footing. If, for example, the woman in an auto accident died leaving three young children, then the money that is recovered might be distributed in proportion to each child's age. A younger child will have lost his or her mother for more years than an older brother or sister. Also, a receiver would have to prefer a secured creditor over those creditors who had no enforceable interest in a particular asset of the company. Unless there is proof that one person in a group is in a special position, the law will assume that each should share equally in proportion to his or her contribution or loss.