5- Trusts in Insolvency Flashcards
s.283(3)(a)
Bankruptcy- Property that the debtor holds on trust for someone else does not form part of his estate.
Goode- Ownership and Obligation in Commercial Transactions (1989)
- Our concepts of ownership and possession must be stated more definitively.
- On the debtor’s insolvency the distinction between ownership (proprietary rights) and possession (personal rights) becomes crucial, because everything that a debtor/insolvent co has proprietary rights in must form part of his estate (property principle).
- If a debtor holds property on trust for a beneficiary, it will not form part of his estate because he has only personal rights in it. The beneficiary has the property rights.
- So the degree to which law recognises the distinction between ownership and possession is significant to unsecured creditors. Extension of ownership would reduce the significance of PP (i.e. the most fundamental principle of insolvency) because it would be easier to creditors to obtain property rights, and thus not have to rely on proving as unsecured creditors.
- BUT insolvency law seems content to technical rules of property acquisition rather than creating clear boundaries.
- The time is ripe for a re-examination of these rules in light of the growing rate of insolvency, the advent of new tech and growing international markets who are focused on commodities, securities and money.
- These new markets have created efficient clearing systems which can process huge numbers of transactions in seconds, facilitating many internatonial transfers, which have expanding the volume of trading.
- This creates a huge build-up of indebtedness and the prospect of series mega-bankruptcies if something goes wrong (he predicted this correctly- financial crisis)
Stevens- Defintion of QT?
A quintclose trust is when A lends money to B to be used in some specific way by B’s creditors.
The intention is that if on B’s insolvency the creditors have not been paid, the money is to be held on trust for A.
Barclays Bank Ltd v Quistclose Investments Ltd (Rolls Razor) [1970]
Rule: Where money is lent with a primary purpose and that purpose has failed, a secondary resulting trust will arise for the lender.
Case: RR obtained a loan from X on the condition that it be used to pay dividend to SHs. The money was paid into a separate account that RR had with its bank. RR had an overdraft of £484,000 with their bank when their permitted limit was £250,000. Before dividend paid RR went into liquidation
Decision: BB could not set off the money.
- The money was held on trust for X. Payments of this type (i.e. where one party lends another money for a specific urpose and that purpose is not fulfilled) have been recognised as giving rise to fiduciary duties for over 150 years.
- The trust can be carried out by recognising both the legal and equitable rights and remedies involved in the transaction.
Equitable right- if a lender lends money to a debtor for a specific primary purpose he retains a beneficial interest (i.e the property rights) in the property, until this purpose is fulfilled.
Legal right- if the specific purpose is fulfilled then the lenders equitable (property) right becomes a legal (personal) right to the debt, for which he would have to prove in the liquidation.
Equitable remedy- If the specific purpose is not fulfilled the court should look for a secondary express or implied purose in the agreement to lend the money. If the implied purpose is that the money should be returned if not used for the specific purpose (as it was here based on separate account and the primary specific purpose), then it will be held on RT for the lender by the debtor, i.e. it cannot form part of the debtor’s estate, because he has only possessory, not ownership rights to it.
Legal remedy- if there is no secondary purpose requiring the return of the property if the primary purpose is not fulfilled, then it becomes part of the debtor’s estate, and lender’s remedy is in debt.
- In this case the bank had notice of the trust, or the circumstances giving rise to it, at the time they received the money (i.e. that the money had been loaned for the purpose of paying dividends). So the trust was binding on them and they could not use set off.
- BUT if the bank did not have notice, it would be acceptable for it to combine accounts and set off.
NB: The precise nature of the primary and secondary trusts so identified subsequently caused considerable controversy and they were variously classified as express trusts, resulting trusts and constructive trusts.
Twinsectra Ltd v Yardley [2002]
Use for cases where money was lent so that A could acquire property, not pay beneficiaries.
Case: T made a 1m loan to Y. It was decided the loan should be paid to S, Y’s solicitor, who personally owed Y 1.5m.
T believed that S was acting as Y’s solicitor and that the money would be used by Y. The agreement stated that the loan paid to S was to ‘be utilised solely for acquisition of property on behalf of Y and for no other purpose’.
S and Y agreed that S should act for himself so he could pay back his indebtedness to Y, but did not tell T this. Only part of the loan was used to acquire the property.
Decision:
- A QT had been created.
- Millet- it is difficult to fit the facts of Twinsectra into the primary and secondary beneficial interest model stated by Wilberforce in BB, because money was lent so Y could acquire property, not to pay SHs.
- There are 4 possibilities about where the BI lies in property cases:
(A) BI lies with lender- money remains beneficially the property of the lender unless/until it is applied in the way agreed, and if not it must be returned to him. The only analysis consistent with orthodox trusts law and commercial reality.
(B) BI lies with the borrower- this would mean the borrower was free to dispose of the money as he wishes, so would defeat the agreement that it should be used for a specific purpose.
(C) BI lies with the contemplated beneficiary (i.e. SHs)- this would not work in a case like this where the loan was not for the benefit of specific persons, but for use for a specific abstract purpose.
(D)BI is in suspense- this would be unorthodox, because equity does not allow a BI to be in suspense and will impose a RT on the lender.
- ‘As Sherlock Holmes reminded Watson, when you have eliminated the impossible, whatever remains, however improbable, must be the truth’. So BI remains with the lender.
- Quistclose trust is “an entirely orthodox example of the kind of default trust known as a resulting trust’
- Followed Goldcorp- the question to ask is not whether the money was lent for a specific purpose, but whether the parties intended the money to be at the free disposal of the recipient.
Space Investments Ltd v Canadian Imperial Bank of Commerce Trust Co (Bahamas) [1986] PC
Case: The trust agreement between the bank and Space Investments allowed the bank to open and maintain current or savings accounts with any bank including itself, with Space Investment’s money.
The bank accordingly placed the moneys on deposit with itself and subsequently went into liquidation.
Decision:
- Where a bank trustee is insolvent, trust money wrongfully treated as being on deposit with the bank must be repaid in full so far as possible out of the assets of the bank in priority to any payment of customers’ deposits and other unsecured debts.
- BUT where a bank trustee lawfully deposits trust money with itself under express authority in the trust, the beneficiaries of the trust are not entitled to the assets of the trust on the bank’s liquidation. They are only entitled to prove in the winding up, ranking pari passu with other unsecured crediotrs.
Forster v Wilson (1843)
Set-off position if the bank, rather than RR, had gone into liquidation (Use with Space Investments if the bank is in liquidation)
Case: W (among others) was in debt to the bank that had gone bankrupt. F was assigned the right to get the debt back for the bank, and tried to claim it from W.
BUT W had been given £5 notes, issued by the bank, by some of his customers in his own business (so the bank owes him this money).
-He had also received other £5 notes, for which the customers were to pay so much only as they should receive from the assignee (F) for such notes.
Issue: could W set off the amounts in the £5 notes against the debts he owed to the bank?
Decision:
- A person with a right to set off a debt against an insolvent company is not subject to the need to prove their debts in the liquidation/bankruptcy.
- W had a beneficial interest in the first type of notes and was therefore entitled to set them off (the opposite to the position of the bank in Barclays, where they were not entitled to set them off)
- But he was not entitled to set off the second type of note, as he held them merely as trustees for the customers.
- Court held that knowledge of the trust was not relevant in set off.
- However, Barclays Bank case seems focus on knowledge - but of the existence of the trust.
- You cannot contract out of set-off (National Westminster Bank) - but there is clearly a special right of the bank to combine accounts where the banks did not have knowledge of the trust (Barclays). So knowledge is important to set off in this respect.
- BUT on the finding in Forster, perhaps this does not extend to the case where the bank is bankrupt and the creditor is a debtor of the bank.
Carreras Rothmans Ltd v Freeman Matthews Treasure Ltd [1985]
Extends the QT principle.
Case: T, a tobacco manufacturer arranged that D, an advertsing agency, would place advertisements for it in newspapers, periodicals and posters.
The advertsing agency incurred debts to various media creditors in carrying out this work, which it charged to T, along with its own fees.
T was concerned about the solvency of D, because it it went into liquidation leaving media creditors unpaid, T’s reputation would suffer (since T was paying D the money for the media crediors), and the compaign would not go ahead.
T therefore paid a sum equivalent to the money due to the 3rd party creditors into a special account (which it would have owed anyway, because D was charging these costs to T). BUT D went into liquidation before it paid this money out to the creditors.
T was therefore forced to pay the debts due to the media creditors to pay to the creditors to maintain its advertising campaign.
T sought to claim back the money in the special account as on QT.
Decision: Peter Gibson
- There are factual differences between this case and RR.
- In RR the transaction was a loan with no contractual obligation on the lender to make payment prior to the agreement for the loan.
- In this case there was no loan. T did owed D a the money, but for the purpose of paying D’s media creditors.
- This factual difference is not legally material. The principle in QT cases is that equity fastens onto the conscience of the person who receives property transfered for a specific purpose, so that such person would not be permitted to use it for another purpose.
- The moneys in the special account were therefore held on trust for T.
- This was not a ‘British Eagle’ case of an agreement attempting to avoid debts for commercial reasons, as the money was never D’s.
Evaluation
- His use of the word ‘conscience’ had been interpreted as him interpreting the QT as a constructive trust (as opposed to a RT).
- The case had been criticised as ignoring the provisions on preferneces.
Re Polly Peck International plc (No.2) [1998] CoA
Role on the CT in insolvency.
NB:
Institutional CT= arises by operation of law from the date of the circumstances which give rise to it. The court’s job is merely to recognise that the trust exists.
Remedial CT= Not declared by the court. Implosed as a judicial remedy and only exists from the date that the court creates it. The extent to which a RCT operates retrospectively to prejudice a 3rd party is at the discretion of the court. Their use is commonplace in Canada, NZ.
Case: PP was a parent co for 200 subsidiaries. In 1990 it went into administration. In 1995 the administrators sold the shares of some subsidiaries which had occupied properties in Turkish occupied areas of Cyprus. These properties had been claimed by Turkey after the Turkish Invasion of Cyprus in the 1970s and had been leased to PP subs ever since.
The applicants were Cypriots who claimed to have owned the properties before the 1970s. Sought leave from the court to commence proceedings against PP for the proceeds of the sale, claiming they represeted the profits of wronfgful occupation.
FI Decision: Granted leave. There was an arguable case that the applicants had remained at all times entitled to possession of their property, and PP and its subs were exploiting the properties. A remedial CT should be imposed on the proceeds of sale in favour of the applicants.
Appeal decision:
- If the court recognised a RCT the proceeds of sale held by the administrators would cease to be an asset of PP and would be excluded from pari passu distribution among unsecured creditors.
- Court could not allow this. While the applicants did have a right agianst PP, it was not proprietary in nature.
- To grant a RCT would confer a priority on the applicants (NB: compare this to Carreras)
- Millet- This would for a judicial decision to go down a road signed ‘no entry’ by Parliament. The insolvency road is blocked off to remedial constructive trusts, at least when judge-driven in a vehicle of discretion.
- Nourse, added further observations- You cannot grant a proprietary right to a person who had not had one beforehand, without taking proprietary rights away from another. English courts have never had the power to do this without authority from Parliament.
- Evaluation- it is premature to assume this case is the end of the RCT in English law. A hint that it is not completely excluded is Browne-Wilkinson in Westdeutche Landesbank, where he said that the court may by way of remedy impose of CT on a D who knowingly retains property of which the C has been unjustly deprived. Since the remedy can be tailored to the circumstances of the particular case, innocent 3rd parties (i.e unsecured creditors) would not be prejudiced.’
Nanawa Goldmines (1955)
Protection of pre-payments and deposits.
Case: Co sought to raise more capital so invited applications for new shares. The application form stated that the creation of new shares would be conditional on the passing of an extraordinary resolution and if this could not be done the applicant’s moneys would be refunded and held in a separate account until then. The resolution was not passed and the money remained in the separate accounts. Receiver appointed.
Harman: The moneys were held on trust for those who paid for the shares. The promise to hold the moneys for the ps was accompanied by putting them into a separate account. This was the decisive factor in illustrating that a QT had been created.
Re Kayford (1975)
Protection of pre-payments and deposits.
Case: K were a small mail order company that was concerned they were facing insolvency. On legal advice, they opened an account names ‘customer trust deposit account’ in which they placed customers’ advance payments for goods not yet delivered, so moneys would be refunded to customers on liquidation. Company wound up two weeks later.
Decision:
- Not a Quistclose trust as there was no agreement between customer and vendor that the money would be refunded if not used to pay for the product.
- Although payment into a separate banking account was a useful indication of a QT trust, it was by no means conclusive. What matters is the manifestation of intent that the money would be used only for a specific purpose.
- BUT an express trust had been created (as the letter showed all the necessary elements showing intention to create a trust (3 certainties).
* “There is no doubt about the so-called “three certainties” of a trust. The subject-matter to be held on trust is clear, and so are the beneficial interests therein, as well as the beneficiaries. As for the requisite certainty of words, it is well settled that a trust can be created without using the words “trust” or “confidence - There is nothing to prevent a company from binding itself by an express trust.
- Mergarry considered that where advances are being paid by ordinary members of the public to a co in return for a supply or goods/services, that, if all elements of a trust are evident, it be protected.
Evaluation of Re Kayford
Correctness open to doubt.
- In Nanwa, Harman found the existence of an agreement to segregate crucial to his quistclose trust finding. In Kayford Meagry saw it as merely incidental but not decisive.
- Why wasn’t a fraudulent preference found?
- Meagry saw it not as a matter of preference but of the vendor preventing those customers from becoming creditors- so they were never creditors.
- Difficult to accept this. A co can prefer a creditor by withdrawing money from its general funds and declaring a trust of it for the benefit of that creditor.
- So not sufficient to say that the vendor created a trust- the money must already be subject to a trust at the minute vendor received it and this was not the case because the customers never knew of the vendor’s intent so a trust could not have been created which bound the vendor to pay the money into the trust account.
- If the vendor had decided to put some of the money into his ordinary account nothing could have compelled him to put it in the trust account.
- This is because the trust was not constituted until the money was paid into the trust account- so until then there was an incompletely constituted trust, which could not be enforced.
- Compare Kayford to Polly Peck and Carreras, as both should potentially also be prefernces.
British Eagle Airlines v Air France (1975)
Difficult to reconcile with Kayford.
When the other airlines party to the clearing house claimed they should be treated as unsecured creditors it was held contrary to public policy as the co would be in breach of its s.302 obligation to apply its property pari passu.
While the clearing house arrangement was a contractual agreement, if BA had created a trust over its property to ensure that one group among the airlines who had dealings with it should escape unscathed from the liquidation, that trust would still be contrary to the s.302 policy, yet this is effectivly what happened in Kayford).
Law Commission, Consumer Repayments on Retailer Insolvency, 2016 Report (Add in other LC report)
R
eccomended certain payments rank as preferential claims.
Why?
- How far losses fall on consumers is a political value judgement.
- Large losses cause public disquiet and undermine legitimacy of the law.
- This ‘limited preference’ would only be used in the most serious cases, where a co took large cash payments from consumers without providing any protection.
- It would apply only to utility companies and online payments which do not offer chargeback.
It was rank before preferential claims of employees but above FTs.
The requirements:
- C must be a consumer;
- The claim must relate to a pre-payment;
- C must have paid £250 or more over a 6 month period immediately before the winding up;
- The payment method must not offer a chargeback remedy or be protected by insurance or trust.
Re Lewis’ of Leicester Ltd [1995]
Case: Department store in administration on 5 January 1994 and administrator sought directions whether proceeds of sale of goods sold by concessionaires operating within the shop held on trust.
Decision:
- First group sold own goods but proceeds paid into store’s tills’ since 21 December 1993. Unknown to concessionaires, store had paid proceeds into separate account. So held that proceeds in separate account were on trust for concessionaires (express trust)
- Second group sold goods to store at net price which resold goods to customers. Proceeds not kept separate and belonged to store. No trust. Would have to prove with other unsecured creditors.
- Third group required proceeds to be held on trust.
- In two cases kept in separate account and therefore valid trust
- in eight cases proceeds paid into store’s own account
- that account overdrawn until 8 December 1993 and not possible to trace proceeds where account subsequently overdrawn (Bishopsgate v Homan) but proceeds paid into account since last overdrawn could be traced and where therefore on trust.
Re Thelluson [1919]
Receipt of money by debtor’s who know they are insolvent.
Case: October 1918 a bankruptcy petition was served on the debtor. On 2nd January 1919 a receiving order (modern equivalent is a bankruptcy order) was, without his knowledge, made against him.
He did not therefore attend the hearing as he was unaware. January 3rd debtor borrowed £1000 from Abdy (to pay one of his creditors), who was unaware of any financial issues affecting the debtor.
The £1000 was paid into the debtor’s bank, which was previously overdrawn by £136. At this time the debtor knew the petition had been set down and that the hearing had been fixed for the preceding day, but not that a receiving order had been made.
A’s debt is NOT PROVABLE because he made the loan after T was declared bankrupt.
Duke:
- A is not entitled to the money under a QT because there was no express stipulation that money should be returned if unable to satisfy creditor or that the money must be applied to the creditor.
BUT
- He is entitled to it under grounds of common honesty and fair dealing- rule in Ex parte James.
- As a number of cases, eg Ex Parte James, have shown, the trustee in bankruptcy is an officer of the court and in deciding what is his duty with regard to a contested claim, the court must consider what in point of honesty the trustee ought to do in respect of the facts.
- James LJ in Ex Parte James: The court ‘ought to set an example’ it ‘ought to be as honest as other people’ that is to say that it ought to be honest.
- Evaluation-Did the court exercise their discretion here unfairly? A would have gotten £450 back if his debt had been provable due to early repayment. He instead got back the entirety minus the £136 which went into the overdraft. So A was put in a better position than T’s other creditors. The court should have allowed him to put in a proof to be fair.
- Is this a type of remedial CT? Seems to be.
