Equity and Trusts - Customer Pre-Payments on Insolvency

Question 1

Trusts can be used to protect money, as they give creditors priority over unsecured creditors on insolvency

Answer 1

Re Kayford

Question 2

Separate bank accounts need not be labled ‘customer payments’ or ‘trust’. Constructive intention is enough

Answer 2

Paul v Constance

Question 3

What indicates certainty of intention for a trust over customer pre-payments?

Answer 3

1- Separate bank account set up for customers money

2- Accountants advised a separate account to be set up

Question 4

Customers property must be kept separate for certainty of subject matter

Answer 4

Re London Wine Company / GoldCorp Exchange

Question 5

A valid trust can be created over a given percentage of intangible property if it is indistinguishable

Answer 5

Hunter v Moss

Question 6

What is the relevant test for certainty of object for customer pre-payment trusts?

Answer 6

You must be able to draw up a complete list of customers for object to be certain

Question 7

Urgent suppliers is uncertain

Answer 7

OT Computers

Question 8

As well as the three certainties, what else must be considered when deciding whether a customer pre-payment trust exists?

Answer 8

1- Beneficiary principle
2- Rule against perpetuities
3- Formalities of declaration
4- Formalities of constitution

Question 9

If a trust exists in favour of the company’s customers, what must be considered next?

Answer 9

Is there an unlawful preference? s.239 Insolvency Act 1986

Question 10

When will a trust be deemed to give an unlawful preference?

Answer 10

1- If trust was constituted within 6 months of liquidation; or
2- If the trust was constituted within 2 years of insolvency if the creditor was connected with the company

Question 11

What is the effect if a trust is found to give an unlawful preference?

Answer 11

The beneficiaries will be put in the same position they would have been in without the trust by the court

Question 12

Declaration of trust over future customer pre-payments is not an unlawful preference (therefore recoverable)

Answer 12

Re Kayford

Question 13

Declaration of trust over existing customer pre-payments is an unlawful preference (therefore not recoverable)

Answer 13

Re Farepak

Question 14

What is the effect if old and new customer money is mixed?

Answer 14

May not be possible to distinguish and trust may well fail