Trusts in Insolvency Law Flashcards
Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567
Case: Q lent money to RR to pay dividend to its shareholders; pending payment RR deposited money in a separate account at Barclays’ RR had other accounts at Barclays which were overdrawn; before dividend paid RR went into liquidation
Decision: The dividend money was held on trust for the lender, but not the shareholder.
Rule: Where money is lent with a primary purpose and that purpose has failed, a secondary resulting trust will arise for the lender
Twinsectra Ltd v Yardley [2002] 2 AC 164
Rule (explaining Q trust): Usually advancing money then becomes property of borrower, however… “Where it established that a loan to a borrower for a specific purpose where the borrower is not free to apply the money for any other purpose gives rise to fiduciary obligations on the part of the borrower which a court of equity will enforce.” Lord Millet
The settlor must possess the objective necessary intention to create a trust (irrelevant what the settlor thought they were doing, it is all about the effect)
The question in every case is not whether the money was for a specific purpose, but whether the parties intended the money be at the free disposal of the recipient (Re Goldcorp Exchange)
Space Investments Ltd v Canadian Imperial Bank of Commerce Trust Co (Bahamas) Ltd [1986] 3 All ER 75 (PC)
Case: Bank lawfully deposited money with itself as banker’ when bank went into liquidation what was the status of the beneficiaries claim against the bank?
Decision: The relationship between the trustee and the bank is key here, not the relationship between the beneficiaries and the trustee. Set off would convert a relationship of trustee/beneficiary to creditor/debtor, so it is not allowed.
Rule: 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. However, where a bank trustee lawfully deposits trust money with itself as banker pursuant to express authority in that behalf conferred by the trust instrument the beneficiaries under the trust do not become entitled to any interest in the assets of the bank but merely to a sum equal to the amount standing to the credit of the trust deposit account. It follows therefore that, if the bank becomes insolvent and goes into liquidation, the beneficiaries are entitled to prove in the winding up of the bank only for the amount standing to the credit of the trust with the bank in the trust deposit account at the date of the liquidation, and accordingly unsecured creditors pari passu.
Forster v Wilson (1843) 12 M&W 191; 152 ER 1165
Concerning Quistclose trust, what would have been the position of B rather than RR had gone into liquidation?
Case: Bank bankrupt; W was in debt to bank; W held as trustee bank notes issued by bank promising to pay bearer the value of the note; could W set off the money owed on the bank notes against the debt he owed to the bank?
Decision: W held the bank notes on trust so there where not mutual beneficial dealings.
N.B. Knowledge was not considered relevant in set off. However, Quistclose seems focus on knowledge - but of trust. You cannot contract out of set-off (National Westminster Bank) - there is clearly a special bank right to combine accounts where the bank’s knowledge of whether money is held on trust or not being important.
Carreras Rothmans Ltd v Freeman Matthews Treasure Ltd [1985] Ch 207
Case: CR used media agent (FMT) to obtain advertising. When they heard of FMT’s financial difficulties, in order to keep good will with media client they agreed for FMT to use a special account for money to be paid to the media client. When FMT went into liquidation, CR paid the media company directly to avoid any non-payment. CR discovered that a number of payments by FMT to the client had not been met and refused to meet these demands as they had paid into the account as agreed (blamed third party for not enforcing debts against FMT).
Decision: The moneys in the special account where held on trust (Quistclose). This was not a ‘British Eagle’ case of void clause avoiding debts for bona fide commercial reasons, as they money was never FMT’s.
The debt owed by CR to FMT for debts incurred by FMT to the media company in July that had not be discharged before liquidation was an asset of FMT available for distribution in the winding up, since in respect of that debt the July agreement was ineffectual, FMT was entitled to counterclaim. The July agreement did not create a charge void for non-registration.
CR took on third party assets/liabilities against FMT; the damages for not paying the third party could not be set off against the £780,000 owed for July services (as the breach of contract happened afterworlds - other elements i.e. relevant date, contingent obligation, mutuality satisfied) - held to be wrong in Re Charge Card Services Ltd
Re Polly Peck International plc (No.2) [1998] 3 All ER 812 (CA)
Case: After Turkish invasion of northern Cyprus property of the applicants became vested in PPI; applicants claimed the property or proceeds were held on a remedial constructive trust.
Rule: There is no remedial constructive trust in English law.
Quote: “Under an institutional constructive trust, the trust arises by operation of law as from the date of the circumstances which give rise to it: the function of the court is merely to declare that such trust has arisen in the past… A remedial constructive trust… is different. It is a judicial remedy giving rise to an enforceable equitable obligation: the extent to which it operates retrospectively to the prejudice of third parties lies in the discretion of the court” per Lord Browne-Wilkinson in Westdeustche
Re Kayford Ltd [1975] 1 All ER 604
Case: Mail order company placed customers’ advance payments in “Customer Trust Deposit account”; company wound up two weeks later
Decision: Not a Quistclose trust (as there was no agreement) but an express trust (as the letter showed all the necessary elements showing intention to create a trust). Although payment into a separate banking account was useful (although by no means conclusive) indication of intention to create a trust, there was nothing to prevent the company from binding itself by a trust even if there were no effective banking arrangements. Mergarry J considered that it was important that they were members of the public, and that where advance is being paid to a company in return for the future supply of good/services then it is. honourable/good for a company to use a trust advice.
N.B. There were all the elements of a preference except a desire to prefer (which is a subjective test) as the intention was to protect the business. British Eagle has no application as the money was held in a special account.
Re Farepak Foods and Gifts Ltd [2007] 2 BCLC 1
Worth reading for revision
Re Lewis’ of Leicester Ltd [1995] 1 BCLC 428
Case: Department store in administration on 5 January 1994 and administrator sought directions whether proceeds of sale of goods sold be concessionaires within stop 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; held proceeds in separate account were on trust for concessionaires
- Second ground sold goods to store at net price which resold goods to customers; proceeds not kept separate and belonged to store.
- Third group required proceeds to be held on trust; in two cases keep 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 on trust.
Re Thelluson [1919] 2 KB 735 (CA)
Case: Debtor did not known of bankruptcy order
Question: Is this a type of remedial constructive trust?
Nestle Oy v Lloyds Bank plc [1983] 2 Lloyds Rep 658
Case: Shipowner made six payments to agent (PSL) for using to pay expenses’ last payment made on day PSL ceased trading and requested bank to appoint receiver; bank had contractual rights to consolidate accounts of PSL and other companies in group
Decision: Similar to FMT, however, not effective opening of Quistclose account as evidence shows that the negative elements of a Quistclose trust not found i.e. no evidence to show that when the principal paid money into the agent’s account gave an indication that those monies were to be kept separate from other monies, nor that they were paid and received for a specific purpose and if not so used should be returned - no express trust and simple debtor/creditor relationship.
Where a principle has paid money to an agent in good faith after the agent has ceased trading, but in ignorance of that fact, a CT would be implied and the agent could not retain that judgment (institutional constructive trust). Given the situation of PSL, Bingham J states that any reasonable and honest director of the company would have arranged for the repayment of the last payment without hesitation or delay. It seems contrary to any notion of fairness that the general body of creditors should profit, so CT is to be inferred.
Re D&D Wines International Ltd [2014] 2 BCLC 129 CA
Case: D&D acted as agent in selling A’s wines; D&D collected payment from customers and after deducting its commission accounted to A for the balance; when D&D in administration A terminated agency; at termination D&D held A$873,000 from other customers; A argued sums on trust for it; as regards A$14,000 trial judge held it was not on trust and A did not appeal [14]-[16] as regards $873,000 trial judge held as it was received after termination it was held on trust for payers with power only to remit to A; D&D appeal against this [16]-[31]; if D&D succeed on that then A argues it was unconscionable for D&D to retain money which is therefore on constructive trust for A.
[This is the reverse of FMT/Nestle Oy]
Decision: Held to be a Quistclose Trust, but not institutional constructive trust. Therefore as between A and D&D, a normal trading relationship continued.
Re London Wine Co (Shippers) Ltd (1975) PCC 121
Case: Wine merchant sold wine to customers agreeing to store wine for them in its warehouse; in fact no wine was appropriated to customers’ contracts; question arose whether wine belonged to customers or remained merchant’s property and thus subject to bank’s floating charged
Re Goldcorp Exchange Ltd [1995] 1 AC 74
Case: Bullion dealer gave retail customers certificates confirming quantity and quality of bullion to be held on their behalf; in fact bullion was not allocated and total stocks held were only sufficient to meet likely demands for delivery; dealer also granted floating charge over all assets, including bullion; question rose whether bullion belonged to customers or remained the dealer’s property and thus subject to the floating charge and whether the customers had any proprietary interest in or arising from their payment of the purchase price.
Decision: They had purchased non-ascertained generics goods and no property in the bullion had passed to the purchaser. Although the company had represented that customers had title to the goods, it was not estopped from denying this title as there was no fixed/identified bulk in existence which title could be appropriated from.
Lord Mustill: Argument was made that the moneys originally paid should come under trust (not raised in London Wine). In order for the money to be held on trust by the vendor there must be a mutual intention shown that the moneys should not fall within the general fund of the company;s assets but should be applied for a special designated purpose (Quistclose).
There are three ways in which a misrep/mistake/total failure of consideration will lead to a proprietary interest in the purchase money:
1. Vitiating factor which distinguishes the relationship from that of an ordinary vendor or purchaser, so as to leave behind with the customer a beneficial interest in the purchase moneys which would otherwise have passed to the company when the money was paid (interest must remain with the customer through everything that followed).
2. If full legal and beneficial interest in purchase moneys passed when they were paid over, but the vitiating factors affected the contract in such a way as to revest the moneys in the purchaser, and, what is more, to do so in a way which attached to the moneys an interest superior to that of the bank.
3. In contracts to the routes just mentioned, where the judgment of the court would do no more than recognise the existence of proprietary rights already in existence, the court should by its judgment create a new proprietary interest, superior to that of the bank, to reflect the just of the case.
**see last page of revision notes for more detail
