Equity & Trusts 2

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Equity & Trusts 2
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  1. Ex P James
    Breach of fiduciary duty/ trust; self-dealing

    The self-dealing rule has been applied strictly; the courts are generally unwilling to consider whether the trustee has gained an unfair advantage and is not permitted in any case, 'however honest the circumstances'
  2. Re Thompson
    Breach of fiduciary duty/ trust; competition with trust

    It was held that a trustee could be restrained by injunction from setting up as a yacht-broker in the same town as the yacht-broker’s business carried on by the trust.

    Setting up a competing business put the trustee in a position where his personal interest conflicted with his duty to the trust. In this case competition would have been inevitable because the business in question was so specialised.
  3. Unauthorised remuneration of trustees
    Breach of fiduciary duty/ trust; unauthorised remuneration

    The basic rule of equity is that trustees cannot demand payment for their services unless authorised in the ways set out below.

    Trustees can recover out-of-pocket expenses from the trust fund, such as the cost of travelling to trustees’ meetings- Trustee Act 2000, s 31(1)(a)

    Remuneration may be authorised in any of the following ways:

    (a) Charging clause in the trust instrument. Trustees can charge fees if there is a clause authorising remuneration in the trust instrument. It is common for wills and trust documents to contain these clauses. They are called ‘charging clauses’.

    • (b) Beneficiaries’ consent.
    • If the beneficiaries are all sui juris they can agree to pay the trustees remuneration. It is presumed that in negotiating such an agreement the beneficiaries are subject to the undue influence of the trustees. Unless the agreement is fair and the trustee makes full disclosure of all relevant facts, the beneficiaries can set it aside later.  Such an agreement is not possible if one beneficiary is under 18, as all the beneficiaries must be sui juris.

    (c) Court order. The court has inherent jurisdiction to authorise remuneration. In Re Norfolk's Settlement, Fox LJ said the courts must balance the need to protect the beneficiaries from trustees’ claims against the effective administration of the trust. The court should order remuneration if it is in the interests of the beneficiaries because, for example, the trust needs the skill of the trustee in question and his fees are not excessive compared with those of other professionals.

    (d) Trustee Act 2000

    -s 28, which defines when a trustee acts in a professional capacity; and

    - s 29, which gives trustees power to charge reasonable fees in certain circumstances if there is no charging clause.
  4. ss28-29 Trustee Act 2000
    Breach of trust/ fiduciary duty; unauthorised remuneration; modes of authorisation; Trustee Act 2000

    s29(2)(a)- To claim the benefit of s 29 it is necessary for the trustee to act in a 'professional capacity'.

    s29(3)(b)- provides that a sole trustee cannot receive remuneration under the act (they have to rely on pre-2000 Act modes of authorisation)

    s28(5) provides that trustees act ‘in a professional capacity’ where they act in the course of a profession or business which consists of or includes the administration of trusts, or particular types of trust or particular aspects of such administration. (eg solicitor)

    Section 29(2) provides that a trustee who is not a trust corporation can charge fees only if all the other trustees agree in writing.

     s29(5) says that ‘if any provision about [trustees’] entitlement to remuneration has been made by … the trust instrument’ then s29 will not apply. This could be a provision for or against remuneration. Thus, s 29 will not apply if there is a charging clause in the trust instrument or a prohibition on remuneration.  

    s29(1) says that if all the hurdles have been cleared, a trustee can charge ‘reasonable’ remuneration for any services provided on behalf of the trust (including work a layperson could have done-s29(4)).

    When determining what is reasonable, s 29(3) requires us to consider the nature of the services (are they very specialist?), the trust (is it a small trust?) and the attributes of the trustee who is seeking to charge (is the trustee the most appropriate person to provide the services, or is it better to use an agent? Might the trustee be expected to provide the services free of charge?).
  5. Williams v Barton
    Breach of trust/ fiduciary duty; incidental profits; remuneration from a third party

    X  is a trustee and is employed as a clerk in a firm of stockbrokers. The stockbrokers pay him commission if he introduces new business to the firm.

    X suggests that the trustees employ his firm to carry out a valuation of the trust shareholdings, and the firm duly pays X commission.  Does X have to account for the commission to the benefi ciaries?

    X does have to account for the commission unless the trust instrument authorises trustees to keep it. There was a conflict of interest. His duty as trustee was to give impartial advice on the choice of stockbroker. His personal interest lay in recommending his firm in order to gain commission for himself.

    He made a profit out of and by reason of his trusteeship, and he has to account to the beneficiaries.
  6. Re Gee
    Breach of trust/ fiduciary duty; incidental profits; remuneration from a third party

    R and Gee are trustees. The trust holds shares in Omega Ltd. The trust shares comprise 45% of all the shares in the company. Gee becomes a director of Omega Ltd and receives a salary from the company.

    At a shareholders’ meeting, Gee was voted on the board of directors by a vote of 100% of the shareholders.

    Gee can keep his salary because he became a director independently of the trust shareholding.

    Even if the votes attached to the trust shares had been used against him, he would still have secured the position.
  7. Re Macadam
    Breach of trust/ fiduciary duty; incidental profits; remuneration from a third party

    Macadam is voted on to the board by a 55% majority comprising the votes attached to the trust shares and Macadam’s own shares.

    In this case had the votes attached to the trust shareholding been used against Macadam’s appointment, he would not have become a director.

    He became a director and will receive the salary by virtue of being a trustee and using trust property.

    Therefore, he is in breach of his duty not to profit from his trust and he will have to account to the trust for the salary.

    However, he is not accountable if the trust instrument or the court authorises him to retain director’s remuneration.
  8. Re Dover Coalfield Extension
    Breach of trust/ fiduciary duty; incidental profits; remuneration from a third party

    Where the trust owns shares in a company at which the trustee is a director, the trustee will not have to account for his director's salary if he became a director before he became a trustee. He did not earn his position by virtue of his position as trustee.
  9. Keech v Sandford
    Breach of trust/ fiduciary duty; incidental profits; renewal of a trust lease

    Here the trustee held a lease on trust for an infant. When the lease expired, the landlord refused to renew the lease in favour of the trust. Instead he granted the new lease to the trustee personally.

    It was held that the trustee had to transfer the lease to the trust and account for the profi ts he had made. The trustee was strictly liable for breaches of fiduciary duty. The honesty of the trustee and the fact that the trust could not have obtained the new lease made no difference.

    The court justified the use of strict liability by saying that it would act as a deterrent to other trustees who might be tempted to obtain renewals for themselves.

    If the courts were to enquire into the merits of the case and allow honest trustees to retain renewed leases, future trustees would be tempted to obtain a new lease for themselves and argue before the court that they had been honest and tried unsuccessfully to gain a new lease for the trust.

    Given that the honesty (or dishonesty) of trustees and the extent of their efforts on behalf of the trust are known only to the trustees, the courts would not be able to ascertain whether the trustees should be permitted to keep the lease. A strict approach which pays no regard to the circumstances removes all temptation from trustees and ensures that they are not distracted by the possibility of personal profit when acting for the trust.
  10. Don King v Warren
    Breach of trust/ fiduciary duty; incidental profits; renewal of a trust contracts (Keech v Sandford principle)

    Mr King and Mr Warren were boxing promoters who had entered into a partnership agreement (the second partnership agreement).

    The agreement said that they each held the benefit of any management or promotion agreement concluded previously, on trust for the partnership. They were thus express trustees.

    In any event, as partners they would have owed each other fiduciary duties with regard to partnership property.

    Mr Warren and Mr King decided to end the partnership and it was duly dissolved, but it had not been wound up because the partnership assets had not been dealt with.

    The question arose as to who owned the benefit of the management and promotion contracts. The provision in the partnership agreement meant that those contracts entered into before dissolution were held on trust for the partnership, but what about those contracts which were renewed in favour of Mr Warren personally after dissolution?

    Keech v Sandford was relevant because trust property (contracts entered into before dissolution) had been renewed in favour of a trustee in a personal capacity.

    Lightman J held that the principle established in Keech v Sandford would extend beyond the renewal of trust leases to cover the present case, and decided that the renewals were also held on trust for the partnership.

    Mr Warren had placed himself in a position of conflict of interest, because his duty was to renew such contracts for the benefit of the partnership in order to maximise the assets available on the winding up.

    Alternatively, he had made a profit ‘by reason of his fiduciary position or of any opportunity or knowledge resulting from it’
  11. Boardman v Phipps
    Breach of trust/ fiduciary duty; incidental profits; use of information or opportunity (strict liability)

    Mr Boardman was the trust’s solicitor. Solicitors are status-based fiduciaries.

    It was held that he was liable even though he was not specifically instructed to acquire the shares for the trust. There were two reasons.

    1) Mr Boardman was acting as the trust’s solicitor in his initial dealings with the company and he acquired valuable information enabling him to make his eventual profit at this stage. It was at a subsequent stage that he made it clear that he was going to acquire the shares on his own account.

    2) His retainer was not limited to particular transactions but he was always in the background and could be expected to be called upon to give advice at any time.  

    As a beneficiary, T would not usually be regarded as a fiduciary, but he was held to hold that position on the facts of this case because he, along with Mr Boardman, had purported to act for and represent the trust in their negotiations with the company. They were self-appointed agents of the trustees. Further, he had not sought to be treated differently from Mr Boardman.

    The majority held that Mr Boardman and T had placed themselves in a position where their interest might conflict with their duty. They maintained that the slightest possibility of a conflict makes trustees accountable for their profit. In this instance, had the trustees asked Mr Boardman whether they should apply to the court for power to buy the shares for the trust, he could not have given impartial advice. The fact that this was unlikely to happen was immaterial.

    The majority also put forward an alternative ground for the decision: where trustees obtain a profit from the use of information or opportunity that comes to them only because they are trustees, they are accountable for the profit.

    Boardman and T had received the information about the company (enabling them to make a profit) and the opportunity to bid for the shares only because they purported to represent the trust. This was a private company. As explained above, a lot of information about the affairs of private companies is not publicly available and the shares are not traded on the open market. Existing shareholders (particularly if they own substantial shareholdings like the trust in this case) can obtain such information. Therefore, as representatives of the trust, they had access to a great deal of information that would not otherwise have been available.

    The fact that they obtained the information and opportunity only through purporting to act as agents of the trust made the information trust property according to Hodson and Guest LLJ. Hence, they had used trust property to gain a profi t and were accountable.

    Cohen LJ held that the information was not trust property, but the fact that they obtained the information and opportunity only by purporting to represent the trust meant that they had to give up the shares and profit.

    Before embarking on the venture, fiduciaries should seek the fully-informed consent of their principal. Trustees should obtain the fully-informed consent of the benefi ciaries who, of course, must all be sui juris.

    In Boardman v Phipps, the House of Lords decided that the trustees had not authorised the profit in this way because, when they consented, they did not have all the information before them.

    Further, one of the trustees (the testator’s widow) had not been consulted, and in any event her medical condition meant that she was incapable of consenting.

    You may be wondering why it was the trustees’ consent which was crucial. The reason was that Boardman and T were agents of the trustees. This meant that they owed their duties to the trustees rather than to the beneficiaries. Therefore, they needed the consent of the trustees. However, it would seem strange if the trustees could sanction the retention of profits by the agent and thereby give away trust property without reference to the benefi ciaries. The safest course for such agents would be to seek the informed consent of the trustees and benefi ciaries.

    The defendants had to account to the trust for their shares and profit (subject to the trust reimbursing them with their costs). However, they were awarded generous remuneration under the court’s inherent jurisdiction because they had been honest, had devoted a great deal of time and skill to improve the fortunes of the company, and had brought a benefit to the trust.
  12. Regal v Gulliver
    Breach of trust/ fiduciary duty; incidental profits; strict liability

    Regal owned a cinema. A subsidiary company, A Ltd, was formed to obtain leases of two other cinemas. The landlord would grant the leases to A Ltd only if the share capital was fully paid up.

    Regal could afford to pay for only some of the shares in A Ltd. The directors paid for and held the other shares. The directors eventually sold these shares at a profit. It was held that the directors had to account to Regal for the profit. The standard was as strict as the rules relating to trustees. It made no difference that the directors were honest, or that Regal could not have purchased the shares, or that Regal benefited from the arrangement.

    (The directors should have protected themselves by obtaining the consent of all the shareholders of Regal before buying the shares.)
  13. Industrial Development Consultants v Cooley
    Breach of trust/ fiduciary duty; incidental profits; strict liability

    Cooley was the managing director of IDC. He negotiated with the Gas Board to obtain a contract for IDC, but the negotiations were unsuccessful. Later, he was told that IDC would not get the work but that he would stand a good chance if he were to tender personally.

    Cooley then resigned from IDC and entered into the contract with the Gas Board.  It was held that Cooley had to account to IDC for the profit he made, even though IDC had little chance of getting the contract. His duty was to pass on the information about the contract to IDC and do his best to get the Gas Board to change its policy and award the contract to IDC. Again, the rule is as strict as it is for trustees.
  14. Companies Act 2006
    Directors

    s 175- , a director must avoid a situation in which he may have a direct or indirect interest that conflicts, or possibly may conflict, with the interests of the company.

    s175(2)- Applies in particular to exploitation of information or opportunity, even if company could not take advantage of it.

    s175(4) says the duty is not infrigned it:

    1) it could not reasonably be regarded as likely to give rise to a conflict of interest OR

    2) it has been authorised by the directors

    • BUT s175(6)
    • - if authorised at meeting of directors, director in question is not counted.

    • - if voted on, result would have been the same even if director's votes had not been counted.

    • s177 is relevant if directors negotiate contracts between themselves and their companies. The directors in question should simply disclose their interests to the other directors.

    s176 prevents directors from accepting benefi ts from third parties conferred by reason of their directorships unless authorised by the shareholders
  15. Trustees defences for breach of trust
    1) Section 61 of the Trustee Act 1925  Section 61 provides that the court can relieve trustees of liability (wholly or in part) if they acted honestly and reasonably, and ought fairly to be excused in respect of the breach and omitting to obtain directions of the court.  The courts are reluctant to grant relief to professional trustees (Bartlett v Barclays Bank) As a matter of policy, the court is unlikely to relieve a trustee for breaches committed as a passive trustee because this would encourage trustees not to be active in trust business.

    • 2) Possible exclusion clause
    • Such a clause can relieve trustees from liability for negligent or innocent breaches but is void insofar as it tries to exclude liability for fraudulent breaches (Armitage v Nurse).  

    Express exclusion clauses can relieve professional trustees. This has been subject to criticism.

    • 3. Consent of beneficiaries
    • If the beneficiary(ies) consented he trustees would have a defence if they were adult and gave  consent freely with full knowledge of the relevant facts. The beneficiary ‘need not know that what he is concurring in is a breach of trust, provided that he fully understands what he is concurring in’ (Re Pauling’s Settlement Trust 1964)

    • 4) Limitations
    • Under s 21(3) of the Limitation Act 1980, actions in respect of any breach of trust cannot be brought after the expiration of six years from the date on which the cause of action accrued. However, if the beneficiary is a remainderman, time does not start to run until his interest falls into possession.

    Under s 21(3) of the Limitation Act 1980, actions in respect of any breach of trust cannot be brought after the expiration of six years from the date on which the cause of action accrued.

    However, under s 21(1): …  no period of limitation prescribed by the Act shall apply to an action by a beneficiary under a trust being an action:

    (a) in respect of any fraud or fraudulent breach of trust to which the trustee was a party or privy; or

    (b) to recover from the trustee trust property or the proceeds of trust property in the possession of the trustee, or previously received by the trustee and converted to his use.
  16. Can trustees claim an indemnity or contribution from co-trustees?
    Co-trustees in breach of trust are jointly or severally liable.

    A trustee who is sued for the entire loss could either:

    1) Claim a contribution from his co-trustees who are in breach of trust under the Civil Liability (Contribution) Act 1978; or

    2) in certain circumstances, seek an indemnity (for 100% of the loss) under equitable rules from his co-trustees who are in breach of trust.

    (a) One of the situations in which a defendant trustee can seek a full indemnity from a co-trustee is where the co-trustee fraudulently obtained a benefit from the breach.

    (b) The alternative ground for claiming an equitable indemnity from Jonathon is because he received trust property and used it for his own benefit (Bahin v Hughes)

    (c) Under the equitable indemnity rules, where a trustee blindly follows the advice of a co-trustee who is a solicitor, he can recover a full indemnity from the solicitor. It is not enough to show that the co-trustee is a solicitor. He would have to prove that the solicitor exerted such a controlling influence that he did not exercise his own judgement (Head v Gould)
  17. Common law tracing
    There are two sets of tracing rules: common law and equitable.

    If the company brings a common law action, it can only use common law tracing rules.

    There has been no fusion of law and equity in this respect; a claimant who brings an equitable claim must use equitable tracing, and a claimant at common law must use common law tracing.

    There are defects in the common law tracing rules. Common law tracing rules can identify an asset through changes in form (eg if a trustee bought a painting with the company’s money) but the ‘right ceases when the means of ascertainment fail which is the case when the subject is turned into money and compounded in a general mass of the same description’ (Taylor v Plumer).

    In other words, common law tracing cannot identify the claimant’s property once it has been mixed with other property. Thus, if a trustee paid company money into his own bank account which already contained her own funds, common law tracing would break down.

    In contrast, equitable tracing can identify the claimant’s property in a mixed fund.

    There is a further possible defect of common law tracing rules. In Agip (Africa) Ltd v Jackson, J stated that common law tracing also breaks down where funds are transferred between banks electronically. He maintained that common law tracing can only follow a physical asset (such as a cheque) and there is no such asset in an electronic transfer. Equitable tracing, on the other hand, is not defeated by electronic transfers of funds.
  18. Royal Brunei Airlines v Tan
    Remedies against 3rd parties; dishonest assistance

    Borneo Leisure Travel (BLT) sold flight tickets for Royal Brunei Airlines and agreed to hold the money on trust for the airline until it was paid over.

    BLT breached the trust by using the flight ticket money in its own business rather than keeping it in a separate trust bank account as agreed.

    By the time the airline found out what was happening, BLT had become insolvent and was not worth suing.

    Mr Tan was the main shareholder and director of BLT and had instigated the breach of trust. The airline decided to sue Mr Tan for compensation on the ground that he had dishonestly assisted BLT to breach its trust. In summary:

    (a) BLT was an express trustee holding the ticket sale money on trust for Royal Brunei Airlines.

    (b) BLT breached the trust.

    (c) Mr Tan, the defendant, was a director of BLT and assisted the company’s breach of trust.

    It was held that it was not necessary for the breach of trust to be dishonest. A stranger can be liable if he participates in or instigates a breach of trust committed by an honest trustee.

    Lord Nicholls confirmed that the stranger must be dishonest. He said that dishonesty means ‘conscious impropriety’; it involves advertent conduct. Carelessness is not dishonesty.

    Dishonesty is ‘not acting as an honest person would in the circumstances’.

    The standard of honesty is objective.

    A defendant who does not act in accordance with the objective standard of honesty is liable; it is no defence for the defendant to plead that, by his personal moral code, he saw nothing wrong with his behaviour.

     However, the assessment of honesty also involves subjective factors. The court will assess how a hypothetical honest person would have acted knowing the facts the defendant actually knows. The court will take account of the defendant’s experience and intelligence, and the circumstances in which the activities occur (such as the usual action taken in that line of business or commerce).

    The court will place a hypothetical honest person in the defendant’s shoes and consider how that honest person would have acted. If an honest person would not have adopted the same course as the defendant, then the defendant is dishonest.

    For example, if the defendant is a solicitor the court will ask, ‘Would a reasonable solicitor, knowing what this defendant knows and with this defendant’s experience, have acted as the defendant did?’ This inquiry has to take account of normal procedures solicitors follow.
  19. BCCI v Akindele
    Remedies against 3rd parties for breach of trust; recipient liability

    The recipient must have a “state of knowledge such as to make it unconscionable for him to retain the benefit of the receipt.”

    Hence, simply knowing the facts, which if inquired into, would put you on notice of fraud or reveal breach of fiduciary duty, is not enough.

    • You actually need to have a state of knowledge of your own, such as to make it unconscionable to retain the benefit of
    • the receipt.

    This could arise because the recipient actually knew of the breach or if they had suspicions but remained silent.

    However, the fact that a reasonable person in the recipient's position should have known is not likely to be sufficient.
  20. Mara v Browne
    Remedies against 3rd parties for breach of trust; intermeddling

    Where someone, who is not a trustee, does acts characteristic of a trustee, he will be liable for any misapplication of trust property or other loss caused to the trust just as if he had been appointed an express trustee.

    Such a person who assumes the role of trustee is called a ‘trustee de son tort’ (a trustee of his own wrong).

    A typical example arises where an agent, such as a solicitor or an accountant, exercises trustee functions over trust property beyond the scope of his agency
  21. Proprietary claims against 3rd parties
    Remedies against 3rd parties for breach of trust; equitable tracing; inequitable result

    • (a) Bona fide purchaser.
    • First, the third party recipient may be a bona fide purchaser for value without notice. Bona fide purchasers take the property free from benefi ciaries’ equitable interests. No proprietary claim can be brought against the third party in this scenario.

    • (b) Constructive trustee.
    • The second possibility is that the third party is not wholly innocent; he knows or suspects that he is getting the property in breach of trust or fiduciary duty. If the third party’s conscience is affected, he is a constructive trustee on the grounds of recipient liability (BCCI v Akindele). A proprietary claim will lie against the third party and, if tracing is necessary, the harsher tracing rules relevant to a trustee apply.

    • (c) Innocent volunteer.
    • The third scenario arises where the third party had no knowledge or notice of the breach of trust or fiduciary duty and provided no consideration for the transfer. A proprietary claim can be brought against the innocent volunteer but the tracing rules are kinder than those applicable to trustees.
  22. Re Diplock
    Remedies against 3rd parties for breach of trust; equitable tracing; inequitable result

    It was inequitable to allow tracing.

    Where, as here, the competition is between two innocent parties, the equitable owners of the trust property ‘must submit to equality of treatment with the innocent volunteer’.

    Where each party has contributed money to buy a mixed asset, each is entitled to a charge to secure the proportion they have respectively contributed. The charge is enforced by a sale of the asset, and as a result each party will receive money and there is no inequity.

    However, where the innocent volunteer has contributed land and the trust has contributed to improvements, tracing does not produce equality of treatment.

    The sale of the land to satisfy the charges will deprive the volunteer of the land. Giving the volunteer some of the sale proceeds instead of the land does not produce an equitable result.

    Therefore the beneficiary could not trace into the improvements because this would have produced an inequitable result.
  23. Common law claim for restitution against a 3rd party
    1) The claimant must be the legal owner since this is not an equitable remedy.

    • 2) The defendant must have received the property (without mixing). Common law tracing cannot pass through a mixed fund.
    • (although it can be placed into an account with other funds)

    If this has happened, there is strict liability for common law restitution. There is no need to inquire as to D's state of mind in receiving the funds.

    Defences

    • 1) D was a bonafide purchaser
    • It would not be possible to bring a claim because D provided consideration and has not be unjustly enriched.

    2) D changed his position

    - This defence is only available if D changed his position in good faith. Thus D will still be liable if he knew the money belonged to someone else.

    • - In Lipkin Gorman v Karpnale, Lord Templeman said suggested that the defence can only be claimed where the defendant has spent the money in a way he would not otherwise have done (ie in an ‘exceptional’ way).
    • -
  24. Re Kayford
    Insolvency; valid creation of a trust; certainty of intention; unlawful preference

    In Re Kayford, the directors of a mail order company realised that it was in financial difficulty, and sought advice on how to protect customer payments for goods ordered by post.

    Accountants advised them to place all future customer payments in a separate account, to be called a ‘Customer Trust Deposit Account’. The directors instructed the bank accordingly, and from that point the bank credited customer payments to a separate account; but contrary to instructions, the name of the account did not include the words ‘Trust’ or ‘Customer’.

    Megarry J held that the mail order company had declared an express trust over the customers’ money. Such a declaration required the three certainties.

    The judge inferred certainty of intention to create a trust from the following:

    (a) The payment of customers’ money into a separate bank account was a ‘useful (though by no means conclusive) indication of an intention to create a trust’.

    (b) The decisive factor was that the company’s accountants had advised that a trust bank account was the best way to protect customers’ money.

    ‘The whole purpose of what was done was to ensure that the moneys remained in the beneficial ownership of those who sent them and a trust was the obvious means of achieving this.’

    (c) The company did not have to state expressly that the bank account was held ‘on trust’ for the customers if in substance that is what the company intended to do.

    • Unlawful preference
    • Megarry J held that the declaration of trust by the company in favour of its customers was not an unlawful preference.

    The declaration of trust did not put creditors in a better position on the subsequent insolvency. The company’s action prevented the customers from becoming creditors in the first place. As soon as the customers paid their money, they were beneficiaries under a trust (of the bank account) and not ordinary creditors. - contrast Re Farepak
  25. Re London wine
    Insolvency; valid creation of a trust; certainty of subject matter

    The buyers of wine stored in a warehouse but not segregated from the general stock of wine could not establish a trust as the subject matter was uncertain.

    Re London Wine Company and Re Goldcorp reveal a difficulty with using trusts to protect customers’ money.

    The prevailing view is that the company must intend to keep the customers’ money or property separate from the company’s other money or assets; the customers’ trust property cannot be used in the company’s general business.

    Companies may not wish to declare such trusts because the need to ‘lock away’ the customers’ money will cause cashflow problems
  26. Re Goldcorp
    Insolvency; valid creation of a trust; certainty of subject matter & intention

    (a) The subject matter was uncertain because individual ingots had not been allocated to particular customers. The warehouse contained a large stock of ingots which were not earmarked for anyone, and indeed the stock was constantly changing because Goldcorp sold and replaced bullion in the course of its business.

    It is possible to declare a trust over a proportion of a collection of items, eg ‘I declare myself a trustee of 4% of the current stock of bullion for X’. However, no such intention existed in this case.

    (b) Uncertainty of subject matter has a bearing on whether there is certainty of intention to create a trust. Where a trust exists, the trustee is to keep the trust property separate from his own funds. Goldcorp never segregated ingots to form the subject matter of customer trusts. It clearly viewed all the bullion as its stock-in-trade and freely dealt with it in the course of its business, constantly selling ingots and replacing them. Thus, it clearly did not intend to create a trust.

    Furthermore, the Privy Council held that the money sent by customers to purchase the bullion was not impressed with a trust either, because there was nothing which required Goldcorp to use that payment and that payment alone to purchase the requisite number of ingots for the customer.

    Customers’ payments went into Goldcorp’s general funds. Contrast Re Kayford, where the customer’s payment was placed in a separate bank account and earmarked for that customer’s order.
  27. Hunter v Moss
    Insolvency; valid creation of a trust; certainty of subject matter

    In Hunter v Moss, Mr Moss was the owner of 950 shares of a private company. He wanted the finance director (Mr Hunter) to own the same number of shares as the managing director and the court found that Mr Moss had tried to declare himself a trustee of 50 of his shares for Mr Hunter. Mr Moss later sold the 950 shares and Mr Hunter claimed part of the sale proceeds. Mr Moss had never done anything to differentiate a block of 50 shares from the holding of 950 shares. It was held that there was a valid trust of 50 shares for Mr Hunter.

    The Court of Appeal distinguished  Re London Wine Co (Shippers) Ltd because that decision related to tangible assets (chattels) whereas  Hunter v Moss concerned intangible assets, namely company shares.

    It would appear that you can create a valid trust of an unascertained part of a bulk of intangible assets. This decision has been criticised.
  28. OT Computers
    Insolvency; valid creation of a trust; certainty of objects

    OT Computers set up two bank accounts. One was held on trust for its customers and was held to be valid (so the money was not available for OT Computers’ creditors when the company subsequently became insolvent).

    The second account was held on trust for ‘urgent suppliers’; this trust was held to be void because the objects were uncertain.

    It was not possible to draw up a complete list of every beneficiary of this fixed trust and therefore it failed and the money was part of the pool of assets to be shared among OT Computers’ creditors.
  29. s239 Insolvency Act 1986
    Insolvency; unlawful preference

    A preference occurs if a company does anything or suffers anything to be done which puts one of its creditors in a better position on the company’s insolvency than it would otherwise have been.

     If: (a) such a preference occurs within six months before the onset of the company’s insolvency (or two years if the creditor is connected to the company, eg a director or spouse of a director); and

    (b) the company was influenced by a desire to put the creditor in a better position,  the court can make an order putting the parties in the same position as they would have been in had there been no preference.
  30. Re Farepak
    Insolvency; unlawful preference; Quistclose Trusts

    Without a trust, the customers would have been unsecured creditors and would have recovered very little on the company’s insolvency.

    As beneficiaries under a trust, they would have recovered their respective shares of the trust property (their payments) ahead of the creditors.

    Farepak tried to create the trust, and the deed of trust provided evidence of that intention. The customer payments were intended to form the subject matter of the trust.

    Customers whose money had already entered the company’s bank account before the declaration of trust were creditors at the time of the declaration.

    The declaration of trust aimed to give them an advantage over the unsecured creditors because, as benefi ciaries under a trust, the customers would have been able to recover their trust property in full.

    Therefore, the declaration of trust constituted an unlawful preference and was accordingly void.

    In summary, a declaration of trust over the money of existing customers is an unlawful preference.

    Some customers had paid their money after the declaration of trust. Mann J said, ‘there may not be a preference so far as those customers are concerned, because they are not creditors at the moment of the creation of the trust over their money, but filtering those customers out may be diffi cult if not impossible’.

    Thus, there could be no valid trust for them either.

    • Quistclose Trust
    • Customers made regular payments to Farepak’s agents throughout the year. The agents passed these payments to Farepak. Near to Christmas, the customers were to receive hampers or shopping vouchers. Unfortunately, Farepak became insolvent in October before customers had received their hampers or vouchers.  It was argued that there was a Quistclose trust because customers had paid their money for the purpose of receiving hampers or vouchers; this purpose was now impossible and thus, it was argued, the money should be held on trust for the customers.   It was held that there was no Quistclose trust because the customers’ money was at the free disposal of Farepak.

    There was no requirement for the company to keep the customers’ payments separate from its own funds pending delivery of the hampers or vouchers.

    It was implausible to suppose that the company had agreed to, say, keep a customer’s January payment separate and intact until the hampers or vouchers were made available the following November.

    Everyone concerned expected the company to use customers’ money for the expenses of the company (such as salaries, advertising etc).   As a result, the customers were ordinary unsecured creditors. Five years later (in February 2012), the customers still had not recovered anything. They were expected to receive 15p for every pound they were owed.
  31. Barclays Bank v Quistclose
    Insolvency; Quistclose trusts

    Quistclose lent £209,719 to a company called Rolls Razor Ltd (‘RR’) on condition that RR would use the money only to pay dividends to its shareholders.

    Before the dividends were paid, RR went into liquidation. This meant that the money could not be used for the stated purpose of paying dividends. Who should get the £209,719 which was sitting in an account at Barclays Bank?

    ■ As one of RR’s unsecured creditors, Barclays Bank argued that the £209,719 formed part of RR’s assets available to pay the unsecured creditors.

    ■ Quistclose claimed that the money was held on trust to pay the dividends, but if that purpose could not be carried out then it was held on trust for Quistclose. If Quistclose was a beneficiary under a trust, it could bring a proprietary action which would enable it to recover the money in full ahead of the creditors (like the customers in Re Kayford).

    The House of Lords decided that a trust did exist.

    (a) The settlor was Quistclose. The trustee was RR.

    (b) It was held that a two-tier trust had been created. RR held the loan money on a primary trust to pay dividends to the shareholders, but should that purpose prove to be impossible (as was the case) there was a secondary trust to return the money to the lender, Quistclose.

    • Certainy of intention
    • Quistclose had not stated explicitly: ‘You (RR) must hold this loan of £209,719 on trust to pay the dividends due to the shareholders, but if that purpose cannot be achieved, then you are to hold it on trust for Quistclose.’ (but cases like Paul v Constance  show that a trust can be created without the settlor using the word ‘trust’)

    Lord Wilberforce was satisfied that Quistclose intended to create a trust because it did not intend the loan money to be at the free disposal of the borrower. The loan money was not to become part of the borrower’s general funds, which could be spent on the outgoings of the business, such as wages, buying stock and energy bills. It was to be used for the sole purpose of paying the dividends (or, if this was impossible, to be returned to the lender).

    • Primary/ secondary trust
    • Lord Wilberforce said that the primary trust ceases when the loan is applied for the stated purpose (here payment of the dividends).

    The lender then has a contractual claim to repayment of the money (ie a debt action) and will rank as an unsecured creditor on the insolvency of the borrower. Accordingly, if RR had paid the dividends before becoming insolvent, Quistclose would have lost its status of a beneficiary under a trust and would have become an ordinary unsecured creditor with a contractual claim against RR.
  32. Twinsectra v Yardley
    Insolvency; Quistclose trusts; certainty of intention

    A finance company agreed to lend £1 million to a purchaser of residential land.

    The finance company paid the loan money to the purchaser’s solicitor but insisted on the solicitor giving an undertaking that the money would be used ‘solely for the acquisition of property on behalf of our client and for no other purpose’.

    Lord Millett’s view was that the undertaking created a Quistclose trust. The other judges in the House of Lords decided the case on other grounds.

    He said a lender intends to create a trust of the loan monies if the monies are not to be regarded as part of the borrower’s general assets and cannot be spent in any way the borrower wishes.

    Certainty of objects/ beneficiary principle

    Lord Millett considered the point here. He maintained that the beneficiary, even of the primary trust to pay the dividends, was the lender. He said the ‘money remains the property of the lender unless and until it is applied in accordance with his directions, and insofar as it is not so applied it must be returned to him’.

    Thus, in Quistclose, at the stage when Rolls Razor held the loan money on trust to pay the dividends, the beneficial interest in the money rested with the lender who could direct how the money should be applied.
  33. Re EVTR
    Insolvency; Quistclose trusts; certainty of intention

    A separate bank account is not essential for a Quistclose trust. Such a trust arose here where the money was paid into the borrower’s general account.

    Part of the money in a general account can still be earmarked as money which can only be used in a particular way and thus subject to a trust.

    Here the claimant (a former employee) lent the company £60,000 ‘for the sole purpose of buying new equipment’ . The £60,000 was paid into the company’s general funds. The company ordered the new equipment and paid for it, but went into receivership before it was delivered. The equipment suppliers refunded £48,536 of the £60,000. Was there a Quistclose trust, so that the £48,536 not used for the stated purpose would be held on trust for the claimant?

    It was held that the original loan of £60,000 had been subject to a Quistclose trust because it was expressly lent for a sole, exclusive purpose. The judge decided that it was not essential for the money to be paid into a separate account. What was the status of the refunded £48,536? It was held that the company also held the refund on a Quistclose trust. This sum could not be used for the specified purpose of purchasing new equipment and was thus held on trust for the claimant lender.
  34. Carreras Rothmans
    Insolvency; Quistclose trusts

    Rothmans lent money to its advertising agency (which was in financial diffi culty) for the sole purpose of paying third party creditors with whom the adverts had been placed. The advertising agency paid the money into a separate bank account. The advertising agency became insolvent before paying the third party creditors. Peter Gibson J held that the money in the separate bank account was subject to a trust in favour of Rothmans because ‘the defendant was never free to deal as it pleased with the moneys so paid’.

    A Quistclose trust arose because the loan money was ring-fenced for a particular purpose (by the specification of a sole purpose and payment into a separate bank account).

    As a beneficiary under a trust, Rothmans recovered the money in full.

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