The case of RE: Nanwa gold mines is an interesting case. The directors of a company sold shares in their company for the purpose of raising enough capital to launch a new venture and if enough capital was not raised the investors who did come forward were to get their money back. The case rested upon the status of the relationship between the company and the investors were they mere creditors or had a trust been created. Before Harman J it was argued that Moseley v Cressey’s co was authority for the notion that an agreement to refund money in such a situation did not show an intention to create a trust. Despite the near identical facts of the cases he distinguished it from the case before him merely by the fact that the agreement said that the money would be “retained” and that the only possible reason for this is that it must have been the intent that the money should be set apart form the companies general assets for the purpose of repaying the investors. This difference seams absurd because there is no way in which one can say that this could not have been the intention in the Cressey case. It was also argued that the case of Lister & co v Stubbs is authority for the notion that placing money in a separate account is not enough to prove that there is intent to create a trust, again the judge dismissed this case this time by pointing out that his finding on the use of the word retained had been enough to prove that a trust was intended. He also made reference to academic works on the matter, However he attacked one of them by pointing out that the main case the author used to support his arguments fails to say what he claimed it said and attacked the other by pointing out that the passage consisted of two different authors who by showing opposing views cancelled each other out. Finally he turned to section 51(3) of the companies act 1948 (which deals with situations where shares and being bought) and used this as authority that the money was actually held on trust for the investors. However this statute only makes it mandatory that the money will be put in a separate bank account under the penalty of a fine. It does not state that a trust is created and it could have been argued that placing the money in a separate account was only done to comply with the statute and not to create a trust. So why did Harman J find less than obvious ways to distinguish two cases and some academic work which strongly disagreed with his conclusion and yet interpreted a statute in his favour when it could easily have been interpreted the other way? The answer is simple, he felt that it was honest and proper that the investors get their money back and for that reason held that a trust had been created, evidence that this was what he was thinking can be found in a passage near the beginning of his judgement which reads “it occurred to me in the course of the argument that if the persons who sent their money on the faith of this document had no lien on the separate account there was something very wrong with the law on this subject.”
The case of Moseley v Cressey’s co had very similar facts to the Nanwa gold mines case but the judge came to the opposite conclusion. The prospectus for the shares simply said “deposit returned if no allotment made” but the judge held that this was simply a contractual promise to return the money and did not create a trust. He compared these people to other creditors who give the company money on the understanding that if it goes insolvent they will have a claim against the general pool of assets and risk there not being enough. On the face of it this appears to be a perfectly valid view to hold on the matter however unlike money received from other creditors which could generally be used for any purpose the intent here was clearly only for the purpose of setting up a company therefore there is no reason why the judge could not have held that a trust had been intended as there clearly were identifiable beneficiaries. It should also be noted that unlike the Nanwa gold mines case where the money was put in a different account but case law prevented the judge from finding that a trust had been created biased on it in this case the money was not put in a different account but the judge held (obiter) that had this been done it would have proved an intent to create a trust (this case came before Lister & co v Stubbs held that doing this does not prove an intent to create a trust and so the judge was free to deal with this issue in any way). So why did the judge decide to hold that there was no intent to create a trust when grounds to hold otherwise did exist? Again it must have been because he felt that it was right to do so. At the start of the judgement he said “Some promoters, as they are called, get up a company, and, among other strange courses taken, they think it consistent with right dealing to borrow the names of some gentlemen as directors, who also think it consistent with right dealing to lend their names for that purpose, under a private agreement that they shall not be answerable for any costs, charges, or expenses whatsoever” the language he used clearly showed that he felt that the entire operation was of a dubious nature. One also has to remember that this case occurred 100 years before the Nanwa case so what was considered to be acceptable and not acceptable would have vastly changed. In the days of Moseley being in debt could get you sent to prison and had a very strong stigma attached to it but by the time on Nanwa things had changed to a point whereby it was common practice to borrow money.
Quistclose style trusts have been used to protect the money of customers in situations where a business takes customers money before it delivers the goods. In the case of RE: Kayford ltd a company which went insolvent placed a significant sum of money in a separate bank account with the intention of holding the money on trust for customers so that they would not loose their money if the goods could not be delivered. Megarry J stated that he wished he had heard of it occurring more frequently and hoped to hear more of it in the future. Although different considerations would apply to trade customers since trade customers are not private individuals who often cannot afford to loose the money and rarely see themselves as creditors of the company they are buying from and therefore do not think about issues such as insolvency. Clearly protecting consumers from corporate insolvency if the company they purchase from happens to go insolvent shortly after they transfer their money is a morally correct an honest thing to do, parliament has recognised this problem in passing section 75 of the consumer credit act 1974 which seeks to give private individuals a guaranteed means of recovering money if they buy goods which they don’t receive for any reason. As usual in this case the learned judge had to decide if or not the customers were beneficiaries under a trust or mere creditors, just like with all cases of this type and that meant establishing if of not the 3 certainties of trust creation had been satisfied. In this case it was certain who the beneficiaries were and what the subject matter was so it rested on if the intent to create a trust had been shown. He felt that there was no authority which established that placing money in a different account proved an intent to create a trust but in this case due to the fact that they had taken expert advise on how to achieve the result of protecting the money and because the bank had been asked to name the account “customer trust deposit account” the necessary intent had been shown.
The above case can be compared with RE: Goldcorp where customers bought large quantities of gold or silver but the company kept possession of it until the customer demanded it. The metal was kept in an un-segregated general pool and a separate company always made sure there was enough. Their lordships held that there was not trust because a lack of segregation meant that specific goods which were to be held on trust could not be ascertained. This seams to be an example of the exception which Megarry recognised in respect of trade buyers taking effect. Perhaps it is the case that withholding assets from other creditors is seen as a greater evil than some trade customers loosing their money but this is not the case if it is a private customer. Due to the current version of the sale of goods act this case would have been decided differently today however.
From this sample of cases that I have compared and analysed it can be seen that judges will reject trusts which they see as being created to achieve dishonest or improper outcomes and allow ones which are created to achieve honest or acceptable outcomes.
Millet has argued that it is difficult to determine what the purpose of the trust in Quistclose actually was, the intended use of the loan was to pay a dividend but what was the underlying purpose of doing this? If it was to prevent the company from going into liquidation then the purpose has clearly failed but if it was to honour what was owed to these people then the trust will not have failed because although Insolvency Act 1986 s.74(2)(f) prevents dividends being paid to the shareholders of a liquidated company this rule only applies to the companies assets and if the money was held on trust then it was not part of their assets at all. Authors have also cast serious doubts onto if or not the trust in the Quistclose case was a trust at all suggesting that it may in fact have only been a power. This means that it would have been easy for five highly experienced House of Lords judges to have been able to come to any conclusion biased upon the facts in Quistclose and this is evidence that what was thought of as being the right and honest outcome and not what was the strict letter of the law is what prevailed.
But are Quistclose trusts really an acceptable and honest thing to do? Academics have argued that a problem with these types of trust is that they are invisible to other creditors. They do not need to be registered and most likely will not be discoverable from inspecting the accounts because under financial reporting standard 5 they will show as an asset and an equal liability and have no note to explain the status of the asset. In some cases this will not be a relevant issue such as where private individuals are the creditors because the average person does not check company’s accounts before buying products from them but most Quistclose trusts occur in a purely professional setting so on most occasions this will be a problem. Another potential issue is if it is right or not that the person who gets the money as a result of a Quistclose trust is the person who should get it. In the Quistclose case itself the primary purpose was to pay the shareholders a dividend. It would have been absurd if the people who owned the company (and therefore both the people who were closest to being actual human debtors and those most likely to have made the mistakes which cause the situation) were entitled to receive a payout from the liquidated companies limited assets which took priority over all the debtors. Yet there is a very real possibility that this could have happened because Quistclose getting the money back was reliant on the purpose of the trust failing but Millet has argued that the purpose didn’t fail under S.74(2)(f) of the Insolvency Act 1986 (which prevents dividends being paid upon liquidation) because the money was held on trust and therefore not owned by Rolls Razor.
In his judgement in Barclays bank v Quistclose lord Wilberforce stated that if Quistclose type trusts were not legal then there would be a situation whereby a person could not give money to another person on the agreement that it is to be used for a specific purpose and this would have many negative implications in many aspects of life. In cases like Quistclose where a company is facing liquidation it would loose a means by which they could find a rescue company which would result in job losses on some occasions and a man would not be able to give a person money to purchase something on his behalf. Lord Wilberforce said he would be surprised if any argument of this kind – so conceptualist in character – had ever been accepted. These observations show that considerations regarding what is and is not acceptable were involved in the judgement of their lordships in Quistclose.
To demonstrate how divided opinion can be on the honesty of a party and what the right outcome is I turn to Twinsecrta v Yardley, a case in which the judges agreed that a trust had been created but were divided as to if or not the conduct in question was dishonest. Lord Hoffmann stated that “a dishonest state of mind, that is to say conciousness that one is transgressing ordinary standards of honest behaviour” was required and Lord Hutton stated that “I do not think that Lord Nicholls was stating that in this sphere of equity a man can be dishonest even if he does not know that what he is doing would be regarded as dishonest by honest people” In other words they felt subjective dishonesty was required however Lord Millett dissented and come to the conclusion that objective dishonesty was required and gave a long and detailed list of reasons for this. The fact that 5 judges in a trust case all gave the issue of honestly a lot of consideration (and in lord millets case a huge amount of consideration) even after deciding that there was a trust shows just how finely balance and dependant on an individuals opinion (as well as how important) the issue is. The fact that there was a dissenting judgement on this issue shows how difficult it is to determine exactly what will and what will not be accepted.
In conclusion the reason why Quistclose trusts are permitted when the courts have the power to set aside trusts which are shams or trusts which are created in order to shield assets is because in the cases where Quistclose trusts have been permitted the courts have felt that the trust is not a sham or an attempt to shield assets but instead a proper and responsible thing to do considering all the circumstances. Moseley v Cressey’s co shows that Quistclose trusts will not always be tolerated. In RE: Kayford customers were protected against loosing both their money and their orders and most people would agree that this is what should be done. The standard of honesty required for a Quistclose trust to be accepted is very high as shown in Lloyds bank v Marcan since the trust was set aside because it produced a dubious outcome despite the fact that the settler had created the trusts with legal advice and the utmost honesty. Comparison of cases with near similar facts such as RE: nanwa gold mines and Moseley v Cressey’s co further shows that what is the fair and honest outcome seams to be the deciding factor simply because a different judge came to a different conclusion. However academics have questioned if or not Quistclose trusts are ever acceptable at all, Issues such as invisibility to other creditors and the money going to an un-deserving party will plague Quistclose trusts even when it seams best to allow the trust and as a result cast doubt on to if or not the judiciary has been right in ever accepting these types of trust for the very general reason for which they have accepted them.
BIBLIOGRAPHY
Books
Hanbury & Martin, “Modern Equity” Sweet & Maxwell, (2005), 17th ed.
Articles
Margaret Halliwell, Elizabeth Prochaska, “Assistance and dishonesty: ring-a-ring o'roses,” Conveyancer and Property Lawyer, 2006.
Wayne Beglan, Alice Belcher, “Jumping the queue” (1997), Journal of Business Law.
P. J. Millett, “The Quistclose Trust: Who Can Enforce It?” (1985) 101 Law Quarterly Review, 271
Legislation
Companies act (1948) s.51(3)
Consumer credit act (1974) s.75
Enterprise Act (2002)
Insolvency Act (1986) s.74(2)(f)
Insolvency act (1986) s.423
Sale of goods act (1979)
Cases
Re Adams and Kensington Vestry (1884) 27 ChD 394
Barclays Bank Ltd. Appellants v Quistclose Investments Ltd [1970] A.C. 567
Boyce v Boyce (1849) 1 Mac & G 551
Re Butterworth (1882) 18 ChD 5---
Carreras Rothmans Ltd. v. Freeman Matthews Treasure Ltd. [1985] 1 Ch 207
Chohan v Saggar & Anor [1992] B.C.C. 306
Re Denley's Trust Deed [1967 D. No. 146]
Re Drucker (No. 1). [1902] 2 K.B. 55
Edwards v Glyn (1859) 2 Ellis and Ellis 29
Re EVTR Ltd (1987) 3 B.C.C. 389
Re Goldcorp Exchange Ltd. [1994] 3 W.L.R. 199
Re Kayford Ltd. [1976] 3 W.L.R. 522
Lister & Co v Stubbs (1890) 45 Ch.D. 1 ; 6 T.L.R. 317
Lloyds Bank Ltd. v Marcan [1973] 1 W.L.R. 1387
Mackay v Douglas [1867 M. 111.]
Midland bank plc v Wyatt [1995] 1 FLR 696
Mackay v Douglas (1872) 14 Eq 106
Moseley v Cressey's Company (1865-66) L.R. 1 Eq. 405
Re Nanwa Gold Mines Ld. [1955] 1 W.L.R. 1080
Re: Northern development [unreported, 1978]
Palmer v Simmonds (1854) 2 Drew 22
Quistclose Investments Ltd. v Rolls Razor Ltd [1964 Q No. 2725]
Quistclose Investments Ltd. v Rolls Razor Ltd. [1968] Ch. 540
Snook v London and West Riding Investments Ltd. [1967] 2 W.L.R. 1020
Stewart v Austin (1866-67) L.R. 3 Eq. 299
Toovey, Assignee of Maxton v Milne (1819) 106 E.R. 514
Twinsectra Ltd v Yardley [2002] 2 A.C. 164
Websites
http://en.wikipedia.org/wiki/Quistclose_trust
Toovey, Assignee of Maxton v Milne (1819) 106 E.R. 514
Barclays Bank Ltd. Appellants v Quistclose Investments Ltd [1970] A.C. 567
Palmer v Simmonds (1854) 2 Drew 22
Boyce v Boyce (1849) 1 Mac & G 551
Re Goldcorp Exchange Ltd. [1994] 3 W.L.R. 199
Re Goldcorp Exchange Ltd. [1994] 3 W.L.R. 199
Midland bank plc v Wyatt [1995] 1 FLR 696
Lloyds Bank Ltd. v Marcan [1973] 1 W.L.R. 1387
Re Nanwa Gold Mines Ld. [1955] 1 W.L.R. 1080
Moseley v Cressey's Company (1865-66) L.R. 1 Eq. 405
Lister & Co v Stubbs (1890) 45 Ch.D. 1 ; 6 T.L.R. 317
Moseley v Cressey's Company (1865-66) L.R. 1 Eq. 405
Re Kayford Ltd. [1976] 3 W.L.R. 522
Re Kayford Ltd. [1976] 3 W.L.R. 522
P. J. Millett, “The Quistclose Trust: Who Can Enforce It?” (1985) 101 Law Quarterly Review, 271.
Wayne Beglan, Alice Belcher, “Jumping the queue” (1997), Journal of Business Law.
Wayne Beglan, Alice Belcher, “Jumping the queue” (1997), Journal of Business Law.
Barclays Bank Ltd. Appellants v Quistclose Investments Ltd [1970] A.C. 567
Twinsectra Ltd v Yardley [2002] 2 A.C. 164