Committee stressed, property held by an insolvent company on trust for others has never passed to the liquidator representing the general body of the company’s creditors because the liquidator takes on the ‘free assets’ of the insolvent company.95 Proprietary interests in favour of third parties prevail against the general body of creditors unless, of course, they are invalidated under any particular statutory provisions (e.g. those relating to the avoidance of floating charges or non-registration of charges). If a lender is placed in the position of a beneficiary of a trust imposed on the company, that lender has a claim in rem against the money at issue in priority to all others claiming against the company’s assets.96 As with retention of title, it is thus possible to avoid pari passu distribution by keeping property out of the body of assets available for settling the company’s debts.

This section of the chapter outlines the conditions under which the law will recognise trusts in the corporate insolvency context. It then considers efficiency issues arising from the use of trusts and finally looks to questions of fairness. (Questions of accountability and expertise were dealt with in chapter 13 when assessing liquidation processes in which the principle of pari passu distribution is applied to the residual estate.)

The recognition of trusts

For a trust relationship to be recognised, the courts must find there to exist both an equitable proprietary interest in the property in question and a fiduciary relationship.97 Circumstances satisfying these conditions may involve three distinct types of trust: express, resulting and constructive.98 For an express trust to be established there are ‘three certainties’ to be shown to be present:99 of intention, subject matter and objects. On the first point, intention will not necessarily involve writing (unless land is

Aspects of Trusts and Fiduciary Obligations (Clarendon Press, Oxford, 1992); Cork Report, ch. 22; A. Oakley, ‘Proprietary Claims and their Priority in Insolvency’ [1995] CLJ 377.

95See Cork Report, para. 1042.

96See Milman and Durrant, Corporate Insolvency, p. 161.

97See Oakley, ‘Proprietary Claims’, pp. 381–3; Agip (Africa) v. Jackson [1989] 3 WLR 1367 at 1386; Re Diplock [1948] Ch 465.

98See S. Worthington, Proprietary Interests in Commercial Transactions (Clarendon Press, Oxford, 1996) pp. 44–5, who argues that some judges and commentators describe a single express trust while others require two trusts: a primary express trust linked with a secondary trust which operates if the primary trust fails, the secondary trust being variously described as an express trust, a resulting trust or even a constructive trust.

99See Milman and Durrant, Corporate Insolvency, p. 166; M. Ellis and L. Verrill, ‘Twilight Trusts’ (2007) 20 Insolvency Intelligence 151 at 152–3; P. Sidle, ‘Whose Money is it Anyway?’ (2005) Recovery (Autumn) 24.

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involved)100 and the key issue is whether in substance a sufficient intention has been manifested.101 As for subject matter, it must be possible to identify the property that is covered by the trust: a special difficulty where money is involved and where trust claims are liable to succeed only if the money at issue is retained in a separate bank account.102 Certainty of objects requires clarity concerning the purposes of the trust relationship. If, for instance, there is an intended trust relationship but it is unclear when funds are to be distributed in a particular way, the trust will fail and money held by a company will, on an insolvency, enter the insolvency estate. This was the position in Re Challoner Club Ltd (in liquidation)103 where members of a company (an incorporated club) donated funds to the troubled company which attempted to create a trust over those funds. The trust terms were too uncertain to identify when the money was to return to the members and consequently the trust failed.

Resulting trusts are based on the presumed intentions of the settlor and are generally held to arise where a party purchases property in the name of another104 or transfers property into the name of another.105 Constructive trusts106 are trusts imposed independently of the intentions of the parties and can be seen as devices used by the courts in pursuit of justice. Cases have suggested that claims to constructive trusts are diffi- cult to establish and in practical insolvency contexts the constructive trust may be of limited importance.107 Recent dicta, however, in Re

100See Re Kayford Ltd [1975] 1 All ER 604 at 607. As Milman and Durrant (Corporate Insolvency, p. 166) note: ‘a trust can arise even though the transaction is not framed in terms of a trust; the crucial factor, as always, is the substantive operation of the arrangement’. See, for example, Re English & American Insurance Co. [1994] 1 BCLC 649 and Re Fleet Disposal Services Ltd [1995] 1 BCLC 345 but compare Swiss Bank Corp. v. Lloyds Bank Ltd [1981] 2 WLR 893. The lack of certainty of intention was critical in

Re Multi Guarantee Co. Ltd [1987] BCLC 257.

101See Re Kayford Ltd [1975] 1 All ER 604.

102See also Re London Wine Shippers Ltd [1986] PCC 121; Re Ellis, Son & Vidler Ltd [1994] BCC 532; Export Credits Guarantee Dept. v. Turner 1981 SLT 286. See further Ulph, ‘Equitable Proprietary Rights in Insolvency’, pp. 489–93.

103The Times, 4 November 1997.

104See Oakley, ‘Proprietary Claims’, p. 386; Dyer v. Dyer (1788) 2 Cox Eq 92.

105Vandervell v. Inland Revenue Commissioners [1967] 2 AC 291. See also the discussion of ‘presumed’ and ‘automatic’ trusts by Megarry J in Vandervell.

106See Re Goldthorpe Exchange Ltd [1995] 1 AC 74 (PC).

107Regarding remedial constructive trusts see Re Polly Peck International (No. 4), The Times, 18 May 1998, per Mummery LJ: ‘The insolvency road was blocked off to the remedial constructive trusts, at least when judge-driven in a vehicle of discretion … to a trust lawyer and, even more so to an insolvency lawyer, the prospect of a court

Farepak Food and Gifts Ltd108 indicate a judicial willingness to recognise the possibility of institutional constructive trusts arising in the context of corporate insolvency.109

In relation to corporate insolvency, trusts are of particular importance in two contexts which are worthy of more detailed attention. These are where funds are advanced for particular purposes and where consumers make payments for goods or services in advance.

Advances for particular purposes

During the nineteenth century the suppliers of funds for speculative enterprises commonly protected their investments by advancing moneys not to companies directly but to trustees.110 The latter would then release funds as required and if the company involved became insolvent any funds left in the hands of the trustees would be recoverable by the investors.111 Such a procedure offered protection but it did involve the inconvenience of using intermediaries.

Whether funds advanced directly to the company for a specific purpose might be held on trust was the issue considered by the House of Lords in Barclays Bank Ltd v. Quistclose Investments Ltd.112 In that case,

imposing such a trust was inconceivable.’ See further G. Stewart, ‘No Remedial Trust in Insolvency’ (1998) (August) Insolvency Practitioner 8; Worthington, Proprietary Interests, p. 50. See generally C. Rickett, ‘Of Constructive Trusts and Insolvency’ in

F.Rose (ed.), Restitution and Insolvency (Lloyd’s of London Press, London, 2000); D. Wright, ‘The Remedial Constructive Trust and Insolvency’ in Rose, Restitution and Insolvency.

108[2008] BCC 22.

109Mann J in Re Farepak Food and Gifts Ltd (in administration) [2008] BCC 22, paras. 37–44, admitted that remedial constructive trusts are not recognised by English law but felt that there was a strong argument that moneys paid to Farepak after it ceased trading (and at a time when it had indicated that payments should not be received) were held by it as constructive trustee (i.e. per an institutional constructive trust). On the facts, however, it could not be established that all the moneys in relation to which the court was asked to make a decision fell within that line of argument. Mann J ‘very much regretted coming to this decision’ but considered ‘the material does not exist which makes it sufficiently clear for present purposes that the sums which are said to come within the constructive trust do in fact do so’.

110See Milman and Durrant, Corporate Insolvency, p. 161.

111National Bolivian Navigation Co. v. Wilson (1880) 5 App Cas 176.

112[1970] AC 567, [1968] 3 All ER 651. See further W. Swadling (ed.), The Quistclose Trust: Critical Essays (Hart Publishing, Oxford, 2004); A. McKnight, The Law of International

Finance (Oxford University Press, Oxford, 2008) pp. 860–4; L. Ho and P. Smart, interpreting the Quistclose Trust: A Critique of Chambers’ Analysis’ (2001) 21 OJLS 267.

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Rolls Razor Ltd was in difficulties but declared a dividend on its shares and Quistclose loaned the company £209,719 solely for the purpose of paying the dividend. The sum was paid into a separate account with Barclays Bank, with whom Rolls Razor were currently overdrawn. Barclays were aware of the payment by Quistclose. Rolls Razor then went into liquidation before the dividend was paid and Barclays claimed to be entitled to set off the money from Quistclose against the overdraft. The House of Lords decided unanimously, however, that the money had been received by the company and held on a primary trust for payment of the dividend and that, the primary trust having failed, that money was held on a secondary trust for Quistclose. Since Barclays had been given notice of the trust disposition, its own claim failed.

The Quistclose type of arrangement is now commonly used and its effect is to give the lender protection in relation to sums not yet expended on the specific purpose.113 Such an arrangement differs from a secured loan in that it does not have to be registered and there is no public notice given of the transaction.

Central to Lord Wilberforce’s analysis in Quistclose was the ‘two trust’ approach – involving the primary trust for the initial purpose and the secondary trust for the lender that commences with the failure of the purpose. The ‘two trust’ approach was, however, criticised in the House of Lords in the Twinsectra case of 2002.114 Lord Millett urged that such an approach created ‘formidable difficulties’ where the trust was for an abstract purpose, since the beneficial interest could not be invested in an abstract purpose (as opposed to, say, a benefiting individual). His own approach was to state that the property was vested in the donor on a resulting trust, with the borrower holding the money as a trustee for the lender and having either a power or a duty to apply the money for the stated purpose. Twinsectra was applied in the Margaretta decision in 2005115 but, whether the ‘two trust’ or the Twinsectra approach is adopted, it is clear that, if there is a Quistclose trust and the purpose

113For recognition of a purpose trust in the context of payments made to administrators to facilitate the discharge of liabilities owed to third parties by the company in administration see Re Niagara Mechanical Services International Ltd (in administration) [2001] BCC 393, described (2000) Recovery (August) 7, [2001] 80 CCH Company Law Newsletter 6.

114Twinsectra v. Yardley [2002] 2 AC 164. 115 Margaretta Ltd [2005] All ER 262.

fails (e.g. because the borrower becomes insolvent) the funds will not form part of the borrower’s estate but will revert to the lender.116

In order for a Quistclose trust to arise, there must be an obligation to put the money aside for the special purpose. In the highly publicised Farepak117 case, the company had operated a Christmas savings scheme involving the collection of money from large numbers of small savers by thousands of agents and the forwarding of such funds to the company in advance payment for Christmas hampers and vouchers. After the company had entered administration on 13 October 2006, the administrators accepted that most of the money collected had disappeared and could not

be returned to the customers – who stood, in their thousands, to recover only around five pence in the pound.118 In the three days prior to the

start of the administration, however, the directors had sought to ringfence moneys received during that short period by creating a deed of trust over funds received into the company’s bank account. Mann J, however, rejected the argument that the company held the customers’ money under a Quistclose trust. The collecting agents were agents of the company, not of the customers, and so the money passed to the company when it was given to the agents and not when it was placed in the company’s bank account. Nor was there any requirement that the agents

116See Sidle, ‘Whose Money is it Anyway?’. Diversity of opinion thus centres on the location of the beneficial interest in the money before the failure of the purpose for which the funds were advanced. Leading views are that there is a trust of the money for the lender with a power to use the money to pay the beneficiary (Lord Millett in Twinsectra) or there is an entitlement in the borrower to use the money beneficially subject to the lender’s proprietary right to prevent misuse of the money (R. Chambers, Resulting Trusts (Oxford University Press, Oxford, 1997) ch. 3; see also R. Chambers, ‘Restrictions on the Use of Money’ in Swadling, Quistclose Trust, p. 77). For a discussion of these and other approaches see Stevens, ‘Insolvency’; Ho and Smart, ‘Re-interpreting the Quistclose Trust’; Moffat, Trusts Law, ch. 15; A. Tettenborn, ‘Resulting Trusts and Insolvency’ in Rose, Restitution and Insolvency.

117Re Farepak Food and Gifts Ltd (in administration) [2008] BCC 22 (Ch). Around 150,000 British families lost an estimated £40 million in the collapse of Farepak: see Editorial, ‘Farepak and the Ghost of Christmas Present’, Financial Times, 17 November 2006.

118In October 2007 Gordon Brown pledged ‘to ensure justice’ for the victims of Farepak: Financial Times, 18 October 2007. Victims received just £8m from a government-backed charity fund: ‘Un-Farepak’, Financial Times, 20 November 2007. Earlier in 2007, following the Treasury’s (Pomeroy) Review of Christmas Savings Schemes (Treasury, March 2007) the Government announced that it had secured industry agreement to a scheme of ring-fenced accounts for customers’ money. By May 2008, an investigation by BERR’s Companies Investigation Branch had been completed and the CIB was taking advice on possible legal action against the Farepak directors. See J. Pickard, ‘Regulator Completes Farepak Collapse Probe’, Financial Times, 13 May 2008.