assessing the desirability of encouraging ‘rescue fund trusts’. On the one hand, there are dangers that their positions will be worsened by ill-informed funders allowing the company to descend into greater troubles than would otherwise be the case; on the other hand, it is to their advantage if prospects of corporate decline can be reduced by encouraging injections of rescue funds. This emphasises that any problems in this area stem from deficiencies in information supplies and use rather than from resort to Quistclose-type trusts.

Fairness

Do trusts of the Quistclose type operate consistently with the fair treatment of corporate creditors? It can be argued that in Quistclose no creditors were misled into making further loans by the existence of a separate dividend account and the bank was aware of the agreement between the parties. This will not always be the case, however.156 Quistclose-type arrangements are not subject to the registration and disclosure requirements associated with security and one effect, indeed purpose, of a Quistclose-type transaction ‘may be to create an impression of commercial solidity so as to enable the borrower to continue trading and avoid insolvency, with the consequence that fresh liabilities to creditors will probably be incurred’.157 Actual and potential creditors of a company may, thus, be deceived in so far as they are led to see the potential insolvency estate as larger than it really is: the property held on an undisclosed trust will lie at the heart of the ‘deception’. Similarly with a Kayford trust, the firm’s general creditors may observe a high level of economic activity and stocking but may not realise that a proportion of this is funded out of consumer prepayments and the involved moneys and assets will at no time enter the insolvency estate. When, moreover, an existing asset (a debt in Carreras Rothmans) is placed in trust for a particular creditor or class of creditor, there is, as has been noted above, a transaction approaching a preference or a breach of British Eagle principles.158 In Kayford the company chose unilaterally to protect a particular set of (new) customers by means of a new trust arrangement. Megarry J decided that this did not constitute a fraudulent preference because the case involved ‘the question not of preferring creditors but of preventing those who pay money from becoming creditors, by making them the beneficiaries under a

156 Moffat, Trusts Law, p. 594. 157 Ibid. 158 See p. 658 above.

self-insurance; and are not fully voluntary creditors because they are poorly informed concerning insolvency risks, are ill-placed to negotiate terms with traders and, indeed, may not see themselves as credit suppliers.

The Cork Committee was unmoved by these arguments, though it did not respond to them in detail and merely urged that consumer creditors extend credit like traders and said that between the two groups, there is ‘no essential difference’. The problem for the proponents of consumer protection lies in any contention that consumers are in a worse position than all unsecured trade creditors. The small unsecured trade creditor who is not in a continuing relationship with a debtor company may (as indicated in chapter 14) be very poorly positioned to evaluate risks, may not consider himself as a credit supplier and, arguably, may be more vulnerable than the average consumer in cases of default. The consumer may be deprived, on default, of a luxury consumer item; the small trade creditor may lose out on the payment that allows his business to continue. The consumer may suffer a personal loss; the small trader’s loss may affect a host of employees very significantly. Any rationale for preferential treatment that is based on a vulnerability assessment might have to include numbers of unsecured trade creditors as well as consumers. Given these considerations, the case in fairness for special treatment of consumers as a general class seems not to be made out.

To conclude on the use of trust devices, there may be a case for encouraging the use of trust-based protections for parties who supply funds in rescue scenarios. Any potential prejudice to the general body of corporate creditors may then be compensated for by attendant increases in the company’s prospects of survival. In relation to non-rescue situations, the justification for trust devices seems highly questionable on efficiency and fairness grounds. Widespread use of trust arrangements is likely to lead to inflexible regimes of financing that are not efficient and consistent with dynamism in the marketplace. Unfairness is also likely to result because of informational and resourcing disparities, with the end result of worsening the positions of unsecured creditors. Legal uncertainties further compound these problems. The way forward on trust may, as Goodhart and Jones suggest,165 be to treat fund suppliers as de facto creditors and to seek to ameliorate the position of unsecured creditors more generally rather than to create yet another protected group.

165 Goodhart and Jones, ‘Infiltration of Equitable Doctrine’, p. 512.