Raymond Beiber and Others v Teathers Limited [2012] EWHC 190 (Ch)

Summary

A Quistclose trust did not arise when the Claimants' monies were transferred from a subscription account into a partnership account because the specific purpose for which the funds were provided was not objectively ascertainable at the time of the transfer.

Background

The Defendant promoted a scheme called "The Take 3 TV Partnerships" and invited subscriptions to it through an Information Memorandum.  The subscription monies were paid by the Claimants into an HSBC Settlement Account.  Once the minimum subscription had been reached, the Defendant was entitled to transfer the monies into a Barclays Partnership Account to be used for the general purpose of investing in Take 3 scheme projects. The criteria for selecting the TV productions was set out in the Information Memorandum provided to each of the Claimants (the "Take Criteria").

The Take 3 TV Partnerships were unsuccessful and the Defendant was subsequently placed into liquidation.  The Claimants advanced a breach of trust claim arguing that the Defendant had failed to invest the funds for the specific purpose of the Take 3 Scheme as set out in the Take Criteria, and that their monies were subject to a Quistclose trust.  The advantage of establishing a Quistclose trust, is that the Claimants' monies could not then be used to satisfy other creditors.

The Defendant countered that the precise terms of the Subscription Agreement had been met and that the monies had been correctly applied.  Accordingly, the monies ceased to belong to the Claimants and became the Take 3 TV Partnership monies.  

Decision

In determining the issue, the Court set out a helpful summary of the principles which are required to establish a Quistclose trust.

The Court held that monies paid by the Claimants to the Defendant for the specific purpose of investment in the Take 3 scheme were not at the free disposal of the Defendant at the time they were paid into the HSBC Settlement Account.  At that stage, the monies were subject to a Quistclose trust.

Once the minimum subscription was reached, the Defendant was entitled to transfer the monies into the Barclays Partnership Account.  At the point that the monies were transferred into the Barclays Partnership Account, the Claimants' beneficial ownership in the monies ceased and they became general partnership funds.

The Court noted that the Defendant could not allocate the subscription monies to the partnership if it actually knew at the time of that allocation that it was impossible for the partnership, once constituted, to effect the specific purpose of the Take 3 Scheme.

The Defendant's regulatory duty in respect of the client monies was to comply with the Claimants' instructions.  The transfer of monies were in accordance with the Claimants' instructions contained in the Subscription Agreement and, therefore, the monies ceased to be client money.

The Court found that there was no Quistclose trust once the monies had transferred to the Barclays Partnership Account.  Whether or not the specific purpose for which the funds have been provided has been fulfilled must be objectively ascertainable at the time the funds are applied for that purpose.  The objectively ascertainable purpose should not be considered in retrospect and, on the particular facts of this case, the specific purpose for which the funds were to be applied was too imprecise to say whether the purpose had been fulfilled.

Conclusion

This case is a helpful reminder of a Quistclose trust, in particular that the purpose of the transfer of the monies in question has to be objectively ascertainable at the time the funds are transferred.