Challinor and others v Juliet Bellis & Co and another

Solicitor – Breach of trust – Property investment scheme – Appellant acting as solicitor for scheme and receiving moneys from respondent investors into its client account – Appellant paying those moneys out in reduction of bridging loan taken out by special purpose vehicle (SPV) to funds acquisition of land for scheme – No formal documentation in place at that date concerning respondents’ rights to equity in SPV – Whether appellant acting in breach of trust by paying moneys out contrary to expectations of respondents as to how their moneys would be held – Appeal allowed The respondents participated as investors in a property investment scheme promoted in 2007 for the development of land in and around Fairoaks airport in Surrey. Most of the respondents had invested in the scheme promoter’s previous schemes and they were early investors in the 2007 scheme. The land was acquired through a special purpose vehicle (SPV). The appellant acted as the solicitor for the scheme and investors’ contributions were paid into its client account. Between them, the claimants invested £2.28m. They anticipated that, as under previous schemes, most of their money would be used as a repayable loan to the SPV while the remainder would buy them control of the SPV through a share in its equity coupled to the loan; however, the equity participation was never formally agreed. With the encouragement of an employee of the scheme promoter, the appellant applied the respondents’ investment moneys to reduce a bridging loan taken out by the SPV to fund the acquisition of the land. The scheme promoter subsequently went into administration and the SPV followed in 2010. The respondents claimed that the appellant had wrongfully paid their investment moneys out of its client account in breach of contract and/or trust. Allowing the claim in the court below, the judge found that the appellant had held the moneys on a trust of the type found to exist in Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567, by analogy with the position where a loan was made to a borrower to be applied only for a specific purpose; he held that the terms on which the appellant had received the claimants’ moneys into its client account, namely to hold them unless and until the respondents’ participation and control of the SPV was safely arranged, negated any intention that the moneys should belong immediately to the SPV. He held that it did not matter that the appellant was not itself the borrower of the funds since Quistclose trust analysis was capable of applying to a three-party situation: see [2013] EWHC 347 (Ch); [2013] PLSCS 62. The appellant appealed. The central issue was whether the respondents had advanced the moneys on trust for themselves pending the satisfaction of certain ill-defined conditions regarding “safety” or had each made an immediate loan to the SPV by paying the money, with no strings attached, to the appellant as the SPV’s agent. Held: The appeal was allowed. (1) The phrase “Quistclose-type trust” referred not only for Quistclose trusts in the strict sense but also to accommodate analogous trusts which shared the same essential characteristics. Such trusts were a species of resulting trust which arose where property, usually money, was transferred on terms which did not leave it at the free disposal of the transferee. The restriction on use was usually created by an arrangement that the money should be used exclusively for a stated purpose or purposes. There had to be, objectively viewed, an intention to create a trust on the part of the transferor; the transferor had to have intended to enter into arrangements which, viewed objectively, had the effect in law of creating a trust and the transferor’s subjective intentions were irrelevant for that purpose. In that respect, Quistclose-type trusts were no different from any other trusts. In particular, they were not presumed to exist unless a contrary intention was proved, as was the case with the traditional type of resulting trust where a person made a gratuitous transfer of property to an apparent stranger. The question of whether a trust had been created, by the imposition of the essential restrictions on the transferee’s use of the property, would usually turn on the true construction of the words used by the transferor. However, where the transferor said or wrote nothing but responded to an invitation to transfer the property on terms, then the true construction of the invitation was likely to be decisive. The invitation would usually come from the transferee but, as in the instant case, it could come from someone else, where that person invited the transferor to transfer money to the transferee to be used solely for a specified purpose. In such cases, whether the transferee would be liable for breach of trust by using the money for some other purpose would depend on whether it knew of the terms of the invitation before disposing of the money. Where property was transferred on terms that did not leave it at the free disposal of the transferee, then, under the Quistclose-type trust thereby established, the beneficial interest in the property would remain with the transferor unless and until the purposes for which it had been transferred were fulfilled. That beneficial interest would cease to exist if, and to the extent that, the property was used for the stated purposes, but not otherwise. If the property could not be applied for the stated purpose owing to some lack of clarity in the identification of that purpose, then the transferor’s beneficial interest would continue in existence. Uncertainty as to whether the property was to be at the free disposal of the transferee would not work in favour of the transferor. Instead, where it could not be demonstrated that money apparently advanced by way of loan was not to be at the free disposal of the transferee, the ordinary consequence was that the money became the property of the transferee, who was free to apply it as it chose, leaving the lender at risk of the transferee’s insolvency: Quistclose and Twinsectra Ltd v Yardley [2002] UKHL 12; [2002] 2 AC 164; [2002] PLSCS 203 applied. (2) Apart from the payment of money, there were no dealings of any kind between the respondents and the appellant as their as alleged trustee with regard to the subject matter of the trust. The basis on which the respondents had paid their money to the appellant depended on the terms of the invitation to which they responded by making those payments, set in its proper context, which consisted mainly of their participation in previous investment schemes put forward by the same scheme promoter. An objective review of the relevant primary facts led to the conclusion that the respondents paid the money to the appellant, as the SPV’s solicitor and agent, by way of immediate loan to the SPV. It was relevant that the Fairoaks scheme differed from the majority of the previous schemes in various respects. Unlike previous schemes, the SPV was an offshore company and the investors were to acquire equity, not in the SPV itself, but in an offshore unit trust which would be set up to acquire the SPV. The invitation materials sent to the respondents clearly invited the making of an early investment by way of immediate loan to the SPV, with no restrictions upon the use which the SPV or the appellant could make of the loan moneys. The invitation materials presented an opportunity to lend before obtaining equity, rather than at the same time, since they emphasised that the equity vehicle had yet to be set up. The judge had therefore erred in finding that the respondents paid the money to the appellant on trust for themselves pending fulfilment of the “safety” condition. The respondents had not, by their conduct, imposed a Quistclose-type trust, or any trust, in relation to those payments. (3) That analysis applied regardless of whether the appellant had the SPV’s authority to receive the money on its behalf or to disburse the money for the SPV’s benefit in the way that it did. In paying the money to the appellant, the respondents had to be taken to have intended, in the relevant objective sense, that the money should belong beneficially to the SPV from the moment when it reached the appellant’s client account, in the same way as it would have done had they paid the SPV directly. The appellant therefore held the money on trust solely for the SPV and not on resulting trust for the respondents. Where a transferor made a payment to a solicitor’s client account for the benefit of the solicitor’s existing client, and the solicitor accepted that payment on those terms, then the solicitor held the payment on trust for its client, regardless of whether the client had authorised the solicitor to receive that payment on its behalf. If, on learning of the solicitor’s receipt of the payment, the client declined to receive it, then it could direct the solicitor to hold the money to the transferor’s order. Unless and until that happened (and it had not happened in the instant case), the solicitor held the money for its client. There was therefore no “lacuna” in the beneficial interest which needed to be filled by a resulting trust: Westdeutsche Landesbank Girozentrale v Islington London Borough Council [1996] AC 669 applied; Vandervell v Inland Revenue Commissioners [1967] 2 AC 291 distinguished. (4) The respondents could have no restitutionary claim against the appellant for unjust enrichment. The appellant was not unjustly enriched by receipt of the money into its client account on statutory trust for the SPV. Regardless of whether there was a relevant mistake or a total failure of consideration, the disbursement of the money by the appellant to or for the benefit of the SPV was a sufficient change of position in good faith, in relation to the respondents, to bar any restitutionary claim. In that context, it was irrelevant whether the appellant acted in all respects with commercial probity with regard to the respondents in its dealings with the money. The appellant owed no owed no duties or responsibilities to the respondents since they had advanced their money by way of immediate loan to its client. Ian Croxford QC and Clare Stanley (instructed by Clyde & Co LLP) appeared for the appellant; Andrew Sutcliffe QC and Adam Kramer (instructed by Hewlett Swanson LLP, of Manchester) appeared for the respondents. Sally Dobson, barrister Click here to read the transcript: Challinor and others v Juliet Bellis & Co and another