Quistclose trusts – solicitor’s client account – restitution
The respondent investors sent money to the appellant solicitors’ client account in response to an invitation from the firm’s client, AFL, to invest in a property scheme, ‘Fairoaks’. The investors were responding to offering documents seeking early investments before the setup of the SPV, in return for loan notes and interest at base rate plus 1%.
The firm paid out the bulk of the investors’ money to RBS in reduction of a bridging loan taken out by AFL as part of the scheme. The scheme folded and AFL entered insolvent administration in 2010. The investors brought proceedings against the firm seeking repayment of the sums paid to RBS based upon: (1) breach of a Quistclose or resulting trust; or (2) restitution on the grounds of mistake or total failure of consideration. At first instance, the investors succeeded on their trust claim.
Allowing the appeal, the Court of Appeal unanimously rejected the trust claim. In order to establish a Quistclose trust (per Barclays Bank v Quistclose Investments [1970] AC 567) a claimant must show a transfer of property on terms which do not leave it at the free disposal of the transferee, usually by showing an arrangement that the property should be used exclusively for a stated purpose or purposes.
However, there must be an intention to create the trust. This is an objective question that means that the transferor must have intended to enter into arrangements which, viewed objectively, have the effect in law of creating a trust. The court will often look to construe the terms of the documents relevant to the arrangement.
In the instant case the investors had transferred funds to the firm in response to offering documents the terms of which could not be construed as giving rise to a trust; rather, the objective intention was that the funds were to be paid to the firm as immediate loans to AFL.
The claim in restitution failed because the firm was not enriched by the mere receipt of funds into its client account, held for its client’s benefit. Furthermore, there was a change of position defence. It could not be said that the firm had acted in a ‘commercially unacceptable’ way when it owed no duties or responsibilities to the investors.
The case highlights the difficulties of establishing Quistclose trusts after the failure of collective investment schemes. The recent decision in Gore v Mischon de Reya [2015] EWHC 164 (Ch) also reinforces the general impression that courts will be reluctant to find such trusts unless there is evidence of clear express terms restricting the transferee’s use of the relevant property.
