Farepak Foods and Gifts Ltd & Ors v Revenue and Customs & Anor Rev 1

Customer payments made through a company’s agents are ordinarily received by the company when received by those agents. A Quistclose trust requires more than advance payment for goods or services; the circumstances must indicate an obligation to keep the money separate pending application to the stated purpose.

A constructive trust may arise where money is received after the company has decided to cease trading and knows that the promised consideration will fail, but the relevant time of payment and receipt must first be established. Rectification may correct a mistaken description in a unilateral trust deed where the intended trust and property are sufficiently proved. The rule in Ex parte James cannot be used simply to override creditors’ legal rights and preference rules.

The joint administrators of Farepak Food and Gifts Ltd, which had entered administration after operating a Christmas savings scheme, sought directions concerning approximately £1 million received from customers shortly before and after the administration. They argued that the money was held for customers under a Quistclose resulting trust, a constructive trust, an express trust deed, or the rule in Ex parte James.

The trust deed identified the wrong bank account. The central issues were the legal status of the agents collecting customer payments, when payments were received by Farepak, whether the relevant trust doctrines applied, whether the deed could be rectified, and whether distributions could safely be authorised on the available evidence.

1. Application refused. The court declined to make any of the directions sought authorising distribution. The conclusions were made on a summary basis and did not prevent a later application supported by fuller evidence.
2. The agents were agents of Farepak, not customers, for the collection and transmission of payments. Payment to an agent was therefore, in principle, payment to Farepak. The customer relationship was contractual: contributions were advance payments towards goods or vouchers, and provisions for refunds were contractual terms. The Quistclose argument consequently failed.
3. A constructive trust could arguably arise where Farepak received money after deciding to cease trading and after indicating that it should no longer receive payments, because there would be a total failure of consideration. The result in Neste Oy v Barclays Bank [1983] 2 Lloyds Rep 658 was treated as capable of reconciliation with institutional constructive trust principles, possibly through mistake. However, the court could not determine when the relevant payments were made and received. Bank credit dates did not necessarily correspond with receipt by Farepak, because agents had already received the money and clearing arrangements intervened.
4. The trust deed was executed through a mistake as to the account number. It could be rectified under Re Butlin’s Settlement [1976] Ch 251 by substituting the intended current account. The rectified deed would cover customer money, but the unresolved question whether it improperly preferred customers who were already creditors prevented distribution.
5. The rule in Ex parte James applied to the administrators as officers of the court under Schedule B1 paragraph 5 of the Insolvency Act 1986. It could address unconscionable reliance on an existing legal right, but could not override beneficial ownership, creditors’ rights or preference rules merely because repayment appeared fair.
6. Post-administration money could be returned where shown to have been received by the company after administration, but the same evidential difficulties applied. The administrators could return money which the company had not previously received and did not wish to retain.