Cooper v PRG Powerhouse Ltd & Ors

A payment made for a specific purpose is subject to a purpose trust where the arrangement shows that the recipient was not intended to have the money at its free disposal. No express trust direction or segregation of the money is essential. The question is one of fact, determined from the arrangement and its circumstances. Payments made in advance for goods or services ordinarily do not create such a trust because the recipient is generally free to use them as working capital. Where the specified purpose fails, the money is repayable if it remains traceable into the recipient’s assets. Equitable tracing may follow money through accounts and may disregard provisional transactions that are later reversed.

Simon Cooper applied under sections 112 and 167(3) of the Insolvency Act 1986 in the liquidation of PRG Powerhouse Limited. He had paid £34,239 into the company’s payroll account so that the company could pay that sum, together with its own contribution, to Godfrey Davis in settlement of the balance due on a car-purchase finance agreement.

The company entered administration before making the onward payment. Cooper sought a declaration that the money was held on a purpose trust and repayment of the traceable amount. The central questions were whether the payment was impressed with such a trust and, if so, whether it could be traced into the company’s bank balances.

1. Purpose trust. The court applied the principles in Barclays Bank Limited v Quistclose Investments Limited [1970] AC 567 and Twinsectra Limited v Yardley [2002] 2 AC 164. The decisive question was whether the parties intended the money to be at the company’s free disposal. The intention was determined objectively from the arrangement and circumstances.
2. Segregation was not a necessary condition. Nor was it necessary for Cooper to have appreciated that the arrangement created a trust. The absence of an express direction to use the money exclusively for the specified purpose was not fatal where the arrangement, read as a whole, excluded use as working capital or for general creditors.
3. The evidence, including the three letters concerning the car and the agreed payment arrangements, established that the £34,239 was to be paid to Godfrey Davis and was not intended to form part of the company’s general assets. It was therefore impressed with a purpose trust. The company’s entry into administration frustrated the purpose, making the money repayable.
4. The court applied equitable tracing principles. The payment was swept from the payroll account into the current account. The balance remained sufficient to support tracing, and provisional transactions which were reversed were disregarded. Cooper could trace £31,218.82 through the current account and, alternatively, the full £34,239 into the net balance held across the company’s Barclays accounts.
5. The application succeeded. Cooper was entitled to recover £34,239, subject to the equitable tracing basis identified by the court.