Raymond Bieber & Ors v Teathers Ltd

A Quistclose trust requires an objectively ascertained arrangement that money is not at the recipient’s free disposal, but is retained beneficially for the payer and may be used only for a defined purpose. A statement of intended use, without more, ordinarily creates personal obligations rather than a trust.

Where investors irrevocably subscribe capital to a partnership on the express terms of a partnership deed, their individual beneficial interests in the subscription money cease on its authorised transfer to the partnership. Investment criteria in a non-contractual information memorandum do not impose additional trust restrictions where they were not incorporated into, and are inconsistent with, the deed.

Client money may cease to be protected by the regulatory trust when paid, on the client’s authority, into a joint partnership account belonging to the client partners.

The claimants invested in the Take 3 television-production partnerships promoted by Teathers Ltd. They alleged that their subscriptions were held on a Quistclose trust and that Teathers could invest only in productions meeting criteria said to arise from the information memorandum, including a 60% pre-sale requirement.

Norris J determined preliminary issues and rejected the alleged continuing trust over money transferred from Teathers’ client account into the partnership account. He also rejected the contention that the transfer breached the regulatory client-money trust.

The claimants appealed. The central issues were whether the subscriptions remained trust money after their authorised contribution as partnership capital, and whether transfer to the partnership account contravened the applicable client-money rules.

1. Appeal dismissed. Patten LJ, with whom Sullivan LJ and Arden LJ agreed, upheld the rejection of both the Quistclose-trust claim and the regulatory-trust claim.

2. A Quistclose trust depends on the objectively determined terms and structure of the transaction. It is insufficient that money is paid for a stated use. The arrangement must show that the money is not intended to become part of the recipient’s general assets and remains beneficially the payer’s, subject to a mandate to apply it for a sufficiently defined purpose.

3. The subscriptions were trust money while held in Teathers’ HSBC client account. They had been paid for the limited purpose of investment in a Take 3 partnership, and had to be returned if the minimum subscription was not achieved. But the authorised transfer into the partnership account changed their legal character. Under the Subscription Agreement, power of attorney and Partnership Deed, each investor irrevocably contributed capital to an unlimited partnership. The investor’s individual beneficial ownership of the subscription then ceased and was replaced by rights to partnership profits and net assets on dissolution.

4. The information memorandum was not itself contractual. Its investment statements did not incorporate the Take Criteria into the Partnership Deed or qualify Teathers’ express powers as managing partner. To imply those restrictions would contradict the deed’s complete contractual scheme and its express authority to manage the partnership business. The court therefore did not need to resolve conclusively whether every reformulated criterion was sufficiently certain for a trust mandate.

5. The client-money rules did not render the authorised transfer to the Barclays partnership account a breach of trust. The account belonged jointly to the client investors as partners. It was not necessary that it be an account in the sole name or sole control of an individual client. Alternatively, the transfer was a payment to a third party on the clients’ instructions. Teathers’ drawing authority arose from its contractual office as managing partner, not from its continuing control of client money.

6. The conclusion did not exclude a distinct claim for breach of fiduciary duty by Teathers as managing partner. Such a claim would concern Teathers’ stewardship of partnership capital and would require proof of breach of the duties attaching to that role; the Take Criteria were not strict trust-based limits on its authority.

• Court of Appeal (Civil Division) dismissed the claimants’ appeal and affirmed Norris J’s determination of the preliminary issues: [2012] EWCA Civ 1466.
• High Court of Justice Norris J rejected the alleged continuing Quistclose trust over partnership money and the alleged breach of the regulatory client-money trust.