Raymond Bieber & Ors v Teathers Ltd

The Court of Appeal decided that the investors in the Take 3 TV partnerships failed to establish a Quistclose-type trust that continued after subscription monies were paid into the partnership account. The court applied the established Quistclose principles (as explained in Barclays Bank Ltd v Quistclose Investments and Twinsectra Ltd v Yardley) and held that the contractual architecture of the Subscription Agreement and the professionally drafted Partnership Deed governed the fate of the monies once the partnership was constituted. The Partnership Deed treated subscriptions as partnership capital and gave Teathers managing-partner powers to invest for the partnership business; that regime was inconsistent with a continuing individual beneficial interest enforceable by a Quistclose trust. The court also rejected a claim that the authorised transfer of monies from the regulated client account to the partnership account breached the client money rules in the applicable financial services regime.

Background and parties. The claimants were investors in the Take 3 TV Partnerships, unregulated collective investment schemes promoted by Teathers & Greenwood Limited, intended to obtain tax relief under s.42 Finance (No. 2) Act 1992 and s.48 Finance (No. 2) Act 1997 and certified under the Films Act 1985. Many productions failed or were not certified and investors sued Teathers under various heads, including breach of trust. Take 3 was selected as the test case to determine whether a Quistclose-type trust governed the use of subscription monies.

Nature of the claim and relief sought. The principal preliminary issue was whether subscription monies were held on a Quistclose trust to be applied only in investments that satisfied the "Take Criteria" set out in the Information Memorandum (for example 60% pre-sales, eligibility for certification as British Qualifying Films and sufficient library rights), and if so whether Teathers had misapplied those monies. The claimants sought a declaration that the partnership account monies remained held on trust and an account of monies improperly applied.

Procedural posture. The dispute reached the Court of Appeal on appeal from Norris J in the High Court (HC09C03105). The High Court had ordered trial of various preliminary issues, framed to determine whether and in what respects Teathers' freedom to dispose of subscription monies was restricted and what regulatory duties applied.

Issues for decision.

• Whether a Quistclose-type trust was created by the Information Memorandum and Subscription Agreement such that funds, even after payment into the partnership account, were held on trust and only to be applied to productions satisfying the Take Criteria.
• Whether the Take Criteria were sufficiently precise to constitute the terms of a mandate the fulfilment of which could be objectively ascertained at the time of investment.
• Whether the transfer of subscription monies from the HSBC client account to the Barclays partnership account breached the client money rules and gave rise to trustee liability.

Reasoning and holdings. The court accepted the general Quistclose principles: the question is whether the payer and recipient intended the money not to be at the recipient's free disposal and whether the purpose is expressed with sufficient precision. The court held that (i) subscription monies were trust/client monies while held in Teathers' client account, (ii) once the subscription monies were applied by Teathers pursuant to the Subscription Agreement and the power of attorney to execute the Partnership Deed they became partnership capital under the Partnership Deed and governed by the partnership contract, and (iii) the Partnership Deed gave Teathers broad powers as managing partner inconsistent with a continuing Quistclose trust in favour of individual investors. The Take Criteria, in whole or as pleaded, were either too imprecise to form objective trust directions at the moment of investment or were inconsistent with the express contractual code in the Partnership Deed. Finally, the court rejected the argument that the authorised transfer of monies to the partnership account offended the client money rules: the partnership account was an account of the client (the partnership) and the transfer was within the regulatory framework and the contractual structure of the partnership. The appeal was dismissed.

Wider context. The court emphasised the need to respect the parties' contractual allocation of rights and duties: a fiduciary or trust overlay cannot be used to contradict clear contractual arrangements in a professionally drawn instrument. The court left open that other equitable or fiduciary claims arising from the managing-partner role might be pursued, but those are different causes of action requiring proof of breach of fiduciary duty.

The appeal is dismissed. The Court of Appeal concluded that a Quistclose-type trust did not survive the authorised payment of subscription monies into the partnership account because the Subscription Agreement and the Partnership Deed treated subscriptions as partnership capital and gave Teathers managing-partner powers inconsistent with the continued beneficial ownership claimed by individual investors. The court also held that the transfer from the client account to the partnership account did not, on the facts and in law under the client money rules, amount to a regulatory trust breach.