Bieber & Ors v Teathers Ltd

A Quistclose trust arises where money is not intended to be at the recipient’s free disposal and is to be used exclusively for a sufficiently certain purpose. The purpose must be objectively ascertainable when the money is applied, rather than by later assessment of success. Contractual terms describing a subscription as partnership capital may determine when the beneficial interest passes and cannot be contradicted by an inferred trust. Investment criteria involving future performance or imprecise judgments do not ordinarily define a trust mandate. Authority to apply money is distinct from the contractual duty to exercise that authority with skill and care. A recipient’s authority is, however, displaced where it actually knows that the stated purpose is impossible to achieve.

Investors brought claims against Teathers Limited, which was in liquidation, arising from an unsuccessful tax-advantaged collective investment scheme involving television productions. The court tried as a preliminary issue whether investors’ subscription monies were held on a Quistclose trust, whether Teathers could apply them only in accordance with pleaded investment criteria, and what regulatory duties governed client money.

The claimants contended that their money remained beneficially theirs until it was invested in accordance with six criteria. Teathers contended that the money became partnership capital once the minimum subscription was reached and the investor was allocated to a partnership. The central issues were the effect of the subscription documents, the partnership deed and the client-money rules.

1. Preliminary issue decided for Teathers. Subscription money was not at Teathers’ free disposal while held in its settlement account. A Quistclose trust therefore existed at that stage.
2. The trust was limited. Once the minimum subscription had been reached, Teathers could allocate the subscriber to a Take 3 partnership and pay the subscription as capital into the partnership account. The beneficial ownership of the subscription money then ceased. The partnership deed treated the contribution as partnership capital, which was irreconcilable with a continuing resulting trust for the individual subscriber.
3. The Take Criteria did not define the trust mandate. Several criteria depended on future events, including certification, payment of a presale or guarantee, and the eventual realisation of rights. Their fulfilment could not be objectively ascertained when the money was applied. Other criteria, including the requirement that downside be largely eliminated, were too imprecise and subjective to operate as directions.
4. The court distinguished the scope of authority from the standard of performance. Carelessness, or failure to exercise contractual skill and care, would not ordinarily invalidate authority to apply money. Teathers’ relevant restriction was its duty to act honestly and loyally. Its authority would cease if it actually knew, when forming the partnership, that it was impossible for the partnership to conduct the business defined in the deed.
5. After the subscription became partnership capital, Teathers’ authority derived from the partnership deed and management agreement. Any relevance of the Take Criteria at that stage concerned personal or contractual obligations, not continuing beneficial ownership.
6. The regulatory rules did not preserve the trust after transfer to the partnership account. The transfer complied with the subscriber’s irrevocable instructions and fell within the applicable safe harbours. The money therefore ceased to be client money when transferred. The regulatory duties were to comply with those directions.