Bieber & Ors v Teathers Ltd

The court applied the authorities on Quistclose/resulting trusts (including Barclays Bank v Quistclose Investments and Twinsectra) and held that subscription monies were subject to a trust while held in the promoter's client settlement account but became partnership capital (and ceased to be held on that resulting trust) once properly allocated to and paid into a constituted Take 3 partnership after the scheme minimum subscription was reached. The Take Criteria distilled from the Information Memorandum were not sufficiently precise or objectively ascertainable at the time of investment to operate as directions creating a continuing Quistclose trust. The parties' written documents (notably the Subscription Agreement and the Partnership Deed) showed that on allocation the money became partnership capital to be dealt with under the Partnership Deed and the Management Agreement. The promoter's authority to apply subscriptions would, however, cease if at the time of allocation the promoter actually knew the partnership's stated business (development, production and exploitation of qualifying British TV productions) was impossible to achieve. Finally, on the regulatory point, transfer of subscriptions from the promoter's client settlement account to the partnership bank account complied with the client money rules' safe harbours and the money ceased to be client money on such transfer.

Background and nature of the claim:

The claimants were investors in the unregulated "Take 3 TV Partnerships" promoted by Teather & Greenwood (Teathers). They alleged, among other causes of action, breach of trust arising from the use of subscription monies and sought equitable remedies including an account or equitable compensation. The court was directed to determine a preliminary issue, selected by the parties, on whether and when subscription monies were held on trust.

Procedural posture:

• First instance Chancery Division trial of a preliminary issue concerning the trust status of subscription monies and related regulatory questions.

Issues framed by the court:

1. Whether money paid by a claimant to Teathers for investment in a Take scheme was at the free disposal of Teathers;
2. If not, how Teathers' freedom to dispose of the money was restricted and whether that restriction derived from the Take Criteria;
3. For what purposes Teathers was entitled to apply the claimants' money;
4. Whether Teathers was authorised to apply funds only in accordance with the Take Criteria;
5. What regulatory duties applied to Teathers in relation to client monies.

Key factual and documentary findings:

• Subscriptions were made by irrevocable offer in a Subscription Agreement and, after allocation, recorded as capital contributions under a Partnership Deed; partnership capital was subject to partnership accounting (including consolidation on dissolution) and to fees and management charges specified in the documents.
• The Information Memorandum described the Take Scheme and articulated several "Take Criteria" (including certification as a British Qualifying Film, presales of at least 60%, gearing, completion within the tax year and realisation of library value) and risk warnings; however, some criteria relied upon by claimants could not be objectively tested at the time of investment.
• Technical Notes and Verification Notes were not part of the admissible background for construing the parties' transaction as they were not shown to have been made known to the investing public and were confidential.

Court's reasoning and disposition:

The court summarised Quistclose principles: the inquiry is whether funds were intended to be at the recipient's free disposal; a resulting trust arises where the mutual intention is that the funds be used exclusively for a specified purpose and returned if not so applied.

The court found that (i) while monies remained in Teathers' settlement account they were client money and subject to a Quistclose-type restriction, (ii) once the scheme minimum subscription was met and a subscriber was allocated to a Take 3 partnership and his subscription paid into the partnership bank account the payment became partnership capital and the subscriber's beneficial interest in the money ceased, and (iii) the Take Criteria were either incapable in principle of being objectively ascertained at the time of investment or too vague to constitute the requisite precise mandate for a continuing resulting trust. The only occasion on which a trust-based restriction would persist beyond allocation was where Teathers actually knew that it was impossible for the partnership to conduct the Partnership Business; actual knowledge of impossibility would extinguish authority and render any application of the money unconscionable.

On regulatory rules the court held that transfer from the settlement account to a partnership bank account was consistent with the client money rules' safe harbours (payment to a client's account or to a third party on client instructions) and therefore the monies ceased to be client money on transfer in accordance with the Subscription Agreement.

Subsidiary findings: The court excluded Technical Notes and confidential Verification Notes as admissible background for construction of the parties' mutual intention, and emphasised that contractual and partnership documents govern property rights and mandates; it rejected arguments seeking to conflate the standard of performance (competence in implementing the scheme) with the scope of authority.

Preliminary issue decided in favour of Teathers. The court held that subscription monies were held on a Quistclose-type resulting trust while in the promoter's settlement account but ceased to be so (and became partnership capital) once properly allocated to and paid into a constituted Take 3 partnership after the scheme minimum subscription was reached. The Take Criteria did not create a continuing trust because they were either incapable of objective ascertainment at the time of investment or too imprecise; Teathers' authority would only be defeated if it actually knew the partnership business was impossible. Transfers to partnership accounts complied with the client money safe harbours and ceased to be client money.