High Court ruling provides further guidance on use of Quistclose trusts

The High Court found that commission payable to Westbury Private Clients, an investment management company in liquidation, was not held on trust for investment introducer Gaudi Regulated Services. Instead the money formed part of Westbury’s assets.

The case is the second major decision relating to Quistclose trusts this year, following a March 2019 Court of Appeal (CoA) ruling in favour of Nigerian company Zumax. The CoA found international money transfers between bank accounts, executed by a clearing system or correspondent bank, do not give rise to a trust relationship in favour of the customer who gave the transfer instruction.

“It is hardly surprising that claimants should wish to push the boundaries of the Quistclose trust, especially when suing an insolvent defendant. However this decision, like the decision in the Zumax case earlier this year, shows that special circumstances are required in order for an ordinary creditor-debtor relationship to be elevated to one between a trustee and beneficiary,” said civil fraud expert Andrew Barns-Graham of Pinsent Masons, the law firm behind Out-Law.

“The case law now clearly demonstrates that establishing the existence of a Quistclose trust is not easy. In the right case it is of course a valuable route to asset recovery but, where the evidence does not stack up, creditors must consider their other options and take specialist advice,” Barns-Graham said.

Pinsent Masons civil fraud expert Alan Sheeley said: “Although this decision re-emphasises that Quistclose trusts exist only in limited circumstances, it is always worth bearing in mind that there are other types of trust which claimants can sometimes rely upon as a means of asserting priority over specific assets.

“For example, it is frequently open to victims of fraud to assert proprietary claims over the proceeds of the fraud. We strongly recommend that victims obtain specialist advice from a fraud litigator when formulating their asset recovery strategy,” Sheeley said.

According to the agreement between Westbury and Gaudi, Westbury was able to debit fees, third-party costs and trade commissions from the client portfolio it was managing for Gaudi.

Gaudi had a separate agreement with the custodian trustee for pension funds held within self-invested personal pension (SIPP) wrappers, which meant that all SIPP accounts would operate in the same way. Westbury’s agreement with the trustee included an obligation that the trustee would hold all cash received from a SIPP for payment of liabilities in a separate bank account, and it would also pay fees, expenses and trade commissions in accordance with the agreement. Meanwhile, a financial adviser would also receive introductory commission from Westbury in respect of Gaudi’s SIPP business.

In 2016 Westbury received over £337,000 in fees and commission from the trustee, including almost £141,000 attributable to the financial adviser’s commission. This sum was later transferred to a segregated bank account in the liquidator’s name.

Gaudi argued that the money was held for it on a Quistclose trust basis, which can in certain circumstances arise where money or other property is transferred to someone else for a particular purpose.

The court disagreed, saying that the contract between Westbury and the financial adviser had created a creditor-debtor relationship, and Westbury was not expected or required to act as a trustee. In addition, there was no contractual relationship between Gaudi or the trustee and the financial adviser, meaning the latter could only seek payment from Westbury.

Westbury’s right to claim from Gaudi and the trustee a sum equal to the commission it owed to the financial adviser was based on commercial agreements which did not establish a trust, and there was no provision requiring Westbury to only use these funds to pay the commission. Accordingly, the £141,000 was part of Westbury’s general funds and should be considered among its assets in its liquidation.