The case concerned a property investment scheme relating to land at and around an airport known as Fairoaks (the Fairoaks scheme). The Fairoaks scheme was the last in a substantial series of schemes (the Albemarle schemes) which, prior to the Fairoaks scheme, were unregulated collective investment schemes promoted by Egan Lawson (later ECS after its takeover by Erinaceous Group PLC (Erinaceous)) involving investment through a single purpose vehicle (SPV). The underlying subject matter of each scheme consisted of either commercial or development property or a mixture of both. The schemes sought to achieve tax advantages for the investors via a combination of loan and equity. The loans usually consisted of unsecured interest-free loans and therefore were subordinated in priority to any secured bank lending. The equity investment consisted of a share in the SPV proportionate to the amount of each investor’s loan. The effect of the equity part of the investment was that the investors could control the SPV. The manner in which investments were solicited and handled at the commencement of each scheme was not wholly uniform.
There were significant differences between the Fairoaks scheme and its predecessors. In the Fairoaks scheme the SPV (AFL) had already completed the acquisition of the property which was the subject of the scheme (through secured lending by RBS, an unsecured loan from Erinaceous and a short-term bridging loan from RBS), the amount to be raised from private investors made it the biggest funding exercise undertaken in relation to any of the Albemarle schemes and an important tax change led to significant differences involving an alternative structure whereby an offshore company would be used as the SPV and investors would acquire equity not in the SPV itself but in an offshore unity trust which would be set up to acquire the SPV. Due to the commercial momentum behind the acquisition of the airport land it could not await perfection of the new structure and so it was decided to press ahead with the acquisition of a suitable Guernsey company as the SPV in time for completion, leaving the perfection of the structure and in particular the formation of the unit trust to a later date. Accordingly AFL was thus acquired with an individual being the beneficial owner of its shares pending the setting up of a unit trust designed in due course to confer indirect ownership and control of AFL upon investors.
The respondents were a group of 21 investors who invested in the Fairoaks scheme. Every one of the respondents had invested in one or more of the earlier Albemarle schemes and it was because they were Albemarle scheme investors that they were targeted with the invitation to make early investments in the Fairoaks scheme. The invitations to invest to which the respondents responded were couched in terms which assumed a general understanding of the essential structure of Albemarle schemes. The first communication to potential investors took the form of an email (the teaser email) which attached a brief description of the development opportunity together with photographs, Excel spreadsheets and a development appraisal. Each of the respondents responded to the teaser email stating how much they wished to be earmarked for them. Subsequently, an email was sent to each respondent (identical save for the amount which each respondent wished to invest) (the loan note email). The loan note email attached a note of the AFL’s solicitors’ (the firm) client account bank details together with a form of loan note certificate (the draft loan note). The loans were to accrue interest at 1% above base and to be repayable on the later of one year from the date of issue or when the senior debt (being the debt held by RBS) should have been repaid in full.
In late August and early September 2007 the firm received into its client account payments from the respondents. The aggregate amount paid by the respondents to the firm was £2.28m. The bulk of that sum was shortly thereafter paid out by the firm to RBS in reduction of the short-term borrowing incurred by AFL. The Fairoaks scheme did not prosper and AFL was eventually placed into insolvent administration with little prospect of any significant distribution to creditors in respect of the Fairoaks scheme.
In November 2010 the respondents commenced proceedings seeking to recover their losses in full from the firm on the main basis that the firm had paid the monies out of its client account to or for the benefit of AFL in breach of what was described as an escrow agreement that it should be held by the firm pending satisfaction of conditions which were in the event never satisfied. Alternatively the respondents claimed that the firm received the monies upon trust for them and disbursed it in breach of that trust. This was argued in three forms: first a Quistclose trust, secondly an implied resulting trust analogous to a Quistclose trust and thirdly a resulting trust arising from the fact that the firm had received the respondent’s money without authority from AFL. Finally the respondents made a claim in restitution upon the bases of mistake and total failure of consideration.
At first instance, the judge gave judgment for the respondents. In so doing, the judge rejected the respondents’ claim that a contractual escrow had been agreed with the firm and the first basis for the existence of a trust (a Quistclose trust) but held in favour of the second and, alternatively, third bases for the existence of a trust. The judge made no finding about restitution but indicated that he probably would have upheld a restitutionary claim in the alternative.
The firm appealed the judge’s conclusions on the trust claim. The respondents sought, if necessary, a judgment in their favour on the restitutionary claim. No challenge was made to the judge’s rejection of the escrow claim.
Held, allowing the appellants’ appeal:
- 1) The judge was wrong to find that the respondent investors paid their money to the firm upon a Quistclose-type trust for themselves, pending fulfilment of the safety condition. Such trusts arose where property was transferred on terms which do not leave the property at the free disposal of the transferee, usually due to an arrangement that the money should be used exclusively for a stated purpose. Where such a trust is established the beneficial interest in the property remains in the transferor unless and until the purposes for which it has been transferred have been fulfilled. The application of the property for the stated purpose is a power vested in the transferee, not (usually at least) a primary purpose trust. If the property cannot be applied for its stated purpose due to some lack of clarity in the identification of the purpose then the transferor’s beneficial interest continues in existence. However this did not mean that uncertainty as to whether the property was to be at the free disposal of the transferee worked in favour of the transferor. Where it is not demonstrated that money apparently advanced by way of loan was not to be at the free disposal of the transferee, the ordinary consequence is that the money becomes the property of the transferee who is free to apply it as he chooses, leaving the lender at risk of his insolvency; the default position being that the transfer of legal title carries with it the beneficial interest. For such a trust to arise the transferor must have intended to create a trust. This was an objective question in that the transferor must have intended to enter into arrangements which, viewed objectively, had the effect in law of creating a trust. A transferor’s subjective intentions are irrelevant, he creates a trust by his words or conduct, not his innermost thoughts. Usually whether the essential restrictions upon the transferee’s use of property had been imposed (so as to create a trust) turns upon the trust construction of the words used by the transferor. However where, as here, the transferor says or writes nothing but responds to an invitation to transfer the property on terms, then it is the true construction of the invitation which is likely to be decisive. The invitation usually comes from the transferee but it can come from a third party (at , , , ,  and ).
- 2) In the present case an objective view of the relevant primary facts led to the conclusion that the respondent investors paid the money to the firm as immediate loans to AFL. It was essential to address the issue as to the respondents’ objective intention by reference to the offering documents (the teaser email and loan note email) since the respondent investors transferred their money to the firm pursuant to the invitations in the offering documents. As these constituted the whole of the invitation material to which the respondents each responded by making their payments they lay at the heart of the analysis of what, if any, restriction the respondents sought to place, when paying the firm, upon the use that could be made of their money. On their face the offering documents seemed to clearly invite the making of an investment by way of an immediate loan to AFL with no restrictions upon the use which AFL or the firm could make of the loan monies. It was plain from the teaser email that the investment contributions were being sought straightway, prior to formal fundraising and at a stage when the fund through which the investors would ultimately be enabled to control AFL had yet to be created. Further the loan note email made clear that the loan money was being requested immediately with loan notes issued straightaway thereafter and all prior to the completion of the unit trust. The draft loan notes made crystal clear that the obligations arising from the payment of the money were to fall on AFL rather than the firm, both as to repayment of the principal and payment of interest. The method of payment to the client account of the firm was simply a means of enabling willing investors to make immediate transfers of loan money. While the context in which the respondents were invited to make payments by way of investment in the Fairoaks scheme assumed a general understanding of the essential structure of Albemarle schemes, of which the Fairoaks scheme was the last in a substantial series, the Fairoaks scheme invitation conspicuously lacked the clear and specific offers of escrow arrangements which had existed in some of the previous Albemarle schemes (at ,  and  to ).
- 3) The conclusion that the respondents did not by their conduct impose a Quistclose-type trust in relation to the payments which they made to the firm means that the issue of the firm’s knowledge does not arise (at ).
- 4) As regards the third basis for the existence of a trust (the resulting trust), contrary to the judge’s conclusion, whether the firm had AFL’s authority to receive the money on its behalf, the firm nonetheless held it on trust solely for AFL and not on resulting trust for the respondents. The judge’s assumption that a payment made by A to a solicitor’s client account for the benefit of the solicitor’s existing client B is not sufficient to confer the beneficial ownership on B where B has not authorised the solicitor to receive it was wrong. If the solicitor accepts A’s payment on those terms then he holds it on trust for B. It is irrelevant whether the beneficiary has authorised the trustee to receive the money on its behalf; the court will enforce that trust regardless of the beneficiary’s authority. If, upon learning of his solicitor’s receipt of the payment, B declines to receive it, then B may direct the solicitor thenceforth to hold the money for A or to A’s order. But until then the solicitor holds the money for B. In the present case, objectively the respondents paid their money to the firm as immediate loans to AFL intending that the money should belong beneficially to AFL from the moment when it reached that client account, even while the legal title remained in the firm (or strictly in its bank), in exactly the same way as it would have if they had paid AFL direct. AFL might in theory have repudiated the payments on grounds of lack of authority and directed the firm thenceforth to hold them for the respondents but it did not. Accordingly the alternative basis of the respondents’ case must fail (at , , ,  and ).
5) Contrary to the judge’s provisional view, there could be no restitutionary claim by the respondents against the firm due to two insuperable obstacles. First, from the moment of receipt the firm held the respondents’ monies on client account trust for AFL. Consequently the firm was not enriched at all by the receipts. Secondly, the disbursement of the money by the firm to or for the benefit of AFL meant that the firm would have had a change of position defence if a restitutionary claim had otherwise been available. In that context it was irrelevant whether the firm acted in all respects with commercial probity in relation to their dealings with money, vis a vis AFL (at  and  to ).