The defendant (Teathers) promoted a series of unregulated collective investment schemes intended to take advantage of tax reliefs available on investments in TV productions. UK tax payers were entitled to write down 100% of any expenditure on a film or TV production certified as a British Qualifying Film. The schemes had not proved successful. Many of the productions were commercial failures and a number of them had not been certified as British Qualifying Films and were illegible for the tax relief that was the rationale behind the schemes. The claimants argued that money invested in the schemes was held on a Quistclose trust. A test case was brought in respect of one of the schemes, known as ‘Take 3’, on the Quistclose point. Each of the claimants was an investor in Take 3.
Applicants to invest in Take 3 were issued with an information memorandum by Teathers, which summarised the scheme, its tax advantages, and warned of the risks. A subscription agreement and power of attorney included at the end of the information memorandum were required to be completed by applicants. Each applicants’ subscription money (a minimum of £25,000) was paid by cheque or banker’s draft in favour of Teathers into Teaethers’ account at HSBC (Stage 1). The HSBC account was governed by client money rules and regulations. The investment was carried out through an unlimited partnership in which the investors were all general partners and Teathers was the managing partner. Teathers was authorised to execute the partnership deed on the investors’ behalf and transfer subscription monies from the HSBC account into a partnership account at Barclays (Stage 2). Money was then used to invest in productions (Stage 3).
The claimants argued that the investors’ money was held on a Quistclose trust to apply money only for the purpose of an investment which satisfied certain criteria derived from the information memorandum, known as the ‘Take Criteria’. The Take criteria were alleged to include that money would only be invested in productions that were certified as qualifying and that no investment would be made unless a pre-sale commitment was in place for at least 60% of the funds invested. It was alleged that the scheme implemented differed fundamentally from the scheme set out in the information memorandum. The claimants argued that if there was a Quistclose trut, then it obviated the need to prove reliance on misrepresentations or to demonstrate negligence. It was enough that the trust funds were misapplied on productions that did not comply with the Take criteria.
At first instance, Norris J rejected the existence of a trust on the basis that such a trust would be inconsistent with the express terms of the subscription agreement. It was impossible for Teathers to know with certainty at the moment they released the money whether the conditions set out in the Take criteria were satisfied. Once a partnership was constituted, no individual partner could claim that the sum he contributed to the partnership assets was held by the partners on resulting trust for him.
Held (dismissing the appeal):
- (1) In deciding whether particular arrangements involve the creation of a trust, proper account must be taken of the structure of the arrangements and the contractual mechanisms involved. Payments are routinely made in advance that do not constitute trust monies. It is necessary to be satisfied not merely that the money paid was not at the free disposal of the payee but that the arrangements were intended to provide for the preservation of the payor’s right through the medium of a trust. This involves the court being satisfied that the intention of the parties was that the money should not become the absolute property of Teathers (para ).
- (2) The investors’ funds were undeniably trust monies at the point of receipt into the HSBC client account (ie stage 1). They were held according to client money rules (para ). There is no necessary correlation between their being trust monies at Stage 1 and how they fell to be treated at Stages 2 and 3. Under the client money regulations, the monies ceased to be client (and therefore trust) monies when they were paid out either to or in accordance with the client’s instructions. The payment into the partnership account at Barclays was authorised by the subscription agreement. Therefore, the critical issue is whether the monies remained trust monies in the partnership account notwithstanding that such payment was authorised. The judge had been right to decide that the monies ceased to be client monies once paid into the partnership account. At that point, the investors’ rights were governed by the partnership deed (paras -). The subscription agreement makes it clear that the investor agrees to join Take 3 under the terms of the partnership deed and no other terms (para ).
- (3) Teathers’ duties as managing partner were owed to the general partners in respect of the partnership capital as a whole. They were not the duties of a trustee owed separately to each individual investor in respect of the monies each individual had contributed to the scheme. Once the partnership was in existence, subscriptions belonged to the firm and were vested in the general partners as joint legal owners. Each investor’s beneficial ownership of individual subscriptions ceased and was replaced with a right to participate in the profits of the firm and its net assets on dissolution (para ).
- (4) The claim based on Quistclose fails. Any equitable claim against Teathers in respect of its choice of investments will require proof that Teathers acted in breach of its duty to be honest and faithful in the exercise of its powers as managing partner (para ).