Patel & Anor v Barlows Solicitors (a firm) & Ors

dated 24 August 2020 of Paul Stanley made on behalf of himself and the other joint trustee in bankruptcy.

The Second Defendants contend that the Claimant’s Advance was a loan or an investment, which ranks as an unsecured claim in the bankruptcy of the Bankrupt. They rely on the fact that while the Bankrupt and the First Claimant were in business, the First Claimant sometimes advanced monies to the Bankrupt’s company to help ease its cash-flow problems. The circumstances when this happened are set out at paragraphs 3 to 8 of the First Claimant’s witness statement. They were briefly as follows.

The Bankrupt ran a company, Window World Ltd, with others, which manufactured and supplied windows for double glazing. The First Claimant had a company which specialised in the installation of those windows.

The First Claimant would often purchase windows for his customers from the Bankrupt’s company and soon became that company’s largest and best-paying customer.

From time to time, the Bankrupt’s company suffered cash-flow problems. When it did, the Bankrupt might ask the First Claimant – quoting from paragraph 5 of his witness statement – “if I could lend his business some money… I recall lending Window World around £10,000 to £15,000 by cheque on a handful of occasions. In return, [the Bankrupt] would deduct this sum from my orders and I would subsequently receive a 2.5% discount for a pro-forma order.” (My emphasis).

The Second Defendants say that this demonstrates that the First Claimant was accustomed to making unsecured loans to or on behalf of the Bankrupt on a regular basis and that the amounts which he had advanced to the Bankrupt for the purchase of the First and Second Properties were also loans or in the nature of loans.

I wholly disagree that amounts advanced by the First Claimant to ease the Bankrupt’s company’s cash flow problems were “loans”, as I understand that expression to be.

The First Claimant may have used inappropriate terminology (“lend” and “lending”) to describe his relationship with the Bankrupt’s company. However, it is clear to me that what he was describing was not the making of a loan but the payment to the Bankrupt’s company “on account” of the purchases that his business intended to make from the Bankrupt’s company for which the First Claimant would receive a 2.5% discount on his next purchase. He explained that that was why he had used the expression “pro-forma order” to describe those transactions. He was at pains to point out that he was not taking any risk in making those payments because he knew that the Bankrupt’s company would supply the windows which related to the pro-forma order and he would be able to deduct the amount of the “on account” payment and the 2.5% discount from the payment due to the Bankrupt’s company on the invoice which related to the order.

I accept what the First Claimant says. The transactions which he was describing with the First Claimant’s business were neither loans nor in the nature of loans.

But there is no question that the First Claimant had made loans to the Bankrupt from time to time after the Bankrupt had split from his “partners” and started his own business. He explains this at paragraph 8 of his witness statement in the following terms:

“I recall that [the Bankrupt] applied for an overdraft but did not get it straightaway and so I lent him £20,000 whilst his application was processed. Any monies that I lent him were always repaid in full and in a timely manner.”

I am unable to accept that the fact that the First Claimant made unsecured loans to the Bankrupt before demonstrates that the payment of the Claimants’ Advance was also made by way of loan. It is one thing advancing small amounts by way of a loan to a friend. It is quite another to be advancing over £200,000 to a friend, even a close friend, without taking any form of security for the repayment of the loan from him. In this context, it is important to note that even though the Bankrupt may have been a close

The First Claimant’s own evidence was that his investment was not to be a loan. This is what he said in paragraph 14 of his witness statement:

“In asking for an investment from myself, [the Bankrupt] was clear that the money I put in would be an investment and not a loan. I had lent him several thousand pounds every now and again in the past so that he could advance his window businesses or pay his bills on the understanding that he would either pay me back as quickly as he could, or he would take the money off my next order(s) until he had cleared the debt. However, this time it was different. He wanted to make some money in the property market, at a time when repossessions were high, but he could not do it alone. He was asking me for a lot more money on the basis that I would be involved rather than on the basis that he would pay me back later.”

If the Claimants’ Advance was paid as a loan, it is difficult to see what the terms of the loan were. There is no documentation which describes the payment of the Claimants’ Advance as a loan; and while this, by itself, does not mean that the payment of the Claimants’ Advance was not made as a loan, there is no evidence about when the loan would be repaid or the rate of interest which would be payable to the First Claimant for the loan. Although the absence of those provisions is not fatal to the existence of a loan, in a situation where the First Claimant was lending over £200,000 to the Bankrupt, one might have expected to see these matters clearly expressed in a document. It is arguable that the payment of a share of the profits (one-third to each Joint Venturer) in accordance with the terms of the Written Agreement represented the First Claim’s return on the loan which the Claimants’ Advance represented. However, that seems to me not just to amount to speculation but would be wholly inconsistent with the terms of that document, which does not record any details relating to its amount or repayment.

The Second Defendants point to the fact that there is no document between the Joint Venturers which states or records that they were agreeing to be partners. However, equally, there is no documentation which describes that the First Claimant was making a loan (or the type of investment suggested by the Second Defendants) to the Bankrupt.

The First Claimant states that the Written Agreement was preceded by at least one meeting in which the Joint Venturers and Mr Thakrar (prior to his ceasing to be involved in the Joint Venture) agreed to be partners, with each of them having to play a separate role in the partnership. He summarises this at paragraph 24 of his witness statement in the following terms:

“We agreed that we would enter into the Partnership and that our roles would be as follows:

(a)

[The Bankrupt] would be responsible for obtaining the mortgage finance (by way of a bridging loan) for 106 and 108 High Street…

(b)

I would provide any outstanding sums needed above and beyond the mortgage finance to purchase the Properties.

(c)

Nirmal would be in charge of arranging the sale of the Properties, as part of a back-to-back sale arrangement. He would not invest any money into the Partnership, but his contribution would be by way of sourcing the Properties and arranging onward sales. He was therefore a crucial part of ensuring the transaction completed.

(d)

[Mr Thakrar] would also put some money in. He would finance the purchase of 43 High Street … so that there would be no need to apply for a mortgage in respect of it.

(e)

Once all the finance had been re-paid (including the money invested by myself and [Mr Thakrar], any net profit would be shared between the four partners equally.”

If there was agreement (whether oral or implied) among the Joint Venturers about each of their roles, the absence of an expression provision in the Written Agreement is of little significance. Nor can I see how the fact that the role of the Third Defendant changed from being an introducer of a purchaser of the Properties to 426 Leicester Ltd (for which he would be paid a finder’s fee of 1%) to a partner in the Joint Venture when that company dropped out of the purchase is significant. The fact is that if the written and oral evidence of the First Claimant are correct, he agreed to be a partner and thus to be entitled to substantially more (for doing a greater amount of work) in that capacity.

When the Joint Venture was first discussed between the First Claimant and the Bankrupt, he was told in no uncertain terms that the Joint Venture would be a partnership between the proposed joint venturers. As he says at paragraphs 15 to 17 of his witness statement:

“15.

[The Bankrupt] told me that when the Properties were sold, the bridging loan and my investment would be cleared first. Any profit made after that would be split equally between all the partners.

The substance of the First Claimant’s evidence was supported by the evidence of the Bankrupt, the Third Defendant and Mr Thakrar.

The Bankrupt does not expressly state in his witness statement that the Joint Venturers had agreed to be partners. However, at paragraph 8 of the witness statement, he describes the Written Agreement as “the partnership agreement”. He also gave it that description in the course of giving his oral evidence.

The Third Defendant was in no doubt that the parties had entered into a partnership. He says so throughout his witness statement. Specifically, at paragraph 11, reflecting what the First Claimant had said in his witness statement, he says this:

“The initial conversation was informal and we talked about the Properties, what we could do with them and what responsibilities we would each have. We agreed that we would enter into a Partnership in which each of us would have the following roles to play:

(a)

[The Bankrupt] would be responsible for obtaining the mortgage finance for 106 and 108 High Street.

b)

Pravin would put down a deposit of around £175,000 and pay any disbursements and legal costs.

c)

Hasmukh would buy 43 High Street using his own money.

d)

I had sourced the Properties and would arrange their onward sale, as part of a back-to-back sale arrangement. I would also find a bridging finance company who could lend [the Bankrupt] the finance required for the purchases. In addition, I would assist with any maintenance / rent collection issues and ensure that we could obtain vacant possession of the Properties.”

The Third Defendant was also clear when he gave oral evidence that they had entered into a partnership, stating, among other things, that there was “no doubt” that “we all knew we were in a partnership.”

Likewise, Mr Thakrar was clear that the proposed joint venturers had agreed to enter into a “partnership”, though in his witness statement, he described the Written Agreement as a “joint venture agreement” and, in the course of giving his evidence, stated that

The Second Defendants say that the Written Agreement does not support the existence of a partnership and the evidence of the Joint Venturers and Mr Thakrar in support of an alleged partnership does not withstand scrutiny when examined properly and carefully.

The Written Agreement is plainly extremely poorly drafted, having been prepared by a non-professional lawyer, albeit one having a Law degree. As I have indicated above, the Second Defendants or the Previous Trustee may have attempted to obtain information from Mr Sachdev, who drafted the Written Agreement, about what the intention behind it was. So far as Mr Sachdev acted for the Bankrupt, the Previous Trustee is likely to have been able to obtain that information, including any documentation which may have been in his possession leading to the signature of the Written Agreement, under sections 311, 333 and 363 of the Insolvency Act 1986. Whether he would have been able to use that information, without the consent of the Bankrupt, is another matter, though there is no reason which I can see why the court would not have allowed him or the Second Defendants to do so if the Bankrupt had refused to provide his consent: see Re Lemos, Leeds v Lemos [2017] EWHC 1825 (Ch), [2018] Ch. 81, where the previous authorities on the subject are analysed in detail. Alternatively, if Mr Sachdev acted for all three Joint Venturers or even just the Third Defendant (as appears possible from the evidence), they might (subject to any claim privilege and, in the case of the Third Defendant, an order for disclosure being made against him) have disclosed that information in these proceedings.

It is important to observe that none of the contemporaneous documentation, whether leading to the proposed purchase of the Properties, or immediately following the abortive purchase of the

As I have already observed, the only direct evidence which there is about what the Joint Venturers intended their relationship to be points to the fact that they had agreed to be partners. Even Mr Thakrar stated that before he had withdrawn from the Joint Venture, the four of them had agreed to be “partners in the loose sense of the word.” I am unable to ascribe any significance to his reference to the four of them being partners in the “loose sense to

The Second Defendants seek to impugn the credibility of the evidence of the Joint Venturers in various ways.

First, they say that clause 2 of the Written Agreement, which states that the “receipt of the rental income of £11,500 per month will be credited into a bank account in the name of [the Bankrupt]”, is inconsistent with the existence of a partnership because it appears to suggest that the Bankrupt was entitled to any rent payable in respect of the Properties, until they were resold, in his own right.

I wholly disagree with that statement. Even disregarding the evidence of the Joint Venturers, it is plain to me that this simply cannot be correct. Clause 2 does no more than specify the account in which the rental payment had to be made. It does not give the Bankrupt the right to be entitled to keep the rental payment for his sole benefit to the exclusion of the other Joint Venturers. It does not require any great amount of ingenuity to know that if rent was being paid in respect of the Properties (which it was), then it needed to be paid into a bank account and, as the transfer of the Properties was being taken in the name of the Bankrupt, it was obvious that it should be paid into his bank account. There is absolutely no indication in the Written Agreement that the Bankrupt would be entitled to keep the rent for himself. Clause 1 of the Written Agreement clearly sets out what was agreed between the parties and clause 2 was no more than a temporary expedient, designed to set out what should happen to the collection of the rental income, pending the sale of the Properties, which the Joint Venturers had hoped would take place speedily after their purchase or – to use the First Claimant’s words – after they were bought and “flipped” over.

That this was what the Joint Venturers had in mind was clear from the evidence of the First Claimant. At paragraph 53 of his written statement, he said that the “[Written Agreement] refers to rental income being paid to Drupad alone. This was in order to keep things simple because all the net profit from the sales would have gone into his account.” In his oral evidence, the First Claimant honestly admitted that he himself had not given much thought to the payment of the rental income. He thought it was payable in the Bankrupt’s account so the Bankrupt could use it for the payment of disbursements and the like. He was clear that the amount of the rental income was not for the Bankrupt to keep for himself. The Third Defendant’s evidence was much clearer on the point. He said that as the Properties were let, rent had to be collected following their purchase and the Bankrupt was charged to collect it. As he observed when questioned: “the [onward] sale [by the Joint Venturers] would not have been completed overnight, so some rent would have been received for the Properties before they were sold.”

Nor is there any substance in the assertion that because the Joint Venturers did not discuss how the losses between them were to be shared, that is inconsistent with the existence of a partnership.

The First Claimant explained why they had not considered how any losses concerning the Joint Venture would be shared: it did not occur to him or the other Joint Venturers that the Joint Venture would make a loss: “… we never thought about anything going wrong; we did not entertain that thought.” However, when asked what would have happened in that situation, he said that “we all would have to be responsible for any losses.”

The evidence of the Third Defendant was to like effect. He said that they “could not see any losses arising because we had a sale set up.” He then stated that he accepted that if any losses were made, he and the other Joint Venturers “would be jointly and severally liable for them.”

That may also be the reason why Mr Sachdev did not think about incorporating a provision regarding losses in the Written Agreement, though, no doubt, a competent solicitor would have done. Partners will often not give thought to the sharing of losses, particularly where, as in this case, they have not taken proper professional advice about their relationship.

The failure of the Joint Venturers to make express provision (whether in writing or orally) for the sharing of losses is not fatal to the existence of a partnership. Where the partners fail to do so, section 24(1) of the PA 1890, which I have set out above, expressly provides that they “must contribute equally towards the losses whether of capital or otherwise sustained by the firm.” If the Joint Venture is a partnership in the present case, the default position in section 24(1) must apply to it. The substance of this position has been recognised in many cases: see, for example, Walker West Developments v FJ Emmett [1979] 2 EGLR 115, CA.

The Second Defendants refer to several areas of the written and oral evidence of the Joint Venturers which they say undermines the First Claimant’s contention that the Joint Venture was a partnership.

First, they refer to the transcript of the Bankrupt’s interview with the Previous Trustee’s solicitor that took place in September 2012 in which he (or his son Anup Chorera who often spoke for him) appeared to use words such as “bridging” to describe the advances which the Claimants had made towards the purchase of the Properties. I have already indicated that I can see no substance in this assertion if one considers the transcript as a whole and what the Bankrupt had to say in his witness statement dated 12 May 2012.

But even if one disregards the cherry-picking by the Second Defendants of various phrases from the transcript in support of their case, and of the explanation provided by the Bankrupt in his written statement and oral evidence about what he meant by them, it is clear that, read as a whole, the relationship which the Bankrupt was describing that he and the other Joint Venturers had in the Joint Venture was one of partnership. The following excerpts from the transcript illustrate this point:

Page 4 of the transcript – 10.26–11.10 mins

“Drupad Chorera: Now the money needs to get back to wherever it is because that’s what...the bridgers got his money [pause] Pravin needs his money.”

(My emphasis).

There is no question in my mind that what the Bankrupt is describing here is a joint venture in which each of the joint venturers would have a third share of the profits after the liabilities to the bridging company (MPV) and the First Claimant are discharged.

There then follows the following exchange between the interviewer and the Bankrupt:

Err, the remaining half a million that would be split three ways.

million gets split three ways. If they, if the insurers give back £203,000, you think Mr Patel should get 200 and then each of you get £1,000 each?

It is plain to me that this part of the exchanges demonstrates that the Joint Venturers never thought that the Joint Venture might make a loss. The interviewer might have raised with the Bankrupt what would happen if the Joint Venture had made a loss. However, he did not. It appears to be clear from the Bankrupt’s answers that it had never entered into the minds of the Joint Venturers that they might make a loss.

The Second Defendants rely heavily on what the Bankrupt says next:

Claimant], I bridged it from the bridger and I was going to bridge it from HKS [i.e. Mr Thakrar].”

The Bankrupt said words which were similar in a previous part of his interview – see recording number 3 – page 4 of the transcript – 3.30 – 7.00 mins:

“Drupad Chorera: So all the money was bridged by whoever it was. The third person was bridging it. The first person was bridging it, second person was bridging it. The money went direct to Barlows. Barlows sent it to, wherever it went…”

(My emphasis)

It is interesting to note that the interviewer does not probe into what the Bankrupt means by the words “I bridged it from Pravin.” If he had thought that the Bankrupt was using the words in the sense in which it is conventionally understood, he might have done because it had to be of crucial importance whether the amount payable to the First Claimant ranked as an unsecured claim in the bankruptcy or whether it had to be accorded some sort of priority. However, I am clear that those words were used in a loose sense, i.e. essentially informing the interviewer where the purchase monies had come from. Taken in isolation, I do not read anything else into those words. Taking the transcript as a whole, it is clear that the Bankrupt was describing an “investment” of capital by the First Claimant into the Joint Venture which he would expect the Joint Venture to pay back to him, before any profits were divided, once the Properties were sold. That much is also clear from the Bankrupt’s written statement in which he described the amount which the First Claimant was going to pay towards the purchase of the Properties as a “deposit”. Despite being asked questions about what he meant by the expression “bridged”, he was unable to expand further upon what he had said in his witness statement and in the transcript of the interview which he had provided.

The interview continued:

just done an agreement and that’s it.

whoever it was owed. It was owed by Barlows to him not me or whoever.”

(My emphasis)

It is from the above exchanges that: (a) that the Bankrupt was not using the expressions “bridge” or “bridging” to describe the making of a “bridging loan” (as conventionally understood) by the First Claimant to him. He appears to be using those expressions to describe how any shortfall between the purchase price of the Properties and the amount which MPV was prepared to advance to the Bankrupt, would be paid; (b) the First Claimant was not making a loan to the Bankrupt. He was investing capital in the Joint Venture; (c) the Bankrupt’s understanding (confirmed by the other Joint Venturers) was that the First Claimant would be entitled to the return of his capital before the profits were divided between them; and (d) each Joint Venturer would be entitled to a third share of the profits.

The Second Defendants next refer to how the First Claimant came to make the Claimants’ Advance to the Bankrupt and contend that, on a careful analysis of the evidence of the First Claimant and the Third Defendant, their account on this issue is wholly unreliable and that no meeting of the type described by them about the Joint venture is likely to have taken place in or about January 2010, as the First Claimant had claimed in paragraph 22 of his witness statement.

At paragraph 11 of his witness statement, the Third Defendant refers to the agreement which the Joint Venturers and Mr Thakrar had reached in January or February 2010 under which they had agreed that the First Claimant would invest £175,000 in the Joint Venture. The Second Defendants point out that this simply cannot be true because on 18 February 2010 (see pages 34 and 35 of the Documents Bundle), MPV had agreed to make a loan of the whole or almost the whole of the purchase price of the First and Second Properties. It was only a few weeks later, on 18 March 2010 (see pages 44 and 45 of the Documents Bundle) that MPV had decided to revise its offer and reduce the amount of the loan which it was prepared to make, such that the First Claimant needed to make a substantially higher investment in the Joint Venture.

The Third Defendant made various suggestions about how he might have known that a sum of some £175,000 would need to be invested by the First Claimant. He stated that the Joint Venturers would have undertaken rough calculations about what might be needed (stating that lenders rarely lent the full amount of the purchase price of a property), that the offers might have related to

The First Claimant was asked similar questions about the discrepancy in the figures. He was questioned why it was necessary for him to invest the full amount of the Claimants’ Advance if MPV were providing the Bankrupt with a loan of the whole or almost the whole of the purchase price of the First and Second Properties. He might have needed to investment monies in the Joint Venture for disbursements (such as stamp duty) but that would be nowhere the full amount of the Claimants’ Advance.

The First Claimant stated that when they had first met, they had discussed, in rough terms, the amount which he would need to invest in the Joint Venture. I accept what he says. It would have been remarkable if they had not.

Whatever different explanations the Third Defendant provided about the discrepancy in the figures (and whether the explanations were plausible), I find that there is little assistance which the Second Defendants can derive from them.

Neither in the Amended Particulars of Claim nor in the witness statement does the First Claimant state how much he would have been required to invest. The Written Agreement is also silent on this point. The clear impression I got from his evidence was that his function was to find (or as the Bankrupt would say “bridge”) any shortfall between the purchase price of the First and Second Properties and the amount which MPV was prepared to advance to the Bankrupt. That shortfall might have been small (to cover disbursements, legal fees, and the like) if the amount under the first offer had been advanced by MPV to the Bankrupt. However, as events transpired, MPV was not prepared to advance that amount. Accordingly, the amount required from the First Claimant was substantially larger because MPV was only prepared to offer a significantly reduced amount. That was his role in the Joint Venture.

I have referred to the lack of contemporaneous documentation referring to the Joint Venturers as partners. Among the various documents upon which the Second Defendants rely is a letter dated 24 May 2011 (at page 234 of the Documents Bundle) in which the First Claimant wrote to David Landau of MPV to inform him of his interest in the First and Second Properties. They say that if there was ever a partnership between the Joint Venturers, the First Claimant, at that stage, would have informed Mr Landau that he was a partner with the other Joint Venturers in the purchase of the First and Second Properties. However, he did not.

The First Claimant’s response was to say that the “question was never asked” and “I did not think it was important”.

I am not sure of the context in which the letter was written. However, the letter does little more than confirm in writing an indication given by the First Claimant over the telephone about the facts that he had an “interest” in the First and Second Properties. I would not think – as he said in his evidence – that it would be necessary for him to set out how he became involved in acquiring that interest. It is noticeable that: (a) he refers to “having an equity stake in the property [i.e. the First and Second] Properties”, which is consistent with his claim that the First and Second Properties were purchased by the Bankrupt on behalf of himself, the First Claimant and Third Defendant as partners; (b) he makes no mention of the fact that his “interest” was in the form of a loan made by him to the Bankrupt; and (b) he makes no mention of the interest of the Third Defendant, even though, at that stage, the Written Agreement had been signed by the Joint Venturers. If that letter had intended to set out his precise interest in the First and Second Properties, it might have mentioned what interest the Third Defendant had in those properties as well. I, therefore, attach no particular significance to that letter. I have carefully considered whether the First Claimant was, at that stage (at a time when the Bankrupt was not subject to a bankruptcy order, though, I believe, was contesting a statutory demand which had been served upon him), seeking to have the best of both worlds – i.e. maintaining a claim to an interest in the First and Second Properties and, at the same time, attempting to distance himself from the Bankrupt for fear that he would be jointly and severally liable for any losses which could arise from the Joint Venture having come to an end. I am entirely satisfied that he was not.

Much the same can be said about the other points, of a similar nature, taken by the Second Defendants.

For example, at the meeting which took place between Alastair Comforth (Barlows’ solicitor instructed through their insurers) and Jag Singh on behalf of the Bankrupt (pages 241 to 244 of the Documents Bundle), neither Mr Singh nor Mr Gooch, who was present at the meeting, made mention of a partnership or even of the First Claimant or the Third Defendant having an interest in the First and Second Properties. The First Claimant’s response to that was to reiterate what he had said throughout his written and oral evidence: the First and Second Properties had been purchased in the sole name of the Bankrupt and it was appropriate, therefore, that any negotiations should be conducted by or on his behalf and in his name. However, it was the First Claimant who had lost monies and, therefore, he was doing a lot of work in the background to recover those monies. A curious feature of the meeting is why the Bankrupt remained outside during the whole meeting. It is at least possible that if he had not, he might have given some indication of what he regarded as being the interests of the other Joint Venturers in the First and Second Properties.

That there was – as the First Claimant observed – a substantial amount of work being done by him in the background (which, he said, also explained why he brought the present proceedings against Barlows a day or so before the expiry of the limitation period) is evident from a number of documents contained in the various bundles. They include the documents at pages 214-216 of the Documents Bundle which show that the fees that the Bankrupt incurred in instructing Messrs Broomhall & Co (“Broomhalls”) to investigate the possibility of making a claim against Barlows – see paragraph 86 of the First Claimant’s witness statement – were being paid by the First Claimant even though Broomhalls purported to act on behalf of the Bankrupt only.

There also appears to be no good reason why Barlows would be communicating with the Third Defendant (see pages 151 to 154, 162, 169, 173, 180, 185 to 186 and 198 to 199 of the Documents Bundle) concerning the purchase of the First and Second Properties, and about the aftermath of the issues which arose, if they only acted for the Bankrupt. Nor, for those reasons, is it clear why Broomhalls would have done so (see pages 188 to 189 of the Documents Bundle).

There is some uncertainty about why Mr Thakrar did not sign the Written Agreement on or before 29 March 2010, as the Joint Venturers had done, when, as late as 9 April 2010, he appeared to be willing to fulfil his role in the purchase of the Third Property under the purported oral agreement referred to in paragraph 143, above, which the First Claimant alleged had been reached between all of them. In fact, there is no evidence about whether Mr Thakrar had ever seen the Written Agreement and, if he had, why he had not signed it.

Mr Vickery says that this supports the premise that when the purchase of the First and Second Properties fell through, even on the First Claimant’s case, there must have been four, as opposed to three, partners and, therefore, the First Claimant’s case is not supported by his pleaded case. I have already indicated that I do not accept that. But if there were four partners at the time, then the account which I direct should be taken must involve Mr Thakrar.

In order to consider the circumstances of Mr Thakrar’s “withdrawal” from the purported agreement which he and the other parties reached at the meeting, it is necessary to consider what his functions were under the terms of that agreement. Mr Thakrar was only going to be involved in the purchase of the Third Property. He had no part to play in the purchase of the First and Second Properties.

In my judgment, whatever Mr Thakrar may have discussed and agreed with the Joint Venturers, he did not believe that he was committed to any involvement in an enterprise with them until the

The First Claimant stated in his oral evidence that Barlows were aware that the First and Second Properties were being purchased by the Joint Venturers as “partners”. The Third Defendant went further and said that he had met Mr Gooch with the First Claimant (possibly when he and the First Claimant first met Mr Gooch in early 2010), gave him a copy of the Written Agreement and told him that the Properties were being purchased in partnership. He seemed to think that he had also sent Mr Gooch an email attaching a copy of the Written Agreement. I am not able to accept what the Third Defendant says about this, though, as I say later, I am satisfied that Barlows were fully aware that the Properties were being purchased by the Bankrupt for himself and others.

There is, of course, no documentation to demonstrate that Barlows ever knew that the Joint Venturers were partners. The Second Defendants can derive no assistance from the fact that Barlows appeared only to be treating the Bankrupt as their client. As I have indicated above, they also sent communication to the Third Defendant about the purchase of the Properties. It is difficult to understand why they would have done so if they thought the Bankrupt was the only person who had an interest in those properties. In addition, they received various sums which constituted the substantial part of the Claimants’ Advance from the First Claimant. They must, therefore, have known that he had some interest in the proposed transaction. Moreover, their email dated 3 February 2010 (page 29 of the Documents Bundle) to the Third Defendant enquires about the person or persons in whose names the Properties are to be purchased. Why, it has to be questioned, would they be asking that question if the only person having an interest in them was the Bankrupt? True it is that they regarded the Bankrupt as their client – see pages 38 and 39 of the Documents Bundle. However, they were plainly aware of some (as the Third Defendant put it) “consortium” having been formed for the purchase of the Properties.

Although the First Claimant says that Barlows were so aware, there is no evidence to support that statement. In addition, although the First Claimant’s witness statement refers to meetings he had with Mr Gooch, he makes no reference in his witness statement to having informed Mr Gooch that the First and Second Properties were being purchased by the Bankrupt on behalf of a partnership. Nonetheless, that does not mean that there was no partnership between the Joint Venturers, simply that there is no evidence that Barlows were aware of one. However, what is clear in my mind – and this is important in the context of the Trust Issue – is that Barlows were fully aware that, despite the fact that the First and Second Properties were being transferred in the sole name of the Bankrupt, it was being purchased by him on behalf of all the Joint Venturers. That fact is not only evident from the account which the First Claimant gave in his written and oral evidence but also by the Bankrupt who, in paragraph 8 of his witness statement, said that he did not think he ever showed Mr Gooch the “partnership agreement” (i.e. the Written Agreement), but was sure that he told him that he “was acting with others to get this deal done” and that “at least one meeting [he] had with Mr Gooch … [the First Claimant] also attended.”

In the circumstances, I am entirely satisfied that the Joint Venture was a partnership and that the Joint Venturers were partners in it.

I am satisfied that the Joint Venture was a “business” within the meaning of the PA 1890.

I am also satisfied that the Joint Venturers carried the business of the Joint Venture in partnership. The Joint Venture has all the

Specifically, I can summarise my conclusions as follows:

On the basis that I have determined the Partnership Issue in favour of the First Claimant, it is not necessary for me to determine the Trust Issue. Nonetheless, I do so in the event that I am found to have erred in my determination of the Partnership Issue.

The First Claimant claims that the Settlement Amount is held on trust for him and, therefore, falls outside “the bankrupt's estate” as defined in section 283 of the Insolvency Act 1986. If he is correct about that, then the Settlement Amount would need to be paid to him at least to the extent of the Claimants’ Advance and any appropriate of interest payable on that amount, subject only to any proper deductions which could be made by the Second Defendants, such as under any order made by the court pursuant to the Expenses Application. If he is not, then the First Claimant would be an unsecured creditor of the Bankrupt and would need to prove in the bankruptcy for the amount of his loss. In that event, it would also be difficult for him to pursue a claim for breach of trust against the Second Defendants unless he could show that there would be a distribution to the unsecured creditors from the proceeds of the recovery of that claim and of the other assets which were included in the Bankrupt’s estate.

The question whether the Settlement Amount is held on trust for the First Claimant is a mixed question of law and fact. The court has to apply the legal principles relating to when a trust comes into existence (law) to the facts of the case (facts).

There is no suggestion by the First Claimant that there is an express declaration of trust by the Bankrupt in his favour. Section 53 of the Law of Property Act 1925 requires such a declaration to be evidenced in writing. There is no such written evidence in existence.

The basis of the claim of the First Claimant may briefly be stated as follows:

The basis upon which it is pleaded that the Claimants’ Advance was held by the Bankrupt, and now the Settlement Amount is held by the Second Defendants, on trust is summarised at paragraph 15 of the Re-Amended Particulars of Claim in the following terms:

“The monies paid by (or on behalf of) [the First Claimant] as pleaded herein were received by Barlows to the order of [the Bankrupt] for the purpose of the joint acquisition of the [First and Second] Properties and were therefore impressed with a resulting or constructive trust in favour of the [First Claimant]. Accordingly, [the Bankrupt’s] cause of action consequent to the negligent disposition of those monies by Barlows was itself held on trust for [the First Claimant], such that the fruits of the cause of action are now held by [the Second Defendants, as joint trustees of the Bankrupt] on trust for [the First Claimant] (to the extent of his financial contribution and/or intended share of the [First and Second Properties]).”

The trust to which the Second Defendants are said to be subject is a Quistclose trust, named after the case in which the House of Lords authoritatively articulated the nature of the trust: Barclays Bank Ltd v Quistclose Investments Ltd [1970] A.C. 567.

The authors of Snell’s Equity (34^th Edition) describe how such a trust arises:

“A trust may arise where one person, A, advances money to another, B, on the understanding that B is not to have the free disposal of the money and that it may only be applied for the purpose stated by A. The effect of the trust is to reserve in A the beneficial interest in the money, so providing him with some proprietary security for his advance. This so-called ‘Quistclose trust’ shows some of the features of a resulting trust… [The] standard case recognised in the authorities [is] where A lends money to B with the specific purpose that B should apply the money for the payment of his creditors, C. The general feature of this variety of trust is that one person uses a trust to retain a security interest in money which he has advanced to another subject to some binding restriction as to its use. The parties are also free to structure their transaction differently, so that the beneficial interest in the money and the rights to enforce the transaction would vest in someone other than the person in the standard case. The recognition of the standard case does not preclude different forms of arrangement if the proper construction of the transactional documents indicates that this is what the parties intended.”

Lewin on Trusts (20^th Edition) summarises a Quistclose trust in similar terms, at paragraph 9-046:

“A Quistclose trust is one whereby A pays or transfers money or property to B so that B holds the money or property in trust for A subject to a power for B to apply the money or property for a stated purpose. Hence A’s beneficial interest in the money or property will remain unless and until the money or property is applied in accordance with that power. The power will be valid (such that if exercised in accordance with its terms, it will be effective to determine A’s beneficial interest) if the court can say that a given application of the money or property does or does not fall within the terms of the power. The question to be asked in terms of validity is whether or not the power is void for uncertainty and it must, accordingly, have certainty of objects. The only trust is the resulting trust for the payer and the power to apply the money for a stated purpose is a mere power and not a purpose trust. If the purpose fails then the money or property is held on resulting trust for A freed from any power, and so can be recovered by A by a proprietary claim whether or not B is solvent. The principle applies not only when the payment is a loan but also when the person making the payment is a debtor making a payment to his creditor with a requirement that it be applied for a particular purpose.”

The First Claimant claims that the summary of the principles relating to a Quistclose trust set out above applies in his case.

There are various matters upon which the Second Defendants rely in contending that the Settlement Amount is not held on a

The first is that the premise upon which the claim based on a Quistclose trust is advanced is inconsistent with the allegation of

In any event, the claim of the First Claimant, based on the Quistclose trust, is advanced by him as an alternative to his claim that the Joint Venture was run as a partnership – see paragraph 15 of the Amended Particulars of Claim. There is nothing in the way in which this alternative basis of the claim is pleaded by the First Claimant which can be said to be inconsistent with the primary basis of his claim.

Nor is there any substance in the contention of the Second Defendants that the case of the First Claimant, based on a Quistclose trust, is not properly pleaded. The basis upon which it is stated that there is a Quistclose trust is sufficiently set out. Paragraph 15 of the Amended Particulars clearly sets out: (a) the purpose for which the amount of the Claimants’ Advance came to be paid to Barlows (“… for the purposes of the joint acquisition of the [First and Second] Properties”); (b) why, therefore, the amount of the Claimants’ Advance was impressed with a trust in favour of the First Claimant; and (c) why the fruits of the cause of action which the Bankrupt had against Barlows as a result of their dissipation of the Claimants’ Advance would be held by the Bankrupt (but following his bankruptcy, by the Second Defendants as his joint trustees) on trust for the First Claimant. The First Claimant has not expressly pleaded either the fact that the Claimants’ Advance can be traced into any assets which Barlows held or that the payment of Settlement Amount gave rise to a new or separate trust because, as I say below, it was not necessary for him to do so. It should also be remembered that CPR 16.4(1)(a) only requires a claimant to include in his particulars of claim a concise statement of the facts upon which he relies. The First Claimant has fully complied with that requirement.

Several cases have clarified the scope and circumstances in which a Quistclose trust will be shown to exist.

Starting with Quistclose itself, Lord Wilberforce said at [1970] A.C 567 at 580D:

“In Toovey v. Milne (1819) 2 B. & A. 683 part of the money advanced was, on the failure of the purpose for which it was lent (viz, to pay certain debts), repaid by the bankrupt to the person who had advanced it. On action being brought by the assignee of the bankrupt to recover it, the plaintiff was non suited and the non suit was upheld on a motion for a retrial. In his judgment Abbott C.J. said, at p. 684:

‘I thought at the trial, and still think, that the fair inference from the facts proved was that this money was advanced for a special purpose, and that being so clothed with a specific trust, no property in it passed to the assignee of the bankrupt. Then the purpose having failed, there is an implied stipulation that the money shall be repaid. That has been done in the present case; and I am of opinion that that repayment was lawful, and that the non suit was right.’

The basis for the decision was thus clearly stated, viz., that the money advanced for the specific purpose did not become part of the bankrupt's estate. This case has been repeatedly followed and applied…”

(My emphasis).

The House of Lords later refined the doctrine in Twinsectra Ltd v Yardley [2002] UKHL 12, [2002] 2 AC 164. In that case, a lender paid money to a solicitor in return for an undertaking by the solicitor that the money lent would be retained by his firm until such time as it was applied in the acquisition of property on behalf of his client, that the money would be used solely for the acquisition of property on behalf of his client and for no other purpose, and that he would repay the money with interest within a certain time. Contrary to the terms of the undertaking, the solicitor paid the money to another solicitor engaged by the client upon receiving an assurance from the client that the money would be applied in the acquisition of property, but the client failed to repay the loan within the prescribed time and became insolvent. The other solicitor paid the money to the client and only part of it was applied by the client in the acquisition of property. The main issue was whether the other solicitor was liable for dishonest assistance in a breach of trust by the solicitor who gave the undertaking. But no question of dishonest assistance could arise unless the solicitor who gave the undertaking to the lender held the money on a trust in which the lender was interested, and not merely on a bare trust for the client. It was held that the money was held by the solicitor who gave the undertaking on a Quistclose trust in favour of the lender and so there was a breach of trust by him in paying the money to another solicitor rather than applying it in the acquisition of property on behalf of the client.

Lord Millett said:

“[68] Money advanced by way of loan normally becomes the property of the borrower. He is free to apply the money as he chooses, and save to the extent to which he may have taken security for repayment the lender takes the risk of the borrower's insolvency. But it is well established that a loan to a borrower for a specific purpose where the borrower is not free to apply the money for any other purpose gives rise to fiduciary obligations on the part of the borrower which a court of equity will enforce. In the earlier cases the purpose was to enable the borrower to pay his creditors or some of them, but the principle is not limited to such cases.

[69] Such arrangements are commonly described as creating ‘a

Quistclose trust’, after the well known decision of the House in Quistclose Investments Ltd v Rolls Razor Ltd [1970] AC 567 in which Lord Wilberforce confirmed the validity of such arrangements and explained their legal consequences. When the money is advanced, the lender acquires a right, enforceable in equity, to see that it is applied for the stated purpose, or more accurately to prevent its application for any other purpose. This prevents the borrower from obtaining any beneficial interest in the money, at least while the designated purpose is still capable of being carried out. Once the purpose has been carried out, the lender has his normal remedy in debt. If for any reason the purpose cannot be carried out, the question arises whether the money falls within the general fund of the borrower's assets, in which case it passes to his trustee in bankruptcy in the event of his insolvency and the lender is merely a loan creditor; or whether it is held on a resulting trust for the lender. This depends on the intention of the parties collected from the terms of the arrangement and the circumstances of the case. ...

[71] ... A settlor must, of course, possess the necessary intention to create a trust, but his subjective intentions are irrelevant. If he enters into arrangements which have the effect of creating a trust, it is not necessary that he should appreciate that they do so; it is sufficient that he intends to enter into them. ... .

[74] The question in every case is whether the parties intended the money to be at the free disposal of the recipient ...

[76] ... It is unconscionable for a man to obtain money on terms as to its application and then disregard the terms on which he received it. Such conduct goes beyond a mere breach of contract. As North J explained in Gibert v Gonard (1884) 54 LJ Ch 439, 440:

‘It is very well known law that if one person makes a payment to another for a certain purpose, and that person takes the money knowing that it is for that purpose, he must apply it to the purpose for which it was given. He may decline to take it if he likes; but if he chooses to accept the money tendered for a particular purpose, it is his duty, and there is a legal obligation on him, to apply it for that purpose.’

The duty is not contractual but fiduciary. It may exist despite the absence of any contract at all between the parties, as in Rose v Rose (1986) 7 NSWLR 679; and it binds third parties as in the Quistclose case itself. The duty is fiduciary in character because a person who makes money available on terms that it is to be used for a particular purpose only and not for any other purpose thereby places his trust and confidence in the recipient to ensure that it is properly applied. This is a classic situation in which a fiduciary relationship arises, and since it arises in respect of a specific fund it gives rise to a trust. ...

[99]

There is a further point which is well brought out in the judgment of the Court of Appeal. On a purchase of land it is a commonplace for the purchaser's mortgagee to pay the mortgage money to the purchaser's solicitor against his undertaking to apply it in the payment of the purchase price in return for a properly executed conveyance from the vendor and mortgage to the mortgagee. There is no doubt that the solicitor would commit a breach of trust if he were to apply it for any other purpose, or to apply it for the stated purpose if the mortgagee countermanded his instructions (see Bristol and West Building Society v Mothew (t/a Stapley & Co) [1996] 4 All ER 698 at 715, [1998] Ch 1 at 22). It is universally acknowledged that the beneficiary of the trust, usually described as an express or implied trust, is the mortgagee. Until paid in accordance with the mortgagee's instructions or returned it is the property of the mortgagee in equity, and the mortgagee may trace

the money and obtain proprietary relief against a third party (see Boscawen v Bajwa, Abbey National plc v Boscawen [1995] 4 All ER 769, [1996] 1 WLR 328). It is often assumed that the trust arises because the solicitor has become the mortgagee's solicitor for the purpose of completion. But that was not the case in Barclays Bank plc v Weeks Legg & Dean (a firm), Barclays Bank plc v Layton Lougher & Co (a firm), Mohamed v Fahiya (N E Hopkin John & Co (a firm), third party) [1998] 3 All ER 213, [1999] QB 309, where the solicitor's undertaking was the only communication passing between the mortgagee and the solicitor. I said:

‘The function of the undertaking is to prescribe the terms upon which the solicitor receives the money remitted by the bank. Such money is trust money which belongs in equity to the bank but which the solicitor is authorised to disburse in accordance with the terms of the undertaking but not otherwise. Parting with the money otherwise than in accordance with the undertaking constitutes at one and the same time a breach of a contractual undertaking and a breach of the trust on which the money is held.’ (See [1998] 3 All ER 213 at 221, [1999] QB 309 at 324).

The case is, of course, even closer to the present than the traditional cases in which a Quistclose trust has been held to have been created. I do not think that subtle distinctions should be made between 'true' Quistclose trusts and trusts which are merely analogous to them. It depends on how widely or narrowly you choose to define the Quistclose trust. There is clearly a wide range of situations in which the parties enter into a commercial arrangement which permits one party to have a limited use of the other's money for a stated purpose, is not free to apply it for any other purpose, and must return it if for any reason the purpose cannot be carried out. The arrangement between the purchaser's solicitor and the purchaser's mortgagee is an example of just such an arrangement. All such arrangements should if possible be susceptible to the same analysis.

[100]

I find unconvincing for the reasons I have endeavoured to explain, and hold the Quistclose trust to be an entirely orthodox example of the kind of default trust known as a resulting trust. The lender pays the money to the borrower by way of loan, but he does not part with the entire beneficial interest in the money, and in so far as he does not it is held on a resulting trust for the lender from the outset. Contrary to the opinion of the Court of Appeal, it is the borrower who has a very limited use of the money, being obliged to apply it for the stated purpose or return it. He has no beneficial interest in the money, which remains throughout in the lender subject only to the borrower's power or duty to apply the money in accordance with the lender's instructions. When the purpose fails, the money is returnable to the lender, not under some new trust in his favour which only comes into being on the failure of the purpose, but because the resulting trust in his favour is no longer subject to any power on the part of the borrower to make use of the money. Whether the borrower is obliged to apply the money for the stated purpose or merely at liberty to do so, and whether the lender can countermand the borrower's mandate while it is still capable of being carried out, must depend on the circumstances of the particular case.”

(My emphasis).

In short, a Quistclose trust will arise when property is transferred on terms which do not leave it at the free disposal of the transferee, usually an arrangement that the property should be used exclusively for a stated purpose. There must be an intention on the part of the transferor to enter into an arrangement which, when viewed objectively, has the effect, in law, of creating a trust. The party seeking to rely on such a trust must prove the creation of the trust. Absent such proof, the trust will not, or not be presumed, to exist: see, for example, Goyal v Florence Care Ltd [2020] EWHC 659 (Ch), [2020] All ER (D) 10 (Apr). The stated purpose must be clear so that a court can determine whether the property was applied for the purpose. The trust which arises as a result of the operation of Quistclose is a resulting trust in the manner indicated above. It is not a constructive trust. In fact, it is correct to point that it is no longer part of the First Claimant’s case that the monies included in the Claimants’ Advance was held by Barlows on some form of constructive trust. It is difficult to see how it can be: see, for example, Paragon Finance plc v D B Thakerar & Co (a firm) [1999] 1 All ER 400, CA.

In Bieber and others v Teathers Ltd (in liquidation), at [15] Patten L.J. stated:

“I would only add by way of emphasis that in deciding whether particular arrangements involve the creation of a trust and with it the retention by the paying party of beneficial control of the monies, proper account needs to be taken of the structure of the arrangements and the contractual mechanisms involved. As Lord Millett stressed in Twinsectra (at 73) and the judge repeated in 17 of his own judgment, payments are routinely made in advance for particular goods and services but do not constitute trust monies in the recipient's hands. It is therefore necessary to be satisfied not merely that the money when paid was not at the free disposal of the payee but that, objectively examined, the contractual or other arrangements properly construed were intended to provide for the preservation of the payor's rights and the control of the use of the money through the medium of a trust. Critically this involves the court being satisfied that the intention of the parties was that the monies transferred by the investors should not become the absolute property of Teathers [i.e. the solicitors] (subject only to a contractual restraint on their disposal) but should continue to belong beneficially to the investors unless and until the conditions attached to their release were complied with.”

There is no reason why a Quistclose trust cannot arise in a partnership setting. In Bieber v Teathers Ltd (in Liquidation) [2012] Civ 1466, the Court of Appeal emphasised that monies paid by investors into a solicitors' client account were initially held on Quistclose trusts. When those monies were paid into the partnership account, such trusts came to an end and the monies belonged to the firm. As Patten LJ said, at [49]:

“In Teathers' hands the investor's funds were undeniably trust monies at the point of receipt. They were client monies paid to Teathers not beneficially but for the specific purpose of being used as an investment in a ... partnership. Teathers could make no other use of them. ... But assuming the scheme went ahead then Teathers had authority ... to use the money subscribed in the client account as that person's contribution to capital ...”

Patten LJ went on to say, at [51] and [52]:

“But I want to concentrate for the moment on the relevance of the subscriptions being trust monies at this stage of the transaction to the question whether they remained trust monies following their authorised payment into the partnership account. [Patten LJ’s emphasis]… The answer to that question is that there is no necessary correlation between their status as trust money at stage 1 (their receipt in the HSBC client account) and how they fell to be treated at stages 2 and 3 (payment into the partnership account and investment in a TV production). Mr Tregear [leading counsel for the appellants] accepts (as he must) that any Quistclose trust of the kind alleged must have existed at stage 1 when the monies were paid to Teathers for onward investment in Take 3. The existence of such a trust is not necessarily inconsistent with the trust expressly imposed by the client money regulations but it is not identical in terms. Under the regulations the monies ceased to be client and therefore trust money once paid out either to or in accordance with the client's instructions. On the assumption that their payment into the partnership account was authorised, they were not therefore trust monies once they reached the Barclays account. But in relation to the alleged Quistclose trust, no allegation of lack of authority can be made in relation to the payment to Barclays… [In this case], the claimants cannot and do not contend in such cases that their payment as partnership capital was unauthorised.”

The First Claimant contends, in contrast to the position in Bieber, that, in the present case, neither Barlows nor the Bankrupt ever had authority to pay the monies included in the Claimants’ Advance away to a third party other than in return for legal title in the First and Second Properties being acquired. The trusts, therefore, never came to an end.

Among the points which the Second Defendants pray in aid in support of their contention that there was no Quistclose trust is the point that the First Claimant is unable to establish either that Barlows had actual knowledge that the amount of the Claimants’ Advance was held by them on behalf of the First Claimant solely for the purpose of the acquisition of the First and Second Properties or that, at the time it was paid by the First Claimant on behalf of the Bankrupt, it was to be held by the Bankrupt on behalf and on trust for that purpose.

It appears to be well-established that whether monies have been advanced by a loan or for any other purpose is irrelevant to the existence of a Quistclose trust, provided the person advancing the monies can prove that it was done for a particular purpose and the monies were not applied for that purpose.

In Quistclose, Lord Wilberforce said (see [1970] A.C. 567 at 580D):

“The second, and main, argument for the appellant was of a more sophisticated character. The transaction, it was said, between the respondents and Rolls Razor Ltd., was one of loan, giving rise to a legal action of debt. This necessarily excluded the implication of any trust, enforceable in equity, in the respondents' favour: a transaction may attract one action or the other, it could not admit of both.

My Lords, I must say that I find this argument unattractive. Let us see what it involves. It means that the law does not permit an arrangement to be made by which one person agrees to advance money to another, on terms that the money is to be used exclusively to pay debts of the latter, and if, and so far as not so used, rather than becoming a general asset of the latter available to his creditors at large, is to be returned to the lender. The lender is obliged, in such a case, because he is a lender, to accept, whatever the mutual wishes of lender and borrower may be, that the money he was willing to make available for one purpose only shall be freely available for others of the borrower's creditors for whom he has not the slightest desire to provide.

I should be surprised if an argument of this kind – so conceptualist in character – had had ever been accepted. In truth it has plainly been rejected by the eminent judges who from 1819 onwards have permitted arrangements of this type to be enforced, and have approved them as being for the benefit of creditors and all concerned. There is surely no difficulty in recognising the coexistence in one transaction of legal and equitable rights and remedies: when the money is advanced, the lender acquires an equitable right to see that it is applied for the primary designated purpose (see In re Rogers, 8 Morr. 243 where both Lindley L.J. and Kay L.J. recognised this): when the purpose has been carried out (i.e., the debt paid) the lender has his remedy against the borrower in debt: if the primary purpose cannot be carried out, the question arises if a secondary purpose (i.e., repayment to the lender) has been agreed, expressly or by implication: if it has, the remedies of equity may be invoked to give effect to it, if it has not (and the money is intended to fall within the general fund of the debtor's assets) then there is the appropriate remedy for recovery of a loan. I can appreciate no reason why the flexible interplay of law and equity cannot let in these practical arrangements, and other variations if desired: it would be to the discredit of both systems if they could not. In the present case the intention to create a secondary trust for the benefit of the lender, to arise if the primary trust, to pay the dividend, could not be carried out, is clear and I can find no reason why the law should not give effect to it.”

(My emphasis).

It is, usually, equally irrelevant that sums in question are paid to a third party. As Briggs L.J. (as he then was) observed in Bellis v Challinor [2015] EWCA Civ 59:

“[59] Usually, the question whether the essential restrictions upon the transferee's use of the property have been imposed (so as to create a trust) turns upon the true construction of the words used by the transferor. But where, as in Twinsectra and indeed the present case, 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.

[60]

In such cases the invitation usually comes from the transferee. In Twinsectra it took the form of a solicitor's written undertaking, the terms of which, as Lord Millett put it, were ‘crystal clear’ in restricting the use of the money

transferred for the specified purpose of the acquisition of property.

[61]

But I am content to assume, as the judge did in the present case, that the invitation may come from someone other than the transferee. A may say to B: ‘If you transfer money to C, it will be used solely for a specified purpose.’ The proper interpretation of B's conduct in transferring money to C pursuant to that invitation is that he thereby created a Quistclose-type trust. Whether C will be liable for breach of that trust by using the money for some other purpose will then depend on whether C knew of the terms of A's invitation before disposing of the money.”

I do not need to repeat or summarise the observations I have made, or the views which I have reached, concerning the evidence that I have heard in these proceedings. Nor is it necessary for to me to repeat or summarise the factual findings I have already come to by reference to that evidence in connection with the Partnership Issue, save to say that they apply equally to the Trust Issue.

It is plain that unless monies are paid to or received by a solicitor by way of costs, disbursement and the like, in which case they will be paid in the solicitor’s office account, they are held by the solicitor on trust. As Lord Hoffmann observed in Twinsectra [2002] UKHL, at [12]:

“Money in a solicitor's client account is held on trust. The only question is the terms of that trust. The only question is the terms of that trust. I should think that what Carnwath J meant was that Sims held the money on trust for Mr Yardley absolutely. That is the way it was put by Mr Oliver QC, who appeared for Mr Leach. But, like the Court of Appeal, I must respectfully disagree. The terms of the trust upon which Sims held the money must be found in the undertaking which they gave to Twinsectra as a condition of payment. Clauses 1 and 2 of that undertaking made it clear that the money was not to be at the free disposal of Mr Yardley. Sims were not to part with the money to Mr Yardley or anyone else except for the purpose of enabling him to acquire property.”

(My emphasis).

Monies paid by a client to a solicitor (other than for costs, disbursements or the like) will always be held on trust for the client. Where the monies are paid by a third party on behalf of the client, the third party will usually stipulate that the monies should be held to his order and only be utilised in accordance with the purpose for which they were paid to the solicitor. Often, but not always, the third party will seek a formal undertaking that the monies will only be used for that purpose. This is particularly so where the third party is a lender advancing the monies to the client on the security of a charge over a property in which case the undertaking will expressly state that the monies will not be released to the vendor or his solicitors unless the client’s solicitor obtains the client’s signature to the charge document and is able to obtain a good and marketable title to the property to enable the lender’s security to enforced in the event that the client defaults under his obligations to the lender.

That was what happened to the monies which were advanced by Mr Thakrar to Barlows for the purchase of the Third Property. Such monies as they paid to Barlows on behalf of Mr Thakrar had to be returned by Barlows to them because, among other things, Messrs Rich and Carr were not satisfied that Wingfield’s solicitors could procure that title to the Third Property would be good and marketable.

However, it is a fallacy to think that the absence of a written document of the type which was found to exist in Twinsectra means that the solicitor does not hold the monies paid to him by the third party for the purpose for which it was expressed to be paid to him.

Leaving aside for the time being the source of the monies paid to Barlows on behalf of the Bankrupt, suppose after the monies were paid to the Bankrupt for the purchase of the First and Second Properties, Wingfield (i.e. the vendor of those properties) withdrew from the proposed purchase. What would Barlows have done in those circumstances? Would they have paid the monies to the Bankrupt?

If they knew the source of the monies, which they obviously did (not just because it is plain from the documentation but also because having to comply with anti-money laundering regulations to which solicitors and those who handle clients’ monies are subject must mean that they have to check those sources), it is inconceivable that they would have done.

Likewise, suppose, the Bankrupt presented his own petition for bankruptcy (now a bankruptcy application) and was made bankrupt on that petition before the monies were disbursed by Barlows. What would Barlows have done in those circumstances? Would they have paid the monies to the Bankrupt’s trustee in bankruptcy? I doubt very much that they would have done, without, at the very least, obtaining a water-tight indemnity from the trustee (as Barlows did in relation to the Settlement Amount) that he would indemnify them from any claims brought against them by a claimant who had a better right to it than the Bankrupt.

In both the above scenarios, it is obvious to me that if they paid the monies to anyone other than the person or persons from whom it was received, they would almost certainly be held to be in breach of trust. It would be a misconception on their part to think that because the monies could not be used for the purpose for which it had been paid to them, they had to be paid to the Bankrupt or, as

So, what is different in the present case? In my view nothing. Barlows had express knowledge of where the sums totalling the amount of the Claimants’ Advance had come from. The First Claimant says that he met Mr Gooch on at least two occasions, once with his passport in order that Mr Gooch could be satisfied about the First Claimant’s identity and know that any funds which Barlows were to receive from him came from a legitimate source. Both he and the Bankrupt (see paragraph 8 of the Bankrupt’s witness statement) say that Mr Gooch was, at the very least, fully aware of the First Claimant’s involvement in the purchase as a funder.

It is plain to me that Barlows also had express knowledge of how the amount of the Claimants’ Advance was to be utilised. That is abundantly clear from their own papers included in the bundles. They even purported to utilise it for that purpose but, through their negligent acts or omissions, were unable to do so. There can be no doubt, therefore, that they were in breach of trust to the First Claimant, from whom they received the Claimants’ Advance, for not utilising them in the manner in which they well knew they should have done. Even if they had no express knowledge (and I am fully satisfied that they did), it requires no ingenuity to know that this is an obvious conclusion which arises from the relationship which a solicitor has to a third party. The solicitor simply cannot pay client or third-party monies for a purpose which is not the purpose for which they were sent to him, still less pay them away in the manner in which Barlows did.

It is painfully obvious that Barlows well knew that the monies sent by the First Claimant were sent to them solely for the purpose of the purchase of the First and Second Properties. That purpose having failed, the money was returnable to the First Claimant under the resulting trust which arose as a result of application of the principles in Quistclose. It follows that the amount of the Claimants’ Advance should have been repaid by Barlows to the First Claimant.

But even if I am wrong about Barlows having express knowledge of who had provided the monies to them, that is insufficient to exculpate them from liability for breach of trust. As Lord Wilberforce pointed out in Quistclose (see [1970] A.C. 567 at 582D):

“This was sufficient to give them notice that it was trust money and not assets of Rolls Razor Ltd: the fact, if it be so, that they were unaware of the lender's identity (though the respondent's name as drawer was on the cheque) is of no significance. I may add to this, as having some bearing on the merits of the case, that it is quite apparent from earlier documents that the bank were aware that Rolls Razor Ltd. could not provide the money for the dividend and that this would have to come from an outside source and that they never contemplated that the money so provided could be used to reduce the existing overdraft. They were in fact insisting that other or additional arrangements should be made for that purpose. As was appropriately said by Russell L.J., ([1968] Ch. 540, 563F) it would be giving a complete windfall to the bank if they had established a right to retain the money.”

(My emphasis).

On the basis of the above analysis, it seems only necessary for Barlows to have known that the Claimant’s Advance was received from a third party and to know the purpose for which it was paid to them. The identity of the person who paid it is not significant. Monies held in a solicitor’s client account in such circumstances are, as I have already indicated, held on trust on behalf of the person who paid it, i.e. the First Claimant; and, in the present case, the purpose for which the payment was made to Barlows was wellknown to them.

The present situation is markedly different from the facts which applied in Challinor v Juliet Bellis & Co [2015] EWCA Civ 59, [2015] 2 P & CR D6 upon which the Second Defendants rely. In that case, the central issue for the trial judge was whether the respondents had advanced the monies which they had each paid to the appellants (a firm of solicitors) on trust for themselves pending the satisfaction of certain conditions or whether the respondents had each made an immediate loan to the appellants’ clients (AFL) which had entered into insolvent administration, by paying the monies, with no strings attached, to the appellants as AFL's agents. If the judge's answer to the first question had been wrong, the question arose whether the appellants had had AFL's authority to receive and disburse the respondents' monies and, if they had not, whether the consequence was that those monies had been held by the appellants upon a resulting trust for the respondents.

On the evidence, the court was not persuaded by the judge's reasons for treating the respondents' payments as having been made to the appellants on terms that they were not to be at the immediate disposal of AFL. On the contrary, on the judge's findings of primary fact, the respondents had made their payments to the appellants as immediate loans to AFL, paying into the appellants’ client account at what they understood to be AFL's direction and, therefore, lending to AFL, by payment to the appellants as their agent. The appellants had received those payments into its client account as trustee for AFL and had committed no breach of any obligation owed to the respondents

However, even if I am wrong about my finding that the monies received by Barlows were held on trust for the First Claimant (i.e. even if it is found that the monies were held by Barlows on behalf of the Bankrupt), I cannot see that they could be said to be held by the Bankrupt on any basis other than on trust for the First Claimant, or the Joint Venture.

The Second Defendants appear to accept that the Bankrupt held the monies on trust for the Bankrupt. If that is correct, it can make no difference that the Bankrupt conducted the proposed purchase of the First and Second Properties through a firm of solicitors. If he had carried out the proposed purchase himself without using solicitors, the same result would follow: he would hold those monies on resulting trust pending the proper completion of the purchase of those properties with full title.

It has to follow from this that so far as the Bankrupt (or the Second Defendants on his behalf) recovered monies which were dissipated by Barlows, such monies (whether characterised as damages, equitable compensation or anything else) were recovered in the Bankrupt’s capacity as resulting trustee. There was no other basis upon which he could have claimed against Barlow, since he never had a beneficial interest in the monies advanced. As the First Claimant rightly contends, Barlows were under an obligation to restore the monies to their client account. If they had done so, the monies would have been held in that account on the same trusts as the original monies (i.e. the Claimants’ Advance) advanced by the First Claimant. The fact that Barlows paid the monies to the Second Defendants can make no difference: the beneficial owner of such monies continues to be the First Claimant.

The only basis upon which it can be contended by the Second Defendants that the Claimants’ Advance was held by Barlows beneficially for the Bankrupt and, therefore, the Settlement Amount which includes, or represents it, should be paid to Second Defendants is if the Claimants had made an unsecured loan to the Bankrupt which he turn paid over to Barlows for the purpose of acquiring the First and Second Properties. As I have already stated, that is almost certainly not what happened.

The Second Defendants argue that even if the amount of the Claimants’ Advance was held on trust, at the point at which it was dissipated by Barlows, any claim which the Bankrupt had against Barlows was a personal, not a proprietary claim. The Bankrupt could not trace the Claimants’ Advance into any assets Barlows (or its insurers) held. Similarly, any claim which the First Claimant had against the Bankrupt was a personal claim. The Settlement Amount recovered under a personal claim cannot be held on trust unless a new trust of the Settlement Amount was created at the point of recovery. The First Claimant would need to show that the Second Defendants were trustees of the Settlement Amount under a new trust created at the point when they received the Settlement Amount. That has neither been pleaded nor can be made out on the facts.

I am unable to accept this argument.

The fact that the original monies were paid to a third party makes no difference. As Lord Browne-Wilkinson said in Target Holdings v Redferns [1996] AC 421 at 436:

“In the case of moneys paid to a solicitor by a client as part of a conveyancing transaction, the purpose of that transaction is to achieve the commercial objective of the client, be it the acquisition of property or the lending of money on security. The depositing of money with the solicitor is but one aspect of the arrangements between the parties, such arrangements being for the most part contractual. Thus, the circumstances under which the solicitor can part with money from client account are regulated by the instructions given by the client: they are not part of the trusts on which the property is held. I do not intend to cast any doubt on the fact that moneys held by solicitors on client account are trust moneys or that the basic equitable principles apply to any breach of such trust by solicitors. But the basic equitable principle applicable to breach of trust is that the beneficiary is entitled to be compensated for any loss he would not have suffered but for the breach. I have no doubt that, until the underlying commercial transaction has been completed, the solicitor can be required to restore to client account moneys wrongly paid away.”

The principle in Target Holdings Ltd v Redferns has been applied to a Quistclose trust – see, for example, Wise v Jiminez [2014] P & CR D27, [2013] All ER (D) 123 (Oct), at [58]-[60], per Miss Penelope Reed QC, siting as a deputy Judge of the High Court.

Barlows were plainly under an obligation to restore the amount of the Claimants’ Advance to their client account. If they had done so, the amount restored would have been held in that account on the same trusts as the Claimants’ Advance. The fact that Barlows instead paid monies (i.e. the Settlement Amount) which included, or largely represented, the amount of the Claimants’ Advance to the Second Defendants can make no difference: the beneficial owner of such monies has always remained the First Claimant. This is obvious from the fact that if the Bankrupt had not been made bankrupt, the Settlement Amount would have had to be paid to him. It is a fallacy to think that the basis upon which the Claimants’ Advance, or the amounts representing it, would be different merely because its characteristics had changed or because it was paid to a representative of the person who was the victim of the transaction (by which I mean, in this context, the Bankrupt) or, as was the position in the present case, a trustee in bankruptcy who represented that victim and in whom, pursuant to sections 283, 307 and 311 of the Insolvency Act 1986, all the property of the bankrupt (other than certain exceptions, which have no relevance in the present case) would vest without any conveyance, assignment or transfer. It would be extraordinary if this outcome could be achieved simply by a person’s bankruptcy. It would put a trustee in bankruptcy in a better position in relation to a claim to an asset than the original claim of the Bankrupt. In this context, the provisions of section 311(4) of the Insolvency Act 1986 should be noted. It states that where “any part of the estate consists of things in action, they are deemed to have been assigned to the trustee; but notice of the deemed assignment need not be given except in so far as it is necessary, in a case where the deemed assignment is from the bankrupt himself, for protecting the priority of the trustee.” The trustee is not stated to have a better right to the chose in action than the bankrupt had. Nor can he be considered to an assignee for value and thus take free from any trust or other liability to which the bankrupt is subject. It must follow from this that although prior to its collection by the Second Defendants, the Negligence Claim was a chose in action, the Second Defendants did not have a better right to its proceeds than the Bankrupt and, therefore, would not have had a better right to the Settlement Amount than the Bankrupt would have had if he had not become bankrupt.

The fact that Second Defendants’ Negligence Claim was formulated as a claim for damages for professional negligence likewise makes no difference. The Settlement Amount was paid under a Tomlin order which did not specify the legal basis upon which it was paid; rather, paragraph 1 of the Schedule to the states that it was paid “in full and final settlement … of all claims … in contract, tort, or on any other ground whatsoever …”. In any event, as the First Claimant rightly points out, even if it had been expressly paid as damages, the damages recovered would have been held on trust for him. The loss claimed was pleaded, and the Settlement Amount paid, by reference to the monies that had been advanced by the First Claimant. The Settlement Amount is, therefore, held on resulting trust for him.

I do not understand the relevance of either Foskett v McKeown [2001] 1 AC 102 or Relfo Limited (In Liquidation) v Varsani [2014] EWCA Civ 360, both of which concerned the remedy of “tracing” or “following” property. In the present case, the First Claimant does not seek such a remedy. The claim by the First Claimant is for the payment of the Claimants’ Advance (and any interest properly payable thereon) from the Settlement Amount on the basis that the Claimant’s Advance was: (a) held on trust for him by Barlows; (b) wrongly paid out by Barlows to Wingfield’s solicitors in breach of that trust; and (c) is represented or included in the Settlement Amount which was recovered by the Second Defendants. As Barlows restored the Claimants’ Advance (which they had paid in breach of trust to Wingfield’s solicitors) by paying the Settlement Amount to the Second Defendants, it was not necessary for the First Claimant to trace or follow the loss which he had suffered as a result of Barlows’ breach of trust in the hands of a third party. It might have been different if the Claimants’ Advance had been paid to the Bankrupt and the Bankrupt had dissipated it before he was made bankrupt. It would then have been necessary for the First Claimant to trace or follow the Claimants’ Advance into the hands of a third party. If he was unable to do that, he would only be entitled to prove in the Bankrupt’s bankruptcy (unless he could demonstrate that the Bankrupt was guilty of fraud, in which case his claim would have survived the bankruptcy, as to which see section 281(3) of the IA 1986). But that is not the position here.

In short, therefore, I wholly agree with the First Claimant’s summary of the position which applies in this case: the present position can be no different to that which would have applied had no solicitors been involved in the purchase of the First and Second Properties. Had the First Claimant paid the Claimants’ Advance directly to the Bankrupt, to be used purely for the purpose of acquiring the First and Second Properties, he too would have held it on trust for the First Claimant and would have needed to return it to the First Claimant once the purpose for which it was advanced had failed. In so far as the Bankrupt directed the Claimants’ Advance to be paid directly to Barlows, it can only have been on the basis that he did so as trustee of it. In either case, the First Claimant retained beneficial ownership under the resulting trust unless and until that purpose was fulfilled. In neither situation was the recipient of the monies free to apply them other than for the purchase of, and obtaining a good and marketable title to, the First and Second Properties. So far as that was not done, the recipient was in breach of trust. It follows that if, contrary to my finding, Barlows held the amount of the Claimants’ Advance on behalf of the Bankrupt, it was held by the Bankrupt on trust for the First Claimant. Accordingly, by utilising the Claimants’ Advance (or instructing, agreeing or authorising Barlows to pay it to Wingfield’s solicitors) without ensuring that it would be used to obtain a good and marketable title to the First and Second Properties, the Bankrupt was in breach of that trust.

This case closely resembles the facts in Glantz v Polikoff & Co [1993] NPC 145, which was not cited to me. The only report of that case which I have been able to find is in [1994] CLY 4241. In that case, P, a solicitor, acting in a conveyance of a flat and its immediate resale at double the price, paid over deposit money supplied by a third party, G (a money-lender), to the order of the purchaser after exchange of contracts. The contract fell through when the bank refused to lend the capital on suspicion of fraud as there were no bona fide circumstances which could explain the transaction, and the deposit was forfeited. P was unaware of the fraud. G sued P for money lost. His Honour Judge Moseley held that that P was liable to G in equity. Once he had received G's money, he became a trustee of it, which put him under a duty to act prudently and, had he so acted, he would not have paid over the money without looking into the doubtful circumstances existing at that date. The judge was not satisfied that P was liable at law as G had not established a sufficient duty of care towards G.

So far as it asserted by the Second Defendants that the way in which the case against them is pleaded by the First Claimant is inadequate to support the basis upon which he relies to make good that claim, I respectfully disagree. Paragraph 15 of the Amended Particulars of Claim adequately sets out that basis.

But the Second Defendants rely upon three further matters in the context of this point.

First, they say that; (a) no claim is pleaded against the Bankrupt alleging any breach of trust by him in relation to the Advance; (b) so far as there is such a claim, the Bankrupt cannot be said to be in breach of any trust; (c) as the Claimants’ Advance was dissipated by Barlows, any claim which the First Claimant has against the Bankrupt as a result of such dissipation is an unsecured claim in the bankruptcy of the Bankrupt; and (d) so far as there is any claim for breach of trust against the Bankrupt, he is entitled to be relieved from any liability under it as a result of the application of section 61 of the Trustee Act 1925.

I am unable to accept any of these points.

The claim of the First Claimant for breach of trust is, as I have already found, rightly made against Barlows, not the Bankrupt, though I have considered the alternative scenario – i.e. the possibility that the Claimant’s Advance was held by the Bankrupt, not Barlows, on trust. As I have already indicated, it is difficult to see how the claim of the First Claimant for breach of trust could be made against the Bankrupt. It is correct that if the Claimants’ Advance had been paid to the Bankrupt, it would be held by him on a Quistclose trust on behalf of the First Claimant. However, it was not paid to him. It was paid to Barlows.

If I had found that the Claimants’ Advance was held by Barlows on trust for the Bankrupt, and in turn, by the Bankrupt on trust for the First Claimant, I would have struggled to find how what Barlows did could amount to a breach of trust on the part of the Bankrupt. That is because the Claimants’ Advance was paid by the First Clamant directly or indirectly to Barlows. It never passed through the Bankrupt. In fact, it was paid to the solicitors that the Joint Venturers had agreed to retain for the purpose of the various transactions which they intended to undertake. At that point, it cannot be said that anyone (whether Barlows or the Bankrupt) was in breach of trust. It is at the point when the Claimants’ Advance was dissipated by Barlows (i.e. paid over to Wingfield’s solicitors without a suitable undertaking being obtained from them) when the breach occurred.

The breach occurred solely because of the acts or omissions of Barlows. It did not happen because the Bankrupt had done anything wrong.

That is precisely how the case has been pleaded by the Claimants against the Second Defendants. The breach of trust relied upon is the breach committed by Barlows, not the Bankrupt because the Bankrupt committed no breach.

The section 61 point is irrelevant on the facts. That point has not been pleaded. It was raised by me in the course of my exchanges with Mr Laughton. I enquired whether, if the Bankrupt had acted in breach of trust, he might be entitled to seek relief under that provision despite the fact he would have been subject to a resulting, as opposed to an express, trust. That was the narrow context in which I had asked the question.

Mr Vickery latched on to this point. He relied upon it in further support of the contention that if the Bankrupt was subject to a Quistclose trust, and had acted in breach of it, he was entitled to be relieved from any liability under that provision.

Section 61 of the Trustee Act 1925 states:

“If it appears to the court that a trustee, whether appointed by the court or otherwise, is or may be personally liable for any breach of trust, whether the transaction alleged to be a breach of trust occurred before or after the commencement of this Act, but has acted honestly and reasonably, and ought fairly to be excused for the breach of trust and for omitting to obtain the directions of the court in the matter in which he committed such breach, then the court may relieve him either wholly or partly from personal liability for the same.”

It has always been thought that a failure to plead section 61 is not fatal to an application for relief under section 61: see Singlehurst v Tapscott Steamship Co. [1899] W.N. 133, CA; and Re Pawson’s Settlement [1917] 1 Ch. 541. However, whether this principle holds good under CPR 16.5(2) is not free from doubt: see, for example, Latchworth Ltd v Dryer [2017] EWHC 1089 (Ch), at [6].

It is clear in my judgment that section 61 has no application in this case for various reasons.

Although section 61 extends to a trustee who holds property on a resulting trust – see section 68(17) of the Trustee Act 1925 – it cannot apply in the present case to Barlows because the Settlement Amount (which includes or represents the Claimants’ Advance that was paid in breach of trust) has been restored by Barlows and paid to the Second Defendants on behalf of the Bankrupt. In any event, it would only be in a rare case that the relief under s 61 would be granted to a professional person who was a trustee, or was subject to a trust, such as the one under consideration in the Claim.

Nor can it apply to the Bankrupt. That is because he has committed no breach of trust.

In the present case: (a) it was Barlows who were subject to the Quistclose trust; (b) they were in breach of that trust, not the Bankrupt; (c) the Claimants’ Advance was represented or included in the Settlement Amount which was paid by them to the Second Defendants for the loss suffered for that breach; and (d) the Settlement Amount is available to be paid out to whoever is entitled to a beneficial interest in it.

The second point which the Second Defendants make is that even if there was a Quistclose trust in the present case, the Claimants’ Advance was applied “in pursuit of the purpose of acquiring the Properties” and there is, therefore, no breach of trust.

That proposition is quite extraordinary.

To suggest that the Claimants’ Advance was applied in pursuit of the purpose of acquiring the First and Second Properties is wrong, both as a matter of law and plain common sense.

The Claimants’ Advance was made to Barlows on the basis that they would use it to acquire a good and marketable title to the First and Second Properties. It simply does not withstand scrutiny to suggest that Barlows paid it in pursuit of that purpose and cannot, therefore, be held in breach of trust. The suggestion proceeds on the remarkable basis that (despite relying on Barlows’ expertise), the First Claimant was content to allow Barlows to take a risk with his monies and to pay it over to a third party, even if they could not complete the purchase of, or secure a good and marketable title to, the First and Second Properties. The First Claimant did no such thing. If there was any merit in that suggestion, Barlows might have raised it in the Negligence Claim (even though I accept that that claim was in negligence, rather than breach of trust).

The third point relied upon by the Second Defendants is that there is no claim against them by the First Claimant for breach of trust.

That is correct. The reason there is not is because the Settlement Amount currently stands to the credit of a separate account in the

I should say, for the sake of completeness, that the First Claimant has intimated a claim for breach of duty against the Second Defendants in paragraph 12 of the Re-Amended Particulars of Claim. However, as I have already indicated, that is a quite separate matter which, I believe Mr Laughton accepts, would need to be the subject of a fresh claim against the Second Defendants.

I can summarise my conclusions on the Trust Issue as follows:

In none of the situations referred to in the preceding paragraph can it be said that the Bankrupt was entitled to the Claimants’ Advance beneficially.

The only basis upon which the Second Defendants would be entitled to the Claimants’ Advance and, therefore, to have the Settlement Amount paid out to them would be if the Claimants’ Advance belonged to the Bankrupt beneficially. That is not the case here.

It follows that if I had not come to the conclusion that the business of the Joint Venture was conducted as a partnership, I would have unhesitatingly come to the conclusion that the whole of the Claimants’ Advance was comprised in the Settlement Amount and that it should be paid out (together with any appropriate interest thereon) to the First Claimant as the sole beneficiary of the Quistclose trust to which Barlows were subject in his favour.

On the basis that the Second Defendants have no interest in the Settlement Amount, the only ground upon which they can claim to be entitled to the Trust Costs is under the narrow jurisdiction set out in Re Berkeley Applegate (Investment Consultants) Ltd (No.1) [1989] Ch 32.

In Berkeley Applegate, the jurisdiction was defined by Mr Edward Nugee QC, sitting as a deputy Judge of the High Court, at [1989] Ch 32, 50H-51B, in the following terms:

“The authorities establish, in my judgment, a general principle that where a person seeks to enforce a claim to an equitable interest in property, the court has a discretion to require as a condition of giving effect to that equitable interest that an allowance be made for costs incurred and for skill and labour expended in connection with the administration of the property. It is a discretion which will be sparingly exercised; but factors which will operate in favour of its being exercised include the fact that, if the work had not been done by the person to whom the allowance is sought to be made, it would have had to be done either by the person entitled to the equitable interest (as in In re Marine Mansions Co., L.R. 4 Eq. 601 and similar cases) or by a receiver appointed by the court whose fees would have been borne by the trust property (as in Scott v. Nesbitt, 14 Ves. Jun. 438); and the fact that the work has been of substantial benefit to the trust property and to the persons interested in it in equity (as in Phipps v. Boardman [1964] 1 W.L.R. 993).

Berkeley Applegate has been approved and applied in several cases, including by the Supreme Court in Re Lehman Brothers International (Europe) (In Administration) [2012] UKSC 6, [2012] 3 All ER 1. Those cases are analysed in the decision of Morgan J in Gillan v HEC Enterprises Ltd Deep Purple (Overseas) Ltd (In Administration) [2016] EWHC 3179 (Ch), [2017] 1 B.C.L.C. 340.

In Re Sports Betting Media Ltd (in administration) [2007] EWHC 2785 (Ch), [2008] BCC 177, at [10], Briggs J (as he then was) identified the scope of the jurisdiction broadly, accepting the substance of the submission made to him that:

“… the court has an inherent jurisdiction to require persons beneficially interested in property to subject their beneficial entitlements to a right of payment to persons who have come otherwise than by officious intermeddling into the position of fiduciaries in relation to the relevant fund and have incurred time and cost in realising the fund and identifying the entitlements of the beneficiaries and paying out to those beneficiaries their entitlements.”

Briggs J went on to say, at [11]:

“In my judgment, [it] is right to seek to have the Berkeley Applegate … principle applied to the position of administrators who, when taking office after the cessation of former administrators, find that they are, whether they realised it previously or not, in the position of having to administer and execute the terms of the statutory charge created by Sch.B1 para.99(4) [of the Insolvency Act 1986]. It seems to me, as a matter of common sense, justice and equity, only right that the beneficiaries of that charge should have to pay collectively a reasonable sum towards the cost of having it executed in their favour against the company's assets.”

It is unlikely that discretion in Re Berkeley Applegate will be exercised in favour of a person where he claims to be entitled to an interest in the fund which is the subject of the dispute between the parties: see, for example, Re Local London Residential Ltd [2004] EWHC 114(Ch), [2004] 2 BCLC 72; and Green v Bramston [2010] EWHC 1306 (Ch). In Green v Bramson, His Honour Judge Cooke, sitting as a Judge of the High Court, said (see [2010] EWHC 1306 (Ch), at [36]):

“The allowance to be given [under the Berkeley Applegate jurisdiction] is a matter of discretion … I do not say that there can be no circumstances in which an allowance can be given out of trust property in respect of work which would be recoverable from other sources such as the free assets of a company in liquidation, or would in principle be so recoverable if any such assets existed, but in my view it would be unlikely to be appropriate to make such an award if the effect of it is to subject the interests of the beneficiaries to the costs of advancing, or considering whether to advance, an interest adverse to their own, as distinct from matters involved in, or for the purposes of, enforcing and giving effect to their own beneficial interest.”

There may be a separate jurisdiction for the costs expenses and remuneration of an office-holder to be paid out of a trust fund even where the office-holder claims to be entitled to an interest in it: see Re Wedstock Realisations Ltd [1988] BCLC 354, (1988) 4 B.C.C. 192. However, this jurisdiction is extremely narrow and has not be relied upon by the Second Defendants in the present case. The circumstances in which it may be invoked by the office-holder are summarised by Muir Hunter on Personal Insolvency (loose-leaf), at 3-1072, in the following terms:

“An inherent jurisdiction has been held to exist in winding-up law and receivership law (which, it is submitted, should logically exist also in bankruptcy law), entitling the insolvency court to order that the costs of determining issues as to the beneficial ownership of funds, which are (as a matter of duty) raised by official receivers, liquidators or receivers, to be paid out of the funds in dispute. Such a jurisdiction may, and often should, be exercisable where the issue is, or should be regarded as, a test case, and where the insolvency office-holders concerned, or representative creditors appointed to argue for conflicting interests, are either not possessed of adequate funds, or have a disproportionately small interest in the subject-matter to justify their incurring of costs: see Re Exchange

Securities Ltd (No.2) [1985] B.C.L.C. 392, and Re Westdock Realisations Ltd [1988] B.C.L.C. 354; cf. also Re Tetley 3 Mans. 226 CA. That jurisdiction is an exception to the general rule applying in insolvency, that in the absence of funds in the insolvent estate, creditors must indemnify their representatives for the purpose of taking proceedings in their interest: see Re Westdock Realisations Ltd, above, applying Re Trent and Humber Shipbuilding Co Bailey and Leatham’s Case (1869) L.R. 8 Eq. 94, and Re London Metallurgical Co [1895] 1 Ch. 758.”

An office-holder will not usually be entitled to recover the costs, expenses and remuneration from the free assets of an insolvent estate for work done exclusively in relation to trust assets in which the general creditors of the insolvent estate have no interest: see, for example, Re Eastern Capital Futures Ltd (in liquidation) [1989] BCC 223 at 227, per Morritt J. In such a case, he should usually seek to recover those costs, expenses and remuneration from the trust assets either under an express or implied provision of the trust or under some other legal basis, such as under the jurisdiction in Berkeley Applegate.

The court has jurisdiction to make a pre-emptive order for costs in favour of a person under the Berkeley Applegate jurisdiction and, in many cases, it would be desirable for it to do so: see Re Wedstock Realisations Ltd, above. However, each case will depend upon its own individual circumstances: see, by way of example, Re Equilift Ltd [2009] EWHC 3104 (Ch), [2010] B.P.I.R. 116.

In my judgment, the discretion in Berkeley Applegate should be exercised by a court, having regard to the following non-exhaustive factors:

As stated above, these factors are not exhaustive. There may be several other factors relevant to the exercise of the discretion of the court, depending on the particular facts and circumstances of a case. In every case, it is important to recognise that the jurisdiction is discretionary and that it may only be exercised “sparingly”. In addition, even if the court is prepared to exercise its discretion in favour of the applicant, it may only do so for a part of the costs incurred or likely to be incurred by him or to impose a ceiling in respect of those costs.

The applicant should also set out, in the written evidence in support of the application: (a) the work already done by him and the costs incurred by him in doing that work; (b) details of the work which remains outstanding; (c) the rate which he proposes charging for that work and the expenses likely to be incurred by him in doing that work; and (d) a proper estimate of the costs and expenses likely to be incurred by him to discharge his duties and functions in full under the trust.

Where the court exercises its discretion in favour of the applicant, it should set out clearly: (a) the precise details of the work for which

Leaving aside the quantum of the Second Defendants’ claim for Trust Costs, which is based on entirely incorrect and misleading information, the grounds upon which the Second Defendants seek to invoke the jurisdiction are set out in Mr Stanley’s second witness statement dated 24 August 2020. I have already referred to the relevant parts of that statement above.

Those grounds were expanded upon by Mr Vickery in the course of his submissions.

First, he said that it was the duty of the Second Defendants to take into his possession all the assets of the Bankrupt to which the Bankrupt appeared to be entitled and this included any asset which appeared to the Second Defendants belonged to the Bankrupt. Although not cited to me, I have no doubt that Mr Vickery had in mind section 305(2) of the Insolvency Act 1986, which states:

“The function of the trustee is to get in, realise and distribute the bankrupt's estate in accordance with the following provisions of this Chapter; and in the carrying out of that function and in the management of the bankrupt's estate the trustee is entitled, subject to those provisions, to use his own discretion.”

In a different but related context, the law recognises that there will be cases where a trustee in bankruptcy may need to seize or take into his possession an asset (almost always a personal chattel) which is not comprised in the bankrupt's estate. Section 304(3) of the Insolvency Act 1986 provides what where he does so and at the time “believes and has reasonable grounds for believing, that he is entitled (whether in pursuance of an order of the court or otherwise) to seize or dispose of that property, the trustee is not liable to any person (whether under this section or otherwise) in respect of any loss or damage resulting from the seizure or disposal except in so far as that loss or damage is caused by the negligence of the trustee; and he has a lien on the property, or the proceeds of its sale, for such of the expenses of the bankruptcy as were incurred in connection with the seizure or disposal.” This provision mirrors the equivalent provision contained in section 234(3) and (4) of the Insolvency Act 1986 which provides an administrator, administrative receiver, liquidator or provisional liquidator with like relief from liability in similar circumstances.

The Second Defendants say that is the precise situation here. They contend that, at the time of bringing the Negligence Claim, the Claimants were not aware of the Claimants’ claim “as pleaded in the current proceedings.” The limitation period was about to expire and if the Second Defendants had done nothing, any chance of recovery would have been, as far as they were aware, lost. They claim that the position was one of emergency and rely on the following passage in Berkeley Applegate (at [1989] Ch 32, 51G to 52B to make good that point:

“The particular aspect of the inherent jurisdiction which is sometimes referred to as ‘salvage’ was said by Evershed M.R. and Romer L.J. in re Downshire Settled Estates [1953] Ch. 218, 235, to be exercisable:

‘where a situation has arisen in regard to the [trust] property (particularly a situation not originally foreseen) creating what may be fairly called an 'emergency' – that is a state of affairs which has to be presently dealt with, by which we do not imply that immediate action then and there is necessarily required – and such that it is for the benefit of everyone interested under the trusts that the situation should be dealt with by the exercise of the administrative powers proposed to be conferred for the purpose.’”

While I can see why, in a urgent case, there might be good reason for a trustee to take in his possession an asset which is not comprised in the bankrupt’s estate, that situation does not apply in the present case. The position might have been urgent if the Joint Trustees (or, more accurately, the Previous Trustee) had been appointed a few days before the limitation period for bringing the Negligence Claim had expired. But that was not the case here. The Previous Trustee and the Second Defendants had plenty of time in which to consider whether it was worth their while bringing that claim.

For the reasons I have already outlined, I am unable to accept the Second Defendants’ contention that they were unaware that the Claimants intended to bring their own action against Barlows because they had received no letter before action from the Claimants or their solicitors. The fact that Mr Stanley had no letter before action is of little significance. It is plain that the Previous Trustee was fully aware of their claim and, as I have observed at paragraph 36, above, the Second Defendants knew or, at the very least, ought to have known, before they took over the trusteeship of the Bankrupt’s bankruptcy from the Previous Trustee, that the Claimants claimed to be entitled to the full benefit of the fruits of any successful claim against Barlows.

Nor am I able to accept that they could not have been aware or expected to know the basis upon which the Claimants’ claim to the Settlement Amount was being claimed until Mr Laughton’s skeleton argument was served. Even if this point is correct – and, as I have already pointed, I do not believe it is – the Second Defendants were sufficiently aware of the basis of the claim to be able to investigate its veracity.

Mr Vickery makes the obvious point that if there is, as I have found, shown to be in existence a partnership between the Joint Venturers, and the advances made by the Claimants were capital contributions, then the Second Defendants, as trustees in bankruptcy of one of the partners (i.e. the Bankrupt), were entitled to bring the Negligence Claim and should be remunerated under the Berkeley Applegate principles for having done so.

I respectfully disagree.

First, it was not necessary for the Second Defendants to take urgent steps to recover the fruits of the Negligence Claim. The Previous Trustee was appointed trustee in bankruptcy on 28 June

Mr Vickery also points out, rightly, that the documentary evidence did not support, unequivocally, the existence of a partnership. He says that all material aspects of the Joint Venture were conducted solely in the name of the Bankrupt. He contends that the evidence was such that it could not be argued that the Second Defendants ought to have immediately accepted the existence of a partnership and not incurred the cost of bringing the Negligence Claim.

This point would not be valid even if the Previous Trustee and the Second Defendants were not from the same practice. But leaving that matter aside, if the Previous Trustee had undertaken proper enquiries in this case, it would have been abundantly clear to him, within a short period of time of his appointment as trustee, that a substantial, if not the full, amount of any recovery he made against Barlows would have had to be paid out to the Claimants. In the four years since the appointment of the Previous Trustee, there was ample time for him to investigate the matter before deciding to bring the Negligence Claim. If he had done so properly, and used the wide powers of investigation which were available to him, he is likely to have been able to decide very swiftly that the creditors were unlikely to benefit from the Negligence Claim. Although the Negligence Claim was issued before the appointment of the Second Defendants as trustees in bankruptcy, they could have undertaken those enquiries as well in the four years they had before the Claim came to trial. Having had more than eight years to investigate matters properly, it ill-behoves them to say that they did not have sufficient time to investigate the veracity of the Claim.

The Second Defendants contend that if the Previous Trustee had not commenced the Negligence Claim, the Claimants would have had no prospect of recovering any sum and, therefore, the Negligence Claim was of substantial benefit to them. They refer to the fact that prior to the Bankrupt’s bankruptcy, the Claimants themselves had to rely on the Bankrupt taking action against Barlows, albeit at the Claimant’s expense, to recover the monies which they had invested.

There is no substance in that point. The transaction relating to the purchase of the First and Second Properties had been conducted in the name of the Bankrupt, albeit on behalf of the Joint Venture. It was, therefore, appropriate that it was the Bankrupt who sought to recover the lost investment from Barlows. However, once the Bankrupt became bankrupt, the position became quite different and, in order to recover that lost investment, the Claimants had to bring a claim against Barlows themselves and set out the full basis of that claim. If the Previous Trustee had investigated the claim properly, as he should have done, and found, as he should also have done, that the claim was unlikely to have any value for the creditors, he could have made it clear to Barlows that he maintained no interest in it. He might then also have taken the courses of action suggested at paragraph 303, above. He should also, at the very least, have cooperated with the Claimants in order to maintain the claim for their mutual benefit. If he had done so, there might have been a stronger case for the exercise of the “sparing” discretion in favour of the Second Defendants.

In addition, as I have indicated above, the Second Defendants put information in support of their claim relating to the amount of their costs which was wholly inaccurate. At the date of the submission of the draft of this judgment to the parties, they have still not corrected the misleading information which they gave to the court and the First Claimant, despite there having been at least one further hearing before the court on 1 October to hear oral submissions from the parties. Although I do not doubt that the information was included by what was an error, I cannot help feeling that, at the time it was provided to the First Claimant, he may have thought to himself whether, if I acceded to application, there was any point in his continuing with the Claim, given that a substantial amount of Settlement Amount would be paid towards the costs of the Second Defendants. I am sure that he would have thought carefully about continuing with the claim if what he was likely to achieve was no more than a pyrrhic victory.

In addition, I am still unaware of the work which the Previous Trustee and the Second Defendants carried out in having the proceeds of the Negligence Claim paid to them by Barlows, particularly on the question of how the Negligence Claim was released from the restraint order by the Crown Prosecution Service). Nor, given that the Previous Trustee was fully aware of the nature of the First Claimant’s claim against Barlows, do I know whether the Second Defendants sought the views of the Bankrupt’s creditors before deciding to bring the Negligence Claim pursuant to section 314(7) of the IA 1986, even if he was not strictly required to so under that or any other statutory provision.

Furthermore, I cannot understand why the application was made so late in the day – literally a matter of a few days before the commencement of the trial of the Claim or why accurate and complete information concerning the free assets available in the Bankrupt’s estate was not provided to the Claimants or the court.

In the circumstances, I cannot help feeling that there has been – to put in Briggs J’s language in Re Sports Betting Media Ltd (in administration) – some “officious intermeddling” in relation to the Negligence Claim.

I am unable, therefore, to find any, or any good, reason to exercise the Berkeley Applegate discretion in favour of the Second Defendants. I agree with Mr Laughton that to do so would be to reward a trustee in bankruptcy who – to use his words – ‘takes a punt’ in attempting to recover for the creditors property that plainly does not fall within the bankrupt's estate, or at least which is unlikely so to fall.

In the circumstances, I dismiss the Expenses Application.

I should add that I have given thought to whether, at least, the legal costs incurred by the Second Defendants in bringing and prosecuting the Negligence Claim should be paid out to the Second Defendants on the basis that the Settlement Amount appears to include the Second Defendants’ solicitors’ costs of the Negligence Claim. If the terms of the Tomlin order had been expressed differently – i.e. if it had included a specific provision for the payment of the Second Defendants’ solicitors costs, as opposed to including those costs in the Settlement Amount – it is difficult to

SUMMARY OF ORDERS I MAKE IN THESE PROCEEDINGS

The substantive orders I make in the proceedings as a result of my judgment are these:

Despite Mr Laughton’s submissions that the taking of an account is not necessary, I consider that it is both necessary and appropriate in this case. I say that because it is possible that there may be a balance from the Settlement Amount which may be considered to be the profits of the Partnership and may have to be split between the Second Defendants (on behalf of the Bankrupt), the Third Defendant and the First Claimant equally. It is possible that the Second Defendants may not wish to participate in the taking of the accounts, either because there is unlikely to be any or any significant amount due and owing to the Bankrupt or because the Partnership may have made losses and any contribution by the Bankrupt towards those losses would rank in the bankruptcy as an unsecured claim. However, even in that latter event, there may be a sum due from the Third Defendant or the First Claimant which the Second Defendants should be entitled to recover from them (in the case of the First Claimant, by the amount due being set off against

It is not appropriate for me to direct the taking of such an account on the footing of the Second Defendants' wilful neglect or default, i.e. on the basis that, in undertaking the accounting exercise, the Second Defendants should not only be charged with accounting for what they have actually received from Barlows but also with what they should have received from them but for their wilful neglect or default, as alleged against them in paragraph 12 of the ReAmended Particulars of Claim. That is because on the material before me, there is no evidence that they might, but for their alleged wilful neglect or default, have received more than the Settlement Amount from Barlows.

In the same way as in the Business and Property Courts of England and Wales, the taking of the account would be undertaken by a Chancery Master, in the present case, it should be taken by a specialist Chancery District Judge, i.e. a District Judge who is authorised to do Chancery work in the Business and Property Courts in Birmingham.

I am also proposing that the Claimants’ Advance should be paid out from the Settlement Amount to the First Claimant before the taking of the account. By virtue of section 24(4) of the PA 1890, a partner is not entitled to interest on the amount of any capital subscribed by him but I fear that the payment of interest may not be straightforward because the factual circumstances which arise in the present case considerably complicate matters. If the taking of the account had occurred when the partnership came to an end 10 or so years ago, the First Claimant would have been entitled to, and received, the return of his capital much earlier. The reason he did not was because of the negligent acts or omissions of Barlows and, subsequently, because of the opposition maintained by the Previous Trustee and the Second Defendants to his entitlement to have that capital returned to him. Although some interest appears already to be included in the Settlement Amount, it is not clear how much that amount is. Subject to hearing submissions on the point, I am proposing to direct that Claimants’ Advance should be paid out to the First Claimant with 14 days of the handing down of this judgment, though it may be that the most appropriate course of action (given what I say at paragraph 307, above) will be to direct that the amount should be paid “on account” of his capital contribution.

MATTERS ARISING

Issues relating to costs and any other matter arising from this judgment (such as directions relating to the taking of the account) may be dealt with when judgment is handed down. I will ask my clerk to list the matter for a hearing, with an estimated length of 1

On the question of costs, in my exchanges with both counsel, I highlighted the possibility of having to consider making an order which is similar to a Sanderson (i.e. Sanderson v Blythe Theatre Co [1903] 2 KB 533) or Bullock (i.e. Bullock v London General Omnibus Co [1907] 1 KB 264) in favour of the First Claimant on account of the costs which he incurred as a result of having to submit to an order that his claim against Barlows should be dismissed with no order as to costs. If the First Claimant wishes to pursue such an order for costs, it would be helpful for me to receive a skeleton argument from both parties on that issue.

It would also be helpful for the skeleton argument to include the parties’ submission on any other issue which arises, including whether, given how I have indicated the Second Defendants have conducted themselves, they should be entitled to the costs of this litigation from any free assets which are available in the Bankrupt’s estate. The First Claimant and the Third Defendant may have an interest in this issue. However, whether or not they do, or whether they wish to be heard on it, that issue should also be determined at the above hearing.

In due course, it will be necessary for counsel to lodge an approved minute of an order to reflect the orders I have made. However, that can await the further hearing when I hope it will be possible for all outstanding issues to be determined.

325 I again express my deep and sincere gratitude to counsel, both for the manner of the presentation of their clients’ case and for their cooperation throughout the trial. Although I have decided most issues in the Claim against the Second Defendants, and expressed strong criticism of their conduct, I do not attribute anything I have said about them to Mr Vickery. He has done everything he possibly can (and a lot more) to present the Second Defendants’ case in the best possible way to the court.