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Omar and Prakash - Two Funds in Bank

Issue

The issue in this case is that whether the funds in the two accounts are subject matter of trust.

Rule

Insolvency law maintains two principles: (1) all unsecured creditors should be treated alike and no unsecured creditor should be given an advantage over the others (the pari passu principle); and (2) assets should not be allowed to be taken from an insolvent person’s estate so that they are unavailable in the administration of the insolvency (the anti-deprivation principle) (Hudson 2014: 132). In case of trust, these principles would mean that the courts would not infer the existence of trusts so easily and on slight evidence, because such trusts will segregate assets away from satisfying the claims of unsecured creditors (Hudson 2014: 132). This is certainty of subject matter and it requires that the subject matter of the trust must be certain. In case of Moneys, this approach would require the segregation of funds if held in accounts.

In Re Kayford Ltd, [1975] 1 WLR 279, the directors of the company were concerned about insolvency and they opened a separate bank account for receiving moneys and prepayments from their customers. The company went bankrupt and the creditors claimed funds in the company bank accounts. But the court held in a judgement given by Megarry J, that the money was subject to a trust. Moreover, all the requirements for creation of a trust were fulfilled in that case according to the court. These include certainty of intention, beneficiaries and subject matter.

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In Re Farepak Foods and Gifts Ltd, [2006] All ER (D) 265 (Dec), where the insolvent company had created a bank account for the specific purpose of receiving prepayments from their customers, the court held that the account was created to hold the prepayments in trust even though the trust instrument had recorded the wrong bank account number. The court used the intention of the settlers to decide that the money in the bank account, despite the error in the account number, was indeed held in trust for the customers.

In MacJordan Construction Ltd v Brookmount Erostin Ltd, [1992] BCLC 350, the court held that money held in a bank account must be held in a segregated account before it can form the subject matter of a trust. In White v Shortfall, [2006] NSWSC 1397, the court held that a trust could be found without the need to segregate the assets into a number of trusts, one for each individual (Hudson 2014: 133).

In Re Global Trader Europe Ltd (in liquidation), [2009] EWHC 602 (Ch), Global Trader held money in accounts for the benefit of its many customers. When it went into insolvency, some of its accounts were segregated while others were not. Thus the question arose of whether trust could be found of each customer. Some customers had funds segregated for them, while the others did not, therefore, for the latter category of persons, there was a difficulty. It was held by Park J, that there could not be a trust over any part of the fund in favour of a particular customer, unless that fund was segregated from other property and held to the account of that particular customer (Hudson 2014: 134).

In Re Lehman Bros International Europe No 2, [2009] EWHC 3228 (Ch), it was held that until the money was segregated there could be no trust over it in favour of any client. But if the money had been segregated from the other assets and held separately for the benefit of a particular client, then it could be said to be in trust for that particular client. If there was no such segregation, then the client would be required to put in a tracing claim. In appeal, in Re Lehman Brothers International (Europe) (in administration) v CRC Credit Fund Ltd, [2010] EWCA Civ 917, the Court of Appeal held that a single trust can be used to create a central pool of property. This was approved of by the Supreme Court in appeal from the Court of Appeal. The Lehman case should be distinguished because it involved CASS regulations, which are not applicable in general trust cases.

It is clear that where there are segregated funds for specific purposes, this goes to create a trust for the object and beneficiary as intended by the settlor.

Application

The bank accounts opened by Omar and Prakash are segregated with one account holding the money received as prepayments from the customers of the company and the second account holding money received as a loan from their aunt for the specific purpose of payment of the rent dues to their landlords. In this situation, as per the principles laid down in various judgements considered above, the bank accounts and the money in the bank accounts can be seen as trust. One trust is for the customers who have made prepayments. Unsecured creditors will not have access to this account as it is obviously intended to hold the money in trust only for the customers of the company. In fact, the account has been designated as the ‘Trust Account’. The second account is only for the payment of the rent dues as agreed to by Omar and Prakash at the time of receiving the loan from their aunt. Therefore, this account cannot be used for the purpose of paying the creditors or any other person and can only be used for the purpose of paying the rent to the landlord.

Conclusion

There are two bank accounts. The ownership of these accounts is vested in trusts. One account is a trust for the customers who have made prepayments and the other account serves as a trust for the landlord for the payment of rental dues.

Bibliography

    1. Atkins S, Equity and Trusts, Oxford: Routledge, 2015.
    2. Bray J, A Student's Guide to Equity and Trusts, Cambridge: Cambridge University Press, 2012.
    3. Garton J, Moffat G, Bean G, Probert R, Moffats’ Trust Law, 6th ed., Cambridge: Cambridge
    4. University Press, 2015.
    5. Hudson A, Equity and Trusts, Oxford: Routledge, 2014.
    6. McKendrick E, Contract Law: Text, Cases, and Materials, Oxford: Oxford University Press, 2012.
    7. Stone, R, Devenney, J, The Modern Law of Contract, Oxford : Routledge, 2015.
    8. Watt G, Equity and Trusts Law Directions, Oxford: Oxford University Press, 2014.

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