Farepak Foods and Gifts Ltd & Ors v Revenue and Customs & Anor Rev 1 [2006] EWHC 3272 (Ch)

[2006] EWHC 3272 (Ch)Case No 7475 OF 2006
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
COMPANIES COURT
Venue Royal Courts of Justice, Strand, London, WC2A 2LLDate 18/12/2006
Before
MR JUSTICE MANNIN THE MATTER OF FAREPAK FOOD AND GIFTS LIMITED(IN ADMINISTRATION)AND IN THE MATTER OF THE INSOLVENCY ACT 1986
Between
SHAGUN SUNIL DUBEYApplicantsMARTHA HANORA THOMPSONApplicantHM REVENUE AND CUSTOMSRespondentsSUZY HALLRespondent
MS. L. HILLIARD (instructed by Messrs Taylor Wessing) for Claimants.MR. J. LOPIAN (instructed by Solicitor for Revenue & Customs) for the First Respondent.MR. A. TRACE Q.C.and MR. M. SMITH (instructed by Denton Wilde Sapte LLP) for Second Respondent.Hearing Hearing dates: 15 th and 18 th December 2006
Judgment

Introduction

[1]This is an application for directions by the administrators of Farepak Food and Gifts Ltd (“Farepak”) as to whether and how they should distribute certain funds held by them. The application turns on whether the moneys are held on trust for the customers who provided them.

Factual background

[2]This case arises out of an insolvency which has caused considerable disappointment and disadvantage to a large number of, typically, low income families. The company operated a Christmas savings scheme under which customers could spread their Christmas savings over a year. Small contributions could be made month by month so that enough had accumulated by the beginning of November to buy a shopping voucher, or a hamper, or other goods. It operated through a system of “Agents”, who were typically work colleagues, friends or members of the same family as the customers. The Agents collected the money and forwarded it to Farepak. There were approximately 26,000 Agents, most of whom had no more than 6 or 7 customers. The administrators’ calculations indicate that the average customer order through an agent was £250 to £300.[3]On 11th October the directors decided to cease trading. Farepak went into administration on 13th October 2006. It is heavily insolvent and any dividend will be but a few pence in the pound. It did not, and will not, fulfil its Christmas 2006 orders. A lot of people who relied on Farepak’s scheme to provide them with their Christmas food or presents will suffer real hardship. The case has attracted considerable publicity.[4]At present there is nothing that can be done for those people in terms of their full Christmas entitlements. The money that they paid has largely gone. However, there is a limited sum as to which they, or some of them, might have some entitlement. In the 3 days leading up to the administration the directors sought to ring-fence the moneys received from customers in that period so that it could be returned to customers if necessary. A deed of trust was executed, though there was apparently a mistake as to the account identified in that deed and questions arise as to its scope. In addition, there is a said to be an argument that the moneys received in that period are subject to a constructive trust in favour of their payors. There is a little short of £1m in respect of which the payers of that money might be said to have retained an interest by one or both of these routes. One of the questions before me is whether or not they have that interest. Of that sum about £390,000 is said to be customer moneys which have been received by the administrators post-administration.

The form and timing of these proceedings

[5]The proceedings before me were commenced by an application issued and served on 8th December 2006. The application asks for "directions" that sums of money credited to the company's current account on or after 11th October are held on trust for the "Agents"; a direction whether certain money paid to Alliance and Leicester is similarly so held; a direction as to whether moneys received into post-administration accounts is so held; a direction as to whether moneys received prior to 11th October was held on trust for the Agents who paid the moneys; and directions for payment out in the event of trusts being established. Despite the constant reference to Agents, the questions have been treated as though they relate to customers (quite rightly).[6]No respondents were joined at that stage. It came before Briggs J in that state on 12th December. As I understand it an attempt was made to get him to order a distribution, but he ordered the joinder of representatives to enable the various standpoints to be argued. As a result HM Revenue & Customs agreed to represent unsecured creditors; they appeared before me by Mr Jonathan Lopian to argue, if thought fit, that no trust exists. An order was made that a Customer be appointed to represent the interests of Customers and to argue, if thought fit, that a trust was created in favour of "all Customers". A Suzy Hall was joined to achieve that. She was represented by Mr Anthony Trace QC at the hearing before me. His skeleton argument describes her as an agent who collected on behalf of three classes of customers. She is not described as a customer herself. However, no point was taken on this and she assumed the role of arguing the customers' corner. The administrators were represented by Miss Lexa Hilliard. Briggs J's order provided for them to advance arguments in support of a trust in favour of customers whose contributions were paid into the company's current account on or after 11th October 2006, in favour of customers whose moneys were paid to the company on or after 11th October 2006 (the difference between those two presumably arising because not all moneys were paid into the current account in the relevant period), and in favour of customers whose moneys were paid after close of business on 13th October 2006. The significance of those dates will be made apparent below.[7]The matter was expedited and came before me on Friday 15th December. It was argued in a day. The documentation was light, but the authorities bundle was not. As I understand it Mr Lopian and Mr Trace had scarcely more than a working day to understand the facts, work up submissions and prepare skeleton arguments. Despite that they presented impressive and concise arguments in support of the cases that their clients were joined to argue. I am grateful to them (and they are to be commended) for the levels to which they managed to raise their arguments in the circumstances.[8]The matter was expedited because of the proximity of Christmas. It was felt by the administrators that if some of the customers were entitled to moneys via the trust route then, if possible, that money should be paid to them so that it can be enjoyed in the Christmas period, bearing in mind the fact that their original contributions were intended to provide for Christmas and bearing in mind that while the actual sums of money involved was likely to be small for any customers who were entitled, nevertheless it could well be significant. That is why a matter which raises a number of serious legal and factual complexities has arrived before me for hearing within a week of the matter starting in these courts, with the respondents having little time to prepare arguments and with various steps which might normally be thought as being required having in fact not taken place. Thus there is a rectification claim before me which I am invited to accept without any cross-examination of the deponent as to intention, with no evidence from the two people who executed the document, and with no disclosure having been given. Mr Trace sought to advance a resulting trust argument which involved an assertion that the directors of Farepak must have known since January 2006, or at least some date in the year much earlier than October, that its business would fail without that ever having been alleged against the directors before he made the assertion, and without any material from the directors dealing with the point. This breakneck speed was justified as being what was required if the customers were to have the benefit of this money in the Christmas period. That period is not the few days leading up to Christmas, because it is most unlikely that any money that I may order to be distributed will find its way to those people before then, but it is the period between Christmas and the New Year, during which it is possible that money will find its way back to customers.[9]In those circumstances I must approach this matter with great care. This court will do what it can to hear urgent cases urgently, and if that means that it is inevitable that the case is heard on less evidence, or with fewer submissions, than if the case were heard less urgently, then the court has to hear the case on the basis of the material that it has before it even though that may well be less than the total material which would otherwise be available. That, however, is not this case. It is not necessary that this matter be determined now. It is merely highly desirable. Neither Mr Trace nor Miss Hilliard argued that I did not have enough material to decide the case now and that as a result it should be adjourned. Both of them urged upon me that I had enough material to decide the case in favour of various classes of customers. Nor did Mr Lopian say that I should adjourn the case so that any particular aspect could be investigated further. His position was to argue that the customers' claims should fail because the evidence and/or the law was not in sufficiently clearly in their favour. However, despite those positions I still approach this matter on the footing that I can only authorise a distribution if, balancing the strong need for a distribution if possible against the need to have as full a picture as possible, the case for a distribution (both legal and factual) has been sufficiently made out.

The facts - detail

[10]The facts referred to below emerge from the evidence of Ms Thompson, one of the administrators, from a witness statement of Mr Steven Fowler, a director of Farepak, and from a very limited quantity of documents.[11]As I have said, Farepak operate via a scheme of Agents. They collected money from customers, and in due course received the goods or vouchers ordered by the customers and passed them on. The Agents were not required to pass on full details of all the customers. As a result Farepak does not have details of all the customers and their contributions. It has some of the customers' details on a database for marketing details, but that database is not complete enough to be used as the means of identifying current customers and their contributions.[12]The terms of the agency appear in a Terms and Conditions document, with some information about the Hamper Industry Trade Association (of which Farepak seems to have been a member) on the same document. The first provision of the agency terms is:
"You become an Agent of the Company for the Christmas 2006 season on acceptance of your first order. The Company reserves the right to refuse to accept individuals as Agents at its discretion and to terminate Agencies not operated in accordance with these terms and conditions ... Various obligations are then fairly sketchily provided. A later clause provides: "
On receipt of your order, regular statements will be sent to you … In the event that your payments fall behind schedule, we reserve the right to contact your customers to discuss their order with them." Products were to be delivered to the Agents for distribution to the customers and it was the responsibility of the Agents to get the products to the customers. The provisions relating to the trade association state:
"The Hamper Agent is appointed by and acts on behalf of, a supply company."
[13]The Agents liaised with customers, took their orders and collected their money. Typically, a customer might well be a friend, work colleague or member of the family of the Agent. Some Agents were also customers and made their own payments. A customer would make an order and the amount of payments to be made by the customer would be established by reference to the item ordered and by reference to the number of weeks left in the payment year (which ended at the beginning of November). The payments were recorded on a payment card. The company produced a catalogue in which "Customer Terms and Conditions" are recorded. These provided for orders to be placed via "your Agent". It also provides:
"You should ensure that your Agent keeps the 'Items Ordered' section on your Customer Payment Card up to date as written confirmation of your order … Cancellations should be notified to your Agent in writing, and it is your Agent's responsibility to refund you any monies owning. No customer orders are accepted until final payment of the purchase price has been made."
There are other references in the terms to "your Agent".[14]As well as hampers (of a non-wicker variety), many customers chose to have redeemable retail vouchers. Until the beginning of 2006 the vouchers came from a concern called Choice. The terms operating between Farepak and Choice provided that Farepak did not have to pay for the sums attributable to the vouchers until the vouchers were redeemed. That has obvious cashflow advantages to Farepak. However, the Choice company became insolvent in 2006 and it was necessary to find a substitute. The possible substitutes required payment up front, which was going to cause a cashflow "spike" for Farepak. It never did find a replacement voucher provider before going into administration.[15]Farepak was part of a group whose banker was HBOS. The group borrowed money from HBOS and part of the security was a charge over Farepak's operating bank account, and in particular its current account at National Westminster Bank (sometimes referred to in the documents I have seen as RBS). By mid-2006 if not before the group was in serious negotiations with HBOS to retain its continued support. Negotiations with its bankers took place from time to time. The shares of the parent company were suspended in August. In September 2006 the board asked HBOS that it be permitted to establish a trust account to ring-fence moneys received from Agents. It took the view that the bank's consent would be required. It was not forthcoming.[16]On Tuesday 10th October, late in the day, HBOS informed Farepak that it would no longer support the group. At 9.15 a.m. on the 11th (Wednesday) the board met and decided it could not continue to trade without HBOS's support. I have seen a formal minute of that meeting. It indicates that a formal insolvency procedure would be required and the board had received advice that Administration was the most appropriate insolvency process. It was agreed that it should stop taking customers' money with immediate effect, so far as it was able to do so. It was inevitable that some customer moneys would still be received and Mr Fowler was to ask HBOS to confirm in writing that monies received from that day and thereafter would not be available to HBOS to reduce the group's debt. Mr Fowler asked Mr Kelly of HBOS that the HBOS charge be released "over any Farepak receipts entering the Farepak account at RBS from this morning". Mr Kelly responded by asking for details of the current account number and sort code of the account at RBS. Mr Fowler then gave him details of an account which were mistaken - he gave him the account details of a dormant account known as the "Savings Club" account, which was not the account into which customer moneys were received.[17]Some time before 6 o'clock in the evening of the same day Mr Fowler spoke to a Mr Hanham at Natwest (RBS) and told him that HBOS were no longer going to support the group and that Farepak would be going into administration in the next 24 hours. He asked Natwest to take steps to stop receipt of moneys into Natwest accounts. Mr Hanham spoke to colleagues and called Mr Fowler back to ask him to put the request in writing and that Natwest could not stop customers paying into branches by cash or cheque. No mention was made of a deed of trust or separate account being set up. At 17.54 Mr Fowler sent an email to Natwest instructing that the bank should "take all possible steps to stop the receipt of monies from agents into the Farepak head office collection account (sort code 62-11-42)". The account there referred to is explained below - this is obviously intended to be an instruction to Natwest to stop the direct receipt of moneys from Agents.[18]At 6.45 pm Mr Kelly of HBOS responded affirmatively to the request that moneys received be excluded from his bank's charge. His response specifically incorporated the account details that had been given to him. At 7.01 pm Mr Fowler asked Mr Beale of Macfarlanes, Farepak's solicitors, if the response was adequate for their purposes. He did so in an email which copied Mr Kelly's email to him (which contained the wrong account number). Mr Beale reminded him that Farepak would also need a declaration of trust over customer deposit moneys to prevent their being available for unsecured creditors generally. He thereafter produced a draft declaration of trust for that purpose. Because he was basing himself on the email from Mr Kelly, the draft contained the same misidentification of the account in question. It should have referred to the Natwest (RBS) current account instead it referred to the dormant Savings Club account.[19]Mr Fowler did not have time to review the draft, or to review it properly. The next day (Thursday 12th October) two other directors, Mr Rollason and Mr Gilodi-Johnson, attended Macfarlanes' offices for other purposes and had the draft declaration of trust explained to them. An engrossment in the same form was executed by them at about 10.30 am.[20]The declaration of trust reads as follows:
"Whereas: 1 Farepak holds the Farepak Food and Gifts Limited Savings Club Account, account number 50114239 at sorting code 011001, with the Royal Bank of Scotland plc ("the Farepak Account"). Moneys are paid into this account by Farepak's customers. 2 Farepak ceased trading as from close of business on 10 October 2006 3 Farepak has entered into this deed to ensure that, in the event of insolvency, money paid into the Farepak Account on or after 11 October 2006 is held on trust for the relevant payors and can be returned to them in due course. NOW THIS DEED WITNESSES as follows: 1 Farepak shall hold the moneys paid into the Farepak Account on or after the 11th October 2006 on trust as trustee for the benefit of the relevant payors. …"
The remainder of the terms are not relevant. As I have already indicated, the account identified in that deed was not the account into which customer contributions were received. That latter account was a Natwest current account number 01016245. After the deed was executed Mr Fowler reviewed it. He did not spot the error in the account identification, but he did spot another mistake which was the suggestion that the account identified was one which received customer moneys only and no other moneys. The current account to which he thought the deed was referring did receive money from persons other than customers, though the bulk of the money going into that account was money emanating from customers. Hearsay evidence from Mr Beale (provided through Mr Fowler) is that he thought that the specified account was one which was used solely to collect customer deposits, and he had explained the matter in that way to the two executing directors. Mr Beale and Mr Fowler discussed ways of improving the wording, but in the events which happened there was no time to prepare a fresh deed. Mr Fowler's witness statement also makes it clear that at the time of the deed he was aware that some customer moneys arrived at the current account through two other accounts - one at HSBC and one at Alliance & Leicester. (These accounts and the moneys in them assume some importance - I shall refer to them as the HSBC account and moneys and the A & L account and moneys respectively.) He did not think it necessary to include an express reference to those other accounts in the documentation since the moneys would in due course be paid into the Natwest account and would then be subject to the trust.[21]Over the next couple of days or so steps were taken to sell parts of the business to a concern called Findel. The administrators' firm considered that sale. Ms Thompson and Mr Dubey from Messrs BDO Stoy Hayward were appointed administrators at 4.13pm on Friday 13th October. They announced that their intention was not to receive any more customer moneys from their appointment.

The operation of the various relevant accounts

[22]All moneys received by Farepak from its customers came via Agents. Customers did not pay direct (save insofar as Agents may have deposited customer cheques). There were four routes through which the Agents paid the contributions over:(a) They paid to Natwest, at various branches, and were collected for the time being into an internal account known as a Head Office Collection Account (HOCA). This was used to gather very many of the credits paid in by agents whether they paid by cheques, cash, postal orders, standing orders or BACS transfers. This type of account is a facility which allows payments from multiple sources to be processed at a single hub. It does not have an account number - it has a sort code unique to the particular customer. From this account credits were passed to the Natwest current account. If the amount paid into the HOCA was of a kind which did not require a clearing period (such as a BACS receipt or cash) the relevant credit was passed to the current account the same day (day one). If it was something with a clearing period (for example a cheque drawn on another branch or another bank) then credit would be passed to the current account two days later, on day three. There was a slightly complicated way of actually passing entries into the current account, but I need not deal with that. That generalised description will suffice.(b) From direct credits to the current account. Some Agents paid to this account, though most paid through the HOCA.(c) Via credit cards and HSBC. These moneys were collected by HSBC, which passed the money directly to the Natwest current account periodically (not daily, apparently).(d) Via A & L. Farepak had an account with A & L. This allowed agents to pay in collected contributions at A & L offices all over the country. It is an old Girobank account. Amounts were swept from this account into the Natwest current account every Tuesday, so an amount was received on the 10th October and another on 17th October.

The allocation of credit receipts to periods

[23]Much work has been done to try to allocate payments by customers to dates which are thought by the administrators to have been the dates of receipt of those payments. They have sought to allocate receipts (a word which causes problems which I have to grapple with below) to one of three periods - the administration period, the period from 11th October to 16th October (the "hiatus period") and the preceding period (the "pre-hiatus period"). Natwest has done a lot of work to try to reconcile credits to one or other of those periods. I am invited to order the distribution of those allocated to the hiatus period and those allocated to the administration period. Alternatively, in lieu of the first of those, I am invited to order distribution of those credited to the current account from 11th October on the footing of a rectified deed of trust.[24]In order to consider this point I need to set out the basis of allocation. The hypotheses on which the exercise has been done are as follows:a. So far as moneys coming from the HOCA are concerned, the amounts should be taken as received by Farepak when the relevant credit appeared in the current account. Thus in the case of a same day clearance item, the amount would be taken as being received by the current account on the same day as it was received by the HOCA. In the case of items with a clearing period, items would only appear in the current account 2 days after the original payment in to HOCA. Thus insofar as credit from HOCA represented a receipt by cheque, a credit to the current account on, say, the 11th October would represent a cheque paid in to the HOCA on the 9th. A cheque paid in to HOCA on the 11th would be reflected in the current account on the 13th.b. So far as moneys from HSBC are concerned, there is one relevant payment to the current account, on 12th October. That is when credit is given. This amount represents moneys received from Agents in the period 4th October to 10th October ie the pre-hiatus period. It is proposed that this money be not treated as money received in the hiatus period because the sum represents money paid before the board meeting on 11th October - that is on the basis of the dates on which the money was paid to HSBC (all pre-11th October dates). It is not therefore proposed to return this money to Agents. (The administrators also seem to have taken into account that Agents will have protection from the credit card scheme, but whether or not that is correct is not something that I have to consider.)c. So far as A & L moneys are concerned, the relevant payment is a payment of £168,379.07 paid to Farepak on 17th October. This was actually received into one of two separate accounts (the "Re accounts") set up on the commencement of the administration, because it was actually received post-administration. This sum can be seen to represent specific sums paid in on the 10th to 16th October. The administrators propose to repay those received by A & L on the 16th October on the basis that it is a post-administration receipt, and that the moneys paid into the A & L account on 11th to 13th October be treated as received by the company on those dates. The 10th October receipts fall into the pre-hiatus period and would be held for the benefit of the creditors generally.[25]I have been provided with an elaborate schedule which shows how these principles operate in relation to the actual transactions which took place. I do not need (and do not have the time) to set out the details. Suffice it to say that it is said that if I decide that the hiatus period receipts (calculated in this way) and the post-appointment receipts are to be returned to the customers who paid them, then £976,444.42 falls within that category. This includes a cash item in respect of 9th October in the sum of almost £69,000 which seems to me to have been included inconsistently with the principles applied. That is doing the calculation on the basis of what has been received into the current account and the Re accounts in respect of the hiatus period, excluding (as I understand it) the A & L moneys. In addition, if I decide that the A & L moneys received in respect of the hiatus period should be returned there will be a further £141,698 to be returned.[26]It is not proposed that the moneys be returned direct to customers. The company does not have the records to enable it do to that, and it is said that gathering in the records from the Agents would be impractical and probably not possible. Instead, it is proposed that the moneys be returned to the Agents. Work has been done to allocate the moneys received in the relevant periods to the Agents paying them. The £976,000 sum would fall to be repaid to 3879 Agents; the £141,000 would fall to be repaid to 701 agents.

The basis of the suggested returns to customers

[27]The basis on which it is submitted that moneys be returned to customers is that the moneys are held on trust for them, or if they are not then the rule in Ex parte James is relied on. The trust is said to arise from three possible sources: 27.1. A Quistclose resulting trust (Barclays Bank v Quistclose Ltd [1970] AC 567; Twinsectra Ltd v Yardley [2002] 2 AC 164). 27.2. A constructive trust arising out of the unconscionability of retaining customer moneys received after the decision to cease trading and the attempts to stop receipt of customer moneys. 27.3. The express declaration of trust, or an implied declaration arising out of the related facts. I shall deal with those claims in turn. However, before doing so I need to deal with the basis on which moneys were received by the Agents, because it has a potentially important bearing on all ways in which the trust claim is sought to be maintained.[28]I also need to make clear the basis on which this application has to be decided. There is no doubt whatsoever that the customers of Farepak deserve an enormous amount of sympathy, and as far as I am concerned they have it. They are also entitled to all the assistance which the court can properly give them, in terms of procedural matters and assistance in having their proper claims speedily determined, including some at least of some of the corner-cutting that has occurred in the present application. That is doubtless why Briggs J ordered that this matter should come on so quickly, and why representative creditors have agreed to be joined and why they and their representatives have acted so expeditiously. Mr Lopian quite properly made it clear that HMRC was not advancing its points with any enthusiasm, but they were points which had to be made. However, at the end of the day their claims have to be based in law, not sympathy. I have to be satisfied that their claims have been made out to a sufficient level at this stage. If I am not then no amount of sympathy can entitle them to be paid moneys to which they are not, or may not be, legally entitled. There are a large number of insolvencies in respect of which various creditors have to be treated with sympathy, but in all cases it is legal claims which have to rule the day.

The basis on which Agents received contributions from customers

[29]I fear that this point received little attention in the material and submissions put before me, but I equally fear that it is an important point. As will be apparent above, the hypothesis on which the administrators have operated in determining when moneys were received by the company is that, so far as moneys ending up in the current account are concerned, it is treated as having been received when the money was credited to the current account. So far as moneys received by A & L are concerned, it is the date when “moneys were paid into [Farepak’s] account with A & L". Looking at the figures, it seems to me to be the date when credit was given by A & L for the moneys paid in, which must itself allow for preceding clearance periods in some cases (the A & L moneys transferred to the company on 17th October included moneys treated as received by it on 16th October - realistically speaking the 16th October items must be items cleared on that date, which must include some items paid in before that date but which took some time to clear). The key point is that in all these cases it is assumed that the company did not receive money when the money was received by the Agents.[30]That assumption seems to me to be misplaced. On the material that I have seen it seems apparent that the Agents are agents of the company, and they are not agents of customers (or at least not in any material respect). The agents’ terms and conditions specify that they are agents of the company (see above) and the trade association provisions (admittedly not strictly contractual for these purposes) indicate the same thing. Farepak is entitled to control the Agents; the customers are not. While it is true that the customer conditions refer to “your Agent” several times, it is equally clear that that is a reference to the Agent as being the Agent with whom the customer habitually deals, and not to an agency created as between customer and Agent. In other words, it describes the person, not the relationship.[31]Miss Hilliard suggested that while the Agents might be agents of the company for some purposes, they were the agents of the customers for the purposes of collecting money and transmitting it to the company. To demonstrate that she instanced the case of a customer handing over cash and then changing his or her mind and asking for it back. She said it was inconceivable that the Agent would not return it, thus demonstrating that the Agent was the agent of the customer. She may be right about the facts - it may be highly likely that the Agent would accede to the request. However, that is probably attributable to the personal relationship between the Agent and the customer, and not the legal relationship. I think that the matter can be tested in a more realistic way. Suppose that an Agent collects money and then runs off with it without transmitting it to Farepak. Would the company be able to disclaim liability, and say that it did not receive the money, on the footing that the Agent received the money as agent of the customer only? The answer to that is clearly No. Farepak would not be able to say that the person that it put out there to be its Agent, and who collected the money, was for that purpose the agent of the customer. While many Agents apparently have personal relationships with their (allocated) customers independently of their Farepak agency, some will not. The idea that an Agent who is not personally known to the customer (before the agency) would handle the customer’s money as agent of the latter seems to me to be quite wrong and totally inconsistent with the pattern of relationships in this case. The Agents are effectively the shopfront for Farepak. Once money is passed to the Agent it is being passed to the shop just as much as money paid over a counter and placed into a till in a conventional shop becomes the shop's money.[32]It therefore appears to be clear to me that the money paid by the customers to the Agents is money paid to the latter and taken by the latter as agent of Farepak. The significance of this appears below.

The Quistclose trust

[33]Mr Trace argued this point. He argued that an analysis of the facts and the customer conditions showed that there was a payment for a specific purpose, and that since that purpose had not been fulfilled the customer money was held on resulting trust. The purpose in question was the provision of vouchers (or other products elected by the customer). So far as the customer conditions are concerned he relied on a term which provided that payments must be “completed in full” before any entitlement arose, and that as between categories of goods ordered the payment would be allocated in a given priority - first vouchers, the frozen hampers, then grocery hampers and so on down the line. He pointed out that if the price were altered the customer has the right to the return of the contributions in full, and the same was true if there were a substitution.[34]This argument, if good, would work to the theoretical benefit of all customers of Farepak in the 2006 Farepak year, and not just those whose payments were received at the time under consideration in this application (though there is no practical benefit to most of them because most of the money has gone anyway). Unfortunately, on the material that I have had the argument fails. I have already held that the money is taken by the Agents as agent for Farepak. That of itself does not militate against the existence of a Quistclose trust. However, there is no suggestion that the Agent was expected to keep the money separate from other money (or indeed his or her own), and it is indeed known that it was mixed with the money of others and paid over to Farepak with the money of others. Again, that of itself it not inconsistent with a Quistclose trust, but it does not help. But crucially, there is no suggestion that the money ought to have been put on one side by Farepak pending the transmutation from credited money to goods or vouchers. If there were a Quistclose trust then that obligation would have been inherent in it, but the business model would have made no sense. It would have required Farepak to have kept all the customer moneys in a separate account from January until November, untouched until the time when the goods or vouchers were acquired and then sent out. That is completely implausible. It would turn Farepak into a very odd savings organisation. Even banks do not have to do that. Mr Trace urged on me that the description of this as a savings scheme (which is how it was described in some publicity) indicated that there was a trust until the vouchers/goods were provided, and pointed to an OED definition which he said supported him. I am afraid it gives him no support at all. The concept of a trust is not inherent in the use of the word “savings”; indeed, most savings organisations do not operate via a trust at all. They operate at the level of contract and debt.[35]On analysis it is apparent enough that what the customer was making was advance payments towards the purchase price of goods or vouchers. The payments were noted on the relevant cards. When the price had been paid the customer was entitled to the chosen goods or vouchers. That describes, and is, a contractual relationship. The provision for the return of money if the price went up, or if acceptable goods were not provided, are contractual terms for the return of an equivalent amount of money, not money held on trust.[36]This argument therefore fails.

The constructive trust

[37]Both Miss Hilliard and Mr Trace sought to make this point. Their starting point was the decision in Neste Oy v Barclays Bank [1983] 2 Lloyds Rep 658 @ 666. In that case a company decided that it should cease trading on 22nd February. On the same date a payment was made to it of moneys to enable it to discharge its function as shipowner’s agent by discharging certain liabilities. The payment was made by inter-bank transfer on that day (see p 662). It was found that this money was paid and received at a time when the recipient company had resolved to cease trading immediately, when it had not itself paid for the services which it was entitled to discharge with the remitted moneys and when there was no chance it would pay for those services. In those circumstances Bingham J held there was a constructive trusteeship of the moneys. “Given the situation of [the recipient company] when the last payment was received, any reasonable and honest directors of that company … would, I feel sure, have arranged for the repayment of that sum to the plaintiffs without hesitation or delay. It would have seemed little short of sharp practice for [the company] to take any benefit from the payment, and it would have seemed contrary to any ordinary notion of fairness that the general body of creditors should profit from the accident of a payment made at a time when there was bound to be a total failure of consideration … It seems to me that at the time of its receipt [the company] could not in good conscience retain this payment and that accordingly a constructive trust is to be inferred.” I draw attention to the use of the words “received” and “receipt” in that citation. That is a point which has to be addressed in the present case. But in the meantime the parallels between what is said there and the present case are obvious. If one looks at the date of receipt into the Natwest current account for the moment, or the date of receipt into the A & L account, then from the 11th October Farepak received sums at a time when it had decided to cease trading, and at a time when it was clear that there would be a total failure of consideration - the goods and vouchers were not going to be provided. It is said that that makes it unconscionable for Farepak and its unsecured creditors to have the benefit of this money in the same way as it was unconscionable in Neste Oy, with the same sort of constructive trust arising as a result.[38]It is, however not that simple. So far as the law is concerned, the reasoning of Bingham J has been criticised by Lord Browne-Wilkinson in Westdeutsche Landesbank v Islington LBC [1996] AC 669 as apparently being premised on reasoning which smacks of a remedial constructive trust which is not recognised by English law; contrast “institutional” constructive trusts, which are. Ferris J in Box v Barclays Bank [1998] Lloyds Rep Banking 185 acknowledged the criticism of Lord Browne-Wilkinson and observed (albeit obiter) that in the light of it:
“it would now be dangerous to rely upon a principle of the kind applied by Bingham J in the Neste Oy case” (see p 200) Ferris J’s caution was shared by Rimer J in Shalson v Russo [2005] Ch 281 at 320. On the other hand it has apparently been endorsed by the Court of Appeal in Friends Provident v Hillier Parker May & Rowden [1997] QB 85, and in Re Japan Leasing (Europe) plc [1999] BPIR 911(in which, however, Box was apparently not cited). Mr Trace pointed out that there was no criticism of Neste Oy in Twinsectra. He also pointed out that in In re Goldcorp Exchange Ltd [1995] AC 74 @ 104 the Privy Council seemed to have accepted Neste Oy as being justifiable as giving rise to a proprietary interest: “where to the knowledge of the payee no performance at all could take place under the contract for which the payment formed the consideration.”
It should, of course, be noted that Goldcorp preceded Westdeutsche. I was taken through other authority which, taken as a whole with all the other authorities, demonstrated that the decision in Neste Oy has not been criticised (as opposed to the reasoning) and that it is possible to justify Neste Oy as being an instance of an institutional constructive trust after all.[39]Reliance was also placed on the fact that Lord Browne-Wilkinson thought that the decision in Chase Manhattan Bank NA v Israel-British Bank (London) Ltd [1981] Ch 105, on which Bingham J had based his reasoning, was justifiable on a different basis from that on which Goulding J had decided it. Goulding J had determined that a payment made under a mistake of fact gave rise to a proprietary interest in the payer. In Westdeutsche Lord Browne-Wilkinson suggested that the proprietary interest might arise once the recipient had knowledge of the mistake (but not before). The retention of the money might give rise to a constructive trust. If that is right then one might categorise the payment in Neste Oy as having been made under a mistake (as to whether the recipient intended to fulfil the contract), so that at the moment of receipt the recipient, himself knowing that he would not fulfil the contract and obviously appreciating that the payer must understand otherwise, could not in good conscience keep the money. (It seems from the report of Neste Oythat the claimant sought to amend to take a mistake point but was not allowed to do so.) It is not just the pricking of the conscience that gives rise to the constructive trust; there is something more.[40]Mr Lopian pointed out (using different terminology) that we are somewhere close to the frontiers of the law of constructive trusts and that if I decided that there were one in this case then I would be deciding new law because I would be creating a remedial constructive trust of a type which is still unknown to English law. I think I can accept that the criticisms of Neste Oy mean that the position in a case like that one, where moneys are paid in the nature of an advance payment to be applied in acquiring goods or services which the company has already decided will not be provided, is not as clear as one would wish, but despite that I think that the decision in that case is clear enough and can be reconciled with principle. If and insofar as it could be established that moneys were paid to Farepak by customers at a time when Farepak had decided that it had ceased trading, and indeed at a time when it had indicated that payments should not be received, then there is a strong argument for saying that those moneys would be held by the company as constructive trustee from the moment they were received. As I have said, it may well be possible to justify this conclusion on the basis of a mistake, to bring it into line with Lord Browne-Wilkinson’s views. So I would be minded to follow the result in Neste Oy, with modified reasoning. I do this with all due diffidence. I was taken (very efficiently) by Mr Trace through over a dozen authorities on this point in less than an hour. That is all that time allowed, but it is not a promising basis for making new law if that is what I am doing. But I do not consider that I would be doing that.[41]However, I am afraid that I cannot determine that all the moneys in relation to which I am asked to make a decision fall within that line of argument. If I am to apply the underlying principles which are demonstrated by Neste Oy then I have to apply them by reference to the time at which the moneys should be taken to have been paid to and received by Farepak. That is not necessarily the same date as the credit appeared in the current account, and that is for two reasons. First, in the case of items with a three day clearing cycle, some of the items credited on 11th October will be items which were “paid into” the HOCA on 9th October (outside the period) and some items credited on 12th October will be items “paid into” HOCA on 10th October (again outside the period). It is not clear on the citation of authorities that I have referred to that it is right to take the date at the end of the clearing cycle as being the date of receipt for these purposes. If the correct analysis is a mistake analysis, at the time when the payment was made in the sense of moneys being paid to the bank there was no relevant mistake because the company had not yet decided to cease trading. The same is true of payments directly into the current account - some of those credited on 11th and 12th October will represent moneys paid in on 9th and 10th October though probably not much money falls into this category. But second, it is in fact even more complicated than that. All the money thus credited is money that had been paid, by some mechanism or another, to Agents before they ever got anywhere near a Natwest account. Since the Agents are agents of the company, receipts by those Agents fall to be treated as receipts by the company. If, as is possible on a scale unknown to me at present, those Agents received cash but paid in with their own cheques, then in a real sense the company has already received the money. Much of that money is likely to have been collected by the Agents outside the hiatus period.[42]The same is true of moneys paid into the A & L account. Any cash paid in is likely to have been collected outside the hiatus period, to an extent which is simply unknown. Any cheques credited to that account will, in large part, have been “paid in” before the hiatus period (assuming the same clearance periods apply to that account as apply to the Natwest accounts), representing money or cheques collected from customers even earlier.[43]Accordingly, an application of the result of Neste Oy (which is the high water mark of the constructive trust case) does not justify the distribution of all the money. Payment and receipt of the money were, in that case, effectively simultaneous. Payment and receipt of the moneys in the present case were not necessarily simultaneous. That creates factual and legal problems. The factual problems lie in ascertaining how moneys arrived at the Agents and at HOCA (and A & L). The legal problems lie in analysing how the constructive trust principles that survive from Neste Oy apply to those facts. The overall position is of sufficient uncertainty that I am unwilling to decide them on the basis of the material that I have.[44]I very much regret coming to this decision. Had it been possible to arrive at a firmer conclusion, applying an appropriate degree of robustness, I would very much have liked to have done so. However, I consider that even allowing for the desirability of distributing now, if at all possible, the material does not exist which makes it sufficiently clear for present purposes that the sums which are said to come within the constructive trust do in fact do so. It is not clear to me whether it is possible to determine that at least some relevant sums do come within the possible trust. I suspect that that will take some work to ascertain that, and that work will be difficult.

The express trusts

[45]Miss Hilliard’s first point in relation to this is that, without the deed of trust, the facts demonstrate an effective declaration of trust over all the customer moneys which the company had or received as at or after the date of the creation of the trust (ie after 10th October). This includes moneys paid in prior to 11th October. I do not think that this argument can succeed. The directors clearly manifested an intention to create a trust, but they have to do something in the nature of a declaration in order actually to create it. What they did was execute the deed of trust. There is no evidence of any other act going beyond a mere declaration of intention, apart from the execution of the deed, that is even a candidate. Accordingly an express trust arises out of the deed or not at all.[46]The main problem with the declaration of trust is that on its terms it does not apply to any moneys because the account referred to is empty. On the facts as placed before me there is a strong case for saying that the problem is one of misdescription which can be cured by a process of construction, but I do not think that it is necessary to agonise over that because it is clear to me on the evidence that the deed was executed as a result of a mistake and falls to be rectified. The mistake is plain - Mr Fowler intended to refer to the account with money in it, and identified the wrong one. His prime purpose was not to declare a trust over the account referred to in the deed. His purpose, and the purpose of the directors, was to declare trusts over real money. He merely misdescribed where it was. That is rectifiable. The directors who executed the deed were told what it was thought the effect was, repeating the mistake. They were similarly mistaken.[47]A unilateral document can be rectified - see Re Butlin’s Settlement [1976] Ch 251. In my view the declaration of trust should be rectified to bring it into line with the intention of the company. The relevant intention is the intention of the board to protect customers whose money was still being received, as refined by Mr Fowler who implemented the intention by giving instructions for the trust deed. His intention was, in substance if not in terms, to declare a trust over the current account. His own evidence is that he did not go further and intend to declare one over any other account or money - the HOCA (if relevant) or the A & L account. The appropriate form of rectification would be to substitute the name and number of the current account for the account identified in the deed.[48]Mr Lopian says that that does not necessarily remove all the problems, however. It is said that clause 1 presents a problem in that it goes further than intended. It states that the moneys in the account are held on trust for the payors, and not merely the customers. The intention of the directors was to protect the customers, not others, and to a limited extent the money of others was also credited to the current account. Thus, says Mr Lopian, the deed does not coincide with the intention of the company even if the name of the account is rectified.[49]That does not seem to me to be a bar to rectification, or treating the deed as if rectified, for two reasons. First, I consider that the deed as rectified only covers customer money on its true construction. The first recital refers to moneys being paid into the account by customers. In that context the word “payors” in recital 3 would quite naturally mean the payors just referred to, namely the customers. There is no reason why a wider class than those just referred to should be intended at this point. That inference is strengthened by the circumstance that anyone else paying money into the account would be someone who intended the company to have the money on any footing – persons other than customers who owed the company money. If that is right then the words “relevant payors” is reference back to the people thus described in the recitals. That means that the deed does indeed refer to a trust over moneys paid in by customers, which is to be held in trust for those customers paying it in.[50]Second, even if the deed does go further than apparently intended (on extrinsic evidence) so far as the apparent beneficiaries are concerned, then that is no reason for saying it has no effect vis-à-vis customers. As a matter of construction it still catches money paid in by customers.[51]The fact that it is actually the agents who pay the money in, and not customers, does not make any difference. It is quite clear what money is being talked about, and who the beneficiaries are said to be.[52]The deed can therefore be treated as rectified to cover the account and moneys it was intended to cover. At this point, however, another problem arises. If and insofar as the money has already been paid to the company (via the Agents) the relevant customers are already creditors. By declaring this trust those customers are apparently given a preference. The whole purpose of this deed is to do just that, though the chain of reasoning is not articulated because no thought was given at the time to the legal route by which the company acquired the money. I do not see at the moment that there is any obvious answer to this, though the point was not argued before me (probably because there was not much focus on the true status of the Agents). If it is possible to treat any customers as paying the money in direct then there may not be a preference so far as those customers are concerned, because they are not creditors at the moment of the creation of the trust over their money, but filtering those customers out may be difficult if not impossible. At the moment this preference point is an obstacle at a practical level, at least, to any sums being paid out on the footing of a rectified deed of trust.

The rule in Ex parte James (1874) 9 Ch App 609

[53]This principle, requiring high standards from officers of the court, is relied on as a further basis for allowing moneys received in the Natwest current account, and from A & L moneys, in the hiatus period to be ordered to be repaid to the contributing customers. It applies to the administrators, notwithstanding that they are not court-appointed, by virtue of the Insolvency Act Schedule B1 para 5, which makes them officers of the court. The principle will operate where it is unconscionable for an officer to rely on a legal right which he or the company otherwise has. It does not allow them to override legal interests in the way which would be required if the principle were to be invoked in the manner suggested. The problem arises in respect of money in respect of which the customer has retained no beneficial interest. It is suggested that the principle be used to override the interest which the company has, and any preference issues which might otherwise arise, so as to return moneys to the contributing customers. On a palm tree justice basis that result might well be seen as fair, but I do not think that that is enough to bring it within the principle. I was not shown any case which goes this far. It could not be described as “dishonourable” for the administrators to retain the money in the company on the basis of the legal analysis set out above (see the formulation in Re Japan Leasing (Europe) plc [1999] BPIR 911 @ 925).

The post-administration receipts

[54]There is no difference in legal principle to payments paid to the company of the administrators. If they were actually received by the company (in the relevant sense) after the cesser of trading then the constructive trust arguments referred to above apply. A fortiori if they were received after the administration. However, they must have been received in a relevant sense. There are the same legal and factual difficulties in determining the status of these moneys as arise in relation to those "received" in the hiatus period.[55]In the case of moneys paid after the commencement of the administration, Miss Hilliard submitted that the rule in Ex parte James again applied to justify the distribution of moneys received through the system. The same answer applies here as applies to the hiatus period moneys – this rule does not go so far as to justify repayment of moneys which the company had received in a relevant sense before the decision to cease trading.[56]There is one additional feature in relation to customers whose contributions reached a Farepak account after the date of the administration. When they took office the administrators announced on Farepak’s website that they would return “Any hamper and voucher related monies received after the Joint Administrators’ appointment” once the source could be traced back. Miss Hilliard urges me to allow the administrators to comply with that indication. So far as moneys can be shown to have been received by the company after that period then the administrators may do so in relation to that money. The trouble may be in isolating those moneys for the reasons given above. They may do so on the basis that the company, like any other person, may return or repudiate money which it does not wish to receive and which it has not already received. That money is like an unwanted gift. It does not seem to me that that indication on the website alters the inappropriateness of applying the rule in Ex p James to require repayment.

Conclusion and further matters

[57]On the determinations made above it may well be the case that the scope for returning funds to customers is limited. However, I should make clear the basis on which my determinations are made. Mr Trace submitted that if I was against him on any of his arguments I should not dismiss them in a fashion which meant that they could not be raised again. Some of his points would involve a proper survey of the evidence, and particularly the historical evidence, and he said it would not be right or fair for a determination in this application to shut out the possibility of raising a better case on them in the future when there may be an opportunity of running them with the benefit of better evidence and more preparation. I am sympathetic and accede to that argument, and I consider that it extends further than merely Mr Trace's arguments. I have remarked more than once on the speed with which this matter has been brought on. I intend that my findings should be dealt with as if this were a summary judgment application. The administrators have applied for liberty to distribute on the basis that the case justifying it is clear enough on the present material and on the present arguments. I have found that in large part that material is not sufficient. I would have authorised distributions if on the present material it had appeared that a proper case had been made out at this stage. Insofar as I consider that it has not been made out I do not intend to find that it cannot be made out, and that the obstacles cannot be investigated further. Those seeking to assert the interests of the customers live to fight another day on the same points. I do not, by this judgment, intend to prevent any of the points being re-run, in the same or a modified form, if in due course it appears that that can be done.[58]With that in mind, the administrators may well wish to consider the effect of this judgment, and if it appears that some of the matters that appear at present to be obstacles to a distribution can be removed then they will be free to apply again for permission to distribute. In particular they may wish to address in more detail the question of when the company should be treated as having received moneys. Nothing in this decision should be taken as preventing that. I will be receptive to an application for further directions taking the points forward if the administrators wish to make such an application.[59]I should also repeat my regrets that I cannot authorise the full extent of the distributions that the administrators would wish to make. It will doubtless seem to some that the points which currently seem to stand in the way of what they propose are technical and unmeritorious. Some of them are certainly technical. But they are real points, I fear, and they arise out of the way that this company conducted its business. They must be disposed of properly and on the basis of law, not purely on the basis of sympathy and Christmas.[60]There is one last point to which I should refer. The application before me proceeded on the assumption that any moneys that are to be paid out should be paid to Agents, who will then account to their customers. The dangers involved in that are obvious. No-one before me argued that it was inappropriate to distribute in this way, though it was not obvious that that was anyone's job as the matter unfolded before me. However, I do have misgivings about it. It should only be done if there is no real practical alternative, and with such safeguards as can be put in place. I am not sure that the evidence goes far enough to justify this course, but in any event it is something that the court is likely to want to be satisfied on in any further applications for permission to distribute.[61]In the circumstances it seems to me to be inappropriate to make any of the directions sought. Whether any substituted directions should be given can be subject of argument after this judgment is handed down.

Cited in 1 later judgment