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06 August 2019
Hight Court decision
Court of Appeal decision
When does a Quistclose trust arise in the context of bank transfers? The Court of Appeal has set out the relevant circumstances in First City Monument Bank PLC v Zumax Nigeria.(1)
The principle of a Quistclose trust was established in Barclays Bank Ltd v Quistclose Investments Ltd,(2) in which Quistclose successfully recovered funds it had lent to Rolls Razor Limited (RRL) which had been advanced in order to facilitate the payment of a dividend. When RRL went into liquidation, Barclays attempted to apply the monies lent by Quistclose to reduce RRL's outstanding overdraft. However, it was found that the monies – held in a separate, designated account at Barclays – were held on trust for the lender, Quistclose.
Zumax Nigeria Limited, a Nigerian company which had provided engineering and other services to oil companies, had previously held a Nigerian naira-denominated account with IMB International Bank plc. Following a series of mergers, First City Monument Bank plc (FCMB), a Nigerian bank, inherited the rights and obligations of IMB.
In order to receive payments in US dollars, Zumax opened a US dollar-denominated account through its nominee, Redsear Limited (the Redsear account) with Chase Manhattan International in London. Any monies paid into the Redsear account were to be transferred to one of three IMB-associated US dollar accounts held with Commerzbank, IMB's correspondent bank in the United Kingdom (the correspondent accounts). On receipt of relevant funds into the correspondent accounts, IMB was to credit Zumax's naira account with the corresponding value.
The claim concerned 10 transfers totalling $3,712,450, which were made from the Redsear account to the correspondent accounts between 2000 and 2002. For each of the transfers, an authorised Redsear representative issued instructions to Chase Manhattan International to effect the transfer to one of the correspondent accounts, noting that the transfer had been made to IMB for onward credit to Zumax.
Zumax alleged that they had not received the money transferred from IMB. They issued proceedings and subsequently applied for summary judgment in March 2014, stating that FCMB held the funds "on trust or on constructive trust for Zumax".
The application came before the High Court in 2017. In his judgment, Justice Barling made clear that he considered the transfers to have created an express trust or, "failing that", a Quistclose trust and that Zumax would have the right to enforce that trust.
In the High Court's view, the transfers were "demonstrably not simple deposits into a current account between banker and consumer". The terms of instruction given by Redsear were "simple and unequivocal" and therefore only capable of the construction that the funds should be held by FCMB in the correspondent accounts only for the benefit of Zumax. It was also found that FCMB understood that the funds were to be held in this way.
Summary judgment was granted in relation to all but one of the 10 transfers and FCMB subsequently appealed, arguing that the transfers did not create a trust.
The Court of Appeal found that the transfers did not give rise to any trust. When overturning the High Court's decision, and in the leading judgment, Newey LJ set out, among others, the following factors which affected his judgment:
This decision reinforces the understandable reluctance on the part of the courts to erode the basic principle that a banker-customer relationship is no more than a contractual one of debtor-creditor. It highlights that the circumstances in which a Quistclose trust can arise are narrow and fact specific, although it is clear that the courts remain willing to declare the existence of such a trust in circumstances where the thresholds are met. This is unsurprising in circumstances where the parties considering claiming that a Quistclose trust has arisen are often the victims of banking fraud.
For further information on this topic please contact Simon Hart or Joseph Cresswell at RPC by telephone (+44 20 3060 6000) or email (email@example.com or firstname.lastname@example.org). The RPC website can be accessed at www.rpc.co.uk.
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