Are payments received for goods or services not supplied held on trust?

Published on
2 min read

An issue which can arise after a company goes into administration, is a creditor arguing funds are held on trust for them – particularly if large payments are made shortly before the insolvency and there is little prospect of a return any other way, which was the issue in this case

Benedict Cole Limited had an invoice discounting facility with Lloyds and in the week before it went into administration several large payments were made by a customer to Lloyds for staff the Company should have supplied. In fact it didn’t supply and there was a credit balance of £124,916.67. An argument then arose over whether this was held on trust for the customer or formed part of the company’s assets – it was argued that the surplus money was held on constructive trust because the company did not supply the staff it was contracted to and the payment made under a mistake. Had the customer known about the impending insolvency (and inability to perform), it would not have paid.

That argument failed - the customer simply had breach of contract claim for failure to supply. The starting point was to look at the contractual arrangements. There were no terms in the agreement which purported to create any form of trust, nor were there any of the other hallmarks of a trust such as separate accounts or segregation of funds. Furthermore, the trust needed to exist at the point of insolvency – not afterwards and here it was claimed to have arisen when the funds were paid by Lloyds to the company (which was after administrators were appointed).

The judgment gives a good summary of how cases have developed in this area, including the leading Supreme Court decision in re D&D Wines in 2016 which tipped the balance away from trust creditors by stating that a constructive trust does not arise simply because payments are made to a company at a time when it had ceased trading.

This area continues to be troublesome for office holders not least because it is difficult, if not impossible, to identify if funds might be impressed with a trust before accepting an appointment. That brings with it all sorts of difficulties over how the office holders will achieve their purpose and be paid once the claim is asserted. There are plenty of circumstances where some form of trust might still arise (a Quistclose or purpose trust being one example), but this recent decision has reaffirmed that the bar for establishing a constructive trust, particularly in the case of advance payments for goods not supplied, is set very high.

Lowe and Jones v Lloyds Bank Commercial Finance Ltd and another [2020] EWHC 946 (Ch)

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