Kingate Global Fund Ltd v Knightsbridge (USD) Fund Ltd, Fortis Bank (Nederland), Standard Chartered Bank, Bank of Bermuda

• Jurisdiction: Bermuda
• Judge: Zacca, P,Evans, JA,Ward, JA
• Judgment Date: 19 November 2009
• Court: Court of Appeal (Bermuda)
• Docket Number: Civil Appeal 2009 No. 17
• Date: 19 November 2009

Between:

Kingate Global Fund Ltd

Appellant

and

Knightsbridge (USD) Fund Limited

Fortis Bank (Nederland)

Standard Chartered Bank

The Bank of Bermuda (HSBC)

Respondents

[2009] Bda L.R. 59

Before: Zacca, P; Evans, JA; Ward, JA

Civil Appeal 2009 No. 17

In The Court of Appeal for Bermuda

Beneficial ownership of shares held on account for the Appellant — Liquidation — Special purpose trust — Construction of Offer documents

The following cases were referred to in the judgment:

Barclays Bank Ltd v Quistclose Investments [1970] AC 567

Twinsectra Ltd v Yardley [2002] 2 AC 164

Henry v Hammond [1913] 2 KB 515

Toovey v Milne (1819) 2 B&A 673

Moseley v Cressey's Co. (1865) LR 1 Eq 405

Stewart v Austin (1866) LR 3 Eq 299

In re Fada (Australia) Ltd [1927] SASR 590

Re Associated Securities Ltd (1981) 6 ACLR 248

In re Nanwa Gold Mines Ltd [1955] 1 WLR 1080

Neste Oy v Lloyd's Bank plc [1983] 2 Lloyds Rep 658

Cooper v PRG Powerhouse Ltd [2008] EWHC 498

Trevor v Whitworth (1887) 12 App Cas 409

Salomon v A Salomon & Co Ltd [1897] AC 22

Mr S Atherton, QC and Mr D Dwyer for the Appellant

Mr V Lyon, QC and Mr N Turner for the 1^st – 3^rd Respondents

Mr A Martin for the 4^th Respondents

JUDGMENT of Evans, JA

1. At issue in these proceedings is the beneficial ownership of a total of US$9 million held by the Bank of Bermuda in the account of Kingate Global Fund Ltd. (“The Fund”). The Fund is in liquidation and its liquidators are the Appellants in this appeal. Kawaley J. held that the beneficial owners are the Respondents, who paid the money to the Bank in the circumstances set out below.

2. There is no doubt that the payments were made to the Bank for the credit of the Fund's account, and were received by the Bank and credited accordingly. The reason for the payments was that the Respondents sought to acquire shares in the Fund in response to a Private Offering of USD Participating Common Shares made by the Fund on 6 October 2008. The shares could not be issued, and the question now is whether the Respondents are entitled to recover the money, or whether it has become an asset of the Fund and is available for distribution in the liquidation accordingly. In legal terms, the issue is whether the payments were made to the Bank subject to a “special purpose” (or plain “purpose”) trust. If so, the purpose having failed, the money must be returned to the Respondents.

3. The law is clear. The parties differ as to its application in the circumstances of this case. The circumstances were unusual, to the extent that the Fund was a “Feeder Fund” for a fund manager based in New York. “It issued shares to investors wishing to invest in Bernard L Madoff Investment Securities LLC (“BLMIS”) in New York” (judgment para.2). It was the arrest of Mr. Madoff on 11 December 2008 which made it impossible to issue the shares for which the Respondents had subscribed, and which led later to the insolvency and liquidation of both BLMIS and the Fund.

4. It is common ground that the issue turns on the true construction of the terms of the Offer, which incorporated a lengthy and detailed Information Memorandum and associated documents.

5. The principle has twice been restated by the House of Lords in modern times. In Barclays Bank Ltd. v Quistclose Investments[1970] AC 567 the Bank made a loan for the specific purpose of enabling its customer, a company in serious financial difficulties, to meet its obligation to pay an ordinary share dividend. The House of Lords held –

“That arrangements of this character for the payment of a person's creditors by a third person, give rise to a relationship of a fiduciary character or trust, in favour, as a primary trust, of the creditors, and secondarily, if the primary trust fails, of the third person, has been recognised in a series of cases over some 150 years.” (per Lord Wilberforce at 580C)

6. It was re-examined in Twinsectra Ltd. v Yardley and others[2002] 2 AC 164 where money was paid to a solicitor against his “personal and irrevocable” undertaking, which was –

“1. The loan moneys will be retained by us until such time as they are applied in the acquisition of property on behalf of our client.

2. The loan moneys will be utilised solely for the acquisition of property on behalf of our client and for no other purpose.

3. We will repay to you the said sum…together with interest…” (see para.58).

7. It was held that the solicitor “held the money in trust for the lender subject to a power to apply it by way of a loan to the client in accordance with the undertaking with the result that the money remained the lender's money until such time as it was so applied” (headnote para.(1))

8. Lord Millett analysed carefully the question “Was there a Quistclose trust?”(para.68). He explained the background, as follows –

“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”… 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. 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. That depends on the intention of the parties collected from the terms of the arrangement and the circumstances of the case.” (our italics).

9. In deference to Mr. Atherton's submissions in the present case, we should add the following quotations from Lord Millett's speech –

“73. A Quistclose trust does not necessarily arise merely because money is paid for a particular purpose. A lender will often inquire into the purpose for which a loan is sought in order to decide whether he would be justified in making it. He may be said to lend the money for the purpose in question, but that is not enough to create a trust; once lent the money is at the free disposal of the borrower. Similarly payments in advance for goods or services do not ordinarily create a trust. The money is intended to be at the free disposal of the supplier and may be used as part of his cashflow. Commercial life would be impossible if this were not the case.

74. The question in every case is whether the parties intended the money to be at the free disposal of the recipient: In re Goldcorp Exchange Ltd.[1995] 1 AC 74, 100 per Lord Mustill. His freedom to dispose of the money is necessarily excluded by an arrangement that the money will be used exclusively for the stated purpose….[citing Lord Wilberforce in Quistclose…. “the word ‘only’ or ‘exclusively’ can have no other meaning or effect.”]…

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…The duty is not contractual but fiduciary…because a person who makes the 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”.

10. Lord Millett then examined the precise nature of the equitable interests arising in such a situation...