English commercial law is suspicious of equity, and has a strong preference for simple common law certainty. Equitable principles are imprecise, giving precedence to achieving fairness. The common law gives precedence to certainty, and in business that is vital, and is surely a significant reason for English law’s popularity in the commercial sphere. There is no shortage of judicial aphorisms here. A good one is Lord Browne-Wilkinson in Westdeutsche Landesbank Girozentrale v Islington LBC [1996 HL]:
“…wise judges have often warned against the wholesale importation into commercial law of equitable principles inconsistent with the certainty and speed which are essential requirements for the orderly conduct of business affairs”.
So Monday’s Court of Appeal judgment in First City Monument Bank Plc v Zumax Nigeria Ltd, should not come as a surprise. The simplified facts were that a nominee company of Zumax had sought to make various transfers of USD to Zumax by instructing Commerzbank to make payments to IMB (a Nigerian bank) “for further credit to” Zumax. Commerzbank paid IMB, but IMB did not credit Zumax’s account. The actual facts are murky, involving a certain, possibly dishonest, Mr Chinye, who was both CEO of IMB and a director of Zumax. IMB had claimed repayment of a loan of an uncertain amount owed to it by Zumax, and wanted to set off the sums it had received for the credit of Zumax against it, and to forestall this Zumax sought a declaration that those sums in the hands of IMB were impressed with a trust in favour of Zumax, either an express trust or a Quistclose trust, and so did not simply represent a debt which could be offset (mutual debts can be set off against one another, but a creditor cannot set its obligation to hand over cash that belongs to the debtor off against the debt). The Judge agreed with Zumax, perhaps surprisingly, but the CA did not, relying heavily on Lord Millett in Twinsectra Ltd v Yardley  HL, and the principle established in 1848 in Foley v Hill that money paid to a bank belonged to the bank, with the depositor simply having a debt claim against the bank for the balance. As Lord Millett had said in 2002:
“A Quistclose trust does not necessarily arise merely because money is paid for a particular purpose… Commercial life would be impossible if this were not the case. The question in every case is whether the parties intended the money to be at the free disposal of the recipient…”
In Zumax the CA decided the words “for further credit” simply indicated where the money was to go. There was no segregation of the payment from other cash, and there was nothing to overcome the heavy presumption from Foley v Hill that the money paid to IMB belonged to IMB absolutely.
All finance lawyers should know what a Quistclose trust is
If the lawyer on the other side refers to it in a meeting and you do not know what he or she is talking about, your client will not be impressed. In 1964 Quistclose Investments lent money to Rolls Razor Limited to finance payment of a dividend, and the cash was credited to a segregated account at Barclays Bank opened for the purpose at the request of Rolls Razor, Barclays having agreed that the balance was only to be used to pay the dividend. Rolls Razor went bust, never having paid the dividend, and Barclays wanted to offset the credit balance in the segregated account against unpaid sums owed to it by Rolls Razor. Barclays failed, because the House of Lords held that Rolls Razor had received the money for a specific purpose which Barclays knew about and which had failed, and in such a case the money was held on a resulting trust for the payer (Quistclose).