trusts created in favour of creditors

Trusts can be created agreement in favor of those advancing moneys for specific purposes and other varying purposes. These may be in respect of customers’ deposits, loans generally or to insolvent companies or companies in liquidation, money for payment of sub-contractors, moneys advanced to borrowers from which they are to pay third party creditors. This practice is however common but not limited to insolvency cases.

The ways which trusts can be created in favor of creditors in the following ways:

• a. Property may be transferred or money is paid to a named supervisor in pursuance of a company’s voluntary arrangements with the property or money held on trust for creditors who are parties to such agreement. The advantage of this is that in the event of winding up of the company, the assets forming the subject matter of the company’s voluntary arrangements cannot be assessed by other creditors. Re TBL Realizations Plc. Oakley-Smith v. Greenberg [2004] B.L.C. 81.
• b. An agreement by a company to a named supervisor to transfer assets which are identified or identifiable on the bases of entering into company’s voluntary arrangements is also sufficient to create a trust. When a company creates a trust, its ownership in the assets which now forms the trust property is extinguished. Re N.T. Gallagher & Sons Ltd Sheierson v. Tomlinson (2002) B.L.C. 867. c. An insolvent company may seek to declare a trust in favor of creditors. Those who continue to pay deposits to the company are converted to beneficiaries under a trust and are no longer treated as creditors. Re Kayford (1975) 1 W.L.R. 279. d. An insolvent company or company in liquidation still operating may convert its assets into a trust fund for the benefit of creditors. In this case, trust accounts are used to protect customers of insolvent businesses. Re Kayford (1975) 1 All E.R. 604. e. A company can create a trust in favor its customers by making itself a trustee of the monies paid by its customers. In that case, as soon as the company is receiving these moneys, the money goes into a trust account. Farepak Foods & Gifts Ltd. (2006) EWHC 3272. f. In some jurisdictions, trusts is be created in favor of some creditors by statute, owing to the nature or importance of their services and the huge capital outlay required to run or execute such businesses. g. Where monies were received on the understanding that it will be kept in a separate account to be applied towards the depositor’s use or purpose, the person whose account the money is, holds the same on trust for the sender. Re Australian Elizabethan Theatre Trust (1991) 102 ALR 681.

Yes, a debt and trust agreement can exist side by side in the same transaction. This is otherwise known as Quistclose trust. This is to the effect that where there is agreement between the lender and the borrower as to how the loan granted is to be utilized, then a primary trust is created and if the actual purpose of the loan fails, then there is a secondary trust (resulting trust) which will take effect in that event. This is often regarded as an opportunity for a well-advised lender to protect himself against the possible bankruptcy of the borrower. While this is obviously advantageous to the lender in question it is disadvantageous to other creditors as it removes a possible source of funds against which they could claim. Barclays Bank Ltd v. Quistclose Investments Ltd. (1963) 3 All ER 651.