Prickly Bay Waterside Ltd v British American Insurance Company Ltd [2022] WTLR 1115

Analysis

Prickly Bay was engaged in the development of houses and apartments at L’Ance Aux Epines, St George, Grenada. Its principal director was Richard Lee, husband of Rosa Lee. Two adjacent properties were owned by a Mr Steele. Following a dispute between Prickly Bay and Mr Steele a consent order was entered into providing that Prickly Bay would purchase the adjacent properties for US$5m. It was a term of the consent order that Prickly Bay would provide a bank guarantee for US$2.25m. The respondent, BAICO, gave the guarantee.

Mr and Mrs Lee, and Prickly Bay, entered into a loan agreement under which Mr and Mrs Lee agreed to lend Prickly Bay US$5,475,000. Part of the sum was to be provided by a guarantee and Mrs Lee agreed to provide or procure a guarantee such that funds of US$2,475,000 would be available.

An annuity policy was entered into in Mrs Lee’s name, which gave her the option of either taking a pension or the return of the accumulated amount at the end of a two-year period. It was common ground that there was no intention to make annuity payments during the term. Prickly Bay deposited the sum of US$2,475,000 with BAICO as the premium on the policy (the annuity moneys). The annuity gave Mrs Lee monthly interest during the policy period which would exceed the amount that Prickly Bay had to pay to Mr Steele under the second sale agreement. It would terminate immediately prior to the payment date for the completion moneys.

On 22 August 2007 Mrs Lee, at BAICO’s request, signed an assignment of the ‘right and title to the annuity’ to Mr Steele. The value assigned to it was US$2,475,000 and the assignment was to become effective on 19 May 2009, the day after payment of the completion moneys was due to Mr Steele should he remain without the completion moneys.

In May 2009 BAICO became insolvent and defaulted on the guarantee. Mr Steele applied to the High Court of Grenada to enforce the consent order. Prickly Bay applied for a declaration that the annuity moneys were held on trust by BAICO and for an order joining BAICO.

The trial judge rejected Prickly Bay’s case as to the existence of a Quistclose trust. There was no expression of an understanding that the money deposited was not to form part of the general assets of BAICO and be at its free disposal. Objectively examined there was no indication that the intention was to preserve Mrs Lee/Prickly Bay’s rights and control of the use of the annuity moneys in the interim.

Prickly Bay paid Mr Steele the completion moneys and Mr Steele assigned his right and interest in the annuity back to Prickly Bay. Prickly Bay then appealed to the Eastern Caribbean Court of Appeal regarding the annuity moneys. The appeal was dismissed. Prickly Bay appealed to the Privy Council.

Held:

1. (1) It was clear from Twinsectra v Yardley [2002] that a Quistclose trust was a default trust. This meant two things:
   1. (i) The resulting trust which characterises the Quistclose trust arises as a matter of law and becomes unconditional on failure of the specified purpose.
   2. (ii) The resulting trust does not override any arrangement which the parties may have agreed for the destination of the funds which had been previously earmarked for the purpose, but takes effect subject to it.
2. (2) Whether the recipient holds any assets not so used for the purpose beneficially, or must hold them on trust for the lender, depends on the intention of the parties. The intention is to be collected from the terms of the arrangement and the circumstances of the case. It is a matter of true construction of the arrangement. It is not enough that the money is lent for a particular purpose without more. Money so lent is at the free disposition of the borrower.
3. (3) There must be mutual intention between payer and recipient that the funds transferred should be used to effect the purpose. Mutual in relation to the intention did not mean shared or reciprocal. It would be enough if one party imposed it on the other who acquiesced in it. The intention was expressed as an intention that the payer should retain some beneficial interest in the funds. It is possible that the trust would not require that the property transferred should be exclusively used for the purpose. The parties may have agreed other terms.
4. (4) To be a Quistclose trust which enables the provider of the assets to enforce the return of those assets in the event of exhaustion or failure to execute the purpose, and thereby to obtain priority over other creditors of the recipient (if insolvent), there must be a sufficient indication that the provider did not intend to dispose of the entire beneficial interest in the assets. Normally, that indication will be a mutual intention that there should be a trust, but it can also be an acceptance that the provider of the assets retains a partial beneficial interest by virtue of the resulting trust. A Quistclose trust will not be established if it is not shown that the provider retained a partial beneficial interest in the property transferred. It will not arise if it is inconsistent with the arrangements under which it is said to be created or with the applicable context.
5. (5) In considering whether a Quistclose trust arises, the court is not necessarily constrained in the matters which may be taken into account as it would be in the case of a written contract. A court could take into account events and documents which postdate the date on which the Quistclose trust was said to be created, although it might conclude that little weight can be attached to such matters.
6. (6) The conditions of the annuity and the assignment of it were equally consistent with Prickly Bay providing collateral to BAICO as security for its guarantee. The assignment had no real weight for the fundamental reason that it was not enough for there to be a purpose: there had to be something further to indicate that the annuity moneys were subject to a trust.
7. (7) The terms of the annuity were inconsistent with the Quistclose trust relied upon:
   1. (i) If the fixed sum was not available on maturity from the investment of the premium it would have to be found from BAICO’s other funds.
   2. (ii) There was no express requirement that BAICO would keep the premium separate from its other funds. The absence of segregation was a powerful factor which indicated that there was no Quistclose trust. The only obligation on BAICO was to pay the agreed sums on maturity.
   3. (iii) The assignment was correctly seen as a sensible safeguard to prevent the risk of double payment.
   4. (iv) There was nothing to indicate that Prickly Bay retained any beneficial interest in the annuity moneys or that they did not form part of the general assets of BAICO.

Appeal dismissed.

JUDGMENT LADY ARDEN: The issue on this appeal concerns a trust for a specified purpose [1] Trusts for the transfer of money or other property for a specified purpose, in this appeal for the payment of debts, may arise where, for instance, one person, A, establishes a trust for the payment of the debts of …

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