Credit & Mercantile plc v Kaymuu Ltd and others
Kaymuu Limited was a company controlled by a director who is now bankrupt. The company had acquired property using a mortgage granted by the claimant which ultimately wished to enforce its security.
A third party contended that the arrangement he had was for the now-bankrupt individual to acquire property in their various development projects and they would share the profits from these projects. He also contended that, not being aware of the mortgage, he was not bound by the security and could take his share of the property free from the charge.
The bankrupt’s trustee intervened in the proceedings. What a mess!
The court analysed the situation in a clear fashion dealing first with the beneficial interest point. It held that the third party did indeed have an interest in the property. To establish such an arrangement, there had to be some pre-acquisition arrangement or understanding between the party buying the property. It was not necessary for that arrangement to have contractual force. It was necessary that, in reliance upon the understanding, the non-purchasing party either did something or failed to do something to confer an advantage on the purchasing party.
In a slight departure from what we would consider to be an estoppel argument, the court held that there did not have to be a detriment suffered by the non-acquiring party.
This, in a sense, ensured that the finding was one of constructive trust based on intention rather than an estoppels argument based on detriment.
It is submitted that the judge was wrong to hold in this manner when, arguably, intention-based trusts are valid irrespective of any advantage given to the purchasing party by the non-purchasing party. However, this decision does show that the trust arguments on party’s intentions are alive and well in the non-domestic context post Stack v Dowden.
On the argument that the third party took free of the mortgage, the court held that the mortgagee is entitled to assume that the facts represented to it are correct. It did not know, and could not have known, about the third party’s interest. He should have taken steps to protect his position. Their security was valid as against his interest.
The trustee lost out. It seems that the trustee had, as the court put it “entered the arena” and taken sides. This lack of neutrality meant that the trustee was not entitled to an allowance from the funds for costs incurred or remuneration.
The lesson to be learned, if there is one, is that, yet again the issue on constructive trusts is a difficult one for trustees and the courts to deal with. Whether there is such an intention will be based on evidence which may well be oral, with little documentary evidence and difficult with the benefit of hindsight to establish what the intention at the time was.
It is submitted the court was wrong to say that there had to be some advantage conferred by the non-buying third party but there is no doubt that is valuable evidence to support the existence of the trust.
The other lesson has to be, as trustee, be careful about the arenas you enter into and the stance that is taken and evaluate the evidence in an objective fashion to consider your arguments and whether you need to be there in the first place.
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