Facts
- First City Monument Bank Plc (FCMB) entered a financing agreement with Zumax Nigeria Ltd, a company engaged in goods importation.
- FCMB advanced funds to Zumax for the express purpose of purchasing goods from a foreign supplier.
- The agreement stated that the funds were to be used only for that purpose, with any unused funds to be returned to FCMB.
- Zumax failed to complete the goods purchase, and the funds remained in Zumax’s account.
- Zumax went into liquidation, and FCMB sought recovery of the funds, contending they were held on a Quistclose trust and did not form part of Zumax’s general estate for creditors.
Issues
- Whether the funds advanced by FCMB to Zumax were held on a Quistclose trust due to the failure of the specified purpose.
- Whether the necessary mutual intention to create a trust existed, as established by contract terms and parties’ conduct.
- Whether the proprietary claim of FCMB over unsecured creditors was justified in light of insolvency and the funds’ status.
Decision
- The Court of Appeal found that the requirements for a Quistclose trust were satisfied: the funds were advanced for a specific purpose, parties intended exclusive use for that purpose, and the requirement for their return was explicit.
- The contractual documentation and surrounding circumstances evidenced mutual intention to create a trust.
- The argument that the funds lost their specific character through mixing with other monies was rejected; tracing principles could be applied if sufficient evidence of their provenance existed.
- Recognition of the Quistclose trust gave FCMB a proprietary interest in the funds, ranking above other unsecured creditors in Zumax’s liquidation.
Legal Principles
- A Quistclose trust may arise where funds are advanced for a specific purpose with mutual intention for exclusive use; upon failure of that purpose, a resulting trust in favour of the lender arises.
- Mutual intention must be inferred from contractual terms and conduct.
- Tracing principles apply to identify trust property, even if funds are mixed.
- Quistclose trusts provide proprietary remedies that may affect the distribution priority in insolvency.
Conclusion
The judgment reaffirms the need for clear mutual intention to establish a Quistclose trust and the critical role of precise contractual drafting. The case demonstrates how such trusts can offer lenders proprietary protection in insolvency, influencing the order of claims in commercial finance transactions.