Re Kayford Ltd [1975] 1 WLR 279 (Ch)

Facts

• Kayford Ltd received advance payments from customers for goods not yet delivered.
• The company, concerned about its solvency, segregated these advance payments into a separate bank account.
• Upon Kayford Ltd's liquidation, the question arose as to whether the funds in the separate account were held on trust for the customers or formed part of the company’s general assets to be shared among ordinary creditors.
• The case centered on whether the actions of Kayford Ltd were sufficient to create an express trust in favor of customers.
• At trial, the High Court examined the significance of separating customer funds and whether this demonstrated the necessary intention to create a trust.

Issues

1. Was an express trust created over customer advance payments by Kayford Ltd’s actions?
2. Does placing customer money in a separate bank account suffice as evidence of an intention to create a trust?
3. How does the creation of such an express trust differ from a Quistclose trust?
4. What are the requirements for establishing an express trust over advance payments in the context of potential insolvency?

Decision

• The court held that an express trust was created over the customer advance payments by the segmentation of funds into a separate bank account.
• It was determined that the company’s clear intention, evidenced by the establishment and use of a separate bank account, was sufficient to establish a trust.
• The customers were thus deemed trust beneficiaries, acquiring proprietary rights superior to unsecured creditors.
• The court clarified that simply opening a separate account is not always conclusive, but in this case, the facts demonstrated intention and explicit conduct required for a trust.
• The case was distinguished from Quistclose-type arrangements, as the creation of the trust depended not on a prior agreement but on the conduct of the debtor company after receipt of the money.

Legal Principles

• An express trust may arise where a company’s actions—including the segregation of customer advance payments into a separate account—demonstrate the necessary intention to create a trust.
• Mere payment of money for goods, without more, creates only a debtor-creditor relationship unless a trust is expressly or impliedly established.
• The existence of a separate account is a strong indication, but not automatic proof, of an intention to create a trust; actual intention and use of the account are essential.
• The case is distinct from Quistclose trusts, which depend on a specific prior agreement or understanding regarding use of advances; here, conduct after receipt was key.
• The protection of customer advance payments through express trusts enhances creditor rights in insolvency situations if the requisite intention is present and appropriately manifested.

Conclusion

Re Kayford Ltd [1975] 1 WLR 279 established that an express trust may arise when a company segregates customer advance payments into a separate account with clear intention, distinguishing such arrangements from Quistclose trusts and providing customers with greater protection in insolvency scenarios.