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	England and Wales High Court (Chancery Division) Decisions
You are here: BAILII >> Databases >> England and Wales High Court (Chancery Division) Decisions >> Bieber & Ors v Teathers Ltd [2012] EWHC 190 (Ch) (09 February 2012) URL: http://www.bailii.org/ew/cases/EWHC/Ch/2012/190.html Cite as: [2012] EWHC 190 (Ch)

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IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

		Royal Courts of Justice The Rolls Building Fetter Lane EC4A 1NL
		09/02/2012

Mr Justice Norris :

1. For the 2001/2002 tax year Teather & Greenwood Limited ("Teathers") promoted an unregulated collective investment scheme called "The Take 3 TV Partnerships" ("Take 3"). Take 3 was intended to be a series of partnerships established principally to co-produce and exploit a portfolio of British TV productions, providing both tax and income benefits to individual partners. It was part of a series of such schemes promoted in earlier and in subsequent tax years ("the Take Schemes").
2. The Take Schemes utilised tax relief that had been made available by section 42 of the Finance (No.2) Act 1992 and section 48 of the Finance (No.2) Act 1997. The combined effect of these sections was to permit an investor to write off 100% of his expenditure on a TV production certified by the Department of Culture Media and Sport as a British Qualifying Film under the Films Act 1985 in the tax year in which the expenditure was made. (The same relief was available for film productions: but several other promoters offered schemes for films, which is why Take 3 emphasised TV productions). The partnerships were the mechanisms by which this expenditure could be laid out and the tax relief made available for use against other income of the investor. There was an initial 9% charge for using the scheme so that an investor could effectively obtain tax relief at 91% of his outlay. If he borrowed in order to make his investment the tax relief could exceed his cash outlay. Take 3 attracted some £18.8 million of investment.
3. Teathers invited subscriptions in an Information Memorandum that explained the Scheme. Those attracted by the prospects held out in the Information Memorandum invested by sending a cheque attached to a Subscription Agreement. Teathers then used the money subscribed to establish partnerships (of which it was managing partner). As managing partner Teathers then selected (from a range of proposals proffered by a specialist film finance company) TV productions in which to invest. The partnerships were real businesses which aimed to re-invest any profits made on the initial investments in further TV productions, and then at a time selected by the Partners to sell the rights in all current projects and the retained rights in any former projects ("Library Sale"). It is frankly acknowledged by Teathers that the Take 3 Scheme and the Take 3 Partnerships have in general been unsuccessful.
4. There are many disappointed investors who say they have lost some 60% of their investment. They have commenced a succession of actions against Teathers. Teathers is now in liquidation. If the investors are able to bring home a claim against Teathers the one asset to which they can look is an insurance policy. According to Teathers this provides cover of £10 million inclusive of Teathers' costs of defending any claim. On this viewhe more that is spent by Teathers on costs the less that is available to the investors as potential compensation.
5. The Particulars of Claim in the proceedings relating to Take 3 are 106 pages long and put the claim of the investors against Teathers in a number of ways, including:-

innocent misrepresentation as promoter

negligent misrepresentation as promoter

specific misrepresentations to individual investors by agents of Teathers

negligent misstatement (in contract or tort) about the risks of investment in the scheme

negligent breach of duty as promoter in failing to analyse the viability of the scheme

negligent breach of duty as managing partner of individual partnerships in production selection

negligent breach of duty as administrator in the tax treatment of certain income and the supervision of investments

regulatory breach of duty under the Financial Services Act 1986

misuse (in breach of trust) of money paid to Teathers by investors.

6. It is plainly not economic to litigate each and every one of these claims on behalf on each and every one of the investors. The Claimants have therefore selected, the Defendant has agreed (and I have by Order dated 28th of January 2011 ("the Order") directed) the trial of one of the causes of action as a preliminary issue, namely the claim that is founded upon breach of trust. It was common ground that if a trust claim (which involves a construction of the scheme documents) was to be considered then it would be convenient also to consider the claim based on regulatory breach of duty.
7. The breach of trust claim was advanced in pre-action correspondence in these terms:-

"It will be the claimants' primary case that [Teathers] received subscribers' funds effectively on trust to invest in a scheme which fulfilled the purposes of the partnerships. If the purposes could not or would not be fulfilled [Teathers] had no authority to incorporate the partnerships and pay subscription monies into the scheme."

This way of putting the claim focuses upon the establishment and funding of the partnerships.

8. The trust claim that emerges at various points in the Particulars of Claim is somewhat different. It does not focus on the application of the subscription monies in the formation of the partnerships. It focuses upon the application of the sums subscribed to the partnership by investment in productions. Thus Paragraph 51 alleges that:-

"[Teathers] used the money paid to it by each Claimant in breach of trust because it failed to use the same in accordance with the Take Criteria - being the sole criteria upon which each Claimant permitted [Teathers] to invest."

The term "Take Criteria" is defined in the Particulars of Claim to mean:-

"…the rubric to be discerned from the [Information Memorandum dated 1^st February 2001] and which [Teathers] was obliged to follow in the implementation of the Scheme… "

It will be seen that the definition itself assumes that the features to which attention is drawn constituted "obligations".

9. The Take Criteria are pleaded in paragraph 54. It is there said that the Information Memorandum which solicited subscriptions "set out a number of key criteria which [Teathers] represented that they would follow when they invested the Claimants' subscriptions", to "include" the following:-

a) "Funds would only be invested in British TV Productions which were so certified by the Department of Culture Media and Sport ("Take Criterion 1")….".

b) "No investment would be made unless a "pre-sale" or "guarantee" was in place for a least 60% of the funds committed by a Partnership which was payable in the immediately following year in time for it to be reinvested……("Take Criterion 2")".

c) "No investment would be made unless borrowing of up to 100% of the value of the presale or guarantees were to be put in place ("Take Criterion 3")…".

d) "Funds would only be invested in a production…capable of being completed by the end of the tax year in which the investment was made and… capable of producing an income to be invested in the immediately following year sufficiently to shelter the tax that would otherwise be payable that year on receipt of the presale or guarantee required by Take Criterion 2 ("Take Criterion 4")…".

e) "At the end of the period of each partnership (typically five years) such partnership had to own rights in each TV production so that the rights could be realised as Library Sale Value ("Take Criterion 5")."

10. To the pleaded Take Criteria there was added (by a letter dated 21 February 2011) an additional criterion ("Take Criterion 1A"):-

"Funds would only be invested so that the downside for investors (that is, the risk of loss) would be largely eliminated."

From the correspondence and from the Claimants' evidence it is clear this and the other Take Criteria represent their attempt to distil the essential elements of the workings of the scheme by identifying "the hard edged matters" which they perceive embody its fundamental principles.

11. The relevance of the Take Criteria is elaborated in paragraph 116 of the Particulars of Claim which is in these terms:-

"The Claimants' subscriptions were collected for the purposes of investing in accordance with the Take Criteria and the Information Memorandum and no others. In the premises [Teathers'] duties owed to the Claimants in respect of Partnership property, including any cash held on behalf of the Claimants, were those of a trustee. "

(There was an additional plea in paragraph 117 of the Particulars of Claim that Teathers held the Claimants' subscriptions upon trust to use the same pursuant only to a validly created partnership deed and management agreement. In the event, part of this allegation was not a matter of controversy (since the formal validity of the partnership and management agreements was not in issue for the purposes of the hearing before me) and the remainder did not add anything to the debate that arose on paragraph 116).

12. Paragraph 126 of the Particulars of Claim then alleged that:-

"… in breach of trust ….. [Teathers] wrongfully paid away monies of the Claimants from its current account at various times …. in the implementation of the Scheme when such money should have been repaid to the Claimants once [Teathers] knew or ought to have known

126.1 the scheme being implemented was fundamentally different from the Scheme as described in the [information memorandum] and that accordingly no authority had been or could have been given for the expenditure of any funds whatsoever: or

126.2 the Scheme as implemented was certain to fail as a tax saving scheme and was overwhelmingly likely to be unsuccessful as an investment: or

126.3 the investments did not comply with the Take Criteria".

13. Paragraph 136 of the Particulars of Claim alleges that Teathers is accountable to the Claimants as an express or constructive trustee and is liable to repay to the Claimants "the sums set out above" (which I take to be a reference back to the amount of the investment together with the expenses incurred ancillary to that investment), the relief sought being an account or equitable compensation.
14. The usefulness of the precise formulation of the preliminary issue agreed at the case management conference did not survive the evidence as it emerged or the argument as it developed, but it was agreed that I must determine the following questions:-

(a) Was money that was paid by a Claimant to Teathers for the purposes of investment in a Take scheme at the free disposal of Teathers?

(b) If not, in what respects was Teathers' freedom to dispose of the money excluded or restricted? In particular was it excluded or restricted by the Take Criteria?

(c) For what purpose or purposes was Teathers entitled to apply the Claimants' money?

(d) Was Teathers authorised to invest Take 3 partnerships' funds or otherwise apply the Claimants' money only in accordance with the purpose identified in (c)? Or only in accordance with the Take Criteria?

(e) What regulatory duty or duties were imposed upon Teathers in the creation and promotion of the Take 3 scheme as regards dealing with client monies?

15. As the pre-action claim, the terms of the Particulars of Claim and the form of the preliminary issue suggest the fundamental question is whether the Claimants can avail themselves of the remedies that would arise if a Quistclose trust was established. Following the decisions in Barclays Bank v Quistclose Investments [1970] AC 567 and Twinsectra Ltd v Yardley [2002] 2 AC 164 the underlying principles by reference to which such a trust will arise are clear. I would summarise them as follows.
16. First, the question in every case is whether the payer and the recipient intended that the money passing between them was to be at the free disposal of the recipient: Re Goldcorp Exchange [1995] 1 AC 74 and Twinsectra at [74].
17. Second, the mere fact that the payer has paid the money to the recipient for the recipient to use it in a particular way is not of itself enough. The recipient may have represented or warranted that he intends to use it in a particular way or have promised to use it in a particular way. Such an arrangement would give rise to personal obligations but would not of itself necessarily create fiduciary obligations or a trust: Twinsectra at [73].
18. So, thirdly, it must be clear from the express terms of the transaction (properly construed) or must be objectively ascertained from the circumstances of the transaction that the mutual intention of payer and recipient (and the essence of their bargain) is that the funds transferred should not be part of the general assets of the recipient but should be used exclusively to effect particular identified payments, so that if the money cannot be so used then it is to be returned to the payer: Toovey v Milne (1819) 2 B & Ald 683 and Quistclose Investments at 580B.
19. Fourth, the mechanism by which this is achieved is a trust giving rise to fiduciary obligations on the part of the recipient which a court of equity will enforce: Twinsectra at [69]. Equity intervenes because it is unconscionable for the recipient to obtain money on terms as to its application and then to disregard the terms on which he received it from a payer who had placed trust and confidence in the recipient to ensure the proper application of the money paid: Twinsectra at [76].
20. Fifth, such a trust is akin to a "retention of title" clause, enabling the recipient to have recourse to the payer's money for the particular purpose specified but without entrenching on the payer's property rights more than necessary to enable the purpose to be achieved. It is not as such a "purpose" trust of which the recipient is a trustee, the beneficial interest in the money reverting to the payer if the purpose is incapable of achievement. It is a resulting trust in favour of the payer with a mandate granted to the recipient to apply the money paid for the purpose stated. The key feature of the arrangement is that the recipient is precluded from misapplying the money paid to him. The recipient has no beneficial interest in the money: generally the beneficial interest remains vested in the payer subject only to the recipient's power to apply the money in accordance with the stated purpose. If the stated purpose cannot be achieved then the mandate ceases to be effective, the recipient simply holds the money paid on resulting trust for the payer, and the recipient must repay it: Twinsectra at [81], [87], [92] and [100].
21. Sixth, the subjective intentions of payer and recipient as to the creation of a trust are irrelevant. If the properly construed terms upon which (or the objectively ascertained circumstances in which) payer and recipient enter into an arrangement have the effect of creating a trust, then it is not necessary that either payer or recipient should intend to create a trust: it is sufficient that they intend to enter into the relevant arrangement: Twinsectra at [71].
22. Seventh, the particular purpose must be specified in terms which enable a court to say whether a given application of the money does or does not fall within its terms: Twinsectra at [16].
23. It is in my judgment implicit in the doctrine so described in the authorities that the specified purpose is fulfilled by and at the time of the application of the money. The payer, the recipient and the ultimate beneficiary of the payment (that is, the person who benefits from the application by the recipient of the money for the particular purpose) need to know whether property has passed.
24. A bank can provide money to a solicitor for the specified purpose of its application in acquiring a good marketable title to and a first charge over Blackacre. At the time of the application of that money at completion it is in principle objectively ascertainable whether the money has been applied for the specified purpose i.e. whether a good marketable title has been acquired and a first charge obtained.
25. But an investor could not, in my judgment, provide money to a stockbroker for the specified purpose of its application in an investment that would double in value over two years (or any other measure of success). Here it is not in principle objectively ascertainable at the time of its application whether the money has been applied for the specified purpose. One has to wait to see how things turn out. Trying to apply the Twinsectra "resulting trust" analysis leads to this. If the investment does double in value one can see (with hindsight) that the payment was mandated, the payer's beneficial interest did come to an end, the full property undoubtedly passed to the investment counterparty party and the obligations of the original recipient were at an end. If the investment does not double in value one can see (with hindsight) that the payment was not mandated, the payer's beneficial ownership of the money did not come to an end, the investment counterparty may not have become the legal and beneficial owner of the money and the original recipient had continued to have obligations to the original payer (including an obligation to account for the money originally paid now that it has turned out that the investment was unsuccessful). In my judgment that is not the way that the Quistclose trust works. The property in the money cannot be in suspension in this way. In the event that the original payer went bankrupt a year after making the investment, nobody would know whether his estate included the investment bought or the original payment for which the stockbroker might become liable to account. If the recipient went bankrupt a year after applying the money in buying the investment, nobody would know whether he was liable to account for the money invested or simply the subject of an unliquidated damages claim for having failed to achieve a doubling of the investment.
26. Thus it seems to me that because the money remains the property of the payer unless and until it is applied in accordance with his directions, those directions have to be not only sufficiently certain for one to say whether the application does or does not fall within the terms of the direction, but the purpose must be such that one can objectively ascertain whether the specified purpose is achieved by that application.
27. With that I turn to consider first, the course of the payments that were actually made; and then secondly the documents relied upon to establish the trust contended for. Looking at the money flow and the terms of the documents I will then consider whether a trust analysis of the payments is sustainable. I will then consider the regulatory issue.
28. Stage 1 of the money flow is that Teathers received subscription monies from investors by cheque, bankers draft or electronic transfer into Teathers bank account at HSBC ("the HSBC Settlement Account"). (It may have moved from the HSBC Settlement Account to some other client money account: but these movements can be disregarded for the purpose of analysis). It is common ground that this is "client money" and is to be so treated (for regulatory purposes) as subject to the operative "client money rules". The receipt of the payment would be acknowledged. If the investor's money remained in the HSBC Settlement Account then it earned interest for the investor which was calculated and paid to the investor by cheque (or otherwise credited to his personal client account).
29. Stage 2 of the money flow was when a Take 3 partnership was formed. Once the subscription level for the Scheme had been passed Teathers would form individual Take 3 partnerships on a rolling basis. Each partnership would resolve to maintain a partnership bank account ("the Barclays Partnership Account") in the name of the partnership (for example "Take 3.2 TV Partnership"), each of the investor partners being jointly and severally liable on that partnership account (but not Teathers, which was not a party to the account). Instruments and orders on the Barclays Partnership Account were to be signed by Teathers' personnel under a signing mandate. When the partnership was formed and the Barclays Partnership Account opened Teathers would transfer from the HSBC Settlement Account to the Barclays Partnership Account the aggregate subscriptions of the investors less Teathers' initial fees (now payable by each investor because his or her subscription was successful) plus any interest earned by the individual subscriptions whilst the subscriptions continued to be held in the HSBC Settlement Account following the formation of the Partnership.
30. Stage 3 of the money flow occurred when an investment decision was taken by or on behalf of a Take 3 partnership to fund a particular British TV production and funds were transferred from the Barclays Partnership Account to the production company's bankers (or whatever destination was stipulated for the invested funds).
31. The foregoing account of the money flow will have given an overview of the way the Take Scheme operated. The initial step was the publication of an Information Memorandum. This began with a Summary (the reader being warned to read it in the context of the whole document). For the purposes of the trust argument the claimants relied on four passages.
32. First, under the heading of "The Objective of Take 3" it was stated:-

"It will be a series of partnerships established to co-produce and exploit a spread portfolio of British TV productions providing both tax and income benefits to individual partners. Partners' funds will be used to co-produce a broad variety of TV material with emphasis on the long term potential sales and realisation of the rights".

33. Under the heading "Low Risk Profile" it was explained:-

"Take 3 will only fund a production if a presale or guarantee is in place from a broadcaster or distributor for at least 60% of the partnership funds committed. This initial 60%, when combined with individual higher rate tax relief, has the effect of largely eliminating any "downside" for investors. Potential upside may be delivered by way of international sales and through the realisation of rights in the programmes after five years".

As is explained elsewhere in the document, a "presale or guarantee" was a reference to an agreement under which an entity such as a broadcaster agreed, even before the production was completed, to acquire a production or to take a licence of certain rights to the production for a stated consideration.

34. Under the heading of "Potential Returns" it was stated:-

"Take 3 intends to spend all monies raised, net of issue costs in the first accounting period in order to provide the maximum tax benefit for Partners. In the following four years, Take 3 intends to reinvest all income in further productions, resulting in a growing portfolio of titles. At the end of the five year cycle, unless otherwise determined by the Partners all accrued income will be distributed to Partners and a realisation of programme rights will be sought in order to produce a further cash sum. On the basis of the financial illustrations [in the Information Memorandum] an overall post tax return of around 159% [later amended to 171%] on the initial contribution could be achievable".

35. Fourth, under the heading "Tax Relief" it was stated:-

"Take 3 intends to deliver a high degree of tax relief relative to the value of a Partner's contribution. Take 3 should provide tax relief of some 91% of the value of a partner's contribution. Partner's cash flow can be enhanced by taking out a personal loan. For instance, a personal loan of 50% of a partner's contribution should provide a cash surplus of up to 41% of a partners contribution… prior to any loan interest payments".

36. The body of the Information Memorandum set out the summarised matters at greater length. It would over-extend this judgment if I were to set out each of the passages relied on; but in reaching my conclusion I have considered the entire Information Memorandum. I propose to set out only those which relate most directly to the Take Criteria.
37. First there is a paragraph headed "60% of Partnership Funds underwritten". This stated :-

"Take 3 will only co-produce British productions where there is a presale commitment for at least 60% of the funds contributed by the Partnership. In addition, the production must have strong international sales potential evidenced by a written sales projection from a reputable distributor. The 60% pre-sale commitment, when combined with higher rate individual tax relief, should have the effect of largely eliminating any "downside" ".

38. Second, the heading "Innovative Geared Structure" identified two elements of gearing in the scheme. An intending partner could borrow to fund his contribution; and the partnership itself could borrow. As the memorandum explained:-

"The second element of gearing relates to the Pre-sale commitment on each of the productions Take 3 will undertake. Take 3 will usually provide 100% of the finance required for each production and thus should be entitled to 100% of the tax relief relating thereto. However, 60% of the finance may be provided by way of a loan taken out by Take 3 for the short period until production is complete, which will be secured against the Pre-sale commitment. These loans will be obtained on the basis that they will be non-recourse to the Partners, being secured against the presale contracts only…"

(In subsequent material it was explained that the loans were "non-recourse" only in the sense that they were secured and that the security should be sufficient). It was explained that the effect of this structure was to provide Take 3 with 100% of the tax relief on the total production cost whilst only having contributed 40% of the production cash.

39. There is then a section headed the "Take 3 Team" which explains that Teathers would be assisted in the management of Take 3 by Baker Street Media Finance Limited ("BSMF"). The role of BSMF is set out and is said to include "review and initial selection of programmes which meet the Take 3 criteria" and "scrutiny of all pre-sale and or guarantee arrangements".
40. There is then a section of financial illustrations which says that:-

"The returns shown…in the tables …are provided for illustrative purposes only, and do not represent forecasts and are not guaranteed".

The following text then appears:-

"Take 3 will be a five year business. Take 3 will aim to invest fully all funds in its first accounting period and therefore file nil accounts for the period. It is this "loss" which technically provides the tax relief. It is intended that all income received in years two to five will be reinvested in an expanding portfolio of TV programmes, so that the Partnerships continue to report nil or minimal tax profits for the full five year period. Over the life of the partnerships this will mean that a growing number of productions will have been funded, resulting in a broad library of programmes owned or part owned by the Partnerships".

41. A section of the Information Memorandum then deals with taxation, referring to section 42 of the 1992 Act and section 48 of the 1997 Act (to which I have referred above). As part of this there is a brief outline of "British Qualifying Films", included in which is the statement :-

"It should be noted that there is no method of obtaining such certification prior to completion of the film."

This is picked up later in a section headed "Risk Warnings" where it is stated:-

"Certification and the amount of reliefs are not guaranteed. The Inland Revenue is not obliged to give advance indication as to the reliefs that will be received by partners and it has not done so in the case of the Partnerships."

Other parts of the description also make plain that it cannot be known whether any particular production will qualify until that production is complete, because the relevant requirements relate to specified percentages of the total production costs (or of elements of those costs), which cannot be known until completion. This feature is also underlined in the Risk Warnings section, where it is stated:-

"Production may go over budget and although steps will be taken to ensure that the producer is responsible for any costs overrun, this may require funding from elsewhere and may reduce the return to the Partners".

42. A section of the Information Memorandum then deals with the Partnerships. The memorandum explains:-

"It is likely that the Take 3 TV Partnerships will from time to time resort to borrowing in order to achieve the optimum tax relief for partners. However any borrowing will be secured against presales …"

It deals with what happens if there is a change of regime in the following terms :-

"If once a Partnership has been set up and the tax regulations or practices change to remove the tax relief described herein, then [Teathers] will have the right to proceed regardless".

43. The Information Memorandum then provides a summary of the Partnership Deed; but since there is a clear and prominent warning that the text is only a summary and clear advice that investors should read the Partnership Deed itself for its full terms I will deal with the Deed itself rather than with the summary.
44. In the section of the Information Memorandum headed "Fees and Expenses" it is made clear that Teathers is entitled to charge each partnership 9% of the initial contributions to cover establishment costs, third party commissions and Teathers' own fees. Teathers then is entitled annually to charge each partnership 4% of the initial contributions in respect of its management function, together with a success fee (in the event that the total return to the partners exceeded 160% of the original cash contribution).
45. The Information Memorandum concludes with a procedure for application. Investors must complete a "Subscription Agreement" and the power of attorney set out at the back of the Information Memorandum. There is a defined application period and a specified procedure for making payments. The Information Memorandum declares:-

"No Partnership shall be formed unless the Minimum Subscription by Partners equals or exceeds £475,000".

An earlier section of the Memorandum had stated:-

"If subscriptions of £475,000 are not received, monies without interest will be returned to subscribers".

46. I can now turn from the Information Memorandum to the Subscription Agreement included within it. By completing it the subscribing investor irrevocably agreed to the following:-

"The subscriber offers to contribute the sum specified above to become a Partner in the Take 3 TV Partnerships on the terms of the Partnership Deed … The subscriber undertakes that [Teathers] may rely on this offer and accordingly that this offer may not be cancelled, rescinded or otherwise revoked. By the execution hereof, and of a Power of Attorney of even date, the subscriber hereby agrees to the execution on his or her behalf of the Partnership Deed in respect of the Partnership to which [Teathers] allocates the subscriber.."

The subscribing investor then gives a series of warranties, the burden of which is that the investor is aware of the risk attached to the proposal, is only relying on the advice of his own professional advisors with regard to the tax, legal, and other economic considerations related to the proposal and has the financial ability to bear the economic risk of the proposal. The document concludes with a further confirmation by the subscriber that he or she has taken appropriate professional advice and is aware of the risks attached to becoming a partner.

47. In the Partnership Deed there are two classes of partner. Teathers is called "the Founding Partner"; whereas the investors are called "the General Partners". The Founding Partner is entitled (after the first five financial years) to any success fee due as a priority profit share; but otherwise it is the General Partners (i.e. the investors) who are entitled to the profits of the business. The "Partnership Business" is defined as:-

"The development, production, acquisition and exploitation of rights in British Television Productions and Programmes which qualify as British Qualifying Films as provided under the Films Act 1985".

48. This Partnership Business is funded by the General Partners. Clause 6.1 of the Partnership Deed provides:-

"Each General Partner shall contribute as capital to the Partnership the amount (if any) shown opposite his name in column 2 of the Schedule"

In a completed Partnership Deed there would be inserted in column 2 the amount which the Partner had enclosed with his Subscription Agreement. Clause 6.3 provides that no partner may withdraw capital from the Partnership, and in the meanwhile the position is governed by clause 6.2 which states:-

"No Partner shall be entitled to any interest on the amount of any capital standing to its credit in the books of the Partnership".

Moreover, under clause 8.5 of the Partnership Deed no shares of profits maybe drawn out unless and until there is a surplus available after making provision for all anticipated future liabilities of the Partnership and appropriate provision for the future financing requirements of the Partnership Business. Once again, in the meanwhile clause 8.6 declares:-

"No partner shall be entitled to any interest in (sic) the amount of any Profit standing to its credit in the books of the Partnership."

49. As I have indicated, the Partnership Deed contemplates that there will be a Managing Partner (in the first instance Teathers as Founding Partner). Clause 14.2 says that "subject to the control and direction of the Partners" the managing partner has a variety of powers. These include:-

a) Under clause 14.2.2 "full power and authority" to open and deal with bank accounts for the Partnership and to draw cheques and other orders for the payment of monies;

b) Under clause 14.2.3 "full power and authority" to receive contributions and loans made by Partners.

c) Under clause 14.2.6 "having regard always to the purpose of the Partnership… full power and authority to identify, evaluate and negotiate investment opportunities…"

d) Under clause 14.2.7 "full power and authority" to acquire and dispose of investments and other partnership assets including borrowing money "for any of the purposes of the partnership… such borrowing not to exceed 150% of the Partnership assets (net of realisations and losses but after adding back any monies due to any Partner)";

e) Under Clause 14.2.8 "full power and authority" to grant a security interest "in all or any part of the Partnership assets".

50. There are provisions for the removal and replacement of the Managing Partner in clause 14.3 of the Deed: and clause 15 provides that the Partnership shall be responsible for the costs and expenses reasonably and properly incurred by the Managing Partner in the performance of its obligations.
51. The liability of the Founding Partner and the Managing Partner (that is in the first instance Teathers) is dealt with in these terms in clause 17:-

"The Founding Partner and the Managing Partner shall not be liable, responsible or otherwise accountable in damages to the Partnership or any Partner … for any action taken or failure to act... unless such action or omission constituted gross negligence, wilful misconduct, bad faith or reckless disregard for its obligations and duties…".

52. Clause 26 deals with the termination of the Partnership. The Partnership has a life of 5 years (unless extended) but termination can occur earlier than the original or any extended termination date if there is "the sale or disposition of all of the assets of the Partnership" or Partners holding at least 51% of the contributions attributable to all of the then existing Partners agree to a termination in writing. Under clause 27 of the Deed, upon dissolution the affairs of the Partnership are to be wound up in accordance with the Partnership Act 1890, no further business being conducted except such as is necessary for "the winding up of the affairs of the Partnership and the distribution of the assets of the Partnership amongst the Partners". Such a distribution takes effect under clause 28 of the Deed. On the dissolution the assets of the Partnership are to be first applied in discharging the costs and expenses of the Partnership under clause 15 (that is, the costs and expenses reasonably and properly incurred by the Managing Partner) and in discharging the indebtedness of the Partnership to third parties. After a consolidation of the accounts of each Partner with the Partnership:-

"… the assets of the Partnership shall be used to pay to the Partners pro rata the amount standing to the credit of their consolidated accounts with the Partnership".

53. The Partnership Deed concludes with a general section which includes (in clause 33.6) the following provision:-

"No term or provision of this Deed shall be varied or modified by any prior or subsequent statement, conduct or act of any Partner… "

54. As indicated in the Partnership Deed, each Partnership entered into a Management Agreement with Teathers for the provision of the administrative and secretarial facilities and services necessary to enable the Partnership to conduct the Partnership Business on a day-to-day basis. It was this Agreement that provided for Teathers to receive its annual fee of 4% of the contributions (accruing daily): and it provided an additional means to recover its reasonable out of pocket expenses.
55. As outlined in the Information Memorandum one of the agreements which Teathers as Managing Partner entered into on behalf of the Partnership was an agreement with BSMF. The role of BSMF was to use all reasonable endeavours to promote the interests of the Partnership, and in so doing it was obliged:-

"..not [to] place itself, or allow itself to be placed … in a position where it [was] unable to recommend or introduce a product (including projects, productions or programmes) which meets the criteria of the Partnership".

Clause 2.3 of BSMF's contract for services provided that the appointment of BSMF was without prejudice to the power and authority of Teathers:-

"To… formulate policy and criteria with regards to appropriate programmes".

The services which BSMF was to provide required it:-

"[To] source, review and identify proposals, programmes and products which meet the criteria of Partnership for presentation to the Partnership".

56. It is common ground that the Information Memorandum, the Partnership Deed and the ancillary Management Agreement and BSMF Contract fall to be construed to see if they establish the trust for which the Claimants contend. But Mr Tregear QC and Mr King argued that two additional categories of documents must be taken into account in this process. The first were the Technical Notes and the second were the Verification Notes.
57. The Technical Notes are not dealt with in the written evidence (though they were referred to at the hearing). They appear to constitute a general introduction to the Take 3 scheme and to be addressed to financial advisers. The language they use assumes that the reader has a degree of familiarity with the entities and concepts which the scheme deploys and is likely to have questions about features of the scheme (which the Technical Notes seek to answer). Thus Technical Note 4 says:-

"Take 3 is fundamentally different from GP, Voyager or any of the other film based financial deals. The only thing in common is that Take 3 uses the same tax loss relief given to British Qualifying Films. The main point is that Take 3 will not make an investment in a programme unless there is a presale commitment for at least 60% of the total production cost ……Take 3, being a real business, is designed to produce a real return….".

Then in Technical Note 5 it is stated:-

"Apart from the normal commercial aspects of the business, Take 3 is governed by the Partnership Deed which appoints [Teathers] as the Managing Partner. … [Teathers], as a properly regulated firm have a duty to carry out their obligations as set out in the Partnership Deed and to invest and manage only under the specific parameters as set out in the Information Memorandum".

These may, I think, be taken as the best examples of the sort of statements made in the Technical Notes.

58. Mr Tregear QC and Mr King did not argue that Technical Notes could themselves be a source of obligations affecting the relationship between Teathers and a Claimant. But they did argue that the Technical Notes could be used as an aid to construction when considering what obligations might have been created by the Information Memorandum and the Partnership Deed.
59. Mr Onslow QC and Mr Hardwick argued that this could not be so. Since the evidence did not demonstrate that the Technical Notes were provided to retail investors or even to all independent financial advisors they could not form part of the background knowledge available to the parties in the situation in which they were at the time of the relevant transaction. I agree with this submission. The intention of the parties in relation to a transaction is to be found in the words they have used to effect the transaction, those words being set in the immediate context of the entire document in which the words are to be found, and the broader context of other documents entered into in connection with the same transaction. On this approach the Technical Notes are not an admissible aid to construction. If one speculates (and the evidence does not establish) that the contents of the Technical Notes were directly or indirectly communicated to a Claimant they would at most form part of the pre-contractual negotiations which eventually led to the making of the irrevocable offer of a Claimant to subscribe to a Take 3 Partnership using the document in the Information Memorandum. As such the Technical Notes could not be used on questions of detailed interpretation. In particular, the Technical Notes could not be used to help ascertain the intention of the Claimant or Teathers as to when property was to pass in the subscription monies.
60. In my judgment essentially the same view is to be taken of the Verification Notes. These were prepared by Teathers, BSMF and the legal and accountancy advisers to Teathers to record the steps which had been taken to verify the facts and to record the basis for the statements of opinion and expectation contained in the Information Memorandum. They were designed to protect the position of those involved in establishing the Partnerships, but were also intended to provide a basis for assuring "all parties concerned" that appropriate steps had been taken in connection with the verification of the Information Memorandum. They were, however, confidential and were not disclosed. What appears to have been disclosed is simply that the process had been undertaken. Mr Tregear QC accepted that insofar as the verification process disclosed what a particular party subjectively thought a particular statement meant or what its effect was, it did not provide admissible evidence. But he submitted that it did indicate how a particular statement should be reasonably understood, and underlined the existence and interlocking nature of the Take Criteria for which he contended.
61. Mr Onslow QC simply submitted that, since the Verification Notes did not "cross the line" between Teathers and a Claimant they were not admissible material if one is trying to understand what a reasonable person would have understood a Claimant and Teathers to have meant by the words they used to effect the transaction between them. I agree with this submission. The mere fact that a particular participant or professional had accepted responsibility for the accuracy of a factual statement or the fairness of an expression of opinion does not assist in determining the legal significance of that statement or opinion in the dealings between the investor and scheme promoter.
62. Having set out the intended (and actual) money flow and the terms of the documents governing the legal relations created between a Claimant investor and Teathers I turn to address the trust argument.
63. It is common ground that money paid by a Claimant to Teathers for the purposes of investment in a Take scheme was not at the free disposal of Teathers. It is agreed that (at least so long as it remained in the HSBC Settlement Account) the money belonged to a Claimant. There is a profound difference of view about the mandate that Teathers had, and consequently about who beneficially owned the money once it left the HSBC Settlement Account.
64. Mr Onslow QC argued that Teathers had authority to apply the money in subscribing to a Take 3 Partnership and that provided that the money was so applied it thereafter ceased to belong to a Claimant at law or in equity. He relied on the precise terms of the offer made by each Claimant in the Subscription Agreement and submitted that Teathers was entitled to accept that offer and when it did so the subscription became capital monies in a partnership and ceased to be subject to any trust. He drew attention to the fact that the memorandum had indicated the circumstances in which subscriptions would be returned, namely if the minimum subscription of £475,000 was not reached. There were no other circumstances in which the money was expressed to be returnable to a Claimant.
65. Mr Tregear QC argued that Teathers had authority only to invest the money subscribed in accordance with the Take Criteria, so that until the money was actually applied in making an investment which satisfied all six Take Criteria it continued to belong in equity to a Claimant. Thus, if any criterion was not satisfied a Claimant could call upon Teathers to account for his money. This argument reflected the terms of paragraphs 51, 116 and 136 of the Particulars of Claim.
66. I reject Mr Tregear QC's argument in this extreme form. It is not in my judgment possible to have a mandate "only to invest the money in accordance with the Take Criteria" for at least two reasons. (There are other fundamental points about the analysis with which I deal later).
67. First, because at the time of the investment it cannot in principle be objectively ascertained whether the purpose has been achieved or not. At the time of the investment in a TV production it cannot be known whether the production would be certified as a British Qualifying Film in satisfaction of Take Criterion 1 because the certification only takes place when the production is completed (a risk to which the Information Memorandum drew attention). Nor can it be known (in satisfaction of Take Criterion 2) whether the pre-sale or guarantee will be payable in the immediately following year, because the TV production is obviously not complete at the time of the investment. Nor can it be known (in satisfaction of Take Criterion 5) whether at the end of the Partnership the partners will then own sufficient rights to enable a realisation of Library Sale Value to occur.
68. Second, I consider that some of the Take Criteria are too loosely expressed to qualify as "directions" or to define a mandate in terms such that a court can say whether a given application does or does not fall within its terms. Take Criterion 3 requires that no investment be made unless borrowing of up to 100% were to be put in place. Take Criterion 1A requires an investment only to be made if the "downside" is largely eliminated. These are imprecise and highly subjective matters quite different from the usually encountered directions to use the money to acquire property, or to obtain a good marketable title or a first charge, or to pay a dividend or to pay the balance outstanding on a loan agreement for a car or to pay a publicity agent.
69. As terms of a mandate or direction to be applied at the time when a partnership invests money in a TV production the Take Criteria represent "lengthy, complex and multifaceted purposes" (per Mr Onslow QC) the fulfilment of which cannot be objectively ascertained at the time of the investment, and are far removed from the straightforward designated purposes found in all the previous Quistclose cases.
70. So Mr Tregear established a secondary position. This was that Teathers had authority only to apply the money subscribed in making an investment that was capable of satisfying the Take Criteria; and this is indeed the language in which Take Criterion 4 is expressed (that funds "would only be invested in a production… capable of being completed by the end of the tax year in which the investment was made …"). This formulation does run the danger of introducing a subjective and judgmental element into the definition of the mandate or the direction; but rather than address the argument on that narrow front I propose to consider it more generally.
71. The suggested formulation of the mandate or direction requires me to consider whether it was the mutual intention of Teathers and a Claimant, at the time when the Subscription Agreement and its accompanying cheque was received by Teathers, that the funds transferred upon presentation of the cheque should be used exclusively to make investments in British TV Productions capable of satisfying the Take Criteria, so that if it could not be so used then it was to be returned to that Claimant.
72. It is in my judgment clear from the express terms of the transaction that this was not their mutual intention.
73. The document under which this money was paid was the Subscription Agreement. This contained an irrevocable offer by a Claimant to contribute the sum enclosed in order to become a partner on the terms of the Partnership Deed. The Partnership Deed says that that money is "capital" of the Partnership. Because it is capital of the Partnership it is at risk in the partnership business. The Partnership Deed says that as such capital it cannot be withdrawn and does not bear interest. This is not consistent with the money continuing to be the equitable property of an individual subscriber/partner. It cannot be both partnership capital and trust money.
74. This contribution of capital is a pure book keeping entry which would normally only figure again in the dealings between partners on dissolution (where in the settlement of accounts the provisions of section 44 (b) Partnership Act 1890 would normally apply). In fact under the Partnership Deed it loses its identity as capital, because on dissolution the Partners accounts are "consolidated" so that loans, contributions of capital and undrawn profit shares are treated without distinction. This process of "consolidation" underlines the fact that the initial capital is not to be treated in some special way (e.g because it is held on trust). It simply goes into the pot along with all other partnership money.
75. The classification of the payment as "capital" is the arrangement the parties set out in the documents recording the transaction they entered. Those terms are (under clause 33.6 of the Partnership Deed) not to be modified by any prior statement, conduct or act of any Partner (including Teathers). The classification is inconsistent with an intention that after the constitution of the partnership it should not be part of the general assets of the partnership, but should remain in the equitable ownership of that claimant.
76. Of course, real money moved. It moved from the HSBC Settlement Account to the relevant Barclays Partnership Account. When that happened the legal ownership and juristic character of the money changed. It ceased to belong to Teathers and became the property of the partners. As is stated in Lindley & Banks on Partnership (19^th ed.) at 17-02:-

"…once a partner has brought in the asset and been credited with its agreed "capital" value in the firm's books, the asset as such will cease to be his property and will thereafter belong to the firm…"

It belonged to the firm not in the sense that each Partner individually owned that little bit of the Barclays Partnership Account which represented his payment, but in the sense that they were joint owners of the whole (just as they were jointly and severally liable on the account). By "joint owners" I do not mean that they were beneficial joint tenants or tenants in common. I mean that the Partners together were joint legal owners and that each Partner was entitled in equity to that floating and unascertainable share of the partnership property that would be determined only at dissolution. The money ceased to be money held by Teathers under an irrevocable offer (but returnable to the offeror if the minimum subscription was not reached). It now became a partnership asset to be dealt with under the terms of the Partnership Deed and s.20 of the Partnership Act 1890. It became liable to bear the 9% initial charge and the daily accruing (and monthly payable) 4% management charge, and to bear the costs and expenses reasonably incurred in managing the partnership (whether any investment was actually made or not). This contractual arrangement does not suggest that the money was mutually intended (as between Teathers as promoter or as partner, and any Claimant) to remain in the equitable ownership of that Claimant pending its application in the Partnership Business.

77. In my judgment it is clear that whilst the subscription money was not intended to be part of the general assets of Teathers whilst it remained in the HSBC Settlement Account and had to be allocated to a capital contribution towards a Take 3 Partnership, once it had been so allocated (and most certainly once it had been transferred to the Barclays Partnership Account) it was part of the general assets of the Partnership.
78. Mr Tregear QC submitted that this was an overly technical analysis which paid too much attention to the form and too little attention to the substance of the scheme, concentrating upon the mechanics and not upon the purpose of the investment. He argued that the money was under the control of Teathers throughout the process (first as promoter and then as managing partner) and that it flies in the face of reality to suggest that at one point they had a mandate over trust property but that at another they did not.
79. I do not accept this criticism. The intended legal relations between the parties were set out in detail in documents which each claimant warranted he had considered and received advice upon. It is not unduly technical to say that the interests of the investors are to be found in those documents properly construed, and not in some unstated understanding which contradicts those terms. It is right that the Claimants' money was in some sense under the control of Teathers throughout; but first in its capacity as promoter, and then in its capacity as managing partner subject to the control and direction of the Partners. The fact that Teathers continued to have powers over and obligations in relation to the money does not mean that the powers and obligations were throughout fiduciary powers and obligations in relation to trust money. In my judgment once a partnership came into existence Teathers' powers and obligations were those of a Founding and Managing Partner under the Partnership Deed and of a Managing Partner under the Managing Agreement: not those of a trustee.
80. Mr Tregear QC submitted that this analysis did not give proper weight to Teathers' role as promoter. He relied on Gluckstein v Barnes [1900] AC 240. In that case a syndicate was formed to buy a property for on-sale to Olympia Ltd, a company in the course of formation. The syndicate made a secret profit which it did not disclose to the shareholders subscribing to Olympia (of which the syndicate members were the directors): so the cost of the property was misstated and the profit being made by the syndicate was not disclosed. Lord Robertson said (at p.257) that:-

" ..the coming directors stood in a fiduciary relationship to the company whose interests were to be in their sole hands….The people for whom these gentlemen were bound to act were their coming constituents, the persons out of whose money they proposed to make their gain."

I do not consider that the conclusion that the syndicate members and putative directors must account as constructive trustees for an improper profit assists me to decide whether Teathers (as promoter of the Take 3 Scheme) was bound (even after the formation of partnerships) to account for the subscriptions collected on the footing that those subscriptions continued to be subject to a resulting trust.

81. Mr Tregear QC further objected that the analysis summarised at paragraph 79 above failed to give any weight to the scheme so carefully set out in the Information Memorandum, submitting that it was "bizarre" to suggest that the apparently careful analysis and explanation in the Information Memorandum was entirely irrelevant to the purpose to which the money would be applied once a partnership was formed.
82. I do not agree. Under the Partnership Deed Teathers had "full power and authority" (without restriction) to identify, evaluate and negotiate investment opportunities, but "having regard always to the purpose of the Partnership". Likewise, as Managing Partner Teathers could borrow "for the purposes of the Partnership". The "purposes" of the Partnership might well be related to "the criteria of the Partnership" to which reference is made in the BSMF Agreement in context of identifying potential investments. That might well, on the true construction of the Partnership Deed, impose some restriction upon the manner in which those powers were to be exercised, a restriction perhaps deriving from the documents which explained the purpose of the partnership to an intending participant. The point, however, does not arise for decision on this preliminary issue. But any such restriction would be a personal obligation arising from contract and from the status as partner (or as managing partner); it would not be a fiduciary obligation arising out of dealing with property that belonged to an individual claimant (and not to the firm as a whole).
83. Mr Tregear said that the analysis I favour was particularly technical in relation to single investor partnerships (where the only members were Teathers as managing partner and a single large investor). But Take 3 is a standard scheme. The same words cannot mean different things depending on how many partners there are. Even a single investor could only get his money out by dissolving the partnership and by complying with the terms of the Partner Deed and the Partnership Act 1890. He could not simply say "the money in the bank account belongs to me".
84. I am clear in my conclusion that once a partnership was constituted no partner could claim that the sum he contributed to the partnership was held by the partners on resulting trust for him pending its application in an investment that either did satisfy the Take Criteria or that was capable of satisfying the Take Criteria. In reaching that conclusion I have not treated a trust relationship and a contractual relationship as mutually exclusive; but it seems to me that the inferred resulting trust cannot contradict the express terms of the contract, and also that the Take Criteria are not suitable conditions for the purpose of identifying when property will pass.
85. This was undoubtedly the focus of the case as argued and the burden of the pleaded case. The emphasis upon the trust continuing until such time as money was actually applied in making an investment in a British TV Production was affirmed at two case management conferences. There is, however, a further thread (expressed in the pre-trial correspondence and contained in paragraph 126 of the Particulars of Claim and never expressly abandoned) which I ought to consider. This argument accepted that a resulting trust continued only until such time as an investor's subscription was allocated to a partnership. But it asserted that Teathers' mandate was not simply to apply the money as capital in a partnership. In addition the partnership itself had to fulfil the purposes of the scheme so that "if the purposes could not or would not be fulfilled [Teathers] had no authority to incorporate partnerships". Accordingly it would have been a "breach of trust" for Teathers to take money out of the HSBC Settlement Account once Teathers knew or ought to have known that "the scheme being implemented was fundamentally different from the scheme as described" or that "the scheme as implemented was certain to fail as a tax saving scheme and was overwhelmingly likely to be unsuccessful as an investment".
86. In my judgment this formulation is in danger of conflating two separate concepts. The first is the scope of the authority: what were the terms of the mandate? The second is the standard of performance to be expected when exercising that authority: how competent is the holder of the mandate expected to be? An investor can give a stockbroker an investment mandate. An investor can require a stockbroker to apply a particular degree of skill and care in the exercise of that mandate. But an investor cannot say that the stockbroker is authorised only to make successful investments.
87. The argument was addressed in Bristol and West Building Society v Mothew [1998] Ch 1. A solicitor was contractually obliged to report to the lender if the borrower was obtaining any other loans before the solicitor applied the lender's money in completing the purchase. The solicitor incompetently failed to do so. The lender argued that the solicitor only had authority to use the advance if he had performed his contractual obligations. The argument was rejected by Millett LJ at p24B in these terms:-

"I do not accept this. The society's standing instructions did not clearly make the defendant's authority to complete conditional on having complied with the instructions. Whether they did so or not is, of course, a question of construction, and it is possible that the society could adopt instructions that would have this effect. But it would in my judgment require very clear wording to produce so inconvenient and impractical result. No solicitor could safely accept such instructions, for he could never be certain that he was entitled to complete. In my judgment the defendant's authority to apply the mortgage money in the completion of the purchase was not conditional on his having first complied with his contractual obligations to the society, was not vitiated by the misrepresentations for which he was responsible but of which he was unaware, had not been revoked, and was effective to prevent his payment being a breach of trust".

88. In my judgment Teathers is in no different a position. It was the recipient of an irrevocable offer from a subscriber to apply the subscription in making a payment of capital in order to form a partnership which partnership had as its expressed purpose the development, production, acquisition and exploitation of rights in British Television Productions which qualified as British Qualifying Films. Carelessness at the time of forming these partnerships in failing to foresee that in practice the implementation will be fundamentally different from the intentions set out in the Information Memorandum or that the partnerships were certain to fail as tax saving schemes and overwhelmingly likely to be unsuccessful as investments would not vitiate Teathers' authority to use the subscription as the capital contribution to a partnership.
89. In my judgment the only restriction on Teathers' authority to deal with the offered capital contribution arises from its duty to act honestly and loyally. If Teathers actually knew at the time of forming a partnership that it was not possible in any circumstances to conduct "the Partnership Business" as defined in the Partnership Deed, then its authority to apply the money would cease. It would be unconscionable (indeed it would not be honest) to apply the offered subscription in the capitalisation of a partnership to conduct a business which it was actually known it was certainly impossible to conduct. It would actually be known that the specified purpose (conducting the Partnership Business) was incapable of being achieved:-

"When the purpose fails, the money is returnable to [the payer], not under some new trust in his favour which only comes into being on the failure of the purpose, but because the resulting trust in his favour is no longer subject to any power on the part of [the recipient] to make use of the money": per Lord Millett in Twinsectra (op cit) at paragraph [100].

90. I would therefore answer the questions raised as follows:-

(a) The money paid by a Claimant to Teathers for the purpose of investment in a Take Scheme was not at the free disposal of Teathers. It was subject to a Quistclose trust which had the effect of leaving the beneficial ownership in the subscription monies in the subscriber until such time as it was applied in the manner set out in (b) below.

(b) Teathers' freedom to dispose of the money was restricted in that Teathers could only apply the money that accompanied a Subscription Agreement if the scheme minimum subscription had been reached. Once that threshold had been crossed then Teathers could apply the money by allocating the subscriber to a Take 3 Partnership and by paying his subscription into the relevant Barclays Partnership Account as the subscriber's contribution of capital to that partnership. The subscriber's beneficial ownership of the money would thereupon cease. But there was a further restriction: Teathers could not allocate a subscriber to a partnership or utilise his subscription as a contribution of capital if Teathers actually knew at the time of that allocation and payment of capital that it was actually impossible for the partnership once constituted to conduct the business of the development, production, acquisition and exploitation of rights in British TV productions and programmes which qualify as British Qualifying Films. If Teathers' actually knew of that impossibility at that time then their authority to deal with the money in that way ceased. The Take Criteria were not relevant to Teathers' authority to deal with the money.

(c) When the subscription monies were in the HSBC Settlement Account and not allocated as capital of a partnership the purpose for which Teathers could apply the money is as summarised in (b) and a Quistclose trust existed. When the money had been contributed as capital to a constituted partnership (pending transfer into a Barclays Partnership Account or after transfer into a Barclays Partnership Account) the purpose for which Teathers could apply the money was any purpose authorised by the Partnership Deed (in its capacity as Managing Partner) or under the Management Agreement (as agent of the Firm).

(d) Teathers' authority to invest Take 3 partnership funds was an authority to invest and deal with partnership property (not separate property belonging to individuals under continuing Quistclose trusts) and it was restricted in accordance with the Partnership Deed or the Management Agreement. It may be that the Take Criteria help determine the manner in which that authority might be exercised: but that is because on the true construction of the Partnership Deed the personal obligations of Teathers as Managing Partner may have to be performed taking account of the Take Criteria (a point which is not before me for decision). The Take Criteria have no bearing on the ascertainment of property interests.

91. The regulatory questions can be dealt with much more shortly. The argument presented at the hearing was much narrower than that canvassed in correspondence. The regulatory regime changed in the period during which the Take 3 Scheme was promoted and operated. That arising under the Financial Services Act 1986 was replaced by that arising under the Financial Services and Markets Act 2000. The detailed provisions contained in the SFA Rule Book were replaced by the detailed rules contained in the Conduct of Business Handbook. For present purposes the content of the relevant rule (Rule 4.59 in the SFA Rule Book and Rule 9.3.133 of the Conduct of Business Handbook) was essentially the same. When the money came into the HSBC Settlement Account it was client money. It would only cease to be "client money" if it was paid:-

(a) to the client or his duly authorised representative: or

(b) to a third party on the instructions of the client: or

(c) into a bank account of the client (not being an account also in the name of Teathers): or

(d) to Teathers itself (when due and payable under the relevant rules): or

(e) to Teathers (when there was an excess on client bank account).

92. These may colloquially be called the "safe harbours".
93. The submission on behalf of the Claimants is that the money in the HSBC Settlement Account was in every case paid into the relevant Barclays Partnership Account, but that account was under the control of Teathers by virtue of a combination of its role as Managing Partner in each of the Partnerships and the terms of the Management Agreement, and such an account is not one of the "safe harbours" contemplated by the rules. Accordingly the fiduciary duties of Teathers continued and would not come to an end until the money was applied in one of the recognised ways.
94. I do not agree with this analysis. For the purpose of the argument I will assume that the effect of the regulations is not simply to declare the obligations which the recipient of client money owes to the client (and the remedies available for breach of those obligations), but is also to prescribe the location of the beneficial interest in those monies without reference to the general law. The object of the rules is clearly to prevent a firm from using client money for its own purposes; the regulations must be construed in the light of that overall purpose and in a way which produces a practical and commercially sensible result.
95. Reading the regulations in that way it seems to me plain that when Teathers transferred a Claimant's subscription from its HSBC Settlement Account to the Barclays Partnership Account of the partnership to which that Claimant subscriber had been allocated, it was transferring the money either to an account in the name of that Claimant (along with others) ("safe harbour" (c)); or (more naturally) to an account in the name of a third party (namely the firm) ("safe harbour" (b)). The account did not cease to be such a "safe harbour" account simply because Teathers had signing rights over the bank account and (subject to the overall control of the Partners) management powers over the application of funds. The transfer was precisely in accordance with the client's irrevocable instructions contained in the Subscription Agreement, and the payment away is exactly what the client had directed. It did not continue to be "client money" for the purposes of the Conduct of Business Handbook.
96. I would therefore answer the last question in the sense that (since no regulatory issues were raised concerning the creation and promotion of the Take 3 Scheme) Teathers' regulatory duties in relation to client monies were to comply with the client's directions; that those directions were contained in the irrevocable offer in the Subscription Agreement; and that when those directions were complied with the money ceased to be client money.
97. I would accordingly decide the preliminary issue in favour of Teathers.
98. By arrangement between the parties I will hand this judgment down on 9 February 2012. I do not expect the attendance of parties or legal representatives. I will on that occasion adjourn the question of costs and any other applications to a hearing on 1 March 2012. The time for appealing any order on this judgement will not start to run until the conclusion of that adjourned hearing.