CC Automotive Group Ltd, Re

B e f o r e :

HIS HONOUR JUDGE KLEIN SITTING AS A JUDGE OF THE HIGH COURT ____________________

____________________

Mark Cawson QC (instructed by Addleshaw Goddard LLP) for the Applicant Benjamin Wood (instructed by Harrison Clark Rickerbys Solicitors Limited) for the First Respondent Hugo Groves (instructed by Walker Morris LLP) for the Second Respondent Hearing dates: 18-19 September 2019 ____________________

HTML VERSION OF JUDGMENT APPROVED ____________________

Crown Copyright ©

HH Judge Klein:

This is the judgment following the hearing of an application by the liquidator of CC Automotive Group Ltd., under section 112 of the Insolvency Act 1986, for directions about how he should administer one of that company's bank accounts.

Before entering into administration on 30 April 2015, CC Automotive Group Ltd. ("Carcraft") traded as a multi-site used vehicle supermarket under the name "Carcraft". In addition to selling vehicles, it offered its customers a product known as the "Drive Happy Package" ("the DHP"). Under a DHP, a customer obtained "free" MOT testing, vehicle servicing, warranty repairs and breakdown cover for a period of up to five years. Customers had the option of obtaining a DHP for a period of one year, three years, four years, or five years. Nothing had to be paid for a one-year DHP. A three-year DHP cost £995. A four-year DHP cost £1,495 and a five-year DHP cost £1,995. The majority of customers who obtained three- to five-year DHPs ("long-term DHPs"), did not pay for their DHPs in cash or by debit card. Instead, because their vehicle purchases were financed by lenders ("third party funders") under a debtor-creditor-supplier agreement ("a section 75 agreement"), those customers' purchase of their long-term DHPs was also financed (or intended by them to be financed) by the same third party funders which financed their vehicle purchases; sometimes under a separate section 75 agreement. The full price for a long-term DHP should have been paid before a customer obtained one; although, in practice, as I shall explain, that did not happen in all cases.

Historically, the payments received for long-term DHPs were used by Carcraft to fund its cash flow. In early 2015, concerned about its solvency, Carcraft consulted solicitors about how it should deal with payments for long-term DHPs. On 23 February 2015, Carcraft made a declaration of trust ("the Declaration of Trust") which, amongst other matters, was intended to offer a measure of protection to future customers obtaining long-term DHPs.

The Declaration of Trust recites that:

The Declaration of Trust contains the following definitions:

By clause 2.1 of the Declaration of Trust, Carcraft declared "that it shall at all times hold the Trust Monies upon trust for the purposes set out in this deed."

Clause 2.2 of the Declaration of Trust provides:

Clause 3 of the Declaration of Trust provides:

Clause 5 of the Declaration of Trust provides:

The Applicant ("the liquidator") was appointed one of Carcraft's administrators and then, on 9 July 2015, one of its liquidators; Carcraft having gone into a creditors' voluntary liquidation. The liquidator is now Carcraft's sole liquidator.

No Discharge Statement was made within 90 days after Carcraft entered into administration. Save that the liquidator claims that there is a resulting trust in Carcraft's favour in relation to sums paid into the Trust Bank Account ("the trust account") referable to long-term DHPs obtained by customers of Premium Credit Ltd. and All in One Finance Ltd., the parties are agreed that, under the Declaration of Trust, the customers (as defined) have become entitled to the balance ("the trust fund") standing to the credit of the trust account. The concession by the liquidator (that only part of the trust fund is held for Carcraft on a resulting trust) and, more generally, the parties' approach to the beneficial ownership of the trust fund (namely, that the customers are the beneficial owners of the trust fund save to the extent that the liquidator or the First Respondent satisfy me otherwise) may be significant, as will become clear in due course.

The liquidator has had a number of difficulties in administering the trust account.

One of the practical difficulties he has faced is that the Customer Trust Account Schedule which was contemplated by the Declaration of Trust has never been completed. In practice, during the Relevant Period, Carcraft calculated, on a weekly basis, the price of the long-term DHPs sold in that week, deducted from that total any refunds paid during that week, and then credited the trust account with the balance, by transferring funds from its own (non-trust) bank account. [1] As part of this exercise, Carcraft in fact credited amounts to the trust account which related to long-term DHPs sold before the Relevant Period began. [2]

Matters are further complicated because, in two cases (relating to multiple customers), on a weekly basis Carcraft credited the full price of long-term DHPs sold during the Relevant Period, even though it did not receive that price. In both cases, the purchase of the long-term DHPs was intended to be funded by a third party funder under section 75 agreements.

Mark Cawson QC (who appeared for the liquidator) explained that the first case concerned Premium Credit Ltd ("PCL"). He explained that, in the case of PCL's customers, Carcraft provided long-term DHPs even though those customers only entered into one-year section 75 agreements. The expectation (and, perhaps, the historical practice) was that, when a section 75 agreement came to an end by lapse of time, a PCL customer was required to enter into a further one year agreement and, if they did not, their long-term DHP lapsed. During the Relevant Period, PCL effectively paid into the trust account £435 for each of its 235 customers who then obtained a long-term DHP and Carcraft paid into the trust account the balance of the full price of those PCL customers' long-term DHPs ("the PCL balances").

PCL has confirmed that it makes no claim to any of the trust fund and the liquidator accepts that, in principle, each of PCL's 235 customers should receive a rateable proportion of £435 from the trust fund (taking into account the deficiency to which I will refer). There is a practical difficulty, in that, as estimated by the liquidator, the costs of distributing £435 (or a rateable proportion) to each of PCL's customers is at least equivalent to the amount available for distribution to them, assuming that their share of the trust fund bears the distribution costs. Hugo Groves, who appeared for the Second Respondent, agreed that a procedure will need to be devised so that PCL's customers can claim the sum which it is agreed is due to them but so that, if they do not do so, the sums in issue can fall into the general liquidation estate. I will need to hear further from counsel about the appropriate procedure.

So far as the PCL balances are concerned, relying on clause 3 of the Declaration of Trust, Mr Groves contended that that part of the trust fund attributable to them ("the PCL shares") is held on trust for PCL's customers. Mr Cawson contended that the PCL shares ought to be treated as belonging to Carcraft.

Mr Cawson explained that the second case concerned All in One Finance Ltd. ("AIOF") (another third party funder) which was a related company to Carcraft. It too is in liquidation and the liquidator is its liquidator. During the Relevant Period, 66 of AIOF's customers obtained long-term DHPs which they expected to pay for under section 75 agreements. AIOF did not credit Carcraft with any sum in relation to those long-term DHPs. However, Carcraft credited the trust account with the full price of those long-term DHPs. Mr Cawson told me that Carcraft and AIOF expected that AIOF would subsequently reimburse it. Some of AOIF's customers did make a payment under their section 75 agreements to AIOF during the Relevant Period. However, the liquidator asks me to proceed on the basis that they have all since been reimbursed. [3] Further, the liquidator (as AIOF's liquidator) has resolved not to recover any sum under the relevant section 75 agreements from the customers in issue. If those customers receive any part of the trust fund, they will do so in circumstances where they have been fully reimbursed (I am asked to assume) and otherwise effectively discharged from their liabilities under the relevant section 75 agreements (so that, it may be said, those customers will receive a pure windfall (there being no evidence that the prices of the long-term DHPs were not the market prices)). As in the case of PCL's customers, so in this case, relying on clause 3 of the Declaration of Trust, Mr Groves contended that AIOF's customers were entitled to part of the trust fund, whilst Mr Cawson argued that the part of the trust fund attributable to the sums paid in relating to AIOF's customers ("the AIOF shares") ought to be treated as belonging to Carcraft.

The balance of the trust account on 30 April 2015 was about £1.265 million. Had Carcraft credited the trust account with what it actually received for the long-term DHPs sold during the Relevant Period, the figure is likely to have been markedly different. Although slightly more stands to the credit of the trust account at present, the balance is likely to be reduced significantly because the court has previously made prospective costs order which entitle the parties to the application to be indemnified their litigation costs and the liquidator to be reimbursed related remuneration out of the trust account, so that there is likely to be a deficiency whatever the outcome of the application.

There is no dispute that, because the section 75 agreements are subject to section 75 of the Consumer Credit Act 1974, the third party funders in this case have been jointly and severally liable for the performance of the long-term DHPs; particularly since Carcraft entered into administration. In addition to a single customer who obtained a long-term DHP by credit card payment, the liquidator estimates that 468 customers of third party funders (in addition to PCL's and AIOF's customers) obtained long-term DHPs during the Relevant Period.

Conscious of their obligations under section 75 of the Consumer Credit Act 1974 in relation to their customers' long-term DHPs (Carcraft being unable to provide any of the DHP services after entering into administration), the third party funders of at least 327 customers obtained what are apparently at least equivalent packages ("alternative policies") for their customers. Those third party funders include the First Respondent ("RateSetter") which provides peer-to-peer lending. RateSetter also reimbursed its customers who had obtained long-term DHPs during the Relevant Period for expenditure they incurred between Carcraft's administration and the provision to them of alternative policies. About £19,000 was reimbursed in this way.

The circumstances in which RateSetter provided alternative policies is set out in its statement of case, in two witness statements filed by Mr Iain Purdy, who is RateSetter's financial controller and who was heavily involved in the provision of alternative policies for its customers, and in a witness statement from RateSetter's solicitor. Mr Purdy's later witness statement was made overnight between the first and second days of the hearing. Having taken instructions, Mr Groves did not object to RateSetter relying on it.

In his first witness statement, Mr Purdy said:

RateSetter's solicitor said in his witness statement:

In Mr Purdy's later witness statement, he said:

In its statement of case, RateSetter said:

In his second witness statement, the liquidator explained that, in the administrators' proposals to creditors dated 12 June 2015, Carcraft's administrators referred to the fact that Carcraft's directors had ring-fenced certain creditor funds and that about £1.3 million was then held in the ring-fenced account.

Because the liquidator was concerned that the third party funders who have provided alternative policies ("alternative policy funders") may have a claim to the trust fund, he made the present application for directions. Annexed to this judgment is a copy of the schedule to the application notice which sets out the questions in respect of which the liquidator initially sought directions. Because the liquidator was coming to court for directions in relation to the claim, if any, of alternative policy funders to the trust fund, he thought it prudent to seek directions in relation to Carcraft's claim, if any, to the PCL and AIOF shares. He also thought it prudent to seek directions in relation to other circumstances which have or, he thought, may have arisen.

On 24 January 2019, HH Judge Mark Raeside QC ordered that RateSetter represent all the third party funders identified in the schedule to the application notice. On the same occasion, he joined the Second Respondent ("Walker Morris") as a party to the application to represent those falling within the definition of "Customer" in the Declaration of Trust.

During the course of the application it became clear that some of the third party funders may not have provided alternative policies to their customers. Because RateSetter relies on the provision of alternative policies to make its case, on 6 August 2019 HH Judge Davis-White QC ordered, by consent, that RateSetter should cease to represent PCL and those other third party funders which have not provided alternative policies to their customers.

I have already indicated that the liquidator was represented by Mr Cawson and Walker Morris was represented by Mr Groves. RateSetter was represented by Benjamin Wood. I am very grateful to them (as I am to their clients) for all the help they gave me during the hearing. Their written and oral submissions were models of brevity and clarity in a case which is somewhat complicated factually and which raises not entirely straight-forward legal issues. I am also grateful to them because, as a result of their submissions and their engagement with each other during the hearing, the liquidator only needs me to determine substantively (i) the dispute between Walker Morris on the one hand (on behalf of customers) and RateSetter on the other hand (on behalf of all alternative policy funders), (ii) the dispute between Walker Morris on the one hand and the liquidator on the other hand in relation to the PCL shares and (iii) their dispute in relation to the AIOF shares. As I have already indicated, and as I note further in this judgment, it may be necessary to work out how, in practice, effect should be given to my decision. It may also be necessary to work out, in relation to those scenarios where the parties are agreed in principle on the course the liquidator should properly take, how, in practice, the liquidator should give effect to that agreement in principle. Counsel have agreed that these matters should be left until after I have handed down this judgment.

At the hearing, counsel approached the dispute between Walker Morris and RateSetter in this way. They proceeded on the basis that, unless any of RateSetter's grounds for opposing a distribution of the trust fund to alternative policy funder customers succeeded, those customers retain a beneficial interest in the trust fund; so that the resolution of the dispute between Walker Morris and RateSetter depends on whether RateSetter has made out any of those grounds.

Section 5 of the Mercantile Law Amendment Act 1856

The first ground on which RateSetter opposes a distribution of the trust fund to customers of alternative policy funders is based on section 5 ("Section 5") of the Mercantile Law Amendment Act 1856 ("Act"). The Preamble of the Act records:

Section 5 provides:

As to the effect of Section 5, Mr Wood argued as follows:

i) The effect of Section 5 is wider than the mischief which the Preamble to the Act suggests was intended to be nullified by the Act;

ii) Section 5 provides two cumulative rights to a co-obligor who performs the co-obligors' duty;

iii) The first right is the right to have assigned to it "every judgment, specialty, or other security which shall be held by the creditor in respect of such…duty" ("the first Section 5 right");

iv) Because of section 75 of the Consumer Credit Act 1974, the third party funders have been liable, with Carcraft, for performance of the long-term DHPs;

v) By the provision of equivalent alternative policies, alternative policy funders have performed (which Mr Groves accepted, so long as the alternative policies are in fact equivalent to the equivalent DHPs);

vi) Customers' beneficial interests in the trust fund are in the nature of security interests; [4]

vii) So that, under the first Section 5 right, so far as they relate to those customers who have been provided with alternative policies, those beneficial interests (or the rights those customers enjoy by the Declaration of Trust) have been assigned to those customers' alternative policy funders; [5]

viii) The second right is the right to use all the creditor's remedies in order to obtain, from the other co-obligor "indemnification for…loss sustained by the [co-obligor] who shall have…performed [the co-obligors'] duty" ("the second Section 5 right");

ix) The second Section 5 right is in wide terms and is not limited to a right to sue the other co-obligor in respect of the duty which has in fact been discharged;

x) The second Section 5 right gives alternative policy funders the right to all causes of action their customers have against Carcraft in all its capacities;

xi) The second Section 5 right therefore entitles alternative policy funders to call for the liquidator to pay over to them their customers' shares of the trust fund, as their customers could;

xii) For the purpose of the second Section 5 right, it does not matter whether or not customers' beneficial interests in the trust fund are in the nature of security interests.

As to the first Section 5 right, Mr Groves argued that the Declaration of Trust did not create security.

Not having been taken, by counsel, to any authority which defines a security for the purposes of Section 5, [6] I need to consider whether the Declaration of Trust created security, by applying first principles.

The authors of Fisher & Lightwood's Law of Mortgage (15 th ed) explain, at paragraphs 1.1-1.2:

In Bristol Airport plc v. Powdrill [1990] Ch 744, Sir Nicholas Browne-Wilkinson VC said at page 760, when considering the proper construction of the phrase "other security" in section 248 of the Insolvency Act 1986:

I have concluded that the customers' beneficial interests in the trust fund are not in the nature of security and that the Declaration of Trust did not create security in the customers' favour.

The provisions of the Declaration of Trust do not obviously create security in the customers' favour. The Declaration of Trust does not obviously display the features of a mortgage, charge, pledge or lien.

Generally, in practice, security interests are created contractually. In this case, the customers did not know about (let alone agree to) the Declaration of Trust before Carcraft entered into administration.

If it is RateSetter's case that the customers acquired security by operation of law, such security would be in the nature of a non-possessory lien. However, the Declaration of Trust confers on customers much more than enforcement rights by judicial process.

There are more fundamental reasons why the Declaration of Trust does not create security in the customers' favour and why customers' beneficial interests in the trust fund are not in the nature of security.

In truth, clause 3 of the Declaration of Trust was only expected to operate when Carcraft's obligations under the long-term DHPs became incapable of further performance by Carcraft or a third party. Clause 5 of the Declaration of Trust (the other clause which provides for payment to customers) was only intended to operate when Carcraft failed to perform its obligation under particular DHPs. The Declaration of Trust does not secure performance of those obligations. Rather, it provides mechanisms for compensating customers (in the case of clause 5, expressly, and in the case of clause 3, in practice) for non-performance of those obligations.

Nor does the Declaration of Trust secure performance of Carcraft's obligations under the DHPs in the event that Carcraft made a Discharge Statement.

Nor does the Declaration of Trust entitle Carcraft to "redeem" the customers' beneficial interests in every case. Suppose more than 90 days after an Insolvency Event, a third party undertook to perform Carcraft's obligations under the DHPs, so that a Discharge Statement could have been made but for the lapse of time. In this case, the Declaration of Trust contains no provisions for reversing the effect of clause 3 (for obtaining back from the customers their beneficial interests).

It follows that the Declaration of Trust does not display the three features of a security which Fisher & Lightwood list at the end of paragraph 1.2.

I turn to consider RateSetter's case on the second Section 5 right.

If Mr Wood's contention about the second Section 5 right is correct, Section 5 will have had a far-reaching effect. On RateSetter's case, the second Section 5 right divests or is capable of divesting beneficiaries of an obligation ("creditors") of all their remedies against a non-performing co-obligor, even if those remedies are wholly unrelated to the obligation which the co-obligor has failed to perform, in order that the other co-obligor, who has performed its pre-existing obligation, can be compensated by its co-obligor, even if the other co-obligor already has a remedy against the non-performing co-obligor.

By way of example, suppose a customer who had a long-term DHP obtained a car service and that, on collecting their car following the service, slipped in a pool of oil negligently left at a Carcraft service centre, injuring themselves (against which risk Carcraft insured). Suppose too that Carcraft never entered into administration but, after the customer was injured, refused to perform its further DHP obligations so that, for this reason, RateSetter procured an alternative policy for the customer, the price of which equated to the value of the customer's personal injury claim. On RateSetter's case, the customer could be divested of their personal injury claim, so that, whilst the customer would continue to enjoy the benefit of an equivalent to a long-term DHP, they might be unable to obtain any compensation for their personal injury which might have otherwise been available to them. The beneficiaries of such an arrangement would be RateSetter and Carcraft. RateSetter would, in practice, have performed its pre-existing obligation under section 75 of the Consumer Credit Act 1974, in return for which it would have the benefit of two causes of action against Carcraft. [8] Carcraft might, in practice, avoid having to compensate for the personal injury claim at all. Instead, if RateSetter sued in relation to the customer's personal injury claim, any compensation thereby recovered would be used to discharge Carcraft's pre-existing obligation to RateSetter.

In Re Russell (1885) 29 ChD 254 , the Court of Appeal had to decide whether a landlord's right of distress amounts to security for the purpose of Section 5. Fry LJ said, at pages 265-6:

It seems to me clear that the Court of Appeal did not view the Act as effecting any radical change. Rather the Court of Appeal viewed the Act, as its Preamble suggests, as removing an inconvenient obstacle which existed in England and Ireland but not in Scotland. [9] It would be surprising, therefore, if the effect of Section 5 was to deprive parties of rights unrelated to the underlying transaction which a co-obligor has performed, as Mr Wood contended.

Although the Court of Appeal, in Re Russell , was not referred to the decision of the Court of Common Pleas in Batchellor v. Lawrence (1861) 9 CB (NS) 543, the Court of Appeal's thoughts about the effect of the relevant part of Section 5 (or, to put in another way, the nature of the second Section 5 right) were consistent with the earlier decision.

In Batchellor , Byles J said, at pages 555-556:

In the light of these two authorities, I have concluded that the second Section 5 right is a right, for a co-obligor who has performed, to enforce the judgment, specialty debt, or security assigned under the earlier part of Section 5 (that is, the first Section 5 right), without facing a procedural bar to doing so because the co-obligors' obligation has been discharged.

That, so far as the second Section 5 right is concerned, all that Section 5 does is to remove any procedural bars to the enforcement of the judgment, specialty or security assigned to the co-obligor who has performed the co-obligors' duty is also the view of Andrews & Millett: Law of Guarantees (7 th ed); at paragraph 11-021, where the authors say:

For the reasons I have given, RateSetter (and the other alternative policy funders) cannot rely on Section 5 as a basis to claim an entitlement to the trust fund. [10]

Equitable subrogation

Relying principally on Banque Financière de la Cité v. Parc (Battersea) Ltd. [1999] AC 221 and Menelaou v. Bank of Cyprus UK Ltd. [2016] AC 176 , RateSetter contended that the provision of alternative policies by alternative policy funders was mistaken, that the customers who benefited thereby have been unjustly enriched, that the alternative policies were therefore normatively defective transfers of the value and that the alternative policy funders are entitled to be subrogated, in equity, to their customers' beneficial interests in the trust fund. [11]

Although I heard detailed oral submissions about whether customers have been unjustly enriched by the provision of alternative policies and whether there have been normatively defective transfers of value, as it happens I do not need to consider those matters at length in this judgment, in the light of the later of Mr Purdy's witness statements to which I have referred.

Mr Groves conceded (rightly, in my view) that, if I accept Mr Purdy's evidence that RateSetter would not have provided alternative policies in the way it did to its customers who obtained long-term DHPs during the Relevant Period had it known of the existence of the trust fund, then RateSetter will have provided those alternative policies under a mistake.

Although Mr Purdy did not say so in terms, considering his evidence as a whole, it is proper to infer that RateSetter assumed that, because of Carcraft's administration, its customers were committed to paying for long-term DHPs even though they were not going to obtain performance of them and might not obtain significant compensation for Carcraft's non-performance. That assumption turned out to be wrong, so far as RateSetter's customers in issue in this application are concerned, because, under the Declaration of Trust, they can look to the trust fund for compensation. Mr Purdy's evidence is, in effect, that, had RateSetter not made that mistaken assumption, it would not have provided alternative policies for the customers in issue in the way it did.

I do accept Mr Purdy's evidence. He was not cross-examined on it. Mr Groves pointed to what RateSetter accepts, and what the liquidator says, RateSetter did know about the arrangements Carcraft had put in place to protect its customers' interests. However, it does not follow from that that RateSetter did not make the mistaken assumption to which I have referred.

It follows that I am satisfied that RateSetter provided alternative policies to its customers who obtained long-term DHPs during the Relevant Period by mistake.

Mr Groves also accepted, for the purpose of the present application only, that, in those circumstances, RateSetter would have a restitutionary (unjust enrichment) claim against its customers in issue.

It must follow (for the purposes of this judgment), that the alternative policies provided by RateSetter were normatively defective transfers of value. [12] Although Mr Groves did not formally concede this, the point ought not to be controversial; in the light of what I have already said. As the Supreme Court explained in Prudential Assurance Co. Ltd. v. Revenue and Customs Commissioners [2018] 3 WLR 652 , at [69]:

It does not follow from this that RateSetter is entitled to be subrogated to its customers' beneficial interests in the trust fund.

It may be said that the majority of the Supreme Court Justices (Lord Carnwath excepted) in Menelaou took a more expansive view of when equitable subrogation might be available to a transferor of value than the Supreme Court took in the later decision of Swynson Ltd. v. Lowick Rose LLP [2018] AC 313 ; a case on which Mr Groves relied. In this context, it is perhaps interesting to consider Lord Sumption's analysis, in Swynson , of Menelaou . Lord Sumption said, at [29], when discussing Menelaou :

Lord Sumption's analysis of Menelaou reflects the way Lord Carnwath decided that case. In that case, Lord Carnwath said, at [107], [111], [140]:

In Swynson at [30]-[31], [34], Lord Sumption explained the function of equitable subrogation thus:

Mr Wood identified two matters which he said satisfied the requirement that, in order to be subrogated to its customers' beneficial interests in the trust fund, RateSetter's expectation of some feature of the transaction, by which alternative policies were provided, must have been defeated.

First, Mr Wood said, had RateSetter known of the trust fund, and turned its mind to its customers' rights under the Declaration of Trust, it would have required the assignment of its customers' beneficial interests in the trust fund in return for providing those customers with alternative policies (and paying ad hoc expenses). I have already indicated that I accept Mr Purdy's evidence to this effect. What Mr Wood described is a hypothetical expectation which RateSetter would have had had it not been mistaken. However, what is required for a transferor of value to be subrogated in equity, following Swynson , is that it (RateSetter) in fact had an expectation, at the time of the normatively defective transfer of value, which has in fact been defeated. A hypothetical expectation is not enough.

Secondly, Mr Wood said, RateSetter expected to obtain "full rights" against Carcraft on the provision of alternative policies. He did not explain what he meant by "full rights". Looking at the witness statements filed in support of RateSetter's case, there is no evidence that RateSetter in fact bargained for or otherwise expected to receive anything from its customers in return for the provision of alternative policies. [14]

Perhaps to overcome the difficulties Swynson creates for RateSetter, Mr Wood prayed in aid the decision of the House of Lords in Lord Napier and Ettrick v. Hunter [1993] AC 713. In that case, Lord Templeman explained that an insurer who has settled an insurance claim is entitled to be subrogated to its insured's cause of action against the wrongdoer for the wrong committed (the risk of which has been insured against), that, on an application by the insurer, the court will not allow any damages awarded to the insured to be paid out without satisfying the insurer's claim and that the insurer has the benefit of a lien or charge over any damages made available by the wrongdoer, to make good the insurer's payment to its insured, because otherwise "the right of the insurer to subrogation will be useless unless equity protects that right". [15]

I am afraid that, in my view, Napier does not assist the alternative policy funders.

It may be enough to say that, contrary to Mr Wood's argument, the alternative policy funders are not "insurers in all but name" (with no direct remedy against the wrongdoer). Under section 75 of the Consumer Credit Act 1974, the third party funders are jointly and severally liable, with Carcraft, to customers and they have a direct remedy against Carcraft.

It may also be enough to say that, in this case, RateSetter relies on equitable subrogation not an insurer's right of subrogation, which is a different concept. As Lord Hoffmann explained in Banque Financière , at pages 231-2:

However, the following points may also be made.

Even if RateSetter's obligation under section 75 of the Consumer Credit Act 1974, arising out of its customers' section 75 agreements, is an insurer's obligation "in all but name", the basis of RateSetter's case in this context is not any obligation arising out of section 75 agreements or that have otherwise been owed under section 75 of the Consumer Credit Act 1974. Whilst their obligation under section 75 of the Consumer Credit Act 1974, arising out of customers' section 75 agreements, may explain why the alternative policy funders decided to procure the alternative policies, RateSetter's case in this context is based on a separate, normatively defective, arrangement; namely, the mistaken procurement of the alternative policies. A restitutionary claim would have equal success whether or not customers had the benefit of section 75 agreements.

Looked at from the insurer's perspective, the insurer's right of subrogation does not depend on a normatively defective transfer of value to its insured, whereas RateSetter's claim to be subrogated does.

RateSetter seeks to rely on the doctrine of equitable subrogation as a basis for its claim to its customers' beneficial interests in the trust fund. That claim falls squarely within the principles set out by the Supreme Court in Swynson . The principled approach demanded by Lord Sumption (see paragraph 34 of the judgment, quoted above) requires the alternative policy funders to satisfy the requirements of that case, which it is not possible to circumvent by praying in aid Napier .

For these reasons, I have concluded that the alternative policy funders are not subrogated to their customers' beneficial interests in the trust fund.

Constructive trust

RateSetter contended that the alternative policy funders' customers hold their beneficial interests in the trust fund on constructive trust for their alternative policy funders because "it would be unconscionable for the customers to receive or retain the rights and benefits [under the Declaration of Trust]" where "the customers could not reasonably have expected or believed that the [alternative policy funders] were…intending to make [a] gift to or confer a gratuitous benefit on them" by the provision of alternative policies. [16] In support of this claim, Mr Wood relied on Hughes v. Lloyd [2008] WTLR 473.

In his skeleton argument, Mr Wood said:

Mr Wood did not make any further substantive submissions in relation to this claim at the hearing. In my view, he was right not to do so.

In Hunt v. Severs [1994] AC 350, 363 Lord Bridge (with whom the other Law Lords agreed), approved the view of Lord Denning in Cunningham v. Harrison [1973] QB 942, that damages recovered by a personal injury claimant for gratuitous care are held on trust for the carer.

In Hughes , [17] counsel for the personal injury claimant's receiver contended that damages for gratuitous care are not held on trust for a carer. Judge Hodge concluded, at [27], that he was bound by Hunt to hold that damages for gratuitous care are held on trust for a carer. Because the House of Lords had not indicated the legal basis for the trust, Judge Hodge was invited to consider that issue and concluded that such a trust is a constructive trust. Inevitably, because of the law as it stands (and stood at the time of the decision), Judge Hodge concluded that that the constructive trust is an institutional constructive trust, but, he added, at [29]:

In the light of Judge Hodge's recognition that the trust of gratuitous care damages is anomalous (or "peculiar"), Hughes is no authority for the imposition of a constructive trust in the present case.

In any event, it is difficult to see how customers (as defined in the Declaration of Trust) have always held their beneficial interests in the trust fund on constructive trust. In these circumstances, it is difficult to see how the constructive trust on which RateSetter relies can be an institutional constructive trust. Of such trusts, Lewin on Trusts (19 th ed) says, at paragraph 7-011:

It is true that a constructive trust (described by Lewin as "of the second kind", to distinguish it from constructive trusts of the first kind (institutional constructive trusts)) is imposed when there has been a mistaken payment, but the constructive trust is imposed in order that the mistaken payer can recover back the mistaken payment. As Lewin explains, at paragraph 7-028:

I do not see how such a constructive trust extends, in this case, to customers' beneficial interests in the trust fund.

In Westdeutsche Landesbank Girozentrale v. Islington LBC [1996] 669, Lord Browne-Wilkinson explained, at page 716, how what has become known as a purely remedial constructive trust would operate:

However, as the Supreme Court has confirmed, more recently, in FHR European Ventures LLP v. Cedar Capital Partners LLC [2015] AC 250 at [47], English law does not recognise a purely remedial constructive trust.

It seems to me that RateSetter is actually asking me to impose purely remedial constructive trusts on customers' beneficial interests in the trust fund, which I cannot do. Whether or not that is right, on the basis of the arguments advanced on RateSetter's behalf in the application, I am not satisfied that there are constructive trusts of those beneficial interests in favour of the alternative policy funders. In particular, Hughes cannot be relied on by RateSetter to establish the existence of such trusts.

It follows therefore that none of the bases advanced by RateSetter establishes that the alternative policy funders have an interest in, or entitlement or claim to, customers' beneficial interests in the trust fund.

The liquidator is concerned (in paragraphs 22-25 of his second witness statement) that a distribution of any part of the trust fund to customers will be difficult and costly in practice; although he properly acknowledged that those concerns are not relevant in determining whether or not third party funders are entitled to any part of the trust fund. There was some discussion, at the hearing, about the procedure for any distribution to customers; in particular, whether an appropriate procedure analogous to that adopted by HH Judge Purle QC in Re Equilift Ltd [2010] BPIR 116 could be devised. In the light of the conclusions I have reached in relation to the alternative policy funders' claims, as I have indicated I will need to hear further from counsel about the appropriate distribution procedure. [18]

The PCL shares and the AIOF shares

The liquidator claims principally that Carcraft is entitled to the PCL shares and AIOF shares on the basis that the payments by Carcraft into the trust account of the PCL balances and of sums attributable to long-term DHPs obtained by AIOF's customers during the Relevant Period were by mistake and were normatively defective transfers of value and that Carcraft is subrogated, in equity, to the PCL shares and AIOF shares.

Even assuming that those payments into the trust account were mistaken and normatively defective transfers of value, [19] I have concluded that Carcraft is not entitled to be subrogated to the PCL shares or the AIOF shares. When Carcraft made those payments it did not bargain for, or otherwise expect, anything in return from its customers. Indeed, the evidence indicates that its customers were wholly ignorant, at the time, of the payments by Carcraft into the trust account and of the Declaration of Trust.

An alternative, and straight-forward, basis which Mr Cawson advanced [20] for Carcraft's claim to the PCL shares and the AIOF shares was that, because Carcraft has never completed a Customer Trust Account Schedule, the trust in favour of customers declared by clause 3 of the Declaration of Trust is too uncertain or vague to be executed, so that the PCL shares and the AIOF shares result to Carcraft. [21] I agree with Mr Cawson that, on the evidence before me, the PCL shares and the AIOF shares do result to Carcraft because the Customer Trust Account Schedule has never been completed. [22]

As Lewin explains, at paragraph 8-005:

In Vandervell v. IRC [1967] 2 AC 291 , Lord Upjohn explained, at pages 313-314:

The evidence before me is extremely limited and not entirely clear. There is no evidence before me about how Carcraft intended to complete the Customer Trust Account Schedule in relation to the PCL balances or in relation to the payments into the trust account referable to the long-term DHPs obtained by AIOF's customers. There is evidence from the liquidator, however, which suggests that these payments into the trust account were a mechanical exercise which did not in fact involve any consideration, at the time, of the special arrangements relating to PCL's customers and AIOF's customers. On the evidence, in the case of PCL's customers at least, I think it is inherently probable that, if anyone did turn their mind, at the time, to how the interests of those customers should be reflected in the Customer Trust Account Schedule, they did not intend to include more than £435 (PCL's payment) as each customer's proportion.

In the circumstances which have happened (when the Customer Trust Account Schedule has not been completed so that the Customer Proportions are not set out in it) and in the light of what I have just said in relation to Carcraft's intention, the PCL shares and the AIOF shares do result to Carcraft.

During the course of the hearing, I speculated whether the liquidator could rescind the trust in favour of PCL's and AIOF's customers on the ground of mistake. Although Mr Cawson and Mr Groves helpfully provided me with submissions on this issue, I do not need to determine the issue (which is complicated), in the light of the conclusions I have already reached.

Disposal

For the reasons I have given, I have concluded that the bases on which RateSetter claims that the alternative policy funders have an interest in, or claim or entitlement to, their customers' beneficial interests in the trust fund fail but that the PCL shares and the AIOF shares are held on resulting trusts for Carcraft.

Postscript

Immediately before I was due to hand down judgment, I learned that, after Carcraft went into liquidation, the trust account was closed by Carcraft's bankers and the liquidator opened a new bank account into which he transferred the credit balance of the trust account. The parties agreed that I should hand down judgment in the form I had intended nevertheless (that is, as above), subject to the addition of this postscript.

Annex

The Applicant, as liquidator of the…CC Automotive Group Limited ("the Company"), seeks directions pursuant to s.112 of the Insolvency Act 1986 in respect of the following questions arising in the winding up of the Company, namely:

Whether the Company holds the monies ("the Monies") standing to the credit of the "Trust Bank Account" (" TBA") as defined in clause 1.1 of a Deed of Declaration of Trust made by the Company on 23 February 2015 ("the Trust Deed") on the trusts declared by the Trust Deed and:

a. if so, how the Monies ought to be paid and applied;

b. if not, how the Monies ought to be paid and applied, and, in particular, whether the Monies ought to be applied for the benefit of the Company's liquidation estate.

Whether such proportion of the Monies as is represented by monies paid for Drive Happy Packages ("DHPs") by Customers (within the definition thereof contained in clause 1.1 of the Trust Deed) by way of cash and/or debit card (or a combination of both) should be paid and applied:

a. to the Customers in question in the proportions that they contributed thereto; or

b. in some other way, and if so, in which way.

Whether such proportion of the Monies as is represented by monies paid for DHPs by Customers using credit cards should be paid and applied:

a. to the credit card issuers in question, save to the extent that the relevant Customers have paid the credit card issuers and have not received refunds from the latter (whether as a result of the operation of s.75 of the Consumer Credit Act 1974 or otherwise), in which case, and to such extent, the appropriate proportion shall be paid to the Customer;

b. to the credit card issuers in question in any event;

c. to the Customers in any event; or

d. in some other way, and if so, in which way.

Whether such proportion of the Monies as is represented by monies paid for DHPs where the purchase price thereof is wholly funded by way of advances (paid directly to the Company) made to the relevant Customers by the third party funders as listed at the foot of this schedule ("TPFs"), should be paid and applied:

a. to the TPFs in question to the extent that the relevant Customers have not made payment to the TPFs in respect of the DHPs, and upon confirmation from the TPFs that they will not seek to pursue the relevant Customers, but to the Customers to the extent that the latter have made payments to the TPFs or such confirmation is not provided;

b. to the Customers in any event;

c. to the TPFs in any event; or

d. in some other way, and if so, in what way.

Whether such proportion of the Monies as is represented by monies credited to the TBA in respect of sales of DHPs where TPFs advanced to the customers part of, but not the full purchase price of the DHPs, but where the Company ring fenced within the TBA (by causing monies to be credited thereto) amounts representing the balance of the purchase price of the DHPs, should be paid and applied:

a. as to the proportion thereof represented by monies paid by the TPFs, to the TPFs in question to the extent that the relevant Customers have not made payment to the TPFs in respect of the DHPs, and upon confirmation from the TPFs that they will not seek to pursue the relevant Customers, but to the Customers to the extent that the latter have made payments to the TPFs or such confirmation is not provided;

b. as to the proportion represented by monies ring fenced by the Company as aforesaid, to the Applicant, as liquidator of the Company, for the benefit of the liquidation estate;

c. in the alternative to sub-paragraph (b)…above, towards making up the deficiency in respect of the Monies that ought to be held in the TBA arising from the fact that the monies standing to the credit of the TBA are less than the sums that would have stood to the credit thereof had credit not been given against monies that would otherwise have been paid into the TBA in respect of DHPs that had been cancelled prior to the terms of the Trust Deed taking effect ("the Deficiency");

d. in such other way for the benefit of the Customers, the TPFs, and/or the Company as the Court might determine; or

e. in some other way, and if so, in which way.

Whether such proportion of the Monies as is represented by monies credited to the TBA in respect of sales of DHPs where All In One Finance Limited ("AIOFL") financed customers for the purchase price of DHPs but without paying the purchase price to the Company, but where the Company ring fenced within the TBA (by causing monies to be credited thereto) amounts representing the purchase price of the DHPs, should be paid or applied:

a. to the Applicant, as liquidator of the Company, for the benefit of the liquidation estate;

b. towards the Deficiency;

c. in such other way for the benefit of the Customers, AIOFL, and/or the Company as the Court might determine; or

d. in some other way, and if so, in which way.

Whether such proportion of the Monies as is represented by transactions involving the sale of DHPs where the DHPs were cancelled within seven days of the entry into the relevant contract, but the monies standing to the credit of the TBA representing such sales were not accordingly debited to the TBA, and still stand credited thereto, ought to be paid and applied:

a. to the Applicant, as liquidator of the Company, for the benefit of the liquidation estate;

b. towards the Deficiency;

c. in such other way for the benefit of the Customers, the TPFs, and/or the Company as the Court might determine; or

d. in some other way, and if so, in which way.

Whether such proportion of the Monies as is represented by transactions involving the sale of DHPs where, although the Company caused the relevant monies to be credited to the TBA, the TPFs did not make any payment to the Company, and the relevant cars have been recovered from the Customer, ought to be paid and applied:

a. to the Applicant, as liquidator of the Company, for the benefit of the liquidation estate;

b. towards the Deficiency;

c. in such other way for the benefit of the Customers, the TPFs, and/or the Company as the Court might determine; or

d. in some other way, and if so, in which way.

In respect of monies credited to the TBA in respect of sales of DHPs where the Customers traded in an old car for a new car and transferred the residual terms of their DHPs to their new cars, whether:

a. all of the monies credited to the TBA in respect thereof should be paid and applied as if the monies in question represented the sale of a wholly new DHP effected after the Trust Deed took effect, or is to be treated as having taken effect, and therefore paid and applied in accordance, as appropriate, with such directions as are given pursuant to paragraphs 1 to 7 above; or

b. whether only such part of the monies credited to the TBA as represents new monies paid to the Company in respect of the replacement DPHs should be paid and applied in accordance, as appropriate, with such directions as are given pursuant to paragraphs 1 to 7 above;

c. in the event that the Court finds for the alternative provided for by sub-paragraph (b) above, whether the balance of the monies standing to the credit of the TBA in respect of the relevant transactions should be paid and applied:

d. in the alternative, whether the monies credited to the TBA in respect of the transactions in question should be paid and applied in some other way, and if so, in which way.

In respect of monies credited to the TBA in respect of DHPs acquired prior 24 February 2015 (i.e. prior to the "Relevant Period" as defined by the Trust Deed), and being the subject of sweeps of funds from other bank accounts of the Company affected on 18 February 2015 and 27 February 2015, whether such monies should be:

a. paid and applied in the same way that they would have been paid and applied had the DHPs in question been acquired on or after the date of the Trust Deed, and therefore in accordance with such directions as are given pursuant to paragraphs 1 to 8 above;

b. paid to the Applicant, as liquidator of the Company, for the benefit of the liquidation estate;

c. paid and applied for the benefit of the Customers, TPFs and/or the Company in such other way as the Court shall direct; or

d. paid and applied in some other way, and, if so, in which way.

Note 1 The numbers of customers in each class which I set out in this judgment are based on the liquidator’s analysis. In fact, the numbers I set out may be inaccurate because the liquidator has explained, in paragraph 34 of his first witness statement, that he has not counted those customers who obtained long-term DHPs in the last two weeks before Carcraft entered into administration, because Carcraft did not credit any sum to the trust account in those two weeks. No party has suggested that, in relation to this judgment, anything turns on that; although those customers may fall within the definition of “Customer” in the Declaration of Trust nevertheless. [Back]

Note 2 There may be a further 11 instances, in addition to the ones I refer to in this judgment, where Carcraft credited the “wrong” amount to the trust fund; thereby compounding the practical difficulties the liquidator has faced. [Back]

Note 3 Mr Cawson was instructed that all of AIOF’s relevant customers have been reimbursed but, very properly, he said that I should determine any issues in relation to AIOF’s customers on the footing that this was so, so that any comfort the liquidator gets from my decision is qualified to that extent. [Back]

Note 4 Mr Wood did not take me to any authority to support this proposition. [Back]

Note 5 Mr Wood also argued that, if the customers obtain judgments against Carcraft, those are also capable of being assigned to the alternative policy funders. The short answer to this point is that no customer has a judgment against Carcraft. Nor was it suggested that any customer might have such a judgment. In those circumstances, at present, this argument does not assist the alternative policy funders, because no judgment can have been assigned to them on which they can rely as against Carcraft or the liquidator. In his skeleton argument, Mr Wood also suggested that customers’ beneficial interests in the trust fund are specialties even if they do not amount to security interests, simply because the Declaration of Trust is a deed. I did not understand him to pursue this point in his oral submissions. I think he was right not to do so. Having regard to the (limited) purpose of the Act, which I consider further below, I agree with Mr Groves that the specialties contemplated by Section 5 are limited to specialty debts (that is, “obligations under seal securing a debt” (see R v. Williams [1942] AC 541 , 554, per Viscount Maugham); so that, ultimately, RateSetter’s case on the first Section 5 ground can only succeed if the Declaration of Trust created security. [Back]

Note 6 The only authority on the definition generally of security to which I was taken, in fact by Mr Groves, was Re Cosslett (Contractors) Ltd. [1998] Ch 495 at 508, to which I make brief further reference below. [Back]

Note 7 In Cosslett , Millett LJ said, at page 508: “There are only four kinds of consensual security known to English law: (i) pledge; (ii) contractual lien; (iii) equitable charge and (iv) mortgage. A pledge and a contractual lien both depend on the delivery of possession to the creditor. The difference between them is that in the case of a pledge the owner delivers possession to the creditor as security, whereas in the case of a lien the creditor retains possession of goods previously delivered to him for some other purpose. Neither a mortgage nor a charge depends on the delivery of possession. The difference between them is that a mortgage involves a transfer of legal or equitable ownership to the creditor, whereas an equitable charge does not.” [Back]

Note 8 Including under section 75(2) of the Consumer Credit Act 1974. [Back]

Note 9 The first reason given by Fry LJ for a right of distress not being a security may support the conclusion I have already reached – that the customer’ beneficial interests in the trust fund are not in the nature of security interests – because the beneficial interests can only be resorted to to compensate customers for non-performance of the DHPs or likely non-performance (in the case of insolvency). [Back]

Note 10 There may be other reasons why they cannot rely on Section 5. Mr Groves contended that there were, but I do not need to consider the merits of those contentions. [Back]

Note 11 Mr Wood also relied, in his skeleton argument, on Re OT Computers Ltd. [2004] Ch 317 . That case is of no assistance because, as is clear from paragraph 6 of the judgment, the administrators of that company accepted that the funder in that case was subrogated to its customers’ rights. [Back]

Note 12 The same cannot be said of the other alternative policy funders, because the detailed evidence provided by Mr Purdy during the hearing properly only extended to RateSetter’s decision-making process. As I explain below, I have concluded that RateSetter is not subrogated to its customers’ beneficial interests in the trust fund, even taking into account Mr Purdy’s evidence. It must follow that the other alternative policy funders are not subrogated to their customers’ beneficial interests, on the available evidence. [Back]

Note 13 To similar effect, see Lord Mance in Swynson at [86]. [Back]

Note 14 Banque Financière was a case in which the bank’s expectation was defeated and, as interpreted by the Supreme Court in Swynson , was a case in which the House of Lords acknowledged that a claimant can only be subrogated in equity if it is defeated in its expectation of some feature of the transaction in issue (see per Lord Sumption, in Swynson , at [24], [25], [30] and [31], and also Lord Mance at [70], [85] and [86] and Lord Neuberger at [118]). Indeed, that, to succeed, a claimant must establish a defeated expectation, is clear from Banque Financière itself; where the House of Lords considered whether the proposed remedy conferred a greater benefit on the bank than it had bargained for (see, for example, per Lord Hoffmann at page 234D-E). In the light of the conclusions I have already reached, Banque Financière does not assist RateSetter. In written submissions filed after the draft judgment was circulated, Mr Wood pointed out that, in Banque Financière , “the House of Lords was willing to grant a remedy for which the plaintiff had not bargained”. In that case, the bank was entitled to be subrogated. I have decided that the alternative policy funders are not entitled to be subrogated at all, so the court does not need to fashion a remedy for them. [Back]

Note 15 Per Lord Templeman at page 737F-G. [Back]

Note 16 See paragraph 34 of RateSetter’s statement of case. [Back]

Note 17 See paragraph 22 of the judgment. [Back]

Note 18 Although I will need to hear further from counsel, it may be appropriate for me to direct advertisements for customers’ claims and, in relation to those customers who do not respond, to order that the liquidator is permitted to distribute on the footing that those customers have disclaimed any beneficial interest they have in the trust fund. The share of the trust fund treated as having been disclaimed would then be held on a resulting trust for Carcraft. [Back]

Note 19 I have reservations about whether the evidence supports the conclusion that the payments were mistaken in the necessary sense. [Back]

Note 20 See, in particular, paragraph 62 of Mr Cawson’s skeleton argument. [Back]

Note 21 As I noted in paragraph 11 above, the liquidator deliberately limited this argument to the PCL shares and the AIOF shares. [Back]

Note 22 Although Mr Cawson suggested, thirdly, that, in the circumstances of this case, the PCL shares and the AIOF shares are subject to a Quistclose trust, it is not necessary, and I am not sure that it is helpful, or indeed correct, to view matters in that way. It is difficult to see, for example, how the Declaration of Trust only gives Carcraft (or the liquidator) a power to pay PCL’s or AIOF’s customers in the event of insolvency (rather than imposing a duty to do so, in accordance with and, at least, following the completion of a Customer Trust Account Schedule). [Back]