Follow The Money

By Vijay Bange and Tanya Chadha

  • Injunction
  • Constructive trust and / or Quistclose trust.

Deluxe property Holdings Ltd (a company registered under the laws of the British Virgin Islands) v (1) SCL Construction Limited & (2) HMRC [2020] EWHC 2865 (TCC)

Cash flow is the lifeblood of the construction industry.  This phrase, coined by Lord Denning MR, and cited relentlessly in the construction industry still holds true. In times of recession, following the cash and preserving the funds that are in dispute is crucial. There is no point in spending time and money pursuing a dispute to fight over a pot of cash that is at real risk of being dissipated.

Seeking and obtaining an injunction is a remedy that parties can avail themselves of in circumstances where damages are not an adequate remedy. Injunctions were previously commonplace in the construction sector, particularly in circumstances where an Employer sought to use retention monies for a purpose other than permitted.  Injunctions in construction have however become far less popular as the rules in which an injunction can be ordered have become more stringent.

The Deluxe case looks at the circumstances of obtaining an injunction in the context of a potential constructive trust and / or Quistclose trust.  A Quistclose trust arises in circumstances where a transfer is made to the recipient for a specific purpose only and therefore cannot be used for any other purpose.

In Deluxe:

  • Deluxe engaged SCL to undertake building works in relation to a student accommodation project
  • Deluxe made interim payments to SCL which included 20% VAT.  SCL paid, or accounted for, that 20% VAT to HMRC.  It subsequently became clear that most of the works carried out were in fact zero VAT rated
  • SCL made a claim to HMRC for return of the overpaid VAT under Section 80 of the value Added Tax Act 1994 (the S.80 Claim).  The S.80 Claim included a signed undertaking from SCL’s Director that it would reimburse Deluxe (and any other named parties) in cash or by cheque all of the amount credited by HMRC without deduction
  • The parties fell into dispute following termination of the contract and Deluxe notified SCL of its intention to recover the overpaid VAT from SCL
  • Deluxe argued that it was entitled to recover the VAT from SCL either expressly under the contract or pursuant to an implied term.  In the alternative, Deluxe argued that it had a proprietary right to the S.80 Claim by way of constructive trust.  More specifically, Deluxe said that SCL’s undertaking meant that SCL held the proceeds of the S.80 Claim on a Quistclose trust for the benefit of Deluxe such that any funds received from HMRC could only be used to repay Deluxe and not for any other purpose
  • SCL subsequently withdrew the S.80 Claim even though HMRC had approved it.  Instead, SCL notified HMRC that it now intended to deal with its over payment of VAT by way of its VAT return instead, presumably by way of acredit against future tax liabilities
  • This caused Deluxe some concern, the inference being that SCL had no intention of reimbursing Deluxe at all and that the funds received from HMRC would be dissipated
  • Deluxe issued Part 8 proceedings, and sought a declaration to the effect that the S.80 Claim, and any sums already paid or future sums to be paid, by HMRC to SCL were subject to a constructive or Quistclose trust in Deluxe’s favour
  • Deluxe also sought an injunction that SCL paid its solicitors the amount received from HMRC in respect of the overpaid VAT
  • The Judge found in Deluxe’s favour on both points.  There was “a good arguable case” that a constructive or Quistclose trust had arisen in respect of the S.80 Claim and any funds realised as a result.  Given SCL’s precarious financial position, the Judge determined that damages would not be an adequate remedy for Deluxe and agreed to continue the previously ordered injunction.

The existence of a constructive / Quistclose trust is interesting and is a salient reminder that there may well be circumstances where monies are paid by one party or held by another that give rise to a trust relationship. In such circumstances, if there is concern that monies may be dissipated, added protection of monies being paid into a third party or escrow account will go a long way to alleviate the risk.

Following the money, and then protecting that money from dissipation, is crucial and may require a party to take decisive action. In a less obvious conundrum, it is not uncommon for companies to pass money through to holding companies higher in the corporate group structure. Can there potentially be instances where monies paid through various company structures, with a view to avoid liability or to dissipate assets, give rise to a trust scenario?  It is certainly worth considering in situations where the pot of gold at the end of the rainbow may vanish and the fruits of a lengthy and expensive dispute cannot be realised.

© 2009- Duane Morris LLP. Duane Morris is a registered service mark of Duane Morris LLP.

The opinions expressed on this blog are those of the author and are not to be construed as legal advice.

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