Carreras Rothmans Ltd v Freeman Mathews Treasure Ltd [1985] ...

Facts

• Carreras Rothmans Ltd, a tobacco company, advanced funds to Freeman Mathews Treasure Ltd, an advertising agency.
• The funds were provided for the specific purpose of paying third-party creditors.
• Freeman Mathews Treasure subsequently went into liquidation.
• The central dispute was whether the advanced funds were held on a Quistclose trust for Carreras Rothmans or formed part of Freeman Mathews Treasure's general assets available to the liquidator.
• The court examined the agreement terms and evidence of intention between the parties, focusing on whether there was a mutual intention to create a trust for the specific purpose.

Issues

1. Whether the funds advanced by Carreras Rothmans to Freeman Mathews Treasure for paying creditors constituted a Quistclose trust.
2. Whether there was a mutual intention between the parties that the funds should not form part of Freeman Mathews Treasure’s general assets.
3. How the distinction between a Quistclose trust and a mere contractual obligation should be drawn in such financial arrangements.
4. What implications the arrangement and court’s decision have for the protection of creditors and commercial transaction practices.

Decision

• The court held that the arrangement satisfied the requirements for a Quistclose trust.
• There was clear evidence that the funds were advanced for a specific purpose, and that both parties had a mutual intention not to include the funds in Freeman Mathews Treasure's general assets.
• As a result, the funds were protected from the claims of the liquidator and other unsecured creditors.
• The decision emphasized the necessity for clear and precise agreement terms to establish such a trust in commercial transactions.

Legal Principles

• A Quistclose trust arises where funds are advanced for a specific and exclusive purpose, and mutual intention exists that the money does not form part of the recipient's general assets.
• The creation of a Quistclose trust requires both a clearly defined purpose and mutual consent from lender and borrower regarding the restriction of the use of funds.
• Distinction is made between a proprietary interest arising through a trust and a simple contractual obligation to use funds in a certain way, with the former offering protection against the borrower's insolvency.
• Clear evidence, including express agreement terms and conduct of the parties, is essential in establishing mutual intention sufficient for a Quistclose trust.

Conclusion

Carreras Rothmans v Freeman Mathews Treasure confirmed that, in commercial arrangements where money is advanced for a defined purpose and accompanied by a mutual intention not to mix the funds with general assets, a Quistclose trust arises, protecting the lender’s interest against the borrower’s insolvency provided the arrangement is properly documented and intention is clear.