Swift and another v Dairywise Farms Ltd and others

Company lending to farmers on security of milk quotas – Borrowers required to transfer quotas to a sister company – Company in liquidation – Liquidators seeking to compel sister company to deal with quotas at their direction – Liquidators making similar application against landlord of sister company – Whether quotas capable of forming subject of trust The applicants were the joint liquidators of Dairywise Ltd (the company), which went into creditors’ voluntary liquidation in June 1999. The company provided loans to farmers on the security of milk quotas, the founder (R) being, at all material times, aware that a quota had to be attached to a holding of appropriate land called a “euroholding”. Since the company did not have a euroholding, a sister company, Dairywise Farms Ltd (Farms Ltd), which did have such a holding (the land), was used as a vehicle for holding the quotas to be offered as security. Farms Ltd held the land under a lease (the Farms lease) granted by the trustees of a pension fund established for the benefit of R and his family (the freeholders). The Farms lease prohibited Farms Ltd from dealing with any milk quota, the land or any part thereof without the prior consent of the freeholders. Under the company’s terms of business, each borrower had to enter into one agreement with the company (the company agreement) and another with Farms Ltd (the Farms agreement). The company agreement set out the terms of the loan, which included a requirement that security be furnished by the simultaneous execution of the Farms agreement, the terms of which would also form part of the company agreement. By the company agreement, the company undertook to “assign back” the quotas in the circumstances specified in the Farms agreement, which took the form of a short-term lease from the borrower to Farms Ltd (described as the “tenant farmer”). Clause 4 of the lease required the borrower (described as “the landlord”) to transfer the quotas to Farms Ltd as security for the purposes of the company agreement. The clause further declared that, upon registration by the intervention board, the transferred quotas would be amalgamated with quotas already registered in the name of Farms Ltd. At the date of liquidation, the company’s only significant assets were outstanding loans of more than £2m. However, the liquidators were unable to deal with the redemption or realisation of the relevant securities unless: (a) Farms Ltd disposed of the quotas as and when directed by the liquidators; and (b) the freeholders (the fourth to seventh respondents) gave all necessary consents to such disposals, and refrained from dealing with the land in a manner calculated to prevent such disposals. In July 1999 the liquidators, claiming that Farms Ltd held those securities as a bare trustee for the company, sought various interim orders with a view to securing the co-operation of the respondents. Disputing the existence of a trust, the respondents maintained that: (i) quota could not be the subject of a trust; (ii) the contractual documents were inconsistent with an intention to create a trust; and (iii) the arrangements for pooling the quotas deprived the alleged trust of certainty of subject-matter. Held: The liquidators were entitled to the orders sought. 1. Since the Farms agreement formed part of the company agreement, there could be no doubt, having regard to the assign-back provisions, that the quotas were regarded by all parties as being under the control of the company. The quotas were, so to speak, parked with Farms Ltd. The respondents’ objections could not stand. Quotas had commercial value and legal effect. That limitations were placed on how quotas might be held or conveyed was no reason for refusing to impose a trust, there being a complete analogy with a trust of a non-assignable contract: see Don King Productions v Warren [1999] 2 All ER 218, distinguishing Faulks v Faulks [1992] 1 EGLR 9. See, to like effect, Official Receiver v Environmental Agency unreported 14 July 1999, holding that a waste-management licence was “property” within the meaning of section 436 of the Insolvency Act 1986. 2. The presence of a forfeiture provision in the contract documents did not preclude an intention to create a trust in favour of the company, as the forfeiture only operated between the defaulting borrower and Farms Ltd, which would continue to hold the security on trust for the company. Nor was any uncertainty created by the pooling arrangements, as the situation was subject to the usual equitable tracing rule, which applied where a trustee mixed trust property with his own and then abstracted part of the mixture. Nor could Farms Ltd deny its trustee status by describing itself as a banker of quotas for the company. 3. The freeholders, knowing at all times that Farms Ltd was acquiring trust property and that the lending system depended upon their co-operation, never complained of any breach of the tenancy agreement when Farms Ltd dealt with the quotas and land in accordance with the farms agreement. Accordingly, for the purposes of interim relief, there was a sufficiently strong case for claiming that equity would act against the freeholders, pursuant to the same principle by which it acted against those who received trust property or assisted others to do so. Having knowingly allowed the borrowers and the lending company, in effect, to attach quotas to their land, they were, for practical purposes, in knowing receipt of it. The liquidators’ case could also be founded upon estoppel. Stephen Davies (instructed by Bond Pearce, of Bristol) appeared for the applicants; Paul Teverson (instructed by Davies & Partners, of Almondsbury) appeared for the first to third respondents; Kim Lewison QC (instructed by Burges Salmon, of Bristol) appeared for the fourth to seventh respondents. Alan Cooklin, barrister