When a customer paid a cheque to a firm, on the assurance that the money was to be held in a separate client account, it expected that it would be safe - but the Court of Appeal has confirmed that where the money was not paid into the client account, the subsequent insolvency of the company concerned meant that the customer became an unsecured creditor, in spite of the clear breach of trust.
It is common practice in many circumstances (e.g. when buying a property) for sums to be paid into client accounts and, when this is done, the money is held on trust for the depositor. In such circumstances, if the business becomes insolvent, the client account monies are normally secure. Professional firms such as solicitors have such accounts and the security is enhanced by tight regulations governing use of client account money and by insurance arrangements.
In the case in question, a firm of boat brokers received £97,500, which was to be banked in its client account on behalf of a client. Virtually the entire sum was instead paid into the firm's general account, which meant it was mixed with other funds that were used to pay off the company's debts.
The company went into liquidation and the customer claimed that its money should have been dealt with as part of the balance on the client account.
Whilst there was no doubt that the money should have gone into the client account, it had not, as a matter of fact, done so. The Court of Appeal ruled that there was a clear claim against the company for breach of trust, but that did not mean that the customer had a right over monies that were held in the client account.
The lessons to be learned are clear. It is unwise to hand over a sum on the mere promise that it will be paid into an account held in trust for clients unless you are absolutely sure that the promise will be fulfilled and that the account is safe. In some cases, it would be advisable to pay money into a client account directly, after confirming the account details. An alternative is to set up an escrow arrangement whereby the funds are held by a trusted third party with appropriate insurance (a bank or your solicitor).
Paying deposits can be risky, especially in these troubled times. A deposit paid or a prepayment for goods or services not yet delivered is normally at risk until the goods or services have been supplied, although a deposit paid by credit card (not debit card) is normally safe.
