How Trust Law can protect you in the event of a customer going bust

Would you like cashback?

Bored with waiting in line for a few pence in the pound? When a customer goes bust, one way to push to the front of the queue is to prove that he doesn’t just owe you money, he holds it in trust for you. Perhaps easier said than done – but still entirely possible if you know your way around basic trust law and have drafted the documents properly.

If, say, you sell insurance policies through a broker or agent, you could make sure that all premiums are held in trust for you if the broker goes bust.

First, you need some trust wording in your contract with the broker - nothing too fancy, just an acknowledgement that premiums are held in trust on your behalf and will be kept separate from other money. (You also need a broker who will comply with this wording.)

Then – the icing on the cake – make sure you tell the broker’s bank that the money in the account is held in trust for you to stop them setting-off money in the account against an overdraft.

But this isn’t the only way in which trust law can help when things go wrong. If an employee has been siphoning-off company cash (it’s more common than you think), trust law can sometimes be used to recover it.

First, look to see where the money was paid (perhaps to a bank, a stockbroker or a spread-betting company) and then ask yourself if the recipients should have had suspicions about where the money came from. If large amounts have been transferred, should it have struck them as unusual and needing to be checked? Did they know what salary your employee (their client) was on? Were the payments excessive for someone of his means? If so, ask a judge for pre-action disclosure – it could reveal internal emails and other evidence where the transactions have been identified and commented on as unusual account activity.

If the recipient has thought it worthy of reporting to the National Criminal Intelligence Service as a suspicious transaction, that report would also be discloseable. If you can then show that he continued to accept payments after becoming suspicious, it is likely that (as we lawyers say) his “conscience will have been affected” and you will have a claim. Lawyers call it knowing receipt – you might just regard it as cashback.

This article first appeared in our Litigation Annual Review January 2006. To view this publication, please click here to open a new window.