The Quistclose Trust

Critical Essays

William Swadling, William Swadling

• Publisher: Hart Publishing
• Year: 2004
• ISBN:
  9781847316899
• Edition: 1
• Topic: Law
• Subtopic: Estates & Trusts Law
• Index: Law

The so-called Quistclose trust probably represents the single most important application of equitable principles in commercial life. (Lord Millett in the foreword to this book).
The decision of the House of Lords in Twinsectra v Yardley has refocused attention on the Quistclose trust. Although accepted by insolvency lawyers as a convenient tool for corporate rescue, the precise basis of the trust has always been in doubt. The purpose of these essays is to explore the foundations of the trust and subject them to a searching analysis. Contributors: Robert Stevens (Oxford), 'Rolls Razor Ltd'; William Swadling (Oxford), 'Orthodoxy'; James Penner (LSE), 'Lord Millett's Analysis'; Lionel Smith (McGill), 'Understanding the Power'; Robert Chambers (Alberta), 'Restrictions on the Use of Money'; Peter Birks (Oxford), 'Retrieving Tied Money'; Ewan McKendrick (Oxford), 'Commerce'; Robert Stevens (Oxford), 'Insolvency'; George Gretton (Edinburgh), 'Scotland'.

1

Rolls Razor Ltd

ROBERT STEVENS

ROLLS RAZOR LTD was incorporated in 1921 to manufacture razors. The razor had an everlasting blade, unlike modern expendable safety razors, and a sharpening mechanism based upon a roller, from which the company took its name. It continued to manufacture them at its Cricklewood factory until the 1950s, but then fell upon hard times, partly due to the arrival on the market of electric razors. In 1958, the company attempted to diversify into washing machines, marketing a model called the Foamatic. It was not a success. Between 1954 and 1959, the company lost around £300,000. Without the intervention of John Bloom, it would probably have been put into liquidation.

John Bloom was born in the East End of London in 1931. His schooling was at Hackney Downs Grammar, which closed in 1995, having been labelled by some sections in the press as the worst school in Britain. Bloom did his national service in the RAF. After demobilisation, he tried several different business schemes. A haulage business and the selling of paraffin door to door proved unsuccessful. He then hit upon the idea of the direct selling of twin tub washing machines. Unlike modern automatic machines, twin tubs had two separate tubs set on the top of the machine, one for washing, the other for spinning. Bloom found a supplier in the Netherlands who was prepared to sell him the machines, called Electromatics, for around £23 each. He sold two versions, one for 49 guineas, and a deluxe model for 59 guineas. In order to trade, he formed the Electromatic Washing Machine Company Ltd. His success came very quickly and was founded on two factors. First, the price of his machines was very low, around half what was being charged by Hoover and Hotpoint, the market leaders. This, coupled with selling on hire purchase terms, meant that the washing machine was no longer a luxury item but affordable by the average housewife. Second, the machines were sold direct by advertising in the daily press, thereby avoiding the costs of selling through retailers. The machines were light enough to be moved and demonstrated by a single salesman. Once in the door, the salesman usually persuaded the housewife that she really needed to buy the more expensive deluxe version with heater rather than the heavily promoted ordinary model (the so called ‘switch selling’ technique).

By May 1958, Bloom had a team of sixty salesmen. An advertisement on the back page of the Daily Mirror in September 1958 led to over 8,000 enquiries. By the following September, he was selling 400 machines per week, as many as his Dutch manufacturers could supply. Bloom needed more machines. Rolls Razor could be used to assist in the manufacturing of the machines and, more importantly, the financing of getting more. Rolls Razor Ltd was a public limited company quoted on the Stock Exchange and therefore ideal for both purposes. Association with the entirely unconnected company of Rolls Royce was also seen as beneficial. In November 1960, a company called Equity and Share Company (London) Ltd acquired the entire issue of 3 million one shilling shares for £150,000. Subsequently, the assets of Electromatic were sold to Rolls Razor in return for those 3 million shares. The Stock Exchange suspended dealings in Rolls Razor shares at the beginning of 1960, but in May 1962, Rolls was allowed to offer 500,000 one shilling shares at a minimum price of 20 shillings per share through Kleinwort Benson. The fraud involved in the acquisition of Rolls Razor and its quotation on the Stock Exchange is outlined by the liquidator of Rolls Razor, Sir Kenneth Cork:¹

When Bloom sold Electromatic to Rolls Razor it was no longer the practice to value a company by its assets. What a company was worth, when it came to selling it, was a matter of multiplication of profits. So if Bloom could augment Electromatic’s profits he could demand more Rolls Razor shares for it than, to put it mildly, was reasonable. John Bloom invented a new kind of fraud. He had to get, and keep his quote on the Stock Exchange, and he needed financial capital both for himself and his company. . . . John Bloom’s profits in these opening stages were reasonably small. What did he do? He formed a new company . . . with practically no share capital, which he owned personally. Then he charged the greatest expenses to that company. For instance purchase tax, advertising, and items like that . . . The result was that when profits were disclosed in the manufacturing company they were magnified enormously; in fact the market price increased by ten times the amount that he had paid himself. Then when the operation was over, he sold sufficient of his shares at the advanced price to put the money into his own little company to pay for the expenses which had been paid on behalf of the manufacturing company!²

Bloom was made managing director of Rolls Razor in March 1960 and given complete control over production at the Cricklewood factory. Unfortunately, the Dutch suppliers of the Electromatic and a group of Bloom’s staff broke away to form their own company selling Duomatic washing machines, a brand name which survives to this day. Bloom was forced to move the bulk of his production to Cricklewood. Unfortunately, the Rolls Electromatic machines were unreliable, with a tendency to flood. The next model adopted a new name, the Starmatic, but these were prone to explode and were returned at almost the rate they were sold. Subsequent models, however, the Rolls 66, Rolls Rapide Deluxe and the Rolls Concorde, saw improvement. Sales steadily grew. Bloom reckoned that sales of 29,000 units in 1960 had more than doubled to 68,000 the following year, and by the end of 1962, had reached 101,000. At one point, Rolls Razor overtook Hotpoint to become the second largest supplier of washing machines in the United Kingdom. Richard Reader Harris, Conservative Member of Parliament for Heston and Isleworth, became Chairman in March 1961, his appointment acting as a counterbalance to the perception of Bloom as an arriviste. In 1962, Sir Isaac Wolfson’s General Guarantee Corporation agreed to provide Rolls Razor with hire purchase facilities of up to £10 million on a revolving credit basis.

Bloom was given a seven-year contract at a salary of £15,000 per annum, the use of a Rolls Royce car, and a Park Lane apartment. His wealth led to fame. In his autobiography, It’s No Sin to Make a Profit,³ he claims to have mixed with a large number of celebrities of the 1960s: Peter Ustinov, Terence Stamp, Lionel Bart, Joe Loss, Tommy Steel, Bernard Bresslaw, Billy Wright, Sean Connery, Shirley Bassey, Adam Faith, Charlie Drake, three of the Beatles, and Robert Maxwell. Bloom courted publicity. He married Anne Cass in February 1961, the wedding stage managed for maximum effect, with the cake consisting of a giant replica of the Rolls washing machine. Pictures of the bride and groom cutting the cake appeared on the front page of the Daily Mirror. Like other tycoons, he became interested in football, becoming a director of Queens Park Rangers and making a highly publicised attempt to take over the club.

Bloom’s profile was further raised by his tangential involvement in the Blue Gardenia Club murder trial. In September 1962, Harvey Holford, owner of the club, killed his wife, Christine. He was eventually convicted of manslaughter. Before the trial, he issued a writ against Bloom, alleging that he had enticed away his wife. The story was front page news in the tabloid press and cannot have enhanced Bloom’s image in the City, where he was already perceived as an upstart.

To cope with demand, the bulk of production of the washing machines was moved in March 1963 to the Swansea works of Pressed Steel Ltd. Bloom also acquired Bylock Electrical Ltd, a manufacturer of the motors in many of his products. However, orders could only be met by sacrificing quality, leaving Rolls Razor with a poor image of reliability. Automatic washing machines had started to come on to the market in the early 1960s. Bloom ordered his production engineers to develop a Rolls Razor automatic, though none had appeared by the summer of 1964. Further, Bloom’s condition that the machine be capable of being transported and demonstrated by a single salesman was to prove impractical. Bloom’s competitive edge was also fast disappearing. The major manufacturers, Hoover and Hotpoint, realised that they could not go on attempting to sell at the high prices they had charged in the past and started to sell much cheaper machines. Retailers, aware that direct selling could put them out of business, also responded with lower prices. Other players also copied Bloom’s techniques. By 1964, another direct-selling competitor was offering a fully automatic machine for 10 guineas less than Rolls Razor’s deluxe model. 1964 saw a sharp falling off of sales: 18,600 in March, 13,800 in April, and only 8,800 in June. By this stage, production was geared to over 5,000 units per week. With the enormous advertising costs involved, each machine was now being sold at a substantial loss.

In an attempt to replicate his earlier success, Bloom diversified into other ventures. Rolls Rentals Ltd was formed to promote the rental of television sets. Rolls Photographic Ltd sold home movie kits and still cameras. Most infamous of all was Rolls Tours Ltd, formed to sell package holidays to Bulgaria. The beaches of Bulgaria are indeed beautiful, but 2,000 mile trips by coach across the Iron Curtain did not prove entirely successful. A Private Eye front cover featured The Wreck of the Medusa, with the speech bubble: ‘That is the last time I book a John Bloom holiday!’⁴ Bloom even bought his own trading stamp company, the Golden Eagle, from Sir Isaac Wolfson, putting his own face, with trademark goatee beard, on the stamps.

In the April 1964 edition of the consumer magazine Which?, the twin tub machine of a competitor was severely criticised. These machines were then dumped on the market at reduced prices (39 guineas), further hitting sales of Rolls Razor’s 59 guinea machines. Rolls Razor’s machines were subsequently criticised in an edition of the BBC consumer watchdog programme, Choice. This seems to have been the catalyst for the loss of confidence in the company.⁵

By ‘the Spring of 1964 Rolls Razor was in Queer Street.’⁶ The situation was chaotic: ‘most of the paperwork was never properly executed and minutes rarely acted on in the way intended.’⁷ Unfortunately, Bloom and the other directors were in a state of denial. On May 14, 1964, the directors approved the accounts for the year ending December 31, 1963 and resolved to recommend a final dividend of 120 per cent, making a total dividend of 200 per cent for that year. On the same day, Patrick Hutber was appointed ‘financial co-ordinator’, a role with no defined duties. Hutber forecast a trading profit of £125,000 to the end of March 1964, and a total profit of £500,000 for the year. In fact, the accounts showed a loss for the first three months of £179,000, a figure that the liquidator subsequently said should have been put much higher.⁸ By June 4, 1964, Rolls Razor’s overdraft with its bank amounted to £484,000, against a limit of £250,000. Its subsidiary, Bylock Electric Ltd, was close to collapse. The bank wrote to Rolls Razor threatening to refuse to allow the continuation of the business unless the overdraft position improved by the end of the month. At a general meeting of July 2, 1964, the recommended dividend was approved, to be paid on July 24. At a board meeting the next day, Bloom told his fellow directors that Rolls Razor needed an immediate cash injection of £1.5 million and that he had so far failed to secure underwriting facilities for an issue of that size. One director, Jack Jacobs, said that unless permanent finance was forthcoming the board must recommend liquidation.

John Bloom was at the time in discussions with the financier Sir Isaac Wolfson, the mysterious Mr ‘X’ of Harman LJ’s judgment,⁹ for a loan of £1 million from his firm, General Guarantee Corporation.¹⁰ As Wolfson was making large profits through the hire purchase contracts entered into by the purchasers of Rolls Razor machines, he had an obvious interest in keeping the ailing golden goose alive for as long as possible. By a memorandum of July 9, 1964, one of the suggested conditions of the financing was that the dividend would be paid.

Quistclose Investments Ltd was a shell company through which John Bloom lent Rolls Razor the money to pay the dividend.¹¹ The source of the funds was John Bloom. Exactly where Bloom obtained the money from is uncertain, though Cork states that it was lent to Bloom by Barclays Bank.¹² This might be a mistake on his part. On 15 July, 1964, Quistclose drew a cheque for £209,719 8s 6d in favour Rolls Razor Ltd. Following a meeting between a Mr Goldbart, a director of Rolls Razor, and a representative of Barclays Bank, the cheque was presented to the bank with a covering letter stating that the money was to be paid into a No 4 ordinary dividend share account and was only to be used for the payment of the dividend. On July 16, 1964, Quistclose Ltd’s account was debited and the next day Rolls Razor’s No 4 account was credited.

Perhaps surprisingly, Bloom showed such confidence that all would be well that he took a plane to Bulgaria on 11 July, where he stayed aboard his £300,000 yacht, The Arianne, in order to make holiday arrangements for Rolls Tours. At a board meeting of Rolls Razor on 17 July, Claude Miller, a ‘financial adviser’ employed by Rolls Razor for a fee of £25,000 for five years (payable in advance), informed the board that Rolls Razor was hopelessly insolvent and that the company should be wound up voluntarily immediately. The board, without the guidance of their managing director, felt obliged to accept this advice and issued a statement to the press and to the Stock Exchange. Upon his return on 20 July, Bloom was left with no choice but to accept what had been done. That same day, Barclays informed Rolls Razor that it was exercising its right to combine all its accounts, saving for the moment the No 4 ordinary share dividend account.

On 25 July, Edward Heath, the then President of the Board of Trade, ordered the appointment of inspectors under section 165(1)(b) of the Companies Act 1948 to enquire into the affairs of Rolls Razor. Morris Finer QC (later Finer J) and Henry Benson (later Lord Benson) were appointed by the Companies Inspection Branch. They reported, after taking a great deal of evidence, on 30 November 1965. The Report was not published because of fears that it might prejudice any subsequent criminal proceedings.¹³ The Companies Investigation Branch is now part of the Department of Trade and Industry. Enquiries have led to the Report being searched for unsuccessfully. Unlike a large number of other documents concerning Rolls Razor, the Report is not held at the Public Records Office.

The accountants Cork Gully were approached to produce a Statement of Affairs for submission to a creditors’ meeting. They reported a total deficit of more than £4 million. Barclays Bank were reasonably protected for, whilst owed £455,000, they had taken a fixed charge over the Cricklewood factory, then valued at £427,000.¹⁴ The position of Rolls Razor’s team of salesmen was considerably less happy.¹⁵ Many were owed a substantial proportion of the commission they had earned as Rolls Razor had ‘retained’ these sums as security against default by the salesmen. They were not entitled to preferential treatment in the winding up as they were independent contractors. As the bank was largely secured, the major losers from...