CL-2025-000062 - [2025] EWHC 1506 (Comm)

For this argument it is worth briefly revisiting the leading authority of Twinsectra v Yardley[2002] UKHL 12; [2002] 2 AC 164 (HL) [13], [81], [100]:

“the Quistclose trust is a simple commercial arrangement akin (as Professor Bridge observes) to a retention of title clause (though with a different object) which enables the borrower to have recourse to the lender's money for a particular purpose without entrenching on the lender's property rights more than necessary to enable the purpose to be achieved. The money remains the property of the lender unless and until it is applied in accordance with his directions, and insofar as it is not so applied it must be returned to him….

…[I] hold the Quistclose trust to be an entirely orthodox example of the kind of default trust known as a resulting trust. The lender pays the money to the borrower by way of loan, but he does not part with the entire beneficial interest in the money, and in so far as he does not it is held on a resulting trust for the lender from the outset.”

As regards the Quistclose trust case Eraaya submitted that there was no hint of this supposed deal with GLAS anywhere in the Second Settlement Agency Agreement – no suggestion that GLAS holds monies on trust for anyone, including any of the Bondholders. It also submits that the wording in the Offering Circular both as to the pledge and suggesting a degree of flexibility in use cuts against this. It further points to the Use of Proceeds section which goes on to state: “pending the use of the net proceeds from the offering for the purposes described above, [Eraaya] intends to invest the net proceeds in the instruments as permitted by applicable laws or regulations issued by [the Reserve Bank of India (RBI)] and the Govt. of India”. Eraaya submits that this is “wholly inconsistent” with the Unutilised Proceeds being held on trust, because it shows Eraaya was entitled to use the money for its own purposes.

Again, I am persuaded that the contrary is arguable. The passages on which Eraaya relies have to be read together with the passages which emphasise repeatedly the overall purpose of fund gathering: “the aggregate net proceeds received by [Eraaya] from the offer will be used towards the acquisition of 100% Equity of Ebix”. The Unutilised Proceeds were therefore to be used for that specified purpose and were not to be at Eraaya’s free disposal. It is very strongly arguable that repaying the (related party, and apparently uncommercial) VLL Loan at a time when Eraaya had already acquired Ebix (albeit only 97.58%, rather than 100%, of its shares), would not be use of the Unutilised Proceeds “towards the acquisition of 100% Equity of Ebix” as contemplated by the Offering Circular.

The pledge/flexibility/investment passages upon which Eraaya relied are at least arguably best read as a recognition that purchase might not be immediate and that the proceeds could be invested until such time as they are used for “the acquisition of 100% Equity of Ebix”. Mr Mammen provided some evidence that Eraaya and Elara initially envisaged there would be an interval between issuance and completion of the Ebix transaction, during which interval the proceeds would need to be deposited with an Indian bank or in short term treasuries. Further as to the pledge the evidence as to the redrafting of Clause 3.4 does give rise to an argument that for the Second Bond Issue prospective investors were not satisfied that the obligation to pledge was enough, without further protection.

This is also consistent with the Subscription Agreement entered into by Oyster Bay in connection with the First Bond Issue. Clause 5.1 of that agreement provides that Eraaya shall use the proceeds “towards the acquisition of 100% Equity of [Ebix] and other eligible purposes”. Other “eligible purposes” are to be determined in accordance with clause 7.5 (titled “Use of Proceeds”), which provides: “In the event that the Issuer intends to use the Proceeds for use other than what is stated in the [T&Cs], it will require prior written consent of the Bondholder”.

Thus it is possible that GLAS holds the Unutilised Proceeds on trust for the benefit of the Bondholders, subject to a power to apply them finally exclusively “towards the acquisition of 100% Equity of [Ebix]” and in the interim “in the instruments as permitted by applicable laws or regulations issued by [the Reserve Bank of India (RBI)] and the Govt. of India.” - or as otherwise authorised by the Bondholders. The situation which arose – a surplus after purchase - is not explicitly dealt with by the Offering Circular. The reality is that Quistclose trusts arise precisely to fill such gaps.

As for the suggestion that the purpose posited could not work because GLAS was never going to be a purchaser of shares in Ebix, Eraaya submitted that if one transposed the Lewin definition of Quistclose trusts (Footnote: ¹) into this situation it would read thus: “A Quistclose trust may arise where the Bondholders transfer money ... to GLAS so that GLAS holds the monies on trust for the Bondholders but subject to a power for GLAS to apply the money or property for a stated purpose”. This, it is said, would require GLAS to be the purchaser, which was never due to happen.

This is cleverly put, but ignores the fact that the Lewin definition is not comprehensive or exclusive. This was a case where a degree of elaboration of the structure was imposed by the interposition of the Settlement Agency Agreement and GLAS – and the new Clause 3.4. The latter would, if Elara/Bondholders are right, be the safeguard and means of directing the funds into the stated purpose.