Quistclose trust

From Wikipedia, the free encyclopedia

You have new messages (last change).

A Quistclose trust is a specific type of trust in common law jurisdictions which arises in relation to sums which are advanced by way of credit to a person for the that person's own use, but for a specific purpose. If the trust fails (because the purpose is not, or cannot, be fulfilled), then the sums become subject to a resulting trust in favour of the person who originally advanced the credit, and the person to whom the sums were advanced holds them as trustee.

Contents

[edit] History

The trust takes its name from the decision of House of Lords in Barclays Bank v Quistclose Investments (sub nom Quistclose Investments v Rolls Razor) [1970] AC 567. The facts of the case are relatively straightforward. Rolls Razor was deeply indebted to Barclays. It needed further additional sums to be able to pay a dividend which it had declared. Rolls Razor borrowed funds from Quistclose in order to satisfy the dividend declared. The terms of the loan were such that the funds would only be used for the sole purpose of paying the dividend. The loan was paid into an account with Barclays, and Barclays was given notice of the arrangement.

However, between the time that the loan was advanced and the dividend being paid, Rolls Razor went into liquidation. Barclays Bank claimed that they were entitled to exercise a set-off of the money in the account against the debts that Rolls Razor owed with respect of Barclays. Quistclose claimed that the moneys had to be returned to them, as the purpose for which they had been lent had now failed and were incapable of being fulfilled (as Rolls Razor was now in liquidation).

The House of Lords (with the leading judgment being given by Lord Wilberforce) unanimously held that the money was held by Rolls Razor on trust for the payment of the dividends; that purpose having failed, the money was held on trust for Quistclose. The fact that the transaction was a loan did not exclude the implication of a trust. The legal rights (to call for repayment) and equitable rights (to claim title) could co-exist. Barclays, having notice of the trust, could not retain the money as against Quistclose. Similarly, the liquidator of Rolls Razor could not claim title to the money, as the assets did not form part the beneficial estate of Rolls Razor.

[edit] Analysis

The conceptual analysis underpinning Quistclose trusts was the source of some debate. Shortly after the decision, an article appeared in the Law Quarterly Review[1] written by Peter Millett QC suggesting how the traditional trust need for certainty of objects (beneficiary) could be squared with the decision of the House of Lords, and the refusal to accept new categories of purpose trust in equity.

Many years later, the House of Lords was called upon to review the law as it related to Quistclose trusts in Twinsectra v Yardley [2002] UKHL 12, and the leading judgment was giving by Lord Millett, whose judicial analysis, unsurprisingly, closely mirrored that which he suggested twenty years previously.

The key issue, according to Lord Millett, in upholding the trust concept is ascertaining where the beneficial interest in the money lies. Lord Millett suggests that there are four possible answers: (1) the lender, (2) the borrower, (3) the ultimate purpose, and (4) no-one, in the sense that the beneficial interest remains "in suspense". Lord Millett then analysed all of the foregoing, and determined that the beneficial interest remains with the lender, until the purpose for which the funds are lent is fulfilled. The only other reasoned decision was Lord Hoffman, who agreed with Lord Millett.

Some have suggested that this means a Quistclose trust, whilst it is indubitably a trust, it would not be a resulting trust as the beneficial interest never 'results back' to the lender; it was with him all the time.

[edit] Requirements

It is sometimes argued that Quistclose trusts are not a separate species of trust at all, but merely a simple trust, which has certain characteristics. However, Quistclose trusts are often regarded as somewhat special and distinct. The English Court of Appeal in Twinsectra v Yardley [1999] Lloyd's Rep 438 suggested, obiter dictum, was in fact a 'quasi-trust' which is not required to satisfy "the usually strict requirements for a valid trust so far as 'certainty of object[s]' is concerned. However, the House of Lords, on appeal, declined to endorse those comments.

[edit] Purpose

However, what differentiates the Quistclose trust from other trusts, is the existence of the specific purpose for which the sums on credit must be applied, and the failure of which gives rise to the trust. It must also be clear that, if that specific purpose fails, the sums will revert to the person who originally advanced them.

The situations in which Quistclose trusts have been upheld are varied. They have been upheld in cases of:

  • sums advanced for the specific payment of a divided;[2]
  • sums advanced for the specific payment of a creditor;[3]
  • sums advanced on the basis of an undertaking for a specific project;[4] and
  • advance payments made on credit for the purchase of specific goods.[5]

One issue that has escaped notice in the judicial consideration of Quistclose trusts to date is how narrowly the purpose has to be defined. Suggestions have been made to the effect that the general law in relation to powers would apply (such that if the purpose is sufficiently well defined to be a power, a Quistclose trust may arise), but others have argued that to take tests from one branch of the law and apply it to another may not be appropriate. The lower courts in Twinsectra suggested that the purpose must be sufficiently well defined, but Lord Millett distanced himself from that position, claiming that "uncertainty works in favour of the lender, not the borrower."[6]

[edit] Certainty of intention

In Twinsectra v Yardley, Lord Millett spent some time considering the necessary intention. It has long been settled law that a person need not have a specific intention to create an express trust, so long as the court can determine from the person's intention that a beneficial entitlement should be conferred which the law (or equity) will enforce.[7] So in Twinsectra where there was a solicitor's undertaking that the money should only be used for one purpose, this was held to be sufficient intent. In Quistclose itself and in Carreras Rothmans v Freeman Mathews Treasure where loans were made for a specific purpose, this may also amount to sufficient intention.[8] Where a loan is advanced for the borrower to use as he will, no Quistclose trust can arise.

[edit] Criticisms

In the early stages of development of the Quistclose trust, it was suggested that the concept was unambiguously good. In Re Kayford it was suggested that a segregated account for customers' money to be placed in to guard against the insolvency of the company was a proper and responsible thing to do.

However, more recently criticism has been mounted that giving a proprietary claim to a lender which enables the lender to reclaim the loan ahead of unsecured creditors has the effect of putting the lender in the position of a secured creditor, but without the need to register any security interest against the borrower (and thus meaning that other creditors would not be aware of the preferential status of the lender's claim).

Quistclose trusts still remain relatively uncommon, and as yet there has been no clamour for legislation or regulation (Quistclose trusts were not even addressed under English law when the insolvency law was last revised in the Enterprise Act 2002). However, should the courts start finding them with increasing frequency,[9] it may be that regulation, or judicial revision, follows.

[edit] References

[edit] Footnotes

  1. ^ 101 (1985) LQR 269
  2. ^ Barclays Bank v Quistclose Investments
  3. ^ Carreras Rothmans v Freeman Mathews Treasure [1985] Ch 207
  4. ^ Twinsectra v Yardley
  5. ^ Re Kayford (in liquidation) [1975] 1 WLR 279 and Re EVTR Ltd. [1987] BCLC 647
  6. ^ Implying that a lack of certainty over the purpose makes it more likely that a trust will be found in favour of the lender.
  7. ^ The most commonly cited example is Paul v Constance [1977] 1 WLR 527, where one party said "this money is as much yours as mine", and this was held to amount to a trust at law.
  8. ^ Not by coincidence, shortly after Quistclose bank loan documents in England began to include clauses covenanted to use the loan for a stated purpose.
  9. ^ For example, in the way that judicial findings of undue influence became prevalent in mortgage lending.
Retrieved from "http://en.wikipedia.org../../../q/u/i/Quistclose_trust.html"