Chapter 1: Introduction

Question 1

1. What is a trust?

Answer 1

A trust is an equitable duty relating to property. It is a very useful mechanism for dividing the
ownership and management of property. There is no single definition of a trust but there are a number of essential features required for a trust to exist. Crucially, there are two key components:
(a) The property component
(b) The obligation component

Question 1

1.1 Property component

Answer 1

Property is an essential requirement for a trust. Lord Browne-Wilkinson said that it is a ‘fundamental’ proposition of trusts law that ‘there must be identifiable trust property’. The proposition is ‘fundamental’ because a trust is an equitable duty
relating to property.

Question 2

1.1.1 Legal interest

Answer 2

A trustee holds a property ‘on trust’ for the beneficiary. Typically, the trustee has a legal interest in the trust property. This means that, as far as the common law is concerned, the trustee is the owner. This gives the trustee all the rights of legal ownership. They can deal with the property as they wish.

Question 3

1.1.2 Equitable interest

Answer 3

Equity recognises another proprietary interest, that of the beneficiary. The beneficiary’s equitable interest is a property right, just like that of the trustee. This means that the beneficiary can, for
example, give away or sell their interest under the trust. What they can’t do is deal with the legal
interest, because that is held by the trustee. Thus the ownership of the property is split. The trustee has the formal, legal interest in the property and is responsible for managing that
property. The beneficiary has the equitable and beneficial interest in that property. They are, in effect the true owner.

Question 4

1.1.3 What can be held on trust?

Answer 4

Almost every asset or right can be held on trust. As Lord Shaw noted in Lord Strathcona Steamship
Co Ltd v Dominion Coal Company Ltd [1926] AC 108, 124: The scope of the trusts recognised in equity is unlimited. There can be a trust of a chattel or of a chose in action, or of a right or obligation under an ordinary legal contract, just as much as
a trust of land.

Question 5

Chattel

Answer 5

A chattel is a tangible item (other than land). Cars, computers, books, jewellery and clothes are obvious examples.

Question 6

Chose in action

Answer 6

A chose in action is an intangible right such as a debt (eg an amount credited to a bank account) or a company share (giving the shareholder rights such as voting rights and the right to receive dividends).

Question 7

1.1.4 Changes to trust property

Answer 7

A trust ceases to exist if, without any fault on the part of the trustee, the trust property is destroyed or consumed. In the absence of any trust property, there is nothing to which a trust can attach. In fact, it is common for the trust property to change without any breach occurring. In many trusts, the trust property fluctuates. For example, in a standard family trust, a principal
function of the trustee is to maximise the financial return from the trust property. This involves the
trustee periodically reviewing the trust property and deciding whether to retain it or to sell and invest the proceeds in other property. Selling the property does not destroy the trust. It simply changes the trust assets

Question 8

1.1.4 Changes to trust property

Answer 8

In contrast, if the trustee is at fault, they will be personally liable to restore the trust property (using their own funds). If the trustee cannot replace the trust property, they will need to pay compensation instead, and this compensation will be subject to the trust. (In such cases it is likely that a new trustee will be appointed.) This brings us to the obligation component of the trust.

Question 9

1.2 Obligation component

Answer 9

A trust must have a trustee. A trustee owns the trust property and has all the rights and powers of legal ownership. But a trustee must exercise those rights and powers for the benefit of the beneficiary.

Question 10

1.2.1 Trustee duties

Answer 10

The trustee owes equitable obligations to the beneficiary. Although the trustee has the legal right to deal with the property as they choose, equity restricts that right by placing duties upon the
trustee. The trustee is required to exercise their legal rights of ownership for the benefit of the
beneficiary. And if the trustee does not act in accordance with those obligations, the beneficiary has personal rights against the trustee. In other words, the beneficiary can sue the trustee for breach of trust.

Question 11

1.2.1 Trustee duties

Answer 11

The functions and duties of trustees are not unitary. They can and do vary. The function and duty
of any specific trustee is determined by the nature of the trust they are administering. In some cases (for example, a family trust) the trustee has an enduring asset management/investment
function and is subject to various duties corresponding to that function.

Question 12

1.2.1 Trustee duties

Answer 12

In other cases (for example, a trust of intermediated securities) the trustee’s function may be no
more extensive than complying with the beneficiary’s instructions in relation to the trust property.
The role of trustee is a voluntary office and is typically unpaid although professional trustees are
entitled to remuneration.

Question 13

1.2.2 Objects

Answer 13

A trust must have a beneficiary or be for a permitted purpose. The beneficiaries or purposes of trusts are known as the trust objects.
A purpose trust is a trust for the promotion or realisation of a purpose (in other words, a trust
without a beneficiary). It is not possible to create a trust for every purpose. It is only possible to
create a trust for a permitted purpose. Charitable purposes are the principal category of permitted purpose trusts. There is also a small (closed) category of non-charitable purpose trusts. Purpose trusts are considered in detail in the chapter on ‘Purpose trusts’.

Question 14

1.2.3 Can a trustee also be a beneficiary?

Answer 14

The basic duty of a trustee is to hold or apply trust property for the benefit of the beneficiary. As
Sir Joseph Napier said in South Australian Insurance Co v Randell [1869] LR 3 PC 101, 110: ‘An
indelible incident of trust property is that a trustee can never make use of it for his own benefit.’ Thus, a person is not a trustee of property which they have the absolute right to use for their own benefit.

Question 15

1.2.3 Can a trustee also be a beneficiary?

Answer 15

Note that a trustee can be one of the beneficiaries of a trust. They will still owe duties to the other beneficiaries so cannot simply use the trust fund for their own benefit. This would be a breach of trust. The powers, duties and liability of trustees are covered in detail in later chapters of this Workbook.

Question 16

1.3 Key case law

Key case: Customs and Excise Commissioners v Richmond Theatre Management Ltd [1995] STC 257

Answer 16

Facts: A theatre company sold advance tickets for performances. The terms and conditions stated
that the company would hold the purchase money ‘upon trust’ for the purchaser until the performance took place and would return the money if it was cancelled. There were no restrictions on how the company could use that money and it was not required to account to the customers.

Held: The company was not a trustee. Its ability to freely use the money for its own purposes was
incompatible with a trust.

Question 17

Key case: Re Bond Worth [1980] Ch 230

Answer 17

The ability of a company to use fibres in its manufacturing process was inconsistent with the company holding the fibres on trust for the unpaid seller of them. Slade J stated (at 261) that South Australian Insurance Co and other cases were:
clear authority for the proposition that, where an alleged trustee has the right to mix tangible assets or moneys with his own other assets or moneys and to deal with them as he pleases, this is incompatible with the existence of a presently subsisting [trust] in regard to such particular assets or money.

Question 18

2. The development of trusts law

2.1 History of the trust

Answer 18

Throughout the 18th and 19th centuries the paradigmatic trust was the family trust, which enabled a person to make provision for successive generations of their family. A person would make a will giving property to trustees and instructing them on how it should be applied. In a standard case, trustees were instructed to distribute income to the deceased’s spouse and (after
the spouse’s death) to the deceased’s children and (after the children’s deaths) to distribute the capital to the deceased’s grandchildren.

Question 19

2.1 History of the trust

Answer 19

Imagine that the trust property was land. How did the trust operate?
Ordinarily trustees would be given legal title to the land by the deceased and they would enjoy all the powers of legal ownership. In the exercise of those powers, the trustees would create tenancies and receive rent from the tenants. The trustees would pay the rent (income) to the deceased’s spouse and then (after the spouse’s death) the deceased’s children. After the children’s deaths the trustees would transfer the
land (capital) to the deceased’s grandchildren. Then the trust would cease to exist.

Question 20

2.2 Expansion of trusts to other contexts

Answer 20

The family trust illustrates two important attributes of a trust. First, a trust allows the separation of
the powers of the legal owner (held by trustees) from the benefits resulting from the exercise of
those powers (enjoyed by beneficiaries). Secondly, a trust can confer different types of rights on
different beneficiaries at different times. The family trust is still in common use today. But trusts
have expanded beyond this paradigmatic model.

Question 21

2.2 Expansion of trusts to other contexts

Answer 21

Today, trusts are used in many contexts and for various reasons. To take just one commercial example, the market in listed securities is underpinned by the trust. Most listed securities are in a ‘dematerialised’ or ‘uncertificated’ form. This means that legal ownership of UK-listed securities requires registration in an electronic register called CREST. Securities are registered in the names of CREST members (usually banks or other financial institutions). The members are the legal owners of securities registered in their names. But they generally acquire and hold the securities for the benefit of their clients. In other words, they hold them on trust.

Question 22

3. Benefits of using trusts

3.1 Separation of ownership and management of property

Answer 22

This is something we have touched on already. There are many reasons why you might want to have someone other than the beneficial owner managing property. One simple reason is that they don’t have the time to manage it themselves.

Question 23

3.2 Expertise

Answer 23

Another reason is that someone else may be an expert in the management of that sort of property
eg a fund manager.

Question 24

3.3 Protection

Answer 24

Another reason is that the beneficial owner may be incapable of managing their own property. For example, they may be a minor who is unable to look after the property themselves (or, in some cases, even hold legal title to that property). And this rationale extends beyond minors to other individuals who, for some reason, are not able to manage the property themselves.

Question 25

3.4 Flexibility

Answer 25

Flexibility is another key reason why you might want property to be held on trust. It is possible to create interests in equity that are not recognised at law. You can divide a piece of property up in different ways, giving different beneficiaries different sorts of interests in that property. Trusts can also be used to give people conditional interests in property, or give someone (perhaps the trustee) the power to determine the rights of the beneficiaries later (perhaps based on their need). This means trusts are very useful for creating future interests, not just immediate interests.

Question 26

3.5 Control

Answer 26

Trusts are also useful for enabling the original owner of property to retain a degree of control even after divesting themselves of their interest in the property. This is something you cannot do if, for example, you are instead making an outright gift of that property.

Question 27

3.6 Ringfencing on insolvency

Answer 27

Trusts can be very powerful when it comes to protecting individuals against the risks of insolvency. As a beneficiary has an equitable proprietary interest in trust property, the property does not form part of the trustee’s estate for the purposes of the bankruptcy and insolvency regimes. It therefore cannot be distributed to the trustee’s creditors. Thus a beneficiary enjoys ‘priority’ over the unsecured creditors of the trustee in the event of the latter’s bankruptcy or insolvency.

Question 28

Example: Treatment of bankrupt debtor’s unsecured creditors

Answer 28

X owes B, C, D and E £50,000 each. B, C, D, and E are unsecured creditors of X. £100,000 is credited to X’s bank account. X is made bankrupt. Assuming X has no other creditors or assets, the claims of B, C, D and E abate rateably. Each will receive £25,000.

Question 29

Example: Treatment of bankrupt debtor’s unsecured creditors

Answer 29

The beneficiary’s interest is protected against the trustee’s insolvency because the trustee does not have a beneficial interest in the trust property. It is also possible to set trusts up in a way that ensures the property is protected against the risk of insolvency of beneficiaries.

Question 30

Example: Treatment of bankrupt trustee’s beneficiary

Answer 30

Vary the example: X owes B, C and D £50,000 each. B, C and D are unsecured creditors of X. X is a trustee of £50,000 for E. £100,000 is credited to X’s bank account: £50,000 of it is trust money. X is made bankrupt

Question 31

Example: Treatment of bankrupt trustee’s beneficiary

Answer 31

The trust money (£50,000) is not part of X’s estate for the purposes of the bankruptcy and cannot be distributed to X’s creditors. It continues to be held on trust for E. Assuming X has no other creditors or assets, B, C and D’s claims abate rateably. Each will receive £16,667.

Question 32

Example: Treatment of bankrupt trustee’s beneficiary

Answer 32

A comparison of E’s position in the examples demonstrates the importance of a beneficiary’s equitable proprietary interest in the event of the trustee’s bankruptcy or insolvency.

Question 33

3.7 Tracing and proprietary claims

Answer 33

In Akers v Samba Financial Group [2017] UKSC 6, Lord Sumption noted that a beneficiary’s interest in the trust property ‘possesses the essential hallmark of any given right in rem, namely that it is good against third parties into whose hands the property or its traceable proceeds may have come’.

Question 34

3.7 Tracing and proprietary claims

Answer 34

Thus, if a trustee misapplies trust property (for example, by giving £100 to their spouse, who is not a beneficiary) the beneficiary can assert their interest in the money against the spouse and demand that it is restored to the trust. Moreover, if the spouse uses the money to buy a painting, the beneficiary can assert an interest in the painting (the ‘traceable proceeds’ of the money) and demand that the painting is added to the trust.

Question 35

3.7 Tracing and proprietary claims

Answer 35

Thus, a beneficiary’s equitable proprietary interest is important because it can be enforced against third parties. However, unlike legal proprietary interests, it cannot be enforced against everyone. More particularly, equitable proprietary interests cannot be enforced against a purchaser of a legal interest who does not have notice of the trust. So, if in breach of trust, a trustee transfers legal title to trust property to a purchaser who is unaware that they are purchasing trust property, the transfer extinguishes the beneficiary’s equitable interest. Tracing and proprietary claims are considered in detail in the chapter on ‘Equitable remedies and tracing’

Question 36

3.8 Tax benefits

Answer 36

Trusts can also have tax benefits although it is important to note that trusts can also trigger taxes. This is beyond the scope of this Workbook but something that must be considered in practice. You will find that many cases you come across when studying trusts arise out of either tax or insolvency litigation.

Question 37

4. Key uses for trusts

Answer 37

As we have already seen, there are many benefits to using trusts, making them a useful mechanism in both the commercial and private, family contexts.

Question 38

4.1 Commercial arrangements

Answer 38

Some commercial uses for trusts include: (a) Share ownership: Publicly traded shares are usually held via trust arrangements. (b) Investment funds: Investment funds commonly involve trusts. (c) Pension funds: Pension funds are a particularly good example of this which demonstrate many of the benefits we have already seen. They are a way of delaying payments to individuals, making use of the expertise of fund managers and also have tax benefits. (d) Other forms of tax-efficient employee remuneration: Trusts can also be used for other forms of employee remuneration. A common example is something called an ‘employee benefit trust’. These are often used by employers alongside more typical salary payments as they have tax benefits. (e) Corporate tax avoidance: Tax avoidance, more generally, is also a common use for trusts.

Question 39

4.2 Private arrangements

Answer 39

Trusts are also commonly used by individuals. In fact, the traditional trust was a mechanism for ensuring property was enjoyed by several generations of an individual’s family. * Testamentary planning: You will often see trusts created in wills, as a way of the testator trying to control the use of their property after they die, and ensure that it benefits the right people. * Land ownership: Joint ownership of land takes place via a trust arrangement. Trusts can be very useful for the purposes of land ownership, as they allow more individuals to have rights in land than can be recognised as legal owners. They can also be used to rectify unfairness in land transactions. * Tax planning: Again, tax planning is a common use for trusts in the private context, particularly inheritance tax planning (although care has to be taken not to trigger an unwanted inheritance tax charge when doing this)

Question 40

4.3 Charitable purposes

Answer 40

As we have already noted, it is possible (in limited circumstances) to set up a trust for a purpose rather than a person. By far the most common, and most useful, example of this is a charitable trust.

Question 41

5 Categories of trusts

Answer 41

Trusts can be categorised in various ways. Some commonly recognised categories of trust are set out below but please note that this list is not exhaustive.

Question 42

5.1 Express trusts compared with trusts arising by operation of law

Answer 42

Probably the most common way of categorising trusts is as either express or implied.

Question 43

5.1.1 Express trusts

Answer 43

An express trust is one which is deliberately created. In other words, it is a trust which arises in response to a person’s intention to create it. The rules for the creation of express trusts are introduced in the chapter on the ‘Creation and requirements of express trusts’.

Question 44

5.1.2 Implied trusts

Answer 44

Unlike express trusts, resulting and constructive trusts arise by operation of law. Resulting and constructive trusts are often together described as ‘implied trusts’.

Question 45

(a) Resulting trusts

Answer 45

Resulting trusts are perhaps the less sophisticated of the two types of implied trust, arising in a fairly limited set of circumstances. Broadly, they arise where a legal owner has transferred ownership of their property to a third party but, for some reason, equity recognises that the transferor should retain or regain the beneficial interest in that property. They can be further subdivided into (i) automatic resulting trusts and (ii) presumed resulting trusts. These categories are considered in further detail in the chapter on ‘Resulting trusts’

Question 46

(b) Constructive trusts

Answer 46

Constructive trusts are more complex and varied in nature. There are many different types of constructive trust, which arise in quite different circumstances, but it is considered that all constructive trusts arise to correct unconscionability. This module considers three broad situations where constructive trusts arise:

Question 47

(i) Institutional constructive trusts

Answer 47

These are the orthodox form of constructive trust that arise because the conscience of the legal owner is affected in some way, preventing them from denying the beneficial interest of another person. This type of constructive trust is imposed automatically in response to a qualifying event. There are many qualifying events but in this module we focus on constructive trusts arising to prevent fraud or to perfect an imperfect gift or trust (see the chapter on ‘Formalities and constitution’).

Question 48

(ii) Constructive trusts as remedy

Answer 48

Constructive trusts can also be awarded by a court as a remedy in a range of circumstances, such as: (1) Following a successful proprietary estoppel claim (see the chapter on ‘Family homes’). (2) When a fiduciary makes a personal profit in breach of the no-profit rule (see the chapter on ‘The fiduciary relationship’) (3) At the end of the tracing process, following a breach of trust or fiduciary duty. (See the chapter on ‘Equitable remedies and tracing’).

Question 49

(iii) Common intention constructive trusts

Answer 49

The final category of constructive trust considered is the common intention constructive trust. These trusts are used to resolved disputes over the beneficial ownership of land occupied by unmarried cohabitees. They are considered in detail in the chapter on ‘Family homes'.

Question 50

5.1.3 Other trusts arising by operation of law

Answer 50

Resulting and constructive trusts are not the only types of trust which arise by operation of law, as there are also statutory trusts (ie trusts which are neither resulting nor constructive but which arise as the result of the application of a specific statutory rule). No statutory trusts are covered in this Workbook but you may come across them in practice

Question 51

5.2 Testamentary and inter vivos trusts

Answer 51

You will also see trusts classified as either testamentary or inter vivos. Testamentary trusts are those created via a will whereas inter vivos trusts are created in the lifetime of the settlor.

Question 52

5.3 Fixed and discretionary trusts

Answer 52

Another key distinction is between fixed trusts and discretionary trusts. Fixed trusts involve the trustee knowing exactly what they need to give to each beneficiary. The interests of the beneficiaries are fixed. In contrast, under a discretionary trust, the trustee knows who the potential beneficiaries are but has the power to determine who benefits and in what shares. This makes them very flexible. Fixed and discretionary trusts are considered in further detail in the chapter on ‘Beneficial entitlement’.

Question 53

5.4 Charitable and non-charitable purpose trusts

Answer 53

We have already seen that it is possible to create trusts for charitable purposes. This is an exception to the general rule (known as the beneficiary principle) that a trust must have a beneficiary. There is a much smaller, more limited class of exceptions known as non-charitable purpose trusts. These are private trusts set up for very specific purposes. They are considered in the chapter on ‘Purpose trusts’.

Question 54

5.5 Bare trusts

Answer 54

The final distinction to make is between bare trusts and trusts where the trustees have active management functions. A bare trust involves the trustee simply holding legal title on trust for the sole benefit of a beneficiary. The trustee has no discretion and no active management duties. They are merely required to follow the instructions of the beneficiary. This is most common when dealing with things like shares, where a stockbroker may hold legal title to the shares on trust for the beneficial owner.

Question 55

5.6 Comparisons and distinctions 5.6.1 Comparing trusts with contracts

Answer 55

At first glance, a trust might seem similar to a contract. Both involve the creation of obligations which, if not performed, can give rise to a personal liability (often to pay compensation). It is also important to note that it is possible to contract to create a trust, and this does happen regularly in practice. But a trust is fundamentally different to a contract, both in the way it is created and in the nature of the relationship between the parties

Question 56

5.6.1 Comparing trusts with contracts

Answer 56

A contract arises as a result of an agreement between its parties, each of whom owes obligations to the other. It is a creation of the common law.

Question 57

5.6.1 Comparing trusts with contracts

Answer 57

Trusts are more complicated arrangements, which are the creation of equity. There is no requirement for an agreement between any of the parties (whether settlor and beneficiary, trustee and beneficiary or settlor and trustee). An express trust arises as a result of intention manifested by the settlor alone. And the only obligations that arise are from the trustee to the beneficiary. The trustee must be willing to act but there is no requirement for an agreement in the contractual sense. If the appointed trustee is unwilling to perform the role, they can be replaced.

Question 58

5.6.2 Comparing trusts with debts

Answer 58

A debt is an obligation to pay a sum of money. The person who must pay is the ‘debtor.’ The person to be paid is the ‘creditor.’ Unlike a trust (which is a duty relating to specific property) a debt does not relate to specific assets or funds. A debt is merely an obligation to pay a sum of money and the debtor may use any of their available resources to effect the payment. Unlike a beneficiary, a creditor cannot compel the debtor to apply any specific asset or fund for their benefit

Question 59

5.6.2 Comparing trusts with debts

Answer 59

A loan is the most common example of a transaction giving rise to a debt: the borrower (debtor) must repay the loan to the lender (creditor). The beneficiary of a trust has an equitable proprietary interest in the trust property. By contrast, a creditor has a mere personal right to payment. If the debtor is unable to pay, the creditor does not have recourse to any of the debtor’s assets to discharge the debt – and, thus, is significantly affected by the debtor’s bankruptcy or insolvency.

Question 60

Key case: Foley v Hill (1848) 11 HLC 28

Answer 60

Perhaps the most familiar example of a debtor-creditor relationship is that between a bank and its customer. In Foley v Hill [1848] 11 HLC 28, the House of Lords held that a bank is not a trustee of money deposited by its customers. The following is an extract from the speech of Lord Cottenham LC

Question 61

Key case: Foley v Hill (1848) 11 HLC 28

Answer 61

Money, when paid into a bank, ceases altogether to be the money of the principal. […] The money placed in the custody of a banker is, to all intents and purposes, the money of the banker, to do with it as he pleases; he is guilty of no breach of trust in employing it; he is not answerable to the principal if he puts it into jeopardy, if he engages in a hazardous speculation; he is not bound to keep it or deal with it as the property of his principal, but he is of course answerable for the amount, because he has contracted, having received that money.

Question 62

Quistclose trusts

Answer 62

The best example of a device which combines a debt and a trust is a Quistclose trust. The name derives from the case in which such arrangements were first recognised.

Question 63

Key case: Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567

Answer 63

Facts: Quistclose Investments Ltd agreed to lend money to Rolls Razor Ltd. The parties agreed that Rolls could only use the money to pay a dividend to its shareholders and that it could not be used for any other purpose. The money was paid into an account which Rolls had opened with Barclays Bank Ltd especially for the deposit of the money. Before it was able to pay the dividend, Rolls was put into liquidation and, as a result, was precluded from paying the dividend

Question 64

Key case: Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567

Answer 64

The issue was whether Barclays could set off the sum credited to the account against Rolls’s indebtedness to Barclays on its other accounts. Held: The sum credited to the loan account was held on trust for Quistclose. Since Barclays had notice of the trust, it could not set off that sum against money owing on Rolls’s other overdrawn accounts.

Question 65

Key case: Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567

Answer 65

Lord Wilberforce reasoned that, since it was agreed that the money could only be used to pay the dividend, it was not part of Rolls’s general assets. As Rolls couldn’t pay the dividend, it had to return the money to Quistclose. In other words, Rolls held the money on trust for Quistclose. He expressly rejected the argument that the loan to Rolls excluded the possibility of a trust, stating that there was ‘no difficulty in recognising the co-existence in one transaction of legal and equitable rights and remedies’ and that ‘the flexible interplay of law and equity’ was perfectly able to facilitate such transactions.

Question 66

Key case: Twinsectra Ltd v Yardley [2002] UKHL 12

Answer 66

Twinsectra is the most important case on Quistclose trusts as it makes clear that it is not sufficient to demonstrate that money was advanced to the borrower for a particular purpose. Rather it is necessary to demonstrate the parties’ mutual intention that the money could only be applied for the purpose and was not at the free disposal of the borrower. It is this feature of the transaction which generates the trust in favour of the lender.

Question 67

Twinsectra also provides helpful guidance on the requirement for certainty of purpose:

Answer 67

(a) The borrower’s power to apply the money is valid only if the purpose is sufficiently certain. (b) A purpose is certain if it is possible to determine whether any given application of the money does or does not fall within it. (c) If the purpose is uncertain, the borrower cannot make any use of the money and simply holds it on trust for the lender.

Question 68

The following explanation of as to the basic operation of a Quistclose trust is provided in Twinsectra:

Answer 68

When the lender advances the money to the borrower, the borrower holds the money on trust for the lender, with a power to use it for a specified purpose. * To the extent that the borrower uses the money for the purpose, the lender’s equitable interest is extinguished. The relationship changes from trustee-beneficiary to debtor-creditor. * To the extent that the borrower applies the money for any other purpose, the borrower commits a breach of trust. The lender can assert their equitable proprietary interest in the misapplied money (or its traceable proceeds). * If it becomes impossible to apply the money for the purpose, the borrower must return the money to the lender.

Question 69

Key case: In Re Farepak Food and Gifts Ltd (in administration) [2006] EWHC 3272 (Ch)

Answer 69

Facts: Farepak ran a Christmas savings scheme. It agreed with its customers that, in return for 11 monthly payments, it would obtain retail vouchers for customers and distribute them in November. Farepak went into administration in October.

Question 70

Key case: In Re Farepak Food and Gifts Ltd (in administration) [2006] EWHC 3272 (Ch) Judgement

Answer 70

Held: The court concluded that the money paid by customers to Farepak was not subject to a Quistclose trust. In particular, Mann J rejected the argument that the money was held on trust because the customers had paid it to Farepak for a particular purpose (ie the provision of retail vouchers):

Question 71

Key case: In Re Farepak Food and Gifts Ltd (in administration) [2006] EWHC 3272 (Ch) Judgement

Answer 71

Crucially, there is no suggestion that the money ought to have been put on one side by Farepak pending the transmutation from credited money to goods or vouchers. If there were a Quistclose trust then that obligation would have been inherent in it, but the business model would have made no sense. It would have required Farepak to have kept all customer moneys in a separate account from January until November, untouched until the time when the goods or vouchers were acquired and then sent out. That is completely implausible.

Question 72

Extension of Quistclose trusts outside loan context

Answer 72

Finally, it is worth noting that although most of the case law involves loans or transactions involving money, Quistclose trusts are not restricted to such circumstances. They arise in any situation where property is transferred to a person whose use of the property is restricted to a specified purpose: to any case where the property is not at the free disposal of the transferee (Ali v Dinc [2020] EWHC 3055 (Ch), paras 234, 238).

Question 73

5.6.3 Comparing trusts with charges

Answer 73

Proprietary security interests secure the performance of an obligation, usually the payment of a debt. A charge is the most common security interest. The chargor (debtor) creates a charge over their property in favour of the chargee (creditor). If the chargor is unable to pay the debt, the chargee can compel a sale of the property and use the proceeds of sale to discharge (or reduce) the debt. Both a beneficiary and a chargee have a proprietary interest in (respectively) the trust property and the charged property.

Question 74

Important Distinctions

Answer 74

* Unlike a trustee, a chargor can use charged property for their own benefit. For example, it is common to acquire residential land using a secured loan (ie a mortgage). This does not prevent the owner occupying the land as their home. * Trust beneficiaries are entitled to the beneficial enjoyment of the entire trust property. A chargee’s interest is limited to the amount of the debt secured. * A defining characteristic of a charge (but not a trust) is a right of redemption, ie the chargor’s right to unencumber their charged property by paying the debt.

Question 75

5.6.4 Comparing trusts with agency

Answer 75

Agency is a relationship in which the agent has authority to create legal relations between the principal and third parties. An example of an agent is a person who sells goods on behalf of someone else. The agent enters into the sale contract and receives payment from the purchasers. They are required to account for the proceeds to their principal.

Question 76

5.6.4 Comparing trusts with agency

Answer 76

A feature which is common to agents and (some) trustees is that both are subject to fiduciary duties. The essential difference between agents and trustees is that, unlike an agent, a trustee cannot commit a beneficiary to a contract with a third party. A trustee acts as a principal in their transactions with third parties.

Question 77

5.6.4 Comparing trusts with agency

Answer 77

The relationship between agent and principal is ordinarily a debtor-creditor relationship. However, it is possible for an agent to become the trustee of money or property received on behalf of the principal. Whether or not a trust relationship has arisen must be determined on the facts of the individual case, by reference to the parties’ intentions, expressed or inferred.

Question 78

5.6.5 Comparing trusts with bailment

Answer 78

Bailment is the transfer of possession of chattels from one person to another. The transferor is the ‘bailor’ and the transferee is the ‘bailee’. So a person who leaves their clothes with a dry cleaner is a bailor and the dry cleaner is a bailee. There is a superficial similarity between a trust and bailment. However, there are significant distinctions between a trust and bailment:

Question 79

5.6.5 Comparing trusts with bailment

Answer 79

* Only tangible personal property (chattels) can form the subject matter of a bailment whereas (with one or two exceptions) any asset or right can be held on trust. * Bailment involves transfer of possession but does not impact the bailor’s legal title to the property. In contrast, the transfer of assets to a trustee completely divests a settlor of their interest in the property. * A bailor’s interest (generally) survives a misapplication of the bailed property to a third party because a bailee has a possessory right to the property but is not the legal owner. In contrast, a trustee can transfer legal ownership, meaning that a beneficiary’s interest will not survive a misapplication in favour of a purchaser without notice.

Question 80

5.6.6 Comparing trusts with companies

Answer 80

Another comparison which it is useful to draw is between trusts and companies. Both can be used as vehicles for holding property, and there are some similarities between the roles of trustee and director (both of which are fiduciary in nature).

Question 81

5.6.6 Comparing trusts with companies

Answer 81

One crucial difference is that, unlike a company, a trust does not have legal personality. This means that a trust cannot bring or defend a legal action in its own name. It is the trustees who, as legal owners of the trust property, must carry out these functions. And, when exercising their rights as legal owners, trustees must act in the best interests of their beneficiaries

Question 82

5.6.6 Comparing trusts with companies

Answer 82

Unlike trust beneficiaries, shareholders of a company do not have a proprietary interest in the company’s assets. Their interest is in the company itself. Similarly, the obligations of the company directors are generally owed not to the shareholders but to the company.

Question 83

5.6.7 Comparing trusts with estate administration

Answer 83

A personal representative is responsible for the administration of a deceased person’s estate. There are two types of personal representatives: * Executors: appointed by deceased * Administrators: appointed by court

Question 84

Personal Representative

Answer 84

A personal representative must distribute the deceased’s estate in accordance with their will or the intestacy rules. There is a striking similarity between a trust and the administration of a deceased person’s estate in both cases one person holds property for the benefit of others.

Question 85

Two Key Distinctions

Answer 85

* As a practical matter, the function of a personal representative is to administer and distribute the deceased’s estate as quickly as is practicable (ideally within a year). By contrast, express trusts are commonly created to endure for many years, meaning trustees often have enduring asset management functions. * Unlike the beneficiary of a trust, a person interested in a deceased person’s estate does not have an equitable proprietary interest in any of the estate assets. Instead, they have a personal right against the executor relating to the proper administration of the estate.