Insolvency Scenarios

Question 1

Why are companies motivated to set up trusts for customer pre-payments?

Answer 1

otherwise the directors may be personally liable if they have not taken steps to
minimise the risk to creditors/customers

Question 2

Six requirements for a trust from customer pre-payment?

Answer 2

3 certainties, beneficiary principle, formalities, constitution

Question 3

What is the order of payment for customers in the event of insolvency?

Answer 3

1. A trust declared for pre-payments in preference to payments over new customers will be
   upheld and repaid first
2. Any trust declared in preference to existing customers will not be upheld.
3. If the monies have been mixed such that existing customers cannot be distinguished from old ones, the trust will fail.

Question 4

When does a Quistclose trust arise?

Answer 4

A Quistclose trust is an automatic resulting trust. It arises because the beneficial interests in a loan for a purpose have not been completely disposed of.

Question 5

What happens once loan monies subject to the Quistclose trust are used up for the specified purpose?

Answer 5

Once all of the loan has been used to fulfil that purpose, the lender’s rights become mere unsecured debts and are no longer equitable interests under a Quistclose trust.

Question 6

3 possible requirements for a Quistclose trust? Which appear to be optional?

Answer 6

1. Exclusively a loan arrangement
2. Loan is explicitly stated to be for a particular purpose
3. Money must be segregated from the borrower’s money.

1 (Re Chelsea Cloisters) and 3 (Re EVTR Ltd) appear to be optional.