Quistclose Flashcards
What is the exception to the rule: a contract to transfer assets does not alter beneficial ownership (merely places a personal oblig on person making oblig to fulfil it) ?
Exception → specifically enforceable contracts
→ Contract (rights of 3rd parties) Act 1999 - 3rd party can enforce a term
Barclays Bank v Quistclose Investment Ltd (1970)
Q made loan to RR (on brink of insolvency) for express purpose of paying dividends that company had declared in favour of its shareholders. Had loan be repaid in normal course of events - common law contractual oblig would have been discharged. However, RR went insolvent before dividend been paid Barclays assumed Q’s contractual claim would join queue of personal claims against estate of insolvent company. Majority favoured the opposite.
→ Lord Wilberforce held the arrangement gave rise to a primary trust in favour of shareholders in whose favour the dividend had been declared, and a secondary trust in favour of Q in event of insolvency
→ Significant: idea trust and debt can co-exist at the same time/transaction
What was the problem with Wilberforce’s judgement in BB v Quistclose?
Why was the primary trust in favour shareholders rendered that the purpose was incapable of being fulfilled?
→ Shareholders should have been able to claim beneficial entitlement under trust even after insolvency
→ Shareholders disappear once company does?
What was Millett’s analysis of BB v Quistclose?
‘REVOCABLE POWER’ - Said beneficial interest was kept in Q (lender) subject to a power in RR (borrower), revocable by Q at any time to apply the fund for the stated purpose (to pay dividends to shareholder)
→ Beneficial interest only leave lender if applied for purpose
Twinsectra Ltd v Yardley (2002)
→ Approved Millett’s reasoning in Quistclose
→ T made loan to Y through agency of solicitors. The Solicitors to whom the loan monies were paid gave an undertaking that the loan money would be retained by them until such time as they were applied in the acquisition of prop on behalf of their client. Said loan money will be used only for acquisition of property on behalf of our client and for no other purposes
→ In event, loan monies were not applied exclusively. Question whether solicitor had breached trust and whether another solicitor involved in transac at later stage might be liable for having dishonestly assisted in breach
→ HELD: the undertaking by the recipient solicitors gave rise to a trust of the Quistclose variety, the terms of the undertaking corresponding to terms of trust
→ Hoffmann accepted that the transferee in Quistclose type cases hold the transferred money on trust for the transferor subject to a POWER to apply in in accordance with the contract between them
→ Millet: borrower is treated as holding the money on a resulting trust for lender but with power to carry out lender’s revocable mandate. If mandate is frustrated, he is entitled to revoke the mandate and demand return of money
Gabriel v Little & Ors (2013)
Where money was loaned to a company in belief it would be used to develop prop, but without any express restriction to a ‘sole’ or exclusive purpose, claim of a Quistclose trust failed
When will court be reluctant to imply a trust under contract?
Where lawyers are involved → expected to make intention for trust clear
What did Millett say in Twinsectra about specified property?
He doesn’t have to apply the loan for specific purpose, but rather is obliged to refrain from applying the loan to any OTHER purpose other than specified purpose.
Policy concern reasoning for Quistclose
Quistclose justified through policy → to protect lenders who make emergency loans to corporations on bring of insolvency
→ A rescued company is a rescued trader and employer. A failed company = unemployment which is a social ill
→ Therefore Quistclose was a short term form of security
→ Also private property must stay private
What would have happened in Quistclose if loan had actually been applied to pay shareholders?
Quistclose would have lost priority over other shareholders
Re EVTR Ltd (1987)
EVTR was in trouble financially + B agreed to assist. He deposited £60,000 with EVTR’s solicitors and authorised them to release for sole purpose of buying new equip. EVTR did this, but went into receivership before equip was delivered. Receivers recovered a large part of money which had been paid to equip. suppliers.
→ Trial judge said sums recovered should be held as part of general assets of company. B successfully appealed.
→ COA held B had paid monies to EVTR for the specific purpose. When this purpose failed, EVTR held money on trust for B. True purpose had not been fulfilled - no acquisition of equipment, had failed.
