Quistclose trusts Flashcards
Definition of the case
Quistclose lent £209,719 to a company called Rolls Razor Ltd (RR) on condition that RR would use the money only to pay dividends to its shareholders. Before the dividends were paid, RR went into liquidation. This means that the money could not be used for the stated purpose of paying dividends.
- As one of RR’s unsecured creditors, Barclays Bank argued that the £209,719 formed part of RR’s assets available to pay the unsecured creditors
- Quistclose claimed that the money was held on trust to pay the dividends, but if that purpose could not be carried out then it was held on trust for Quistclose. As you are aware, if Quistclose was a beneficiary under a trust, it could bring a proprietary action which would enable it to recover the money in full ahead of the creditors
It was held that a two-tier trust had been created. RR held the loan money on a primary trust to pay dividends to the shareholders but should that purpose prove to be impossible, there was a secondary trust to return the money to the lender, Quistclose.
Conditions
1) Intention
2) Subject matter
3) Objects
Conditions - Intention
Loan for a specific purpose. Money understood not to be at the free disposal of borrower. E.g The loan money was not to become part of the borrower’s general funds, which could be spent on the outgoings of the business, such as wages, buying stock and energy bills. It was to be used for the sole purpose of paying the dividends. A lender intends to create a trust of the loan monies if the monies are not to be regarded as part of the borrower’s general assets and cannot be spent in any way the borrower wishes – the critical fact to determine whether a trust exists is whether the parties intend the loan money to be at the free disposal of the borrower.
Conditions - Subject Matter
Money transferred and clarity of purpose. E.g stated to be used for the sole purpose of paying dividends
Conditions - Objects
Primary trust = enforceable by those benefitting from the purpose. Secondary trust = when the purpose is not possible E.g RR held the loan money on a primary trust to pay dividends to the shareholders but should that purpose prove to be impossible, there was a secondary trust to return the money to the lender, Quistclose.
