Quistclose Trusts Flashcards
What is meant by a Quistclose trust?
Where A pays money to B for a specific purpose that is communicated and intended by both parties, this money does not become part of their assets but exists as a primary trust to be used for that purpose. If this primary purpose fails, a secondary trust arises where B holds the money on trust for A
Essentially allows a lender to convert what would be a debt into a trust, escaping consequences of being an unsecured creditor if the borrower is insolvent
Where does the Quistclose trust come from and what are the facts?
Barclays Bank v Quistclose Investments
FACTS: Rolls Razor borrowed money from Quistclose to pay off dividends owed to C. A loan was given on the condition it be used to pay the dividends. However, before it could be paid Rolls Razor went into liquidation and Barclays sought to use the money to pay off an overdraft RR had with them previously.
DECISION: Barclays held the money on trust for Quistclose
* The loan was made specifically to pay the dividend on mutual intention of the parties
* Consequence of this is that it should be returned if this was not possible
* The intention to create a secondary trust for the benefit of the lender to arise if the primary trust to pay the dividend could not be carried out is clear
* Mere request to money in account is not sufficient notice, but the letter about how money should be used is and showed it was trust money
LORD WILBERFORCE
How does Swadling criticise the decision in Quistclose?
- The House of Lords was wrong to find a trust and give priority to the lender, money should have been held as part of Rolls Razor’s general assets
- Decision departs from orthodox trust law, the restrictions only referred to how the rights should be applied and not whom they were held for
- Even if intended, hard to define the objects. Could not be creditors or lender as it could allow them to be paid twice. Could not be the purpose since this was private
- Chambers argues that there need be no primary trust, but this does not explain why the personal right that the funds be applied a certain way apply to others
- Because of this, secondary trust cannot be said to arise
How did cases between Quistclose and Twinsectra develop the doctrine?
- Re EVTR: The purpose for which money is advanced can be partially completed. Purpose was not complete as agreement was for delivery that never happened
- Carreras Rothmans: Proposed the Quistclose trust was a type of Denley purpose trust
- Re Kayford: Held that where customers money was paid into a separate account to pay them back in the event of liquidation, an express trust was created. Paying into separate account was indicative of intention
What is Lord Hoffmans judgement about the Quistclose trust?
Twinsectra v Yardley
Argued Quistclose is an entirely orthodox example of a resulting trust. Beneficial interest always stays with the lender. The borrower is authorised to apply the money for a purpose but this is a power. When the purpose of this power fails, the money returns under the same trust. Discussed other possible grounds but concluded they failed:
THE BORROWER
* Cannot be with borrower as it would leave the money free at his disposal, against the terms of the original agreement
* The borrowers interest is minimal and restrictive
DENLEY PURPOSE TRUST?
* In all cases the primary purpose had either been carried out or failed
* In Re Northern it was said the primary trust was a Denley trust, but in Quistclose it was said the right of the lender is negative injunction to stop improper use
* The bank’s purpose is lending money is not to benefit the creditors except indirectly
* In several cases the primary trust was for an abstract purpose with no one but the lender to enforce performance
CHAMBERS THEORY & ADOPTION BY COA
* Chambers argues the borrower receives beneficial ownership subject to a contractual right to not use money other than the stated purpose
* If this fails, a resulting trust arises
* However issues with this are cases of non-contractual payment, does not properly explain remedies against third parties and existence surely would not stand over secured creditors in the borrowers insolvency
How have Chambers and Millett expanded their theories since Twinsectra?
CHAMBERS
Argues there are two possible types of resulting trust that can arise when the purpose fails
* The first type of resulting trust will place the beneficial interest entirely in the hands of the lender
* The second, when the restrictions on the use of money placed on the borrower are minor, will place beneficial interest in the hands of both the lender and borrower
MILLETT
* Nature of the trust continues to be debated as to what type of trust it is
* It may be any of them given the facts of the case and the boundaries of trust categories that not everyone agrees on
* The Quistclose trust is simply a tool needed in commercial dealings
Perhaps there should not be one signle explanation for all types of Quistclose trusts
What have recent cases said about the Quistclose trust?
First City Monument Bank v Zumax Nigeria
The basic bank-customer relation is that of debtor and creditor. Money given to a bankis theirs to do with as they please. It may be possible for a bank to become a trustee for a customer, but this is the exception and on the facts statements by the parties did not amount to an intention of trust so Quistclose did not apply
Prickly Bay Waterside v British American Insurance, Lady Arden
* The term Quistclose trust may commonly be used whenever a person provides assets to another for the purpose of paying debts that creates a trust
* It can take many forms, it may be express as to what is to happen on failure of the specified purpose or resulting as by operation of law, this is the flexibility of equity
* Must be sufficient indication that the provider did not intend to dispose of the entire beneficial interest in the trust funds
