Quistclose trusts Flashcards
Barclays Bank v Quistclose Investments Ltd [1970] AC 567
held: The House of Lords unanimously decided that the money had been received upon trust to apply it for the payment of dividends; that purpose having failed, the money was held on trust for Quistclose. The fact that the transaction was a loan, recoverable by an action at law, did not exclude the implication of a trust. The legal and equitable rights and remedies could co-exist. The Bank, having notice of the trust, could not retain the money against Quistclose.
Facts: Rolls Razor Ltd, very much indebted to Barclays Bank, was in need of £209,719 to pay dividends which had been declared on its shares. This sum was borrowed from Quistclose under an arrangement whereby the loan was to be used only for that purpose. The money was paid into a separate account at Barclays Bank, the Bank having notice of the nature of the arrangement.
Before the dividend was paid, Rolls Razor went into liquidation. The question was whether the money in the account was owned beneficially by Rolls Razor, in which case Barclays Bank claimed to set it off against the overdraft, or whether Rolls Razor had received the money as trustee and still held it on trust for Quistclose.
Issue: who got the money? Dispute between Barclays and QT – the latter argued that there was a trust (does not from part of their assets).
Westdeutsche Landesbank Girozentrale v Islington LBC [1996] AC 669
nature of the QT
The House of Lords allowed the appeal. All five judges agreed that there could not be a resulting trust because trusteeship requires the conscience of the recipient to be affected.
During the rate-capping of local government finances, a number of local authorities turned to unorthodox ways of raising capital that avoided this legislative control. Islington Council contracted with the claimant bank for what was in effect a loan, but was formally an ‘interest rate swap’. It had a speculative element. It was later held in Hazell v Hammersmith and Fulham London Borough Council [1992] 2 AC 1 (HL) that such agreements were ultra vires the councils’ powers and therefore void. The bank then sought the return of monies advanced pursuant to the void agreement and compound, not merely simple, interest.
Until the later decision in Sempra Metals Ltd v Inland Revenue Commissioners [2007] UKHL 34, [2008] 1 AC 561, it was not possible to obtain compound interest except where the remedy was proprietary. The bank therefore argued that monies paid towards a void contract were held on resulting trust for the payor.
At first instance, Hobhouse J ruled that the monies were held on resulting trust and that compound interest was therefore available.
Twinsectra Ltd v Yardley [2002] 2 AC 164
nature of the QT
NB: regarding the dishonesty point - Lord Millet dissented -see remedies for breaches of trusts.
The House of Lords all held the loan from Twinsectra Ltd was held on trust by the solicitors.
He firstly held that the nature of the trust, by which the solicitors held Twinsectra Ltd’s loan money was a resulting trust, with a power to apply the money in accordance with the loan contract’s terms. He viewed this to be the proper characterisation of this and all Quistclose trusts.
T intended to lend money to Y for the purchase of property without specifying which property. S, a solicitor acting for Y, had given an undertaking to T in the following terms: “The loan moneys will be retained by us until such time as they are applied in the acquisition of property on behalf of our client. The loan moneys will be utilised solely for the acquisition of property on behalf of our client and for no other purposes”. T paid over the loan amount to S who then paid it over to L, another solicitor acting for Y. Y used the loan for purposes other than the purchase of property. T claimed that the payment from S to L amounted to a breach of the undertaking and thus a breach of trust which L had assisted (see dishonest assistant in the remedies for BoT section)
Re Kayford [1975] 1 WLR 279
authorities on the QT
Held:
Kayford Ltd held the money in the account on trust for its clients
Kayford Ltd were a mail order company. They received pre-payments from customers and was concerned that they may be facing insolvency. On taking legal advice they opened a separate bank account to deposit the customer’s pre-payments. The account was named ‘Customer Trust Deposit Account’. Kayford Ltd subsequently did become insolvent and the creditors sought to claim the money in the separate account as part of the company assets.
Re EVTR [1987] BCLC 646
authorities on the QT
there was a trust: money not spent on new equipment was to be returned to C
Facts:
* Money was lent for the borrower to buy video equipment
* The borrower paid the money as deposit to the supplier before equipment was delivered and the supplier provided temporary equipment before delivery of the actual equipment
* The borrower went bankrupt before delivery of the actual equipment and the deposit was paid back to the borrower
Carreras Rothmans v Freeman Mathews Treasure [1985] Ch 207
quistoclose trusts
’ the plaintiff made its payment on the terms of that letter and the defendant received the moneys only for the stipulated purpose. That purpose was expressed to relate only to the moneys in the account. In my judgment therefore the plaintiff can be equated
with the lender in Quistclose as having an enforceable right to compel the carrying out of the primary trust.’
‘In my judgment the principle in all these cases is that equity fastens on the conscience of the person who receives from another property transferred for a
specific purpose only and not therefore for the recipient’s own purposes, so that such person will not be permitted to treat the property as his own or to use it for other than the stated purpose.’
Held: The plaintiff prevailed over the creditors based on the principle in Quistclose. However, it appears that the trust was not rationalized as a resulting trust but more as a constructive trust (‘equity fastens on the conscience of the
person…’) and the beneficial interest in the money pending its use for the stated
purpose was unclear
Facts: The claimant was a tobacco company and the defendant was an advertising agency. The agency purchased space on the company’s behalf. The company would pay the agency, who would pass the money on to the third parties from which it has purchased space. The advertising agency was in financial trouble, but the tobacco company wanted to continue doing business with it, mainly because the agency was able to negotiate significant discounts on advertising space.
In July 1983, it was agreed that the agency should open a special account, into which the tobacco company would pay money to meet the costs of June’s bills, which the agency would pay by the end of July. The agency sent out cheques, but went into liquidation at the beginning of August. The liquidator immediately froze all the agency’s bank accounts and stopped the cheques.
Bellis v Chalinor
QT authorities
Held: no specific purpose, just investing money generally.
Facts: collective property investment scheme where the money was applied for different purposes and the lenders argued it was a QT.
Cooper v PRG Powerhouse Ltd [2008] EWHC 498 (Ch)
QT authorities
Held:
trust: C had given money for express purpose (pay off car creditors)
C entitled to money in full as beneficiary of trust. QT established even though it was not in a segregated account.
Facts:
C resigned from job at P & part of severance package C was promised his company car (if he paid off money still owing on credit agreement)
C paid remaining £34 000 to P, who confirmed it would used to pay off car creditors
P went into liquidation before paying money to car creditors
Issue:
was a trust created?
Prickly Bay Waterside v British American Insurance Co [2022] UKPC 8 (JCPC)
QT authorities
Held: The Privy Council concluded that a Quistclose trust had not arisen where a sum of money was paid by Mrs Lee (as part of a loan arrangement with Prickly Bay) to BAICO with the intention of being used to pay a debt that would arise in two years’ time.
No QT established because the other arrangement that Lee entered into inconsistent with the existence of a QT.
Facts: The appellant Prickly Bay had, following litigation with a Mr Steele, agreed to a consent order under which, amongst others, Prickly Bay agreed to purchase a property from Mr Steele, on a deferred basis, with the balance of the price being payable on the deferred completion date together with interest. Prickly Bay further agreed to provide a bank guarantee. That guarantee was to provided by the respondent, BAICO, on the basis that a deposit (of USD2.475m, being the balance and the interest) would be placed with it. Mrs Lee, the wife of a director of Prickly Bay, deposited the amount with BAICO. The moneys were then used to purchase an annuity in Mrs Lee’s name, which gave her monthly interest at an annual rate exceeding the amount that Prickly Bay had to pay to Mr Steele under the consent order and which would terminate immediately prior to the payment date for the completion moneys due under it. BAICO then provided a receipt for USD2.475m “being the sum to be held under the Deed of Guarantee made between [BAICO] and [Mr Steele]”. Subsequently, BAICO became concerned that it might have to pay out twice (under the Guarantee and under the Annuity). It required Mrs Lee to assign her interest in the Annuity to Mr Steele, the assignment providing that it would become effective on the day following the deferred completion date, and if Mr Steele had not received the completion monies under the consent order or the guarantee. BAICO subsequently went into an insolvency process in Grenada and failed to make payment under its guarantee. On BAICO’s default, Mr Steele applied to the High Court of Grenada to enforce the terms of the Consent Order. Prickly Bay applied for a declaration that the moneys which had been deposited were held on trust by BAICO, under a Quistclose trust: it argued that when the full context of the arrangements between the parties was considered, Mrs Lee retained the beneficial right and title to the moneys deposited and that BAICO, having failed to pay under the guarantee, was liable to return the moneys to her. BAICO was joined to the proceedings. At first instance, Prickly Bay’s argument was rejected. Prickly Bay’s appeal to the Eastern Caribbean Court of Appeal was also dismissed.
China Life Trustees Ltd v China Energy Reserve and Chemicals Group [2024] HKCFA 15
Holding: the Court of Final Appeal found a Quistclose trust in the present case.
While it is safer to spell out the requisite intention to retain a beneficial interest in the relevant property transferred for a specific purpose in order to ensure that the property would be subject to a Quistclose trust, the absence of the same will not be fatal to the trust. The Court will look at the objective factual evidence that the transferor transfers the property for a specific purpose and for that purpose only, rather than requiring an express manifestation of intention that a beneficial interest in the property be retained. The same principle applies to intra-group transfers even where there is understandably a close financial relationship and a likelihood of less robust documentation.
Held:
- No need to prove separately an intention to retain a bene’s interest bc that is the legal consequence of a QT trust ( does thus not also need to be part of our intention) - to require that would require the borrower and lender to know trust
- The fact that it was a group did not prevent the finding of a QT trust.
Facts:
Two special purpose vehicles were set up within the same corporate group (the “Group”), they are: SPV1 for issuance of bonds maturing in 2022 denominated in HKD (the “2022 Bonds”) and SPV2 for issuance of bonds maturing in 2018 denominated in USD (the “2018 Bonds”). SPV1 and SPV2 shared the same bank account (the “Account”) in the name of SPV1, which was divided into 2 sub-accounts denominated in HKD (for the 2022 Bonds) and USD (for the 2018 Bonds). SPV2 was short of funds when the 2018 Bonds matured. The Group, through its treasury company, injected USD120 million (the “Funds”) into the USD sub-account. Despite this effort, the Funds were insufficient and SPV2 was in default, triggering a cross-default of the 2022 Bonds. The 2022 Bonds holder therefore obtained a judgment against SPV1 and a garnishee order over the Funds remaining in the Account. SPV1 appealed, contending that the Funds were clothed with a Quistclose trust, and sought to set aside the garnishee order.
This argument was rejected by the Court of Appeal.
Two questions:
1) How do we assess intention in the case of a Quistclose trust? Does it need to be intended that the transferor retain a beneficial interest, or is it enough that the transferee was not intended to have the assets at their free disposal?
2) In the context of a group of companies, does common control over transferor and transferee make any difference to the assessment of intention of the QT?
Re: The Common Professional Examination Board, 19 April 2000 (CA)
QT trust
A party was required to pay money into court before pursuing an appeal. She borrowed money for this purpose but on the express condition that it should be used for this purpose only and was not to become part of her general assets. The money was paid into court, but the appeal was compromised in her favour. The judge ordered payment out to her opponent, to satisfy earlier unsatisfied costs orders. Her request for leave to appeal succeeded. The trust was as between her and the bank, and no need of others being notified arose. As trustee for the bank, she had a duty to act to recover it, and so had locus standi.
