Quistclose trusts

Question 1

Typical scenario

Answer 1

A lent money on condition that it is used for a specific purpose
B owes A money but becomes insolvent
A does not join general pool of creditors, has priority

Question 2

Barclays Bank v Quistclose Investments (Wilberforce)

Answer 2

a) When money is advanced, primary trust arises fro common intention for the specific purpose
b) When purpose fails, secondary trust arises by implication
c) Knowledge of this specific purpose prevents it from conscionably claiming the money

Question 3

Difficulties in Wilberforce’s explanation

Answer 3

a) Nature of primary trust
- Primary trust offends beneficiary principle (would fail)
- Secondary trust only arises if primary purpose fails

b) Nature and basis of lender’s rights to ensure that money is spent for the stipulated purpose
- No trust for lender until primary trust fails
- Unclear where the immediate equitable right comes from

Question 4

Lord Millett’s extrajudicial response to Quistclose

Answer 4

Not express trust for benefit of contemplated beneficiaries or non-charitable purpose trust, or loan subject to undertaking

What it is: undertaking to use funds only for specific purposes, giving rise to fiduciary relationship

• No intention to transfer beneficial interest to borrower, so only resulting trust, not constructive
• Beneficial interest remained throughout in the lender, subject to borrower’s power or duty to apply funds according to fiduciary undertaking

Question 5

Twinsetra v Yardley - what QC trust is

Answer 5

What A lends money to B on the condition that B applies money only for specific purpose, trust of money immediately arises in A’s favour, but trust is defeasible by exercise of power vested in B to apply the money to specific purpose

• Nature of trust: resulting trust
• Borrower has no beneficial interest, remains with lender
• If/when money is applied, the trust ends = personal duty to repay lender

Question 6

Advantages of Lord Millett in Twinsetra

Answer 6

a) A has freedom to convey money to B while having equitable interest in it
b) Resolves problem of non-charitable purpose trust
c) Lower threshold of establishing trust (benevolent cosntruction)

Penner: QC trust whenever condition is attached to loan or purpose is stated, despite parties having no positive intention to retain the beneficial interest

Alternative by Chambers: borrower’s lack of free disposal = borrower has full beneficial ownership of money
- Lender only has equitable right to prevent use fo fund for any other purpose

Question 7

Twinsetra v Yardley - when the trust arises

Answer 7

At the point of the undertaking when it was common intention to use the money for the specific purpose

Question 8

Twinsetra v Yardley - nature of QC trust

Answer 8

Automatic - beneficial interest not fully disposed at point of undertaking

Presumed - transfer of property, with no intention to benefit recipient (like gratuitous transfer)

Question 9

Challioner v Juliet Bellis & Co

Answer 9

Objective test to determine if/when QC trust arises

Nature - ambiguous
Intention to create trust by transferor = express?
Not presumed to exist unless contrary intention is proved = NOT presumed resulting trust

Question 10

Current approach to QC trusts

Answer 10

If there is sufficient evidence that trust is intended in borrower’s favour = express trust (Hudson)

If there is sufficient evidence that lender does not itnend money to be at free disposal of borrower, but insufficient evidence that lender formed positive intention to keep money = resulting (Lord Millett, Penner)

Question 11

Alternative approach to QC trusts

Answer 11

Constructive trusts with a power (YK Liew)