Quistclose Trusts Flashcards
1
Q
- What is the fact pattern which gives rise to a Quistclose trust?
- What are the mechanics of the Quistclose trust (according to Lord Wilberforce)? (3 points)
- How did the most recent analysis of the Quistclose trust analyse it?
A
- Where A pays money to B for a specified purpose (such as payment of B’s debts to C), which then fails, it may be that the property is held on trust for the original transferor. This situation most commonly arises where one party lends money to a borrower on the understanding that the borrower can only use the money for a specified purpose. If it becomes impossible to fulfill that purpose, and the money hasn’t been spent, the lender might be able to enforce a proprietary interest in the money. This effectively enables a lender to convert what would otherwise be a debt into a trust, thereby escaping the consequences if borrower becomes insolvent.
- Under a Quistclose trust:
(i) The money is not a part of B’s general property
(ii) The money is the subject of a primary trust to be used for the specified purpose and no other.
(iii) If the primary purpose fails, a secondary trusts arises whereby B holds the unexpended money on trust for donor A. - HL in Twinsectra classified them as resulting trusts. But they’re not necessarily RTs.
2
Q
Barclays Bank v Quistclose Investments Ltd [1970]
Facts:
A
Quistclose lent money to Rolls Razor specifically to enable RR to pay a dividend it had previously declared but couldn’t afford to pay. Money borrowed was paid into a separate account specifically opened for the purpose. RR went into liquidation, so the dividend couldn’t be paid. Bank wishes to use the money in the account to discharge RR’s overdraft. Q say no, you can’t, because the money is held on trust for us.
3
Q
Barclays Bank v Quistclose Investments Ltd [1970]
- Held:
- LW on whether the bank could use the money?
- Question 1: whether between Q and RR there was a trust in Q’s favour in the event of a dividend not being paid?
- Question 2: Did Barclays have sufficient notice to be bound by the trust?
A
- HL agree: there’s a trust in favour of Q.
- Lord Wilberforce: the bank can’t use this money because it’s held on trust for Q, even though it had been lent to RR:
- (i) The “mutual intention” of the parties here (which we can see by looking at the terms on which they dealt) wasn’t that when the money was lent to RR and it became part of RR’s assets, but, rather, that it “should be used exclusively for payment of a particular class of its creditors, namely, those entitled to the dividend.”
(ii) This must mean that if the dividend wasn’t paid, the money was to be returned to Q – “the word ‘only’ or ‘exclusively’ can have no other meaning or effect” [i.e. that the money was only to be used to pay the dividend].
(ii) The arrangements for payment of a person’s creditors by a TP “give rise to a relationship of fiduciary character or trust, in favour, as a primary trust of the creditors, and secondarily, if the primary trust fails, of the third person”. Lots of authority to support this (gives some 19th century cases). He thinks these authorities are good, but given that they’re not binding on HL, looks at the reasons.
(iv) It had been submitted for Barclays that the loan gave rise to a legal action of debt, and this excluded the implication of a trust enforceable in equity
- Rejected: this would mean that despite the arrangement between lender and borrower, if the purpose fails the money would be available to other of the borrower’s creditors “for whom [the lender] has not the slightest desire to provide”
(v) Instead, the court should be recognizing the coexistence of legal and equitable rights:
- When the money is advanced, the lender acquires an equitable right “to see that it is applied for the primary designated purpose”
- When the purpose has then been carried out (i.e. the debt paid), the lender has his remedy against the borrower (because the debt has been paid).
- If the purpose can’t be carried out, though, “the question arises if a secondary purpose (i.e. repayment to the lender) has been agreed, expressly or by implication.” If it has, then remedies of equity should be employed to give full effect to it. If not (meaning the intention is for the money to fall into the general fund of the debtor’s assets), then there’s the “appropriate remedy for recovery of a loan.” The ‘flexible interplay of law and equity’ can ‘let in these practical arrangements’.
(vi) in this case, “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.” The law should give effect to it. - (i) Yes
(ii) A mere request to put a certain sum of money into a separate bank account is no notice. Here, though, bank was aware (through a cover letter) that the money was paid for the specific purpose of benefitting TPs rather than the borrower.
4
Q
Barclays Bank v Quistclose Investments Ltd [1970]
Analysis:
- Can the beneficial interest under the primary trust be with the recipient of the money advanced?
- Can the beneficial interest lie with the recipient of the benefit of the payment of dividends?
- Issues with this + alternatives? - What is the implication if the primary trust is an express trust?
- How did Peter Gibson J conceptualise it?
- Issues with this analysis? - How did Lord Millet conceptualise it?
A
- No - would defeat the whole object of the exercise by enabling that money to be claimed by his trustee in bankruptcy.
- Possibly (though they don’t have the same rights as other beneficiaries) + in suspense until the benefit given; alternatively, it remains in the person who advanced the money in the first place (i.e. Quistclose).
- the persons, if any, in whose favour payments can be made pursuant to a specified purpose have the right to call for payment of the sums due to them.
- CT
(a) But it is difficult to see how a trust which comes into existence, because of express or implied intentions of its settlor and/or trustee: such a trust is imposed by the court as a result of the conduct of the trustee and therefore arises quite independently of the intentions of any of the parties.
(b) The principal argument against the imposition of a constructive trust is that the equitable interest of the lender appears to exist before the borrower seeks to perform any unconscionable act in relation to the property. As Browne-Wilkinson in Westdeutsche Landesbank v Islington reminds us, a constructive trust only comes into existence when the trustee has knowledge of some factor which affects her conscience. - Resulting trust. He rejects LBW’s view that successive primary and secondary trusts arise – there is one trust throughout, a trust in favour of the person who advanced the funds.
5
Q
Barclays Bank v Quistclose Investments Ltd [1970]
• D+V
- Summary of Lord Wilberforce’s argument?
- What do they think of LW’s view?
- What does Bingham LJ say?
A
- Wilberforce held that where the primary trust failed, a secondary trust might arise if this had been agreed expressly or impliedly. He emphasised that money paid for a particular purpose shouldn’t be available for the borrower’s general creditors who the lender hadn’t intended to benefit.
- It might, though, seem a bit generous to allow a lender a proprietary interest under a trust, rather than limiting the lender to his usual personal action in debt.
- In Re EVTR [see below], Bingham LJ eventually agreed that a Quistclose trust arose on the facts of the case, but said: “My doubt has been whether the law as it stands enables effect to be given to the common fairness of the situation”
6
Q
Barclays Bank v Quistclose Investments Ltd [1970]
Swadling
A
- He has questioned whether the lender should benefit from proprietary protection.
- Denounces the Quistclose decision – says it’s contrary to orthodoxy.
7
Q
- defending the mechanism on policy grounds
- how might helping a company on the brink of insolvency help other creditors?
- why would a proprietary interest increase the chances lenders will put forward money?
- Thus, are creditors really worse off through availability of Quistclose trust?
- Counterargument to claim that Quistclose trusts help insolvent companies and many other parties as a consequence?
A
- we might nevertheless be able to defend the mechanism on policy grounds: the lender’s intention that a borrower shouldn’t benefit generally from the transaction should be respected, and the particular purpose imposed should be taken seriously. Might have a qualm that recognising that this unfairly prefers one creditor over another (i.e. nothing distinguishes the two creditors who have suffered the same loss!)
- But in context of a company on the brink of insolvency that needs a loan for a particular purpose – like paying off a dividend – giving the lender this sort of protection arguably doesn’t cause much prejudice, since it’s possible that without that protection, the lender wouldn’t make the loan in the first place, which would increase the chances of the company becoming bankrupt, which wouldn’t be good for all those unsecured creditors.
- If a lender will have a proprietary interest, on the other hand, this may increase the chances that they’ll lend money to a suffering company, which is beneficial both to company and its creditors.
- This means that unsecured creditors aren’t really worse off through the availability of Quistclose trusts.
- Admittedly, as Millett recognised in Twinsectra, these trusts don’t only arise where the purpose for lending money was to pay off creditors. But still, Quistclose trusts are clearly most necessary in the context of insolvency (my point: so why not limit it to these cases?)
8
Q
Re Kayford [1975]
Facts:
Key issue:
A
- Customers of a company either paid full price for goods in advance or paid a deposit. The Company’s chief suppliers went into liquidation. The Company could not meet its orders.
- The Company was advised by its accountants to open a separate bank account called Customers’ Trust Deposit Account and pay money into it received from customers for goods not delivered to them, withdrawing the moneys only if the goods were later delivered. The Company accepted the advice but instead paid money into a dormant deposit account in the company’s name (though the name was later changed).
- The company went into voluntary liquidation. Was the money part of the company’s general assets, or held on trust for customers in proportion to the amounts paid by them?
9
Q
Re Kayford [1975]
Megarry J
Issue with finding a Quistclose trust on the facts?
A
- “The sender may create a trust by using appropriate words when he sends the money… or the company may do it by taking suitable steps on or before receiving the money. If either is done, the obligations in respect of the money are transformed from contract to property, from debt to trust”
- So he thinks that in these circumstances, the latter applies (i.e. this is about the steps the company took in receiving the money), and so the “money is held in trust for those who paid for it”
- “Payment into a separate bank account is a useful (though by no means conclusive) indication of an intention to create a trust.”
- “It is an entirely proper and honourable thing for a company to do what this company did, upon skilled advice, namely, to start to pay the money into a trust account as soon as there begin to be doubts as to the company’s ability to fulfil its obligations to deliver the goods or provide the services.”
NB
- It’s not easy to justify the existence of a Quistclose trust in cases like this. Those paying the money in question never had any intention of being anything other than general creditors.
- So it’s not easy to see why the unilateral creation of property rights in their favour does not amount to an unlawful preference if the only reason why they did become beneficiaries of a trust rather than general creditors of the recipient is that unilateral act (i.e. the creation of the bank account).
• NB, this issue clearly does not affect the more typical types of Quistclose trust.
10
Q
Carreras Rothmans v Freeman Mathews Treasure [1985]
Facts:
A
- CR contracted for FMT to manage its advertising.
- Fees were paid not only in respect of FMT’s services, but also in discharge of FMT’s liabilities to media creditors (FMT incurred debts those debts as principal for CR). Thus, CR had an antecedent debt owed to FMT.
- FMT came to be in financial difficulty. CR made arrangement with FMT to pay the latter’s monthly invoices, and that a special bank account should be established in FMT’s name to be used “only for the purposes of meeting the accounts of the media and production fees of third parties directly attributable to CR’s involvement with the agency.” Bank was aware.
- FMT went into liquidation. CR notices that some of the TPs hadn’t been paid by FMT, even though money had been given to FMT to pay those TPs. So, FMT hadn’t used that money for the purpose.
- CR sought declaration that the money was held on trust for sole purpose of paying FMT’s fees and media creditors, and ought to be repaid to CR.
11
Q
Carreras Rothmans v Freeman Mathews Treasure [1985]
Peter Gibson J
A
- money in the account was subject to a trust in CR’s favour.
- FMT wasn’t free to deal with the money how it wanted: was “clearly intended that the moneys once paid would never become the property of the defendant… It is manifest that the defendant was intended to act in relation to those moneys in a fiduciary capacity only.”
- “The bank was to be put on notice of the conditions and purpose of the account. I infer that this was to prevent the bank attempting to exercise any rights of set off against the moneys in the account.”
- “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 use it for other than the stated purpose.”
- Submission 1:
(i) It was submitted that this couldn’t be Quistclose because there, the settlor was provider of loan moneys. Here, however, the settlor is not CR (who provided the money), but FMT (CR owed FMT money to reimburse for debts owed to TPs). Here’s CR is simply paying FMT previously-owed debt.
(ii) Yes, if FMT hadn’t agreed to the contract letter [i.e. I think setting up the new account], CR wouldn’t have broken its contract, and would still have paid its debt to FMT (since the arrangement always had been that CR paid FMT for various things including discharging debt to third parties).
(iii) But it’s still the case that CR made its payment on the terms of that letter “and the defendant received the moneys only for the stipulated purpose”
(iv) [i.e. it wasn’t that they were just receiving the money under their old agreement; it wasn’t that these payments were simply payments of previously-owed debt; they were payments under the new scheme, i.e. specifically for the purpose of paying the fees and creditors]
(v) Thus CR is “equated” to the lender in Quistclose. - Submission 2:
(i) Was also submitted that TP creditors had no enforceable rights, and so there was no primary trust.
(ii) BUT “the existence of enforceable rights in such persons had not been treated as crucial to the existence of a trust” in Quistclose cases.
(iii) Also, in light of Re Northern Developments “I cannot accept… that the TP creditors for the payments of whose debts [CR] had paid the moneys into the special account had no enforceable rights.”
12
Q
Carreras Rothmans v Freeman Mathews Treasure [1985]
- What distinguishes this case from other Quistclose trust cases?
- What does it say re conscience?
A
- A Quistclose trust can arise where the money in question, although advanced for a specific purpose, had been paid not by way of loan, but rather in satisfaction of a contractual debt.
- The case also demonstrates the importance of conscience, because not withstanding the different facts from Quistclose, drew on general principle 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 the recipient can only use the property for that stated purpose
13
Q
Re Northern Developments [1978]
Facts:
A
- Company N was parent company of a group of companies including K which was in financial difficulty.
- 17 banks put up a fund to rescue K and paid moneys into account in N’s name for express purpose of providing moneys for K’s unsecured creditors and for no other purpose (object behind this was that K could keep trading, otherwise, if it goes down, it could bring down the whole group).
- The amounts advanced were treated [by N, I think] as advances to the banks’ other customers in N’s group.
- K was put into receivership; half of the fund was unspent.
14
Q
Re Northern Developments [1978]
Sir Robert Megarry VC
- what type of trust was it?
- what was the interest of the creditors?
(i) what was the object of vesting beneficial interest in recipient?
(ii) any parallels with share of residue under a will? - Interests of the banks?
A
- There was a Quistclose trust attached to the fund. It was a purpose trust but enforceable by identifiable individuals: banks as lenders, K, and K’s creditors (i.e. Re Denley trust).
- Interests of the creditors:
(i) “The fund was established not with the object of vesting the beneficial interest in them, but in order to confer a benefit on Kelly (and so, consequentially, on the rest of the group and the bankers) by ensuring that Kelly’s creditors would be paid in an orderly manner.”
(ii) “There is perhaps some parallel in the position of a beneficiary entitled to a share of residue under a will. What he has is not a beneficial interest in any asset forming part of residue, but a right to compel the executor to administer the assets of the deceased properly. It seems to me that it is that sort of right which the creditors of Kelly had.” - Interests of the banks held to be under secondary trust if the primary trust failed (i.e. money would be paid back to them)
15
Q
What are the difficulties when object of trust is a purpose to purchase particular assets?
2 key questions
A
- What is a failure of purpose?
2. What is the nature of the trust? Resulting, constructive?
16
Q
Re EVTR [1987]
Facts:
A
- Mr Barber agreed to help a company by procuring a lease of equipment for it, and so deposited £60k with company’s solicitors “for the sole purpose of buying new equipment”. The £60k was used to buy the equipment. Deal worked as follows:
(i) The equipment was bought via a leasing company, and was to be delivered in 7 months
(ii) In the meantime, the supplier delivered less sophisticated equipment for temporary use, in exchange for the £60k as a deposit
(iii) The company’s solicitor was authorised to release the sum (for the sole purpose of buying the equipment) and £21k was paid to the leasing co, £39k to the supplier. - The company, though, then went into receivership (before delivery of the proper equipment).
- The supplier took back the temporary equipment, and repaid £29,652 to the receivers. This sum was £39k, i.e. the purchase price, with an agreed deduction for the Company’s breach of contract. The leasing company repaid £18,911 —£21k they had received, minus loss of interest.
- The question is whether the receivers are entitled to retain the repaid sums as assets of the Company (i.e. so that they are to be distributed amongst the unsecured creditors), or whether Barber was entitled to them.
17
Q
Re EVTR [1987]
Court of Appeal:
Per Dillon LJ:
(i) what if company went into liquidation before Barber paid?
(ii) what if company went into liquidation after transaction had gone all the way through?
(iii) when does RT arise?
(iv) what is the ‘long-established’ principle of equity relevant here?
(vi) conclusion?
Bingham LJ:
(i) if the sum had never been paid out?
(ii) was the purpose carried out?
- does he think the law is fair?
Henry Hoskins:
(i) why is this an extension of Quistclose?
A
- although the equipment had been purchased, the purpose had ultimately failed because the equipment had not been delivered, and so the money that had been paid was held on trust for the claimant.
- Dillon LJ:
(i) Under Quistclose, if the Company had gone into liquidation before the £60k was paid, Barber would have been able to recover the full amount, “on the footing that it was impliedly held by the company as a resulting trust for him as the particular of the loan had failed.”
(ii) At the other end of the spectrum, if the transaction had all gone through, Barber’s only right would have been as an unsecured creditor of the company for the £60k. “The present case lies on its facts between those two extremes of the spectrum.” Money had been spent on the purpose for which it was meant; but that purpose had then failed, and the bulk of the money had been repaid.
(iii) “On Quistclose principles, a resulting trust in favour of the provider of the money arises when money is provided for a particular purpose only, and that purpose fails”
(iv) It is a “long-established” principle of equity that if a trustee receives money / property because of / in respect of trust property, he’ll hold that money as a constructive trustee
(v) It follows that “the repayments made to the receivers are subject to the same trusts as the original £60k in the hands of the company”
(vi) “There is now, of course, no question of [money that was repaid] being applied in the purchase of new equipment for the company, and accordingly, in my judgment, it is now held on a resulting trust” for the claimant.” - Bingham LJ
(i) Had the sum never been paid out, the facts would have been identical to Quistclose. The purpose — acquiring the new equipment — was not carried out, so A was entitled to the £40k returned to the Company.
(ii) Although the fund was applied to the stipulated purpose, the object of the fund was not achieved. Most people would be surprised if A were reduced to the position of unsecured creditor.
- (Note, though, that whilst he eventually concludes there’s a Quistclose trust under present law, he has his doubts about whether the law as it stands is fair). - Henry Hoskins: the beneficial ownership went, for a time, to the supplier [and presumably to the leasing company]. The extension rests on the constructive trust analysis [i.e., once the money is repaid to the company, at this point they hold it as constructive trustee]
18
Q
Twinsectra Ltd v Yardley [2002]
Facts:
A
- Twinsectra lent money to Mr Yardley for the purchase of property.
- A solicitor, Sims, received the money, having given a personal (written) undertaking to T to retain it until it was used to purchase property (undertook that the loan money would be used only for that purpose).
- The money was, though, used to discharge a debt that Sims owed to Yardley.
- Sims became bankrupt, and T wanted to recover the property.
- The only claim before the HL was whether Leach, another solicitor acting for Y, was liable for dishonest assistance in a breach of trust (Sims had paid the money (for T) to Leach, who then paid some of it out on Y’s instructions for other purposes).
- Liability depended first on identifying that the money was held by Sims on trust.
19
Q
Twinsectra Ltd v Yardley [2002]
House of Lords: the money was held on trust for T.
Lord Hoffmann
A
1, Lord Hoffmann (Slynn, Steyn, Hutton agreed; so this is the view of the majority): money held on express trust.
(i) “The effect of the undertaking was to provide that the money in Sims’ client account should remain Twinsectra’s money until such time as it was applied for the acquisition of property in accordance with the undertaking”
(ii) So e.g. if Yardley had gone bankrupt before the money had been so applied, it wouldn’t have formed part of his estate (as it would have if Sims had held the money for Y absolutely).
(iii) Therefore: “Sims held the money on trust for T, but subject to a power to apply it by way of loan to Y in accordance with the undertaking. No doubt Sims also owed fiduciary obligations to Y in respect of the exercise of the power, but we need not concern ourselves with those obligations because in fact the money was applied wholly for Y’s benefit.”
20
Q
Twinsectra Ltd v Yardley [2002]
Lord Millett (Hutton agreed again): money held on Quistclose trust characterised as being a resulting trust.
6 steps to his analysis.
- what happens in normal loan
- difference with Quistclose cases
- how do we distinguish (1) from (2)
- why is it unconscionable?
- is the duty contractual or fiduciary?
- how does the trust arise?
A
- Money advanced by way of loan normally becomes the property of the borrower. He is free to apply the money as he chooses, and, save to the extent to which he may have taken security for repayment, the lender takes the risk of the borrower’s insolvency.
- But it is well established that a loan to a borrower for a specific purpose, where the borrower is not free to apply the money for any other purpose, gives rise to fiduciary obligations on the part of the borrower which a court of equity will enforce.
- This depends on intention of the parties, and the circumstances of the case
- It’s unconscionable to get money on terms as to its application, and then discard them
- This is not a contractual duty, but a fiduciary one. May exist despite the absence of any contract, and it binds third parties (as in Quistclose).
- And since this fiduciary relationship arises in respect of a specific fund, it gives rise to a trust.
21
Q
Twinsectra Ltd v Yardley [2002]
Lord Millett (Hutton agreed again): money held on Quistclose trust characterised as being a resulting trust.
Intention/purpose
A
- A Quistclose trust does not necessarily arise merely because money is paid for a particular purpose — there must be intended (objectively) to be some sort of limitation. It is common for a lender to inquire into the purpose and lend it for a particular purpose — it is not enough to create a trust. Otherwise “commercial life would be impossible.”
- On the facts: the undertaking was “crystal clear”. So, there’s a Quistclose trust: money was never at Y’s free disposal, it belonged throughout to T, subject to Y’s right to apply it for the acquisition of property. T gave the money to Sims, relying on him to ensure that it was properly applied, or else returned.
22
Q
Twinsectra Ltd v Yardley [2002]
Lord Millett (Hutton agreed again): money held on Quistclose trust characterised as being a resulting trust.
• The nature of the trust
A
- Lord Wilberforce’s analysis in Quistclose suggests there are two trusts: one for identifiable beneficiaries and a second for the lender arising on failure of the first – primary and secondary trusts. However, there are many theoretical difficulties with this and little academic support.
- On the present facts, there is no identifiable beneficiary but merely an abstract purpose: to buy property. So where is the beneficial interest? The lender, the borrower, the contemplated beneficiary, in suspense?
(i) The lender
♣ Means the Quistclose trust is a simple commercial arrangement where the lender retains ownership but gives the borrower enough to carry out his purpose. If the money is not applied as the lender instructs then it returns to him. [so, the money is held on resulting trust for the lender the whole time]. There is considerable academic support for this view (including an article by Millett himself – see below). He thinks this is the only option that fits orthodox law and commercial reality, but considers the other options
(ii) The borrower
♣ I.e. so that the money is at borrower’s free disposal. This cannot be the case, since the whole purpose is to restrict the borrower’s use.
(iii) The contemplated beneficiary
♣ In Quistclose itself, there was no reason to explore the position where the primary purpose could still possibly be carried out. In all the cases up to there, the contest is between the borrower’s trustee-in-bankruptcy, and the lender. ♣ The question whether the primary trust is accurately described as a trust for the creditors first arises in Northern Development Holdings. Megarry relies on Wilberforce to say that the primary trust was a purpose trust enforceable by (amongst others) the creditors, as the people for whose benefit the trust was created. ♣ The most serious problem with saying that the beneficial interest should vest in the intended beneficiary is that this would mean there could be no trust on the present facts – a situation where you have a non-charitable purpose and no beneficiary (so no-one but the lender to enforce performance). ♣ Similarly in EVTR, where the purpose is just to buy new equipment—any analysis of Quistclose trusts, however, must be able to accommodate gifts and loans for an abstract purpose like in these cases. Because there’s no reason (and nothing in the cases to suggest) to create an arbitrary distinction between different purposes of loan (i.e. ones for an abstract purpose not qualifying for Quistclose, and ones for a purpose and said to benefit an ascertainable class of beneficiaries qualifying)
(iv) In suspense
♣ Gibson J points out in Carreras Rothmans that the effect of adopting Megarry’s analysis is to leave the beneficial interest in suspense until the stated purpose is carried our, or fails.
♣ But this doesn’t have regard to the role that a resulting trust plays in equity; it doesn’t fit with the analysis of an RT as operating where the beneficial interest is not disposed of (i.e. the second type of RT [automatic]).
23
Q
Twinsectra Ltd v Yardley [2002]
Lord Millett (Hutton agreed again): money held on Quistclose trust characterised as being a resulting trust.
• Quistclose as an RT?
A
- Chambers’ central thesis on RTs: RT arises whenever there is a transfer of property in circumstances in which the transferor (or more accurately the person at whose expense the property was provided) did not intend to benefit the recipient.
(i) It responds to the absence of an intention on the part of the transferor to pass the entire beneficial interest, not to a positive intention to retain it. Insofar as the transfer does not exhaust the entire beneficial interest, the resulting trust is a default trust which fills the gap and leaves no room for any part to be in suspense.
(ii) “An analysis of theQuistclosetrust as a resulting trust for the transferor with a mandate to the transferee to apply the money for the stated purpose sits comfortably with Dr Chambers’ thesis, and it might be thought surprising that he does not adopt it”.
24
Q
Twinsectra Ltd v Yardley [2002]
Lord Millett (Hutton agreed again): money held on Quistclose trust characterised as being a resulting trust.
On CA’s reasoning
A
- CA was happy to treat beneficial interest as in suspense, or, following Chambers, to hold that it was in the borrower, lender having only a contractual right enforceable by injunction to prevent misapplication.
(i) But this is inconsistent with the actual result they reach, that T has a proprietary remedy – unless the money belonged to D before its misapplication, there’s no basis on which can justify a proprietary remedy against TPs
(ii) Chambers’ “novel view” [reading list]:
♣ The arrangements do not create a trust (i.e. Wilberforce’s primary trust) at all; the borrower receives the entire beneficial ownership in the money subject only to a contractual right in the lender to prevent the money being used otherwise than for the stated purpose.
♣ If the purpose fails, a resulting trust in the lender springs into being: the lender’s equity (which is an equitable right to prevent money from being used for other purposes, rather than a right to compel fulfilment of a specified purpose) is merged in a RT in favour of lender.
♣ So, this sidesteps the problem about the location of the beneficial interest prior to purpose failure,
(iii) Millett: “In fact, Chambers argues for a kind of restrictive covenant enforceable by negative injunction yet creating property rights in the money. But restrictive covenants, which began life as negative easements, are part of our land law. Contractual obligations do not run with money or a chose in action like money in a bank account” [i.e., contractual obligations don’t produce proprietary rights]
(iv) Lots of academic reaction to Chambers. Ho and Smart (2001) [on reading list] Millett thinks, destroy Chamber’s theory:
♣ Chambers’ analysis doesn’t give a solution to cases of non-contractual payment (i.e. where the loan is not made as part of a contract).
♣ It’s inconsistent with Wilberforce’s description of the borrower’s obligation as fiduciary and not merely contractual.
♣ It fails to explain the evidential significance of a requirement that the money should be kept in a separate account.
♣ It can’t easily be reconciled with the availability of proprietary remedies against 3rd parties (dishonest assistance, knowing receipt).
♣ And whilst the existence of a mere equity like this will be enough to prevent money from being available to unsecured creditors (because the trustee in bankruptcy has no greater rights than his bankrupt), it won’t prevail over secured creditors. (so would mean that where, e.g. in Quistclose, the bank holds a floating charge – as it probably did – Chambers’ analysis would have led to a different outcome)
25
Q
Twinsectra Ltd v Yardley [2002]
Millet:
- Can the lender enforce the trust as a beneficiary of the secondary trust?
- Can the lender enforce the trust as a settlor?
- What did Chambers argue? But what are the issues with this suggestion?
- Thus, what is the one explanation of the lender’s fiduciary right to enforce the primary trust?
A
- “He cannot do so as the beneficiary under the secondary trust, for if the primary purpose is fulfilled there is no secondary trust”.
- “He cannot do so as settlor, for a settlor who retains no beneficial interest cannot enforce the trust which he has created”.
- Chambers insists that the lender has merely a right to prevent the misapplication of the money, and attributes this to his contractual right to specific performance of a condition of the contract of loan.
(i) Millett: this provides no solution where the arrangement is non-contractual.
(ii) And Wilberforce clearly based the borrower’s obligation on an equitable or a fiduciary basis and not a contractual one.
(iii) He was concerned to justify the co-existence of equity’s exclusive jurisdiction with the common law action for debt. Basing equity’s intervention on its auxiliary jurisdiction to restrain a breach of contract would not have enabled the lender to succeed against the bank, which was a third party to the contract (i.e. if the obligation is contractual, how could it be enforced against TPs to the contract?) - There’s only one explanation of the lender’s fiduciary right to enforce the primary trust which can be reconciled with basic principle: he can do so because he is the beneficiary.
26
Q
Twinsectra Ltd v Yardley [2002]
Millet:
o Second, seeing the beneficial interest as being in the lender explains why the primary trust is said to have failed in several cases (especially Toovey v Milne and Quistclose itself)
- did the borrower’s bankruptcy prevent the creditor being paid?/failure of purpose?
- Why must the purpose fail?
- Why does a RT work? (according to Millet?)
A
- Since the money did not belong to the borrower, the borrower’s bankruptcy/insolvency did not prevent the creditor being paid (since, when you’re bankrupt/ insolvent, a third party could still pay particular creditors). So, on this basis, there’s no failure of purpose.
- The reason the purpose failed must be because the lender was trying to save the borrower from bankruptcy/insolvency. This in itself isn’t enough to make the trust fail – it’s just the settlor’s motive which has been frustrated, but a trust only fails if it becomes illegal or impossible.
- However, if the borrower is seen as holding the money on a RT for the lender but with power/a duty to carry out the lender’s revocable mandate, and the lender’s object in giving the mandate is frustrated, he is entitled to revoke the mandate and demand the return of money which was beneficially his throughout.
27
Q
Twinsectra Ltd v Yardley [2002]
Millet:
Conclusion
- orthodox example of RT?
- When does it arise?/does borrower have beneficial interest?
- why does money come back upon the purpose failing?
- significance of circumstances of the case
A
- Quistclose trusts are orthodox examples of resulting trusts. The lender pays the money to the borrowerby way of loan, but he does not part with the entire beneficial interest in the money, and in so far as he does not it is held on a RT for the lender from the outset (does this support retention theory??)
- It arises when the lender parts with the money on terms that don’t exhaust the beneficial interest. It is the borrower who has a very limited use of the money, being obliged to apply it for the stated purpose or return it. He has no beneficial interest in the money, which remains throughout in the lender subject only to the borrower’s power or duty to apply the money in accordance with the lender’s instructions.
- When the purpose fails, the money is returnable to the lender, not under some new trust in his favour which only comes into being on the failure of the purpose, but because the resulting trust in his favour is no longer subject to any power on the part of the borrower to make use of the money.
- Whether the borrower is obliged to apply the money for the stated purpose or merely at liberty to do so, and whether the lender can countermand the borrower’s mandate while it is still capable of being carried out, must depend on the circumstances of the particular case.
28
Q
Davies & Virgo on Quistclose Trusts
- importance of purpose
- importance of purpose failing
(i) re insolvency
(ii) how must the failure be shown? - Why is there a trust?
(i) reasoning in Quistclose case
(ii) Issue with primary trust being for identified beneficiaries?
(iii) Issue with trust being a purpose trust?
(iv) re Millet’s approach?
A
- First, there must be a clear purpose for a Quistclose trust to arise, and the property must be transferred to be used exclusively for that purpose. It’s crucial that the property isn’t at the free disposal of the recipient. This might be evidence by, e.g., recipient being required to keep the property segregated from his general assets (as in e.g. Quistclose)
- It is also crucial that the purpose must fail:
(i) It’s generally assumed that the power fails on insolvency: since one of the reasons for lending is often to avoid borrower’s insolvency, if this then happens, then the purpose must have failed.
(ii) The failure of the purpose must, however, be clearly shown. EVTR: although the equipment had been purchased, the purpose had ultimately failed because the equipment hadn’t been delivered. - So, it’s relatively easy to explain how a Quistclose trust comes about. What’s more difficult is to explain why there is a trust.
(i) In Quistclose, HL held that there were effectively 2 trusts: primary express trust for a purpose, and secondary trust for the lender, which arose on the failure of the purpose. But this reasoning is problematic:
(ii) The primary trust for identified beneficiaries would allow beneficiaries to terminate the trust and transfer the property to themselves (under Saunders v Vautier). This is unlikely to be what parties intended.
(ii) On the other hand, if it’s a trust for a specified purpose, it’s unlikely to be valid, since there are no objects to enforce the trust.
(iii) And even if the purpose trust is valid as being essentially for identifiable beneficiaries (i.e. under Denley), this would mean the beneficial interest in the property is in suspense until the given purpose was either fulfilled or failed. Because the primary trust either comes to an end when the money has been used for the correct purpose, or when it hasn’t been (in which case the secondary trust comes in)
• This approach was criticised by Millett in 1985, before he became a judge:
o “To impute to A an intention to confer on C a right to call for property enforceable in equity but not an equitable interest in the property is to attribute to him the motivation of an antiquarian.”
• So, in Twinsectra, Millett says there’s no need to conclude that the beneficial interest in the property was in suspense. Instead, he says there’s a resulting trust, which would account for the beneficial interest in the property at all times: the beneficial interest would remain with the transferor unless and until the purpose is fulfilled.
29
Q
- How many trusts does Millet say that there are?
- PRT or ART?
- problems with a PRT analysis
- problems with ART analysis? - How would an ART analysis work?
- What is the role of the power?
- Does Millet say in the intro of Swadling’s et al collection of essays on Quistclose trusts?
- So which principles do we apply to the Quistclose trust?
- What is the argument that there should be an express trust?
A
- Millett says there’s only ever one trust here – an RT from the beginning. It’s not that there’s an express trust that has failed.
- Does this mean that it’s an RT responding to settlor’s presumed intention? [i.e. rather than an automatic RT]. Possibly, but difficulties might arise here where it’s the borrower who segregates the lender’s property from his own general funds, without being instructed to do so:
- It might be better to explain the Quistclose trust as arising on the failure of an express trust:
- We take the transferor to have intended to create a purpose trust; which then isn’t valid because it’s not charitable. So, instead, recipient holds the property transferred on RT for the transferor. - But the recipient still has power to use property for the purpose for which it was transferred at the outset, given that the transferor’s consented to this.
- It might, however, be better not to try and explain all instances of Quistclose trusts in the same way. Indeed Millett has written, in 2004 (intro to Swadling’s collection of essays on quistclose):
(i) Quistclose trust is probably the “most important application of equitable principles in commercial life”
(ii) But the nature of the trust and location of the beneficial interest “remain elusive” – even post-Twinsectra, they are much debated
(iii) He thinks it can be any of express, implied, constructive or resulting trust, “depending on the facts of the particular case and the boundaries between these various forms of trust”
(iv) From a commercial POV, though, it’s just a “mechanism by which one person may allow the use of his money by another for a stated purpose without losing his right to the money more than necessary to achieve the purpose.” Obviously there is a commercial need for this.
(v) The problems courts are likely to face aren’t in determining the nature of the trust, but in distinguishing it from the ordinary case of a lender who wants to know why borrower wants the money (but doesn’t therefore lend it on trust, retaining the beneficial interest). - So, the nature of the trust might depend on the facts of any case. But it’s important to appreciate that the well-established principles of each type of trust should be applied.
- There’s a strong argument to say that if a lender wants to be protected in the event of the borrower’s insolvency, the lender should make his intentions express. If he does so, then an express trust could arise.
(i) This possibility has been recognised judicially by Lord Millett, in Latimer (post-Twinsectra)
(ii) And the majority in Twinsectra thought it was an express trust [see Hoffmann above]
