WS 9b Trusts and Insolvency - Loan for a Particular Purpose Flashcards
Barclays Bank v Quistclose Investments
Quistclose lent money to Rolls Razors on the condition that RR would use the money only to pay dividends to its shareholders. Before the dividends were paid, RR went into liquidation. This meant that the money could not be used for the stated purpose of paying dividends. [HOUSE OF LORDS]
House of Lords – Trust existed:
a) Settlor was quistclose; trustee was RR
b) Held that a two-tier trust had been created. RR held the loan money on a primary trsut 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.
What was held in Barclays Bank v Quistclose?
It was held that the arrangement gave rise to a relationship of a fiduciary character for the purpose of ensuring that it was used only for the purpose of paying the dividend and, that purpose having failed, it was repayable in full to the lender and did not form part of the company’s assets distributable amongst its creditors.
Twinsectra v Yardley [2002] - House of Lords
A lender had lent money to an agent for the purpose of investing it in property. The loan was actually paid to a solicitor purporting to act for the agent upon written conditions which included the following express undertaking:
- The loan monies will be retained by us until such time as they are applied in the acquisition of property on behalf of our client.
- The loan monies will be used solely for the acquisition of property on behalf of our client and for no other purpose.
Lord Millett said there was a Quistclose trust (paras 68-76). The other judges found a trust on other grounds.
Carreras Rothmans v Freeman Matthews Treasure [1984]
Rothmans lent money to its advertising agency (which was in financial difficulty) for the sole purpose of paying third party creditors with whom the adverts had been placed. The advertising agency paid the money into a separate bank account. Ad agency became insolvent before paying the third party creditors.
Peter Gibson J. held that the money in the separate bank account was subject to a trust in favour of Rothmans because ‘the defendant was never free to deal as it pleased with the moneys so paid’
A Quistclose trust arose because the loan money was ring-fenced for a particular purpose (by the specification of a sole purpose and payment into a separate bank account).
Re EVTR [1987]
Claimant (a former employee) lent the company £60,000 ‘for the sole purpose of buying new equipment’. The £60,000 was pid into the company’s general funds. The company ordered the new equipment and paid for it, but went into receivership before it was delivered. The equipment suppliers refunded $48,536 of the 60 grand. Was there a Quistclose trust?
HELD - the original loan of 60 grand had been subject to a Quistclose trust because it was expressly lent for a sole, exclusive purpose. The judge decided that it was not essential for the money to be paid into a separate account. HELD that the refund was held on a Quistclose trust.
Why was there not a Quistclose trust in Farepak?
Because the customers’ money was at the free disposal of Farepak. There was no requirement for the company to keep the customers’ payments separate from its own funds pending delivery the hampers or vouchers.
Stages in a loan for particular purpose question
Step 1: Introduce the concept of a Quistclose Trust
Step 2: Is the Quistclose trust validly established: Are the three certainties present? (not necessary to address the beneficiary principle and formalities)
Step 3: Has the purpose of the primary trust failed?
- Certainty of intention?
a. The money should have been lent for a sole specified purpose and not intended to be at the borrower’s free disposal (Quistclose; Twinsectra)
b. Payment of the loan into a separate bank account is strong evidence of certainty of intention, but not essential (Re EVTR)
Certainty of objects?
the lender is likely to be deemed the object of a Quistclose trust as per Lord Millett in Twinsectra. However, this isue has not yet been conclusively decided. In Re Northern Developments, the object was said to be “the person the money benefits”
What if the purpose of the primary trust fails?
A resulting trust arises in favour of the original lender. As the lender therefore has a proprietary interest, any proprietary claim they make will have priority over all other secured and unsecured creditors on the business’s insolvency.
What if the purpose of the primary trust is fulfilled?
Primary trust ceases. The lender no longer has a beneficial interest, the lender will only have a contractual claim for the repayment of the loan, and will consequently rank alongside other unsecured creditors.
