#15709 - Quistclose Trusts - Trusts and Equity

QUISTCLOSE TRUSTS

The basic principle

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:

• The money is not a part of B’s general property

• The money is the subject of a primary trust to be used for the specified purpose and no other.

• If the primary purpose fails, a secondary trusts arises whereby B holds the unexpended money on trust for donor A.

The most recent analysis of Quistclose trusts in the HL in Twinsectra classified them as resulting trusts. But they’re not necessarily RTs.

Barclays Bank v Quistclose Investments Ltd [1970]

Facts: 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.

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:

• Question 1: whether between Q and RR there was a trust in Q’s favour in the event of a dividend not being paid

• 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.”

• 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].

• 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 19^th century cases). He thinks these authorities are good, but given that they’re not binding on HL, looks at the reasons.

• 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”

• 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’.

• 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.

• Question 2: Did Barclays have sufficient notice to be bound by the trust? Yes

• 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.

Analysis:

• My thoughts

• It is clear that the beneficial interest under what Lord Wilberforce classified as the primary trust can’t be in the recipient of the money advanced (i.e. RR) since this would defeat the whole object of the exercise by enabling that money to be claimed by his trustee in bankruptcy.

• The only other possibilities are that the beneficial interest is in the persons, if any, who will receive the benefit of any payments made pursuant to the specified purpose that is it is in suspense, or that at all times remains in the person who advanced the money in the first place (Quist).

• If the primary trust is an express trust, then it would appear to follow that 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.

• Peter Gibson J, who did reach the same conclusion, however regarded the primary trust as a constructive trust.

  • 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.

  • 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.

• According to Lord Millett’s analysis (resulting trusts, see below), successive primary and secondary trusts do not arise – there is one trust throughout, a trust in favour of the person who advanced the funds.

• D+V

• 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”

• Swadling has also questioned whether the lender should benefit from proprietary protection [see below]. Denounces the Quistclose decision – says it’s contrary to orthodoxy.

• D+V: 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:

  • 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. In Twinsectra, Millett was very aware of the need to distinguish between a purely personal contractual obligation, and a proprietary relationship.

Re Kayford [1975]

Facts: 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. Later the name was changed to that suggested.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...