#16174 - Quistclose Trusts - Trusts and Equity

TRUSTS: QUISTCLOSE TRUSTS

Quistclose Trusts

• Where property transferred for a specific purpose, recipient must use it for that purpose or hold it on trust for transferer if purpose fails (important because transferer has priority over creditors)

• Operation of Quistclose trusts:

  • Barclays Bank v Quistclose Investments: D lent money to X to enable it to pay a dividend but X went into liquidation without paying it and wished to use the money to pay its overdraft. HL held that X couldn't do that because money was held on trust for D to ensure that it was used for the stipulated purpose. Trust recognized for policy grounds that D didn’t intend to benefit X’s creditors.

  • Twinsectra v Yardley: C lent money to solicitor on behalf of D to retain the money until purchase of property. In breach of the undertaking the money was paid for other purposes. Held that the solicitor held the money on trust; Hoffmann said express trust, while Millett held it was a Quistclose trust categorized as resulting trust.

• Requirements of Quistclose trusts:

  • Particular purpose (often a loan to pay borrower’s creditors)

  • Exclusive use for stated purpose

  • Borrower required to keep the property separate (really a factor of strong evidentiary significance rather than a requirement, as while it was there in Quistclose it wasn’t in Twinsectra)

  • Failure of purpose

    • Re EVTR: C deposited money for company to buy equipment; delivery failed and company received most of the payment back. This was held on trust for C.

• Nature of Quistclose trusts:

  • Express trust for third party – orthodox view, per Lord Wilberforce in Quistclose, recognizing that the money was held on trust for the creditors following the failure of which a resulting trust is declared in favour of transferer. This is unsatisfactory as it doesn’t explain all cases, like those trusts for abstract purposes rather than beneficiaries (like Twinsectra)

  • Express trust for lender: recognized by Lord Hoffmann in Twinsectra, but inconsistent with view of express trusts (which enable lender to compel use for promised prupose, revoke loan though prupose was capable of being fulfilled, require borrower to use for another purpose etc. which are inconsistent with requirements of Quistclose trusts)

  • Beneficial interest in suspense: CoA in Twinsectra held the money was express NCPT in which case the beneficial interest would be in suspense until identified purpose had been carried out. Rejected by Lord Millett (unorthodox, purpose of resulting trust to fill gap where beneficial interest is not exhausted)

  • Express trust for borrower: no because then borrower would be entitled to free disposal of property

  • Loan subject to contractual undertaking: transfer of property to borrower but lender has contractual right enforceable in Equity to prevent it from being used for other purposes. Millett rejected:

    • Doesn’t provide solution where there is a non-contractual payment

    • Inconsistent with Wilberforce’s recognition in Quistclose that borrower is subject to fiduciary obligations

    • Doesn’t explain evidential significance of requirement that transferred property should be kept separate

    • Doesn’t explain how proprietary rights can arise from contractual relationships

  • Resulting trust from the outset: Per Lord Millett in Twinsetra – because transferer hadn’t exhausted beneficial interest. Thus money lent was held on resulting trust for Twinsectra subject to the solicitor’s power to apply it for a specified purpose.

    • Inconsistent with requirements for automatic resulting trusts (which arise only when property is transferred on failed express trust) because Lord Millett didn’t identify an express trust, and in many Quistclose cases the purpose had not failed so there was no failure of trust (but rather failure of reason for lending the money)

• Application of Quistclose trusts proven highly beneficial to lenders and sometimes third party creditors

• Re-evaluation needed after confusion describing it as illusory trust, purpose trust, constructive trust

Re Australian Elizabethan Theatre Trust

• Facts: AETT sponsored Australian arts organizations and donors had tax deductions if shown that AETT received donations unconditionally. Thus a standard form was devised where donors could state unconditionality and a preference for a particular recipient. All money were mixed into one account and funds weren’t marked with recipient. Was argued that a Quistclose trust arose where the arts organizations were entitled as beneficiaries to the funds that donors had earmarked for their use

• Gummow J:

  • No Quistclose trust because no intention to create express trust (didn’t criticize Quistclose but pointed out that it was testimony to the ‘flexibility of the institution of the express trust’)

  • To speak of the Quistclose trust as a new legal institution rather than an example of the particular operation of principle is false

Barclays Bank v Quistclose

• Facts: Rolls experienced financial problems (overdraft with Barclays of million pounds plus a dividend) so obtained a loan from Quistclose on the condition that the funds would only be used for paying the dividend. Prior to payment Rolls went into liquidation and Quistclose brought an action claiming that the funds were held on trust because they were paid for purpose. Since purpose failed, Quistclose alone was entitled to the funds.

• Central issues:

  • Whether trust could be established when there was a debtor/creditor relationship (trust co-exist with contract)

    • Wilberforce: yes.

  • If so, what were the necessary criteria for the trust

    • Requirements of a express private trust: mutual intention of D and C was that the sum shouldn’t become Rolls’ assets but used exclusively for payment. Consequently if the dividend couldn’t be paid then the money was to be returned.

    • Wilberforce’s general principle: arrangements for payment of a person’s creditors by a third parson gives rise to a fiduciary relationship in favour of the creditors as primary trust and secondarily, if primary trust fails, of the third person.

  • How does such a trust function

  • Nature of the trust established

    • Wilberforce’s primary/secondary trusts distinction is superficially attractive but over-emphasizes purpose rather than intention. Problems:

      • Where does beneficial interest lie?

      • What is meant by failure of primary trust and what factors would indicate its failure?

      • Conclusion: problem with Quistclose wasn’t the decision but treatment of legal issues

• Wilberforce’s general principle misleading because there wasn’t a good understanding of what gave rise to a Quistclose trust and this was open to court interpretation

• Why QTs different from standard loans:

  • Borrower wouldn’t obtain beneficial interest (sum didn’t become assets of Rolls)

  • Sum advanced constituted a separate fund from borrower’s assets

• Underlying reason: security device where lender retains beneficial interest and therefore control

Contrast between the two cases

• Aus case: no express private trust in favour of recipients because –

  • Nature of transactions and words used was very different from exclusive nature/specific purpose of QTs

    • “Unconditionally” leads to opposite result (no qualification/obligation)

    • It was only a statement of “preference” as tax exemption required the gift to be made outright

  • Donations weren’t deposited in a separate account earmarked for payment to recipients

• Conclusion: Aus case illustrates that preferred purpose of funds is insufficient to give rise to a trust especially where monies don’t constitute a separate fund

Major difficulties with Quistclose’s emphasis on purpose

• What is the nature of trust relationship between debtor and creditor?

  • Illusory trust: Millett – illusory because the apparent beneficiaries take no beneficial interest. It is created by the single intention of settlor and is revocable at any time. Problems:

    • Facts in Quistclose different from those giving rise to an illusory trust – funds weren’t for paying Quistclose’s debts but Rolls’ own debts

    • Doesn’t take into account the mutual intention of the parties and possibility of an underlying contract

  • Purpose trust: Rickett – Quistclose can’t be explained on basis of traditional trust principles but primary trust should be a NCPT followed by a secondary resulting trust in favour of lender (problem is that NCPTs are usually invalid). Causes of the mistaken classification:

    • Wilberforce over-emphasized purpose of loan to ascertain existence of a trust and its structure

    • Semantics: QTs created for a specific purpose, confused with a PT

  • Clear that it’s not a NCPT: fundamental difference per Gummow J – in Quistclose there was a trust fund held for a class of ascertained beneficiaries; word purpose describes the end sought to be achieved and is not indicative of “heralding a new era for NCPTs”

  • Express private trust: Yes – subject to certain conditions (purposes)

  • Constructive Trust: suggested in NZ, while in Canada QTs are underdeveloped because constructive trusts are a broad remedy based on unjust enrichment (means that NZ and CDN caselaw are not authoritative)

  • Express trust with two limbs: Gummow J tried to reconcile the view of QTs as a single express trusts with Wilberforce’s description of a dual trust mechanism – it is an express trust with two limbs (no further elaboration)

• Which parties are required to show intention to create a trust?

  • Quistclose and Aus case both didn’t decide whether the mutual intention of lender and...