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Clearing up the Quistclose Trust

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About The Author

Anirudh Mandagere (Former Law and Social Policy Editor)

Anirudh is the judicial assistant to Lord Justice Jackson. Previously he studied History at St. Catherine’s College, University of Oxford and undertook the Graduate Diploma in Law and the Bar Professional Training Course at City University. Outside of the law, Anirudh enjoys running, badminton and watching the cult Netflix series, ‘Bojack Horseman’.

Where property is transferred for a particular purpose, a Quistclose trust ensures that the recipient uses the property solely for that purpose. This has great advantages in the context of lending: where a lender successfully establishes a Quistclose trust, they will acquire a proprietary interest in the property that elevates an otherwise unsecured debt to one with priority over other creditors.

The Origins of the Quistclose Trust

The trust derives its name from the case of Barclays Bank v Quistclose Investments Ltd [1968]. Here, Quistclose Investments Ltd lent money to Rolls Razor Ltd in order to enable the company to pay a dividend. The money was paid into a bank account with Barclays on the strict agreement that the money would only be used to pay that dividend.

Subsequently, Rolls Razor filed for bankruptcy and went into liquidation. Barclays wished to use the money in the Rolls Razor account to discharge the company’s overdraft. Quistclose Investments disputed this, arguing that their agreement with Rolls Razor meant that the money was held on trust.

The House of Lords agreed with Quistclose's case: it held that a ‘special arrangement’ existed between Quistclose and Rolls Razor which resulted in the money being held on trust. Thus, the concept of the Quistclose trust was formed.

The Development of the Quistclose Trust

The Quistclose trust was further developed in the later case of Twinsectra v Yardley [2002], such that it was used for another purpose: the foundation of a dishonest assistance claim. Here, Twinsectra Ltd lent money to a solicitor, Sims, on behalf of an entrepreneur, Yardley, who had made arrangements to borrow the money. Dishonestly, Sims paid the money to another solicitor, Leah, who used some of the money for other purposes. Subsequently, Sims became bankrupt and Twinsectra sued Leach for assisting a breach of trust committed by Sims.

The question for the House of Lords in this case was whether Sims had held the money provided by Twinectra on trust. Lord Millett gave what is now deemed to be an ‘authoritative exposition’ of the Quistclose trust:

Money advanced by way of loan normally becomes the property of the borrower. But it is well established that a loan to a borrower for specific purpose where the borrower is not free to apply the money for any purpose gives rise to fiduciary obligations on the part of the borrower which a court of equity will enforce.

Such arrangements are commonly described as creating “a Quistclose trust”… When the money is advanced, the lender acquires a right, enforceable in equity, to see that it is applied for the stated purpose, or more accurately to prevent its application for any other purpose. This prevents the borrower from obtaining any beneficial interest in the money, at least while the designated purpose is still capable of being carried out.

The principal question in Twinsectra was whether the creation of a Quistclose trust was ever intended by either Twinsectra or Sims. Lord Millett argued that, while the parties may not have appreciated that they were going to create a trust, the Court needed to consider the arrangements of the parties to examine whether, in effect, they had actually done so. In Quistclose and Twinsectra, the nature of the documents played a major role in deciding what the parties had intended. The documents showed that the relationship was more than that of a borrower and lender; rather, there was a fiduciary duty imposed on the borrower not to apply the money for an ulterior purpose.

What type of trust is it?

While the judges in Twinsectra all agreed that the money was held on trust, disagreement arose concerning the nature of the Quistclose trust itself. Lords Hoffman, Slynn, Steyn, and Hutton agreed that the money was held on express trust, while Lord Millett held that the money was held on resulting trust.

Express Trust: where A explicitly transfers property to B, to hold for C. 

An express trust is the simplest form of trust. In Knight v Knight (1840) 3 Beav 148, Lord Langdale reported that, for such a trust to be valid, it must satisfy three conditions: the settlor (A) must have intended the trust to have been created; the subject-matter of the property must be certain; and the identity of the beneficiary (C) must be clear.                                                                                                     

In the original Quistclose judgment, Lord Wilberforce maintained that the loan in question existed as two trusts. The first was as a primary express trust. Such a trust is based on the principle that, when money is lent for a specific purpose, the lender creates an express trust because there is certainty of intention, subject-matter, and beneficiary. However, if the purpose of the loan fails, the primary express trust is replaced by a secondary resulting trust (see below) which allows the money to be transferred back to the lender.                     

This approach was subject to criticism by Lord Millett in Twinsectra who maintained that the loan in Quistclose was for a purpose: to ensure the provision of dividends. If Quistclose trusts were to be interpreted as an express trust in this way, the loan would be for a purpose and not for any intended beneficiary. Thus, the express trust would not satisfy the third condition of ‘certainty of beneficiary’ for an express trust in Knight v Knight.

It is true that certain trusts can be for a purpose, rather than for a beneficiary. These are known as non-charitable purpose trust. Such purpose trusts which are not for charity are usually void because of the fear that they could potentially be vehicles be fraud. While there are exceptions to this rule, a loan does not count as one of them.

Classifying the Quistclose trust as an express trust for the lenders leads to further conceptual difficulties. One principle of express trusts is that they can be terminated at will, and the property transferred to the beneficiaries at any time. Taking this logic, if the Quistclose trust was an express trust for the creditors, the insolvency of the company would have meant that the lenders could simply have accrued their dividends.

Resulting Trust: The property ‘jumps back’ to A.

A private express trust arises because the settlor (A) intends for the trust to arise. By contrast, a resulting trust occurs where A does not comply with the necessary formalities or does not disclose their intentions. In this situation, the property ‘jumps back’ to A.

Lord Hoffman divided up the Quistclose trust into two trusts: a primary express trust and a secondary resulting trust. This was questioned in Lord Millet’s dissenting judgment in Twinsectra. He stated that the Quistclose trust was an orthodox example of a resulting trust. This meant that, despite being transferred, the trust property was still held by the lender and could be retained since the whole of the beneficial interest had not been transferred. Accordingly, if the lender’s purpose was not adhered to, the lender can revoke the borrower’s power and apply for the money themselves.

This approach seems convincing, for it avoids the necessary formalities that are required of an express trust. However, cases of resulting trust usually occur where there is a failure of the trust. In Quistclose, the purpose of the transfer had not failed, and so there was no failure of trust. However, in Twinsectra, Lord Millet held that there was no express trust created and the resulting trust had arose immediately from the transfer.

How have the courts interpreted Quistclose trusts since then?

The question of Quistclose trusts can be classified as express or resulting has provoked much academic debate. However, the situation in Bellis v Challinor [2015] EWCA Civ 59 provided an opportunity to clear up the Quistclose trust and establish some fundamental principles.

The investors, Challinor, sent money to the appellant solicitors’ client account in response to an invitation from the firm’s client to invest in a property scheme. The investors were responding to documents seeking early investments before the setup of the scheme.

The firm paid out the bulk of the investors’ money to RBS for a loan taken out by the property scheme. Unfortunately, the scheme soon became insolvent. The investors brought proceedings against the firm seeking repayment of the sums paid to RBS. 

The main question concerned whether Challinor had advanced the money on trust for themselves pending the satisfaction of ill-defined conditions, or whether they had made a loan to the company. In dealing with this issue, Lord Justice Briggs emphasised the role of ‘certainty of intention’ to examine whether a trust had been created. It was found by Lord Justice Briggs that, for a Quistclose trust to be created, there must be an intention to create a trust on the part of the transferor which should be ascertained objectively. In the absence of contractual documents, attention was placed on the Challinor’s ‘written invitation’ to the firm. While examining the terms of the written invitation, Lord Justice Briggs found that Challinor had not done enough to create a trust, and so the claim for breach of trust failed.

The emphasis on certainty of intention concurred with the decision in Carreras Rothmans Ltd v Freeman Matthews Treasure Ltd [1985] Ch 207. In this case, under a specific agreement the claimant paid money into the defendant’s account to meet the invoices needed to pay a third party. When the defendant went into liquidation, the Court held that the written agreement created a Quistclose trust and the claimant could retrieve their money.

What is the significance of Bellis v Challinor?

In Challinor, Lord Justice Briggs regarded it as important to examine the development of the Quistclose trust and reflect on its jurisprudential principles. He affirmed that Lord Wilberforce’s analysis of the express trust in the original Quistclose judgment was flawed because it left uncertain the ownership of the beneficial interest in the money during the period between the transfer and the failure of the primary purpose.

Briggs described Lord Millet’s analysis in Twinsectra as ‘compelling’. While it was classified as a ‘dissent’, Briggs argued that the majority opinion in Twinsectra had, in fact, concurred with Lord Millet’s analysis in ‘abbreviated form’. He therefore interpreted the Quistclose trust as a resulting trust which ‘arose where property is transferred on terms which do not leave it at the full disposal of the trustee’. In doing so, he viewed Quistclose trusts as an unorthodox resulting trust which require an intention for them to be created.

Some have stated that the emphasis on intention in Challinor demonstrates that Lord Justice Briggs viewed Quistclose trusts as a form of express trust. However, this is inconsistent with his own explanation in the judgment which expressly characterises such trusts as resulting trusts. While Briggs did place emphasis on the role of ‘intention’ to find a Quistclose trust, this should not be seen as a rejection of Lord Millet’s analysis, but a re-interpretation of the resulting trust.

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Tagged: Equity

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