Quistclose Trusts Flashcards
(13 cards)
What is a Quistclose trust?
Where money is lent for a specific purpose, on terms where you can’t do anything else with it as borrower.
It will be held on trust for the lender if not used for that specific purpose - so the lender has a proprietary claim.
Quistclose facts + holding
D received a loan from C to pay off dividends to shareholders. D put it in a new, separated account with Barclays (whom they owed a lot of money to) then went insolvent.
Held: HL held that if the money was used for a purpose other than what was specified, money held on trust for lender.
How does the multiple trust concept from Quistclose work?
Two trusts:
- For payment of the loan and its conditions to be effected.
- For the lender.
Lord Wilberforce said the intention for the secondary trust is clear, and the law should give effect to it.
To suggest that money provided exclusively to pay one creditor should become available to all creditors on insolvency, without some priority, would be unjust.
Where is the beneficial interest? Creditors? Borrower? Lender? Purpose? What type of trusts are these? Westdeuche and Twinsectra
We know the beneficial interest must attach to somebody (Vandervell).
Some argue it is the creditors - However not every Quistclose trust has creditors or parties who directly benefit. Also issue with Saunders.
Is it the borrower? No the essence of a QT is that the borrower does not have free disposal of the money.
Is it the purpose itself? Swadling says might be hard to identify exact purpose. Trusts for purposes also void unless charitable, and exception in Re Denley is problematic + we cannot point to any one person for whom the rights areheld.
Westdeuche: Suggests that it is a presumed resulting trust - the law presumes it was not a gift - much like voluntary transfer RTs.
Twinsectra: Fiduciary duty FOR LENDER arises where money is given on terms that it is to be used for a particular purpose only, due to the trust and confidence in that relationship - classic fiduciary situation.
This means only one trust is created at any time (for the lender) - but it is subject to a power for the borrower to exercise it for the purpose. When they fail to do that, the money is returnable to the lender since the RT is no longer subject to such a power.
Swadling objects to trust for lender, since lender could recover twice, plus inappropriateness of fiduciary label in commercial dealings. Also problem of Saunders - inconsistent with a loan.
Re EVTR - Applying the money to the purpose
It was not enough that the company spent the money to buy the equipment, since they didn’t actually obtain the equipment, which was the purpose of the trust.
Carreras Rothmans - Why does the trust get created? - Equity
Equity fastens on the conscience of the person, so the person will not be permitted to treat the property as his own, or keep the property if purpose not fulfilled.
Sounds a little like CTs here - fixing on your conscience?
What does the lender need to show? Cooper
Purpose defined, so that recipient understood it was not at his free disposal.
We don’t need separate account - other evidence and context of the deal can show the requisite understanding and intention.
Prickly Bay - what should court take into account and what intention is needed from both parties?
Court should take into account events and documents, but overall has flexibility and discretion to give weight to different factors.
Here - no QT as there must be clear evidence the parties intended a trust to arise.
Some sort of mutual intention required or intention from the lender and acquiescence from the borrower.
China Life - what needs to be intended?
You do not need to show intention that the assets would be on trust - you just need to show intention that the transferee doesn’t have the assets at their free disposal.
Retention of beneficial interest is a consequence of a finding of QT, not a requirement for it - not every party knows about trusts and QTs.
You also don’t need an express restriction - any evidence can establish the necessary intention.
Thus, even a transfer of assets within a company group can amount to a QT where there is intention for them to be applied for a specific purpose only.
What type of trust is this? Academic opinion Millett, Penner and Glister
We already know Millett labelled this an RT, arising because the power was not exercised.
Penner - argues this is an intentional trust, and thus an investigation of the parties’ true intentions is always needed. Intention does not create an RT, but it does create an express trust.
Glister - Depends on circumstances - might be an express trust in one QT situation, and an RT in another. Seemed to be supported in Prickly Bay by Lady Arden - flexible approach.
Should we have these trusts? Swadling, Grower, Hudson
Swadling - These trusts give original lender priority over unsecured lenders. That can involve banks and companies, but also anyone who has any contractual or tort claim against the person.
Why should a bank, with their legal advice be prioritised over individuals who have been wronged by the borrower?
Counter: Not always a bank.
Grower - Essentially an easy way of creating a quasi-security interest, giving the transferor priority. This puts you ahead of unsecured creditors in such an easy way, without registration needed or any notification of others, nor any complex procedures.
Hudson - We already have a statutory insolvency scheme to determine the fairest distribution - QTs undermine the whole thing.
Perhaps, QTs need to be registered as a security interest to ensure transparency for third parties.
Why do we recognise this trust, but not say the remedial CT?
Swadling’s objections to the trust analysis
- There was a contract of loan to provide for insolvency procedures.
- Generally, trustees aren’t liable for loss of trust money where he has acted in good faith - however here they do. Lenders are cleared of all risk here, since they don’t have to worry about insolvency of borrower (which lenders usually do), or destruction of subject-matter (which beneficiaries usually do)
- Fiduciary relationship is inappropriate here - does a borrower really have duties of loyalty and no conflict with a bank?
- Trust should only be found where there is an obligation to hold rights for another. Just by agreeing to restrictions doesn’t make a trust - you have to voluntarily assume being an express trustee. This also shouldn’t be a presumed trust since there is no gap in the evidence to fill.
Courts do not usually find trusts in loans, since there is already an obligation to repay - don’t want double recovery.
Hudson’s arguments against a QT:
- Empirical evidence - lack of evidence that QTs incentivise lending to financially stressed entities - just speculative.
- Are lenders deserving targets of protection? Many of them are sophisticated, well-advised players who undertake cost-benefit analysis.
- Neg impact on other creditors - puts others at the back of the queue even though they may have good claims and be vulnerable - eg seeking remedies in contract or tort,
Undermines statutory insolvency regime which is designed to produce fair distribution of assets to all creditors. - Undermines transparency - Can obscure true financial position of a company - they may have assets but don’t disclose they are part of a QT. Makes it hard to assess creditworthiness and creates barriers for trade/mergers.
- Should be subject to regulation if they function like security interests. Charges must be registered, to make sure third parties know about risks before offering credit. Why shouldn’t QTs also alert third parties to risk? They function similarly to charges, giving lender protection and priority
