Quistclose Trusts Notes

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TRUSTS: QUISTCLOSE TRUSTS
VIRGO PP.275-284
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:
o 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.
o 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:
o Particular purpose (often a loan to pay borrower's creditors)
o 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)
o 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:
o 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)
o 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)
o 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)
o 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

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CONTRACT: BREACH AND REMEDIES FOR BREACH 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)o

BURNS, "THE QUISTCLOSE TRUST: INTENTION AND THE EXPRESS PRIVATE
TRUST", (1992) 18 MONASH U.L.R. 147Application 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:
o 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')
o 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 1/2 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:
o Whether trust could be established when there was a debtor/creditor relationship (trust co-exist with contract)
-Wilberforce: yes.
o If so, what were the necessary criteria for the trust

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CONTRACT: BREACH AND REMEDIES FOR BREACH 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.
o 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:
o Borrower wouldn't obtain beneficial interest (sum didn't become assets of Rolls)
o 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 -
o 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 purposeWhat is the nature of trust relationship between debtor and creditor?
o 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:

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CONTRACT: BREACH AND REMEDIES FOR BREACH 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
o 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"
o Express private trust: Yes - subject to certain conditions (purposes)
o 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)
o 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?
o Quistclose and Aus case both didn't decide whether the mutual intention of lender and borrower is necessary in every case

If lender argues that there was a trust relationship but borrower denies it, is the unilateral intention of lender sufficient?
Which party (lender or third party creditor) holds beneficial interest?-Intention and the trust structure-

Is the dual trust mechanism necessary in Quistclose?
o Intention of parties was not only that Rolls would use money for payment of dividend but also that it would constitute a fund separate from Rolls' assets
IAO Court could have found a single trust with two limbs where Quistclose was a lender and beneficiary at all times, and Rolls trustee with limited power to use the funds

Carreras Rothmans v Freeman Mathews Treasure Ltd-

Facts: D (advertising agency undertaking services for C) spent funds for campaigns for C involving third parties and each month C paid D equivalent of third party bills for previous month. D began to have financial difficulties and C and D agreed that C
would deposit into a special account due to third parties, but D withdrew from that account to pay creditors and then went into liquidation. C sought return of money paid into account (after paying third parties)
Gibson J: funds were to be used for a special purpose .
Weakness:
o Assumed that dual trust applied in Quistclose form while it is unlikely that borrower would have parted with all interest in the funds when intention is to pay third party creditors (thus first express trust dubious)
o Unorthodox view of status of third party creditor: under primary trust third party holds an enforceable right to ensure the property administration of the primary trust (rather than beneficiary interest which would conflict with intention)
-This is less than beneficial interest but lender also doesn't have it
-Gibson J: cannot accept that third party creditor had no enforceable rights, and that where a trust cannot be unilaterally revoked by C and that was expressed as a trust to pay the third party (which was still

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CONTRACT: BREACH AND REMEDIES FOR BREACH

possible) could leave C, who had parted with the money, with beneficial interest
Difference between Quistclose and Carreras was that in the latter the funds were set aside for the purpose of payment of Carreras' debt (to benefit third party creditor)
whereas in Quistclose it was to provide an opportunity for Rolls

Conclusion-

Impossible to describe QTs because they are an interplay between contracts and trusts
Three undeniable characteristics common to Quistclose and Carreras:
o Intention of both lender and borrower that funds weren't available for distribution among borrower's general creditors

Intention of both that borrower was obliged to keep the money separate

Relationship was based on an intention between the parties in terms as outlined
Single express trust (preferred view)
o Two limbs - first gives effect to parties' intention insofar as borrower holds funds as trustee and has power to expend funds in manner specified, while second limb arises where purpose can no longer be fulfilled and lender as beneficiary is entitled to return of funds

GOODHART AND JONES, "THE INFILTRATION OF EQUITABLE DOCTRINE INTO
ENGLISH COMMERCIAL LAW" (1980) 43 MLR 489 AT 489-501-Traditional attempts to introduce equitable doctrines into commercial law were unsuccessful, but more recent attempts succeeded in cases of people supplying goods/
paying money to a company that subsequently becomes insolvent
Quistclose line of cases:
o Re Nanwa Gold Mines: Company wanted to raise money by inviting applications for new shares under condition of passing resolutions at a GM -
people applied and paid in full, but conditions were unfulfilled. Issue was whether the payment (in separate account) belonged to company or had to be returned - held for latter

Quistclose v Rolls Razor: Important for 1) approval of principle of bankruptcy cases it upheld and 2) rejection of principle that transactions giving rise to legal action for debt cannot also create a trust

Re Kayford: More controversial than Quistclose (on its own facts a just decision) - mail order business case.
Distinguishing factors between cases:
o Nanwa: trust was product of an agreement between the parties, while Kayford -
trust was unilaterally declared by company without regard to customers'
intentions

Question: whether declaration of trust meant customers ceased to be creditors,
and whether trust was effective against company's other creditors
-First question: IAO no because customers would have had to agree to release their debts upon creation of the trust

Kayford irreconcilable with British Eagle International v Compagnie Nationale
Air France (both parties were members of IATA so all inter-airline transactions were channelled through it and at end of each month net creditors claimed from
IATA and net debtors had to pay it. When British Eagle went into liquidation it was creditor to Air France and successfully recovered over ordinary unsecured

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CONTRACT: BREACH AND REMEDIES FOR BREACH creditors because through arrangement with IATA they had assumed position of secured creditors without having to register charges.
MILLETT, "THE QUISTCLOSE TRUST: WHO CAN ENFORCE IT?" (1985) 101 LQR
269--

Questions where A lends money to B to pay debts owed to C:
o Can C compel B to pay debts?
o Can A change his mind and release B's obligation (and demand repayment/allow
B to spend as he chooses)?
o Where is beneficial interest pending B's application?
Answer must depend on intentions of parties

Re Northern Developments: Megarry held that C could compel application even in the face of A's objection; pending application, beneficial interest is in suspense

Carreras: treated Re Northern Developments as laying down a general rule
Earlier cases:
o Toovey: basis of decision was that money advanced didn't become part of B's estate, but why purpose failed is unclear (B could still pay C). Explanations: B's payment of C is not a trust but a power and B elected not to exercise it, or purpose was rather to save B from bankruptcy

Moore v Barthrop: Father and son carried partnership business, indebted to bank and borrowed money for paying this debt. They went bankrupt before they could pay so returned the cheque to A - assignee sued A to recover the money and claim was dismissed because cheque was given to pay debt to bank (here they could still have paid the bank, so would only succeed if purpose was to reduce partners' overdraft)
o Edwards v Glyn: primary purpose identified (to enable B to meet the run NOT
to enable B's creditors to be paid) - same reasoning but NB here Crompton J
explained why (bankrupts may have legal but not equitable right to use money for other purpose)
Later cases:
o Re Northern Developments: Megarry relied on Wilberforce in Quistclose to propose that 1) primary obligation of B to pay C is a trust and not mere power and 2) A can obtain mandatory order to compel B to pay. However IAO neither proposition can hold based on Quistclose because 1) statement was open to interpretation and 2) Wilberforce's reference to Re Rogers clearly meant it was a power of injunction not compulsion
-This case was significant because it was the first that tested whether C
could compel performance even against A's wishes - B was a parent company including one subsidiary (Kelly) who was near bankruptcy but if it stopped trading there was fear that it would bring down the whole group. So A lent money to B in separate account for sole purpose of repaying Kelly's creditors but Kelly went into liquidation before all the money was used up. Question was whether A or creditors were entitled to balance.
-Distinguishable from Quistclose:
-In Quistclose money was lent to pay a particular class of creditors but in this case it was to pay general creditors of third party
-Though B's position is similar in both cases Kelly's position was different; money was paid into its ordinary account for purpose of

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CONTRACT: BREACH AND REMEDIES FOR BREACH ??allowing it to keep trading (thus the money provided fresh capital for Kelly to incur new liabilities rather than repay existing ones)
-In Re ND Kelly's creditors were told of the size and purpose of the fund (to keep Kelly going) - in all other QT cases C was unaware of arrangements between A and B (IAO this must be decisive as forbearance by C raises equity against A preventing him from revoking arrangements - but Megarry didn't rely on it but treated it as an ordinary QT case)
Megarry's conclusion: B's payment of C was a trust not power, and was a
PT like Re Denley enforceable by A (lender), by Kelly (for whose benefit the fund had been set up) and C (Kelly's creditors)
Interests of C: fund's purpose wasn't to benefit C but Kelly and rest of the group. Thus C doesn't have beneficial interest in the residue but right to compel proper administration.
Peter Gibson J in Carreras: beneficial interest is in suspense until payment is made

Solution:
o In every case A's intention is to benefit B or to advance his own commercial interests not to benefit C; therefore beneficial interest remains with A
throughout subject to obligation of B enforceable by A to apply funds for stated purpose

Thus primary trust is enforceable by A
o This solution is consistent with ordinary trust principles and QTs are therefore not a new kind of trusts

Lord Millett's Conclusion on QTs

1. If A's intention is to benefit C then creates irrevocable trust in favour of C
enforceable by C and not by A (beneficial interest in C)

2. If A's intention is to benefit B or himself, and not C, then trust in favour of A
enforceable by A and not by C (beneficial interest in A)

3. If A's object is to save B from bankruptcy by paying creditors, then:
a. If A has interest of his own (separate from B's) to see money applied for the purpose then B is under positive obligation enforceable by A to apply it for that purpose; otherwise B has power but no duty and A only has injunction b. Prima facie A's directions are revocable by A, but he can contract with B not to revoke them without B's consent c. Communication to C of arrangements prior to A's revocation creates an irrevocable trust for C
RICKETT, "DIFFERENT VIEWS ON THE SCOPE OF THE QUISTCLOSE ANALYSIS"
(1991) 107 LQR 608
English cases-

Barclays v Quistclose: loan from A to B for express purpose of payment of B's debts gave rise to a trust relationship of fiduciary character in favour as primary trust of creditors as an "expressed purpose trust" and secondary trust in favour of A as an
"expressed persons trust"
Re Kayford Ltd: cites Quistclose but on Megarry J's analysis is clearly not a Quistclose case. Facts - K mail-order company where customers paid either a deposit or full price before receiving ordered goods. K worried about supplier's ability to continue trading

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CONTRACT: BREACH AND REMEDIES FOR BREACH

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