Quistclose trust
Encyclopedia
Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567 (sub nom Quistclose Investments v Rolls Razor) is a leading property
, unjust enrichment
and trusts
case, which invented a new species of proprietary interest. What is now known as a "Quistclose trust" means that when an asset is given to somebody for a specific purpose and for whatever reason the purpose for the transfer fails, the transferor may take back the asset.
Suppose a debtor undertakes to use the loan in a particular way, and segregates the creditor's money from his general assets. Consequently, if the debtor becomes insolvent, the creditor's money is refundable, and not available to pay the debtor's other creditors, i.e. if the trust fails (because the purpose is not, or cannot, be fulfilled), then the sums become subject to a resulting trust
in favour of the person who originally advanced the credit, and the person to whom the sums were advanced holds them as trustee
.
was deeply indebted to Barclays
. It needed further additional sums to be able to pay a dividend
which it had declared. Rolls Razor borrowed funds from Quistclose in order to satisfy the dividend declared. The terms of the loan were such that the funds would only be used for the sole purpose of paying the dividend. The loan
was paid into an account
with Barclays, and Barclays was given notice of the arrangement.
However, between the time that the loan was advanced and the dividend being paid, Rolls Razor went into liquidation
. Barclays Bank claimed that they were entitled to exercise a set-off
of the money in the account against the debts that Rolls Razor owed with respect of Barclays. Quistclose claimed that the moneys had to be returned to them, as the purpose for which they had been lent had now failed and were incapable of being fulfilled (as Rolls Razor was now in liquidation).
) unanimously held that the money was held by Rolls Razor on trust for the payment of the dividends; that purpose having failed, the money was held on trust for Quistclose. The fact that the transaction was a loan did not exclude the implication of a trust. The legal rights (to call for repayment) and equitable rights (to claim title) could co-exist. Barclays, having notice
of the trust, could not retain the money as against Quistclose. Similarly, the liquidator
of Rolls Razor could not claim title to the money, as the assets did not form part the beneficial estate of Rolls Razor.
in equity. In Twinsectra v Yardley the House of Lords reviewed the law and the leading judgment was given by Lord Millett
, whose judicial analysis, unsurprisingly, closely mirrored that which he suggested twenty years previously.
The key issue, according to Lord Millett, in upholding the trust concept is ascertaining where the beneficial interest in the money lies. Lord Millett suggests that there are four possible answers: (1) the lender, (2) the borrower, (3) the ultimate purpose, and (4) no-one, in the sense that the beneficial interest remains "in suspense". Lord Millett then analysed all of the foregoing, and determined that the beneficial interest remains with the lender, until the purpose for which the funds are lent is fulfilled. The only other reasoned decision was Lord Hoffmann, who agreed with Lord Millett, though disagreed as to whether it was an express or resulting trust.
Some have suggested that this means a Quistclose trust, whilst it is indubitably a trust, it would not be a resulting trust
as the beneficial interest never 'results back' to the lender; it was with him all the time. However, others point out that there are many resulting trusts where the beneficial interest never leaves the donor: the classic example of a trust failing for uncertain objects, for example.
in Twinsectra v Yardley [1999] Lloyd's Rep 438 suggested, obiter dictum
, that it was in fact a 'quasi-trust' which is not required to satisfy "the usually strict requirements for a valid trust so far as 'certainty of object[s]' is concerned. However, the House of Lords, on appeal, declined to endorse those comments.
The situations in which Quistclose trusts have been upheld are varied. They have been upheld in cases of:
One issue that has escaped notice in the judicial consideration of Quistclose trusts to date is how narrowly the purpose has to be defined. Suggestions have been made to the effect that the general law in relation to powers would apply (such that if the purpose is sufficiently well defined to be a power, a Quistclose trust may arise), but others have argued that to take tests from one branch of the law and apply it to another may not be appropriate. The lower courts in Twinsectra suggested that the purpose must be sufficiently well defined, but Lord Millett distanced himself from that position, claiming that "uncertainty works in favour of the lender, not the borrower."
However, more recently criticism has been mounted that giving a proprietary claim to a lender which enables the lender to reclaim the loan ahead of unsecured creditor
s has the effect of putting the lender in the position of a secured creditor
, but without the need to register any security interest
against the borrower (and thus meaning that other creditors would not be aware of the preferential status of the lender's claim).
Quistclose trusts still remain relatively uncommon, and as yet there has been no clamour for legislation or regulation (Quistclose trusts were not even addressed under English law
when the insolvency law was last revised in the Enterprise Act 2002
). However, should the courts start finding them with increasing frequency, it may be that regulation, or judicial revision, follows.
English property law
English property law refers to the law of acquisition, sharing and protection of wealth in England and Wales. Property law can refer to many things, and covers many areas. Property in land is the domain of the law of real property. The law of personal property is particularly important for...
, unjust enrichment
Unjust enrichment
Unjust enrichment is a legal term denoting a particular type of causative event in which one party is unjustly enriched at the expense of another, and an obligation to make restitution arises, regardless of liability for wrongdoing.Definition:...
and trusts
English trusts law
English trusts law is the original and foundational law of trusts in the world, and a unique contribution of English law to the legal system. Trusts are part of the law of property, and arise where one person gives assets English trusts law is the original and foundational law of trusts in the...
case, which invented a new species of proprietary interest. What is now known as a "Quistclose trust" means that when an asset is given to somebody for a specific purpose and for whatever reason the purpose for the transfer fails, the transferor may take back the asset.
Suppose a debtor undertakes to use the loan in a particular way, and segregates the creditor's money from his general assets. Consequently, if the debtor becomes insolvent, the creditor's money is refundable, and not available to pay the debtor's other creditors, i.e. if the trust fails (because the purpose is not, or cannot, be fulfilled), then the sums become subject to a resulting trust
Resulting trusts in English law
Resulting trusts in English law are trusts created where property is not properly disposed of. It comes from the Latin resultare, meaning to spring back, and was defined by Megarry VC as "essentially a property concept; any property that a man does not effectually dispose of remains his own". These...
in favour of the person who originally advanced the credit, and the person to whom the sums were advanced holds them as trustee
Trustee
Trustee is a legal term which, in its broadest sense, can refer to any person who holds property, authority, or a position of trust or responsibility for the benefit of another...
.
Facts
Rolls RazorRolls Razor
Rolls Razor Limited was a British company known for its manufacture of a sophisticated safety-razor and an "affordable" twin-tub washing machine.-Origins: razor:...
was deeply indebted to Barclays
Barclays plc
Barclays PLC is a global banking and financial services company headquartered in London, United Kingdom. As of 2010 it was the world's 10th-largest banking and financial services group and 21st-largest company according to a composite measure by Forbes magazine...
. It needed further additional sums to be able to pay a dividend
Dividend
Dividends are payments made by a corporation to its shareholder members. It is the portion of corporate profits paid out to stockholders. When a corporation earns a profit or surplus, that money can be put to two uses: it can either be re-invested in the business , or it can be distributed to...
which it had declared. Rolls Razor borrowed funds from Quistclose in order to satisfy the dividend declared. The terms of the loan were such that the funds would only be used for the sole purpose of paying the dividend. The loan
Loan
A loan is a type of debt. Like all debt instruments, a loan entails the redistribution of financial assets over time, between the lender and the borrower....
was paid into an account
Bank account
A Bank account is a financial account recording the financial transactions between the customer and the bank and the resulting financial position of the customer with the bank .-Account types:...
with Barclays, and Barclays was given notice of the arrangement.
However, between the time that the loan was advanced and the dividend being paid, Rolls Razor went into liquidation
Liquidation
In law, liquidation is the process by which a company is brought to an end, and the assets and property of the company redistributed. Liquidation is also sometimes referred to as winding-up or dissolution, although dissolution technically refers to the last stage of liquidation...
. Barclays Bank claimed that they were entitled to exercise a set-off
Set-off (law)
In law, a set-off is a statutory defense to the whole or to a portion of a plaintiff's claim. It had no existence under the English common law, being created by 2 Geo. II c. 22 for the relief of insolvent debtors, although set-off was recognized in equity...
of the money in the account against the debts that Rolls Razor owed with respect of Barclays. Quistclose claimed that the moneys had to be returned to them, as the purpose for which they had been lent had now failed and were incapable of being fulfilled (as Rolls Razor was now in liquidation).
Judgment
The House of Lords (with the leading judgment being given by Lord WilberforceRichard Wilberforce, Baron Wilberforce
Richard Orme Wilberforce, Baron Wilberforce, PC was a Lord of Appeal in Ordinary in the House of Lords from 1964 to 1982....
) unanimously held that the money was held by Rolls Razor on trust for the payment of the dividends; that purpose having failed, the money was held on trust for Quistclose. The fact that the transaction was a loan did not exclude the implication of a trust. The legal rights (to call for repayment) and equitable rights (to claim title) could co-exist. Barclays, having notice
Notice
Notice is the legal concept in which a party is made aware of a legal process affecting their rights, obligations or duties. There are several types of notice: public notice , actual notice, constructive notice, and implied notice....
of the trust, could not retain the money as against Quistclose. Similarly, the liquidator
Liquidator (law)
In law, a liquidator is the officer appointed when a company goes into winding-up or liquidation who has responsibility for collecting in all of the assets of the company and settling all claims against the company before putting the company into dissolution....
of Rolls Razor could not claim title to the money, as the assets did not form part the beneficial estate of Rolls Razor.
Significance
The conceptual analysis underpinning Quistclose trusts was the source of some debate. Shortly after the decision, an article appeared in the Law Quarterly Review written by Peter Millett QC suggesting how the traditional trust need for certainty of objects (beneficiary) could be squared with the decision of the House of Lords, and the refusal to accept new categories of purpose trustPurpose trusts in English law
A purpose trust in English law is a trust created for the fulfilment of a purpose, not for the benefit of a person. With the exception of charitable trusts, these are normally considered invalid by the courts; most often because they have no beneficiaries, and therefore nobody who can enforce the...
in equity. In Twinsectra v Yardley the House of Lords reviewed the law and the leading judgment was given by Lord Millett
Peter Millett, Baron Millett
Peter Julian Millett, Baron Millett, PC, QC is a British former judge and barrister.The son of Denis and Adele Millett was educated at Harrow School, London and Trinity Hall, Cambridge, where he received a Master of Arts in classics and law in 1954. From 1955 to 1957, he served as Flying Officer...
, whose judicial analysis, unsurprisingly, closely mirrored that which he suggested twenty years previously.
The key issue, according to Lord Millett, in upholding the trust concept is ascertaining where the beneficial interest in the money lies. Lord Millett suggests that there are four possible answers: (1) the lender, (2) the borrower, (3) the ultimate purpose, and (4) no-one, in the sense that the beneficial interest remains "in suspense". Lord Millett then analysed all of the foregoing, and determined that the beneficial interest remains with the lender, until the purpose for which the funds are lent is fulfilled. The only other reasoned decision was Lord Hoffmann, who agreed with Lord Millett, though disagreed as to whether it was an express or resulting trust.
Some have suggested that this means a Quistclose trust, whilst it is indubitably a trust, it would not be a resulting trust
Resulting trust
A resulting trust is the creation of an implied trust by operation of law, as where property gets transferred to one who pays nothing for it; and then is implied to have held the property for benefit of another person. The trust property is said to "result" back to the transferor...
as the beneficial interest never 'results back' to the lender; it was with him all the time. However, others point out that there are many resulting trusts where the beneficial interest never leaves the donor: the classic example of a trust failing for uncertain objects, for example.
Requirements
It is sometimes argued that Quistclose trusts are not a separate species of trust at all, but merely a simple trust, which has certain characteristics. However, Quistclose trusts are often regarded as somewhat special and distinct. The English Court of AppealCourt of Appeal of England and Wales
The Court of Appeal of England and Wales is the second most senior court in the English legal system, with only the Supreme Court of the United Kingdom above it...
in Twinsectra v Yardley [1999] Lloyd's Rep 438 suggested, obiter dictum
Obiter dictum
Obiter dictum is Latin for a statement "said in passing". An obiter dictum is a remark or observation made by a judge that, although included in the body of the court's opinion, does not form a necessary part of the court's decision...
, that it was in fact a 'quasi-trust' which is not required to satisfy "the usually strict requirements for a valid trust so far as 'certainty of object[s]' is concerned. However, the House of Lords, on appeal, declined to endorse those comments.
Purpose
However, what differentiates the Quistclose trust from other trusts, is the existence of the specific purpose for which the sums on credit must be applied, and the failure of which gives rise to the trust. It must also be clear that, if that specific purpose fails, the sums will revert to the person who originally advanced them.The situations in which Quistclose trusts have been upheld are varied. They have been upheld in cases of:
- sums advanced for the specific payment of a dividend;
- sums advanced for the specific payment of a creditor;
- sums advanced on the basis of an undertaking for a specific project; and
- advance payments made on credit for the purchase of specific goods.
One issue that has escaped notice in the judicial consideration of Quistclose trusts to date is how narrowly the purpose has to be defined. Suggestions have been made to the effect that the general law in relation to powers would apply (such that if the purpose is sufficiently well defined to be a power, a Quistclose trust may arise), but others have argued that to take tests from one branch of the law and apply it to another may not be appropriate. The lower courts in Twinsectra suggested that the purpose must be sufficiently well defined, but Lord Millett distanced himself from that position, claiming that "uncertainty works in favour of the lender, not the borrower."
Certainty of intention
In Twinsectra v Yardley, Lord Millett spent some time considering the necessary intention. It has long been settled law that a person need not have a specific intention to create an express trust, so long as the court can determine from the person's intention that a beneficial entitlement should be conferred which the law (or equity) will enforce. So in Twinsectra where there was a solicitor's undertaking that the money should only be used for one purpose, this was held to be sufficient intent. In Quistclose itself and in Carreras Rothmans v Freeman Mathews Treasure where loans were made for a specific purpose, this may also amount to sufficient intention. Where a loan is advanced for the borrower to use as he will, no Quistclose trust can arise.Criticisms
In the early stages of development of the Quistclose trust, it was suggested that the concept was unambiguously good. In Re Kayford it was suggested that a segregated account for customers' money to be placed in to guard against the insolvency of the company was a proper and responsible thing to do.However, more recently criticism has been mounted that giving a proprietary claim to a lender which enables the lender to reclaim the loan ahead of unsecured creditor
Unsecured creditor
An unsecured creditor is a creditor other than a preferential creditor that does not have the benefit of any security interests in the assets of the debtor....
s has the effect of putting the lender in the position of a secured creditor
Secured creditor
A secured creditor is a creditor with the benefit of a security interest over some or all of the assets of the debtor.In the event of the bankruptcy of the debtor, the secured creditor can enforce security against the assets of the debtor and avoid competing for a distribution on liquidation with...
, but without the need to register any security interest
Security interest
A security interest is a property interest created by agreement or by operation of law over assets to secure the performance of an obligation, usually the payment of a debt. It gives the beneficiary of the security interest certain preferential rights in the disposition of secured assets...
against the borrower (and thus meaning that other creditors would not be aware of the preferential status of the lender's claim).
Quistclose trusts still remain relatively uncommon, and as yet there has been no clamour for legislation or regulation (Quistclose trusts were not even addressed under English law
English law
English law is the legal system of England and Wales, and is the basis of common law legal systems used in most Commonwealth countries and the United States except Louisiana...
when the insolvency law was last revised in the Enterprise Act 2002
Enterprise Act 2002
The Enterprise Act 2002 is an Act of the Parliament of the United Kingdom which made major changes to UK competition law with respect to mergers and also changed the law governing insolvency bankruptcy.-Structure:*Part 1 The Office of Fair Trading...
). However, should the courts start finding them with increasing frequency, it may be that regulation, or judicial revision, follows.