Quistclose Trusts

Question 1

1. What is the fact pattern which gives rise to a Quistclose trust?
2. What are the mechanics of the Quistclose trust (according to Lord Wilberforce)? (3 points)
3. How did the most recent analysis of the Quistclose trust analyse it?

Answer 1

1. Where A pays money to B for a specified purpose (such as payment of B’s debts to C), which then fails, it may be that the property is held on trust for the original transferor. This situation most commonly arises where one party lends money to a borrower on the understanding that the borrower can only use the money for a specified purpose. If it becomes impossible to fulfill that purpose, and the money hasn’t been spent, the lender might be able to enforce a proprietary interest in the money. This effectively enables a lender to convert what would otherwise be a debt into a trust, thereby escaping the consequences if borrower becomes insolvent.
2. Under a Quistclose trust:
   (i) The money is not a part of B’s general property
   (ii) The money is the subject of a primary trust to be used for the specified purpose and no other.
   (iii) If the primary purpose fails, a secondary trusts arises whereby B holds the unexpended money on trust for donor A.
3. HL in Twinsectra classified them as resulting trusts. But they’re not necessarily RTs.

Question 2

Barclays Bank v Quistclose Investments Ltd [1970]

Facts:

Answer 2

Quistclose lent money to Rolls Razor specifically to enable RR to pay a dividend it had previously declared but couldn’t afford to pay. Money borrowed was paid into a separate account specifically opened for the purpose. RR went into liquidation, so the dividend couldn’t be paid. Bank wishes to use the money in the account to discharge RR’s overdraft. Q say no, you can’t, because the money is held on trust for us.

Question 3

Barclays Bank v Quistclose Investments Ltd [1970]

1. Held:
2. LW on whether the bank could use the money?
3. Question 1: whether between Q and RR there was a trust in Q’s favour in the event of a dividend not being paid?
4. Question 2: Did Barclays have sufficient notice to be bound by the trust?

Answer 3

1. HL agree: there’s a trust in favour of Q.
2. Lord Wilberforce: the bank can’t use this money because it’s held on trust for Q, even though it had been lent to RR:
3. (i) The “mutual intention” of the parties here (which we can see by looking at the terms on which they dealt) wasn’t that when the money was lent to RR and it became part of RR’s assets, but, rather, that it “should be used exclusively for payment of a particular class of its creditors, namely, those entitled to the dividend.”
   (ii) This must mean that if the dividend wasn’t paid, the money was to be returned to Q – “the word ‘only’ or ‘exclusively’ can have no other meaning or effect” [i.e. that the money was only to be used to pay the dividend].
   (ii) The arrangements for payment of a person’s creditors by a TP “give rise to a relationship of fiduciary character or trust, in favour, as a primary trust of the creditors, and secondarily, if the primary trust fails, of the third person”. Lots of authority to support this (gives some 19th century cases). He thinks these authorities are good, but given that they’re not binding on HL, looks at the reasons.
   (iv) It had been submitted for Barclays that the loan gave rise to a legal action of debt, and this excluded the implication of a trust enforceable in equity
   - Rejected: this would mean that despite the arrangement between lender and borrower, if the purpose fails the money would be available to other of the borrower’s creditors “for whom [the lender] has not the slightest desire to provide”
   (v) Instead, the court should be recognizing the coexistence of legal and equitable rights:
   - When the money is advanced, the lender acquires an equitable right “to see that it is applied for the primary designated purpose”
   - When the purpose has then been carried out (i.e. the debt paid), the lender has his remedy against the borrower (because the debt has been paid).
   - If the purpose can’t be carried out, though, “the question arises if a secondary purpose (i.e. repayment to the lender) has been agreed, expressly or by implication.” If it has, then remedies of equity should be employed to give full effect to it. If not (meaning the intention is for the money to fall into the general fund of the debtor’s assets), then there’s the “appropriate remedy for recovery of a loan.” The ‘flexible interplay of law and equity’ can ‘let in these practical arrangements’.
   (vi) in this case, “the intention to create a secondary trust for the benefit of the lender, to arise if the primary trust, to pay the dividend, could not be carried out, is clear.” The law should give effect to it.
4. (i) Yes
   (ii) A mere request to put a certain sum of money into a separate bank account is no notice. Here, though, bank was aware (through a cover letter) that the money was paid for the specific purpose of benefitting TPs rather than the borrower.

Question 4

Barclays Bank v Quistclose Investments Ltd [1970]

Analysis:

1. Can the beneficial interest under the primary trust be with the recipient of the money advanced?
2. Can the beneficial interest lie with the recipient of the benefit of the payment of dividends?
   - Issues with this + alternatives?
3. What is the implication if the primary trust is an express trust?
4. How did Peter Gibson J conceptualise it?
   - Issues with this analysis?
5. How did Lord Millet conceptualise it?

Answer 4

1. No - would defeat the whole object of the exercise by enabling that money to be claimed by his trustee in bankruptcy.
2. Possibly (though they don’t have the same rights as other beneficiaries) + in suspense until the benefit given; alternatively, it remains in the person who advanced the money in the first place (i.e. Quistclose).
3. the persons, if any, in whose favour payments can be made pursuant to a specified purpose have the right to call for payment of the sums due to them.
4. CT
   (a) But it is difficult to see how a trust which comes into existence, because of express or implied intentions of its settlor and/or trustee: such a trust is imposed by the court as a result of the conduct of the trustee and therefore arises quite independently of the intentions of any of the parties.
   (b) The principal argument against the imposition of a constructive trust is that the equitable interest of the lender appears to exist before the borrower seeks to perform any unconscionable act in relation to the property. As Browne-Wilkinson in Westdeutsche Landesbank v Islington reminds us, a constructive trust only comes into existence when the trustee has knowledge of some factor which affects her conscience.
5. Resulting trust. He rejects LBW’s view that successive primary and secondary trusts arise – there is one trust throughout, a trust in favour of the person who advanced the funds.

Question 5

Barclays Bank v Quistclose Investments Ltd [1970]

• D+V

1. Summary of Lord Wilberforce’s argument?
2. What do they think of LW’s view?
3. What does Bingham LJ say?

Answer 5

1. Wilberforce held that where the primary trust failed, a secondary trust might arise if this had been agreed expressly or impliedly. He emphasised that money paid for a particular purpose shouldn’t be available for the borrower’s general creditors who the lender hadn’t intended to benefit.
2. It might, though, seem a bit generous to allow a lender a proprietary interest under a trust, rather than limiting the lender to his usual personal action in debt.
3. In Re EVTR [see below], Bingham LJ eventually agreed that a Quistclose trust arose on the facts of the case, but said: “My doubt has been whether the law as it stands enables effect to be given to the common fairness of the situation”

Question 6

Barclays Bank v Quistclose Investments Ltd [1970]

Swadling

Answer 6

1. He has questioned whether the lender should benefit from proprietary protection.
2. Denounces the Quistclose decision – says it’s contrary to orthodoxy.

Question 7

1. defending the mechanism on policy grounds
2. how might helping a company on the brink of insolvency help other creditors?
3. why would a proprietary interest increase the chances lenders will put forward money?
4. Thus, are creditors really worse off through availability of Quistclose trust?
5. Counterargument to claim that Quistclose trusts help insolvent companies and many other parties as a consequence?

Answer 7

1. we might nevertheless be able to defend the mechanism on policy grounds: the lender’s intention that a borrower shouldn’t benefit generally from the transaction should be respected, and the particular purpose imposed should be taken seriously. Might have a qualm that recognising that this unfairly prefers one creditor over another (i.e. nothing distinguishes the two creditors who have suffered the same loss!)
2. But in context of a company on the brink of insolvency that needs a loan for a particular purpose – like paying off a dividend – giving the lender this sort of protection arguably doesn’t cause much prejudice, since it’s possible that without that protection, the lender wouldn’t make the loan in the first place, which would increase the chances of the company becoming bankrupt, which wouldn’t be good for all those unsecured creditors.
3. If a lender will have a proprietary interest, on the other hand, this may increase the chances that they’ll lend money to a suffering company, which is beneficial both to company and its creditors.
4. This means that unsecured creditors aren’t really worse off through the availability of Quistclose trusts.
5. Admittedly, as Millett recognised in Twinsectra, these trusts don’t only arise where the purpose for lending money was to pay off creditors. But still, Quistclose trusts are clearly most necessary in the context of insolvency (my point: so why not limit it to these cases?)

Question 8

Re Kayford [1975]

Facts:

Key issue:

Answer 8

1. Customers of a company either paid full price for goods in advance or paid a deposit. The Company’s chief suppliers went into liquidation. The Company could not meet its orders.
2. The Company was advised by its accountants to open a separate bank account called Customers’ Trust Deposit Account and pay money into it received from customers for goods not delivered to them, withdrawing the moneys only if the goods were later delivered. The Company accepted the advice but instead paid money into a dormant deposit account in the company’s name (though the name was later changed).
3. The company went into voluntary liquidation. Was the money part of the company’s general assets, or held on trust for customers in proportion to the amounts paid by them?

Question 9

Re Kayford [1975]

Megarry J

Issue with finding a Quistclose trust on the facts?

Answer 9

1. “The sender may create a trust by using appropriate words when he sends the money… or the company may do it by taking suitable steps on or before receiving the money. If either is done, the obligations in respect of the money are transformed from contract to property, from debt to trust”
2. So he thinks that in these circumstances, the latter applies (i.e. this is about the steps the company took in receiving the money), and so the “money is held in trust for those who paid for it”
3. “Payment into a separate bank account is a useful (though by no means conclusive) indication of an intention to create a trust.”
4. “It is an entirely proper and honourable thing for a company to do what this company did, upon skilled advice, namely, to start to pay the money into a trust account as soon as there begin to be doubts as to the company’s ability to fulfil its obligations to deliver the goods or provide the services.”

NB

5. It’s not easy to justify the existence of a Quistclose trust in cases like this. Those paying the money in question never had any intention of being anything other than general creditors.
6. So it’s not easy to see why the unilateral creation of property rights in their favour does not amount to an unlawful preference if the only reason why they did become beneficiaries of a trust rather than general creditors of the recipient is that unilateral act (i.e. the creation of the bank account).

• NB, this issue clearly does not affect the more typical types of Quistclose trust.

Question 10

Carreras Rothmans v Freeman Mathews Treasure [1985]

Facts:

Answer 10

1. CR contracted for FMT to manage its advertising.
2. Fees were paid not only in respect of FMT’s services, but also in discharge of FMT’s liabilities to media creditors (FMT incurred debts those debts as principal for CR). Thus, CR had an antecedent debt owed to FMT.
3. FMT came to be in financial difficulty. CR made arrangement with FMT to pay the latter’s monthly invoices, and that a special bank account should be established in FMT’s name to be used “only for the purposes of meeting the accounts of the media and production fees of third parties directly attributable to CR’s involvement with the agency.” Bank was aware.
4. FMT went into liquidation. CR notices that some of the TPs hadn’t been paid by FMT, even though money had been given to FMT to pay those TPs. So, FMT hadn’t used that money for the purpose.
5. CR sought declaration that the money was held on trust for sole purpose of paying FMT’s fees and media creditors, and ought to be repaid to CR.

Question 11

Carreras Rothmans v Freeman Mathews Treasure [1985]

Peter Gibson J

Answer 11

1. money in the account was subject to a trust in CR’s favour.
2. FMT wasn’t free to deal with the money how it wanted: was “clearly intended that the moneys once paid would never become the property of the defendant… It is manifest that the defendant was intended to act in relation to those moneys in a fiduciary capacity only.”
3. “The bank was to be put on notice of the conditions and purpose of the account. I infer that this was to prevent the bank attempting to exercise any rights of set off against the moneys in the account.”
4. “In my judgment the principle in all these cases is that equity fastens on the conscience of the person who receives from another property transferred for a specific purpose only and not therefore for the recipient’s own purposes, so that such person will not be permitted to treat the property as his own or use it for other than the stated purpose.”
5. Submission 1:
   (i) It was submitted that this couldn’t be Quistclose because there, the settlor was provider of loan moneys. Here, however, the settlor is not CR (who provided the money), but FMT (CR owed FMT money to reimburse for debts owed to TPs). Here’s CR is simply paying FMT previously-owed debt.
   (ii) Yes, if FMT hadn’t agreed to the contract letter [i.e. I think setting up the new account], CR wouldn’t have broken its contract, and would still have paid its debt to FMT (since the arrangement always had been that CR paid FMT for various things including discharging debt to third parties).
   (iii) But it’s still the case that CR made its payment on the terms of that letter “and the defendant received the moneys only for the stipulated purpose”
   (iv) [i.e. it wasn’t that they were just receiving the money under their old agreement; it wasn’t that these payments were simply payments of previously-owed debt; they were payments under the new scheme, i.e. specifically for the purpose of paying the fees and creditors]
   (v) Thus CR is “equated” to the lender in Quistclose.
6. Submission 2:
   (i) Was also submitted that TP creditors had no enforceable rights, and so there was no primary trust.
   (ii) BUT “the existence of enforceable rights in such persons had not been treated as crucial to the existence of a trust” in Quistclose cases.
   (iii) Also, in light of Re Northern Developments “I cannot accept… that the TP creditors for the payments of whose debts [CR] had paid the moneys into the special account had no enforceable rights.”

Question 12

Carreras Rothmans v Freeman Mathews Treasure [1985]

1. What distinguishes this case from other Quistclose trust cases?
2. What does it say re conscience?

Answer 12

1. A Quistclose trust can arise where the money in question, although advanced for a specific purpose, had been paid not by way of loan, but rather in satisfaction of a contractual debt.
2. The case also demonstrates the importance of conscience, because not withstanding the different facts from Quistclose, drew on general principle that “equity fastens on the conscience of the person who receives from another property transferred for a specific purpose only and not therefore for the recipient’s own purposes” so that the recipient can only use the property for that stated purpose

Question 13

Re Northern Developments [1978]

Facts:

Answer 13

1. Company N was parent company of a group of companies including K which was in financial difficulty.
2. 17 banks put up a fund to rescue K and paid moneys into account in N’s name for express purpose of providing moneys for K’s unsecured creditors and for no other purpose (object behind this was that K could keep trading, otherwise, if it goes down, it could bring down the whole group).
3. The amounts advanced were treated [by N, I think] as advances to the banks’ other customers in N’s group.
4. K was put into receivership; half of the fund was unspent.

Question 14

Re Northern Developments [1978]

Sir Robert Megarry VC

1. what type of trust was it?
2. what was the interest of the creditors?
   (i) what was the object of vesting beneficial interest in recipient?
   (ii) any parallels with share of residue under a will?
3. Interests of the banks?

Answer 14

1. There was a Quistclose trust attached to the fund. It was a purpose trust but enforceable by identifiable individuals: banks as lenders, K, and K’s creditors (i.e. Re Denley trust).
2. Interests of the creditors:
   (i) “The fund was established not with the object of vesting the beneficial interest in them, but in order to confer a benefit on Kelly (and so, consequentially, on the rest of the group and the bankers) by ensuring that Kelly’s creditors would be paid in an orderly manner.”
   (ii) “There is perhaps some parallel in the position of a beneficiary entitled to a share of residue under a will. What he has is not a beneficial interest in any asset forming part of residue, but a right to compel the executor to administer the assets of the deceased properly. It seems to me that it is that sort of right which the creditors of Kelly had.”
3. Interests of the banks held to be under secondary trust if the primary trust failed (i.e. money would be paid back to them)

Question 15

What are the difficulties when object of trust is a purpose to purchase particular assets?

2 key questions

Answer 15

1. What is a failure of purpose?

2. What is the nature of the trust? Resulting, constructive?

Question 16

Re EVTR [1987]

Facts:

Answer 16

1. Mr Barber agreed to help a company by procuring a lease of equipment for it, and so deposited £60k with company’s solicitors “for the sole purpose of buying new equipment”. The £60k was used to buy the equipment. Deal worked as follows:
   (i) The equipment was bought via a leasing company, and was to be delivered in 7 months
   (ii) In the meantime, the supplier delivered less sophisticated equipment for temporary use, in exchange for the £60k as a deposit
   (iii) The company’s solicitor was authorised to release the sum (for the sole purpose of buying the equipment) and £21k was paid to the leasing co, £39k to the supplier.
2. The company, though, then went into receivership (before delivery of the proper equipment).
3. The supplier took back the temporary equipment, and repaid £29,652 to the receivers. This sum was £39k, i.e. the purchase price, with an agreed deduction for the Company’s breach of contract. The leasing company repaid £18,911 —£21k they had received, minus loss of interest.
4. The question is whether the receivers are entitled to retain the repaid sums as assets of the Company (i.e. so that they are to be distributed amongst the unsecured creditors), or whether Barber was entitled to them.

Question 17

Re EVTR [1987]

Court of Appeal:

Per Dillon LJ:

(i) what if company went into liquidation before Barber paid?
(ii) what if company went into liquidation after transaction had gone all the way through?
(iii) when does RT arise?
(iv) what is the ‘long-established’ principle of equity relevant here?
(vi) conclusion?

Bingham LJ:

(i) if the sum had never been paid out?
(ii) was the purpose carried out?
- does he think the law is fair?

Henry Hoskins:

(i) why is this an extension of Quistclose?

Answer 17

1. although the equipment had been purchased, the purpose had ultimately failed because the equipment had not been delivered, and so the money that had been paid was held on trust for the claimant.
2. Dillon LJ:
   (i) Under Quistclose, if the Company had gone into liquidation before the £60k was paid, Barber would have been able to recover the full amount, “on the footing that it was impliedly held by the company as a resulting trust for him as the particular of the loan had failed.”
   (ii) At the other end of the spectrum, if the transaction had all gone through, Barber’s only right would have been as an unsecured creditor of the company for the £60k. “The present case lies on its facts between those two extremes of the spectrum.” Money had been spent on the purpose for which it was meant; but that purpose had then failed, and the bulk of the money had been repaid.
   (iii) “On Quistclose principles, a resulting trust in favour of the provider of the money arises when money is provided for a particular purpose only, and that purpose fails”
   (iv) It is a “long-established” principle of equity that if a trustee receives money / property because of / in respect of trust property, he’ll hold that money as a constructive trustee
   (v) It follows that “the repayments made to the receivers are subject to the same trusts as the original £60k in the hands of the company”
   (vi) “There is now, of course, no question of [money that was repaid] being applied in the purchase of new equipment for the company, and accordingly, in my judgment, it is now held on a resulting trust” for the claimant.”
3. Bingham LJ
   (i) Had the sum never been paid out, the facts would have been identical to Quistclose. The purpose — acquiring the new equipment — was not carried out, so A was entitled to the £40k returned to the Company.
   (ii) Although the fund was applied to the stipulated purpose, the object of the fund was not achieved. Most people would be surprised if A were reduced to the position of unsecured creditor.
   - (Note, though, that whilst he eventually concludes there’s a Quistclose trust under present law, he has his doubts about whether the law as it stands is fair).
4. Henry Hoskins: the beneficial ownership went, for a time, to the supplier [and presumably to the leasing company]. The extension rests on the constructive trust analysis [i.e., once the money is repaid to the company, at this point they hold it as constructive trustee]

Question 18

Twinsectra Ltd v Yardley [2002]

Facts:

Answer 18

1. Twinsectra lent money to Mr Yardley for the purchase of property.
2. A solicitor, Sims, received the money, having given a personal (written) undertaking to T to retain it until it was used to purchase property (undertook that the loan money would be used only for that purpose).
3. The money was, though, used to discharge a debt that Sims owed to Yardley.
4. Sims became bankrupt, and T wanted to recover the property.
5. The only claim before the HL was whether Leach, another solicitor acting for Y, was liable for dishonest assistance in a breach of trust (Sims had paid the money (for T) to Leach, who then paid some of it out on Y’s instructions for other purposes).
6. Liability depended first on identifying that the money was held by Sims on trust.

Question 19

Twinsectra Ltd v Yardley [2002]

House of Lords: the money was held on trust for T.

Lord Hoffmann

Answer 19

1, Lord Hoffmann (Slynn, Steyn, Hutton agreed; so this is the view of the majority): money held on express trust.

(i) “The effect of the undertaking was to provide that the money in Sims’ client account should remain Twinsectra’s money until such time as it was applied for the acquisition of property in accordance with the undertaking”
(ii) So e.g. if Yardley had gone bankrupt before the money had been so applied, it wouldn’t have formed part of his estate (as it would have if Sims had held the money for Y absolutely).
(iii) Therefore: “Sims held the money on trust for T, but subject to a power to apply it by way of loan to Y in accordance with the undertaking. No doubt Sims also owed fiduciary obligations to Y in respect of the exercise of the power, but we need not concern ourselves with those obligations because in fact the money was applied wholly for Y’s benefit.”

Question 20

Twinsectra Ltd v Yardley [2002]

Lord Millett (Hutton agreed again): money held on Quistclose trust characterised as being a resulting trust.

6 steps to his analysis.

1. what happens in normal loan
2. difference with Quistclose cases
3. how do we distinguish (1) from (2)
4. why is it unconscionable?
5. is the duty contractual or fiduciary?
6. how does the trust arise?

Answer 20

1. Money advanced by way of loan normally becomes the property of the borrower. He is free to apply the money as he chooses, and, save to the extent to which he may have taken security for repayment, the lender takes the risk of the borrower’s insolvency.
2. But it is well established that a loan to a borrower for a specific purpose, where the borrower is not free to apply the money for any other purpose, gives rise to fiduciary obligations on the part of the borrower which a court of equity will enforce.
3. This depends on intention of the parties, and the circumstances of the case
4. It’s unconscionable to get money on terms as to its application, and then discard them
5. This is not a contractual duty, but a fiduciary one. May exist despite the absence of any contract, and it binds third parties (as in Quistclose).
6. And since this fiduciary relationship arises in respect of a specific fund, it gives rise to a trust.

Question 21

Twinsectra Ltd v Yardley [2002]

Lord Millett (Hutton agreed again): money held on Quistclose trust characterised as being a resulting trust.

Intention/purpose

Answer 21

1. A Quistclose trust does not necessarily arise merely because money is paid for a particular purpose — there must be intended (objectively) to be some sort of limitation. It is common for a lender to inquire into the purpose and lend it for a particular purpose — it is not enough to create a trust. Otherwise “commercial life would be impossible.”
2. On the facts: the undertaking was “crystal clear”. So, there’s a Quistclose trust: money was never at Y’s free disposal, it belonged throughout to T, subject to Y’s right to apply it for the acquisition of property. T gave the money to Sims, relying on him to ensure that it was properly applied, or else returned.

Question 22

Twinsectra Ltd v Yardley [2002]

Lord Millett (Hutton agreed again): money held on Quistclose trust characterised as being a resulting trust.

• The nature of the trust

Answer 22

1. Lord Wilberforce’s analysis in Quistclose suggests there are two trusts: one for identifiable beneficiaries and a second for the lender arising on failure of the first – primary and secondary trusts. However, there are many theoretical difficulties with this and little academic support.
2. On the present facts, there is no identifiable beneficiary but merely an abstract purpose: to buy property. So where is the beneficial interest? The lender, the borrower, the contemplated beneficiary, in suspense?
   (i) The lender

♣ Means the Quistclose trust is a simple commercial arrangement where the lender retains ownership but gives the borrower enough to carry out his purpose. If the money is not applied as the lender instructs then it returns to him. [so, the money is held on resulting trust for the lender the whole time]. There is considerable academic support for this view (including an article by Millett himself – see below). He thinks this is the only option that fits orthodox law and commercial reality, but considers the other options

(ii) The borrower

♣ I.e. so that the money is at borrower’s free disposal. This cannot be the case, since the whole purpose is to restrict the borrower’s use.

(iii) The contemplated beneficiary

♣	In Quistclose itself, there was no reason to explore the position where the primary purpose could still possibly be carried out. In all the cases up to there, the contest is between the borrower’s trustee-in-bankruptcy, and the lender.
♣	The question whether the primary trust is accurately described as a trust for the creditors first arises in Northern Development Holdings. Megarry relies on Wilberforce to say that the primary trust was a purpose trust enforceable by (amongst others) the creditors, as the people for whose benefit the trust was created. 
♣	The most serious problem with saying that the beneficial interest should vest in the intended beneficiary is that this would mean there could be no trust on the present facts – a situation where you have a non-charitable purpose and no beneficiary (so no-one but the lender to enforce performance).
♣	Similarly in EVTR, where the purpose is just to buy new equipment—any analysis of Quistclose trusts, however, must be able to accommodate gifts and loans for an abstract purpose like in these cases. Because there’s no reason (and nothing in the cases to suggest) to create an arbitrary distinction between different purposes of loan (i.e. ones for an abstract purpose not qualifying for Quistclose, and ones for a purpose and said to benefit an ascertainable class of beneficiaries qualifying)

(iv) In suspense

♣ Gibson J points out in Carreras Rothmans that the effect of adopting Megarry’s analysis is to leave the beneficial interest in suspense until the stated purpose is carried our, or fails.
♣ But this doesn’t have regard to the role that a resulting trust plays in equity; it doesn’t fit with the analysis of an RT as operating where the beneficial interest is not disposed of (i.e. the second type of RT [automatic]).

Question 23

Twinsectra Ltd v Yardley [2002]

Lord Millett (Hutton agreed again): money held on Quistclose trust characterised as being a resulting trust.

• Quistclose as an RT?

Answer 23

1. Chambers’ central thesis on RTs: RT arises whenever there is a transfer of property in circumstances in which the transferor (or more accurately the person at whose expense the property was provided) did not intend to benefit the recipient.
   (i) It responds to the absence of an intention on the part of the transferor to pass the entire beneficial interest, not to a positive intention to retain it. Insofar as the transfer does not exhaust the entire beneficial interest, the resulting trust is a default trust which fills the gap and leaves no room for any part to be in suspense.
   (ii) “An analysis of theQuistclosetrust as a resulting trust for the transferor with a mandate to the transferee to apply the money for the stated purpose sits comfortably with Dr Chambers’ thesis, and it might be thought surprising that he does not adopt it”.

Question 24

Twinsectra Ltd v Yardley [2002]

Lord Millett (Hutton agreed again): money held on Quistclose trust characterised as being a resulting trust.

On CA’s reasoning

Answer 24

1. CA was happy to treat beneficial interest as in suspense, or, following Chambers, to hold that it was in the borrower, lender having only a contractual right enforceable by injunction to prevent misapplication.
   (i) But this is inconsistent with the actual result they reach, that T has a proprietary remedy – unless the money belonged to D before its misapplication, there’s no basis on which can justify a proprietary remedy against TPs
   (ii) Chambers’ “novel view” [reading list]:

♣ The arrangements do not create a trust (i.e. Wilberforce’s primary trust) at all; the borrower receives the entire beneficial ownership in the money subject only to a contractual right in the lender to prevent the money being used otherwise than for the stated purpose.
♣ If the purpose fails, a resulting trust in the lender springs into being: the lender’s equity (which is an equitable right to prevent money from being used for other purposes, rather than a right to compel fulfilment of a specified purpose) is merged in a RT in favour of lender.
♣ So, this sidesteps the problem about the location of the beneficial interest prior to purpose failure,

(iii) Millett: “In fact, Chambers argues for a kind of restrictive covenant enforceable by negative injunction yet creating property rights in the money. But restrictive covenants, which began life as negative easements, are part of our land law. Contractual obligations do not run with money or a chose in action like money in a bank account” [i.e., contractual obligations don’t produce proprietary rights]
(iv) Lots of academic reaction to Chambers. Ho and Smart (2001) [on reading list] Millett thinks, destroy Chamber’s theory:

♣ Chambers’ analysis doesn’t give a solution to cases of non-contractual payment (i.e. where the loan is not made as part of a contract).
♣ It’s inconsistent with Wilberforce’s description of the borrower’s obligation as fiduciary and not merely contractual.
♣ It fails to explain the evidential significance of a requirement that the money should be kept in a separate account.
♣ It can’t easily be reconciled with the availability of proprietary remedies against 3rd parties (dishonest assistance, knowing receipt).
♣ And whilst the existence of a mere equity like this will be enough to prevent money from being available to unsecured creditors (because the trustee in bankruptcy has no greater rights than his bankrupt), it won’t prevail over secured creditors. (so would mean that where, e.g. in Quistclose, the bank holds a floating charge – as it probably did – Chambers’ analysis would have led to a different outcome)

Question 25

Twinsectra Ltd v Yardley [2002] Millet: 1. Can the lender enforce the trust as a beneficiary of the secondary trust? 2. Can the lender enforce the trust as a settlor? 3. What did Chambers argue? But what are the issues with this suggestion? 4. Thus, what is the one explanation of the lender's fiduciary right to enforce the primary trust?

Answer 25

1. “He cannot do so as the beneficiary under the secondary trust, for if the primary purpose is fulfilled there is no secondary trust”. 2. “He cannot do so as settlor, for a settlor who retains no beneficial interest cannot enforce the trust which he has created”. 3. Chambers insists that the lender has merely a right to prevent the misapplication of the money, and attributes this to his contractual right to specific performance of a condition of the contract of loan. (i) Millett: this provides no solution where the arrangement is non-contractual. (ii) And Wilberforce clearly based the borrower's obligation on an equitable or a fiduciary basis and not a contractual one. (iii) He was concerned to justify the co-existence of equity's exclusive jurisdiction with the common law action for debt. Basing equity's intervention on its auxiliary jurisdiction to restrain a breach of contract would not have enabled the lender to succeed against the bank, which was a third party to the contract (i.e. if the obligation is contractual, how could it be enforced against TPs to the contract?) 4. There’s only one explanation of the lender's fiduciary right to enforce the primary trust which can be reconciled with basic principle: he can do so because he is the beneficiary.

Question 26

Twinsectra Ltd v Yardley [2002] Millet: o Second, seeing the beneficial interest as being in the lender explains why the primary trust is said to have failed in several cases (especially Toovey v Milne and Quistclose itself) 1. did the borrower's bankruptcy prevent the creditor being paid?/failure of purpose? 2. Why must the purpose fail? 3. Why does a RT work? (according to Millet?)

Answer 26

1. Since the money did not belong to the borrower, the borrower’s bankruptcy/insolvency did not prevent the creditor being paid (since, when you’re bankrupt/ insolvent, a third party could still pay particular creditors). So, on this basis, there’s no failure of purpose. 2. The reason the purpose failed must be because the lender was trying to save the borrower from bankruptcy/insolvency. This in itself isn't enough to make the trust fail – it’s just the settlor’s motive which has been frustrated, but a trust only fails if it becomes illegal or impossible. 3. However, if the borrower is seen as holding the money on a RT for the lender but with power/a duty to carry out the lender’s revocable mandate, and the lender’s object in giving the mandate is frustrated, he is entitled to revoke the mandate and demand the return of money which was beneficially his throughout.

Question 27

Twinsectra Ltd v Yardley [2002] Millet: Conclusion 1. orthodox example of RT? 2. When does it arise?/does borrower have beneficial interest? 3. why does money come back upon the purpose failing? 4. significance of circumstances of the case

Answer 27

1. Quistclose trusts are orthodox examples of resulting trusts. The lender pays the money to the borrower by way of loan, but he does not part with the entire beneficial interest in the money, and in so far as he does not it is held on a RT for the lender from the outset (does this support retention theory??) 2. It arises when the lender parts with the money on terms that don’t exhaust the beneficial interest. It is the borrower who has a very limited use of the money, being obliged to apply it for the stated purpose or return it. He has no beneficial interest in the money, which remains throughout in the lender subject only to the borrower's power or duty to apply the money in accordance with the lender's instructions. 3. When the purpose fails, the money is returnable to the lender, not under some new trust in his favour which only comes into being on the failure of the purpose, but because the resulting trust in his favour is no longer subject to any power on the part of the borrower to make use of the money. 4. Whether the borrower is obliged to apply the money for the stated purpose or merely at liberty to do so, and whether the lender can countermand the borrower's mandate while it is still capable of being carried out, must depend on the circumstances of the particular case.

Question 28

Davies & Virgo on Quistclose Trusts 1. importance of purpose 2. importance of purpose failing (i) re insolvency (ii) how must the failure be shown? 3. Why is there a trust? (i) reasoning in Quistclose case (ii) Issue with primary trust being for identified beneficiaries? (iii) Issue with trust being a purpose trust? (iv) re Millet's approach?

Answer 28

1. First, there must be a clear purpose for a Quistclose trust to arise, and the property must be transferred to be used exclusively for that purpose. It’s crucial that the property isn't at the free disposal of the recipient. This might be evidence by, e.g., recipient being required to keep the property segregated from his general assets (as in e.g. Quistclose) 2. It is also crucial that the purpose must fail: (i) It’s generally assumed that the power fails on insolvency: since one of the reasons for lending is often to avoid borrower’s insolvency, if this then happens, then the purpose must have failed. (ii) The failure of the purpose must, however, be clearly shown. EVTR: although the equipment had been purchased, the purpose had ultimately failed because the equipment hadn’t been delivered. 3. So, it’s relatively easy to explain how a Quistclose trust comes about. What’s more difficult is to explain why there is a trust. (i) In Quistclose, HL held that there were effectively 2 trusts: primary express trust for a purpose, and secondary trust for the lender, which arose on the failure of the purpose. But this reasoning is problematic: (ii) The primary trust for identified beneficiaries would allow beneficiaries to terminate the trust and transfer the property to themselves (under Saunders v Vautier). This is unlikely to be what parties intended. (ii) On the other hand, if it’s a trust for a specified purpose, it’s unlikely to be valid, since there are no objects to enforce the trust. (iii) And even if the purpose trust is valid as being essentially for identifiable beneficiaries (i.e. under Denley), this would mean the beneficial interest in the property is in suspense until the given purpose was either fulfilled or failed. Because the primary trust either comes to an end when the money has been used for the correct purpose, or when it hasn’t been (in which case the secondary trust comes in) • This approach was criticised by Millett in 1985, before he became a judge: o “To impute to A an intention to confer on C a right to call for property enforceable in equity but not an equitable interest in the property is to attribute to him the motivation of an antiquarian.” • So, in Twinsectra, Millett says there’s no need to conclude that the beneficial interest in the property was in suspense. Instead, he says there’s a resulting trust, which would account for the beneficial interest in the property at all times: the beneficial interest would remain with the transferor unless and until the purpose is fulfilled.

Question 29

1. How many trusts does Millet say that there are? 2. PRT or ART? - problems with a PRT analysis - problems with ART analysis? 3. How would an ART analysis work? 4. What is the role of the power? 5. Does Millet say in the intro of Swadling's et al collection of essays on Quistclose trusts? 6. So which principles do we apply to the Quistclose trust? 7. What is the argument that there should be an express trust?

Answer 29

1. Millett says there’s only ever one trust here – an RT from the beginning. It’s not that there’s an express trust that has failed. 2. Does this mean that it’s an RT responding to settlor’s presumed intention? [i.e. rather than an automatic RT]. Possibly, but difficulties might arise here where it’s the borrower who segregates the lender’s property from his own general funds, without being instructed to do so: 3. It might be better to explain the Quistclose trust as arising on the failure of an express trust: - We take the transferor to have intended to create a purpose trust; which then isn't valid because it’s not charitable. So, instead, recipient holds the property transferred on RT for the transferor. 4. But the recipient still has power to use property for the purpose for which it was transferred at the outset, given that the transferor’s consented to this. 4. It might, however, be better not to try and explain all instances of Quistclose trusts in the same way. Indeed Millett has written, in 2004 (intro to Swadling’s collection of essays on quistclose): (i) Quistclose trust is probably the “most important application of equitable principles in commercial life” (ii) But the nature of the trust and location of the beneficial interest “remain elusive” – even post-Twinsectra, they are much debated (iii) He thinks it can be any of express, implied, constructive or resulting trust, “depending on the facts of the particular case and the boundaries between these various forms of trust” (iv) From a commercial POV, though, it’s just a “mechanism by which one person may allow the use of his money by another for a stated purpose without losing his right to the money more than necessary to achieve the purpose.” Obviously there is a commercial need for this. (v) The problems courts are likely to face aren’t in determining the nature of the trust, but in distinguishing it from the ordinary case of a lender who wants to know why borrower wants the money (but doesn’t therefore lend it on trust, retaining the beneficial interest). 6. So, the nature of the trust might depend on the facts of any case. But it’s important to appreciate that the well-established principles of each type of trust should be applied. 7. There’s a strong argument to say that if a lender wants to be protected in the event of the borrower’s insolvency, the lender should make his intentions express. If he does so, then an express trust could arise. (i) This possibility has been recognised judicially by Lord Millett, in Latimer (post-Twinsectra) (ii) And the majority in Twinsectra thought it was an express trust [see Hoffmann above]

Question 30

1. How is Davies and Virgo's analysis similar to Millet's analysis? 2. why might it be better to point to a settlor's express intention? (i) issue with express trust analysis re intention? (ii) what would a consequence of this analysis be re how the lender can treat the money? (iii) their conclusion of their approach?

Answer 30

1. Factually similar to the RT under Millett’s approach. Under both approaches, beneficial interest remains in the lender 2. to justify the lender having priority over other unsecured creditors in the event of insolvency. (i) However, for an express trust to be found, need sufficient certainty of intention to create a trust (ii) And a consequence of this analysis would be that lender could compel the use of the money for the promised purpose, or revoke the loan even where the purpose is still capable of being fulfilled, or even change the purpose. All this is pretty inconsistent with what has commonly been understood as a Quistclose trust. (iii) So this characterisation isn't free from difficulty.

Question 31

1. What does Payne note re the express trust analysis? 2. What do D & V note? 3. What if there is no express trust?

Answer 31

1. commenting on whether the express trust approach could explain Quistclose itself: o If Quistclose took full beneficial interest in the trust property from the start, they ought to have been able to wield all of the rights normally associated w. beneficial interest, eg to compel RR to use the money for the dividend, to revoke the loan, to prevent payment of the dividend by RR to their shareholders while the purpose remains capable of fulfilment, etc. o But doesn’t appear that they had all these rights 2. D+V: whilst, however, Q didn’t appear to have these rights, it might not be improper for them to have them, especially if there was enough certainty of intention for an express trust to arise – such an express trust shouldn’t operate differently from other ETs just because it comes under Quistclose fact-pattern 3. But, if there’s no such express intention to create a trust, it may be that there’s only a personal, contractual relationship between the parties, rather than a trust. Unless can find an RT

Question 32

Millett, ‘The Quistclose Trust: Who Can Enforce It?’ (1985) Does the QT represent a departure from well-settled principles of trust law? Questions to answer: 1. Can the creditors (of B) compel B to apply the money to debts owing to them? 2. Or can A change his mind, release B from the obligation to apply the money only for the specified purpose and either demand repayment or allow B to spend the money as he chooses? 3. And where, pending its application by B, is the beneficial interest in the money?

Answer 32

A Quistclose trust does not represent any departure from well-settled principles of trust law. • A lends money to B for a specific purpose (to enable B to pay his creditors, for a particular class of item), and for no other purpose. The answer depends on A’s intention: 1. If A’s intention was to benefit C, or his object would be frustrated if he were to retain a power of revocation, the transaction will create an irrevocable trust in favour of C, enforceable by him alone. Beneficial interest — C. 2. If A’s intention was to benefit B (though without vesting a beneficial interest in him) or himself, but not C, the transaction creates a trust in favour of A alone and B holds the property in trust to comply with A’s directions. The Trust is therefore enforceable by A, not C. Beneficial interest – A. 3. Where A’s object was to save B from bankruptcy by enabling him to pay his creditors, then (2) apples. Whenever that is the correct inference: a. Where A has an interest (separate & distinct from B) in seeing the money applied for the stated purpose, B will be under a positive obligation, enforceable by A. Converse: B has a power, but no duty to apply the money and A’s remedy confined to preventing the misapplication of the money. b. Prima facie, A’s directions will be regarded as revocable by him, but he can contract with B so that there can be no revocation without B’s consent. c. Communication with C of the arrangements prior to A’s revocation will effect the assignment of A’s equitable interest to C and convert A’s revocable mandate into an irrevocable mandate for C (NB – resulting trust, so no formality requirements).

Question 33

Swadling (2004): Quistclose violates orthodox trust law 1. evaluation on whether LW adhered to orthodox trust principles - why couldn't the transfer be on trust (nb restriction on how they are applied)? 2. And even if we could say a trust was intended, how do we identify the objects of the trust? (i) creditors? (ii) lender? (iii) purpose? 3. Does Chambers' argument succeed? 4. Does Lord Wilberforce's secondary trust analysis work? 5. Conclusion of Quistclose judgment? comment on how swiftly Swaddling dismisses the law

Answer 33

Wilberforce’s main worry seems to have been that Barclays could exercise its right of set-off and thereby evade a Pari-Passu [equal, I think] distribution of the loan moneys. But in seeking to avoid this, Wilberforce departed from orthodox trust law principles • “It is impossible to say that the transfer was a transfer on trust because the restriction only referred to how the rights were applied, not for whom they were held” 2. (i) Can’t be the creditors. For lots of reasons. E.g. because this would allow them to be paid twice over (ii) Can’t be the lender, for almost identical reasons (iii) Can’t be the purpose, cos the purpose was a private purpose, which English law doesn’t allow. 3. Chambers’ argument, that there need not be a primary trust, doesn’t succeed either, because it doesn’t explain how a personal right to see that the fund isn't misapplied can bind a stranger, including borrower’s trustee in bankruptcy, to the contract which creates that right. 4. And given that Wilberforce’s secondary trust depends on the validity of the primary trust, the argument that there was a consensual trust of the loan monies in favour of the lender on the failure of the purpose can’t be sustained. 5. So, HL was wrong in Quistclose to find a trust. Lender shouldn’t have had any priority here – funds should have been treated as part of RR’s general assets. NB: SD: Swadling is quick to dismiss HL decisions. He’s right here, but note that it’s still the law.

Question 34

Adrian essay on Quistclose trust COLLECTION Intro

Answer 34

Sui generis trust; not perfectly a trust for persons or as a trust for purposes and attempts to categorise the primary and secondary trusts in Quistclose as one or the other is futile

Question 35

Adrian essay on Quistclose trust COLLECTION 1. The primary trust as a purpose trust i.e. case law? 2. Issues with this conception? (i) there are key differences between the position of the settlor and beneficiaries between Re Denley purpose trusts and a Quistclose trust:

Answer 35

1. The strongest argument for Quistclose trusts as purpose trusts is supplied by Re EVTR. In Re norther Developments, applied in Carreras Rothmans, the court went further saying that the primary trust in Quistclose was actually not just similar to a Re Denley-typ trust, but was such. Yet, this conception of the primary trust as a Re Denley purpose trust is vast problematic: (i) In a Re Denley trust, the settlor can compel the trustees to apply the trust property. But, in Quistclose, they had no right to compel Rolls Razor to spend the money to pay off its creditors - it had only the power to prevent misapplication of the funds for other purposes.

Question 36

Adrian essay on Quistclose trust COLLECTION 1. The primary trust (b) Key differences between position of settlor and beneficiaries in a Re Denley trust vs Quistclose?

Answer 36

2. In a Re Denley type purpose trust, the beneficiaries have the full set of beneficial rights, but in Quistclose the beneficiaries (creditors of Rolls Razer) had limited rights - they could not collapse the trust under the rule in Saunders v Vautier, and they could not directly enforce the trust (Re Northern Developments held that they could but this must be wrong because if the creditors had a beneficial interest then the purpose trust would not have failed).

Question 37

Adrian essay on Quistclose trust COLLECTION 1. The primary trust Third difficulty conceiving the trust as Re Denley trust Fourth difficulty...

Answer 37

Some Quistclose trusts would be invalid for abstract purposes as was the case in Twinsectra v Yardley. Secondly, as millet writes, it is generally undesirable to rely on Re Denley as the validity of which is disputable, to create further exceptions to the beneficiary principle. Re Denley forms a conceptually uncertain basis for rationalising the Quistclose trust.

Question 38

Adrian essay on Quistclose trust COLLECTION 1. The primary trust - trust for persons? Express trust (Millet 1985)? Penner's explanation?

Answer 38

Millet in his 1985 article argued that it was an express trust for the lender. The entire beneficial interest was vested in the vender subject only to a revocable power vested in the borrower. This understanding explains why the lender can restrain misapplication of the trust property but does not explain why the lender cannot compel application of the trust property if he supposedly has the full beneficial interest vested in him. Penner explains this difficulty on the basis of the contract between the lender and the borrower, but this is unconvincing for how can a contract (which creates rights in personam) take precedence and suspend proprietary rights (rights in rem)? Millet's 1985 article does not help us understand the nature of the Quistclose trust then

Question 39

Adrian essay on Quistclose trust COLLECTION 1. The primary trust Alternatives - combination of being vested in the borrower and lender? Chambers?

Answer 39

If the beneficial interest is not vested entirely in the lender, and it is plainly cannot be vested entirely in the borrower, then he would be free to treat the property as he wished, contrary to Lord Wilberforce in Quistclose, perhaps it is some combination of the two: perhaps the beneficial interest is shared between the borrower and lender? Chambers adopts this analysis saying that the beneficial interest is in the borrower, but subject to a 'fiduciary string' (the power to prevent misapplication) in favour of the lender, which arises via contract. if Chambers is correct then there is a modified express trust for persons (of the oddest kind) - that person being the borrower. But Chabers' view is an unsatisfactory explanation of the Quistclose trust - it cannot survive the obkections put to it by Ho and Smart, the most fatal of which being that it cannot explain how Quistclose trusts can arise in non-contractual situations.

Question 40

Adrian essay on Quistclose trust COLLECTION 1. The primary trust Summary so far

Answer 40

all of the explanatinos of the primary trust in Quistclose have been lacking: it can not be categorised satisfactorily as a trust for persons, or for purposes.

Question 41

Adrian essay on Quistclose trust COLLECTION 2. The secondary trust 1. millet's view? 2. common intention?

Answer 41

The same theme emerges upon examination of the secondary trust. 1. there must be a secondary trust which arises since Millet's 1985 theory was the onlyy one that denied such a possibility, saying that there was one trust - the express trust for the lender - in existence the whole time. as we have seen, this theory has been rejected. 2. Another possibility is that a resulting trust arises based on common intention of the parties, stemming from the original agreement. but this is unsatisfactory as often there is no evidence of mention express or implied to form the basis of resulting trusts (and as Lord Browne-Wilkinson said in Westdeutsche, presumed resulting trusts are the product of intention). This seems a strange classification that all resulting trusts are the product of an absence of intention (i.e. they are not express trusts) is preferred.

Question 42

Adrian essay on Quistclose trust COLLECTION Conclusion

Answer 42

Quistclose trust is clearly sui generis (NB what are the drawbacks of this analysis? I.e. numerus clausus) No single theory provides a satisfactory account of it, and attempts to do so are wrong.

Question 43

My COLLECTION 'The so called Quistclose trust… has resisted attempts by academic lawyers to analyse it in terms of conventional equitable principles.’ (Lord Millett). Discuss.' Introduction

Answer 43

The Quistclose trust defies categorization. It is unable to be coherently explained through current principles of orthodox trust law. However, upon closer analysis, the Quistclose trust does not defy conventional equitable principles to the extent that some commentators, such as Swaddling, have argued. Nonetheless, if, as Lord Millett states, the Quistclose trust has ‘resisted’ analysis under conventional equitable principles, it may be better to regard it as a sui generis trust.

Question 44

My COLLECTION 1. Lord Wilberforce’s dual trust analysis Facts

Answer 44

In the eponymous case of Barclays Bank v Quistclose Investments Ltd, Lord Wilberforce analysed the Quistclose trust as a dual trust mechanism. On the facts of the case, A (lender transferred loan money to B (borrower). B was on the brink of insolvency and had an overdrawn facility with C. The loan from A to B as to pay dividends to its shareholders. However, before B could pay C it became insolvent. C then sought to claim the loan money which meant the loan money by exercising its right of off set. However, A challenged this by claiming that it had an equitable interest in the loan money and meant the loan money was not included in the assets used to pay off the creditors. The issue for the House of Lords was whether C (the company creditor) or A (the lender) should have priority as to the loan money. Lord Wilberforce found in favour of A, holding that the loan money was held on trust by B to A. To give effect to this, his Lordship held that first a primary trust, which arises by virtue of the purpose expressed as to the usage of the loan monies (in this cases to pay dividend/prevent insolvency). When the primary trust fails, a secondary trust arises in favour of the lender.

Question 45

My COLLECTION 1. Lord Wilberforce’s dual trust analysis Issue (i) LBW failed to define the nature of the trust; which trust is the Quistclose trust?

Answer 45

The first issue with Lord Wilberforce’s judgment is that he failed to define the nature of the trust. Further, it is unclear which of the two trusts is the Quistclose trusts. Is it the primary trust or the secondary trust, or are they collectively defined as a Quistclose trust?

Question 46

My COLLECTION 1. Lord Wilberforce’s dual trust analysis Issue (ii) Assuming it's an express trust 1. why assume LW meant the primary trust to be an express trust? 2. issues re certainty of intention? 3. re trust only stating the purpose for which it should be applied? 4. issues re certainty of objects

Answer 46

1. The starting point for any analysis of a primary is that it is an express trust – as it is the failure of an express trust which ordinarily give rise to an (automatic) resulting trust (see Westdeutche Landesbank per Lord Wilberforce). 2. However, Swaddling (2004) argues that it is impossible to say that the transfer of the loan money from A to B was on trust. 3. First, the trust appears to lack certainty of intention, since there is no express declaration of trust. 4. Secondly, he holds that ‘it is impossible to ay that the transfer was on trust since the restriction only referred to how the rights were applied, not for whom they were held.’ Therefore, there could be no creation of an equitable interest. 5. Thirdly, he argues that the trust lack certainty of objects: ‘[The trust] could not be for the creditors as it would allow them to be paid twice over… and for almost identical reasons it could not be for the lender’.

Question 47

My COLLECTION 1. Lord Wilberforce’s dual trust analysis Issue (ii) (a) the trust lacks certainty of intention (b) double recovery point

Answer 47

Addressing each concern in turn, Megarry J in Re Kayford, approved by Scarman LJ in Paul v Constance, infers an intention to hold money separately from the act of opening a separate bank account. Further, Newey J in First City Movement Bank plc v Zumax Nigeria held that the funds were not segregated ‘in any meaningful way’ and found no Quistclose trust. As such, there is precedent for not finding express intention. Yet, justifying this inference of intention is problematic and weakens well-established principles, even if there is precedent. With regards to the double recovery point, an implied term of the loan contract might prevent C from collapsing the trust to obtain payment. C, arguably, holds his right under trust subject to his contractual obligations under the loan contract, and cannot exercise his trust rights inconsistently with the contract. Such a view is consistent with the contract holding theory found in the context of unincorporated associations. Moreover, Re Lipinski provides authority for the fact that the contract holding theory can operate within the law of truss. At the very least an implied term of the contract may reduce the debt pro tanto to reflect any sums recovered under the trust.

Question 48

My COLLECTION 1. Lord Wilberforce’s dual trust analysis Issue (iii) can't have private purpose trusts

Answer 48

A further problem with the analysis in Quistclose is that ‘English law does not countenance trusts for private purposes’ (Swaddling 2004) since that violates the beneficiary principle. Who would enforce it? This problem could be addressed by pointing to Re Denley, in which individuals with a direct or indirect benefit can enforce the trust, thereby qualifying the beneficiary principle. The Re Denley principle may explain why the lender or third party who was to recover the money are given right to enforce the trust for the benefit of the purpose. Yet, Re Denley provides an exception to ‘conventional equitable principles’ according to Swaddling and should arguably be held void because the employees had factual (not legal) benefit. Therefore, they could not invoke Sundaers v Vautier to compel transfer and so the beneficiary principle was hardly satisfied.

Question 49

My COLLECTION 1. Lord Wilberforce’s dual trust analysis Issue (iii) the trust property is in suspense

Answer 49

A final issue with Lord Wilberforce’s analysis is that while on the formation of the resulting trust the beneficial interest clearly rests in the lender, prior to the constitution of the resulting trust the beneficial interest is in suspense. Lord Upjohn in Vandervell v IRC comments that ‘equity abhors a beneficial vacuum’. This forms the basis of Hudson’s criticism on the Quistclose trust and Stevens adds that during this ‘beneficial vacuum’ the liquidator would have taken the loan money into the company assets in compliance with ordinary insolvency procedure. One response to this concern is that if an express purpose was intended, the result would be that the trust is void from the beginning and the property comes back immediately on resulting trust. This produces a similar dual-trust analysis to that proposed by Lord Wilberforce albeit the resulting trust arises immediately rather than subsequently when the purpose fails.

Question 50

My COLLECTION 1. Lord Wilberforce’s dual trust analysis Summary of flaws with Lord Wilberforce's analysis

Answer 50

Nonetheless, the dual express/resulting trust analysis which represents the genesis of the Quistclose trust is riddled with conceptual contradiction. Attempts to modify the analysis provide some conceptual coherence, but it cannot be said that these modified analyses are ‘conventional’.

Question 51

My COLLECTION 2. Lord Millett’s resulting trust analysis Facts of Twinsectra

Answer 51

Twinsectra v Yardley expanded the application of the Quistclose trust. Whereas in the case of Quistclose money was transferred for a purpose, and the purpose became frustrated, in Twinsectra money was transferred for a purpose, however the money was misappropriated and used contrary to the stated purpose. The court concluded that the misappropriated money was held on trust.

Question 52

My COLLECTION 2. Lord Millett’s resulting trust analysis

Answer 52

Lord Millett, on the majority of the Quistclose point, held that the loan money was held on resulting trust arising from the outset: ‘The lender pays the loan money but he does not part with the entire beneficial interest in the money, and in so far as he does not it is held on a resulting trust for the lender form the outset’.

Question 53

My COLLECTION 2. Lord Millett’s resulting trust analysis Rejection

Answer 53

However, Lord Millet’s theory is not without criticism. First, Penner (2004) argues that Millett lowers the threshold for inferring intention by the lender to retain the beneficial interest. According to Lord Millett’s theory, the Quistclose trust responds to a negative intention (absence of intention to transfer the beneficial interest) as opposed to positive intention to retain the beneficial interest. This approach stems from Dr Chambers’ ‘absence of intention’ theory of resulting trusts, which in accordance with Birks’ Restitutionary theory of resulting trusts, would unduly expand the scope of the Quistclose trust to cases like Westdeutche, where is was not possible to create a trust since it was ultra vires. This is contrary to ‘conventional equitable principles’ for two reasons. First, it defies Lord Browne-Wilkinson’s classification of resulting trusts in Westdeutche and that of Megarry J in Re Vandervelle (No 2) which overlap significantly. Secondly, it can be argued that the separation between equity and commercial transactions is a well-stablished precedent. Lord Mustill in Re Goldcorp and Lindley LJ in Manchester Trust v Furness warn against introducing equity as it will create uncertainty, defying the keystone principle of legal certainty.

Question 54

My COLLECTION 2. Lord Millett’s resulting trust analysis But why Millet's reasoning may not be so unique

Answer 54

Equally, attempts have been made to make the ‘absence of intention’ approach conventional. It must be noted that a trust arose in Vandervell, in spite of the express contrary intention. Similarly, Lord Millett in the Privy Council case Air Jamaica v Charlton reaffirmed his absence of intention approach taken in Twinsectra. Consequently, Quistclose trusts may not be unique in this regard.

Question 55

My COLLECTION 3. Re EVTR and Carreras Rothmans v Freeman Matthews Treasure

Answer 55

In Re EVTR, the Court of Appeal recognised that there was no conscious consideration by the lender that the borrower would even be insolvent, much less an intention to create a trust upon insolvency. Lowering the threshold so as to give the lender an automatic proprietary interest in the loan money is normatively questionable. Its justifications lie in policy concerns, more specifically to protect such lenders, thereby encouraging these arrangements and to potentially give English law ‘a competitive edge over their continental counterparts’ (Chan). In Carreras, the lender could not revoke the loan and was held to be compelled by a third party. In such a situation the lender has in effect null beneficial interest at the time the loan is transferred. Although we can conceptualise this scenario as the beneficial interest being subject to the broader contractual framework, this has never been approved by their Lordships, and remains wholly unorthodox. Furthermore, in cases like Re EVTR, where the benefit of the loan was clearly for a third party, it is wrong to talk of the lender retaining a beneficial interest. Further still, even the contract holding theory, proposed by Chambers, breaks down when applied to cases like Twinsecctra, which involved the misappropriation of loan money. Twinsectra makes it clear that a lender is able to trace into a fund and obtain an equitable proprietary remedy of dishonest assistance or knowing receipt. However, since the lender’s initial right is merely contractual, it is unclear how or why the lender has any equitable right in the loan money (not least an equitable right strong enough to bind third parties). Conversely, a merely contractual right cannot, and should not, bind third parties.

Question 56

My COLLECTION 4. The constructive trust analysis

Answer 56

Finally, Peter Gibson LJ in Carreras proposed a constructive trust analysis, an approach which has been adopted in other commonwealth countries such as Australia. It arises, according to this view, because it would be unconscionable for the borrower to assert title to the money if it wasn’t used for the purpose for which it was lent. Equity therefore operated to impose a trust, so as to prevent the borrower from acting unconscionably. Yet, such an approach unduly expands the ambit of the constructive trust, which in itself lacks any coherent or ‘conventional’ principles to guide its development. Further, if the constructive trust arises on transfer of the property, in a situation analogous to the McFarlane approach of ‘receipt of property sub conditione’ then the beneficial interest is immediately placed with the lender (the problems of which have already been discussed in the context of Lord Millett’s resulting trust). Secondly, the constructive trust would have to arise immediately, which raises the problems discussed in relation to where the beneficial interest might be.

Question 57

My COLLECTION 5. Conclusion

Answer 57

The Quistclose trust defies conventional equitable categorisation and the rules which determine when a trust can arise. Modifications can be made to the analyses so that the resistance to analysis under conventional equitable principles is not as great as it might first appear. Nonetheless, the better approach is to regard it as a sui generis trust, justifiable only on commercial policy grounds of protecting and encouraging lenders of loan money.

Question 58

-Operation of Quistclose trusts:

Answer 58

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.

Question 59

-Requirements of Quistclose trusts:

Answer 59

o Particular purpose (often a loan to pay borrower’s creditors) o Exclusive use for stated purpose o 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.

Question 60

Nature of Quistclose trusts:

Answer 60

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 o 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 o 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)

Question 61

Burns, “The Quistclose Trust: Intention and the Express Private Trust”, (1992)

Answer 61

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

Question 62

Goodhart and Jones, "The Infiltration of Equitable Doctrine into English Commercial Law” (1980)

Answer 62

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 Kayford (although megarry J's analysis such that it is clearly not a Quistclose trust) 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 creditors because through arrangement with IATA they had assumed position of secured creditors without having to register charges. Key point is we need consistent approach

Question 63

Payne, “Quistclose and Resulting Trusts” in Birks and Rose, eds, Restitution and Equity: Resulting Trusts and Equitable Compensation (2000),

Answer 63

Proper categorization necessary for proper understanding and application of trust law (affects formality requirements under s53 LPA 1925) Might affect future development of QTs Conclusion: it is better to continue to treat QTs as separate category of trusts rather than as express, resulting or constructive.

Question 64

Ho and Smart, “Reinterpreting the Quistclose Trust: a Critique of Chambers’ Analysis” (2001)

Answer 64

Chambers argues that QTs don’t actually create a trust but borrower receives entire beneficial ownership subject to contractual right enforceable by injunction on the part of lender to prevent misuse. This leaves unresolved important issues: 1) Potter LJ’s insistence on requirement of segregation of QT funds from B’s general assets, 2) inapplicable when QTs arise outside of contractual setting or when dispute involves third party. Author argues that QTs should continue to be seen as an express purpose trust (another tolerated exception to beneficiary principle).] - Criticism: Chambers’ analysis applies to a narrow range of factual situations where QTs might arise o Doesn’t address cases where there is a positive obligation on borrower to use money for the specified purpose (rather than a negative obligation not to use for other purpose) o Doesn’t address cases where there is no contract

Question 65

The Quistclose Trust ed. (Swadling)

Answer 65

Argues that Quistclose cannot be reconciled with orthodox principles of trusts; it is a “sustained assault on the decision and the case-law it relies on”. HL made an error and priority to lender is undeserved – Millett and Chambers’ attempts at rescuing Quistclose are flawed Conclusion: couldn’t have been a primary trust and Lord Wilberforce was wrong to find one. Thus, there is no room for a secondary trust arising from failure of primary trust. Also, the right to restrain a misapplication of a fund is a personal and not proprietary right (contrary to Chambers) so cannot bind third parties. Lord Millett says that there doesn’t have to be a secondary trust – it can be a trust in favour of lender with a power for borrower to appoint to creditors (but any notion of primary trust is untenable).

Question 66

Swadling, why is the primary trust not valid?

Answer 66

- Wilberforce thought it was consensual, but Twinsectra (HL) more equivocal - Situations where NCTs usually arise: o Response to wrongdoing: A-G for Hong Kong v Reid – arose out of breach of fiduciary duty (regardless of validity doesn’t explain Quistclose as Rolls didn’t do anything wrong at moment of receipt where the primary trust arose) o Unjust enrichment: Chase Manhattan v Israel-British Bank – recipient of mistaken payment was trustee for payor (no unjust enrichment of Rolls at time of receipt – not unjust (mistake, duress, failure of consideration) or enrichment (Rolls liable to repay)) o Pre-Quistclose case law: Wilberforce claims over 150 years of authority for his principle but this doesn’t shed light on reason for trust. Cases cited: ♣ Toovey v Milne: genesis of principle – facts: brother-in-law lent bankrupt money to pay creditors, unable to pay and returned some of the money, which the bankrupt’s assignee claimed against the brother-in-law. Claim refused because money had been received on trust (because it was for a specific purpose) and never formed part of bankrupt’s estate. No explanation as to why a trust arose. ♣ Later cases: followed Toovey without question ♣ Edwards v Glyn: Crompton J – bankrupts may have a legal right to use money for other purposes but no equitable right and equity would intervene to prevent such use ♣ Re Rogers: Lindley LJ – lender could have obtained injunction to restrain bankrupt from using money for other purposes, meaning that the money was never the bankrupt’s ♣ Problem: right of restraint in equity doesn’t give rise to a trust or even equitable proprietary interest – thus no plausible explanation from Toovey

Question 67

Swadling, if there is a trust, who are the objects?

Answer 67

- Not dealt with by Wilberforce - Three possibilities: o Dividend creditors: difficult because not all QTs involve loans for payment of specific creditors (Re EVTR, Twinsectra – for purchase of assets) o Lender: (Twinsectra solution Millett) difficult because lender could recover twice (as beneficiary and as oblige under contract of loan), inappropriateness of fiduciary label in commercial, arms-length context, Saunders v Vautier which gives beneficiary right to demand transfer of subject-matter at any time despite terms of trust (inconsistent with rights given by contract of loan) o Purpose: difficulty of identifying the exact purpose – to benefit dividend creditors or ensure solvency of Rolls? Even if purpose ascertainable Re Endacott rule (beneficiary principle) but could be resolved by Re Denley (as adopted in Re Northern Development by Megarry) ♣ Problems with Re Denley: 1) inconsistent with Re Endacott, 2) internally flawed – Goff said that beneficiary principle only applied to trusts involving abstract purposes but then started applying it to the case before him

Question 68

Swadling on Chambers' analysis that there is no trust

Answer 68

- Chambers explanation: no primary trust as the equitable right of restraint recognized in Quistclose was enough to make arrangement binding on third parties (but is this a personal or property right because only property rights can bind third parties) - No case says that right to restrain misapplication of funds is a property right and Barker v Strickney says it is not

Question 69

Swadling on the the secondary trust

Answer 69

- Consent o Proven consent: Wilberforce – “intention to create a secondary trust for the benefit of the lender … is clear” but IAO it’s not clear at all as there wasn’t even proof of intent to create a primary trust o Presumed consent: No because transfer was for consideration and there were no missing facts - Not consent o Failure of primary trust: Vandervell v IRC (RT arises where a trust fails for uncertainty of objects) – debatable because ‘presumed intent’ is not a universal truth as shown by Vandervell itself and also because it’s not a presumption of intent but merely a presumption that he might have so intended had he thought about it (it is clear that he didn’t intend it because if he did then he would have catered for the eventuality of failure). Thus such a trust arises by operation of law. ♣ Quistclose is not a Vandervwell-type trust: primary trust in Quistclose failed subsequently while Vandervell trust failed from the start (subsequent failure is difficult because trusts for persons cannot fail subsequently, this isn’t a CPT (failure governed by cy-pres) and NCPTs aren’t valid and even if valid law needs to develop a machinery to cope with subsequent failure) o Unjust enrichment: (Birks) Trust arises because transfer not intended to ensure benefit of transferee. No because there was no enrichment (obligation to pay)

Question 70

Penner, Lord Millett’s Analysis

Answer 70

Argues that Lord Millett’s explanation of Quistclose conclusion as orthodox is mostly successful but that subsequent judges have shown a willingness to depart from traditional principles in a way out of keeping with general spirit of Lord Millett’s original explanation. Conclusion: Millett’s analysis altered from that stated in his 1985 article to Twinsectra o Unchanged: RTs determined by inferring parties’ true intentions o Changed: attempt to combine original analysis with Chambers’ general thesis of RTs o IAO hybrid is unstable and undesirable (gives court broad discretion to find trusts irrespective of parties’ true intention – uncertainty, possibility of injustice); 1985 analysis IAO provides for all factual situations o Commercial dealings represented by lawyers will often involve intention to be bound to no more than agreed; approaching commercial arrangements focusing not on true intentions of parties leads to confusion (as IAO happened in Twinsectra)

Question 71

Criticisms of Quistclose LBW analysis Millet's criticisms of it

Answer 71

- HL didn’t specify nature of primary and secondary trusts (were they PTs, private express trusts, implied trusts…?) o Re EVTR and Carreras suggested primary trust was constructive trust and secondary was resulting trust (but with constructive trusts usually require unconscionable conduct – absent in Quistclose) o Re Northern Developments: Megarry J said primary trust was an express trust (Re Denley type) (but Re Denley trusts must have ascertainable people to enforce – Re EVTR doesn’t have any) o Twinsectra: primary trust wasn’t a trust but beneficial interest transferred to borrower subject to contractual right in lender to prevent funds being spent for other purpose (only if purpose fails is there a resulting trust) (but why the need for a separate bank account? Also if funds are used for wrong purpose then why does lender have proprietary claims?) Peter Millett QC, “The Quistclose Trust: Who Can Enforce It” – further criticisms: - Per Wilberforce shareholders become equitable owners on payment of loan – why can’t they enforce the trust then? - Also Per Wilberforce purpose failed because company legislation prevented company in liquidation from paying dividends out of its own assets – but Rolls was never beneficial owner but only trustee, and when trustee goes bankrupt it doesn’t affect beneficial ownership; thus Rolls could have paid money to shareholders - Quistclose elevates position of unsecured creditor to secured creditor with beneficial interest, although no registration system exists for Quistclose creditors, so later creditors have no way of discovering them and can lose out

Question 72

Re EVTR criticisms

Answer 72

Similar reasoning to Carreras (primary trust was constructive trust) – also said obiter that the fund need not be segregated to attract Quistclose (validity doubted) Constructive Trust - Imposed by law regardless of intention, usually only where there is unconscionable conduct by a fiduciary - Test: to decide what is fair having regard to the whole course of dealing between parties, rather than inferring intention from the start - Arises in situations: o Trustees’/fiduciaries’ unauthorized profits resulting from conflict of interest o Breach of fiduciary duty leading to unauthorized profits o Misuse of confidential information by fiduciary o Where fiduciary accepts bribes

Question 73

Twinsectra Ltd v Yardley [2002] criticisms

Answer 73

``` Lord Millett (leading judgment, also wrote the article): - Four possibilities as to passage of beneficial interest when loan was made: o Borrower: rejected as it would allow Barclays in Quistclose to claim the fund, defeating the object of high-risk lending o Ultimate beneficiary: rejected because beneficiary might be a purpose (Re EVTR) which would void the trust o Suspense: rejected as artificial due to equitable remedy of resulting trust (under English law if beneficial interest fails to find a target it results back to donor) o Stays with lender: accepted by elimination - Thus beneficial interest never leaves the lender; borrower given a power to apply the funds for intended purpose and failure of purpose means interest remains with lender ``` Criticism: - What sort of resulting trust is it? o ARTs result back if beneficial interest doesn’t vest in intended beneficiary, but here it never left o PRTs are rebutted if money is loaned (Hodgson v Marks) o New species of RTs? - Rejection of in suspense argument is artificial: considering a discretionary trust (no beneficiary has interest until discretion is exercised) who owns beneficial interest before selection? Is it not in suspense?