Quistclose trusts in English law
Encyclopedia
A Quistclose trust is a trust
created where a creditor has lent money to a debtor for a particular purpose. In the event that the debtor uses the money for any other purpose, it is held on trust for the creditor. Any inappropriately spent money can then be trace
d, and returned to the creditors. The name and trust comes from the House of Lords
decision in Barclays Bank Ltd v Quistclose Investments Ltd (1970), although the underlying principles can be traced back further. There has been much academic debate over the classification of Quistclose trusts in existing trusts law: whether they are resulting trusts
, express trusts, constructive trusts
or, as Lord Millett said in Twinsectra Ltd v Yardley
, illusory trusts.
in loans, through inserting a clause into the contract which limits the purposes for which the borrower can use the money. If the funds are used for a different purpose, a trust is created around the money for the benefit of the moneylender. This allows the moneylender to trace
any inappropriately spent funds, and, in the case of the borrower's insolvency, prevents the money from being taken by creditors. The name and trust comes from the House of Lords
decision in Barclays Bank Ltd v Quistclose Investments Ltd, in which Lord Wilberforce
maintained that in Quistclose situations, the intention must be to create a secondary trust for the benefit of the moneylender, arising if the "primary trust" (the appropriate use of the money) is not fulfilled. The idea of a primary and secondary trust comes from Toovey v Milne, where money was lent by A to B, to pay off his debts. When B went bankrupt and returned the money to A, the courts held that the creditors could not recover this money, as it was held in a form comparable to a trust. Most situations in which a trust will arise require that a specific use of the money is identified by the contract.
; this is that the Quistclose trust is an "illusory trust", where the apparent beneficiary (the moneylender, for example) takes no active role. This trust is created by the intention of either party, and is revocable at any time. The problems with this idea are that the facts in Quistclose are not those of a normal illusory trust, and Millett failed to consider the mutual intention of the parties and any underlying contracts.
in the loan, with the borrower holding it on resulting trust for him. Under Wilberforce's two-stage trust, the interest in the money first goes from the lender to the borrower (the primary trust) and then, when the trust's purpose fails, reverses (the secondary trust). In Twinsectra Lord Millett also explained that a Quistclose trust is a resulting trust, but held that the lender retains the interest throughout the transaction, with no need for this interest to reverse if the purpose of the loan fails. The problem with Wilberforce's analysis, as explained by Alastair Hudson
, Professor of Equity and Law at Queen Mary, University of London
, is that because the resulting trust only comes into existence after the misuse of the loan, it may come too late; if the money is not available when the claim is brought, there is no remedy. The borrower may already have spent the money, or already be insolvent and the subject of claims by creditors.
Another flaw with both Wilberforce's and Millett's explanations is that if the interest is retained by the lender from the outset of the contract, it is not a resulting trust at all; the complete transfer of money should end the lender's equitable interest. It could be argued that the creation of a Quistclose trust is not based on the recovery of the original interest, but the creation of a new one. Doubts have also been raised about the Twinsectra case in general, in that the facts of the case did not create a stereotypical Quistclose trust; this causes problems with applying Millett's analysis.
. Two problems with this are that it has not been upheld by the English courts, and that the courts would require those explicit terms to be part of the contract; Hudson considers it the most advantageous however, because it would offer the simplest protection of the money by not requiring the contract to be breached for the trust to come into existence. In Swiss Bank Corporation v Lloyds Bank Ltd, the courts considered a situation similar to Quistclose, in that a loan agreement was made where the borrower's explicitly agreed to follow guidelines on the use of the money, something they failed to do. The Court of Appeal and the House of Lords refused to constitute any kind of trust or return the money however, applying Lord Wrenbury's judgment in Palmer v Carey, when he said that "such a stipulation will not amount to an equitable assignment".
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...
created where a creditor has lent money to a debtor for a particular purpose. In the event that the debtor uses the money for any other purpose, it is held on trust for the creditor. Any inappropriately spent money can then be trace
Tracing in English law
Tracing in English law is a procedure to identify property that has been taken from the claimant involuntarily. It is not in itself a way to recover the property, but rather to identify it so that the courts can decide what remedy to apply...
d, and returned to the creditors. The name and trust comes from the House of Lords
Judicial functions of the House of Lords
The House of Lords, in addition to having a legislative function, historically also had a judicial function. It functioned as a court of first instance for the trials of peers, for impeachment cases, and as a court of last resort within the United Kingdom. In the latter case the House's...
decision in Barclays Bank Ltd v Quistclose Investments Ltd (1970), although the underlying principles can be traced back further. There has been much academic debate over the classification of Quistclose trusts in existing trusts law: whether they are resulting trusts
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...
, express trusts, constructive trusts
Constructive trusts in English law
Constructive trusts in English law are a form of trust created by the courts primarily where the defendant has dealt with property in an "unconscionable manner", but also in other circumstances; the property will be held in "constructive trust" for the harmed party, obliging the defendant to look...
or, as Lord Millett said in Twinsectra Ltd v Yardley
Twinsectra Ltd v Yardley
Twinsectra Ltd v Yardley [2002] is a leading case in English trusts law. It provides authoritative rulings in the areas of Quistclose trust and dishonest assistance.-Facts:...
, illusory trusts.
Definition
A Quistclose trust is a method by which a moneylender can hold a security interestSecurity 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...
in loans, through inserting a clause into the contract which limits the purposes for which the borrower can use the money. If the funds are used for a different purpose, a trust is created around the money for the benefit of the moneylender. This allows the moneylender to trace
Tracing in English law
Tracing in English law is a procedure to identify property that has been taken from the claimant involuntarily. It is not in itself a way to recover the property, but rather to identify it so that the courts can decide what remedy to apply...
any inappropriately spent funds, and, in the case of the borrower's insolvency, prevents the money from being taken by creditors. The name and trust comes from the House of Lords
Judicial functions of the House of Lords
The House of Lords, in addition to having a legislative function, historically also had a judicial function. It functioned as a court of first instance for the trials of peers, for impeachment cases, and as a court of last resort within the United Kingdom. In the latter case the House's...
decision in Barclays Bank Ltd v Quistclose Investments Ltd, in which Lord Wilberforce
Richard 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....
maintained that in Quistclose situations, the intention must be to create a secondary trust for the benefit of the moneylender, arising if the "primary trust" (the appropriate use of the money) is not fulfilled. The idea of a primary and secondary trust comes from Toovey v Milne, where money was lent by A to B, to pay off his debts. When B went bankrupt and returned the money to A, the courts held that the creditors could not recover this money, as it was held in a form comparable to a trust. Most situations in which a trust will arise require that a specific use of the money is identified by the contract.
Categorisation
The primary problem with Quistclose trusts is their categorisation within the accepted types of trust. The two-part trust structure (primary and secondary trusts) explained by Lord Wilberforce in Quistclose does not appear elsewhere in English trusts law, and the type of trust used has an impact on the rights available to the parties. Quistclose trusts have variously been considered resulting, express or constructive in nature. An alternate explanation is given by Lord Millett in Twinsectra Ltd v YardleyTwinsectra Ltd v Yardley
Twinsectra Ltd v Yardley [2002] is a leading case in English trusts law. It provides authoritative rulings in the areas of Quistclose trust and dishonest assistance.-Facts:...
; this is that the Quistclose trust is an "illusory trust", where the apparent beneficiary (the moneylender, for example) takes no active role. This trust is created by the intention of either party, and is revocable at any time. The problems with this idea are that the facts in Quistclose are not those of a normal illusory trust, and Millett failed to consider the mutual intention of the parties and any underlying contracts.
Resulting trust
Lord Wilberforce, in Quistclose, stated that the contract gives the moneylender an equitable interestEquitable interest
An equitable interest is an "interest held by virtue of an equitable title or claimed on equitable grounds, such as the interest held by a trust beneficiary." The equitable interest is a right in equity that, if violated , is subject to satisfaction...
in the loan, with the borrower holding it on resulting trust for him. Under Wilberforce's two-stage trust, the interest in the money first goes from the lender to the borrower (the primary trust) and then, when the trust's purpose fails, reverses (the secondary trust). In Twinsectra Lord Millett also explained that a Quistclose trust is a resulting trust, but held that the lender retains the interest throughout the transaction, with no need for this interest to reverse if the purpose of the loan fails. The problem with Wilberforce's analysis, as explained by Alastair Hudson
Alastair Hudson
Alastair Hudson is an English barrister and legal academic. He is a National Teaching Fellow, a Fellow of the Higher Education Academy, and a Fellow of the Royal Society of Arts...
, Professor of Equity and Law at Queen Mary, University of London
Queen Mary, University of London
Queen Mary, University of London is a public research university located in London, United Kingdom and a constituent college of the federal University of London...
, is that because the resulting trust only comes into existence after the misuse of the loan, it may come too late; if the money is not available when the claim is brought, there is no remedy. The borrower may already have spent the money, or already be insolvent and the subject of claims by creditors.
Another flaw with both Wilberforce's and Millett's explanations is that if the interest is retained by the lender from the outset of the contract, it is not a resulting trust at all; the complete transfer of money should end the lender's equitable interest. It could be argued that the creation of a Quistclose trust is not based on the recovery of the original interest, but the creation of a new one. Doubts have also been raised about the Twinsectra case in general, in that the facts of the case did not create a stereotypical Quistclose trust; this causes problems with applying Millett's analysis.
Express trust
The second possibility is that Quistclose trusts are express trusts. If the contract included a provision that the money was to only be used for certain purposes, it could be interpreted that this money is held on trust until it is used for those purposes. The borrower would be a trustee; using the money for any other purpose would be in violation of the trustee's duties, and so void. This trust would be created as soon as the contract is agreed, with the normal requirement for it to be validly createdCreation of express trusts in English law
The creation of express trusts in English law must involve four elements for the trust to be valid: capacity, certainty, constitution and formality. Capacity refers to the settlor's ability to create a trust in the first place; generally speaking, anyone capable of holding property can create a trust...
. Two problems with this are that it has not been upheld by the English courts, and that the courts would require those explicit terms to be part of the contract; Hudson considers it the most advantageous however, because it would offer the simplest protection of the money by not requiring the contract to be breached for the trust to come into existence. In Swiss Bank Corporation v Lloyds Bank Ltd, the courts considered a situation similar to Quistclose, in that a loan agreement was made where the borrower's explicitly agreed to follow guidelines on the use of the money, something they failed to do. The Court of Appeal and the House of Lords refused to constitute any kind of trust or return the money however, applying Lord Wrenbury's judgment in Palmer v Carey, when he said that "such a stipulation will not amount to an equitable assignment".