A ''Quistclose'' trust is a
trust
Trust often refers to:
* Trust (social science), confidence in or dependence on a person or quality
It may also refer to:
Business and law
* Trust law, a body of law under which one person holds property for the benefit of another
* Trust (bus ...
created where a creditor has lent money to a debtor for a particular purpose. If the debtor uses the money for any other purpose, then it is held on trust for the creditor. Any inappropriately spent money can then be
trace
Trace may refer to:
Arts and entertainment Music
* ''Trace'' (Son Volt album), 1995
* ''Trace'' (Died Pretty album), 1993
* Trace (band), a Dutch progressive rock band
* ''The Trace'' (album)
Other uses in arts and entertainment
* ''Trace'' ...
d, and returned to the creditors. The name and trust comes from the
House of Lords
The House of Lords, also known as the House of Peers, is the Bicameralism, upper house of the Parliament of the United Kingdom. Membership is by Life peer, appointment, Hereditary peer, heredity or Lords Spiritual, official function. Like the ...
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
A resulting trust is an implied trust that comes into existence by operation of law, where property is transferred to someone who pays nothing for it; and then is implied to have held the property for benefit of another person. The trust property ...
,
express trusts
An express trust is a trust created "in express terms, and usually in writing, as distinguished from one inferred by the law from the conduct or dealings of the parties." Property is transferred by a person (called a trustor, settlor, or grantor) ...
,
constructive trusts
A constructive trust is an equitable remedy imposed by a court to benefit a party that has been wrongfully deprived of its rights due to either a person obtaining or holding a legal property right which they should not possess due to unjust enri ...
or, as
Lord Millett
Peter Julian Millett, Baron Millett, , (23 June 1932 – 27 May 2021) was a British barrister and judge. He was a Lord of Appeal in Ordinary from 1998 to 2004.
Biography
Early life
The son of Denis and Adele Millett, he was educated at Har ...
said in ''
Twinsectra Ltd v Yardley
is a leading case in English trusts law. It provides authoritative rulings in the areas of ''Quistclose'' trusts and dishonest assistance.
Facts
Twinsectra Ltd sued an entrepreneur, Mr Yardley, and two solicitors, Mr Sims and Mr Paul Leach (o ...
'', illusory trusts. At least one textbook has been written dedicated solely to exploring issues around the true nature and classification of ''Quistclose'' trusts.
Lord Millett
Peter Julian Millett, Baron Millett, , (23 June 1932 – 27 May 2021) was a British barrister and judge. He was a Lord of Appeal in Ordinary from 1998 to 2004.
Biography
Early life
The son of Denis and Adele Millett, he was educated at Har ...
, writing extra-judicially, has called the ''Quistclose'' trust "probably ... the single most important application of equitable principles in commercial life", and further noting that despite 200 years of existence "it has resisted attempts by academic lawyers to analyse it in terms of conventional equitable doctrine".
Definition
A ''Quistclose'' trust is a method by which a creditor can hold a
security interest
In finance, a security interest is a legal right granted by a debtor to a creditor over the debtor's property (usually referred to as the ''collateral'') which enables the creditor to have recourse to the property if the debtor defaults in makin ...
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
Trace may refer to:
Arts and entertainment Music
* ''Trace'' (Son Volt album), 1995
* ''Trace'' (Died Pretty album), 1993
* Trace (band), a Dutch progressive rock band
* ''The Trace'' (album)
Other uses in arts and entertainment
* ''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
The House of Lords, also known as the House of Peers, is the Bicameralism, upper house of the Parliament of the United Kingdom. Membership is by Life peer, appointment, Hereditary peer, heredity or Lords Spiritual, official function. Like the ...
decision in ''
Barclays Bank Ltd v Quistclose Investments Ltd'', in which
Lord Wilberforce
Richard Orme Wilberforce, Baron Wilberforce, (11 March 1907 – 15 February 2003) was a British judge. He was a Lord of Appeal in Ordinary from 1964 to 1982.
Early life and career
Born in Jalandhar, India, Richard Wilberforce was the son of S ...
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 affects 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
Peter Julian Millett, Baron Millett, , (23 June 1932 – 27 May 2021) was a British barrister and judge. He was a Lord of Appeal in Ordinary from 1998 to 2004.
Biography
Early life
The son of Denis and Adele Millett, he was educated at Har ...
in ''
Twinsectra Ltd v Yardley
is a leading case in English trusts law. It provides authoritative rulings in the areas of ''Quistclose'' trusts and dishonest assistance.
Facts
Twinsectra Ltd sued an entrepreneur, Mr Yardley, and two solicitors, Mr Sims and Mr Paul Leach (o ...
''; 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 interest
An equitable interest is an "interest held by virtue of an equitable title (a title that indicates a beneficial interest in property and that gives the holder the right to acquire formal legal title) or claimed on equitable grounds, such as the int ...
in the loan. 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 (born 6 November 1968), FHEA, FRSA, is an English barrister and academic. He is, in 2017/18, employed at the University of Strathclyde, Glasgow and is also visiting professor of law at the University of Portsmouth. He has worked ...
, Professor of Equity and Finance Law at the
University of Exeter
The University of Exeter is a public university , public research university in Exeter, Devon, England, United Kingdom. Its predecessor institutions, St Luke's College, Exeter School of Science, Exeter School of Art, and the Camborne School of Min ...
, 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 created. 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
Swiss may refer to:
* the adjectival form of Switzerland
*Swiss people
Places
* Swiss, Missouri
*Swiss, North Carolina
*Swiss, West Virginia
*Swiss, Wisconsin
Other uses
*Swiss-system tournament, in various games and sports
*Swiss International ...
'', the courts considered a situation similar to ''Quistclose'', in that a loan agreement was made where the borrowers 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".
Constructive trust
The third main theory is that ''Quistclose'' trusts could be constructive trusts, which are created when the future trustee uses the money in an "unconscionable" manner. In ''Quistclose'' situations, the requirement of "unconscionableness" could be met by the borrower using the money for a purpose other than the one for which it was lent, allowing the lender to claim an equitable interest in it. In ''Carreras Rothmans Ltd v Freeman Mathews Treasure Ltd'', the ''Quistclose'' trust principle was said by
Peter Gibson J. to be 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 to use it for other than the stated purpose"; this reference to "conscience" could make ''Quistclose'' trusts constructive in nature. However, no constructive trust could be created until the money is misused, which may be too late for an effective remedy.
References
Bibliography
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{{DEFAULTSORT:Quistclose Trusts In English Law
English trusts law