Quistclose trust

“My Lords, there are two issues in this appeal. The first is concerned with the nature of the so-­called “Quistclose trust” and the requirements for its creation. The second arises only if the first is answered adversely to the appellant. It is whether his conduct renders him liable for having assisted in a breach of trust.” Lord Millett in Twinsectra Ltd v Yardley and Others [2002] 2 AC 164 at paragraph

52. Critically analyse Lord Millett’s views on the two issues referred to above indicating the extent to which you agree with him.

The fact pattern of Quistclose trusts is generally straightforward and arise in circumstances where money has been paid to a borrower for a particular purpose, the borrower will then hold that money on trust for the lender for a particular specified purpose. Should the purpose fail, the money is held on trust for the lender. This allows the lender to retain his proprietary interest in the loan monies until the transaction is complete and the express purpose of the loan has been fulfilled. The lender is protected should the borrower become insolvent before the specified date. However this gives rise to fiduciary obligations on the part of the borrower, which an equity court will enforce. Judges and commentators have failed to address the type of trust a Quistclose trust is.

In Twinsectra Limited v Yardley the borrower (Yardley) required a short term finance of £1m for the purchase of land, worried that the original lender would not get his money on time, the borrower approached another lender. The initial lender was able to hand over the money on time and the borrower used the money to purchase the land. Negotiations were carried out with the new lender for the money as he was owed £1.5m by his solicitor (Sims) under a previous transaction both had carried out and thus asked the solicitor to give a personal undertaking to repay the loan if he was unable to do so. The solicitor agreed. The money was transferred to the solicitor with the stipulation that the money would only be used purely for the acquirement of property on the behalf of the client and no other purpose. The claim before the House of Lords was whether Leach another solicitor acting for Yardley was dishonestly assisting in the breach of trust.

Lord Millet (with whom Lord Hutton also agreed) held that the money was held on a Quistclose trust. He said:

73. A Quistclose trust does not necessarily arise merely because money is paid for a particular purpose. A Lender will often inquire in the purpose for which a loan is sought in order to decide whether he would be justified in making it. He may be said to lend the money for the purpose in question, but this is not enough to create a trust; once lent the money is at the free disposal of the borrower. Similarly payments in advance for goods or services are paid for a particular purpose, but such payments do not ordinarily create a trust. The money is intended to be at the free disposal of the supplier and may be part of his cash flow. Commercial life would be impossible if this were not the case.

His Lordship continued by clarifying that the Court of Appeal were correct in their analysis and the money was never at Mr Yardley’s free disposal. The money throughout belonged to Twinsectra, subject only to Mr Yardley’s right to apply it for the acquisition of property and any deviance from the purpose would lead to a breach of trust.

The difficulty here was ascertaining whether a Quistclose trust had been intended here due to the party’s intention being wholly focused on ensuring that the solicitor had given his consent to the personal undertaking, and no real regard or importance was ascribed to the specific purpose outside the contract.

Lord Millet deviated from his previous position of a Quistclose trust being a bare trust with authoritative order whereby the beneficial ownership is vested with the transferor from the outset. Lord Millet substituted his previous analysis to state that Quistclose trusts are resulting trusts,which arise by an operation of law, ‘Quistclose trusts are intentional trusts, that is, trusts that arise on the basis of the genuine intentions of the parties involved’.

This withdraws the position which the courts have taken that a Quistclose trust arises based on the parties intentions and not on based on presumption in no case has the lender (A) been identified as having beneficial interest based on evidentiary longstop’ (Penner).

Lord Millet arrives at this conclusion by his approval of Chamber’s general theory of resulting trusts. This centres on a resulting trust emerging when there is a transfer of property in which the lender did not intend to benefit the recipient. This could cause ramifications in the world of insolvency as Quistclose trusts will no longer be based on finding a positive intent but the presence of the lack of intent to benefit the recipient. The main question in every case is whether the parties intended the money to be at free disposal of the recipient. Many loan relationships would be re-catergorised into Quistclose trusts where there is no actual intent for a trust like relationship to occur to the detriment of creditors. Penner clearly states that this is a recipe for ‘unfettered discretion in the court to find trusts in commercial circumstances on flimsy evidence as to what was absent in A’s mind, as opposed to determining the true intentions of the parties’. Lord Millet highlights the importance of finding that the parties didn’t intend the one to be a free disposal to import a Quistclose trust. This would be lead to the unconscionable idea that courts construing and loan stated for a specific purpose would give rise to a Quistclose trust, expressing that sort of restriction would be the same as saying that the money is not to be at the borrower’s free disposal.

Lord Millet based the Quistclose trust principally in the loan contract where the money was to be used in the acquisition of property. Prior Quistclose cases where money was in being advanced were very precise in nature and the vagueness and the contracting parties intentions did not worry Lord Millet in the slightest. Here the intention of the contracting parties would be paramount as this would highlight dishonesty and breach of trust should it be have been negligently carried out. As the saying ‘it would be easier to commit fraud and a breach of trust for an insider and try to get away with it as opposed to an outsider’.

Lord Millet’s analysis when combined with the chambers resulting trust does not lead to a complete disregard of the parties intention but he is reluctant to investigate and draw the relevant inferences. Lord Millet even further goes on to refuses to focus on surrounding facts that the parties intended the lender to be an unsecured creditor. Putting aside the lack of intent to retain beneficial ownership the loan is suggestive of an unsecured loan. Which can prove detrimental for the lender as many companies tend to declare liquidation overnight.

Lord Millet’s stance in Twinsectra where he referred to the Quistclose trust being a resulting trust arising by operation of law the theory disassociates the example of express Quistclose trusts which arise from the parties original intentions to create a trust which is clearly evidential in the conduct and documents of parties. The theory also deals with requirements which underpin all trusts- certainty of object and intention. The test in Re Gulbenkian would fail on the certainty of object as it would lack specificity on determining on the vague words used ‘Acquisition of property’ thus leaving the question which acquisition is allowed and which is not. Quistclose trust have been moulded over the years to cater for each individual cases as Lord Millet has attracted attention for his comments and commentators disagree with the approach he has adopted. Smolyansky states that there is no real basis for an express trust as there is no intention for the lender to retain beneficial interest. There is no resulting trust as Westdeutsche Landesbank Gironzentrale v Islington London Borough illustrates the two types of resulting trust and Quistclose does not fit into neither. Smolyansky goes on to state that Quistclose trusts should be based on constructive trusts which can come into force regardless of express or implied intentions and it would be imposed when its unfair for the legal owner of the property to claim a beneficial interest in the funds. It was put forwards due to the unsecured creditors obtaining windfalls at the expense of the lender who has provided funds to a company which is struggling. One would agree with the approach `Smolyansky has put forward as this would enable the lender to have some sort of security in the event should there be a breach of trust or fraud committed. Gummow J states that a Quistclose trust is staggering between being a express trust or a remedial constructive trust and put forward the opinion of visualising a Quistclose trust as an express trust which would introduce higher standards as one would need a clear intent and even explicit language. The second question whether the conduct renders him liable for the breach of trust would