Citation(2014) 26 SAcLJ 649
Date01 December 2014
Published date01 December 2014

A Bridge Too Far?

An analysis of the jurisprudential nature of the Quistclose trust reveals that it is a species of resulting trust. The cases support a unified theory of resulting trust, which arises whenever the transferor has no intention to benefit the recipient. However, this unified theory poses the question of whether the resulting trust arises in response to unjust enrichment or is merely a vindication of a pre-existing property interest. The main thrust of this article is that, despite the unified theory, the resulting trust cannot and should not be rationalised as a response to unjust enrichment for both logical-legal and practical reasons. The resulting trust should be rationalised as a set of institutional equitable rules, which by custom have been regarded to have proprietary effects, and is at root a vindicatio claim.

I. Introduction to the Quistclose trust

1 In the law, defined events lead to expected legal results. In the milieu of what has traditionally been regarded as the law of trusts, one scenario runs thus:

(a) A transfers a sum of money to B.

(b) It is understood that B is to use the money solely for a specified purpose.

(c) Upon spending the money for the specified purpose, an ordinary creditor-debtor relationship arises between A and B.

(d) If B becomes insolvent prior to the spending of the money for the specified purpose, the money is unavailable to the trustee in bankruptcy or liquidator, and is not distributed to B's general creditors. Rather, the money is recoverable by A.

2 The legal mechanism that results in the money being recoverable by A has proven to be extremely controversial. In particular, two House of Lords cases have sought to explain the result in entirely different ways.

3 In the eponymous case of Barclays Bank Ltd v Quistclose Investments Ltd1 (“Quistclose”), Rolls Razor Ltd (“Rolls Razor”), a company in financial distress, obtained a loan from Quistclose Investments Ltd (“Quistclose”) to pay a declared dividend. The loan was dispensed by way of a cheque, which was deposited into a separate bank account with Barclays Bank. The covering letter accompanying the cheque evidenced an understanding between Rolls Razor and Barclays that the money would only be used to pay the declared dividend. Before this dividend was paid, Rolls Razor went into voluntary liquidation. Quistclose brought an action against Rolls Razor and Barclays, claiming that the money was held by Rolls Razor on a trust in Quistclose's favour, and that Barclays was bound by the trust. In a unanimous speech, Lord Wilberforce found that the loan was made specifically in order to enable Rolls Razor to pay the dividend, and for no other purpose. Accordingly, the mutual intention of Quistclose and Rolls Razor was that the money advanced would not become part of the assets of Rolls Razor, and was to be used exclusively to pay the creditors entitled to the dividend.

4 To Lord Wilberforce, it was a trite proposition of law to state that:2

… arrangements of this character for the payment of a person's creditors by a third person, give rise to a relationship of a fiduciary character or trust, in favour, as a primary trust, of the creditors, and secondarily, if the primary trust fails, of the third person …

Barclays Bank had notice that the money advanced was impressed with a trust, and was thus not entitled to retain it. Rolls Razor successfully recovered the money.

5 Twinsectra Ltd v Yardley3 (“Twinsectra”) concerned a Yardley, who sought to borrow £1m from Twinsectra Ltd. A firm of solicitors, Sim & Roper of Dorset (“Sims”), represented themselves as acting on behalf of Yardley. They received the money in return for an undertaking, inter alia, that the loan money would be utilised solely for the acquisition of property and for no other purpose. Contrary to the undertaking, Sims did not retain the money until it was applied in the acquisition of property by Yardley, and paid it to a Leach, who was another solicitor acting for Yardley. Leach, in turn, did not take any steps to ensure that the money was used to purchase property, and simply

paid it out upon Yardley's instructions. Twinsectra sued all the parties involved, in particular alleging that Leach had dishonestly assisted in Sim's breach of trust.

6 Lord Millett embarked on a jurisprudential analysis into the nature of the Quistclose trust, and in this respect his analysis had the concurrence of the rest of the House of Lords.4 He pointed out that Lord Wilberforce's two-trust solution in Quistclose had formidable difficulties, and had hitherto attracted little academic support.5 Lord Millett proposed an alternate model. He held that the Quistclose trust was an entirely orthodox example of a resulting trust, which is a kind of default trust. The lender, in transferring the money to the borrower, does not part with the entire beneficial interest in the money, which is held on a resulting trust for the lender from the outset.6 The resulting trust arises whenever there is a transfer of property in circumstances in which there is an absence of an intention on the part of the transferor to pass the entire beneficial interest. The resulting trust

is a default trust which fills the gap and leaves no room for any part of the beneficial interest to be in suspense.7

7 The Quistclose trust stands at the intersection between disparate areas of the law —viz, equity, restitution and property. This article will first examine the jurisprudential basis of the Quistclose trust, before analysing the larger structural and normative issues which the spectre of the Quistclose trust raises in the fields of restitution and property.

II. The jurisprudential basis of the Quistclose trust

A. An express trust?

8 In commercial transactions entered into by sophisticated parties, the quintessential defining feature is that of party autonomy.8 Any trust which arises in a Quistclose-type situation must be analysed in the light of this.9

9 The most obvious candidate is the express trust. In giving effect to an express trust, the law responds to the settlor's intention to bifurcate the legal and equitable interests and constitute the recipient (or the settlor himself) as trustee.10 The intention of the recipient is also material, in the sense that he can decline to act as trustee (and consequently to hold the property on trust).11 Such a trust intention is

most clearly manifested by words construed to be imperative.12 Even in the absence of such words, trust intention can also be inferred from the surrounding circumstances: a duty to segregate received property has been held to be indicative of a trust.13 However, a duty to segregate cannot be inferred from the mere fact of segregation. Commercial parties may segregate money into separate accounts (with different uses) for convenience of ascertainment or other logistical reasons.14

10 As an aside, there is a crucial distinction between the law of obligations and the law of property. Where persons agree in a commercial loan situation to set up an express trust, the express trust does not respond to the common intention of the parties. Rather, it is the contractual obligation to set up an express trust that is founded on the parties' common intention. Technically, the true causative event which gives rise to the express trust is the unilateral trust intention of the settlor, who in setting up the trust fulfils his contractual obligation to do so.15 Similarly, where a settlor creates an express trust by way of gift it is the unilateral intention of the settlor that is the causative event, leading to the trust taking effect when the trust property is effectively transferred to a trustee.

11 While the express trust analysis is attractive, this cannot be the solution for the majority of Quistclose-type situations. The need to resort to a Quistclose trust arises precisely because the requisite trust intention cannot be found.

12 An express trust responding to the transferor's intention qua settlor cannot arise on the facts of Quistclose. Quistclose merely resolved

in a board meeting that the loan was for “the purpose of [Rolls Razor] paying the final dividend due”.16 No imperative words were used; neither was a duty to segregate imposed on Rolls Razor. There was no evidence that the board's resolved purpose was even communicated to Rolls Razor. There are no facts which can ground an inference of a trust intention on the part of Quistclose. Neither can such an express trust arise on the facts of Twinsectra. The borrower's solicitor undertook that the “loan moneys will be utilized solely for the acquisition of property on behalf of the client and for no other purpose”. Again, there were no imperative words or an obligation to segregate.17

13 It is equally difficult, if not more so, to find an express trust responding to the recipient's intention qua settlor. It would be exceptional for a commercial, arms-length recipient to voluntarily constitute himself as trustee for the transferor in the absence of a bargain to that effect.18 In Quistclose, Barclays Bank argued unsuccessfully that it was unaware that the money advanced was impressed with a trust. In Twinsectra, the parties did not bargain for the borrower's solicitors to be constituted as trustee for the lender: instead, there was a mere undertaking19 to release the money only for property acquisition.20 The bottom-line is that the absence of the word “trust” or “trustee” in a document prepared by lawyers advising commercial parties negotiating at arm's length, must be taken to be a counter-indication for trust intention.21

B. Who are the objects of the trust?

14 The typical Quistclose-type situation is difficult to square with a trust in favour of a third party.22 Such a trust would prevent any subsequent variation of the contract between the borrower and the lender without the third party's consent.23

15 A trust for purposes comports with the...

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