The Quistclose trust

What is it?

In Twinsectra v Yardley (2002), Lord Millett said:

‘Money advanced by way of loan normally becomes the property of the borrower. He is free to apply the money as he chooses, and…the lender takes the risk of the borrower’s insolvency. 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… Such arrangements are commonly described as creating “a Quistclose trust”, after the well known decision of the House [of Lords] in [Barclays Bank Ltd v Quistclose Investments Ltd (1970)]…’

So when we talk about a ‘Quistclose trust’ we are primarily talking about the trust that arises when A lends money to B making it clear that that money is only to be used for a specific purpose. B will then hold that money on trust – a Quistclose trust. There are two points of dispute about this type of trust:

What sort of trust is it?

As the money handed over to B is only to be used for a particular purpose, we might naturally think that the trust that B holds the money on is a non-charitable purpose trust, under which B is required to use the money for the purpose for which he was given it. Early on in the development of the Quistclose trust, there were a couple of factors that would have weighed in favour of this analysis being the correct one:

(1) In Barclays Bank Ltd v Quistclose Investments Ltd (1970) itself, A lent money to B for the express purpose of paying a dividend to B’s shareholders. The money was paid into a bank account with C, B’s bank. Before the dividend was paid, B went bust, and C (to whom B owed a lot of money) sought to use the money in the bank account to pay off B’s debts to it. A argued that C was not entitled to do that; and the money in the bank account was held on trust for it. The House of Lords agreed. But they held that the money in the bank account had in fact been subject to two trusts. The first trust – which is the trust we commonly talk about when we talk about a ‘Quistclose trust’ – had arisen when A lent the money to B. The second trust – under which B held the money in its bank account on trust for A – arose when B went bust. So we have here a situation where money is handed over to B, is held on a valid trust, and then something happens to collapse that trust, and in its place arises a trust back to the person from whom the money was received. If the first trust that B held the money on was a non-charitable purpose trust, then this sequence of events would make sense. B gets the money, holds it on a non-charitable purpose trust, B’s going bust make the purpose of the trust impossible to fulfil, so that trust collapses, and in its place we have a resulting trust back to the person who set up the trust in the first place. If the first trust that B held the money on was a fixed trust for a particular beneficiary, then this first trust could only have collapsed if it was made clear at the time B accepted the money from A that, ‘You are to hold this money on trust for [whoever], but if you go bust you are then to hold on trust for us.’ But that was never made clear in Barclays Bank v Quistclose Investments; if it had been, the case would probably never have gone to court.

(2) In Carreras Rothman v Freeman Matthews Treasure (1985) – a case where A paid money to B to be used solely for the purpose of paying off debts that A owed to C, various newspapers and periodicals that had carried advertisements for A’s products – Peter Gibson J held that the money paid by A to B was held on a Quistclose trust, and that: (i) the beneficial interest in the trust money was ‘in suspense’; and (ii) C was entitled, under this trust, to compel B to use the trust money to pay off the debts that A owed C. The only way we can make legal sense of this is if Peter Gibson J thought that the money paid by A to B was held on a non-charitable purpose trust to pay off A’s debts to B. If the money paid by A to B were held on trust for C, then C would have a beneficial interest in the money: but Peter Gibson J said that the beneficial interest was ‘in suspense’. The only kind of trust which allows us to say that no one has a beneficial interest in the trust property is a purpose trust.

However, there are formidable difficulties in the way of saying that the Quistclose trust is a non-charitable purpose trust:

(1) There is, first, the authority of Re Endacott (1960), which expressly ruled out the possibility of creating any more exceptions to the rule against non-charitable purpose trusts other than the anomalous exceptions of trusts for the saying of masses for one’s soul, funerary monuments, and identifiable animals. (All these non-charitable purpose trusts owe their validity to the fact that people would not stop making provision for these purposes in their wills, even if they were told that the provisions were invalid. After all, if you think you are going to die, you will want to leave some money aside for masses to be said for your soul (if you believe in Heaven, and more importantly, Hell), for a gravestone so you won’t be forgotten, and for your pets to be looked after, after you die. This accounts for why these anomalous exceptions to the rule against non-charitable purpose trusts are explained away as ‘concessions to human nature’.)

(2) Even if we concede that there may have been some moves at the end of the 1960s to relax the rule against non-charitable purpose trusts (cf. Goff J’s judgment in Re Denley (1969), and Lord Cross of Chelsea’s judgment in Dingle v Turner (1972)), if in Barclays Bank v Quistclose Investments the House of Lords had meant to recognise a new category of non-charitable purpose trust, it would have gone way beyond anything that has been suggested before or since by way of relaxing the rule against non-charitable purpose trusts. As B’s going bust brought the primary trust in Quistclose to an end, if that primary trust was a non-charitable purpose trust, we would have to suppose that the purpose of the trust was to keep B solvent, or to give people the impression that B was solvent. It is very hard to imagine that the House of Lords was intending in Quistclose to say that a trust for such a purpose could be valid.

But if the Quistclose trust is not a non-charitable purpose trust then what is it? Lord Millett’s analysis, advanced in Twinsectra v Yardley, is that when A lends money to B making it clear that the money is only to be used for a specific purpose, then B holds that money on trust for A, subject to a power or permission to use that money for the purpose for which he has been lent it by A. On this view, the House of Lords was wrong to think that the money in Barclays Bank v Quistclose Investments was held on two successive trusts. There was only one trust all along – a trust back to A, subject to a power in B to use that money to pay a dividend to its shareholders.

Lord Millett’s analysis gives rise to a further point of dispute:

How does it arise?

In his judgment in Twinsectra, Lord Millett seemed to be undecided as to whether a Quistclose trust arises because that is what the parties intended (that is, B holds on trust for A subject to a power to use the money for the purpose for which it was lent because A and B agreed that B should hold the money on trust for A) or because such a trust arises as a matter of law when A lends money to B but specifies that the money is only to be used for a specific purpose. At one point he said:

‘the Quistclose trust is a simple commercial arrangement akin…to a retention of title clause (though with a different object) which enables the borrower to have recourse to the lender’s money for a particular purpose without entrenching on the lender’s property rights more than necessary to enable the purpose to be achieved. The money remains the property of the lender unless and until it is applied in accordance with his directions, and insofar as it is not applied it must be returned to him.’

This seems to suggest that the Quistclose trust is something that arises because it was intended to arise by A and B when A lent B the money. However, later on his judgment, Lord Millett said:

‘a resulting trust arises whenever there is a transfer of property in circumstances in which the transferor…did not intend to benefit the recipient. 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… An analysis of the Quistclose trust as a resulting trust for the transferor with a mandate to the transferee to apply the money for the stated purpose sits comfortably with [this] thesis…’

This seems to suggest that the Quistclose trust arises as a matter of law: when A lent B money specifying that it could only be used for a particular purpose, it is is clear that he did not intend that money to benefit B, and given this, the money must have been held on resulting trust for A (subject to permission to apply the money for the purpose for which it was lent).

Let us consider both possibilities:

(1) Express trust. The possibility of analysing the Quistclose trust as arising because it is intended to arise by A and B when A lends money to B to be used for a specific purpose is criticised by Bill Swadling in his essay ‘Orthodoxy’ (in Swadling (ed), The Quistclose Trust: Critical Essays (2004)). He points out that in Barclays Bank v Quistclose Investments Ltd itself there was no real evidence that A and B intended that the money lent by A to B should be held on trust for A. Moreover, the facts that: (i) the relationship between A and B was one of creditor-debtor; (ii) B was under no duty to keep the money lent by A to B separate from his other assets; and (iii) B was under no duty to act loyally in A’s best interests in dealing with the money lent to him by B, would all normally count against our finding that A and B intended that the money lent by A to B was to be held on trust for A.

(2) Trust arising as matter of law. The difficulty with analysing the Quistclose trust as arising under a rule of law that if A transfers property to B and does not intend that property to be enjoyed beneficially by B, then B will hold that property on a resulting trust for A is that it is questionable whether such a rule exists in English law. (For further discussion of this issue, see the post on ‘Resulting Trusts’ elsewhere on this website.) Proponents of such a rule argue that finding that B holds on resulting trust for A is necessary to prevent B being unjustly enriched. It’s doubtful whether this is true, but as Bill Swadling points out in his ‘Orthodoxy’ essay it is certain that this argument cannot work to justify a resulting trust arising in a Quistclose situation as B is in any case under a liability to repay the money he has received from A.

So neither of Lord Millett’s suggestions as to how the Quistclose trust (if analysed as a resulting trust, whereby B holds on trust for A subject to a power or permission to apply the money received from A for the purpose for which it was lent) might be explained as arising seem to work. My Suggestion is that we can explain the Quistclose trust as arising in the following way. When A lends B the money, he intends that B should hold that money on a purpose trust, to apply the money for the purpose for which A lent it to B. This purpose trust – not being charitable in nature – is invalid. So the money which A has lent B is intended to be held on a trust that fails ab initio (from the start, from the moment the money is handed over). As a result, B holds the money on trust for A, in the same way as happens all the time when someone transfers money to another to be held on a trust that fails. So when A lends B the money, intending that B hold the money on a purpose trust, B ends up immediately holding that money on trust for A. But as A is (for the time being) happy for B to use the money for the purpose for which he lent it to B, B will be allowed to use that money for that purpose even though he technically holds the money on trust for A. So we end up with agreeing with Lord Millett that when A lends B money to be used for a specific purpose, B will hold that money on trust for A subject to a power (or permission) to use that money for that purpose. But that trust does not arise because it was intended to arise, or because there is some rule that a resulting trust will arise whenever A transfers money to B and does not intend that B should enjoy that money beneficially. Instead, the trust arises because when A transferred the money to B he intended that it be held on a purpose trust that was invalid because non-charitable and it is the invalidity of that trust that gives rise to the resulting trust.

Donations

My Suggestion allows us to provide a satisfactory analysis of a situation that Peter Birks made very heavy weather of in his essay on ‘Retrieving tied money’ in the Swadling volume on the Quistclose trust. This is the situation:

‘An announcement is made that a new road has been approved. The map shows the line running straight through a thriving neighbourhood. A local councillor assumes the leadership of the campaign to prevent this disaster. All the residents give generously in response to his appeal for funds “to fight the road”. Six months later, when only one tenth of the fund has been spent, two things happen. First, the proposal for the road is withdrawn. Second, the councillor’s family business collapses, leaving many unpaid creditors. £300,000 at the moment stands in the account which he had opened to hold the campaign funds. He accepts that he owes that £300,000 to the subscribers… He is anxious to repay. His unsecured creditors maintain that the subscribers must stand in the queue waiting to receive, pari passu with themselves, whatever is left when the secured creditors have been paid off.’

Birks wants to argue that the money in the account is held on trust for the subscribers, but finds it difficult to distinguish the case from one where A pays B for goods that aren’t supplied, and the money that A paid B is still traceably in B’s hands. My Suggestion makes it easy.

When the subscribers donate money to fight the proposed new road, they intend that the councillor will hold the money on a purpose trust, under which he will be required to use the money for fighting the road proposal. However, this purpose trust is invalid. It cannot be charitable as it is political. And it obviously does not fall within any of the anomalous exceptions to the rule against non-charitable purpose trusts. So as soon as a subscriber donated money to the campaign, it was held on a resulting trust for him by the councillor. But the subscribers were happy for the councillor to use the money for the purpose of fighting the road, and so the councillor had a power (or permission) to use the money that he held on trust for the subscribers for that purpose. Now that the threat to build the road has gone away, that power has vanished, and the councillor simply holds the money on resulting trust for the subscribers.

There is no comparison with the case where A pays B money for goods that are never supplied. When A pays the money he has no intention that B hold the money on a purpose trust, and so My Suggestion does not apply. The only basis for finding that B holds the money on a resulting trust for A here would be if A and B positively intended that B should hold that money on trust for A until A got his goods, as in Re Kayford (1975).

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s