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The property of the borrower
There are two main issues to be discussed in the statement given by the question, (i) whether the Quistclose trust is a resulting trust, and (ii) the statement which states “it is a default trust which fills the gap when some part of the beneficial interest is indisposed of and prevents it from being in suspense”.
Generally, a money advance by way of loan becomes the property the property of the borrower. The borrower is free to apply the money as he chooses and the lender takes the risk of the borrower's insolvency. Mr. William Swadling justified the advancement by way of loan does not give rise to a presumption that a trust of the transferred funds was declared by the lender in his own favour is that proof of an agreed debtor-creditor relationship itself resolves any ambiguity over the capacity in which the transferee received the funds and, the receipt on loan is proof that he took absolutely and not as a trustee. However, when a person pays money for a specified purpose on the basis it will be used only for that purpose, the recipient of the money will generally hold it on trust to use it only for that purpose. If the specified purpose fails, there will be a resulting trust of the money for the person who paid it. This type of trust is known as ‘Quistclose Trust' after the decision in the House of Lords in Barclays Bank Ltd v Quistclose Investments Ltd.
In Quistclose case itself, money was advanced to Rolls Razor Ltd for the purpose of paying a dividend on its shares. The advance was made on the basis that the money was to be used only for the purpose but the company subsequently became insolvent. If Quistclose Investment was the unsecured creditor of the company, it would enjoy no priority over any other creditor, the money in the bank would belong to the company, and the bank would be entitled to set off the credit balance of the account against the much larger amount owed to it by the company. If, on the other hand, the money was held on trust for Quistclose Investment, its proprietary interest in that money would enjoy priority over the rights of the bank. The House of Lords held that if the purpose has been carried out completely, Quistclose Investment would become no more than an unsecured creditor. However, since the purpose has not been fulfilled, the money was able to recover held on trust by the company. In Re EVTR, the Court of Appeal held that if part of the money advanced has indeed been used up for the specific purpose, it does not prevent a Quistclose trust arising in respect of whatever is left, enabling the payer to recover that amount when the purpose failed.
Nonetheless, as Professor Birks pointed out, that the Quistclose trust is not just only applicable to the money advanced by way of loan for a specific purpose, it is applicable when a person has mistaken belief the purpose existed and had advanced the money for that particular purpose. It is also applicable to the purchaser who had induced by fraudulent misrepresentation and has advanced the money for a specific purpose which never existed as can be seen in Twinsectra Ltd v Yardley. According to Peter Gibson J. in Carreras Rothmans v Freeman Matthews Treasure, equity will fasten 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.
Lord Wilberforce (with whom Lords Reid, Morris, Guest, and Pearce agreed) in Quistclose case itself, analysed the nature of Quistclose trusts by reference to primary and secondary trusts, holding that arrangements for the payment of a debtor's creditors by a third party 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 party. The precise nature of the primary and secondary trusts so identified subsequently caused considerable controversy and they were variously classified as express trusts, resulting trusts and constructive trusts.
If the primary trust is an express trust, then it would appear to follow that the persons, if any, in whose favour payments can be made pursuant to the specified purpose have the right to call for the payment of the sums due to them. In Re Northern Development Holdings, Megarry V-C regarded the primary Quistclose trust as an express trust, but avoided this conclusion by classifying it as a purpose trust. Whereas, in Carreras Rothmans v Freeman Matthews Treasure, Peter Gibsson J. stated that the primary Quistclose trust as a constructive trust. Professor Chambers, who defends the result in Quistclose, took the view that there was no primary trust in that case. He argues that this does not matter, for the equitable right of restraint recognised in Quistclose was sufficient to make the arrangement binding on third parties. The Court of Appeal's opinion in Twinsectra v Yardley, was that there is no trust at all while what Lord Wilberforce classified as the primary trust is in existence.
When Twinsectra v Yardley reached the House of Lords, Lord Millet stated (where none of the other members of the House of Lords dissented) that the Quistclose trust is “an entirely orthodox example of the kind of default trust known as a resulting trust. The lender pays the money to the [recipient] by way of loan, but he does not part with the entire beneficial interest in the money, and insofar as he does not it is held on a resulting trust for the lender from the outset… When the purpose fails, the money is returnable to the lender not under some new trust in his favour which only comes into being on the failure of the purpose, but because the resulting trust in his favour is no longer subject to any power on the part of the [recipient] to make use of the money. Whether the [recipient] is obliged to apply the money for the stated purpose or merely at liberty to do so, and whether the lender can countermand the [recipient's] mandate while it is still capable of being carried out must depend on the circumstances of the particular case.” It should also be noted that Lord Millett envisaged that the power vested in the recipient could either be a trust power or a mere power, and clearly it is a mere power of a fiduciary nature, given that the recipient is a trustee.
Moreover, according to Lord Millett's analysis, the successive primary and secondary trusts therefore do not arise. There is only one trust throughout, a trust in favour of the person who advanced the funds. If the transferor expressly transferred the money to the recipient on the basis that the latter held it on trust for him subject to a power to expend that money for the specified purpose and for no other purpose, there will be no room for the resulting trust. However, in practice, Mr. A.J. Oakley was of opinion that it is highly unlikely that there will have any express agreement in such specific terms and so it is virtually inevitable that the adoption of Lord Millett's statements will mean that every Quistclose trust gives rise to a resulting trust.
Besides, like all other trusts, in order for a valid Quistclose trust, the transferor must fulfill the three certainties laid down by Lord Langdale in Knight v Knight, ie, certainty of intention, subject matter and object matter.
The task of a court when asking whether a disposition exhibits certainty of intention is to examine the words and conduct of the proposed settler to see if these amount to an intention to create a trust. It is not necessary that the settlor have a subjective intention to create a trust, it is sufficient that he exhibit an intention which can be interpreted by the court. Similarly in a Quistclose trust, the court must look to the terms of the loan to determine whether there is certainty of intention and in Quistclose case itself, there was certainty of intention as the money is provided for the purpose of giving out the dividends. This condition was also satisfied in Twinsectra, where Mr. Sim's undertaking would be used solely for the acquisition of property and for no other purpose. However, Potter LJ stated that the declaration by the lender of purpose was not enough, by itself, to create a trust. It requires the segregation of the loan monies from the borrower's other assets. This was not followed by Lord Millett in the House of Lords. The only question is ‘whether the parties intended the money to be at the free disposal of the recipient'. The segregation of funds is just an evidential role in determining whether there was certainty of intention of the lender's part.
As a matter of certainty of subject matter, the property subject to the trust must either be clearly defined or be capable of ascertainment. The subject matter under the Quistclose trust is the money which advanced for a specific purpose. It can be said that there is certainty of the subject matter as the money advanced is a tangible and it is identifiable.
The third certainty, the certainty of object matter is also known as the beneficiary. In Morice v Bishop of Durham, the beneficiary principle requires of a private trust must be ascertainable of human beneficiaries (except charitable trusts and a limited number of non-charitable purpose trusts) in order to be valid. At first sight, the Quistclose trust will fail on the grounds of lack of certainty in the object matter. The trusts seem to fall into the category of non-permitted purpose trusts, the purpose being to pay a creditor, a dividend, or in the case of Twinsectra, to purchase property. However, based on Lord Millett's analysis of a Quistclose trust, the trust does have ‘certainty of objects', the beneficiary is the lender.
The next issue to be concerned is when a Quistclose trust has failed to carried out. Peter Gibson J pointed out in Carrereas Rothmans Ltd v Freeman Mathews Treasure Ltd, the effect of adopting Megarry V-C analysis is to leave the beneficial interest in suspense until the stated purpose is carried out or fails. However, Lord Millet in Twinsectra v Yardley, viewed that Peter Gibson J has failed to give the regard to the role which the resulting trust plays in equity's scheme of things, or to explain why the money is not simply held on a resulting trust for the lender.
In Westdeutsche Landesbank Girozentrale v Islington London BC, Lord Brown-Wilkinson gave an authoritive explanation of the resulting trust and among his examples, one of the resulting trust he gave is ‘Where A transfers property to B on express trusts, but the trusts declared do not exhaust the whole beneficial interest…' The Quistclose trust was among the cases he cited as examples. Chambers' opinion is that a resulting trust arises whenever there is a transfer of property in circumstances in which the transferor did not intend to benefit the recipient, and in so far as the transfer does not exhaust the entire beneficial interest, the resulting trust is a default trust which fills the gap and leaves no room for any part to be in suspense.
Lord Millet in Twinsectra viewed that the Quistcloase 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 Chamber's opinion, and, he stated that the court will fill the gap when a trust is failed to dispose of rather than leaving it to be suspend and only apply to the lender. However, the power given to the borrower or transferee must be stated with sufficient clarity for the court to able determine whether it is still capable of being carried out or whether the money has been misapplied, it is sufficiently certain to be enforced. If it is uncertain, however, then the borrower has no authority to make any use of the money at all and must return it to the lender under the resulting trust.
In conclusion, Quistclose trust is a resulting trust. It only applies when the person pays money only for specified purpose and that purpose has failed to carry out. The court will try to fill the gap rather than letting the trust fail to operate and suspend it there by looking at the type of power given to the borrower or the transferee.
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