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A Quistclose Trust or a Dud?

In Prickly Bay Waterside Ltd v British American Insurance Company Ltd[1] the Privy Council considered the nature of the ‘Quistclose trust’. The reasons are useful to gain an understanding of that device. The term ‘Quistclose trust’ derives from the eponymous name of the case Quistclose Investments Ltd v Rolls Razor Ltd,[2] a 1968 decision of the Appellate Committee of the House of Lords.

Although a Quistclose trust does not seem to have yet been established in Canada, its requirements have been discussed in two cases, both of which held that a Quistclose trust had not arisen on the facts.[3] I shall discuss the nature of the Quistclose trust further below, but its essence is that moneys are lent to be used for a specific purpose and the parties intend that the lender retain an interest in the moneys. The borrower is then both a debtor to and trustee for the lender. If the money is paid as intended, the trust is fully performed and comes to an end, leaving only a debt. If it is not paid because the borrower becomes insolvent, the money is not available to the borrower’s other creditors but is held in trust for the lender.

The facts in the Quistclose case were as follows: Rolls Razor was a client of Barclays Bank, but it was in financial difficulties and had exceeded its allowed overdraft. A lender agreed to lend Rolls Razor one million pound on condition that it obtain funds from another source to pay its shareholders a dividend that was soon due. That source was Quistclose. It agreed to lend Rolls Razor the required amount on condition that the moneys would be used only for that purpose and that they would be paid into a special account opened for that purpose with Barclays Bank until the dividend was paid. Rolls Razor was unable to raise further funds to stay in business and went into liquidation. The bank then set off the balance in the special account against the debit balance owed to it by Rolls Razor. Quistclose sued the bank to recover the moneys and the House of Lords held that it was entitled to do so once it established that the moneys were impressed with a trust in its favour, and that the bank had notice of the trust.

The following is an abbreviated version of the facts in Prickly Bay. Prickly Bay (‘PBWL’) was a developer of houses and apartments in Grenada. After being sued by its neighbour, Mr Steele, the parties agreed to a consent order in 2007, under which PBWL agreed to purchase two properties adjacent to the development from Mr Steele for 5 million USD on the following terms: PB was to pay 2.5 million USD for one property and a deposit of 250,000 USD for the other at the time of the agreement. The purchase of the second property was to be completed on 18 May 2019 with interest payable at 5% per annum. PBWL also had to provide a bank guarantee for the payment of the balance. British American Insurance Company Ltd (‘BAICO’) agreed to give the guarantee if a deposit of 2.475 million USD was placed with it. The principal director of PBWL and his wife, Mr and Mrs Lee, agreed to lend PBWL the sum of 5.475 million USD, part of which was to be provided by a guarantee. Mrs Lee agreed to provide or procure the guarantee so that there would be funds available to pay the 2.475 million USD on 18 May 2009. BAICO then entered into a standard annuity with Mrs Lee and PBWL deposited the 2.475 million USD with BAICO as the premium for the annuity in Mrs Lee’s name. The purpose of the annuity was to allow Mrs Lee to maximize the payment of interest. The annuity was scheduled to retire on 18 May 2012, and she was to receive interest at 8.42% per annum during the period. BAICO then insisted that Mrs Lee assign her rights under the annuity to Mr Steele, which she did.

BAICO then became insolvent and went into judicial management. Mr Steele sued PBWL to enforce the consent order. PBWL applied for a declaration that the moneys were held on trust by BAICO, and  the court made an order joining BAICO.

Henry J of the Eastern Caribbean Supreme Court rendered judgment in 2015 in favour of Mr Steele and BAICO, after which PBWL paid the amount due to Mr Steele to complete the second sale agreement and Mr Steele assigned his right and interest in the annuity to PBWL. Henry J rejected PBWL’s argument that the moneys were held upon a Quistclose trust. She held that there was no mutual understanding  between the payer and BAICO that the moneys were not to form part of BAICO’s general assets and could not be freely disposed of by it. In other words, there was no indication that Mrs Lee and PBWL retained an interest in the funds during the life of the annuity (para 17).

PBWL appealed to the Court of Appeal of the Eastern Caribbean Supreme Court. It dismissed the appeal for essentially the same reasons. The court therefore concluded that BAICO was entitled to intermingle the moneys with its own assets (paras 18ff).

PBWL then appealed to the Privy Council. The Board agreed with the reasons of the lower courts. The Board’s advice was given by Lady Arden. The Board first considered a couple of cases that outlined the principles necessary to establish a Quistclose trust. Both were decisions of the Court of Appeal of England and Wales. In the first case, First City Monument Bank Plc v Zumax Nigeria Ltd,[4] the court held that there was no Quistclose trust. If it were treated as an express trust, the required certainty of intention, objects, and subject matter were lacking. And if it were treated as a resulting trust, the claimant had to show more than that the moneys were paid for a purpose, for example, by proving that they were not at the free disposition of the recipient, or that they were paid into a segregated account (para 21). In the second case, Bieber v Teathers Ltd (In Liquidation),[5] the court found that were was a Quistclose Trust initially because the moneys were held in a client account for the purpose of investing. But the funds were then paid on behalf of the client to a partnership so that they became partnership property and were no longer held on a resulting trust for each individual (para 22).

The Board then discussed the features of the Quistclose trust in detail with particular reference to Twinsectra Ltd v Yardley.[6] a case in which the House of Lords followed  Quistclose Investments Ltd v Rolls Razor Ltd, but broadened its principles significantly (paras 23-29). The facts were these: Yardley received a loan from Twinsectra to buy a specific property but asked Sims, a firm of solicitors that purported to act for Yardley, for an undertaking to ensure that the moneys would be used only for that purpose. Sims granted the undertaking but breached it by paying the moneys to another firm of solicitors, Leach, which acted for Yardley, and which promised Sims that the moneys would be applied in accordance with the undertaking. Leach did not do so but paid the moneys out to Yardley for other purposes in accordance with his instructions. Twinsectra sued Yardley, Sims, and Leach. The House of Lords held that a Quistclose trust had been created. The majority of the law lords treated the trust as an express trust because the lender intended to retain beneficial ownership of the moneys (para 23) However, Lord Millett regarded it as a resulting trust because the lender did not intend to transfer beneficial ownership to the borrower (paras 24-28).

Lord Millett regarded the Quistclose trust as a default trust, because: (a) it arises as a matter of law and becomes unconditional on failure of the specified purpose; and (b) it takes subject to the arrangements the parties have agreed about how the moneys should be dealt with. He confirmed that the trust does not arise simply because the moneys are lent for a particular purpose. If nothing else is said about it, the borrower is free to dispose of the moneys as it sees fit. So the question that must be answered in every case is whether the parties intended that the moneys are to be used exclusively for the particular purpose. If it is, the borrower is a fiduciary.

Lady Arden noted (para 29) that Lord Millett’s judgment has become the accepted analysis of Quistclose trusts. It is sometimes suggested that there must be a ‘mutual intention’ on the part of lender and borrower that the funds should be used exclusively for the specific purpose (para 30). However, Lady Arden noted that Lord Millett was of opinion that it would be sufficient if one party imposed that condition on the other who acquiesced in it. Further, it is not necessary to find an intention that the funds should not form part of the general assets of the recipient; an intention that the lender should retain some beneficial interest in the funds is sufficient. Indeed, the trust does not have to require that it be used ‘exclusively’ for the purposes of the Quistclose trust, for the parties may have agreed to other terms. This flows from the fact that the resulting trust is only a default trust. It applies only if and to the extent that the parties have not agreed to what should happen to the moneys if the trust fails (para 31).

Although the Board paid close attention to, and followed, Lord Millett’s views, it did not dismiss the possibility that the trust could be express. In other words, it can either be express or a resulting trust. But it is now generally accepted that if or to the extent there is no express trust that applies on failure of the specified purpose, there is a resulting trust to the lender. Regardless, the lender will only be able to recover the moneys once the purpose for which they were lent fails if the evidence shows sufficiently that the lender did not intend to dispose of the whole beneficial interest (paras 32-33).

The Board then applied these principles to the facts. The appellants emphasized that the assignment of the annuity raised an inference that the parties intended that BAICO would use the capital at the end of the period to pay the amount owing to Mr Steele from Prickly Bay 0para 36). The Board agreed that assignment should be given some weight, but it was not sufficient to lead to the conclusion that there was a Quistclose trust (para 37) for two reasons: (a) the conditions of the annuity and the assignment were equally consistent with PBWL providing collateral to BAICO as security for its guarantee (para 38); and (b) although there was a purpose for the loan and the assignment, that was insufficient to indicate that the moneys were subject to a trust (para 39). Moreover, the issue of the annuity was inconsistent with the alleged Quistclose trust for two reasons: (a) when Mrs Lee paid the premium for the annuity, she paid for an investment product with an agreed rate of return, the investment being at the discretion of BAICO, and for payment of a fixed sum to her on maturity (paras 40-41); and (b) with a Quistclose trust, the moneys are normally segregated from the borrower’s other funds; while that is not a requirement, the lack of a requirement that they be kept separate indicates that they were not held in trust (para 42). Further, there was nothing to indicate that PBWL retained the beneficial interest in the moneys (para 44).

Accordingly, the Board dismissed the appeal.

[1]    [2022] UKPC 8.

[2]    [1970] AC 567, [1968] UKHL 4, sub nom Barclays Bank Ltd v Quistclose Investments Ltd.

[3]    See Re Cliffs Over Maple Bay, 2011 BCCA 180; Ontario (Training, Colleges, and Universities) v Two Feathers Forest Products LP, 2013 ONCA 598.

[4]    [2019] EWCA Civ 294.

[5]    [2012] EWCA Civ 1466.

[6]    [2002] UKHL 12, [2002] 2 AC 164.


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