“A Quistclose trust does not necessarily arise merely because money is paid for a particular
purpose.”
(Twinsectra v Yardley (2002) per Lord Millett).
Critically examine this statement. Consider the nature of Quistclose trusts and the
requirements for their creation. Explain how they affect creditors of an insolvent
company, and whether they can be justified in that context
Introduction
Opening statement – This essay will examine the creation and purpose of Quistclose trust to
provide a greater understanding how they affect creditors of an insolvent company and
whether or not equity has gone too far in the use of such trusts.
What is a Quistclose trust?
The type of trust which can be established to assist a lender or payee who makes an
advance for a specific purpose to a company before becoming insolvent is generally called a
Quistclose trust – deriving from its case - Barclays bank v Quistclose
FACTS:
- Rolls Razor (the borrower) entered into a loan agreement with Quistclose
Investments (which was the lender) for £209,719 , "for the purpose of that company
paying the final dividend due on July 24 next." The cheque was paid to Barclays,
who were informed that the money was to be used only for the payment of the
dividend. Barclays agreed the arrangement, evidenced by a letter to Barclays from
Rolls razor which stated: “We would like to confirm the agreement reached with you
this morning that this amount will only be used to meet the dividend due on July 24,
1964."
- Rolls Razor went into liquidation before the dividend was paid. Barclays claimed the
money as a creditor, and so did Quistclose. The House of Lords found for Quistclose.
Lord Wilberforce held that there was an implied term in the contract that the money
was to be returned if not used for the purpose for which it was specifically lent. This is
a quistclose trust.
Academia:
Lord Millet: - “A Quistclose trust does not necessarily arise merely because money is paid
for a particular purpose.”
Gary Watt – provides an overview of arguments and issues surrounding quistclose
trusts and the postion they enable creditors to take if they are established. He argues
there are some policy reasons which justify the trusts whilst adding weight to millets
notions.
- “there is one policy that might be: the desire to protect lenders who make emergency
loans with the purpose of ‘saving’ corporations on the brink of insolvency.”
- “A rescued company is a rescued trader and a rescued employer; a failed company
very often results in unemployment with all the social ills that entails.”
- “if the loan in Quistclose itself had actually been applied to pay the dividend to the
shareholders, the lender would, at that point, have lost its priority over other creditors
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