Insolvency; Quistclose trusts
Quistclose lent £209,719 to a company called Rolls Razor Ltd (‘RR’) on condition that RR would use the money only to pay dividends to its shareholders.
Before the dividends were paid, RR went into liquidation. This meant that the money could not be used for the stated purpose of paying dividends. Who should get the £209,719 which was sitting in an account at Barclays Bank?
■ As one of RR’s unsecured creditors, Barclays Bank argued that the £209,719 formed part of RR’s assets available to pay the unsecured creditors.
■ Quistclose claimed that the money was held on trust to pay the dividends, but if that purpose could not be carried out then it was held on trust for Quistclose. If Quistclose was a beneﬁciary under a trust, it could bring a proprietary action which would enable it to recover the money in full ahead of the creditors (like the customers in Re Kayford).
The House of Lords decided that a trust did exist.
(a) The settlor was Quistclose. The trustee was RR.
(b) It was held that a two-tier trust had been created
. RR held the loan money on a primary trust to pay dividends to the shareholders
, but should that purpose prove to be impossible (as was the case) there was a secondary trust to return the money to the lender, Quistclose
- Certainy of intention
- Quistclose had not stated explicitly: ‘You (RR) must hold this loan of £209,719 on trust to pay the dividends due to the shareholders, but if that purpose cannot be achieved, then you are to hold it on trust for Quistclose.’ (but cases like Paul v Constance show that a trust can be created without the settlor using the word ‘trust’)
Lord Wilberforce was satisﬁed that Quistclose intended to create a trust because it did not intend the loan money to be at the free disposal of the borrowe
r. The loan money was not to become part of the borrower’s general funds, which could be spent on the outgoings of the business, such as wages, buying stock and energy bills. It was to be used for the sole purpose of paying the dividends (or, if this was impossible, to be returned to the lender).
- Primary/ secondary trust
- Lord Wilberforce said that the primary trust ceases when the loan is applied for the stated purpose (here payment of the dividends).
The lender then has a contractual claim to repayment of the money
(ie a debt action) and will rank as an unsecured creditor on the insolvency of the borrower. Accordingly, if RR had paid the dividends before becoming insolvent, Quistclose would have lost its status of a beneﬁciary under a trust and would have become an ordinary unsecured creditor
with a contractual claim against RR.