Vol 9 (2012) - Issue 2

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The Uncertainty Surrounding the Quistclose Trust – Part One

Introduction
A Quistclose trust arises when money is paid to a recipient for a specific purpose, if that purpose fails the money is held on trust for the payer. Although this type of trust can be traced back to 1819, considerable uncertainty shrouds the device. The Quistclose trust is most pertinent on insolvency as this is when it is imperative to decipher if the creditor in question holds a personal or proprietary right, the proprietary right of course allowing the otherwise unsecured creditor to bypass the insolvency regime as the beneficial owner and extrapolate the funds it transferred to the recipient. Judges and commentators alike have failed to reach a consensus on the type of trust the Quistclose trust is, which has resulted in confusion over the evidentiary standard that needs to be demonstrated to successfully establish a Quistclose trust. Furthermore, the policy motivations supporting the trust have been thought to introduce inconsistency into the ranking of claims on insolvency leading to certain unsecured creditors being indirectly preferred over others. It has been suggested that the Quistclose trust is an example of the judiciary utilising equitable principles in the commercial realm to obtain a fairer result in the context of insolvency. Many have suggested the Quistclose trust must be treated as any other fully fledged security device taking into account the protection it offers the payer on insolvency and should therefore be registrable, this proposal has too divided opinions. This paper will attempt to examine and untangle these issues to help build a clearer picture of the device’s scope and the philosophy underpinning it.

Barclays Bank Limited v Quistclose Investments Limited
The facts of the case are as follows; in July 1964 Rolls Razor a company in grave financial difficulties declared a dividend it could not meet. In a bid to meet the dividend and uphold the appearance of solvency Rolls Razor borrowed money from Quistclose Investments. The money was transferred to a separate account and was accompanied by a note specifying that the money must only be used for the purpose of paying the dividend. On 27 August before the dividend was paid Rolls Razor entered voluntary liquidation. Barclays claimed the funds comprised in the separate account provided by Quistclose Investments were eligible for setoff against other overdrawn accounts of the company. Quistclose Investments argued the money was held on trust for them. The House of Lords unanimously agreed with Quistclose Investments. Lord Wilberforce clarified that a debt and contractual relationship can co exist together:
'There is surely no difficulty in recognising the coexistence in one transaction of legal and equitable rights and remedies'
Lord Wilberforce also explained the trust structure a Quistclose trust evoked:
'That arrangements of this character for the payment of a person’s creditors by a third person to give rise to a relationship of fiduciary character or trust in favour, as a primary trust, of the creditors, and secondly if the primary trust fails, of the third person, has been recognised in a series of cases over some 150 years'