Vol 9 (2012) - Issue 3

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The Uncertainty Surrounding the Quistclose Trust – Part Two

In the second part of this essay I will be examining the key policy motivations behind the Quistclose trust and I will assess if the Quistclose trust is being employed by the judiciary as a tool to achieve fairer decisions in the commercial realm. I will also consider whether the Quistclose trust should be subject to the registration regime.

Policy motivation
From analysing the earlier authorities preceding Quistclose Investments like Toovey v Milne, Moore v Barthrop, Edwards v Glyn, Giber v Gonard, Re Rogers it’s clear courts favour claims made by lenders to companies struggling financially. There is a clear public interest in encouraging lenders to make credit available to struggling companies. The courts via the vehicle of the Quistclose trust have provided an incentive for lenders to do so by ensuring that until the money is applied for the purpose the money will be beneficially vested in them, so that if the company does go insolvent in the meantime the money is securely held for them. Though the judiciary have actively sought to upheld this policy view it’s unclear whether the legislators endorse this extra level of protection for lenders in corporate rescue situations. The Insolvency Service published a consultative paper exploring the possibility of giving lenders who give funds to a company in a company voluntary arrangement a statutory super priority (SSP) 'One option for guaranteeing funding during a moratorium is to introduce the concept of statutory super priority so that providers of funding during this period can have priority over all existing creditors. This is a concept found in the USA Chapter 11'. However this suggestion was quickly dashed on the premise that 'competition between lenders to provide SSP funds (with repayment having priority over all existing debts, including secured debts) might mitigate against the proper consideration of the viability of the business by a lender'. This seems to betray an unwillingness to give lenders who are providing finance in a moratorium an extra dimension of protection. Companies who are in a CVA are in a more desperate position than company’s who are struggling before a winding up petition is served so if there is no desire to aid lenders in CVA’s its unlikely legislators will want to provide extra protection to lenders providing money before a CVA. The Quistclose trust is built upon the backdrop of corporate rescue scenarios, the judiciary in these cases have shown a willingness to allow lenders to be treated as a beneficiary, however these reports from the Insolvency Service doesn’t replicate this attitude or policy motivation. It could be that the Insolvency Service believes that the Quistclose trust provides enough security for lenders in corporate rescue situations and they do not wish to build on this.