Quistclose trusts
To begin: what considerations in any area of trusts do we need to take?
Doctrine: you analyse the past cases and judges, and you figure out how the current case attached to them. Basically, you want your case to fit with the past ones, because you want coherence with doctrine
Justice: you want to consider fairness, or whether it is correct on the basis of the parties / closely related individuals in the court. This tends to be corrective justice, making good between the parties
Policy: may not always be just, but is a consideration of the general good into account. How will it impact the community? Legal economists focus on this, and they seek to have an incentive related structural outcome. Policy tends to equal distributive justice –making it so that the whole thing on the whole is just and fair
How do these applies to Quistclose trusts?
- It’s not the fact that there is a purpose: the bank will always ask what it’s for, and it will determine the interest
Policy:
- Everything regards insolvency – because this is a very complicated area of law, and when you make decisions about it, you need to consider how it will affect the whole regime.
- When you have a Quistclose trust, you automatically get priority over everyone else.
- If someone is declared bankrupt, and you’re an individual you are given a trustee in bankruptcy, and if it’s an institution, you have a liquidator
- First thing they do is they try and save you. If that fails, they liquidate your assets and they are divided by your creditors: those who are secured (their money was held on trust – because they have a proprietary right in your assets – they can point to an asset and say that is mine) and those who are not (usually this group has a contractual right –employees have a right for some salary and some holiday pay, children who deserve alimony). Usually, the latter split up like 10%, they get nothing
- Usually, most people want to go from unsecured to secured, because it’s the difference between getting the money and not
So, if under policy we allow lots of QT trusts, what happens?
- Well we incentivise lenders to give loans to companies in difficulties
- Is this a good thing? Well, it saves the employees of the companies, and stops growing unemployment. It also lets them contribute to the economy, and maintain the status quo – could be a domino effect of downward spiral
- Also, some companies may have great potential, but just make a wrong turn – think about the Razor guys – they made manual washing machines, but then the electric ones came around. Now, they shouldn’t have been saved, but think about companies with actual potential.
- In short they give a safety net to the companies which is offered by the market, not by the state
- What’s the downside? More likely than not, a QT only buys the company some extra time. Everyone who becomes an unsecured creditor in that borrowed time loses 100%.
- Also, all securities are supposed to be registered. However, with QT, you’re creating a security that is not registered, ever, and people who are considering becoming creditors will not know about it and cannot take preventative measures. In short, market transparency suffers
Justice
- Who are the parties in court? The lender and the other creditors. The important thing is, A lent to B to pay back C, but B goes bankrupt before they can pay back C. So B still has the money. The reason C rights A is that if A has priority, then A gets back all their money and C and all their cohort has less to divide amongst them
- Who is a secured creditor? It is someone who can point to part of the pot and say “that is mine”. The first example is someone with a security : Eg. A bank with a mortgage – the house is theirs. The second is someone who was having their money held on trust , for the same reason .
- So in court we have the lender and the liquidator, who needs to distribute the assets in accordance to law, so to avoid being sued
- The question if justice, then is between the lender and the unsecured creditors
Doctrine
- Is it a purpose trust?
- A resulting one? Constructive? Express?
- What was the intention of the parties?
- In Quistclose trusts, each one of the above is contested, and any decision will have a domino effect on those who follow
The Quistclose case
A is Quistclose Ltd – the lender. B is Rolls Razor – the debtor. C is Rolls Razor's shareholders – 3rd party
It was found in the case that there was a trust.
The primary trust: B was the trustee, C is the beneficiary. However, the whole arrangement is made to benefit B. If C were truly the beneficiary, they could collapse the trust and get the benefit at any time because of the Son de Vautier – which is evidently Not what A wanted
The secondary trust: only occurs if the primary one fails and there is an automatic resulting trust, with A as the beneficiary. This is what there was found to be.
The Cooper case
Cooper is A. PRG is B. The car dealer is C.
Cooper was paying for the car in instalments, but the way it was being done was that the company was taking the money from his salary and transferring it to the dealer. When he resigned, the deal was that A would give the remainder lump sum to B, who would add the remaining amount from his salary and send it all to C. B makes the check, but goes insolvent so it bounces.
So, it’s a purpose trust = there is no beneficiary, there is only a purpose. The purpose here was to pay C. When the purpose trust fails, A gets their money back through the Automatic Resulting Trust
Only one issue. Purpose trusts don’t exist in English law, except when it’s about charities. The exception to this was Reid – because there was an idea that there, we knew exactly (well...) who the beneficiaries are
This was a case that was truly founded on justice. It could have been completely technical, but the judge evidently felt it would be completely unjust – this wasn’t a bank, this was a dude who did everything right and just got screwed over .
Can you say that he did everything right? Well, think about tort victims, they get screwed over. What about cleaners and employees, they can’t calculate the risk either but they get screwed over. Just because they’re dealing with the company –so you can say that the whole reason against the QT is that the whole point of the careful insolvency separation is to freeze the assets and work carefully. Why
Millett
There was an express trust from the beginning. The contract if the loan creates a trust where the borrower is the trustee and the lender is the beneficiary. But it is a bare trust with a mandate which says B can transfer the money to a third party unless they B goes bust. This is similar to when you buy a house – you transfer the money to a lawyer who is told they can make the payment to the old owners when the house is registered in your name .
However the issue here is intention – also do you really want to elevate all contracts to a trust? No.
Millett in Twinsectra says that it’s a resulting trust – it arises (per chambers) that there was an absence of intention to transfer the beneficiary interest. However, how can a not intend to transfer the beneficiary interest when they want B to pay to C? However, when B goes bankrupt the rationale of the loan collapses and the interest returns to A. So you analyse the situation based on evidence for the lack of intention.
