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A trust that arises between a debtor and a creditor, when the creditor undertakes to use the loan in a particular way, and segregates the creditor's money from the his general assets. Consequently, if the debtor becomes insolvent, the creditor's money is refundable, and not available to pay the debtor's other creditors. The creation of a Quistclose trust, therefore, serves to allow a creditor to make a loan without fear that he will be unable to recover the money if the debtor goes bankrupt. It also has the effect that, if the debtor uses the money for a purpose other than that specified, he is in breach of trust, as is anyone else who dishonestly assists him to do so.
The term arises from BarclaysBankVQuistclose1970, a case in which an investment company (Quistclose) lent a sum of money to a manufacturer in order for it to declare a divided to its shareholders. The company went backrupt before the divided was declared, and the HouseOfLords held that the loan was held on trust for the lender, not part of the manufacturer's general assets. Although the reasoning is not absolutely clear, a good explanation for the decision is that the debtor held the creditor's funds separate from its general accounts (and thus there was CertaintyOfSubjectMatter), and that the debtor was using the creditor's funds for the creditor's purpose. In Quistclose_, the reason the for the loan was to allow the manufacturer to declare a dividend and thus make its economic fortunes look more appealing to prospective investments. In doing so, Quistclose was protecting its own investments in manufacturer, which would have been at risk had the manufacturer been declared insolvent. However, this requirement -- that the loan be to accomplish a purpose on behalf of the lender -- has not been enforced in subsequent cases.
The Quistclose principle has been extended over the years. For example, ReKayford1975 is an example of a Quistclose-type trust where the protected creditors were the debtor's customers (rather than lenders).
Quistclose trusts raise two problems -- one pragmatic and one theoretical. The pragmatic problem is that, by allowing the use of the Quistclose trust by the debtor to favour a particular creditor, the courts are side-stepping a basic principle of insolvency law: that the debtor may not favour creditors. After all, when a company becomes insolvent, there are alway creditors who suffer; why should the company be allowed to choose which ones they are?
The theoretical problem is that it is not entirely clear what type of trust a Quistclose trust is. It is usually analysed as an AutomaticResultingTrust (ART), but since WestdeutscheVIslington1996 it is not clear that there is any longer such a thing as an ART.
Alternatively, it can be argued that the lender is creating an express trust of the money for a specific purpose. When that purpose fails, a resulting trust is imposed at that point for the benefit of the lender. The problem with this analysis is that the express trust would be a private purpose trust, and therefore invalid unless it can be brought within the scope of ReDenley1969.
Aa further view is that no resulting trust arises at all. Instead, the lender pays the money on express bare trust for himself, and (presumably) directs the disposition of both legal and equitable title at some future time. Under this analyssis, there is no resulting trust at all -- the arrangment starts as a bare trust, and remains a bare trust.
However, in TwinsectraVYardley1999, Lord Millet concluded that the equitable interest in the loan money remained with the lender until such time as the purpose was carried out. But he also stated that the relationship was a resulting trust from the outset. It is not clear how a bare trust can turn into a resulting trust -- if the settlor starts off with the beneficial interest, and never gets rid of it, we are contemplating a change in the nature of the trust with no change in the settlor, trustee, or the obligations between them. However, this may be a nit-picking objection -- it may be that in some circumstances the terms `bare trust' and `resulting trust' are synonyms.
Twinsectra shows that the Quistclose trust is still alive and well after Westdeutsche_; but there is some evidence of an increased reluctance of the courts to find a Quistclose trust in circumstances where the parties did not agree specifically that they were creating a trust. This supports the view that a Quistclose trust is a resulting trust, and that Westdeutsche restricts the creation of such trusts to circumstances where there is an intention to create a trust. In Twinsectra itself, the House of Lords were unanimous that an undertaken given by a solicitor created a fiduciary relationship, even if the agreement did not use the work `trust'.
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