Quistclose Trusts

In times of recession the unusual name of Quistclose may come to the fore in arguments over beneficial ownership of assets and funds.  It’s an important consideration for all those that have assets or funds lodged with other parties and if the Quistclose principles apply it may make the difference between recovery or loss.

Covid-19 is causing unprecedented disruption in the world economy.  In the UK and other countries, many businesses have been required to close and cease trading for an indefinite period of time.  Despite the Government’s ongoing commitments, businesses are likely to be short of cash in the coming weeks and months, and with economists forecasting a global recession, many may collapse (dependent on the length of the lockdown and the depth of the recession).

In light of this, individuals and businesses should be aware that when they transfer money to another party (the recipient), for a specific purpose, it cannot be used by the recipient for any other purpose. This money is held by the recipient on trust for the person who paid it (the donor), referred to by lawyers as a Quistclose trust.

If a donor can establish that he is the “beneficiary” of a Quistclose trust, this will provide significant advantages to him, particularly if the recipient “trustee” of the Quistclose trust is insolvent or has been declared bankrupt.

What is a trust?

A trust is a type of property relationship, occurring when, although legal title to assets or money is passed from a donor to a recipient, the donor retains an interest in the asset or money.  After the transfer, the recipient may have physical possession and legal title to the assets, but the trust prevents the recipient from treating the assets (or value) as their own.

As described above, a Quistclose trust is a specific type of trust, in which the donor gives the assets to the recipient for a specific purpose and for no other purpose. The recipient can only use the funds for the intended purpose and should not mix these funds with its own. Once the intended purpose has been carried out, the trust comes to an end.

For example, a company paid funds to its advertising agency for the sole purpose of paying third parties on behalf of the company. The advertising agency was bound only to use the funds as intended, despite its subsequent insolvency (Carreras Rothmans Ltd v Freeman Mathews Treasure Ltd (In Liquidation) [1985] Ch. 207).

In the absence of a Quistclose trust, or some other enduring interest in the asset or money in question, the donor whose money has not been used for the stipulated purpose would only have a claim in breach of contract against the recipient and join the queue with other creditors.

The advantages of a Quistclose trust, particularly in case of recipient insolvency, are as follows:

• The donor stands at or near the head of the queue of creditors, since he is technically only seeking the return of property which belongs to him (and not merely enforcing a debt);
• If the asset or money has changed form (for example, if the donor’s money has been used by the company to buy a piece of artwork for the director of the recipient company), the value of the asset or money can be traced into that new form and a claim made to it. This may be particularly helpful if the new asset has appreciated in value; and
• If third parties have knowingly participated in or assisted the transfer away or misuse of the trust assets or money, the donor may also have a claim against those third parties. Where the recipient is a company, these “third parties” could include the directors or other individuals controlling the company’s operations.

As a practical matter, these advantages can be of substantial value.

If you have provided money to someone for a specific purpose, and they have failed to carry out that purpose whether through their own fault or otherwise, such as a frustrating event (for which see our blog on this subject), please feel free to contact Fred Sheppard or any member of the Commercial Litigation team.

 

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