Exam 3: Implied Trusts

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Quistclose trusts are a particular type of trust that arises in the context of a loan where the lender specifies that the loaned funds must be used for a specific purpose. The concept originates from the landmark case Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567 (HL), a decision of the House of Lords in the United Kingdom.

In the Quistclose case, Quistclose Investments lent money to Rolls Razor Ltd to pay dividends to its shareholders. The money was deposited in a separate bank account, and it was agreed that if the dividends were not paid, the money would be returned to Quistclose. Rolls Razor went into liquidation before the dividends were paid, and Barclays Bank, which held a debenture over Rolls Razor's assets, claimed the money. The House of Lords held that the money was held on a trust for Quistclose and could not be claimed by Barclays as part of the assets of Rolls Razor.

The essence of a Quistclose trust is that the lender gives money to a borrower for a specific purpose, and if that purpose fails, the money does not become part of the borrower's general assets but is held in trust to be returned to the lender. This arrangement creates a fiduciary relationship between the borrower (as trustee) and the lender (as beneficiary) with respect to the use of the funds.

Quistclose trusts are an example of a resulting trust, which is a form of trust that arises by operation of law when property is transferred under circumstances that give rise to an inference or presumption that the transferor did not intend to give the beneficial interest in the property to the transferee. In the case of a Quistclose trust, the presumption is that the lender did not intend to part with the beneficial interest in the funds except for the specified purpose.

The Quistclose trust has been recognized and applied in various common law jurisdictions, and it serves as a useful tool for lenders to protect their funds in the event of the borrower's insolvency. It also provides a mechanism for prioritizing the lender's claim over those of other creditors, as the funds held in trust are not available for distribution to the general body of creditors.

However, the precise legal nature and the requirements for establishing a Quistclose trust have been the subject of much debate and judicial consideration. Courts have looked at the intention of the parties, the degree of control retained by the lender, and the circumstances under which the funds were advanced to determine whether such a trust exists.