Quistclose Trusts: A Critical Analysis

THE QUISTCLOSE TRUST: CRITICAL ESSAYS

The decision of the House of Lords in Twinsectra v Yardley has refocused attention on the Quistclose trust. Although accepted by insolvency lawyers as a convenient tool for corporate rescue, the precise basis of the trust has always been in doubt. The purpose of these essays is to explore the foundations of the trust and subject them to a searching analysis.

The Quistclose Trust: Critical Essays

Edited by

William Swadling

OXFORD AND PORTLAND, OREGON 2004

Hart Publishing Oxford and Portland, Oregon Published in North America (US and Canada) by Hart Publishing c/o International Specialized Book Services 5804 NE Hassalo Street Portland, Oregon 97213-3644 USA © The editor and contributors severally 2004 The Editor and Contributors have asserted their right under the Copyright, Designs and Patents Act 1988, to be identified as the authors of this work Hart Publishing is a specialist legal publisher based in Oxford, England. To order further copies of this book or to request a list of other publications please write to: Hart Publishing, Salter’s Boatyard, Folly Bridge, Abingdon Road, Oxford OX1 4LB Telephone: +44 (0)1865 245533 or Fax: +44 (0)1865 794882 e-mail: [email protected] WEBSITE: http//www.hartpub.co.uk British Library Cataloguing in Publication Data Data Available ISBN 1–84113–412–0 (hardback)

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Contents Foreword Preface List of Contributors Table of Cases Table of Legislation

vii ix xi xiii xxi

1. Rolls Razor Ltd Robert Stevens

1

2. Orthodoxy William Swadling

9

3. Lord Millett’s Analysis James Penner

41

4. Understanding the Power Lionel Smith

67

5. Restrictions on the Use of Money Robert Chambers

77

6. Retrieving Tied Money Peter Birks

121

7. Commerce Ewan McKendrick

145

8. Insolvency Robert Stevens

153

9. Scotland George Gretton

167

Index

187

Foreword The so-called Quistclose trust probably represents the single most important application of equitable principles in commercial life. It has been well established for some two hundred years, at least in relation to insolvency, though it is now seen to be of more general application. Yet it has resisted attempts by academic lawyers to analyse it in terms of conventional equitable doctrine. Even that modern master of equity Sir Robert Megarry V-C was inclined to think that it was an aberrant creation of common law judges. It was too much to hope that a single decision of the House of Lords would put an end to controversy. The nature of the trust and the location of the beneficial interest remain elusive and continue to be debated by distinguished academic lawyers. They demand to know whether the Quistclose trust is a form of express, implied, constructive or resulting trust. If the mere author of a foreword may venture to intrude in a private dispute (at the risk of exposing himself to derisive comment from all sides), I would say that it may be any of them, depending on the facts of the particular case and the boundaries between these various forms of trust, on which not everyone is agreed. From a commercial point of view, however, the trust is simply a mechanism by which one person may allow the use of his money by another for a stated purpose without losing his right to the money more than necessary to achieve the purpose. The commercial need for such a mechanism is obvious. The problems which will face the courts are not likely to derive from any difficulty in analysing the nature of the trust, but from the need to distinguish the case where it arises from the ordinary case of the lender who naturally wishes to know why the borrower wants the money. Lord Millett House of Lords 27th October 2003

Preface On October 31st, 1968, the House of Lords handed down its decision in Barlcay’s Bank Ltd v Quistclose Ltd. Their Lordships there held that money lent for a purpose was held by the borrower on trust for the lender should that purpose not be achieved. It was therefore not available to satisfy the debts of the borrower in the event of his insolvency. The decision was immediately seen as controversial, for, as Meagher and Gummow noted, it gave the lender the best of both worlds. As beneficiary, it could stand outside the liquidation and recover the loan in full, yet if the company had remained solvent, but, without fault on its part, the fund had disappeared, the lender . . . could have recovered the money at law as a debt.

The case was also doctrinally difficult. Who, for example, owned the beneficial interest while the purpose could still be attained? And what of the fact that the relationships of debtor and creditor on the one hand and trustee and beneficiary on the other are normally considered to be mutually exclusive? Though attracting attention from some of the leading trusts lawyers around the Commonwealth, the controversy over the correctness of Quistclose has never been satisfactorily resolved. One with a long-held fascination with the case is Lord Millett, who, as PJ Millett QC, appeared as counsel in one of the post-Quistclose cases and who immediately wrote a penetrating analysis of the doctrine for the Law Quarterly Review. It came as no surprise to find, therefore, that when the first case to reach the House of Lords since Quistclose which raised questions of how the doctrine was to be understood, Lord Millett seized the opportunity to provide an expanded discussion of the case. It was the handing down of the decision in Twinsectra v Yardley, and Lord Millettís speech in particular, which persuaded the essayists in this book to take a fresh look at the doctrine. The chapters which follow were all delivered as papers at a small conference held in All Souls College, Oxford in late 2002. They are not intended to give a textbook account of the subject, nor even to be in agreement with each other. They are simply the views of eight different people on various aspects of the Quistclose trust, both as it was seen in 1970, and how it has been reinterpreted in Twinsectra. The authors would like to thank those who attended the conference for their astute criticisms. And most of all, they would like to thank Dr Arianna Pretto, now a fellow of Brasenose College, for the huge amount of work she put in to the administrative side of the conference. William Swadling Oxford 23rd November 2003

List of Contributors Peter Birks QC, LLD, FBA is Regius Professor of Civil Law and Fellow of All Souls College, Oxford Robert Chambers is Professor of Law at the University of Alberta George Gretton is Lord President Reid Professor of Law at the University of Edinburgh Ewan McKendrick is Professor of English Law and Fellow of Lady Margaret Hall, Oxford James Penner is Reader in Law at the London School of Economics and Political Science Lionel Smith is Professor of Law at the University of McGill Robert Stevens is Fellow in Law at Lady Margaret Hall, Oxford William Swadling is Fellow in Law at Brasenose College, Oxford

Table of Cases A-G v Alford (1855) 4 De GM & G 843 ........................................................81 A-G v Blake [1998] Ch 439 ...........................................................................18 A-G for Hong Kong v Reid [1994] 1 AC 324 ..................11, 19–20, 23, 119, 133 Abbott, Re [1900] 2 Ch 326 ........................................................................139 Abigail v Lapin [1934] AC 491....................................................................118 Adams & Kensington Vestry, Re (1884) 27 Ch D 394....................................13 Air Jamaica Ltd v Charlton [1999] 1 WLR 1399 ....................................52, 137 Allcard v Skinner (1887) 36 Ch D 145 ...........................................................95 Aluminium Industrie Vaassen BV v Romalpa Aluminium Ltd [1976] 1 WLR 676...................................................................................179 Ames’ Settlement, Re [1946] Ch 217 ...........................................................116 Andrew’s Trust, Re [1905] 2 Ch 48...............................................................14 Anstis, Re (1885) 31 Ch D 596 ......................................................................24 Anthony v Wright [1995] 1 BCLC 237 ........................................................146 Ashburn Anstalt v Arnold [1989] 1 Ch 1..................................................31, 48 Astor’s Settlement Trusts, Re [1952] Ch 534 ......................................29, 46, 81 Australian Elizabethan Theatre Trust, Re (1991) 102 ALR 681....................153 Bacon (MC), Re [1990] BCC 78 ..................................................................162 Baden’s Deed Trusts (No 2), Re [1973] Ch 9 .................................................57 Bain, Petitioner 2002 SLT 1112 ...................................................................174 Baird v Murray’s Crs 1744 Mor 7737...................................................170, 181 Bank of Scotland v Hutchison Main 1914 SC 1 ...........................................177 Bank of Scotland v Macleod Paxton Woolard & Co 1998 SLT 158..............174 Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567 .....................................i, 4–6, 9–25, 27–30, 32–4, 36–9, 41–58, 60–5, 67–9, 71–9, 87, 91, 96–8, 112, 115, 118, 124, 127, 145–57, 159–62, 164–7, 169–72, 176, 180, 182, 184 Barclays Bank plc v Weeks Legg & Dean [1999] QB 309 .............................105 Barker v Strickney [1919] 1 KB 121 .........................................................25, 31 Barrett, Re (1914) 6 OWN 267 .....................................................................87 Bartlett v Bartlett (1845) 4 Hare 631 .............................................................98 Bateman’s Will Trusts, Re [1970] 1 WLR 1463............................................108 BCCI (No 8), Re [1998] AC 214..................................................................165 Beatty, Re [1990] 1 WLR 1503......................................................................70 Bell v Lever Bros Ltd [1932] AC 161 .............................................................21 Belmont Finance Corp v Williams Furniture Ltd (No 2) [1980] 1 All ER 393.............................................................................................96 Berry, Re (1906) 147 F 208 ..........................................................................116

xiv Table of Cases Bird v Luckie (1850) 8 Hare 301....................................................................57 Blacklocks v JB Developments (Godalming) Ltd [1982] Ch 183 ...................117 Bond Worth, Re [1980] Ch 228...................................................................166 Bowes, Re [1896] 1 Ch 507....................................................................14, 122 Box v Barclays Bank plc The Times, 30 April 1998......................................147 Boyes, Re (1884) 26 Ch D 531.....................................................................110 Bristol & West Building Society v May, May & Merrimans (a firm) [1996] 2 All ER 801.................................................................................147 Bristol & West Building Society v Mothew [1998] Ch 1 ..................18, 105, 136 British Linen Company v Kansas Investment Co (1895) 3 SLT 183; aff’d without reasons (1895) 3 SLT 202........................................................181–2 Brook’s Settlement Trusts, Re [1939] Ch 993 .....................................45, 69, 71 Brown v Burdett (1882) 21 Ch D 667 ............................................................57 Brown v Kempton (1850) 19 LJ NS CP 169 ...................................................26 Browne, Re [1944] IR 90.............................................................................108 Burnett’s Tr v Grainger 2002 SLT 699 ........................................................179 Burroughs v Philcox (1840) 5 Myl & Cr 72 .................................................128 Burt v Claude Cousins & Co Ltd [1971] 2 QB 426.......................................147 Cameron v Neil 1926 SLR 56 ..................................................................182–3 Car & Universal Finance Co Ltd v Caldwell [1965] 1 QB 525...............117, 136 Carreras Rothman Ltd v Freeman Mathews Treasure Ltd [1985] Ch 207 ..................29, 62, 77, 86, 91, 93, 99, 147, 149, 151–3, 159, 162–4, 166 Cave v Cave (1880) 15 Ch D 639.................................................................141 Chase Manhattan Bank NA v Israel-British Bank (London) Ltd [1981] Ch 105 ..........................................................21, 116, 135–7, 141, 159 Chelsea Cloisters, Re (1981) 41 P & CR 98 .................................................158 Chichester Diocesan Fund v Simpson [1944] AC 341.....................................72 Chillingworth v Esche [1924] 1 Ch 97 .........................................................114 City Equitable Fire Insurance Co Ltd, Re [1930] 2 Ch 293 ...........................157 Clapman v Edwards [1938] 2 All ER 507 ......................................................94 Clark Taylor & Co Ltd v Quality Site Development (Edinburgh) Ltd 1981 SC 111............................................................................................179 Cleveland Shoe Co Ltd v Murray Book Sales (Kings Cross) Ltd [1973] EGD 335 ................................................................................................147 Collings v Lee [2001] 2 All ER 332 ..............................................................136 Commissioner of Stamp Duties (Queensland) v Livingstone [1965] AC 694...................................................................................................152 Commissioners of Inland Revenue v Broadway Cottages Trust [1955] Ch 20 .....................................................................................72, 128 Conservative & Unionist Central Office v Burrell [1982] 1 WLR 522.............................................................................77, 93, 95, 129 Consul Development Pty Ltd v DPC Estates Pty Ltd (1975) 132 CLR 373 ..................................................................................................96

Table of Cases xv Cook v Hutchinson (1836) 1 Keen 42 ..........................................................100 Cowan v Scargill [1985] Ch 270....................................................................90 Croome v Croome (1888) 59 LT 582...........................................................100 David Securities Pty Ltd v Commonwealth Bank of Australia (1992) 175 CLR 353 ..........................................................................................135 De Mattos v Gibson (1859) 4 De G & J 276 ..................................................96 Denley’s Trust Deed, Re [1969] 1 Ch 373 ..................................................28–9 Dibbens (E) & Sons Ltd, Re [1990] BCLC 577 ..............................................26 Dickinson v Burrell (1866) LR 1 Eq 337 ......................................................117 Diplock, Re [1948] Ch 465..........................................................................117 Dixon & Wilson v McIntyre (1898) 6 SLT 188 ............................................182 DKLR Holding Co (No 2) Pty Ltd v Commissioner of Stamp Duties (1982) 149 CLR 431 ................................................................................116 Douglas, Re (1887) 35 Ch D 472...................................................................57 Dow Corning Corporation, In re (1996) 192 Bank Rep 428 .........................159 Drucker (No 1), In re [1902] 2 KB 55; aff’d [1902] 2 KB 237 ............................................................25, 30, 78, 91, 153, 155, 160 Duke of Northumberland v IRC [1911] 2 KB 343; rev’d on another point [1911] 2 KB 1011 ......................................................................................71 Dumas, Ex parte (1754) 2 Ves Sen 582 ..........................................................95 Dyer v Dyer (1788) 2 Cox 92 ........................................................................12 Edgington v Fitzmaurice (1885) 29 Ch D 459 ................................................36 Edwards v Glyn (1859) 2 El & El 29........................................25–6, 91, 95, 155 El Ajou v Dollar Land Holdings plc [1993] 3 All ER 717; rev’d [1994] 2 All ER 685 .....................................................................................95, 117 Eldan Services Ltd v Chandag Motors Ltd [1990] 3 All ER 459....................115 Ellenborough Park, Re [1956] Ch 131 ...........................................................88 Endacott, Re [1960] Ch 232 ...........................................................28–9, 46, 72 English & American Insurance Co Ltd, Re [1994] 1 BCLC 649....................147 Errington v Errington & Woods [1952] 1 KB 290..........................................31 EVTR, Re [1987] BCLC 646 .................17, 27, 42, 48, 65, 69, 147, 149, 151, 153 ffrench’s Estate, Re (1887) 21 LR Ir 283 ......................................................141 Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour Ltd [1943] AC 32 ..........................................................................................115 Foord, In re [1922] 2 Ch 519 .......................................................................100 Foskett v McKeown [2001] 1 AC 102...............................23, 37, 95, 121, 132–3 Garrud, ex p Newitt, Re (1880) 16 Ch D 522...............................................155 General Communications Ltd v Development Finance Corporation of New Zealand Ltd [1990] 3 NZLR 406 ..............................69, 92, 98, 100, 109, 153 Gestetner Settlement, Re [1953] Ch 672 ........................................................57

xvi Table of Cases Gibert v Gonard (1884) 54 LJ Ch 439 ................................................25, 30, 91 Gillingham Bus Disaster Fund, Re [1958] Ch 300; aff’d [1959] Ch 62 ..............................................................................36, 137, 139 Goldcorp Exchange Ltd, Re [1995] 1 AC 74...............................18–19, 55, 115, 131–2, 134, 138, 140, 147–8, 150 Grey v Inland Revenue Commissioners [1960] AC 1....................................106 Guardian Ocean Cargoes Ltd v Banco do Brasil SA (Nos 1 and 2) [1994] 2 Lloyd’s Rep 152, 160..............................................77, 103, 114, 147 Guinness Mahon & Co Ltd v Kensington and Chelsea Royal London BC [1999] QB 215 ..................................................................................133 Gulbenkian’s Settlement Trusts, Re [1970] AC 508..................................57, 59 Gulbenkian’s Settlements (No 2), Re [1970] Ch 408 ......................................74 Halifax Plc v Omar [2002] 2 P & CR 26......................................................141 Hallett’s Estate, Re (1879) 13 Ch D 696 ........................................................95 Harries v Church Commissioners for England [1992] 1 WLR 1241................90 Harrison, ex p Jay, Re (1880) 14 Ch D 19 ...................................................154 Hassall v Smithers (1806) 12 Ves 119.......................................................95, 98 Hay’s Settlement Trusts, Re [1982] 1 WLR 202.............................................70 Hayim v Citibank NA [1987] AC 730 ...........................................................70 Hazel v Hammersmith and Fulham LBC [1992] 2 AC 1...............................131 Henry v Hammond [1913] 2 KB 515 .............................................................17 Hill v Tupper (1863) 2 H & C 121 ................................................................94 Hodgson v Marks [1971] Ch 892 ..................................................................83 Holiday Promotions (Europe) Ltd, Re [1996] 2 BCLC 618....................147, 150 Holroyd v Marshall (1862) 10 HLC 191........................................................99 Hooley, Re [1915] HBR 181....................................................25, 153, 155, 160 Hopkins’ Will Trusts, Re [1965] Ch 669 .....................................................106 Hoystead v Federal Commissioner of Taxation (1920) 27 CLR 400 ...............99 Hughes v Footner [1921] 2 Ch 208................................................................73 Hunter BNZ Finance Ltd v CG Maloney Pty Ltd (1988) 18 NSWLR 420 .......95 Ilich v The Queen (1987) 162 CLR 110 .........................................................97 Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1WLR 896........................................................................146 James v Commonwealth Bank of Australia (1995) 13 ACLC 1604 ...............160 Johnston, Re [1939] 2 All ER 458 .................................................................13 Jones (FC) & Sons v Jones [1997] Ch 159 .....................................................95 Jopp v Johnston’s Trustee (1904) 6 F 1028 ..................................................175 Kayford Ltd, Re [1975] 1 WLR 279 .....................................................153, 158 Kelly v Cooper [1993] AC 205 ......................................................................74 Kelly v Solari (1841) 9 M & W 54.................................................................21

Table of Cases xvii Keppell v Bailey (1834) 2 My & K 517 ..........................................................94 Kern Corp Ltd v Walter Reid Trading Pty Ltd (1987) 163 CLR 164 .............100 Kleinwort Benson Ltd v Sandwell BC [1994] 4 All ER 890 ...........................134 Klug v Klug [1918] 2 Ch 67...........................................................................70 Lac Minerals Ltd v International Corona Resources Ltd (1989) 61 DLR (4th) 14 .......................................................................................20 Lady Hood of Avalon v Mackinnon [1909] 1 Ch 476 ....................................95 Lambe v Eames (1871) 6 Ch App 597............................................................64 Latec Investments Ltd v Hotel Terrigal Pty Ltd (1965) 113 CLR 265............118 Leahy v A-G for New South Wales [1959] AC 457 ........................................46 Ledgerwood v Perpetual Trustee Co Ltd (1997) 41 NSWLR 532..................108 Lewis’s of Leicester Ltd, Re [1995] BCC 514 ...............................................158 Lipinski, Re [1976] Ch 235 ...........................................................................14 Lipkin Gorman v Karpnale Ltd [1991] 2 AC 548 .......................95, 97, 141, 162 Lohia v Lohia [2001] EWCA Civ 1691 ..........................................................83 London County Council v Allen [1914] 3 KB 642 ..........................................25 Lonrho Plc v Fayed [1992] 1 WLR 1............................................................136 Lysaght v Edwards (1876) 2 Ch D 499 ............................................20, 23–4, 99 Macadam v Martin’s Trustee (1872) 11 M 33..............................................175 MacJordan Construction Ltd v Brookmount Erostin Ltd [1992] BCLC 350 .........................................................................................32, 163 Mackay, Ex p (1873) 8 Ch App 643.............................................................154 McPhail v Doulton [1971] AC 424 .....................................................57, 59, 70 Mallott v Wilson [1903] 2 Ch 494 ...............................................................102 Malory Enterprises Ltd v Cheshire Homes (UK) Ltd [2002] Ch 216 .............117 Manchester Trust v Furness [1895] 2 QB 539 ..........................................18, 55 Marwalt, Re [1992] BCC 32 ................................................................147, 156 Melbourne Banking Corp v Brougham (1882) 7 App Cas 307 ......................117 Mercedes-Benz Finance Ltd v Clydesdale Bank plc 1997 SLT 905 .........169, 184 Mettoy Pension Trustees Ltd v Evans [1990] 1 WLR 1587 .........................71–2 Mid-Kent Fruit Factory, Re [1896] 1 Ch 567 ...............................................157 Middlemas v Gibson 1910 SC 577...............................................................172 Miles, ex p National Australia Bank Ltd v Official Receiver in Bankruptcy, Re (1988) 85 ALR 216......................................................16, 27 Milroy v Lord (1862) 4 De GF & J 264 .........................................................22 Ministry of Health v Simpson [1951] AC 251 ..............................................117 Moffit v Moffit [1954] 2 DLR 841 ...............................................................100 Mond v Hammond [2000] Ch 40 ................................................................156 Moore v Bathrop (1822) 1 B & C 5...............................................................25 Morice v Bishop of Durham (1805) 10 Ves 522 .............................................35 Morley v Morley (1678) 2 Ch Cas 2..............................................................16 Morley-Clarke v Jones (Inspector of Taxes) [1986] Ch 311..........................146

xviii Table of Cases Mortgage Corporation v Mitchells Robertson 1997 SLT 1305 ..........174, 184–5 Moseley v Cressey’s Co (1865) LR 1 Eq 405 ................................................115 Mycroft, Petitioner 1983 SLR 342 ...............................................................172 Nanwa Goldmines Ltd, Re [1955] 1 WLR 1080...........................................115 Napier v Public Trustee (Western Australia) (1980) 32 ALR 153..................101 National Bank of Scotland v MacQueen (1881) 18 SLR 683 .................170, 181 National Provincial Bank Ltd v Ainsworth [1965] AC 1175...........................31 National Westminster Bank v Halesowen [1972] AC 785 ............................157 National Westminster Bank plc v Somer International (UK) Ltd [2002] QB 1286...................................................................................................97 Neste Oy v Lloyds Bank plc [1983] 2 Lloyd’s Rep 658 ..........................................................17, 21, 116, 135–7, 156, 158–9 Neville Estates v Madden [1962] Ch 832 .....................................................129 Niagra Mechanical Services International Ltd (Canary Wharf Contractors (DS6) Ltd v Niagra Mechanical Services International Ltd), Re [2000] 2 BCLC 425 .................................................................................147 Noreberg v Wynrib (1992) 92 DLR (4th) 449 .................................................19 Northern Bank Ltd v Ross [1990] BCC 883 .................................................165 Northern Developments (Holdings) Ltd, In re, 6 October 1978 ...............................................................29, 47, 98, 109, 153 Osoba, Re [1979] 1 WLR 247 ................................................................14, 122 Park, Re [1932] 1 Ch 580..............................................................................73 Pascoe v Turner [1979] 1 WLR 431...............................................................22 Paul v Constance [1977] 1 WLR 527........................................................62, 79 Pennington v Waine [2002] 1 WLR 2075.......................................................22 Perowne, Re [1951] Ch 785.........................................................................128 Peter v Beblow [1993] 1 SCR 980, 101 DLR (4th) 621 ...................................116 Pettkus v Becker [1980] 2 SCR 834, 117 DLR (3rd) 257 ................................116 Pollitt, Re [1893] 1 QB 455 .........................................................................157 Polly Peck International plc (in administration) (No 2), Re [1998] 3 All ER 812 ...........................................................................................159 Practice Direction (Judicial Precedent) [1966] 3 All ER 77 ...........................151 R v Clowes (No 2) [1994] 2 All ER 316..................................................17, 147 R v Common Professional Examination Board, ex p Mealing-McCleod The Times, 19 April 2000..................................................53, 64–5, 147, 150 Recher’s Will Trusts, Re [1972] Ch 526.......................................................129 Rogers, ex p Holland & Hammond, In re (1891) 8 Morr 243...........................................................25–6, 77, 95, 153, 155, 160 Rolls Razor Ltd v Bloom, 30 July 1969 ...........................................................7 Rolls Razor Ltd v Cox [1967] 1 QB 552..........................................................6

Table of Cases xix Rose, Re [1952] Ch 499 ................................................................................22 Rose v Rose (1986) 7 NSWLR 679 ..............................................................102 Roxborough v Rothmans of Pall Mall Australia Ltd (2002) 76 ALJR 203 ...................................................................................123, 135 Royal Products Ltd v Midland Bank Ltd [1981] 2 Lloyd’s Rep 194 ..............147 Ryall v Ryall (1739) 1 Atk 59 ......................................................................116 Sanderson’s WT, Re (1857) 3 K & J 497 .......................................................14 Satnam Investment Ltd v Dunlop Heywood & Co Ltd [1999] 3 All ER 652.............................................................................................20 Saunders v Vautier (1841) 4 Beav 115; aff’d (1841) Cr & Ph 240....27–9, 85, 126 Schebsman, Re [1944] Ch 83 ...............................................................104, 124 Schmidt v Rosewood Trust Ltd (Isle of Man) [2003] 3 All ER 76 .............73, 75 Schulman v Hewson [2002] EWHC 855 .....................................................147 Seldon v Davidson [1968] 2 All ER 755 .........................................................84 Sharp v Thomson 1995 SC 455; rev’d 1997 SC 66 ....................................178–9 Sharp’s ST, Re [1973] Ch 331 .......................................................................73 Sharpe, Re [1980] 1 WLR 219.......................................................................13 Shaw, Re [1957] 1 WLR 729.......................................................36, 57, 72, 128 Shaw v Foster (1872) LR 5 HL 321 ...............................................................99 Sinclair v Brougham [1914] AC 398 ..........................................121, 132–4, 141 Smith v Hurst (1852) 10 Hare 30 ....................................................98, 105, 109 Smith v Liquidator of James Birrell Ltd 1968 SLT 174.................................183 Smith, Re (1971) 16 DLR (3rd) 130................................................................80 Sorochan v Sorochan [1986] 2 SCR 35, 29 DLR (4th) 1 ................................116 Souper v Smith 1756 Mor 744..............................................................171, 181 Space Investments Ltd v Canadian Imperial Bank of Commerce Trust Co (Bahamas) [1986] 1 WLR 1072..................................................................68 Standing v Bowring (1885) 31 Ch D 282......................................................102 Stanlake Holdings Ltd v Hammoud Financial Times, 25 June 1991 .............147 Stocznia Gdanska SA v Latreefers Inc (No 2) [2001] 2 BCLC 116.................147 Stump v Gaby (1852) 2 De GM & G 623.....................................................117 Style Financial Services Ltd v Bank of Scotland 1996 SLT 421; 1998 SLT 851 ..................................................................................175, 184 Sutman International Inc v Herbage 2 August 1991 ..........................175, 183–4 Taitapu Gold Estates Ltd v Prouse [1916] NZLR 825..................................117 Tay Valley Joinery Ltd v CF Financial Services Ltd 1987 SLT 207 ...............175 Taylor v Plumer (1815) 3 M & S 562.......................................................26, 37 Taylor v Wheeler (1706) 2 Ver 564 ...............................................................95 Tinsley v Milligan [1994] 1 AC 340.............................................................165 Toovey v Milne (1819) 2 B & A 683...................................................25–7, 155 Tribe v Tribe [1996] Ch 107 .......................................................................165 Triffit Nurseries Ltd v Salads Etcetera Ltd [2000] 2 All ER Comm 737 .....135–6

xx Table of Cases Trusts of the Abbott Fund, Re [1900] 2 Ch 326 .............................................14 Tulk v Moxhay (1848) 2 Ph 774 ..............................................................25, 96 Turner v Turner [1984] Ch 100 ...............................................................70, 72 Tutt v Doyle (1997) 42 NSWLR 10 .............................................................117 Twinsectra Ltd v Yardley [2002] 2 AC 164........i, 6, 11, 16–17, 19, 24, 27, 41–3, 46–7, 49–56, 58–61, 63, 65–7, 69, 75, 77–8, 82, 84, 88–9, 92–3, 96, 103, 105, 111, 116, 121, 124–9, 132, 136, 139, 141–2, 146–9, 153, 165, 184 US v Jones (1915) 236 US 106 .....................................................................117 Vandervell v IRC [1967] 2 AC 291 ........12, 22, 35–8, 51–2, 61, 83, 110, 116, 137 Vandervell’s Trust (No 2), Re [1974] Ch 269 .........................................51, 107 Vatcher v Paull [1915] AC 372......................................................................70 Venture, The [1908] P 218 ............................................................................12 Verrall v Great Yarmouth BC [1981] QB 202................................................86 Vinogradoff, Re [1936] WN 68.....................................................................12 Walsh v Lonsdale (1882) 21 Ch D 9 ..............................................................23 Watson, Re (1912) 107 LT 96; aff’d (1912) 107 LT 783..........................................................25, 30, 78, 91, 95, 153, 155, 160 Westdeutsche Landesbank Girozentrale v Islington LBC [1996] AC 669........................................12, 35, 61, 121, 132–7, 140, 142, 158 Williams & Glyn’s Bank Ltd v Boland [1981] AC 487 ...................................12 Winter Garden Theatre (London) Ltd v Millennium Productions Ltd [1948] AC 173.....................................................................................31, 48 Wood v Leadbitter (1845) 13 M & W 838.....................................................48 Wood v R [1977] 6 WWR 273, 9 AR 427 ......................................................81

Table of Legislation Australia Bankruptcy Act 1966 s 122.......................................................................................................161 Companies Code s 451.......................................................................................................161

Canada Matrimonial Property Act 2000 (Alberta) s 36 ..........................................................................................................83 Perpetuities Act 1990 (Ontario) s 16 ..........................................................................................................81 Residential Tenancies Act 2000 (Alberta) s 46(2) ....................................................................................................119

New Zealand Property Law Act 1952 s 49A(3)..................................................................................................109

United Kingdom Bankruptcy Act 1869 ..................................................................................162 Bankruptcy Act 1883 s 4(1)(g) ..................................................................................................155 s 43 ........................................................................................................155 s 49 ........................................................................................................156 Bankruptcy Act 1914 s 1(1)(g) ..................................................................................................155 s 31 ........................................................................................................156 s 37 ........................................................................................................155

xxii Table of Legislation s 44 ........................................................................................................161 (1).....................................................................................................161 s 45 ........................................................................................................156 Bankruptcy (Scotland) Act s 33(1)(b) ................................................................................................171 Charities Act 1993........................................................................................81 Companies Act 1948 s 165(1)(b)..................................................................................................6 s 212.......................................................................................................161 s 302.......................................................................................................158 s 320.......................................................................................................158 s 495.......................................................................................................163 Companies Act 1985 s 395.......................................................................................................163 s 458.......................................................................................................164 Contract (Rights of Third Parties) Act 1999..................................................24 Conveyancing and Feudal Reform (Scotland) Act 1970 s 27 ........................................................................................................173 Enterprise Act 2002 ....................................................................................166 s 250.......................................................................................................167 Estate Agents Act 1979 ...............................................................................174 s 13(1) ....................................................................................................175 (2) ....................................................................................................175 Insolvency Act 1986 .....................................................................2, 153, 161–2 s 72A......................................................................................................167 s 74(2)(f).................................................................................................161 s 107.......................................................................................................154 s 127.......................................................................................................155 s 213.......................................................................................................164 s 214.......................................................................................................165 s 239(4) ..................................................................................................158 (5) ..................................................................................................158 s 240(1)(a) ..............................................................................................158 s 283(3)(b) ..............................................................................................153 s 284.......................................................................................................155 s 328(3) ..................................................................................................154 s 436 ........................................................................................................59 Insolvency Rules 1986 r 4.90......................................................................................................156 r 4.181 ....................................................................................................154

Table of Legislation xxiii Law of Property Act 1925 s 53 ..........................................................................................................83 (1)(c)....................................................................................35, 106, 109 s 60(3) ......................................................................................................83 Solicitor’s Accounts Rules 1986 rr 3–7 .......................................................................................................63 Trustee Act 1925 s 31(2)(i)(b) ..............................................................................................73 Trusts (Scotland) Act 1961 s 2 ..........................................................................................................180 Variation of Trusts Act 1958 ........................................................................73 Wills Act 1837 ...............................................................................80, 104, 108

1

Rolls Razor Ltd ROBERT STEVENS

was incorporated in 1921 to manufacture razors. The razor had an everlasting blade, unlike modern expendable safety razors, and a sharpening mechanism based upon a roller, from which the company took its name. It continued to manufacture them at its Cricklewood factory until the 1950s, but then fell upon hard times, partly due to the arrival on the market of electric razors. In 1958, the company attempted to diversify into washing machines, marketing a model called the Foamatic. It was not a success. Between 1954 and 1959, the company lost around £300,000. Without the intervention of John Bloom, it would probably have been put into liquidation. John Bloom was born in the East End of London in 1931. His schooling was at Hackney Downs Grammar, which closed in 1995, having been labelled by some sections in the press as the worst school in Britain. Bloom did his national service in the RAF. After demobilisation, he tried several different business schemes. A haulage business and the selling of paraffin door to door proved unsuccessful. He then hit upon the idea of the direct selling of twin tub washing machines. Unlike modern automatic machines, twin tubs had two separate tubs set on the top of the machine, one for washing, the other for spinning. Bloom found a supplier in the Netherlands who was prepared to sell him the machines, called Electromatics, for around £23 each. He sold two versions, one for 49 guineas, and a deluxe model for 59 guineas. In order to trade, he formed the Electromatic Washing Machine Company Ltd. His success came very quickly and was founded on two factors. First, the price of his machines was very low, around half what was being charged by Hoover and Hotpoint, the market leaders. This, coupled with selling on hire purchase terms, meant that the washing machine was no longer a luxury item but affordable by the average housewife. Second, the machines were sold direct by advertising in the daily press, thereby avoiding the costs of selling through retailers. The machines were light enough to be moved and demonstrated by a single salesman. Once in the door, the salesman usually persuaded the housewife that she really needed to buy the more expensive deluxe version with heater rather than the heavily promoted ordinary model (the so called ‘switch selling’ technique). By May 1958, Bloom had a team of sixty salesmen. An advertisement on the back page of the Daily Mirror in September 1958 led to over 8,000 enquiries. By

R

OLLS RAZOR LTD

2 Robert Stevens the following September, he was selling 400 machines per week, as many as his Dutch manufacturers could supply. Bloom needed more machines. Rolls Razor could be used to assist in the manufacturing of the machines and, more importantly, the financing of getting more. Rolls Razor Ltd was a public limited company quoted on the Stock Exchange and therefore ideal for both purposes. Association with the entirely unconnected company of Rolls Royce was also seen as beneficial. In November 1960, a company called Equity and Share Company (London) Ltd acquired the entire issue of 3 million one shilling shares for £150,000. Subsequently, the assets of Electromatic were sold to Rolls Razor in return for those 3 million shares. The Stock Exchange suspended dealings in Rolls Razor shares at the beginning of 1960, but in May 1962, Rolls was allowed to offer 500,000 one shilling shares at a minimum price of 20 shillings per share through Kleinwort Benson. The fraud involved in the acquisition of Rolls Razor and its quotation on the Stock Exchange is outlined by the liquidator of Rolls Razor, Sir Kenneth Cork:1 When Bloom sold Electromatic to Rolls Razor it was no longer the practice to value a company by its assets. What a company was worth, when it came to selling it, was a matter of multiplication of profits. So if Bloom could augment Electromatic’s profits he could demand more Rolls Razor shares for it than, to put it mildly, was reasonable. John Bloom invented a new kind of fraud. He had to get, and keep his quote on the Stock Exchange, and he needed financial capital both for himself and his company. . . . John Bloom’s profits in these opening stages were reasonably small. What did he do? He formed a new company . . . with practically no share capital, which he owned personally. Then he charged the greatest expenses to that company. For instance purchase tax, advertising, and items like that . . . The result was that when profits were disclosed in the manufacturing company they were magnified enormously; in fact the market price increased by ten times the amount that he had paid himself. Then when the operation was over, he sold sufficient of his shares at the advanced price to put the money into his own little company to pay for the expenses which had been paid on behalf of the manufacturing company!2

Bloom was made managing director of Rolls Razor in March 1960 and given complete control over production at the Cricklewood factory. Unfortunately, the Dutch suppliers of the Electromatic and a group of Bloom’s staff broke away to form their own company selling Duomatic washing machines, a brand name which survives to this day. Bloom was forced to move the bulk of his production to Cricklewood. Unfortunately, the Rolls Electromatic machines were 1 Sir Kenneth Cork, Cork on Cork (London, 1988). Kenneth Cork was the foremost insolvency practitioner of his generation. His firm, Cork Gully, now part of Price Waterhouse Coopers, carried out the most important liquidations of the 1970s. He chaired the Insolvency Law Review Committee, the recommendations of which led to the Insolvency Act 1986: Insolvency Law and Practice, Report of the Review Committee (Cmnd 8558, 1982). He was subsequently Lord Mayor of London. 2 This form of creative accountancy resembles the more complex fraud involving Enron’s use of Special Purpose Entities: Report of Investigation by the Securities Investigative Committee of Enron Corp (The Powers Report) 1 February 2002.

Rolls Razor Ltd 3 unreliable, with a tendency to flood. The next model adopted a new name, the Starmatic, but these were prone to explode and were returned at almost the rate they were sold. Subsequent models, however, the Rolls 66, Rolls Rapide Deluxe and the Rolls Concorde, saw improvement. Sales steadily grew. Bloom reckoned that sales of 29,000 units in 1960 had more than doubled to 68,000 the following year, and by the end of 1962, had reached 101,000. At one point, Rolls Razor overtook Hotpoint to become the second largest supplier of washing machines in the United Kingdom. Richard Reader Harris, Conservative Member of Parliament for Heston and Isleworth, became Chairman in March 1961, his appointment acting as a counterbalance to the perception of Bloom as an arriviste. In 1962, Sir Isaac Wolfson’s General Guarantee Corporation agreed to provide Rolls Razor with hire purchase facilities of up to £10 million on a revolving credit basis. Bloom was given a seven-year contract at a salary of £15,000 per annum, the use of a Rolls Royce car, and a Park Lane apartment. His wealth led to fame. In his autobiography, It’s No Sin to Make a Profit,3 he claims to have mixed with a large number of celebrities of the 1960s: Peter Ustinov, Terence Stamp, Lionel Bart, Joe Loss, Tommy Steel, Bernard Bresslaw, Billy Wright, Sean Connery, Shirley Bassey, Adam Faith, Charlie Drake, three of the Beatles, and Robert Maxwell. Bloom courted publicity. He married Anne Cass in February 1961, the wedding stage managed for maximum effect, with the cake consisting of a giant replica of the Rolls washing machine. Pictures of the bride and groom cutting the cake appeared on the front page of the Daily Mirror. Like other tycoons, he became interested in football, becoming a director of Queens Park Rangers and making a highly publicised attempt to take over the club. Bloom’s profile was further raised by his tangential involvement in the Blue Gardenia Club murder trial. In September 1962, Harvey Holford, owner of the club, killed his wife, Christine. He was eventually convicted of manslaughter. Before the trial, he issued a writ against Bloom, alleging that he had enticed away his wife. The story was front page news in the tabloid press and cannot have enhanced Bloom’s image in the City, where he was already perceived as an upstart. To cope with demand, the bulk of production of the washing machines was moved in March 1963 to the Swansea works of Pressed Steel Ltd. Bloom also acquired Bylock Electrical Ltd, a manufacturer of the motors in many of his products. However, orders could only be met by sacrificing quality, leaving Rolls Razor with a poor image of reliability. Automatic washing machines had started to come on to the market in the early 1960s. Bloom ordered his production engineers to develop a Rolls Razor automatic, though none had appeared by the summer of 1964. Further, Bloom’s condition that the machine be capable of being transported and demonstrated by a single salesman was to prove impractical. Bloom’s competitive edge was also fast disappearing. The major 3

J Bloom, It’s No Sin to Make a Profit (London, 1971).

4 Robert Stevens manufacturers, Hoover and Hotpoint, realised that they could not go on attempting to sell at the high prices they had charged in the past and started to sell much cheaper machines. Retailers, aware that direct selling could put them out of business, also responded with lower prices. Other players also copied Bloom’s techniques. By 1964, another direct-selling competitor was offering a fully automatic machine for 10 guineas less than Rolls Razor’s deluxe model. 1964 saw a sharp falling off of sales: 18,600 in March, 13,800 in April, and only 8,800 in June. By this stage, production was geared to over 5,000 units per week. With the enormous advertising costs involved, each machine was now being sold at a substantial loss. In an attempt to replicate his earlier success, Bloom diversified into other ventures. Rolls Rentals Ltd was formed to promote the rental of television sets. Rolls Photographic Ltd sold home movie kits and still cameras. Most infamous of all was Rolls Tours Ltd, formed to sell package holidays to Bulgaria. The beaches of Bulgaria are indeed beautiful, but 2,000 mile trips by coach across the Iron Curtain did not prove entirely successful. A Private Eye front cover featured The Wreck of the Medusa, with the speech bubble: ‘That is the last time I book a John Bloom holiday!’4 Bloom even bought his own trading stamp company, the Golden Eagle, from Sir Isaac Wolfson, putting his own face, with trademark goatee beard, on the stamps. In the April 1964 edition of the consumer magazine Which?, the twin tub machine of a competitor was severely criticised. These machines were then dumped on the market at reduced prices (39 guineas), further hitting sales of Rolls Razor’s 59 guinea machines. Rolls Razor’s machines were subsequently criticised in an edition of the BBC consumer watchdog programme, Choice. This seems to have been the catalyst for the loss of confidence in the company.5 By ‘the Spring of 1964 Rolls Razor was in Queer Street.’6 The situation was chaotic: ‘most of the paperwork was never properly executed and minutes rarely acted on in the way intended.’7 Unfortunately, Bloom and the other directors were in a state of denial. On May 14, 1964, the directors approved the accounts for the year ending December 31, 1963 and resolved to recommend a final dividend of 120 per cent, making a total dividend of 200 per cent for that year. On the same day, Patrick Hutber was appointed ‘financial co-ordinator’, a role with no defined duties. Hutber forecast a trading profit of £125,000 to the end of March 1964, and a total profit of £500,000 for the year. In fact, the accounts showed a loss for the first three months of £179,000, a figure that the liquidator subsequently said should have been put much higher.8 By June 4, 1964, Rolls Razor’s overdraft with its bank amounted to £484,000, against a limit of £250,000. Its subsidiary, Bylock Electric Ltd, was close to collapse. The 4 5 6 7 8

Private Eye, No 65, 2 June 1964. Benson, Accounting for Life (London, 1989), 142. Barclays Bank Ltd v Quistclose [1968] 1 Ch 540, 548 (Harman LJ). Above n 1 p 63. Above n 1 p 63.

Rolls Razor Ltd 5 bank wrote to Rolls Razor threatening to refuse to allow the continuation of the business unless the overdraft position improved by the end of the month. At a general meeting of July 2, 1964, the recommended dividend was approved, to be paid on July 24. At a board meeting the next day, Bloom told his fellow directors that Rolls Razor needed an immediate cash injection of £1.5 million and that he had so far failed to secure underwriting facilities for an issue of that size. One director, Jack Jacobs, said that unless permanent finance was forthcoming the board must recommend liquidation. John Bloom was at the time in discussions with the financier Sir Isaac Wolfson, the mysterious Mr ‘X’ of Harman LJ’s judgment,9 for a loan of £1 million from his firm, General Guarantee Corporation.10 As Wolfson was making large profits through the hire purchase contracts entered into by the purchasers of Rolls Razor machines, he had an obvious interest in keeping the ailing golden goose alive for as long as possible. By a memorandum of July 9, 1964, one of the suggested conditions of the financing was that the dividend would be paid. Quistclose Investments Ltd was a shell company through which John Bloom lent Rolls Razor the money to pay the dividend.11 The source of the funds was John Bloom. Exactly where Bloom obtained the money from is uncertain, though Cork states that it was lent to Bloom by Barclays Bank.12 This might be a mistake on his part. On 15 July, 1964, Quistclose drew a cheque for £209,719 8s 6d in favour Rolls Razor Ltd. Following a meeting between a Mr Goldbart, a director of Rolls Razor, and a representative of Barclays Bank, the cheque was presented to the bank with a covering letter stating that the money was to be paid into a No 4 ordinary dividend share account and was only to be used for the payment of the dividend. On July 16, 1964, Quistclose Ltd’s account was debited and the next day Rolls Razor’s No 4 account was credited. Perhaps surprisingly, Bloom showed such confidence that all would be well that he took a plane to Bulgaria on 11 July, where he stayed aboard his £300,000 yacht, The Arianne, in order to make holiday arrangements for Rolls Tours. At a board meeting of Rolls Razor on 17 July, Claude Miller, a ‘financial adviser’ employed by Rolls Razor for a fee of £25,000 for five years (payable in advance), informed the board that Rolls Razor was hopelessly insolvent and that the company should be wound up voluntarily immediately. The board, without the guidance of their managing director, felt obliged to accept this advice and issued a statement to the press and to the Stock Exchange. Upon his return on 20 July, Bloom was left with no choice but to accept what had been done. That same day, Barclays informed Rolls Razor that it was exercising its right to combine all its accounts, saving for the moment the No 4 ordinary share dividend account. 9 10 11 12

Barclays Bank Ltd v Quistclose Ltd [1968] 1 Ch 540, 549. Cork, above n 1 p 64; Bloom, above n 3 p 8. Bloom, above n 3 p 207, 234, 250; Cork, above n 1 p 64. Cork, above n 1 p 66.

6 Robert Stevens On 25 July, Edward Heath, the then President of the Board of Trade, ordered the appointment of inspectors under section 165(1)(b) of the Companies Act 1948 to enquire into the affairs of Rolls Razor. Morris Finer QC (later Finer J) and Henry Benson (later Lord Benson) were appointed by the Companies Inspection Branch. They reported, after taking a great deal of evidence, on 30 November 1965. The Report was not published because of fears that it might prejudice any subsequent criminal proceedings.13 The Companies Investigation Branch is now part of the Department of Trade and Industry. Enquiries have led to the Report being searched for unsuccessfully. Unlike a large number of other documents concerning Rolls Razor, the Report is not held at the Public Records Office. The accountants Cork Gully were approached to produce a Statement of Affairs for submission to a creditors’ meeting. They reported a total deficit of more than £4 million. Barclays Bank were reasonably protected for, whilst owed £455,000, they had taken a fixed charge over the Cricklewood factory, then valued at £427,000.14 The position of Rolls Razor’s team of salesmen was considerably less happy.15 Many were owed a substantial proportion of the commission they had earned as Rolls Razor had ‘retained’ these sums as security against default by the salesmen. They were not entitled to preferential treatment in the winding up as they were independent contractors. As the bank was largely secured, the major losers from the litigation in Barclays Bank v Quistclose Investments Ltd were the unsecured creditors, who were as a result to receive nothing from the sale of the Cricklewood premises. Before the House of Lords, the interests of the unsecured creditors were unrepresented, although counsel for the liquidator had appeared at first instance and before the Court of Appeal. At the shareholders meeting in the Kingsway Hall on 27 August, Bloom was far from friendless. Whilst the salesmen outside jeered him, a slight majority of shareholders in a floor vote were against liquidation: 74 to 72. However, a proxy vote disclosed an overwhelming majority in favour of liquidation. Bloom himself was the largest single shareholder, with 500,000 shares.16 He had previously held a much larger shareholding. The winding up was finally completed in 1980, with creditors paid a dividend of just under 12 (new) pence in the pound. The criminal charges against John Bloom were brought to trial in 1969. He was charged with seven counts of fraud. The difficulties of bringing a complex fraud case to trial five years after the event, and the additional problem of finding reliable oral witnesses, are obvious. In an early example of plea bargaining, Bloom pleaded guilty to two counts and was fined £30,000. Fining someone such as Bloom seems particularly pointless. If declared bankrupt, the fine would 13

H Benson, Accounting for Life (London, 1989), 143. Cork, above n 1 p 66. The bank does not appear to have taken a floating charge over the entire undertaking: cf Twinsectra v Yardley [2002] UKHL 12, [2002] AC 164, 191, per Lord Millett, though this does not undermine the force of Lord Millett’s point. 15 See Rolls Razor Ltd v Cox [1967] 1 QB 552. 16 Cork, above n 1 p 68. 14

Rolls Razor Ltd 7 remain payable and enforceable, its burden consequently falling on his unsecured creditors. Only one civil action was successfully brought against Bloom. An action for breach of warranty in relation to the sale of Electromatic to Rolls Razor resulted in a judgment for £51,195 5s 5d.17 Another action, brought by the liquidator on behalf of the company against Bloom for misfeasance, was commenced but not pursued to trial. The liquidator commenced several actions against the company’s professional advisers, including Kleinwort Benson and Price Waterhouse, for negligence. These actions were also not pursued to trial. The major losses were, however, caused by the directors’ share dealings. These losses were suffered not by the company but by the other shareholders, who were left with nothing. John Bloom’s subsequent career was also colourful, if less legally interesting. He ran a number of clubs, including the Crazy Horse Saloon in the West End of London, where he had a notorious affair with a waitress, the implausibly named Miss Lovebody. He appears to have been forced out by a gangster, Jo Wilkins. In 1972, he opened a chain of Merrie England restaurants around Los Angeles. His house was raided by the FBI, and in March 1979 he was given a suspended sentence for making pirated video copies of the film Star Wars.18 He then left for Majorca, where he opened a bar/restaurant. Here the trail goes cold. It would be a mistake to consider Bloom to be a villain in the same class as Robert Maxwell. The verdict of Sir Kenneth Cork was that John Bloom was not ‘a particularly attractive character, but with all the bad advice he had to suffer and his inability to see it as such I could not but have a certain sympathy for him.’19 Bloom succeeded in breaking into a market and radically lowering prices. Like Sir Freddie Laker twenty years later, he was not the one to take the benefit from the market he transformed. The major beneficiary was the consumer.

17 18 19

Rolls Razor Ltd v Bloom (30 July 1969) (Fisher J). Cork, above n 1 p 68. Cork, above n 1 p 60.

2

Orthodoxy WILLIAM SWADLING

great difficulties with the decision of the House of Lords in Barclays Bank Ltd v Quistclose Ltd1 is squaring it with orthodox principles of trusts law. This chapter takes the view that it cannot be done. It mounts a sustained assault on the decision and the case-law it relies on. By examining the precise grounds on which the trust was found in that case, it concludes that the House of Lords fell into error and that the priority thereby given to the lender was undeserved. A number of distinguished commentators, most notably Lord Millett and Professsor Chambers, have attempted to rescue Quistclose by explaining the result on different grounds. This chapter takes the view that those explanations are also flawed.

O

NE OF THE

I : THE QUISTCLOSE TRUST ( S )

Rolls Razor Ltd, a company in the empire of the notorious John Bloom, was in desperate financial straits. It had declared a generous dividend for its shareholders of £209,719 8s 6d, though it did not have the wherewithal to pay it. Worse still, its overdraft limit of £250,000 had been exceeded by a factor of almost two, and its bankers, Barclays, were refusing to lend any more. Fortunately, a mysterious and unnamed person2 agreed to lend Rolls Razor a huge sum of money (around £1,000,000), provided only that it first found the funds to pay the dividend. Bloom arranged for another company in his group, Quistclose Ltd, to lend Rolls Razor the money, and a note that the loan was made to Rolls Razor ‘for the purpose of that company paying the final dividend due on July 24 next’ was recorded in the board minutes of Quistclose. Payment to Rolls Razor was made by cheque, which Rolls Razor passed to Barclay’s, telling them of the purpose of the loan, instructing them that it was to be used only for that purpose, and requesting that a separate account be opened, and the money paid into it. Not long afterwards, and before the dividend had been paid, 1

[1970] AC 567. This turns out to have been Sir Isaac Wolfson. Wolfson had an interest in keeping Rolls Razor Ltd afloat as it was his firm which supplied the credit for Rolls Razor’s customers. Details in ch 1 of this volume: p 5. 2

10 William Swadling Rolls Razor went into voluntary liquidation. Barclay’s, relying on its right of set-off,3 thereupon sought to offset the positive balance in the new account with the negative balance in Rolls Razor’s other accounts. Quistclose argued that the chose in action represented by the positive balance in the new account was, in the events which had happened, now held for them by Rolls Razor on trust. And given that Barclay’s had notice of that trust, they could not claim the benefit of the chose in action for themselves. The House of Lords agreed. Lord Wilberforce, with whom Lords Reid, Morris of Borth-y-Gest, Guest, and Pearce agreed, concluded: . . . arrangements of this character for the payment of a person’s creditors by a third person,4 give rise to a relationship of a fiduciary character or trust, in favour, as a primary trust, of the creditors, and, secondarily, if the primary trust fails, of the third person. . . .5

We will consider the two trusts Lord Wilberforce describes, the ‘primary’ trust and the ‘secondary’ trust, in turn.

II : THE PRIMARY TRUST

There is no doubt but that the right held by Rolls Razor, the benefit of the chose in action against Barclay’s, was capable of forming the subject-matter of a trust.6 The difficult question is why it was held on trust rather than outright.7

1. The causative event Rights do not arise spontaneously but respond to events which happen in the world. If I carelessly run you down and cause you physical injury, you are given a right against me in damages. In the same way, the placing of rights behind a trust is not a spontaneous occurrence. It too is a response to events. The most common event by which a trust arises is a conveyance of rights to another with an expression of intent by the transferor that the transferee hold them, not for himself, but for another.8 Alternatively, a right-holder might declare himself a

3

Presumably conferred on Barclays by virtue of its contract with Rolls Razor. This was not the facts of Quistclose, for the payment, if made, would not have been of Rolls Razor’s creditors by Quistclose but by Rolls Razor itself. 5 [1970] AC 567, 580. 6 Lawyers often talk about the subject-matter of a trust as the ‘trust property’. However, there is no requirement that the subject-matter be property rights. Many personal rights, such as the benefit of a loan, can also be held on trust. 7 Although Lord Wilberforce talks of ‘fiduciary relationship’ and ‘trust’ as alternatives, only the latter could give Quistclose the priority it sought. 8 It is assumed for the moment that a trust must have a person as its object. The question of trusts for purposes is addressed below: text to nn 114–24. 4

Orthodoxy 11 trustee. In both cases, the law responds to a manifestation (declaration) of consent on the part of a right-holder to create a trust. Though that declaration needs normally to be proved to have taken place, in a few limited instances courts will presume a declaration to have been made.9 But a presumed declaration is just as much a manifestation of consent as a proven declaration. For ease of exposition, we will therefore call all declared trusts, proven or presumed, ‘consent’ trusts. But events other than manifestations of consent can cause rights to be placed behind a trust. A clear example is the trust which arose in A-G for Hong Kong v Reid.10 There, a high-ranking government official who took bribes to suppress criminal prosecution was turned by the court into a trustee of the bribe moneys for his employer. This trust undoubtedly arose in response to an event which was not a manifestation of consent to create a trust. Those who transferred the rights to Reid, criminal gangs in Hong Kong, intended Reid to hold them for himself, not the Hong Kong Government. And Mr Reid at no point declared himself a trustee of his rights for the Hong Kong Government. Nor did the facts bring it within one of the situations in which courts presume that a declaration of trust was made.11 The trust in Reid can only have arisen because of an event which had nothing to do with a manifestation of intent to create a trust. It is therefore an unequivocal example of what we will call a ‘not-consent’ trust.12 One of the most difficult questions which can be asked about the primary trust in Quistclose is whether it was a consent trust or a not-consent trust. The answer has not been spelt out in any case, and it is interesting to note that counsel for the lender in Twinsectra Ltd v Yardley, at least in the Court of Appeal,13 described the trust argued for as an express/implied/constructive/bare trust. He was, in other words, arguing for a consent/not-consent trust. We have to do better than that. And we do so by first asking whether the trust can be seen as one arising because of a manifestation of consent. If this is not possible, we ask whether the trust in Quistclose is consistent with any of the situations in which not-consent trusts presently arise. i. Identifying the primary trust We need to first know exactly what it was that was held on trust and by whom. We also need to know the identity of the settlor. We will leave to one side the 9

Below, text to nn 16–22. [1994] 1 AC 324. 11 Enumerated below at text to nn 16–22. 12 It might be asked why such trusts are not called ‘constructive’ trusts. The reason is the inherent ambiguity in the word ‘constructive’ (LD Smith, ‘Constructive Trusts and Constructive Trustees’ [1999] CLJ 294) and its consequent loose usage by the courts, as witness the so-called ‘common intention constructive trust’. 13 [1999] Lloyd’s Rep Bank 438, 449. The arguments of counsel in the House of Lords are, unfortunately, not separately reported: [2002] 2 AC 164, 166. 10

12 William Swadling objects of the trust for the moment. The subject-matter of the trust was the chose in action Rolls Razor held against Barclays, which arose when Rolls Razor lent to Barclays the money they had in turn borrowed from Quistclose. And the trustee could only be Rolls Razor, for it alone held the benefit of the chose in action. It could not be Barclays, for the burden of an obligation cannot form the subject-matter of a trust; though I might declare myself a trustee of money owed to me, I cannot declare myself a trustee of money I owe to others.14 And assuming for the moment that this was a consensual trust,15 the settlor, the person creating the trust, must have been Quistclose, the transferor of the right. If Rolls Razor was to be considered as having declared itself trustee for the dividend creditors, it would have been a fraudulent preference. ii. Is the primary trust a consent trust? Presumed Consent At the outset, we can say that this was not one of those situations in which a declaration of trust is presumed. Those situations are threefold: where there is a gratuitous transfer of rights to a person not the wife or child of a male transferee;16 where a purchase of rights is made in the name of another;17 and where part of the purchase price is provided but title is taken in the name of another.18 Like all presumptions of fact, the presumption that a trust was declared will not arise where evidence before the court proves that a declaration was not in fact made.19 There are at least two reasons why the facts of Quistclose do not fall within one of these three facts situations. First, the presumption only arises where the full facts are not before the court.20 The presumption arises to fill a gap in the evidence, and here there was no lacunae to fill.21 Second, the transfer of rights was made for consideration: there was an obligation to repay the amount borrowed. Courts do not presume that a declaration of trust was made in situations in which money has been advanced by way of loan, for if the purchaser was to 14 Lord Wilberforce seemed to treat Barclays as a trustee, for he says that it is important to ask whether it had notice of the terms on which the loan was made: [1970] AC 567, 579, 582. This is strange. If a right is held by a person as trustee, it is simply not available to pay that person’s creditors. It is of course different if it has been so applied, and the question then is whether the creditor can claim to be a bona fide purchaser for value without notice. But prior to such application, questions of notice can have no relevance. 15 There is no possibility of finding a settlor where the trust is a not-consent trust. 16 As, eg, in Re Vinogradoff [1936] WN 68. 17 Dyer v Dyer (1788) 2 Cox 92. 18 As, eg, in Williams & Glyn’s Bank Ltd v Boland [1981] AC 487. 19 Westdeutsche Landesbank Girozentrale v Islington LBC [1996] AC 669, 708 (Lord BrowneWilkinson). 20 As was clearly the case in The Venture [1908] P 218, where it was unclear whether money used to buy a yacht was transferred by way of gift, loan, or purchase. 21 Vandervell v IRC [1967] 2 AC 291, 329 (Lord Wilberforce). This case is discussed in more detail below: text to nn 149–70.

Orthodoxy 13 have an interest in the fund as well as a right to be repaid, he would ‘get his money twice: once on repayment of the loan and once on taking his share of the . . . property.’22 The reason why advancement by way of loan does not give rise to a presumption that a trust of the transferred funds was declared by the lender in his own favour is that proof of an agreed debtor/creditor relationship itself resolves any ambiguity over the capacity in which the transferee received the funds. Receipt on loan is proof that he took absolutely and not as trustee. Proven Consent If it was a consent trust, then we need to find on the proven facts an intent by Quistclose to vest the rights in Rolls Razor as trustee rather than absolutely. The clearest way for a right-holder to demonstrate that he intends to make another a trustee is to use the word ‘trustee’ to describe that other. No such words were used in Quistclose. This is not necessarily fatal to the finding of an intention to create a trust. Where we do not have the use of the word ‘trust’, what is needed are words indicating that the transferor is obliged to hold the rights received on behalf of another, not himself. An expression of desire to benefit another will not be enough.23 At the very least, the words must be imperative.24 The problem here, of course, is that no words whatever were used by Quistclose to indicate that the rights vested in Rolls Razor were to be held for anyone other than Rolls Razor itself. All we have is a note in the lender’s board minutes that the loan was made for the purpose of enabling Rolls Razor to pay the dividend; it was never a condition of the loan that it would be so used. Of course, the terms on which Rolls Razor lent the money to Barclay’s did state that the chose in action could only be applied to the discharge of this particular debt. And by a remarkable process of interpretation, Lord Wilberforce seized on this to ascribe to Quistclose the same intention: It is not difficult to establish precisely upon what terms the money was advanced by [Quistclose] to Rolls Razor Ltd. There is no doubt that the loan was made specifically in order to enable Rolls Razor Ltd to pay the dividend. There is equally, in my opinion, no doubt that the loan was made only so as to enable Rolls Razor Ltd to pay the dividend and for no other purpose. This follows quite clearly from the letter of Rolls Razor Ltd to the bank of July 15, which letter, before transmission to the bank, was sent to [Quistclose] under open cover in order that the cheque might be (as it was) enclosed in it. The mutual intention of [Quistclose] and of Rolls Razor Ltd, and the essence of the bargain, was that the sum advanced should not become part of the assets of Rolls Razor Ltd, but should be used exclusively for payment of a particular class of its creditors, namely, those entitled to the dividend.25 22

Re Sharpe [1980] 1 WLR 219, 223 (Browne-Wilkinson J). Thus, the words ‘in full confidence that [my widow] will do what is right as to the disposal thereof between my children, either in her lifetime or by will after her decease’, in that they did not impose an obligation on the transferee to hold for another, were held not to create a trust: Re Adams & Kensington Vestry (1884) 27 ChD 394. 24 Re Johnston [1939] 2 All ER 458, 460 (Crossman J). 25 [1970] AC 567, 579–80. 23

14 William Swadling But even if Lord Wilberforce was right to ascribe the intentions of Rolls Razor to Quistclose, the question is whether those intentions comprised an intention to constitute Rolls Razor a trustee of the right transferred. The words may have been imperative, but that fact alone is not enough. If I order a new computer and make it a term of the contact that it must arrive by next Monday, I do not thereby create a trust, for I say nothing about rights being held by one person on behalf of another. And neither does an intention that the money be used for no other purpose than the payment of a dividend indicate an intention to create a trust, for, whatever else those words might mean,26 they do not say that the rights transferred are not to be held outright by the transferee. They speak only to the ends to which the rights should be applied, which is a completely different thing. An example will illustrate. Suppose my teenaged son proposes to buy himself a motorbike. Worried for this safety, I promise to buy him a safety helmet if he will agree to never to ride the bike over the applicable speed limit. Can it realistically be said that by so agreeing he has declared himself a trustee of the bike? And the position can no different where, instead, I buy the bike and transfer it to him on exactly the same condition. Are we really saying that by agreeing to a restriction on its use my son thereupon ceases to hold his rights in the motorbike for himself? That he now holds them on trust? Not surprisingly, there are a number of cases, none of which were cited to the House in Quistclose, where a condition of use attached to a transfer has been held not to evidence an intention to create a trust.27 They lay down the following rule: where the whole of a sum is given for a particular purpose, the transfer is seen as absolute.28 Where, however, only part of a larger sum is to be used for that purpose, the transfer of that part is absolute and the remainder returns to the transferor.29 Thus, the purpose, where it is operative, is seen merely as defining the subject-matter of the gift; it in no way creates a purpose trust. The purpose is seen as either the motive for the gift or as defining the subject-matter of that gift. As Buckley LJ explained in re Osoba:

26

The actual meaning of the words is discussed below, text to n 52. Prominent examples are: Re Bowes [1896] 1 Ch 507; Re Andrew’s Trust [1905] 2 Ch 48; Re Lipinski [1976] Ch 235; Re Osoba [1979] 1 WLR 247. 28 The leading case is Re Sanderson’s WT (1857) 3 K & J 497 where Page-Wood V-C, at p 503, gave the rule of construction for transfers for purposes: If a gross sum be given . . . and a special purpose assigned for that gift, this Court always regards the gift as absolute. . .; while, on the other hand, if a portion only of the fund is given for maintenance, then they are entitled to draw out so much only as may be necessary for the purpose specified . . . Thus, where there is the gift of a sum to apprentice a child, or to buy a commission for a son, the Court gives effect to the entire gift; and whether the sum can or cannot be applied for the purpose of buying the commission or apprenticing the child, the Court holds that the child is entitled to the whole of it. On the facts of re Sanderson itself, the second construction was adopted. 29 As in re Trusts of the Abbott Fund [1900] 2 Ch 326. 27

Orthodoxy 15 If a testator has given the whole of a fund . . ., whether directly or through the medium of a trustee, he is regarded, in the absence of any contra indication, as having manifested an intention to benefit that person to the full extent of the subject matter, notwithstanding that he may have expressly stated that the gift is made for a particular purpose, which may prove to be impossible of performance or which may not exhaust the subject-matter. . . . This is because the testator has given the whole fund; he has not given so much of the fund as will suffice or be required to achieve the purpose, nor so much of the fund as a trustee or anyone else should determine, but the whole fund. This must be reconciled with the testator’s having specified the purpose for which the gift is made. This reconciliation is achieved by treating the reference to the purpose as merely a statement of the testator’s motive in making the gift.30

It might be argued that Quistclose is different, for here the dedication of the fund to the particular purpose was an enforceable term of a contract of loan. We have already seen that, on the actual facts of Quistclose, this was not actually true. But, even if it was, this contractual enforceability cannot show an intention to create a trust, for if a non-contractual expression of a purpose is not an expression of an intention to create a trust, the same intention now incorporated as a term of a contract is not an intention to create a trust either. As was said above, the mere fact that an obligation has been laid upon a person does not mean that a trust has thereby been created. Only if that obligation is to hold rights on behalf of another will there be a trust, and in such a case it will not matter whether that obligation was or was not contained in a contract, for the obligation to hold rights on trust can be independent of any contractual obligation.31 Contra-indications But not only were no positive words of trust used in Quistclose, there were facts which would usually be taken as indicating that no trust was intended. i. Rights transferred pursuant to contract of loan The first contra-indication of a consent trust is that the rights which formed the subject-matter of the trust were transferred to Rolls Razor pursuant to a contract of loan. This meant that Rolls Razor was contractually obliged to repay the amount it received to Quistclose from the moment of receipt. A number of commentators, including Professors Birks and Chambers in this volume,32 take the view that the debt only arises at the moment of application of the money to the purpose for which it was lent, or on the failure of the purpose. There is also a clear implication in Lord Wilberforce’s speech to the same effect, when he says that Rolls Razor’s liability to repay the amount borrowed to Quistclose arose on the application of the loan monies to the intended purpose.33 But this simply does not square with the facts, as the contract of loan provided nothing of the sort. Thus, in the 30

[1979] 1 WLR 247, 257. As, for example, where a right-holder gratuitously declares himself trustee for another. 32 Pp 78 (Chambers) and 125 (Birks). 33 ‘. . . when the purpose is carried out (ie, the debt paid) the lender has his remedy against the borrower in debt’: [1970] AC 567, 581. 31

16 William Swadling unlikely event of the insolvency of Barclays Bank, Rolls Razor would have been liable to Quistclose to repay the amount borrowed, whether or not the money had been paid to the dividend creditors. An even clearer case is the only other decision of the House of Lords on the topic, Twinsectra Ltd v Yardley,34 for here the borrower incurred a liability to pay interest (at 24%) the moment the money was advanced. If, at this point, the money was not owed, how could it be that the borrower could be charged interest? A liability to repay the value received does not arise where rights are transferred on trust. The relationship between trustee and beneficiary is not one of debtor and creditor. If a trustee puts trust money in a bank and the bank fails, the trustee, assuming he has acted intra vires and with due care, will not be personally liable to make good the loss to the trust fund. In Morley v Morley 35 the defendant was trustee for the plaintiff, an infant, one of the trust assets being £40 in gold. An employee of the defendant stole £200 of his employer’s own money, as well as the £40 in gold. It was held that the defendant was not liable to pay his beneficiary the value of the stolen gold. Quistclose is therefore distinctly odd, because the consequence of the finding of a trust, which trust was to co-exist alongside an obligation to repay, meant that the lender neither bore the risk of destruction of the subject-matter of the trust (as would a normal trust beneficiary), nor the risk of the borrower’s insolvency (as would a normal lender).36 It is no accident, as we have already seen,37 that courts refuse to presume a declaration of trust in the case of money transferred by way of loan. None of this would the case were we talking about a loan for use rather than for consumption. If I lend you my bike and, without fault on your part, the bike is stolen or destroyed, I have no claim against you for payment to me of the value of the bike. The rights remained in me, and with those rights went the risk of loss or destruction of their subject-matter. But Quistclose involved a loan for 34

[2002] 2 AC 164. (1678) 2 Ch Cas 2. 36 The point is well put by Meagher and Gummow, who say that the decision in Quistclose gave the lender the ‘best of all possible worlds. As beneficiary it could stand outside the liquidation and recover the loan in full, yet if the company had remained solvent but, without fault on its part, the fund had disappeared, the lender presumably could have recovered the money at law as a debt’: R Meagher and W Gummow, Jacob’s Law of Trusts in Australia, 5th edn (Sydney, 1986) para 215. The sixth edition of this work, published in1997, omits any criticism of the case. One judge has questioned the priority in insolvency that Quistclose gives. In re Miles, ex p National Australia Bank Ltd v Official Receiver in Bankruptcy (1988) 85 ALR 216, 221, Pincus J said: Experience suggests that bankruptcy or the liquidation of an insolvent company often awkwardly interrupts the progress of an intended transaction or set of transactions. If goods are delivered under a contract of sale and the property has passed, but bankruptcy supervenes just before an intended payment is made for them, the vendor cannot get them back. He must submit to their being sold to satisfy the general body of creditors–or perhaps even more galling, to satisfy a secured creditor or one having statutory priority. The common sense claim of such an unpaid vendor to recover ‘his’ goods rather than prove for the price may be no less appealing than Quistclose’s claim to repayment of the money it advanced and the same may be said of any number of types of transaction interrupted by bankruptcy. 37 Text to nn 21–2. 35

Orthodoxy 17 consumption. If I lend you a bag of sugar and that sugar is, without fault on your part, stolen or destroyed, your obligation to give me a bag of sugar is not dissolved. Loans for consumption are different from loans for use, and the loan in Quistclose was a loan for consumption. This difference was not, however, noticed by Lord Wilberforce. ii. No duty of segregation A second contra-indication of a consent trust is that the lender imposed no obligation on the borrower to keep the funds separate from its own assets.38 Although the presence of such a requirement is not determinative of the question whether or not there was an intention to create a trust, its absence is a good indicator that the funds were to be held absolutely by their recipient. As Channell J said in Henry v Hammond:39 It is clear that if the terms upon which the person receives the money are that he is bound to keep it separate, either in a bank or elsewhere, and to hand the money so kept as a separate fund to the person entitled to it, then he is a trustee of that money and must hand it over to the person who is his cestui que trust. If on the other hand he is not bound to keep the money separate, but is entitled to mix it with his own money and deal with it as he pleases, and when called upon to hand over an equivalent sum of money, then, in my opinion, he is not a trustee of the money, but merely a debtor.40

There, a shipping agent had sold coals on behalf of his principal. The sums received in exchange were paid by the agent into his own bank account, there being no obligation on him to keep them separate. For the purposes of limitation, it was necessary to decide whether the agent had received the proceeds of sale as a trustee for his principal or on his own behalf. Channell J held that he took them for himself, with merely a duty to account to his principal.41 The same result obtained in Neste Oy v Lloyds Bank plc,42 where payments were made to an agent to enable him to pay expenses incurred in respect of the principal’s ships. Bingham J held that since there was no obligation on the agent to keep the payments separate, he was not a trustee of them, with the consequence that the principal had no priority on the insolvency of the agent.43 iii. Inappropriateness of fiduciary relationship A trustee is a fiduciary. This means that he must avoid situations in which his own interests might conflict with those of his beneficiary. At the very least, he has a duty to be loyal to his 38 This feature is also lacking in a number of other cases on this topic, eg, re EVTR [1987] BCLC 646, and Twinsectra Ltd v Yardley [2002] 2 AC 164. 39 [1913] 2 KB 515. 40 Ibid p 521. See also R v Clowes (No 2) [1994] 2 All ER 316, where, at p 325, Watkins, LJ said: ‘As to segregation of funds, the effect of the authorities seems to be that a requirement to keep moneys separate is normally an indicator that they are impressed with a trust, and that the absence of such requirement, if there are no other indicators of a trust, normally negatives it’ (emphasis in original). 41 [1913] 2 KB 515, 522. 42 [1983] 2 Lloyd’s Rep 658. 43 Ibid p 664.

18 William Swadling beneficiary.44 Can it really be said that a person who borrows money from a bank and promises to use it only to buy a new car is in a fiduciary position viz a viz that bank, with all the consequence that such a relationship brings, so that, for example, that he must be loyal to that bank during the currency of the loan and not take his banking business elsewhere? The courts have, on a number of occasions, warned against the wholesale infiltration of equitable doctrines into commercial law.45 This is not to say that equitable doctrines have no place in commercial law. Far from it. But what it does mean in this context is that equitable doctrines should not be used to rewrite consensual bargains so as to turn an arms-length bargaining relationship into one of trust and confidence.46 It is instructive to compare the facts of Quistclose with those of the well-known decision of the Privy Council in re Goldcorp Ltd.47 Goldcorp Ltd contracted to sell gold bars to a number of customers. The gold was not to be delivered immediately but stored by Goldcorp until needed by the customers. The company did promise, however, to have enough stocks of gold to always maintain their obligations to customers. There never was any gold, or at least not as much as promised. On Goldcorp’s insolvency, the assets of the company being swallowed up by a floating charge in favour of a bank, the customers tried, inter alia, to make claims to some sort of proprietary right in the money (or its traceable proceeds) they had paid over under the contracts of purchase. The New Zealand Court of Appeal48 held that Goldcorp stood in a fiduciary relationship to its customers and from the moment of receipt of the purchase price held those monies on trust, which trust, through a process of tracing, gave the customers a charge over the company’s assets ranking in priority to the bank’s charge. The Privy Council disagreed. There was no fiduciary relationship between the customers and Goldcorp. Lord Mustill said: No doubt the fact that one person is placed in a particular position vis-à-vis another through the medium of a contract does not necessarily mean that he does not also owe fiduciary duties to that other by virtue of being in that position. But the essence of a fiduciary relationship is that it creates obligations of a different character from those deriving from the contract itself. Their Lordships have not heard in argument any submissions which went beyond suggesting that by virtue of being a fiduciary the company was obliged honestly and conscientiously to do what it had by contract promised 44 ‘The distinguishing obligation of a fiduciary is the obligation of loyalty. The principal is entitled to the single-minded loyalty of his fiduciary’: Bristol & West Building Society v Mothew [1998] Ch 1, 18 (Millett LJ). It has been argued that the duties go further, that the fiduciary owes positive duties of altruism to his beneficiary: P Birks, ‘The Content of Fiduciary Obligation’ (2002) 16 TLI 34. 45 The most famous example is that of Lindley LJ in Manchester Trust v Furness [1895] 2 QB 539, 545, who warned about the dangers of introducing ideas of constructive notice into the area of bills of lading. 46 The Court of Appeal in A-G v Blake [1998] Ch 439, 453 spoke of the inappropriateness of branding a contract-breaker a fiduciary in order simply to force him to disgorge profits consequential on breach. Labeling the borrower a fiduciary would seem even less defensible in the case of a simple loan transaction. 47 [1995] 1 AC 74. 48 [1993] 1 NZLR 257.

Orthodoxy 19 to do. . . . It is possible without misuse of language to say that the customers put faith in the company, and that their trust has not been repaid. But the vocabulary is misleading; high expectations do not necessarily lead to equitable remedies.49

If it was right to say that there was no fiduciary relationship in re Goldcorp, it is difficult see how it could be right to say that there was such a relationship in Quistclose. The warning of Sopinka J in Noreberg v Wynrib 50 that ‘Fiduciary duties should not be superimposed on . . . common law duties simply to improve the nature or extent of the remedy’51 would seem particularly apposite here. What did the parties intend? If it was not meant to create a trust, what was the condition meant to achieve? This is difficult to say, for, as we have seen, Lord Wilberforce ascribed an intention to Quistclose it never actually had. But even if we accept that Quistclose did place such a limitation on the use of the moneys, what was it intended to achieve? Since this was never spelt out, we can only speculate. The most likely explanation is that Quistclose wanted Rolls Razor to be able to secure the loan of £1,000,000 from Mr X. In other words, the purpose of the restriction was to ensure the solvency of Rolls Razor, not to provide security for Quistclose. And, so far as that purpose was concerned, the creation of a trust of which Rolls Razor was trustee could do absolutely nothing to further that aim.52 iii. Is the primary trust a not-consent trust? If it is not possible to say that the primary trust in Quistclose arose as a response to some manifestation of intent on the part of Quistclose, proven or presumed, that Rolls Razor was to hold the rights vested in it on trust, might it be that the trust was in fact a not-consent trust? We have already seen an example of a notconsent trust in A-G for Hong Kong v Reid.53 Might the Quistclose trust also be of the same kind? Although Lord Wilberforce seemed to think that he was dealing with a consensual trust,54 their Lordships in Twinsectra v Yardley were more equivocal.55 Lord Hoffmann said only that the terms on which the money was

49

[1995] 1 AC 74, 98. (1992) 92 DLR (4th) 449. 51 Ibid p 481. 52 Though this was not the case in Quistclose, the aim may sometimes be to give the lender security in the event of the borrower’s insolvency. That may well have been the lender’s purpose in Twinsectra Ltd v Yardley [2002] 2 AC 164 in enjoining the borrower only to spend the money on ‘property’. But, as Lord Hoffmann, at p 169, pointed out, this would be a fairly ineffective form of security because there would be nothing to stop the borrower then mortgaging that ‘property’ to the hilt. And even if this did not happen, it would often be the case that ‘property’ once purchased would be subject to a pre-existing floating charge in favour of the borrower’s bank. 53 Text to nn 10–12. 54 There is, however, an indication in his speech to the effect that the right arises by operation of law. This is discussed below: text to n 86. 55 The matter is dealt with in greater detail in the chapter by Penner in this volume. 50

20 William Swadling lent meant that it was received on trust.56 But whether this was because those terms57 evinced an intention to create a trust or because they created a not-consent trust58 is nowhere made clear. Lord Hutton also talks of the undertakings creating a trust without saying whether that trust was a consent or a notconsent trust.59 And, as we will see below,60 there are a number of passages in Lord Millett’s speech which indicate that the trust in that case was a not-consent trust.61 This is not the place to go into the rights and wrongs of not-consent trusts. For the moment, we can only note the situations in which they conventionally arise and ask whether the Quistclose trust falls within one of those categories. English law makes no effort to categorise its not-consent trusts according to the events which bring them into existence, preferring instead to lump them all under the heading of ‘unconscionability’. However, if we are to subscribe to the rule of law, we must be able to do better. Events other than consent which have the effect of creating rights can be conveniently classified under the headings of Wrongs, Unjust Enrichment, and Miscellaneous Others.62 And looking at the matter empirically, it seems that those same events sometimes have the effect of placing rights behind a trust. Wrongs There is no doubt that trusts sometimes, though rarely, arise as a response to wrongdoing. A-G for Hong Kong v Reid63 is a clear example, the wrong there being a breach of fiduciary duty. It is a difficult question whether any other wrongs have this effect,64 and even whether the wrong of breach of fiduciary duty should do so.65 But accepting for the moment that wrongs can have the 56 ‘The terms of the trust upon which Sims held the money must be found in the undertaking given to Twinsectra as a condition of payment. Clauses 1 and 2 of that undertaking made it clear that the money was not to be at the free disposal of Mr Yardley. Sims were not to part with the money to Mr Yardley or anyone else except for the purpose of enabling him to acquire property. . . . In my opinion the effect of the undertaking was to provide that the money in the Sims client account should remain Twinsectra’s money until such time as it was applied for the acquisition of property in accordance with the undertaking’: [2002] 2 AC 164, 168. 57 Clause 1 provided that: ‘The loan moneys will be retained by us until such time as they are applied in the acquisition of property on behalf of our client’. Clause 2 provided that ‘The loan moneys will be utilized solely for the acquisition of property on behalf of our client and for no other purpose’. 58 As cases like Lysaght v Edwards (1876) 2 Ch D 499 (specifically enforceable contract of sale) show, contractual terms can also create not-consent trusts: text to nn 83–4. 59 [2002] 2 AC 164, 171. 60 Text to nn 87–8. 61 [2002] 2 AC 164, 185. 62 This is the scheme proposed by P Birks, ‘Definition and Division: A Meditation on Institutes 3.13’ in P Birks (ed), The Classification of Obligations (Oxford, 1997), 1. 63 [1994] 1 AC 324. 64 In common law Canada, it seems breach of confidence might have this effect, though since the reasoning is phrased in terms of ‘unconscionability’, it is impossible to be sure: Lac Minerals Ltd v International Corona Resources Ltd (1989) 61 DLR 14. Breach of confidence has been held not to have the effect of creating a trust by the English Court of Appeal in Satnam Investment Ltd v Dunlop Heywood & Co Ltd [1999] 3 All ER 652, though the point is only obiter. 65 For a convincing criticism of the reasoning in Reid, see D Crilley, ‘A Case of Proprietary Overkill?’ [1994] RLR 57.

Orthodoxy 21 effect of placing rights behind a trust, it is clear that this cannot be the explanation for the primary trust in Quistclose, for there was no wrongdoing on the part of Rolls Razor at the moment of receipt, the point at which the primary trust arose. So an explanation based on wrongdoing cannot work. Unjust Enrichment There are cases in which a trust has arisen as a response to an unjust enrichment. Examples are Chase Manhattan v Israel-British Bank,66 where Goulding J held that the recipient of a mistaken payment was a trustee of it for the payor, and Neste-Oy v Lloyds Bank,67 where Bingham J held that a payment received for a consideration which at the time was known to have failed was similarly held on trust. Both cases are unequivocal examples of not-consent trusts responding to the not-consent event of unjust enrichment. The problem in explaining the primary Quistclose trust as an unjust enrichment trust, however, is that there was no unjust enrichment of Rolls Razor at the moment of receipt. Not only was there no unjust factor (mistake, duress, failure of consideration, etc), there was a valid contract subsisting between Rolls Razor and Quistclose at the date of payment, and claims in unjust enrichment for restitution of benefits transferred under a valid contract cannot succeed unless and until that contract is first set aside.68 No such avoidance having been made in Quistclose, the primary trust cannot be said to be responding to the unjust enrichment of Rolls Razor. But there is another, logically prior, reason why the primary trust in Quistclose could not be a trust responding to the unjust enrichment of Rolls Razor. This is because the receipt of the loan monies was not an enriching event, for Rolls Razor was already contractually liable from that point on to repay the amount received. If I receive £10 and am immediately liable to repay £10, there is no enrichment needing reversal. If we were to add in an unjust enrichment generated obligation to repay the same amount, then I would be liable to pay £20, not £10. It is different with the classic unjust enrichment scenario, the mistaken payment. In Kelly v Solari,69 a widow was mistakenly paid money under a lapsed insurance policy. She had never contractually promised to repay that sum. If the unjust enrichment obligation to repay the amount received had not arisen, the payment would have been enriching, as she would have had no obligation whatever to repay. Miscellaneous Others This category, as its name makes clear, is a miscellany. There are demonstrably cases in which not-consent trusts have arisen which cannot be explained as responding to the events of wrongdoing or unjust enrichment. And though we may be able to state the rules generating these trusts, they are impossible to 66 67 68 69

[1981] Ch 105. [1983] 2 Lloyd’s Rep 658. Bell v Lever Bros Ltd [1932] AC 161. (1841) 9 M & W 54.

22 William Swadling rationalise. For this reason, such cases languish in an innominate category. The main situations in which not-consent trusts arise outside wrongs and unjust enrichment,70 in no particular order, are as follows: i. The rule in re Rose71 A non-intentional trust will arise where I purport to make a gift to you but that gift does not take effect immediately because a third party has yet to take action to transfer to you the right which is the subjectmatter of the gift. Until that action is taken, I will, for reasons which have never been made clear,72 hold that right for you on trust, a trust which I clearly did not intend to create. This is the rule in re Rose. It forms an exception to the rule that the courts of equity will not perfect imperfect gifts.73 And this explains why the rule can have no possible application to the facts of Quistclose, for the transfer of rights in that case was not imperfect in any way. ii. Imperfect gift and detrimental reliance Where a donor purports to make a gift of rights to a donee but fails to comply with the formalities necessary to pass those rights to the donee, and the donee, thinking that the gift is perfect, acts to his detriment, the donor will be a trustee of those rights for the donee.74 Like re Rose, it provides an exception to the imperfect gift rule. And for that reason, it too can have no application to the facts of Quistclose. iii. Mutual Wills This is a complicated doctrine, and it unnecessary to go into it in detail.75 It relies, however, on two persons making wills in each other’s favour, agreeing that the survivor should enjoy all their rights and then leave them to nominated beneficiaries. Provided certain conditions are met, this will lead to the creation of a not-consent trust. But given that no wills were involved in Quistclose, the doctrine can have no application on the facts of the case. iv. Transfer on Trust Failing to Exhaust the Beneficial Interest 76 The typical case is where I convey rights to you with a declaration of trust for uncertain objects. In such a case, you will hold those rights on trust for me rather than the uncertain objects. That such a trust is not responding to a manifestation of consent, either presumed or proved, was made clear by the House of Lords in Vandervell v IRC,77 where evidence that the transferor did not wish a trust to be 70 Though this list tries to detail the main instances of not-consent trusts outside Wrongs and Unjust Enrichments, it makes no claim to being exhaustive. It does, however, hope not to have omitted any not-consent trust bearing any relation to that in Quistclose. 71 [1952] Ch 499. 72 The Court of Appeal in the leading case of re Rose [1952] Ch 499, 506, said that the trust arose as a matter of ‘common sense’. The more recent case of Pennington v Waine [2002] 1 WLR 2075 is no better, the judges there being content to talk only of ‘unconscionability’. 73 Milroy v Lord (1862) 4 De GF & J 264, 274–75. 74 As, for example, in Pascoe v Turner [1979] 1 WLR 431. 75 Discussion in T Youdan, ‘The Mutual Wills Doctrine’ (1979) 29 University of Toronto Law Journal 390. 76 Some, most notably Birks and Chambers, would argue that this head of not-consent trust should be included under the heading of ‘unjust enrichment’. 77 [1967] 2 AC 291.

Orthodoxy 23 created in his favour was held to be irrelevant to the question whether he was a beneficiary of that trust. But the simple reason why the primary trust in Quistclose cannot be seen as an example of this sort of trust is that the initial transfer in that case was, as we have already seen,78 not a transfer on trust. v. Unauthorised substitution 79 If I take your money without consent and buy myself a car, I will hold that car for you on trust.80 Just like the trust in A-G for Hong Kong v Reid,81 the trust is one arising from an event other than a manifestation of intent on either of our parts to constitute me a trustee. But that kind of trust cannot be relevant here, for, though there was a substitution in Quistclose,82 it was not unauthorized. vi. Specifically enforceable promise to transfer rights This is the last category. The most common example of this type of not-consent trust is that which arises when the holder of a fee simple estate in land enters into a contractual promise to convey his right to the promisee. Provided specific performance is available, the vendor immediately becomes a trustee of his right for the promisee. As Sir George Jessel MR said in Lysaght v Edwards:83 The moment you have a valid contract for sale the vendor becomes in equity a trustee for the purchaser of the estate sold, and the beneficial ownership passes to the purchaser, the vendor having a right to the purchase-money, a charge or lien on the estate for the security of that purchase-money, and a right to retain possession of the estate until the purchase-money is paid . . .84

Exactly why a trust should arise in such a situation has never been satisfactorily explained, the courts being content to rely on the fiction that ‘equity looks upon as done that which ought to be done’, which, of course, is no explanation at all. But the one thing we can be sure of is that the trust here arising does not do so because of any intention by the vendor to constitute himself a trustee for his purchaser. Might it be argued that the primary Quistclose trust belongs here? The answer is no, for two reasons. First, as we have seen, the doctrine rests on the maxim that ‘equity looks upon that as done which ought to be done’. It anticipates the fact that the promisee will undoubtedly, because performance will be compelled if not voluntarily made, become holder at law of the rights he has contracted to buy. The promise in Quistclose, however, was purely negative, 78

Text to nn 16–51. Like the previous head, this too is argued by some to fall under the general heading of ‘Unjust Enrichment’: P Birks, ‘Property, Unjust Enrichment, and Tracing’ (2001) 54 CLP 231, 245–47. There is also a case for saying that it falls under the heading of ‘Wrongs’. 80 Foskett v McKeown [2001] 1 AC 102. 81 [1994] 1 AC 324. 82 The benefit of the chose in action Quistclose enjoyed against its bankers was exchanged for the benefit of a chose in action against Rolls Razor. 83 (1876) 2 Ch D 499. The other commonly cited case in this area is Walsh v Lonsdale (1882) 21 Ch D 9, in which the leading judgment is also given by Sir George Jessel. 84 (1876) 2 Ch D 499, 506. 79

24 William Swadling that the money would not be applied for any purpose other than the payment of the dividend. There was no guarantee that it would ever be applied to anyone. And second, even if it was positive, the dividend creditors were strangers to the contract of loan and consequently had no ability to compel its performance.85 This is important, for the Lysaght v Edwards trust only arises in favour of a person both able to compel performance and in whom the rights will eventually vest.85a In Quistclose, by contrast, the lender could, assuming a positive rather than a negative stipulation, compel a performance which would not vest in him the rights concerned, but the creditors, who would eventually obtain the rights concerned, could not compel performance. vii. Right of restraint? It is clear, therefore, that the facts of Quistclose fit no pre-existing category of not-consent trust. Might it be argued that the existence of a power enforceable by injunction to restrain the application of the rights in a particular way gives the holder of the right of restraint an interest under a trust? Such thinking can be found in the speeches of both Lord Wilberforce in Quistclose and Lord Millett in Twinsectra. In Quistclose, Lord Wilberforce said that ‘when the money is advanced, the lender acquires an equitable right to see that it is applied for the primary designated purpose’.86 Lord Millett’s speech in Twinsectra is even clearer in pointing to a not-consent trust arising in this way: Money advanced by way of loan normally becomes the property of the borrower. He is free to apply the money as he chooses, and save to the extent to which he may have taken security for repayment the lender takes the risk of the borrower’s insolvency. But it is well established that a loan to a borrower for a specific purpose where the borrower is not free to apply the money for any other purpose gives rise to fiduciary obligations on the part of the borrower which a court of equity will enforce. . . . When the money is advanced, the lender acquires a right, enforceable in equity, to see that it is applied for the stated purpose, or more accurately to prevent its application for any other purpose. This prevents the borrower from obtaining any beneficial interest in the money, at least while the designated purpose is still capable of being carried out.87

That the obligation precedes and is the cause of the trust is made even clearer two pages later: It is unconscionable for a man to obtain money on terms as to its application and then disregard the terms on which he received it. Such conduct goes beyond a mere breach of contract. . . . The duty [of application] is fiduciary in character because a person who makes money available on terms that it is to be used for a particular purpose only and not for any other purpose thereby places his trust and confidence in the recipient to ensure that it is properly applied. This is a classic situation in which 85 At least at the time Quistclose was decided, ie, before the enactment of the Contract (Rights of Third Parties) Act 1999. 85a Re Anstis (1885) 31 Ch D 596, 605 (Lindley LJ). 86 [1970] AC 567, 581. 87 [2002] 2 AC 164, 184 (emphasis supplied).

Orthodoxy 25 a fiduciary relationship arises, and since it arises in respect of a specific fund it gives rise to a trust.88

But is it correct to say that a right to restrain the use to which rights are put makes the person against whom the restraint can be exercised a not-consenttrustee of the rights he holds? It is difficult to see how it can. There are certainly cases in which negative restrictions enforceable in equity have been held to create rights in their holder which are capable of binding third parties. An example is a restrictive covenant over the use of land, as exemplified by Tulk v Moxhay.89 There are, however, at least two problems with the application of that doctrine to the facts of Quistclose. First, it requires that there be land which is benefited as well as land which is burdened.90 For this reason, the doctrine was held by Scrutton LJ in Barker v Strickney to have no possible application to things other than land.91 But more fatal is the objection that even if we were able to apply the Tulk v Moxhay doctrine we would not end up with a trust. The right which the dominant landowner obtained in Tulk v Moxhay was a right which he held outright, not one held for him on trust by his neighbour. The only right the servient owner held was his fee simple, and he held that for himself. By contrast, the right we are concerned with is one held by one person on behalf of another. For the short reason that Tulk v Moxhay does not produce trusts, it can have no application here. viii. Pre-Quistclose case-law It will be recalled that Lord Wilberforce claimed over 150 years of authority for his principle. Does that authority shed any light on the reason for the trust? Unfortunately, it does not. Lord Wilberforce cited five cases in support of his proposition, Toovey v Milne,92 Edwards v Glyn,93 in re Rogers, ex p Holland & Hammond,94 in re Drucker (No 1),95 and in re Hooley, ex p Trustee.96 Lord Millett97 has identified three further cases, Moore v Bathrop,98 Gibert v Gonard,99 and re Watson.100 The genesis of the principle is to be found in Toovey v Milne. A bankrupt was lent £120 by his brother-in-law to settle with his pressing creditors. He was unable to do so and repaid £95 of the money. His assignee in 88 Ibid p 186 (emphasis supplied). A similar point is made at p 188, where his lordship says that ‘the equitable right [Lord Wilberforce in Quistclose] had in mind was not a mandatory order to compel performance but, a negative injunction to restrain improper application of the money. . . .’. 89 (1848) 2 Ph 774. 90 London County Council v Allen [1914] 3 KB 642. 91 [1919] 1 KB 121. The case is discussed in more detail below: text to nn 137–9. 92 (1819) 2 B & A 683. 93 (1859) 2 El & El 29. 94 (1891) 8 Morr 243. 95 [1902] 2 KB 237. 96 [1915] HBR 181. 97 PJ Millett QC, ‘The Quistclose Trust: Who Can Enforce It?’ (1985) 101 LQR 269, 270–74. 98 (1822) 1 B & C 5. 99 (1884) 54 LJ Ch 439. 100 (1913) 107 LT 783.

26 William Swadling bankruptcy brought money had and received against the brother-in-law to recover the £95 on the ground that the repayment could not be ‘protected’. Abbott CJ refused to allow the claim. The money had been received on trust and so never formed part of the bankrupt’s estate: . . . the fair inference is from the facts proved was that this money was advanced for a special purpose, and that being so clothed with a specific trust, no property in it passed to the assignee of the bankrupt. Then the purpose having failed, there is an implied stipulation, that the money shall be repaid. That has been done in the present case; and I am of the opinion that the repayment was lawful . . .

Surprisingly, this dogmatic statement of a common law judge101 has been simply followed unquestioned in all the later cases. Only two cases come near to explaining why a trust should arise in such circumstances. In Edwards v Glyn, money borrowed to meet a run on a bank was repaid when it became apparent that the run could not be met and pressure was brought by one of the guarantors of the loan. A claim by the assignee in bankruptcy to return the money on the ground of a fraudulent preference was rejected, the reason being that a payment under pressure could not be said to be voluntary.102 A minority of the court, Erle and Crompton JJ, also found in favour of the repaid lender on the ground of Toovey v Milne. The explanation for the trust there put forward by Crompton J was that ‘the bankrupts, though they might have a legal, had not an equitable right to use the money for any other purpose; and equity would, I think, have interfered to prevent them from doing so.’103 The same explanation was put forward in re Rogers, where money lent to pay off pressing creditors and so used was reclaimed by the trustee in bankruptcy. The Court of Appeal refused the claim on the ground that the money was impressed with a trust. Lindley LJ said: I entertain no doubt that [the lender] could have obtained an injunction to restrain the bankrupt from using that money for any purpose except that of paying his pressing creditors. If this be so, the money never was the bankrupt’s in any proper sense so as to vest in his trustee [in bankruptcy] as part of his general assets.104

But the problem with these explanations is, as we have already seen,105 that a right of restraint in equity does not give rise to a trust, nor (outside the case of 101 In this respect, we might heed the warning given by Harman J in re E Dibbens & Sons Ltd [1990] BCLC 577, 579: ‘As so often when common law judges talk about trustees, who were the trustees, for what purpose they were the trustees and on what terms they held the trust fund or what the trust fund was are entirely unclear’. In that case, an insurance policy held by a furniture storage company which protected ‘Goods in Trust’ was held to refer to goods ‘entrusted’ to the company as bailees, not trustees. A similar confusion between trust and bailment can be detected in the judgment of Lord Ellenbrough in Taylor v Plumer (1815) 3 M & S 562. 102 Applying the rule in Brown v Kempton (1850) 19 LJ NS CP 169. 103 (1859) 2 El & El 29, 51. The case was actually decided on the ground that the repayment of the lender was not a fraudulent preference. The Toovey v Milne principle was applied only by two out of the four judges, and then as an alternative ground. 104 (1891) 8 Morr 243, 248. 105 Above, text to nn 86–91.

Orthodoxy 27 land) does it even create an equitable proprietary interest. The upshot is that there is simply no plausible explanation of the trust which arose in Toovey v Milne, the case from which the Quistclose trust is derived.

2. If there is a trust, who or what are the objects? But even if we could say that Rolls Razor was a trustee, we would need to go on to identify the objects of that primary trust. This issue was not addressed by Lord Wilberforce. There are three possibilities: i. The dividend creditors Grave difficulties stand in the way of saying that the creditors were the objects of the trust, for not all Quistclose–type trusts involve loans for the payment of specific creditors.106 Some, such as those in re EVTR107and Twinsectra Ltd v Yardley,108 were for the purchase of particular assets. And even those which do involve loans for the payment of creditors cause difficulties. First, many involve ordinary trade creditors. As has already been pointed out, it is simply a nonsense to say that the debtor owes the fiduciary obligations which attach to trusteeship to such persons.109 Second, if the creditors were the beneficiaries of these trusts, they could compel payment of the loan moneys to them, leaving the lender and borrower with no opportunity to vary the terms of the contract between them. And third, the creditors would be able to claim twice over. Assume I owe you £10. Someone then gives me £10 to hold for you on trust. If, following an application by you under the rule in Saunders v Vautier,110 I give you the £10 trust money, the debt obligation is left intact. In exactly the same way, if the creditors are given the rights held for them under the trust, the debt they are owed is not discharged. The result is that they can recover twice over.111 ii. The lender This is the solution adopted by Lord Millett in Twinsectra. In his view, the only explanation consistent with orthodox trust law is to say that the lender is the beneficiary, with a power in the borrower/trustee to appoint to the purpose for 106 In the decision of the Federal Court of Australia in re Miles (1989) 85 ALR 216, Pincus J, who was obviously unhappy with Quistclose (n 1 above) refused to extend it beyond the payment of money for the discharge of debts. 107 [1987] BCLC 646 (purchase of ‘equipment’). 108 [2002] 2 AC 164 (purchase of ‘property’). 109 Text to nn 44–51. 110 (1841) 4 Beav 115. 111 This last problem would of course disappear if there was no debt until the money was spent or the purpose failed, but this is not how the loans are structured. See discussion above, text to nn 32–7.

28 William Swadling which the loan was made.112 There are a number of difficulties here, similar to those considered immediately above. There is the problem that the lender could recover twice, first as beneficiary of the trust, and second as obligee under the contract of loan. There is the inappropriateness of the fiduciary label in a purely commercial, arms-length context. And finally, there is the problem of Saunders v Vautier,113 which gives the beneficiary of a trust the right to demand that the subject-matter of the trust be transferred to him at any time, despite terms of the trust to the contrary. Such rights are clearly inconsistent with the rights given by the contract of loan. iii. The purpose Might it be that the objects of the trust were not the lender or the creditors but the purpose for which the money was lent? One difficulty is in identifying the exact purpose for which the loan was made. Was it to benefit the dividend creditors? Or was it to ensure the solvency of Rolls Razor?114 This uncertainty alone should cause any purpose trust to fail. But even were the purpose to be considered certain, the difficulty immediately encountered would be the rule laid down by the Court of Appeal in re Endacott.115 In that case, a testator left his residuary estate ‘to the North Tawton Parish Council for the purpose of providing some useful memorial to myself’. Provided these words were sufficient to indicate that a trust was intended, the Court of Appeal held that any such trust would be void. It was a fundamental principle of the law of trusts that trusts for purposes are void unless those purposes are charitable: No principle perhaps has greater sanction or authority behind it than the general proposition that a trust by English law, not being a charitable trust, in order to be effective, must have ascertained or ascertainable beneficiaries.116

This is the ‘beneficiary principle’. Its application to the facts of Quistclose would mean that the primary trust, which was certainly not a charitable trust, was void for want of beneficiaries. Unfortunately, none of the authorities on this question were cited to the House of Lords. Might it be argued that the primary trust in Quistclose fell within the exception created by Goff J in re Denley’s Trust Deed?117 Denley conveyed a plot land land to trustees to be ‘maintained and used as and for the purpose of a recreation or sports ground primarily for the benefit of the employees of [a particular] company and secondarily for the benefit of such other person or persons (if any) as the trustees may allow . . .’. Despite the fact that this was clearly not a charit112 113 114 115 116 117

[2002] 2 AC 164, 187. (1841) 4 Beav 115. As Stevens in this volume shows, it was almost certainly the latter: pp 5–6. [1960] Ch 232. Ibid p 246 (Lord Evershed MR). [1969] 1 Ch 373.

Orthodoxy 29 able trust, Goff J refused to allow it to be struck down. It was not caught by the beneficiary principle because its purpose directly or indirectly benefited individuals. This indeed was the solution adopted by Sir Robert Megarry V-C in re Northern Development118 and by Peter Gibson J in Carreras Rothman Ltd v Freeman Mathews Treasure Ltd,119 two cases which utilize the Quistclose trust. There are, however, a number of problems with re Denley. First, it is clearly inconsistent with the actual decision of the Court of Appeal in re Endacott, where the provision of a useful memorial to the testator would have benefited the residents of North Tawton just as much as the provision of a sports ground benefited the employees and their guests in re Denley. Second, even if it could be distinguished from re Endacott, the decision is internally flawed. Goff J said that the beneficiary principle laid down in Endacott only applied to trusts involving abstract purposes.120 But, having said this, he went on to apply that same beneficiary principle to the case before him, which he assumed not to involve abstract purposes. He said that the trust did have beneficiaries, viz, the employees of the company. But this is to confuse factual with legal benefit.121 There is no doubt that the employees would receive a benefit in a very general sense if the trust were upheld, for they would now have somewhere to play football on a Sunday morning; if the trust were struck down, they would have to find somewhere else. So there were people who benefited. But this is not the same thing as saying that the rights to the land held by the trustees were held on trust for the employees, for, if they were, the employees could exercise their rights under Saunders v Vautier122 and compel the transfer of those rights to themselves. The trust which the settlor created was not one in which the employees were intended to have what we might be loosely called ‘ownership’ rights, only ‘use’ rights, which is not the same thing at all. Thus, despite Goff J’s protestations to the contrary, the beneficiary principle was not satisfied on the facts of re Denley, and the trust should accordingly have been held void. As it is, we are left with the situation in Denley of not being able to point to any person for whom the rights were held. This problem was in fact recognized by Peter Gibson J in Carreras Rothmans, when he said that the beneficial interest in a Quistclose trust is in suspense until the purpose is either carried out or fails,123 though for reasons which are left unexplained, he did not seem to find this problematic.124 However, if there is to be a primary trust in Quistclose, this would seem to be the only solution to the problem of who or what the objects of such a trust might be. 118

6 October 1978. [1985] Ch 207. 120 [1969] 1 Ch 373, 383. An example would be re Astor’s Settlement Trust [1952] Ch 534, where the objects included ‘the maintenance of good relations amongst nations’ and ‘the preservation of the independence of the newspapers’. 121 JM Evans, (1969) 32 MLR 96, 98. 122 (1841) 4 Beav 115. 123 [1985] Ch 207, 223. 124 This may be due to the very curious fact that no cases on the beneficiary principle were cited to the court. 119

30 William Swadling 3. Perhaps there was no trust at all The difficulties which lie in the way of saying there is a primary trust in Quistclose, consensual or otherwise, would appear to be insuperable. Might it therefore be that there was in fact no trust at all? i. Quasi-trusts It is not without significance that not all the cases talk of a trust.125 So, for example, in Gibert v Gonard126 North J described money lent for a purpose as being traceable ‘in the same way as if it had been trust money’.127 In re Drucker (No 1)128 Wright J said at first instance that the fund was ‘impressed with a trust—not in the strict sense of the word—but in substance with a quasi-trust that it should be applied . . . for the discharge pro tanto of the claim of the bank’.129 Phillimore J used the same expression in the later case of re Watson.130 And though neither Wright J or Phillimore J explain what a ‘quasi-trust’ might be, the one thing we can be sure of is that it is not a trust. A quasi-cat may be a dog, but it is certainly not a cat.131 A quasi-contractual obligation is not a contractual obligation, but one arising for not-contract reasons, usually, though not always, the unjust enrichment of the defendant. Exactly what a quasi-trust might be is never made clear. It does, however, show that some judges at least thought the doctrine they were applying was not orthodox. ii. The Chambers explanation Chambers, who defends the result in Quistclose, also takes the view that there was no primary trust in that case. He argues that this does not matter, for the equitable right of restraint recognized in Quistclose was sufficient to make the arrangement binding on third parties, such as the defendant bank in that case. He says: The trustee in bankruptcy takes the property of the bankrupt ‘subject to equities’, ie, has no greater rights to the property than did the bankrupt. The property is not available for distribution if the bankrupt could have been restrained from using the property for that purpose. The bankrupt need not be a trustee with only bare legal title.132 125 Even Lord Wilberforce talked of a ‘relationship of a fiduciary character or trust’: [1970] AC 567, 580. 126 (1884) 54 LJ Ch 439. 127 Ibid p 440. 128 [1902] 2 KB 55. 129 Ibid p 57. 130 (1912) 107 LT 96, 98. Aff’d (1912) 107 LT 783. 131 P Birks, An Introduction to the Law of Restitution (Oxford, 1989) 22. 132 R Chambers, Resulting Trusts (Oxford, 1997) 72.

Orthodoxy 31 Unfortunately, this passage suffers from a failure to identify whether this right to restrain a misapplication of the funds (which presumably is born of contract) is a personal right or a property right. Only property rights are capable of binding strangers to their creation. It does not follow that simply because a right is enforceable in equity that it is a property right.133 So, for example, a trustee’s liability to his beneficiaries for losses made through his negligent investment, even though enforced in equity, binds the trustee alone. It is a personal right. If the right of restraint is a personal right, then it cannot be enforced against third parties, even third parties who know of its existence. Contractual licensors of land, for example, can be restrained by injunction from preventing their licensees using the land as agreed, but that fact alone does not elevate the contractual licence into a property right.134 If it did, then the line between personal rights and property rights would be all but destroyed. Lord Wilberforce himself said the same thing in respect of the so-called ‘deserted wife’s equity’ in National Provincial Bank Ltd v Ainsworth:135 Early in the development of the doctrine it was perceived that the deserted wife’s right could not be classified as an equitable interest in land. . . . This appears to me to have been inevitable and correct, and it should have led to the conclusion that the wife’s right was not binding on third parties. But, instead, it was sought to describe it as an ‘equity’ which as such could be binding on assignees of the husband. In the authorities, the word is used in several senses and for several purposes. Sometimes it is used as referring merely to the existence of an equitable remedy, such as a remedy by injunction: the thought seems to have been that since the courts will interfere by injunction to prevent interference with or departure from a right, that gives the proprietor of the right something which is capable of binding not only the other party but his assignees, or successors, provided of course that they have notice of the right. In this form the argument is clearly fallacious. The fact that a contractual right can be specifically performed, or its breach prevented by injunction, does not mean that the right is any the less of a personal character or that a purchaser with notice is bound by it: what is relevant is the nature of the right, not the remedy which exists for its enforcement.136

The exercise which has to be undertaken here is a search through decided cases and statutes to discover whether a right to restrain the misapplication of a fund is a property right. No case says it is. More importantly, Barker v Strickney,137 already encountered above,138 says that it is not. There, a purchaser of copyright was held not to be bound by contractual stipulations entered into by its creator 133 This is the mistake made by Denning LJ in Errington v Errington & Woods [1952] 1 KB 290, 298–99, where he held that the making available by the House of Lords in Winter Garden Theatre (London) Ltd v Millennium Productions Ltd [1948] AC 173 of equitable relief in the form of an injunction meant that a contractual licensee of land now had an equitable property right. 134 Ashburn Anstalt v Arnold [1989] 1 Ch 1. 135 [1965] AC 1175. 136 Ibid pp 1252–53. 137 [1919] 1 KB 121. 138 Text to n 91.

32 William Swadling and the purchaser’s predecessor in title, despite the fact that the purchaser had actual notice of the terms. Scrutton LJ said: A purchaser of chattels is not to be bound by mere notice of stipulations made by his vendor unless he was himself a party to the contract in which the stipulations were made.139

It might be objected that Chambers is not talking about a right binding third parties, merely one binding the trustee in bankruptcy. But, unless the right he describes is one which can bind a third party, it cannot explain the result in Quistclose itself, where the third-party bank was (at least according to Chambers’ theory) held bound by Quistclose’s right to restrain Rolls Razor from applying the funds other than to the payment of the dividend. Furthermore, his argument assumes that an injunction would indeed issue against a trustee in bankruptcy. That assumption is wrong. If I have a contractual licence to use your computer but you become insolvent, I will not be allowed to claim an injunction to prevent your trustee in bankruptcy taking the computer back, for that would allow me to evade the pari passu distribution rule. Instead, I will be left to my claim in damages. This important point was noticed in MacJordan Construction Ltd v Brookmount Erostin Ltd.140 A company had promised but failed to set up a retention fund out of which the plaintiffs were to be paid. The Court of Appeal held that the failure to set aside such a fund was fatal to any claim that an interest in such a fund existed. Furthermore, Scott LJ said that a mandatory order to set up the fund, even if available against the company itself, would not issue against the liquidator: In a case where the employer is insolvent when the application for a mandatory order is made, the mandatory order would, assuming it were complied with, give preference to the contractor as against other unsecured creditors. I do not see any reason why the court should do such a thing. If the directors of an insolvent company were . . . to set aside a retention fund for the benefit of a building contractor, questions of preference might well arise. . . . So I question whether in a case where the employer is insolvent the court would necessarily make a mandatory order for the setting up of the retention fund. If, in the present case, there had been funds available for unsecured creditors of Brookmount, I do not follow why the plaintiff should, in respect of the indebtedness due to it for retentions, be in any better position than other unsecured creditors.141

The upshot is, therefore, that the argument of Chambers cannot save the result in Quistclose either, for the right of restraint was not one capable of binding anyone other than the borrower in that case.142

139

[1919] 1 KB 132. [1992] BCLC 350. 141 Ibid p 359. 142 The different question whether a right of restraint enforceable by injunction creates a trust was dealt with above, text to nn 86–91. 140

Orthodoxy 33

III : THE SECONDARY TRUST

The argument so far has been that there cannot have been a primary trust in Quistclose, and that Lord Wilberforce was wrong to find one. If that is right, then there is obviously no room for a secondary trust arising on the subsequent failure of the primary trust because there is no primary trust to fail. It was further argued, contrary to the view of Chambers, that the right to restrain a misapplication of the fund is a personal and not a proprietary right and therefore not one capable of binding third parties, even third parties with notice, so that on the insolvency of the borrower there could again be no right over the funds capable of binding the trustee in bankruptcy. But not all those who support the outcome in Quistclose argue that there need be a secondary trust arising on failure. Most prominent of these is Lord Millett, who says that there is simply one trust throughout, a trust in favour of the lender with a power in the borrower to appoint to the creditors.143 We have, however, already seen how any notion of a primary trust is untenable. But in order to examine the secondary trust of Lord Wilberforce, we must assume, contrary to what has been argued above, that there was a valid primary trust, that the object of that primary trust, contrary to the beneficiary principle, was the payment of the dividend creditors, that the primary trust failed on the insolvency of Rolls Razor Ltd,144 and that the secondary trust arose at the point when the primary trust failed. The question which must then be asked is exactly why that secondary trust arose.

1. Objects Before embarking on our search for the causative event, we should immediately note that, differently from the primary trust, there is no problem in identifying the object of the secondary trust. It is the lender. This does not, however, mean that the difficulties we identified with the primary trust which would arise if the lender were its beneficiary145 now disappear. The same objections, for example, as to double recovery, are still present.

143

[2002] 2 AC 164, 187. It has been questioned whether the insolvency of Rolls Razor really did cause the purpose of the loan to fail. Why, it is asked, was it not still possible to pay the dividend creditors?: W Goodhart and G Jones, ‘The Infiltration of Equitable Doctrine Into English Commercial Law’ (1980) 43 MLR 489, 494, n 28. 145 Text to nn 32–51. 144

34 William Swadling 2. Causative Event As with the primary trust, we will first ask whether the secondary trust was created because of a manifestation of consent, and, if not, whether it comes within one of the recognized categories of not-consent. i. Consent We have seen how consent needs normally to be proved, though in limited circumstances it may be presumed. Proven Consent Lord Wilberforce was clearly of the opinion that the secondary trust in Quistclose arose as a response to proof of intent to create a secondary trust. He said: ‘the intention to create a secondary trust for the benefit of the lender, to arise if the primary trust to pay the dividend, could not be carried out, is clear . . .’146 But, with respect, it was not clear at all that any such trust was intended. As we have seen, there was no proof of an intent to create even a primary trust, let alone a secondary trust, and, as the following passage makes clear, particularly by his use of the words ‘necessary consequence’, Lord Wilberforce’s finding of an intent to create a secondary trust is dependent on there being a primary trust in place: The mutual intention of the respondents and of Rolls Razor Ltd, and the essence of the bargain, was that the sum advanced should not become part of the assets of Rolls Razor Ltd, but should be used exclusively for payment of a particular class of its creditors, namely, those entitled to the dividend. A necessary consequence from this, by process simply of interpretation, must be that if, for any reason, the dividend could not be paid, the money was to be returned to the respondents: the words ‘only’ or ‘exclusively’ can have no other meaning or effect.147

For the same reasons that made it impossible to find any intent to create a primary trust, there could be no proven intent secondary trust either. Presumed Consent Will presumed consent supply the causative event? In one of the situations in which the court presumes that a declaration of trust was made, the trust there arises in favour of the transferor. The secondary trust in Quistclose arose in favour of a transferor. Might it therefore be that the secondary trust arising in Quistclose did so because this was a case in which the courts presumed a declaration of trust to have been made? The answer is no. For the same reasons that the primary trust could not be said to have arisen because of a presumption of intent on the part of Quistclose, ie, because the transfer was for consideration 146 147

[1970] AC 567, 582. Ibid p 580.

Orthodoxy 35 and there were no missing facts,148 it is equally clear that the secondary trust cannot be one based on a presumption that a declaration of trust was made by the transferor in his or her own favour. ii. Not Consent If it is not consent, then we might describe the event giving rise to the secondary trust as the failure of the primary trust. There is no doubt that trusts arise in favour of transferors for reasons other than consent on the failure of trusts. The clearest example is the trust which arises where a trust fails for uncertainty of objects.149 That they arise for a reason which is not consent was established by the House of Lords in Vandervell v IRC,150 where a settlor failed to declare the intended objects of a trust of an option to purchase. The House of Lords held that the option to purchase was held for the settlor on trust. It rejected an argument that the trust was based on a presumption of intent on the part of the settlor that he wanted such a trust, and that evidence that he did not intend to create a trust for himself could therefore rebut the presumption. The House held that the trust arose by operation of law, not because of a presumption of consent. It could not be a presumption of consent, said Lord Wilberforce, for the simple reason that all the facts were known: The transaction has been investigated on the evidence of the settlor and his agent and all the facts have been found. There is no need, or room, as I see it, to invoke a presumption. The conclusion, on the facts as found, is simply that the option was vested in the trustee company as a trustee on trusts, not defined at the time, possibly to be defined later.151

Despite the fact that this reasoning, being the ground on which Mr Vandervell lost his case,152 forms the ratio of the decision, Lord Browne-Wilkinson has since rejected the notion that a trust in favour of the settlor arising on the failure of an express trust for uncertainty of objects arises for a reason other than the consent of the settlor. In Westdeutsche Landesbank Girozentrale v Islington LBC,153 he said that such trusts were based on the presumed intentions of the settlor.154 In should straightaway be noticed that his lordship’s opinion was obiter and, as a matter of precedent, therefore carries little weight.155 But,

148

Above, text to nn 16–22. As, for example, in Morice v Bishop of Durham (1805) 10 Ves 522. 150 [1967] 2 AC 291. 151 Ibid p 329 (emphasis supplied). 152 He won a different point on the application of the Law of Property Act 1925, s 53(1)(c). 153 [1996] AC 669. 154 Ibid p 708. 155 It therefore comes as a surprise to find some textbooks citing Westdeutsche as good law on this point. So, for example, Oakley, in AJ Oakley, Parker & Mellows: Modern Law of Trusts, 7th edn (London, 1998) 273 says that Lord Browne-Wilkinson’s view ‘unquestionably represents English law at present.’ J Martin, Hanbury & Martin: Modern Equity, 16th edn (London, 2001) 238 is only marginally better. 149

36 William Swadling as a matter of principle, it is clearly wrong. Lord Browne-Wilkinson would presumably argue that most settlors who discovered their trusts to be void for uncertainty of objects would want the rights they had transferred to the intended trustees returned. That may well be true, though, as Vandervell v IRC shows, it is not a universal truth. But this would not be a presumption of intent at all. Bowen LJ reminded us in Edgington v Fitzmaurice that:156 . . . the state of a man’s mind is as much a fact as the state of his digestion. It is true that it is very difficult to prove what the state of a man’s mind at a particular time is, but if it can be ascertained it is as much a fact as anything else.157

Lord Browne-Wilkinson would not be talking about the presumption of a fact, an event which happened in the world. He would instead be talking about presuming an intent which the settlor never had, but which we suppose he might have had had he been asked what his intentions were if the trust was to fail. We know that he did not actually have such an intention because he did not address his mind to the question of failure: if he had, he would have have catered for such an eventuality along with the invalid declaration of trust.158 In truth, Lord Browne-Wilkinson’s ‘presumed’ intent is no intent at all, as Harman J acknowledged in re Gillingham Bus Disaster Fund:159 The general principle must be that where money is held upon trust and the trusts declared do not exhaust the fund it will revert to the donor or settlor. . . . This doctrine does not . . . rest on any evidence of the state of mind of the settlor, for in the vast majority of cases no doubt he does not expect to see his money back: he has created a trust which so far as he can see will absorb the whole of it. The . . . trust arises where that expectation is for some unforeseen reason cheated of fruition, and is an inference of law based on after-knowledge of the event.160

In other words, the trust here arising in favour of the transferor does so by operation of law, which is simply another way of saying that it arises for a reason other than the consent of the transferor. Might it be that the secondary trust in Quistclose is a not-consent trust of the Vandervell type? The immediate objection is that the consent trust in Vandervell failed from the start, whereas in Quistclose the primary trust failed subsequent to the receipt of the funds, on the insolvency of Rolls Razor. Subsequent failure is difficult. Trusts for persons cannot fail subsequently: there are either beneficiaries at the outset or there are not. Subsequent failure is only a possibility in the case of trusts for purposes. We have already seen how trusts for charitable 156

(1885) 29 Ch D 459. Ibid p 483. 158 As, eg, did George Bernard Shaw in re Shaw [1957] 1 WLR 729, where the author by his will tried to set up a trust for the invention of a new alphabet and, obviously being warned by his legal advisers that such a trust would be struck as not charitable and therefore a void purpose trust, further provided what was to happen to his estate should the trusts ‘fail through judicial decision’. 159 [1958] Ch 300. 160 Ibid p 310. 157

Orthodoxy 37 (public) purposes are the only purpose trusts which are tolerated. In such cases, there is an elaborate machinery to deal with subsequent failure, the cy pres doctrine, whereby the court has power to declare new trusts for other charitable purposes as near as possible to those originally intended. Such trusts are clear examples of trusts arising by operation of law. There is no similar machinery for failed private purpose trusts, for, ex hypothesi, no such machinery is needed. We are assuming, however, that the primary trust in Quistclose was valid, and, as such, was a trust for purposes rather than persons, and that those purposes were private, not public. If the law were to allow private purpose trusts to exist, then it would need to invent some machinery to cope with subsequent failure. In the absence of some private cy pres doctrine,161 it would arguably utilize the sort of trust which arose in Vandervell, using the (slightly dubious) argument that funds not spent before the purpose failed were simply funds over which no valid trust had been declared.162 If such a trust were to arise, the question we would have to ask is why it did so. Recall for the moment that are still in the realm of not-consent trust. This is an extremely difficult issue. On the assumption that we are dealing with a Vandervell-type trust here, the natural place to begin is with Vandervell itself. Unfortunately, the case itself gives little guidance. Both Lords Upjohn and Wilberforce explain the incidence of the trust on the ground that, the consent trust being void ab initio, the settlor’s option to purchase had not been given away and so remained in him.163 But this is wrong, for in cases such as these, the transferor does manage to get rid of the interest he was holding. If he had not done so, there would be no question of that right now being held for him on trust by another. The interest he holds as beneficiary of the trust is different to the outright interest he held before the transfer.164 There can therefore be no retention. Instead, there is a new right. And it is the creation of that new right which needs explanation.165 161 Gardner has argued for just such a thing: S Gardner, ‘New Angles on Unincorporated Associations’ [1992] Conv 41, 52. 162 The difficulty is that it would not be clear at the outset which funds were subject to the primary trust and which to the secondary trust. 163 ‘If A intends to give away all his beneficial interest in a piece of property and thinks he has done so but, by some mistake or accident or failure to comply with the requirements of the law, he has failed to do so, either wholly or partially, there will, by operation of law, be a . . . trust for him of the beneficial interest of which he had failed effectually to dispose. If the beneficial interest was in A and he fails to give it away effectively to another or others or on charitable trusts, it must remain in him.’ (Lord Upjohn, [1967] 2 AC 291, 313). ‘. . . [T]he equitable, or beneficial, interest cannot remain in the air: the consequence in law is that it must remain in the settlor. . . . [Mr Vandervell] had, as a direct result of the option and of the failure to place the beneficial interest in it securely away from him, not divested himself absolutely of the shares which it controlled’ (Lord Wilberforce, [1967] 2 AC 291, 329). 164 I myself have fallen into error on this point in the past: WJ Swadling, ‘Property’ in P Birks and F Rose, Lessons of the Swaps Litigation (London, 2000) 242, 265–67. 165 A similar failure to recognize a new right is evident in the cases on unauthorized substitutions, such as Taylor v Plumer (1815) 3 M & S 562 and Foskett v McKeown [2001] 1 AC 102. For criticism of Foskett on these lines, see P Birks, above n 79, 242–5.

38 William Swadling The only explanation so far put forward is that of Professor Birks,166 who says that such trusts are unjust enrichment trusts, arising ‘because the evidence shows that the transfer was not intended to enure to the benefit of the transferee.’167 That thesis is taken up and expanded by Professor Chambers, who says that the raising by the court of a trust is ‘an active response to the fact that the settlor did not intend to benefit the trustee.’168 Birks and Chambers argue that the prevention of unjust enrichment explains the incidence of all trusts, other than proven consent trusts, which arise in favour of transferors and a refutation would require a full-scale assault on their work. There is no room to do that here. For the moment, we have to see it as the best explanation so far of the trust which arose in Vandervell v IRC.169 It is, however, difficult to extend it to the facts of Quistclose for similar reasons to those which prevented us saying that the primary trust was responding to the unjust enrichment of Rolls Razor. Not only is the initial receipt of the loan monies, because of the contractual obligation to repay, a non-enriching event, their retention is not an enriching event either, for the obligation to repay still subsists. Only if the contract is first put to one side, which it never was in Quistclose, is there the beginning of an argument that the second trust in that case was responding to the unjust enrichment of Rolls Razor. We must not forget, however, that we are still playing Lord Wilberforce’s game and assuming that there was a valid primary trust. If, as has been argued, there was not, then there is no need to find an explanation for the secondary trust, for the secondary trust simply never in fact arises. Finally, it should be recalled that Professor Chambers’ own explanation of the trust in favour of the lender arising at the moment of failure cannot be sustained because, as has been argued above,170 the equitable right of restraint is not a right capable of binding third parties and therefore not one which could give priority on the insolvency of the borrower. And the Quistclose trust in favour of the lender would certainly appear to do just that.

IV : CONCLUSION

What seems to have worried Lord Wilberforce in Quistclose was the thought that Barclays could exercise its right of set-off and thereby evade a pari passu distribution of the loan monies.171 This would certainly not have been possible 166 P Birks, ‘Restitution and Resulting Trusts’ in S Goldstein (ed), Equity and Contemporary Legal Developments (Jerusalem, 1992) 335, reprinted in P Birks and F Rose, Restitution and Equity (London, 2000) 265. 167 Ibid p 362. 168 R Chambers, Resulting Trusts (Oxford, 1997) 41. 169 [1967] 2 AC 291. 170 Text to nn 132–42. 171 He describes it at the end of his speech as a ‘complete windfall’: [1970] AC 567, 582.

Orthodoxy 39 had Rolls Razor opened a special account with a different banker, and the real question, which will not be pursued here, is whether it is correct to say that set-off rights operate in an insolvency in the same way as when all parties are solvent. But in seeking to avoid the application of set-off by the finding of a trust, Lord Wilberforce departed from orthodox principles of trust law. It is impossible to say that the transfer was a transfer on trust because the restriction only referred to how the rights were to be applied, not for whom they were held. And even were we able to say that a trust was intended, grave difficulties arise in identifying the objects of that trust. It could not be the creditors for a number of reasons, the most prominent of which is that it would allow them to be paid twice over. For almost identical reasons, it could not be the lender. Nor could it be the purpose, for the purpose was a private purpose and English law does not countenance trusts for private purposes. And the argument of Chambers, that there need be no primary trust, does not succeed either, because it fails to explain how a personal right to see that the fund is not misapplied can bind a stranger, including the borrower’s trustee in bankruptcy, to the contract which creates that right. And given that Lord Wilberforce’s secondary trust depends on the validity of the primary trust, the argument that there was a consensual trust of the loan monies in favour of the lender on the failure of the purpose cannot be sustained. For the same reasons, a secondary trust arising by notconsent on the subsequent failure of the primary trust is not arguable either. In short, the House of Lords was wrong in Quistclose to find a trust and thereby give priority to the lender. The funds should have been held to be part of Rolls Razor’s general assets and treated accordingly.

3

Lord Millett’s Analysis JAMES PENNER 1

I : INTRODUCTION R I T I N G I N 1985 ,2

Lord Millett (then Peter Millett QC) showed how the trust found in the case of Barclays Bank Ltd v Quistclose Investments Ltd 3 could be explained as a perfectly orthodox trust, fully in line with traditional principles. He has more recently applied this analysis in his speech in Twinsectra v Yardley.4 The argument of this paper is that Lord Millett’s explanation of the Quistclose trust is, for the most part, successful. However it will also be argued that in recent cases, judges, Lord Millett included, have, in the course of determining whether a Quistclose trust has arisen, shown a willingness to depart from traditional principles of trust law in a way that is out of keeping with the general spirit of Lord Millett’s original explanation. The fact pattern of Quistclose trusts is generally quite simple. A transfers money to B, which money B receives under an obligation to use it for some specified purpose, typically to pay off particular creditors of B. Upon spending the money according to the obligation, it is clear that B becomes a debtor to A for the equivalent sum (and interest, usually). It is also clear that, should B become insolvent prior to his expenditure of the money according to the obligation, the money does not stand as one of B’s assets available to his trustee in bankruptcy for the benefit of his general creditors. So much is agreed. Where competing analyses differ is in the legal structure they claim operates during the period when B is in receipt of the money but his expenditure of the money according to his obligation under the arrangement with A is still in the offing. One analysis, convincingly demolished by William Swadling in this volume,5 is that B holds the money under a hitherto unrecognised private purpose trust. A second,

W

1 Thanks to Peter Birks, Andrew Burrows, Robert Chambers, George Gretton, Ewan McKendrick, Charles Mitchell, Lionel Smith, Robert Stevens and William Swadling for comments. I also was much enlightened by Eoin O’Dell’s extensive, but as yet unpublished paper, ‘Understanding Quistclose’, which he let me see in draft, and Jamie Glister’s ‘Twinsectra v Yardley: Trusts, Powers, and Contractual Obligations’ (2002) 16 Trust Law International 223. 2 ‘The Quistclose Trust: Who Can Enforce It?’ (1985) 101 LQR 269. 3 [1970] AC 567. 4 [2002] 2 AC 164. 5 At pp 9–39.

42 James Penner originating in the work of Robert Chambers, is discussed by him in this volume.6 A third, which will be the focus of this chapter, is the analysis first developed to any degree of clarity and rigour by Lord Millett. We should begin by pointing out that in commercial transactions our initial analytic impulse should be toward the contractual, at least in so far as the use of the trust device is not expressly intended. Traditionally, and usually, if A lends money to B, the money immediately becomes B’s legal property and A becomes an ordinary creditor of B, having the right to be paid an equivalent sum and, almost always, interest. This is so even if A pays the money to B with certain stipulations, for example, that the money has been lent for and must only be expended on certain business projects. If B spends the money otherwise, he commits a breach of contract, one consequence of such a breach of contract possibly being that the loan is immediately repayable. Loans of money, then, typically sound entirely within the law of contract. As Lord Millet put it: [A lender] may be said to lend the money for a purpose in question, but this is not enough to create a trust; once lent the money is intended to be at the free disposal of the borrower. Similarly payments in advance for goods or services are paid for a particular purpose, but such payments do not ordinarily create a trust. The money is intended to be at the free disposal of the supplier and may be used as part of his cashflow. Commercial life would be impossible if this were not the case.7

However, it is clear that in Quistclose itself and the line of cases leading up to it more than mere contractual obligations were involved, for the court in these cases found an arrangement whereby the money received by B was not at B’s free disposal subject only to a contractual obligation to spend it in a particular way, but was someway bound in equity, with the result that, for example, unexpended money did not fall into B’s estate in bankruptcy. Lord Millett’s analysis proceeds as follows: A, the provider of the funds, never relinquishes the beneficial ownership of the trust property until the recipient, B, applies the money in line with the instructions A gives, eg to pay a dividend (as in Quistclose) or to purchase new equipment (as in Re EVTR8), and, until such time, B holds it on trust for A. The disposal of the money is properly accomplished when B exercises his power as legal owner of the property and carries out A’s direction to spend the money as A instructs; that terminates the trust, for the subject matter of the trust has been fully disposed of in compliance with A’s 6 At pp 77–120. It will not be my purpose here to compare and in consequence favour either Chambers’ or Lord Millett’s analysis. It will be argued that Lord Millett’s view in its original version (see Section III, below) both explains the case law (in the sense of justifying those decisions which appear right and giving grounds for explaining the errors in cases which appear wrong) and does so according to traditional principles of trust law. As Chambers himself puts it in his chapter, the central question concerning his analysis is whether the arrangement he describes stands as a legal device which subjects of the law ought to be able to employ in the organisation of their affairs, having advantages which are not available under the Quistclose trust as characterised by Lord Millett. 7 Twinsectra Ltd v Yardley [2002] 2 AC 164, 185. 8 [1987] BCLC 646.

Lord Millett’s Analysis 43 instructions, ie properly disposed of not in breach of trust. When B has done this, B may become A’s debtor for an equivalent sum plus interest if there is also a contract between them so specifying, though, as Lord Millett has rightly insisted, there is no necessity that a transfer of property from A to B on trust for A subject to a power in B to distribute the trust property according to instructions given by A only arise in the context of commercial loan arrangements.9 B must follow (or at least must not violate10) A’s instructions, and by using the money for a purpose not instructed or allowed by A, B would commit a breach of trust as well as a breach of contract where there is one. This analysis is clearly attractive. It is simple and straightforward, and the trust as characterised operates on conventional principles of trust law; it also assimilates the Quistclose trust to the extremely common trust upon which purchasers and mortgagees transfer funds to solicitors so that the latter may complete a purchase of land, a variant of which arose in Twinsectra itself. In such cases, the money is held on trust for the mortgagee or purchaser, but the solicitor may under the mandate given to him transfer the money to the vendor of the property so as to complete the purchase of the land and acquire a legal mortgage in favour of the mortgagee. Until this is done, the money is beneficially the mortgagee’s or purchaser’s; if the solicitor spends the money otherwise than in pursuance of the mandate, he commits a breach of trust; if the instruction cannot be carried out, the money is simply held by the solicitor to the order of the mortgagee or purchaser; if the transaction goes ahead, and the money is properly spent on completion, the trust terminates as the trust fund is properly disposed of according to the beneficial owner’s instruction. Finally, Lord Millett’s analysis appears to avoid a difficulty faced by Chambers’ analysis: since the trust for A exists from the outset of the arrangement, rather than arising upon B’s insolvency, the trust for A is straightforwardly unavailable to B’s creditors on traditional insolvency principles.11 There are, however, two features of Lord Millett’s analysis which cause difficulty. The first has to do with certain of his characterisations of A’s instructions to B. The second concerns his characterisation of the Quistclose trust as a ‘resulting’ trust.

II : THE CHARACTER OF B ’ S POWERS AND DUTIES

There are two possible ways to characterise the nature of the obligations of the trustee under the Quistclose trust consistent with Lord Millett’s analysis. Under the first, A is essentially the beneficiary of a bare trust. There are no trust terms 9

10 11

‘Any analysis of the Quistclose trust must be able to accommodate gifts and loans for an abstract purpose’: Twinsectra Ltd v Yardley [2002] 2 AC 164, 189. See section II. Discussed in detail by Stevens in Chapter 8 of this volume.

44 James Penner other than that B should hold the trust property to A’s order. A’s instructions constitute mandates, which A may give, vary and revoke from time to time— they may either impose duties on B positively to do something, or confer powers upon B to deal with the property in certain ways if he so chooses. These mandates impose personal obligations upon B. If B distributes the trust property in violation of one of these mandates, he thereby commits a breach of trust, though not because the mandate is a term of the trust; he commits a breach of the only trust term there is, viz the overarching duty to hold the property to A’s order or mandate. By distributing the trust property in violation or outside the scope of A’s orders, he fails to hold the property to A’s order and for that reason commits a breach of trust. By contrast, in general B commits no breach of trust if his failure to comply with a mandate is a matter of non-feasance. In the case of non-feasance, B still holds the property to A’s order; he simply fails to carry out a particular mandate of A’s. If I transfer £10,000 on bare trust to my broker or agent to make investments on my behalf, and over the course of this relationship the broker fails to carry out an order to invest £5000 in shares of XYZ plc, in consequence of which I must buy them later at a higher price, we would not normally say that the broker or agent committed a breach of trust. We would say instead that he failed to carry out a contractual mandate concerning the disposition of my equitable property. We would not say that he violated my property rights in equity—rather, he simply failed in a personal contractual obligation to me, for which he should be liable for damages. The situation is analogous to a contractual bailment, where the bailee must hold the property to the bailor’s order—to sell it on specified terms with the bailor’s authority if the bailor so instructs, and so on. If the bailee sells the property without authority, it is clear that he has interfered with the bailor’s property rights and is thereupon liable for conversion. But if he merely failed to carry out an instruction, he would not have interfered with the bailor’s property rights—he would merely be liable for breach of contract. Furthermore, A’s mandate to B does not bind A in any way as a matter of property law, since A is the beneficial owner of the trust property; A may, however, contract with B not to revoke his instruction; if A then revokes, it would seem12 that B will commit a breach of trust if he goes ahead and spends the trust money to carry out A’s original instruction; no longer being able to carry out the instruction without committing a breach of trust, B may, however, sue A for breach of contract for any damages which A’s revocation causes him. It is the essence of this explanation of the Quistclose trust that the trust aspect of the relationship is minimal. The trust secures A’s beneficial interest in the property in question, keeping it safe from B’s insolvency and from B’s wrongful expenditure of it. But the rest of the arrangement between A and B sounds not in the law of property rights, but in the law of obligations, usually the law of contract.

12

See text accompanying nn 22–26.

Lord Millett’s Analysis 45 However, in keeping with the general framework of Lord Millett’s analysis, the Quistclose trust can be analysed otherwise. One can analyse the trust as a special, as opposed to a bare, trust. A’s instructions under the contract of loan could be regarded as specific terms of the trust that B undertakes, imposing true trust duties or conferring true trust powers on B. To the extent that A had the power to add to, vary, or revoke any of those instructions, this would be conceived as the power to vary the terms of the trust. On this view, any instructions imposed by A upon B that were obligatory would count as trust duties, or more shortly, trusts, and any rights conferred upon B that he might choose to exercise or not at his discretion, powers over trust property, powers to appoint. Under such a trust, A, by making the trust irrevocable, could not revoke any of the duties imposed or powers conferred upon B. Where A genuinely imposed trust duties upon B to expend the property in various ways so as not to benefit A, during such time as those duties were in place (not revoked), A’s beneficial interest in the trust funds would be to that extent displaced, so that in such cases it would no longer be true that the beneficial interest in the trust funds would remain in A throughout the life of the trust, and such cases would depart from the thrust of Lord Millett’s analysis. Thus, in order to keep within Lord Millett’s analysis, one would have to stipulate that where the arrangement imposed a duty on B with respect to the funds, such a duty would need to be seen as personal (typically, contractual), though where B merely received powers under the arrangement, these could be true powers of appointment forming part of the trust terms, for the mere conferral of powers does not displace the beneficial interest in the property of those who would take in default of exercise of the power,13 here A. Notice that these two analyses are not entirely incompatible. True, they are incompatible to the extent there is any positive obligation upon B to expend the trust moneys in any particular way. Under the first analysis, these obligations are purely contractual, while under the second, they are trust duties, which actually displace A’s beneficial interest. But as regards mere powers over the trust property vested in B, it is difficult to distinguish the cases. Whether a mere personal obligation under the contract or mandate under the former or as a power ‘under the trust’, an actual term of the trust, the effect is essentially the same (leaving to one side the issue of revocation).14 In both cases, any misfeasance will be restrained by equity in protection of A’s beneficial interests in the trust property and will result in liability for breach of trust if carried out. The asymmetry between the case of the power and the duty arises because of the nature of A’s rights in the property. In the case of powers, both the improper exercise of a power under the trust and a power or authority conferred under a contract have the same result—an unauthorised dealing with A’s equitable property rights, which equity will restrain. It is not the source of any powers to 13 14

Re Brook’s Settlement Trusts [1939] Ch 993. The nature of the power is discussed by Smith in Chapter 4 of this volume.

46 James Penner deal with the property that B has which is in issue in such cases—not being authorised by any means to deal with A’s property in this way, B is a simple interferer with A’s property; we are back to the default position of A’s property rights being invaded by someone without a right to do so. When B acts beyond his powers or authority to deal with A’s property, he is in no better position than any third party who interferes with A’s property rights; when B acts outside of his rightful authority he is not in a better or different position than such a third party because he is authorised by A to deal with A’s property in some other way. In the case of duties, the situation is starkly different. A’s contractual mandate to B does not bind the trust property. It confers upon B an authority to deal with the property in compliance with the duty (a duty to do something comprises the right to do it) but it does not impress the property with that duty as under a trust—it does not displace A’s beneficial interest in favour of the beneficiary of the duty, or create a purpose trust in which no one has any beneficial interest in the trust property. It merely creates a personal obligation in B to use his authority to deal with the property in a particular way. But in the latter case, the duty binds the property itself. As a trust will not fail for want of a trustee, should B get hit by a bus, the court will see that another trustee carries out the duty. In view of this, it appears that we can frame certain parameters for the shape of the Quistclose trust such that there may indeed be slight variations in the character of the duties and powers involved. In the first place, it seems wrong to state that B’s positive obligations to expend the trust monies in any particular ways should be treated as trust duties. They should always be regarded as personal. This is essential for two reasons. The first, the cornerstone of Lord Millett’s analysis, is that under a Quistclose trust the beneficial interest remains at all times in A until the money is properly expended, and the imposition of any trust duties on B would necessarily displace A’s interest. Secondly, given the scope of Quistclose trusts, only by treating any duties upon B as personal does Lord Millett’s analysis keep the Quistclose trust within the traditional principles of trust law. It is common ground that under Quistclose arrangements A can impose a duty upon B to expend the trust monies so as to carry out an abstract purpose which, were it to be seen as a duty imposed under a trust, would be invalid on orthodox trust principles, both in violation of the certainty of objects requirement15 and of the beneficiary principle.16 As Lord Millett states, ‘There is no reason to make an arbitrary distinction between money paid for an abstract purpose and money paid for a purpose which can be said to benefit an ascertained class of beneficiaries, and the cases rightly draw no such distinction.’17 But of course, if B has trust duties to carry out abstract purposes, the trust clearly violates these principles. 15

Re Astor’s Settlement Trusts [1952] Ch 534. Leahy v A-G for New South Wales [1959] AC 457; Re Endacott [1960] Ch 232; Re Astor’s Settlement Trusts [1952] Ch 534. 17 Twinsectra Ltd v Yardley [2002] 2 AC 164, 189. 16

Lord Millett’s Analysis 47 At points in his speech in Twinsectra, Lord Millett appears to suggest that B is under trust obligations to expend the trust money according to the stated purpose, the performance of which equity will compel, although this is usually qualified. So, for example, he says: ‘When the money is advanced, the lender acquires a right, enforceable in equity, to see that it is applied for the stated purpose, or more accurately to prevent its application for any other purpose’.18 Similarly, criticising Chambers’ view that the beneficial interest lies with B during the time that the purpose can be carried out, Lord Millett refers to ‘the fact, well established by the authorities, that the primary trust is enforceable by the lender’,19 though ‘enforceable’ here could mean either compelling performance or restraining misuse. Perhaps the statement which best expresses the view that B’s positive obligations are trust duties is the following: The duty [on B] is not contractual but fiduciary. . . . The duty is fiduciary in character because a person who makes money available on terms that it is to be used for a particular purpose only and not for any other purpose thereby places his trust and confidence in the recipient to ensure that it is properly applied. This is a classic situation in which a fiduciary relationship arises, and since it arises in respect of a specific fund it gives rise to a trust.20

Elsewhere, however, Lord Millett seems to depart from this view. Criticising Megarry V-C’s analysis in In Re Northern Developments,21 in which the ViceChancellor held that the primary trust was a valid purpose trust, Lord Millett states: ‘Lord Wilberforce [in Quistclose] makes it plain that the equitable right he had in mind was not a mandatory order to compel performance, but a negative injunction to restrain the improper application of the money’.22 However, towards the end of his exposition of the nature of the Quistclose trust, Lord Millett quite firmly adopts the view that B is not under any trust duties, saying: ‘The borrower is authorised (or directed) to apply the money for a stated purpose, but this is a mere power and does not constitute a purpose trust’.23 If, under the trust, B has only a mere power, even when directed, ie obliged, to apply the money for a stated purpose, then any positive obligations which B has must be personal, typically contractual. If the preceding analysis is right, equity will not compel the performance of a trust against B; at most, it could require specific performance on B’s part, and to the extent the trust purpose is abstract, the application of the principle of equity looking upon that as done which ought to be done to give rise to a constructive trust could not operate, for there is no person or persons who could be the beneficiaries of such constructive trust.

18 19 20 21 22 23

Ibid p 184 (emphasis supplied). Ibid p 191. Ibid p 186. 6 October 1978. Twinsectra v Yardley [2002] 2 AC 164, 188. Ibid p 193 (emphasis supplied).

48 James Penner There are a few final loose ends to tidy up. First, in most cases it will not in practice matter whether the power given to B to expend the funds in a particular way is treated as a personal authority under a bare trust or a mere power under a special trust. In either case, equity will be able to restrain any expenditure by B lying outside the scope of the purpose. It will, however, matter in the case where A makes the grant of the power or authority irrevocable. To the extent that the authority lies in contract, A would be in breach of contract were he to revoke B’s power to distribute the trust property according to the purpose. But at common law, the general rule, as shown in Wood v Leadbitter,24 is that one’s powers over one’s property remain effective despite one’s contractual obligations. Accordingly, A would be entitled to revoke B’s power to distribute the trust assets, even though he would be acting in breach of contract, and, in consequence, if B went ahead in the face of the revocation and distributed the property anyway, he would be liable for breach of trust. True, recent judicial developments concerning contractual licenses of land do not leave ejected licencees simply to their remedy in damages—equity may specifically enforce their contracts, effectively nullifying the licensor’s power to revoke a licence in breach of a contract allowing occupation of land.25 But it is not clear that this equitable specific performance right will or should apply equally to the case of Quistclose trusts. Consider, for example, a case such as Re EVTR,26 where the plaintiff provided money under a Quistclose trust to his former employer to buy equipment. Normally, grants of powers or rights under contracts are irrevocable by the other side unless clearly specified—to revoke would be to depart from the terms of the contract agreed, and the provision of general powers of revocation under contracts would be atypical. Nevertheless, if the plaintiff in this case, having second thoughts about the arrangement, had revoked his former employer’s authority to deal with the trust funds, there seems to be no compelling reason to give the employer the protection of an injunction, or refrain from treating him as a trustee in breach should he anyway go ahead with the purchase of the equipment, relying for protection on the fact that no power of revocation was specified in the contract. After all, the plaintiff was in essence doing his former employer a great favour, and it is difficult to see why the employer should not be left to claim in damages for a loss the revocation caused him, if any. In general, the tenor of a Quistclose trust is that A empowers B to deal with his, ie A’s property, to benefit B in a course of action with which A agrees. In these circumstances, it should be a rare case in which A’s beneficial interest in the property and the powers that go with it should not trump any personal rights to deal with the property that B has.27

24

(1845) 13 M & W 838. Winter Garden Theatre (London) v Millenium Productions Ltd [1948] AC 173; Ashburn Anstalt v Arnold [1989] Ch 1. 26 [1987] BCLC 646. 27 See further, Glister, above, n 1 p 227–29. 25

Lord Millett’s Analysis 49 The situation is, of course quite different where the entire transaction takes place within the law of trusts. While we have seen that it would violate basic trust principles to allow any duties on B to be part of the trust structure, the same does not apply to powers. It is perfectly conceivable that A could grant B a mere power to deal with the trust property otherwise held entirely for A. Unless A specifically grants himself a power to revoke such a power, it is irrevocable. For it is part of the trust now, and A’s beneficial interest in the trust property is now subject to it. A no longer has an indefeasible full beneficial interest in the trust property, as he did under the bare trust. (The interest under the bare trust is not diminished from full beneficial ownership by the fact that A may from time to time direct by issuing revocable mandates to his trustee how the property should be dealt with, for in such cases B is applying the property to A’s order, not complying with trust terms over which A no longer has any control.) A has a defeasible interest, which may be defeated if B ever exercises the power he has, over which A has no controlling rights whatsoever. It seems unlikely that this sort of framework would represent the intentions of many As, and in many cases, Quistclose included, it could not have been the framework. No one suggests that Rolls Razor Ltd had an indefeasible power to pay the loan moneys out as a dividend to its shareholders come what may, or that its liquidator acceded to such a power on Rolls Razor’s insolvency. Such an irrevocable power would be an asset available to the liquidator, with which the liquidator might have bargained with the shareholders for its exercise. (There is no suggestion that the power was other than personal; that is, that neither Rolls Razor (nor thus, the liquidator) could be regarded as fiduciary power holders, holding it for the best interests of the shareholders.) The point, of course, is that no one thinks that the power granted to B is ever meant to last beyond B’s bankruptcy. Nor does the general intent seem to be that the power be irrevocable by A, but lapses automatically (is a determinable interest from the outset or is alternatively defeasible via a condition subsequent) when B becomes bankrupt. As Lord Millett states: [I]f the borrower is treated as holding the money on a resulting trust for the lender but with power (or in some cases a duty) to carry out the lender’s revocable mandate, and the lender’s object in giving the mandate is frustrated, he is entitled to revoke the mandate and demand the return of the money which never ceased to be his beneficially.’28

The clear implication of this is that the frustration of the purpose or the bankruptcy of B are not events which determine rights or powers under the arrangement automatically, as under a detailed, drafted, special trust, but that A, with all the rights and powers that would attend the beneficiary of a bare trust in his favour, is entitled to react to such events and revoke all the powers of B, as until

28

Twinsectra Ltd v Yardley [2002] 2 AC 164, 192 (emphasis supplied).

50 James Penner the trust property is paid away according to his order, it remains his absolutely in equity. One must remember that both of the preceding arrangements are possible, and, as O’Dell and Chambers29 both warn, it would be a mistake to assume that every sort of Quistclose arrangement is organised wholly in equity rather than incorporating contractual elements. The claim here is that, generally, it makes most sense of the intentions of the parties, purposes of the arrangements, and results when things go wrong to begin with what might be called the ‘minimum’ input of equity that secures the central features revealed by the cases, and this is best accomplished by the bare trust elaboration of Lord Millett’s analysis, rather than the special trust elaboration wherein all powers are equitable. As has been pointed out above, since it is patently impossible to claim that B has any trust duties while at the same time maintaining that A’s beneficial interest remains in him throughout, it would make sense to treat all the ‘special’ features of the Quistclose arrangement as personal, typically contractual, which sit on the bare trust structure, rather than shoehorning as much as one can permissibly manage into the realm of trusts, ie making the powers special features of the trust structure, while out of necessity ‘leaving’ any duties as merely personal.

III : EXPRESS OR RESULTING TRUST ? 30

We have so far proceeded on the basis that, even if informally expressed, Quistclose trusts are intentional trusts, that is, trusts that arise on the basis of the genuine intentions of the parties involved. But in Twinsectra, Lord Millett stated quite unequivocally that Quistclose trusts are resulting trusts arising by operation of law. This departure from the view he expressed in 1985, where the Quistclose trust was clearly characterised as one based on the parties’ actual

29

O’Dell, above, n 1; Chambers, pp 77–120 of this volume. In first preparing this section of the chapter, I took my task to be one of clearing up a possible confusion that might arise from Lord Millett’s use of the term ‘resulting trust’ in Twinsectra. To my mind, Lord Millett merely extended the use of the term beyond the two conventional cases of presumed intention resulting trusts and automatic resulting trusts to encompass any trust, express or not, under which the provider of value to the trust received a beneficial interest. Thus a bare express trust, where A transfers property to B to hold to his order, would count as a ‘resulting trust’ on this broad use of the term. My initial view was that, despite his use of ‘resulting trust’, Lord Millett would fully agree with the proposition that Quistclose trusts were express or intentional trusts (however informally expressed) (see my statement to this effect in (2002) 16 Trust Law International 165, 171), and I thought it best to dispel any idea that Lord Millett’s use of ‘resulting trust’ indicated otherwise. However, on closer comparison of Lord Millett’s views expressed in 1985 and those in Twinsectra itself, I now think that his view of the nature of the trust has genuinely shifted to one in which he does not, as a matter of principle, regard the central case of the Quistclose trust as being express, but as arising by operation of law, though as we shall see in this part and the next, many traces of what I now think as his former view (that Quistclose trusts are express) also appear in Twinsectra. 30

Lord Millett’s Analysis 51 intentions,31 is a source of considerable worry. It is important to note that on Lord Millett’s analysis, the impossibility of B carrying out A’s instruction does not give rise to what Megarry V-C dubbed an ‘automatic resulting trust’ in Re Vandervell’s Trust (No 2),32 which would properly describe the ‘secondary trust’ that would arise upon the failure of a purpose trust. According to Lord Millett’s analysis, which is approved of here, the beneficial interest remains with A throughout. Nor could the trust properly be called a ‘presumed’ or ‘presumed intention’ resulting trust under the second category identified by Megarry V-C in Vandervell, for in no case has A ever been identified as having the beneficial interest on the basis of the evidentiary longstop33 to which the ‘presumption’ of resulting trust is applied. Therefore, according to the orthodox classification of resulting trusts, there is no ‘resulting’ trust at all in Quistclose cases. A’s beneficial ownership is intended from the first—he takes that interest as the intended beneficiary under the bare trust or nomineeship. His continuing interest until the money is properly applied or returned to him is never his as the result of the operation of a resulting trust, automatic or presumed. Lord Millett, however, holds the Quistclose trust to be ‘an entirely orthodox example of the kind of default trust known as a resulting trust. The lender pays the money to the borrower by way of loan, but he does not part with the entire beneficial interest in the money, and in so far as he does not it is held on resulting trust for the lender from the outset.’34 31 In his 1985 article (n 2), Lord Millett (by my count) only uses the term ‘resulting’ trust three times, on pp 270, 280, and 287, to describe the ‘secondary’ trust that would arise on a failure of a purpose under the ‘two trusts’ analysis of Quistclose of which he disapproves: thus at p 287 he says: ‘A’s right is not the right of the beneficiary under the resulting trust, for if the primary trust is fulfilled there is no resulting trust.’ The only statement in the article which comes close to treating the trust as one arising by operation of law is at p 284: ‘In the case of an ordinary express trust the answers depend on the construction of the trust instrument. The Quistclose trust, however, arises only partly from the language used. In most cases it arises largely, and in some cases wholly, by implication of law. It is a presumed or implied trust. . .’ (emphasis supplied). But the author then carries on as follows: ‘. . . and the answers to questions such as those raised above have to be inferred from the language and conduct of the parties and the circumstances of the case’ (emphasis supplied), indicating that the court is not implying a trust by operation of law but inferring the parties’ intentions from all the available evidence. Throughout the rest of the article, the trust is analysed as an intentional one, though one which might be informally expressed and where A’s intentions must be determined on the basis of all the evidence in context. So, for example, he says (at p 289): ‘This construction of the deed [ie where B is to hold the property on trust to A’s order], however, depends on the intention which the court attributes to A. Thus where the court is able to draw the inference that it was A’s intention to benefit his creditors, or where the obvious intention of the transaction would be frustrated if he were to retain a power of revocation, the deed will be held to create an irrevocable trust in favour of the creditors’. An almost identical statement is made at p 285, and similar remarks about inferring A’s intentions are made at pp 288 and 289. Finally, and most unambiguously, in his summary and conclusions at p 290, he writes: ‘The answer to the question raised at the beginning of this article depends upon A’s intention, to be collected from the language used, the conduct of the parties, and the circumstances of the case. The following, it is suggested, may be regarded as suitable guidelines by which A’s intention may be ascertained . . .’ All of the suggestions made concern the ascertainment of A’s genuine intentions. 32 [1974] Ch 269, 294. 33 Vandervell v IRC (1967) 2 AC 291, 313, (per Lord Upjohn). 34 Twinsectra Ltd v Yardley [2002] 2 AC 164, 192–93.

52 James Penner This characterisation of the Quistclose trust seems to follow from Lord Millett’s approval of Chambers’ general theory of the resulting trust, which he endorses in Twinsectra as follows: The central thesis of Dr Chambers’s book is that a resulting trust arises whenever there is a transfer of property in circumstances in which the transferor (or more accurately the person at whose expense the property was provided) did not intend to benefit the recipient. It responds to the absence of an intention on the part of the transferor to pass the entire beneficial interest, not to a positive intention to retain it. Insofar as the transfer does not exhaust the entire beneficial interest, the resulting trust is a default trust which fills the gap and leaves no room for any part to be in suspense. An analysis of the Quistclose trust as a resulting trust for the transferor with a mandate to the transferee to apply the money for the stated purpose sits comfortably with Dr Chambers’s thesis, and it might be thought surprising that he does not adopt it.35

In Air Jamaica v Charlton, Lord Millett characterised the resulting trust as follows: Like a constructive trust, a resulting trust arises by operation of law, though unlike a constructive trust it gives effect to intention. But it arises whether or not the transferor intended to retain a beneficial interest—he almost always does not—since it responds to the absence of any intention on his part to pass a beneficial interest to the recipient. It may arise even where the transferor positively wished to part with the beneficial interest, as in Vandervell v Inland Revenue Commissioners. . . .36

It would be unfortunate were the analytic clarification of the nature of Quistclose trusts to depend upon the adoption of Chambers’ thesis as to the nature of resulting trusts, as elaborated by Lord Millett, irrespective of how compelling some commentators find it. The thesis is a controversial one, and it is questionable whether a novel thesis, whose first extensive elaboration occurred with the publication of Chambers’ book in 1997, and which extends the ambit of the category of resulting trust well beyond the traditionally recognised categories, can form part of an analysis the central claim of which is that it accords with orthodox principles of trust law. Furthermore, the Chambers’ resulting trust analysis cannot cover express Quistclose trusts, ie cases where the documents specifically declare that B holds the property on trust for A until properly applied for the specified purpose, for in such cases there is no question that there is merely an absence of intention on A’s part that B should take the property beneficially—there is a positive intention that the property is to be held on trust for A. One could of course maintain that true Quistclose trusts are only those trusts that arise by operation of law in circumstances where it would be unjust for B to treat the money at his free disposal, and in which A had only an absence of intention to benefit B, but no

35 36

Twinsectra Ltd v Yardley [2002] 2 AC 164, p 190. [1999] 1 WLR 1399, 1412.

Lord Millett’s Analysis 53 genuine intention that the money should be held beneficially for himself,37 whereas cases where A positively intends to retain the beneficial interest in the money until properly applied38 should be called something else, perhaps ‘loans with retention of beneficial title’. However, there is no advantage in this. Whether the Quistclose trust is express or arises by operation of law, the structure of the trust and its operation are the same. Lord Millett himself said: I do not think subtle distinctions should be made between ‘true’ Quistclose trusts and trusts which are merely analogous to them. It depends on how narrowly or widely you choose to define the Quistclose trust. There is clearly a range of situations in which the parties enter into a commercial arrangement which permits one party to have a limited use of the other’s money for a stated purpose, is not free to apply it for any other purpose, and must return it if for any reason the purpose cannot be carried out. The arrangement between the purchaser’s solicitor and the purchaser’s mortgagee is an example of just such an arrangement. All such arrangements should if possible be susceptible to the same analysis.39

It is not clear how the arrangement between the solicitor and his purchaser’s mortgagee is plausibly to be regarded as arising by operation of law rather than on the basis of the parties’ expressed intentions, so the ‘resulting trust arising by operation of law’ analysis now apparently favoured by Lord Millett would appear to make the common analysis he favours unlikely. It is well beyond the scope of this chapter to try to determine whether Chambers’ general theory of resulting trusts is correct, or to determine to what extent, according to it, trusts formerly regarded as intentional (where that intent is presumed rather than proven) ought now to be regarded as arising by operation of law. However, we cannot put off the resolution of this issue for long, for it largely determines how the court should properly take into account evidence of the parties’ intentions in determining whether a Quistclose trust has been created or has arisen. If the trust arises by operation of law on the court finding that A did not intend B to take the transferred property beneficially, then a Quistclose trust will arise in any case of a loan where A insists that B use the money only for a stated purpose in terms which seem to indicate that the money is ‘not at the free disposal of’ B. If a resulting trust arises by operation of law in response to the absence of intention, it is not clear how any of the traditional requirements for express trusts (the ‘three certainties’ of intention, subject-matter, and objects), 37 This distinction is almost scholastic in its unreality. What, in a two party case where A transfers property to B, genuinely distinguishes A’s intention that he retain the beneficial interest from A’s intention only that B should not have it? If B is not to have it, then who else can A mean to have it except himself? We are not concerned here with the possibility that A might want to vest the interest in a third party, C, but only as to whether A or B is to have it, and with respect it seems clear that the exclusion of an interest for one party necessarily dictates that it rests with the other. 38 A clear example is the decision of the Court of Appeal in R v CPE Board, ex p MealingMcCleod The Times, 19 April, 2000, where the loan documents specified the trust on which the borrower held the money for the lender. 39 Twinsectra Ltd v Yardley [2002] 2 AC 164, 192.

54 James Penner which might otherwise constrain a finding of trust, are presumed to be relevant, for these concern the intentional creation of trusts, and not trusts arising by operation of law. Therefore, A need have no intention that the money is to be held for him beneficially (ie no intention to create a trust), no intention that the funds are to be held separate from B’s own, and no genuine application of the test of certainty of objects. Rather, in circumstances where the court finds a resulting trust arising by operation of law on the basis only that A did not intend B to take a beneficial interest—in the sense that A did not want the funds to be at B’s free disposal—the court itself must devise a workable trust which reflects as best it can its determination to preserve in A a beneficial interest in some property, whether the property received by B or some traceable substitute. The need to locate a traceable substitute is likely to arise again and again, for having no intention to positively retain any beneficial interest A is unlikely to have instructed B to keep the property separate, and so B would naturally mix it with his own. This approach is a recipe for a largely unfettered discretion in the court to find trusts in commercial circumstances on flimsy evidence about what might have been absent to A’s mind, as opposed to determining the true intentions of the parties. And once we escape any requirement that the court find a genuine intention on the part of A that the beneficial interest in the property is to remain his until properly applied by B, it seems difficult not to conclude, despite Lord Millett’s claim that loans granted with a purpose for the money should typically be seen as sounding only in contract,40 that any loan which is expressed to be used only for a stated purpose should give rise to a Quistclose trust, for expressing that sort of restriction is tantamount to saying the money is not to be at B’s free disposal. In short, shorn of any genuine requirement that the parties intend A to have the beneficial in the property, and in that sense it is understood that the money is not to be at B’s ‘free disposal’, ie, it is not his money to spend (however informally or imperfectly this genuine intention is expressed), ‘the free disposal’ criterion must inevitably amount to an invitation to the courts to impose a trust wherever a purpose is stated. Seen from the perspective of the Chambers theory of resulting trusts, as adopted by Lord Millett, how can the following statement of his Lordship suggest anything else? It is unconscionable for a man to obtain money on terms as to its application and then disregard the terms on which he received it. Such conduct goes beyond a mere breach of contract. . . . The duty is not contractual but fiduciary. It may exist despite the absence of any contract at all between the parties . . .; and it binds third parties. . . . The duty is fiduciary in character because a person who makes money available on terms that it is to be used for a particular purpose only and not for any other purpose thereby places his trust and confidence in the recipient to ensure that it is properly applied. This is a classic situation in which a fiduciary relationship arises, and since it arises in respect of a specific fund it gives rise to a trust.41 40 41

Text accompanying n 6. Twinsectra Ltd v Yardley [2002] 2 AC 164, 186.

Lord Millett’s Analysis 55 Note that the reference to a specific fund does not require any finding of intention as to the beneficial interest in that specific fund. Since all loans are loans of specific funds, this ‘requirement’ on the finding of a Quistclose trust serves no gate-keeping function whatsoever. This invitation seems to have been taken up without hesitation by Lord Millett in Twinsectra, as appears from the concise statement of his reasoning to a result: In the present case paragraphs 1 and 2 of the undertaking are crystal clear. Mr Sims undertook that the money would be used solely for the acquisition of property and for no other purpose; and was to be retained by his firm until so applied. It would not be held by Mr Sims simply to Mr Yardley’s order; and it would not be at Mr Yardley’s free disposition. Any payment by Mr Sims of the money, whether to Mr Yardley or anyone else, otherwise than for the acquisition of property would constitute a breach of trust.42

If the situation is as I have described it, then Lord Millett’s adoption of the Chambers thesis produces just the likelihood of uncertainty and injustice from the intervention of equity into commercial transactions of which judges have long warned.43 Having said that, however, Lord Millet’s approach to the relevance of the parties’ intentions elsewhere in Twinsectra seems to indicate that more was necessary to give rise to a Quistclose trust than the mere acceptance of money to be used for a purpose: On this analysis [ie, Lord Millett’s own], the Quistclose trust is a simple commercial arrangement akin . . . to a retention of title clause (though with a different object) which enables the borrower to have recourse to the lender’s money for a particular purpose without entrenching on the lender’s property rights more than necessary to enable the purpose to be achieved. The property remains the property of the lender unless and until it is applied in accordance with his directions, and insofar as it is not so applied it must be returned to him. I am disposed, perhaps pre-disposed, to think that this is the only analysis which is consistent both with orthodox trust law and with commercial reality.44

In this passage, the Quistclose trust is characterised as a simple commercial arrangement akin to a reservation of title clause. In the vast majority of cases, one would presume that reservation of title arrangements are intentionally entered into by the parties, not that they arise by operation of law. Certainly, in the case of a clause reserving legal title, there is no room for a resulting trust analysis, for the operation takes place wholly at law. The arrangements in a 42

Ibid p 186 (emphasis in original). See, eg Manchester Trust v Furness [1895] QB 539, 545, (per Lindley LJ); Re Goldcorp Exchange Ltd [1995] 1 AC 74, 98, (per Lord Mustill). In the Court of Appeal in Twinsectra, Potter LJ adverted to this consideration: [1999] Lloyd’s Rep Bank 438, 454, though it did not prevent him finding a trust on the facts. 44 Twinsectra Ltd v Yardley [2002] 2 AC 164, 187 (emphasis supplied). 43

56 James Penner Quistclose trust are intentionally conceived, as appears from the passage, as ones in which the lender’s money is made available to the borrower, ie that there is a shared understanding or intention that the money remains the lender’s property and does not become the borrower’s. What clearer intention could there be that the money is held on trust for the lender? I have pursued this issue in some detail so as to make the following conclusion plausible. It seems that Lord Millett’s analysis has altered from that stated in his 1985 article to his elaboration of it in Twinsectra. In respect of its orthodoxy and its respect for commercial reality and its kinship with similar commercial arrangements, the analysis is essentially unchanged. The Quistclose trust is an intentional (if informally expressed) trust, created by the parties, and the determination whether an arrangement is a Quistclose trust must be determined by drawing such inferences as the court can as to the parties’ true intentions from their statements, their actions, and all the surrounding circumstances. But overlaid upon this original analysis has been an attempt to combine it with or modify it to cohere with Chambers’ general analysis of resulting trusts. It is submitted that this hybrid is unstable, leading to any number of inconsistencies in approach to the facts of a case. It is further submitted that the move in the direction of Chambers’ general thesis in this particular area of law is not to be recommended. It invites a broad discretion in the court to find trusts irrespective of, or giving little weight to, the parties’ true intentions, introducing uncertainty in the law and, as with all broad discretions, giving rise to the possibility of significant injustice. It also seems wholly unnecessary. There does not seem to be a single instance in which the original 1985 elaboration of Lord Millett’s analysis cannot provide for a solution. Finally, it is simply the case that, as in reservation of title cases, the background assumption must be that commercial actors, advised as they often are by lawyers (as they were in Twinsectra), will regard themselves appropriately bound only to what they agreed, ie to arrangements that reflect their intentions. Taking an approach to commercial arrangements which focuses not upon the true intentions of the parties but on what was not on their mind can only sew confusion in the judgments, and with respect, this seems to be what happened in Twinsectra, which will provide the focus of the discussion of the requirements of certainty of objects and certainty of intention in the next section.

IV : CERTAINTY OF OBJECT , PURPOSE AND INTENTION

A brief recapitulation of the facts in Twinsectra is necessary. The borrower, B, was seeking short term finance of £1m for the purchase of land, fearing that his regular lender would not approve a loan in time. Through an intermediary, the lender, L, was approached. As it turned out, B’s regular banker did provide a loan of £1m, which was used in the intended purchase of land. However, B continued, via a solicitor, S1, to negotiate for the loan with L. At this stage, it was

Lord Millett’s Analysis 57 clear that the nature of B’s interest in the loan from L had changed. S1 owed B upwards of £1m under a series of dubious transactions involving bribes to Nigerian officials paid to realize certain amounts to be paid by a Nigerian Ministry under an engineering contract. S1 gave his personal undertaking to repay the loan, and B appeared to think that, in consequence, he would receive the loan funds and that S1 would be solely, or primarily, liable to repay them. B no longer had any intention to use the loan moneys from L for the purpose of a specific property transaction, and following receipt of the money by S1, it was transferred to S2, another solicitor of B’s, who placed it in his client account and expended the money to the order of B. About two-thirds of the money was expended on several different purchases of land, while the rest was used for various business purposes of B. The loan was negotiated on behalf of L by several intermediaries, but was concluded by his solicitor, S3. The main difficulty in determining whether the loan arrangement gave rise to a Quistclose trust was that the attention of all the parties active in negotiating and concluding the agreement was directed to obtaining S1’s undertaking to repay the loan money, the form of that undertaking, and the interest rate. Little or no attention was paid to the loan purpose. The following two terms appeared in the written form of the undertaking signed by S1: 1. The loan moneys will be retained by us until such time as they are applied in the acquisition of property on behalf of our client; 2. The loan moneys will be utilized solely for the acquisition of property on behalf of our client and for no other purpose.

Certainty of object or purpose Whether contractual or an actual term of the trust, any power to spend the trust funds must be sufficiently certain to determine whether the property is applied or misapplied, for only on that basis will the parties and the court be able to determine whether a breach of trust has taken place. Traditionally, of course, the test has been framed in terms of certainty of objects, objects here being conceived of as human beneficiaries. A court must be able to determine with certainty whether any given postulant ‘is or is not’ within the class entitled to benefit.45 However, courts clearly seem to accept the possibility that mere powers may be for abstract purposes,46 so long as they are not capricious,47 and, of course, to the extent that Lord Millett’s analysis of the Quistclose trust is in all basic terms correct, as I have argued it is, the validity of Quistclose trusts is itself proof that powers for abstract purposes are valid in English law. It follows that 45 Re Gestetner Settlement [1953] Ch 672; Re Gulbenkian’s Settlement Trusts [1970] AC 508; McPhail v Doulton [1971] AC 424; Re Baden’s Deed Trusts (No 2) [1973] Ch 9. 46 Re Douglas (1887) 35 Ch D 472; Re Shaw [1957] 1 WLR 729. 47 Brown v Burdett (1882) 21 Ch D 667; but see Bird v Luckie (1850) 8 Hare 301.

58 James Penner the same test, the ‘is or is not’ test, should apply to determine whether any purpose is certain enough, suitably modified to cover purposes rather than people: a power should be valid if it can be determined whether any application of the funds falls within the class of expenditures the purpose comprises. It is worthwhile noting that, though we traditionally distinguish ‘certainty of objects’ from ‘certainty of intention’, using the latter to state the requirement that the settlor must intend to create a trust, the test of certainty of objects can only be applied to what the settlor, or the parties in a commercial relationship such as the Quistclose trust, intended. It only operates when there is some intended purpose, and to that purpose the test of certainty is applied. So, in respect of certainty of purpose, we are clearly in the realm of dealing with the parties’ intentions as inferred from all the evidence. At trial, Carnwath J found that L could not claim that the purposes for the loan money were critical to its agreement to the loan: [The principal of Twinsectra (the lender)] understood that the borrower did not want detailed investigation of the underlying transaction. He accepted that position, since, as he emphasized in evidence, the security on which he was relying was the solicitor’s undertaking.48

As to S3, L’s solicitor, Carnwath J found that he had in the form of the undertaking ‘deliberately excluded any reference to a transaction, or even a specific client.’49 He also found that S3 regarded the entire transaction as a dubious one, that he had ‘deliberately refrained from asking the relevant questions and encouraged the ambiguity of the undertaking’:50 In my view, neither the content of the undertaking . . . nor the evidence of the parties, justifies the implication of such a trust in this case. It is possible that the original draft, which [S3] used as a base, was prepared with Quistclose in mind. However there is no evidence that [S3] or his clients were alive to that aspect when concluding the present transaction. Nor does the document itself have the certainty necessary to create a trust. A basic requirement for a Quistclose form of trust is that there is clearly identified the purpose, failure of which is to trigger the resulting trust in favour of the lender. I have already commented on the lack of clarity of the undertaking as to what was thought to be the intended use of the loan, and the deliberate omission of any specific references. This ambiguity is reflected in the different ways in which the alleged trust is defined in the pleadings. . . . If equity were to impose a trust, it would not be giving effect to the intention of the parties.51

Potter LJ52 in the Court of Appeal and Lords Hoffmann and Millett in the House of Lords disagreed. They all found the purpose as stated in the document describing the undertaking, ‘the acquisition of property’, sufficiently certain. 48 49 50 51 52

Twinsectra Ltd v Yardley, 20 December, 1996, Lexis transcript, p 21. Above, n 48, p 20. Above, n 48, p 26. Above, n 48, p 30. With whom Sir Iain Glidewell and Sir David Hirst agreed.

Lord Millett’s Analysis 59 Unfortunately, in reaching this conclusion, neither Lord Millett nor Lord Hoffmann correctly stated the test for certainty of powers established in Re Gulbenkian.53 In that case, the House of Lords explicitly disapproved the view of Lord Denning MR in the Court of Appeal that a power was valid so long as one or a certain number of dispositions under the power could be said to be certain.54 In Twinsectra, Lord Hoffmann said, citing McPhail v Doulton,55 that ‘a power is sufficiently certain if the court can say that a given application of the money does or does not fall within it terms’.56 But the test is whether any application of the money could be said to fall within the power’s terms. Lord Millett put it this way: ‘Provided the power is stated with sufficient clarity for the court to be able to determine whether it is still capable of being carried out or whether the money has been misapplied, it is sufficiently certain to be enforced.’57 This formulation too seems to focus upon there being some cases where the expenditure would fall within the scope of the purpose (‘is still capable of being carried out’) or specific cases before the courts (‘whether the money has been misapplied’) rather than the ‘any possible case’ stringency of the Gulbenkian test. We should not make too much of this. In a context where both their Lordships thought the stated purpose, ‘the acquisition of property’, was certain enough, perhaps abundantly certain in their view, precise statements might not be necessary. But it is more than arguable that ‘acquisition of property’ would not survive scrutiny as a purpose defining the scope of a power to expend trust property under the ‘is or is not’ test of Re Gulbenkian. One might suppose that, in one sense, ‘property’, treated as a legal term of art, could not be regarded by the courts as uncertain on pain of bringing the law into disrepute, though it is fair to point out that ‘property’ is variously defined by statutes for their own purposes.58 The problem in Twinsectra was that it is obvious that the acquisition of anything that would count as a property interest in law would not have fallen within the power intended by the parties. Closer would be the ‘acquisition of real property’. Closer still might be the ‘acquisition of fee simple interests in real property’, but here we run into real problems, for it is doubtful on the facts that even if the parties had addressed their minds more resolutely to the purpose of the loan than they clearly did, they would have been able to state with sufficient certainty what all might have contemplated to be the purpose. Long-term leasehold interests? A residence for Mr Yardley as opposed to business premises? With respect, it would appear that the ‘acquisition of property’ does not have the robustly certain scope which their Lordships seemed so easily 53

[1970] AC 508. [1968] Ch 126, 133, 134. 55 [1971] AC 424. 56 Twinsectra Ltd v Yardley [2002] 2 AC 164, 169 (emphasis supplied). 57 Ibid p 193. 58 For example, the Insolvency Act 1986, s 436, provides that: ‘ “Property” includes money, goods, things in action, land and every description of property wherever situated and also obligations and every description of interest, wherever present or future or vested or contingent, arising out of, or incidental to, property’. 54

60 James Penner to find.59 What seems to have led their Lordships to this conclusion is the analogy of money being provided to solicitors for the purchase of a specific parcel of land. That is indeed what the transaction was originally intended to be. The ‘acquisition of Blackacre’ is undoubtedly certain. The irreproachable certainty of ‘the acquisition of Blackacre’ seems to have, in the context of this case, made the ‘acquisition of property’ equally robust, which on closer examination it is not. Given the trial judge’s views on this point, it is at first sight surprising that their Lordships did not discuss this issue in greater detail, as their findings do not appear to meet the essence of Carnwath J’s argument that the purpose was uncertain. Carnwath J did not claim that a general purpose such as ‘the acquisition of property’ was inherently uncertain, but rather that, on the facts of this case, no general purpose of this kind represented the true intentions of the parties. His view was that if there was a Quistclose trust intended here at all, it must have concerned a specific property transaction, not the general purpose of ‘acquiring property’. Carnwath J found that L never settled on any purpose for the loan, specific or general. At the outset, it wished to make the loan on the basis of a specific underlying transaction, but refused to concern itself in any way with specifying what that was; following the debtor’s default it chose to claim, relying on terms 1 and 2 of the form of the undertaking, that a general, unspecified purpose of ‘acquiring’ property was its intention for the loan, but Carnwath J found that this was simply not the case. This is a perfectly plausible reading of the facts, and if correct, would mean that there was no certainty of purpose. It is no objection to this finding that a general purpose of ‘acquiring property’ is certain enough if that reflects the true intentions of the parties; the point is that Carnwath J found that in the circumstances of this case no such general purpose of that kind was intended by the parties. What clearly distinguished the approach of the trial judge on this issue and that of Potter LJ in the Court of Appeal and Lords Hoffmann and Millett in the House of Lords is that they concerned themselves only with the purpose as expressed in the document of undertaking, whereas Carnwath J looked to the parties’ intentions as gleaned from all the surrounding circumstances.60 This difference of approach was also reflected in their approach to the certainty of intention to create a trust, to which we now turn.

Certainty of intention to create a trust As we have seen, Carnwath J looked to the true intention of the parties as the foundation for any trust. Though he framed the trust as resulting, he did so 59

I am grateful to Charles Mitchell for drawing many of the points in this paragraph to my atten-

tion. 60 As was accepted he was entitled to do: Twinsectra Ltd v Yardley [1999] Lloyd’s Rep Bank 438, 459 (Potter LJ).

Lord Millett’s Analysis 61 following Lord Browne-Wilkinson’s characterisation of a presumed resulting trusts61 as one which ‘gives effect to [the lender’s] presumed intention’.62 To say, however, that his finding was one of a ‘presumed resulting trust’ is to erroneously apply the label. Presumed resulting trusts only arise where the presumption is necessary to dispose of a case. It is a longstop, to be used only where the evidence is not sufficient to determine a case and all reasonable inferences have first been drawn from the surrounding circumstances.63 In Twinsectra, all the relevant parties were alive and testified and there was a wealth of evidence upon which to infer their intentions—there was simply no room for the presumption to operate.64 On the issue whether the parties’ intentions were sufficiently certain for the creation of an express trust, Potter LJ said that the question turned on the true construction of the undertaking in light of the surrounding circumstances,65 and found that the surrounding circumstances ‘lean[t]’ in favour of an intention to create a trust [in the terms of the undertaking]’.66 In the House of Lords, Lord Hoffmann held that L’s intention depended not on what L understood, but on the true construction of the undertaking, in particular, paragraphs 1 and 2 of the loan document.67 Lord Millett’s reasons were more extensive, but along the same lines. He said: A settlor must, of course, possess the necessary intention to create a trust, but his subjective intentions are irrelevant. If he enters into arrangements which have the effect of creating a trust, it is not necessary that he should appreciate that they do so; it is sufficient that he intends to enter into them. Whether paragraphs 1 and 2 of the undertaking created a Quistclose trust turns on the true construction of those paragraphs. . . . The question in every case is whether the parties intended the money to be at the free disposal of the recipient . . .. His freedom to dispose of the money is necessarily excluded by an arrangement that the money shall be used exclusively for the stated purpose, for as Lord Wilberforce observed in the Quistclose case . . .: A necessary consequence from this, by a process simply of interpretation, must be that if, for any reason, [the purpose could not be carried out,] the money was to be returned to [the lender]: the word ‘only’ or ‘exclusively’ can have no other meaning or effect.68

From the perspective of Quistclose trusts being intentional trusts, this approach seems radically insufficient. The terms of the undertaking did not use the word ‘trust’, nor did they require the borrower to hold the assets separately, for 61 62 63 64 65 66 67 68

Above, n 48, p 30. Westdeutsche Landesbank Girozentrale v Islington LBC [1996] AC 669, 708. Vandervell v IRC [1967] 2 AC 291, 313 (Lord Upjohn). Ibid p 329 (Lord Wilberforce). Twinsectra Ltd v Yardly [1999] Lloyd’s Rep Bank 438, 460. Ibid. Twinsectra Ltd v Yardley [2002] 2 AC 164, 169. Ibid p 185.

62 James Penner example, in a special bank account. Paragraphs 1 and 2 speak only of the retention of the loan money until applied for the stated purpose, albeit in fairly stringent terms. Now it is trite law that the presence or absence of the word ‘trust’ is not determinative of whether a settlor’s expression gives rise to a trust,69 but the absence of the word ‘trust’ in a document prepared by lawyers which was the focus of extensive negotiations cannot be taken as leaning in favour of a trust, and must indeed be a counter-indication, though perhaps a weak one. The issue was complicated by the fact that the loan money was to be transmitted to B’s solicitor, who would of course hold the funds in a separate account, ie in his client account. An intention that moneys were to be transmitted by L in this way should serve perfectly well in some circumstances as sufficient evidence of an intention that the funds be segregated so as to draw the inference that a Quistclose trust was intended, but by the same token, it would not necessarily do so in every case. In this case, Carnwath J found that both B and S2 believed that S2 held the funds to B’s order, and while the learned trial judge may have got that wrong, there is nothing inconceivable about such an arrangement. The mere fact of a lender transmitting funds to a borrower’s solicitor cannot in all cases necessarily give rise to a Quistclose trust in favour of the lender, for it is perfectly plausible that the funds were transmitted to the solicitor in this way to help give effect to a loan purpose or for the borrower’s convenience, as, for example, in this case, where the money was expended by S2 in transactions involving various companies of B, in short, for reasons of commercial convenience. The facts of this case are clearly unusual; this was not a usual transmission of funds to a solicitor by a lender/mortgagee for the completion of a purchase of land; nor was there any apparent concern over the possibility of B’s insolvency, such that L might seek the Quistclose device to protect himself. In this respect, it is noteworthy that Lord Millett did not advert to the discussion in his 1985 article as to when a Quistclose trust ought typically to be inferred.70 As regards the line of cases more or less directly leading to Quistclose, he there considered that where the intentions of the parties must be gathered from the circumstances as opposed to being expressed explicitly in the contract of loan, a Quistclose trust will properly be inferred if the arrangement can be interpreted as one in which B is, in essence, spending L’s money to achieve a purpose which L cannot by spending his own money directly. In Quistclose itself, Quistclose was hoping to stave off Rolls Razor’s bankruptcy by ensuring that Rolls Razor was able to pay its declared dividend. If, however, Quistclose had tried to pay the dividend itself, it would have revealed to the world Rolls Razor’s desperate circumstances. So it could only do so by putting the money in Rolls Razor’s hands.71 Nothing of this sort of motivation coloured L’s intention in this case. 69

See, eg, Paul v Constance [1977] 1 WLR 527. PJ Millett QC, ‘The Quistclose Trust: Who Can Enforce It?’ (1985) 101 LQR 269, 284 et seq. 71 Carreras Rothmans Ltd v Freeman Mathews Treasure Ltd [1985] Ch 207 is an even better example of a case where L intended to spend the money for its, ie L’s, own purposes, but could not do so just by spending the money itself. 70

Lord Millett’s Analysis 63 Apparently, Lord Millett did not think it appropriate to undertake an investigation of the parties’ actual intentions, even though the meagre documentation of the transaction would appear to have invited it. Rather, he was able to find that B’s obligations to retain the money until applied only for the stated purpose, as expressed in the undertaking, were a sufficient basis for the court’s finding an absence of intention on L’s part to part with the beneficial interest in the money advanced. This is reflected in the passages quoted in the preceding section, where Lord Millett characterises his approach to equity’s intervention in such cases and his short summary of his reasoning,72 and in the passage quoted directly above, where he focuses exclusively on B’s duty to apply the money only for the stated purpose, making no reference to any duty to hold the funds separately for L or otherwise treat them as belonging to A beneficially. By contrast, Potter LJ in the Court of Appeal appeared to regard the intention to segregate the fund as a highly relevant indication of an intention to create the trust: [I]n a commercial setting, there must be some element or circumstance present additional to a simple declaration of purpose to give rise to a fiduciary obligation on the recipient of a loan, such element or circumstance usually being found to exist in the form of a requirement by the lender that the loan monies be held in a special account separate from the recipient’s general funds.73

It seems clear that Lord Millett’s decision in Twinsectra, in the way that it addressed both the issues of certainty of purpose and certainty of intention to create a trust, is best explained as a departure from an analysis of the Quistclose trust as an intentional trust. Perhaps the clearest evidence of this is his apparent unconcern whether the parties evinced any intention that the recipient hold the funds separately as the beneficial property of someone else, not as his own. This is an absolutely essential aspect of any true intention to create a trust. Where the parties intend to create a Quistclose trust, their intention, as in all other cases of trusts, is the intention to enter into a specific sort of property transaction, under which the property the recipient receives is not to be regarded as beneficially his, and not beneficially his in a strong sense, ie that he must hold the property separate from his own and for the benefit of the intended beneficiary, be that the transferor or a third party. Having this intention does not require using the word ‘trust’, or even knowing what a trust is in law. But it does require the understanding that to deal inappropriately with the received funds would be equivalent to theft or conversion, ie, the taking of or interference with someone 72

Text to nn 38–39. Twinsectra Ltd v Yardley [1999] Lloyd’s Rep Bank 438, 456. Potter LJ stated (at p 458) that deposit in a solicitor’s client account could serve as sufficient segregation of Quistclose trust funds: 73

[S]egregation from [S1’s] own assets was inherent in the requirements of the Solicitor’s Accounts Rules 1986, rules 3–7, relating to the keeping of a client account. While the money in the client account would not be segregated from the monies of other clients . . ., the strict obligations imposed by the Rules as to the payments proper to be made into and out of the account would ensure the preservation of the fund once paid in.

64 James Penner else’s property, and not merely the breach of a personal obligation as regards what one does with one’s own. Furthermore, it is not fanciful to suggest that having this intention may be undermined by the facts even in the face of a loan contract specifying that the borrower will hold the funds on trust. Consider, for example, the decision of the Court of Appeal in R v Common Professional Examination Board, ex p Mealing-McCleod,74 in which the written contract of loan included the following provision: ‘You must use the cash loan for any purpose specified overleaf. . . . You will hold that loan, or any part of it, on trust for us until you have used it for that purpose’. That seems straightforward enough. But one should still look at how the money was advanced. What if the bank, according to its regular practice, simply paid the loan money into its borrower/client’s current account? That would raise the suspicion that the contractual provision was mere boilerplate, especially if this was in the bank’s standard form, inserted on solicitor’s advice at head office to take advantage of the decision in Quistclose, with the local loan officer or bank manager probably having no idea of its real significance. One can easily imagine, upon the lender/client asking what it imported, the manager saying something like, ‘it means you must spend the loan money on the purpose you told us about in applying for the loan’, which of course indicates no intention to create a trust as opposed to a mere contractual obligation. And if neither A nor B see anything wrong in paying the loan money into B’s current account, ie immediately mixing the funds with B’s own, this should give rise to a strong presumption that whatever the words of the loan contract, including ‘trust’, there was no intention to create a Quistclose trust at all. It seems that Lord Millett’s analysis, when combined with the Chambers theory of resulting trust, leads not to a complete disregard of the parties’ intentions, but rather to an unwillingness to explore them and draw the appropriate inferences. As has already been pointed out, this difference is clearly reflected in the different approaches of Carnwath J, on the one hand, and the appellate courts on the other. Though it was not mentioned by any judge in the case, it is trite law that vagueness in or uncertainty of objects has a ‘reflex’ action, calling into doubt the question whether the settlor had an intention to create a trust at all.75 For this reason, the validation of ‘the acquisition of property’ as a certain purpose by the Court of Appeal and the House of Lords, without addressing Carnwath J’s finding that no such settled general purpose reflected the parties’ intentions, further weakens any suggestion that the appellate courts concerned themselves seriously with the question whether the parties actually intended a trust relationship. Indeed, on this point, Lord Millett said, ‘If [the power to apply the money] is uncertain, however, then the borrower has no authority to make any use of the money at all and must return it to the lender under the 74 75

The Times, 19 April, 2000. Lambe v Eames (1871) 6 Ch App 597.

Lord Millett’s Analysis 65 resulting trust. Uncertainty works in favour of the lender, not the borrower.’76 In short, the preceding principle of orthodox trust law, that uncertainty of object or subject-matter calls into doubt the intention to create a trust, has no room for operation in Quistclose cases, because the establishment of the trust does not turn on the actual intentions of the parties. Similarly, while the majority of the House quite properly expressed the view that only in rare circumstances should an appellate court overturn a trial judge’s finding of fact with regard to the dishonesty of a defendant, none of their Lordships showed the same hesitation in overturning Carnwath J’s finding that the parties to the loan agreement in question did not intend a Quistclose trust.77 This is remarkable, for it is clear that the intention to create a trust, in particular whether parties to a transaction have with any certainty determined that a recipient of property is to hold it on trust, is a matter of fact, which, just as much as dishonesty, will turn on the veracity and creditable memory of those testifying in the witness box. Though remarkable, it is the result one would expect if the parties’ true intentions were not the basis upon which the Quistclose trust was established.

V : CONCLUSION

For the reasons given at the end of section III, and which are illustrated in section IV, it is submitted that the original analysis of Lord Millett, under which Quistclose trusts are to be seen as intentional trusts, is to be preferred to the more recent hybrid of his lordship’s original analysis and Chambers’ theory of resulting trusts, which appears to discourage an investigation of the parties’ true intentions. Consider again, for example, the fact situation in R v CPE Board, ex p Mealing-McLeod,78 described above.79 What would have been the result if it turned out that the practice of the bank was indeed to write loans on standard forms incorporating boilerplate provisions declaring the funds were to be held on trust until applied for the purposes stated (‘overleaf’, no doubt), but that also as a matter of course the loan money was paid into the borrower’s current account, immediately mixing the funds with the borrower’s own? On the hybrid analysis as applied in Twinsectra, the bank’s true intentions, as reflected in its practice, which show no understanding of or intention to create the expressed trust, would be irrelevant. This cannot be regarded as a correct result on orthodox trust principles, and neither would it seem an advance in justice to pursue the result the hybrid would appear to dictate. 76

Twinsectra Ltd v Yardley [2002] 2 AC 164, 193. It is rather disturbing to find that the Quistclose trust appears to be something of an appellate court phenomenon. Besides the Court of Appeal’s and the House’s finding a trust where Carnwath J did not in Twinsectra, trial judges found no such trust to reflect the true intentions of the parties in Re EVTR [1986] BCLC 523, 531 or in Barclay’s Bank v Quistclose [1967] Ch 910, 929–31 itself. 78 Above, n 74. 79 Ibid. 77

66 James Penner In any case, as things presently stand, it seems that the conflicting statements of Lord Millett in Twinsectra, some of which appear to make sense only on the original version, others promoting the hybrid, can only lead to disarray as lower courts try to follow the decision, particularly if the hybrid version is understood to reflect orthodox principles of trust law.

4

Understanding the Power LIONEL SMITH 1

I would reject all the alternative analyses, which I find unconvincing for the reasons I have endeavoured to explain, and hold the Quistclose trust to be an entirely orthodox example of the kind of default trust known as a resulting trust. The lender pays the money to the borrower by way of loan, but he does not part with the entire beneficial interest in the money, and insofar as he does not it is held on a resulting trust for the lender from the outset. Contrary to the opinion of the Court of Appeal, it is the borrower who has a very limited use of the money, being obliged to apply it for the stated purpose or return it. He has no beneficial interest in the money, which remains throughout in the lender subject only to the borrower’s power or duty to apply the money in accordance with the lender’s instructions. When the purpose fails, the money is returnable to the lender, not under some new trust in his favour which only comes into being on the failure of the purpose, but because the resulting trust in his favour is no longer subject to any power on the part of the borrower to make use of the money. Whether the borrower is obliged to apply the money for the stated purpose or merely at liberty to do so, and whether the lender can countermand the borrower’s mandate while it is still capable of being carried out, must depend on the circumstances of the particular case.2 H I S C H A P T E R F O C U S E S on one aspect of Lord Millett’s analysis: the power or duty of the borrower to dispose of the money lent. How can it be understood within the general law of trusts, and what implications are there for the parties’ ability to unwind the arrangement voluntarily? To begin, we have to understand a number of different features or characteristics of powers.

T

I : POWER OR DUTY ?

In the extract above, and elsewhere in his speech, Lord Millett refers to the possibility that the borrower is not holding a power to dispose of the money in a particular way, but in fact is under a duty to do so.3 In such a case, there would 1 I acknowledge with gratitude the financial support of the Social Sciences and Humanities Research Council of Canada. 2 Twinsectra Limited v Yardley [2002] 2 AC 164, para 100 (Lord Millett). 3 See especially paras 76 and 98. Para 76, read literally, suggests that whenever specific property is transferred subject to a promise, that promise takes effect as a trust with effects on third parties. This

68 Lionel Smith not simply be a power to dispose, but rather disposal would be required by the terms of the trust. If there is a duty to dispose to a person or persons, then they will be beneficiaries of the trust. There would not be any power as that term is normally used.4 There would not be what we would call a Quistclose trust. If there is an attempt to impose a duty to dispose in favour of an impersonal purpose, then in general, according to orthodox doctrine, the attempt fails.5

II : ADMINISTRATIVE OR DISPOSITIVE ?

Leaving aside the possibility that there is a duty on the lender to dispose of the money, we can consider the case where there is a power of disposal without any duty to dispose, which is usually what is implied when we say there is a power of disposal. Common practice distinguishes the ‘dispositive’ powers of trustees from their ‘administrative’ powers. The latter exist for the benefit of the trust beneficiaries. Examples are powers to insure and powers to invest. Here again, the power is actually coupled with a duty. It is not a duty to dispose as such. But administrative powers are held for the benefit of the trust beneficiaries. They are therefore constrained by the duty of loyalty owed to those beneficiaries: the trustee must exercise the power (or not) in what he perceives to be the best interests of the beneficiaries. To put it differently, an administrative power does not have ‘objects’ of the power who can benefit from it; it only exists for the benefit of those who are already beneficiaries. Again, there is no Quistclose trust in this case. Consider Space Investments Ltd v Canadian Imperial Bank of Commerce Trust Co (Bahamas).6 Here, the trustee, a bank, had an unusual investment power, one that allowed it, as trustee, to lend the money to itself, as bank. It did this and later became insolvent. The trust beneficiaries failed in their argument that they deserved a special priority. They were unsecured creditors of their own trustee. It is similar to Lord Millett’s analysis of a Quistclose trust in that the trustee, by a lawful act, applied the trust property in such a way that the beneficiaries lost their trust interest and instead became mere creditors. But the power in this case was one to invest the trust property. So again, as in the case of a duty to dispose, this is not what we usually mean by the terms ‘power of disposition’ or more briefly, ‘power.’7 Those ‘dispositive’ seems too wide. On its terms it is confined to money, but there is no principle of equity that applies only to money and not to other property. The proper reading is probably that this occurs when the true construction of the promise is such that it does not allow the transferee to enjoy the property beneficially. 4 If a trustee has a duty to transfer property to X, inevitably he also has a power to make the transfer. But when ‘power’ is opposed to ‘trust’ or ‘duty,’ the connotation of ‘power’ is ‘power but not duty.’ 5 Of course there is a lively debate about this, outlined later in this chapter: text to n 23. 6 [1986] 1 WLR 1072. 7 Among dispositive powers, it is normal to distinguish powers of appointment, powers of maintenance and powers of advancement; the distinctions concern the function that the disposition is to serve.

Understanding the Power 69 powers always have objects, whose interests can potentially be opposed to the interests of the beneficiaries.8

III : PERSON OR PURPOSE ?

As is the case with trusts, so with powers of disposition, we can ask whether the object is a person (or persons), or is an impersonal purpose. In some of the Quistclose cases, the lender advanced money to the borrower to be used for a particular purpose, such as buying equipment.9 Lord Millett was at pains to point out that such an arrangement should be just as valid as a case where the purpose was to pay a person.10 The validity of powers for purposes will be discussed below. Of course, there is another possibility, that the power is one to dispose of the property to, or for the benefit of, a particular person or persons. In Quistclose Investments Ltd v Rolls Razor Ltd11 itself, Quistclose lent money to Rolls Razor for the purpose of the latter discharging its debts to shareholders arising from the declaration of a dividend. On Lord Millett’s analysis, Rolls Razor held the money on trust for Quistclose, with a power to use it to pay the dividend. We might say that the objects of the power were the shareholders, an ascertained or ascertainable class. If the power was exercised, they would benefit by getting money, albeit in discharge of a debt owing to them. Alternatively, we could say that the object of the power was Rolls Razor itself, since it would benefit by discharging its debt to shareholders, albeit with the acquisition of a different debt, to Quistclose. In Twinsectra, Lord Millett considered and rejected the possibility that either the borrower or the potential recipient of the money were trust beneficiaries.12 But his arguments are not inconsistent with the possibility that these parties are objects of the power he proposes.

8 Of course, it is often the case that the objects of the power are the same as the beneficiaries of the trust, in which case the opposition is less clear. Even here, though, their interests as objects of the power are distinct from (and possibly opposed to) their interests as trust beneficiaries. For example, X may be entitled to the trust property on reaching the age of 18, but the trustee may have a power to appoint property to her before then. The exercise of the power inevitably reduces the amount of property available upon reaching 18. In Re Brooks’ ST [1939] Ch 993, a beneficiary’s settlement of his beneficial interest did not include (even though it was apparently intended to) what he later received as object of a power of appointment. 9 Re EVTR [1987] BCLC 646; General Communications Ltd v Development Finance Corporation of New Zealand Ltd [1990] 3 NZLR 406. 10 [2002] 2 AC 164, para 89: ‘Any analysis of the Quistclose trust must be able to accommodate gifts and loans for an abstract purpose.’ 11 [1970] AC 567. 12 [2002] 2 AC 164, paras 82–97.

70 Lionel Smith

IV : HOW IS THE POWER HELD ?

It is conventional wisdom that a power may be held in one of two ways. It may be held in a fiduciary capacity, or not. To take a typical example: a trustee, T, holds an investment portfolio for A for life, remainder to B, which means that A is entitled to the income for her life, and on A’s death, the capital goes to B. The trustee may well have a power to encroach on the capital during A’s life, in favour of A, or B, or both.13 This power is held in a fiduciary capacity. We could imagine that, in addition, A herself has a power to appoint the trust capital to B during A’s own life. This is a power held in a non-fiduciary capacity. The exercise of dispositive powers is subject to two distinct kinds of control. One is the obvious requirement that a power can only be exercised according to its terms.14 If there is a power to dispose of property among a person’s children, a purported disposition to his nephew is void. This is so whether the power is held in a fiduciary capacity or not. Where the power is held in a fiduciary capacity, there is another control that arises out of the fiduciary obligation.15 In general, the fiduciary obligation of loyalty requires the fiduciary to act with a particular motive: she must act (or not act) in what she perceives to be the best interests of the person to whom the duty is owed. This applies directly in the case of administrative powers, which are held for the benefit of some beneficiary, and which are constrained by the same fiduciary duty that is owed to that beneficiary. But where the fiduciary holds a dispositive power, the position is different.16 The trustee has express authority to favour the interests of one or of some over the interests of others, and it would therefore not make sense to control the power through the duty of loyalty, not even with the help of the ‘even hand’ rule that assists when the duty of loyalty is owed to more than one person. The dispositive power authorizes uneven treatment. Moreover, the objects of the power may not even be trust beneficiaries; in this case, the power authorizes the trustee to advance the interests of a nonbeneficiary over those of a beneficiary. In exercising a dispositive power, therefore, the fiduciary’s motive need not be what he perceives to be the best interests of one or more beneficiaries; instead, he should be motivated by fulfilling the purposes for which the power was granted.17

13 And, conversely, may have a power to withhold income from A and add it to capital, or give it to B, or both. 14 A violation of this requirement is called ‘the excessive execution of a power’ in the terminology of G Thomas, Powers (London, 1998) ch 8. 15 A violation of this requirement is called ‘fraud on a power’ in the terminology of G Thomas, Powers (London, 1998) ch 9. 16 DWM Waters, The Law of Trusts in Canada, 2nd edn (Toronto, 1984) 788. 17 Vatcher v Paull [1915] AC 372, 378; Klug v Klug [1918] 2 Ch 67; McPhail v Doulton [1971] AC 424, 449, 457; Re Hay’s Settlement Trusts [1982] 1 WLR 202, 209; Turner v Turner [1984] Ch 100; Re Beatty [1990] 1 WLR 1503, 1506; Hayim v Citibank NA [1987] AC 730, 746.

Understanding the Power 71 The case in which the object of a fiduciary power is not a trust beneficiary is quite likely to arise under Lord Millett’s analysis of the Quistclose trust, and so deserves further consideration. Assume that T holds property on trust, with a power to appoint any or all of it during a ten-year period to L or M in whatever proportions T sees fit. The trust instrument further provides that if any property remains unappointed after ten years, it shall be transferred absolutely to N, thereby bringing the trust to an end. It may well be the case that N has no realistic expectation of getting any of the property. On the other hand, it is clear that L and M are not trust beneficiaries; they are only objects of a power. The property is held in trust nonetheless, and it follows that the only trust beneficiary is the ‘taker in default (of exercise of the power)’, ie, N. But N’s beneficial interest is defeasible by the exercise of the power in favour of L or M.18 T owes a duty of loyalty to N, but also holds the power of appointment which allows him to act otherwise than in what he perceives to be the best interests of N. A duty of loyalty is not owed to L or M; T does not need to act in what he perceives to be their best interests. His duty in respect of the power, to act in what he perceives to be the best fulfilment of the purpose for which the power was granted, is owed to L and M, and probably to N as well. So, for example, if it is the case that T simply fails to address the question whether the power should be exercised, L and M have standing to implead him and demand that he do so, or that he be replaced.19 A trustee is often said to be presumed to hold any dispositive power in a fiduciary capacity.20 It is possible to rebut this presumption, however, and show that although the trustee owes fiduciary duties to the trust beneficiaries, the particular power is held in a non-fiduciary capacity.21 There are two important consequences of the difference between holding a power in a fiduciary capacity and holding it in a non-fiduciary capacity. One relates to release. A non-fiduciary can release the power; that is, abandon its future exercise and so terminate it. A fiduciary cannot, because this would be inconsistent with the duty to exercise it in what he perceives to be the fulfilment of the purpose for which it was granted.22 That duty implies a positive obligation to turn his mind from time to time to the exercise of the power. Another consequence relates to powers for impersonal purposes. The primary objection of principle to trusts for purposes is that they purport to impose 18 Duke of Northumberland v IRC [1911] 2 KB 343, rev’d on another point [1911] 2 KB 1011; Re Brooks’ ST [1939] Ch 993. 19 G Thomas, Powers (London, 1998) 291–93, 378. Where the class of objects is very wide, our understanding of the duty owed by the donee to the objects may need to change. One could argue that in such a case the donee’s duties owed to the objects are impliedly modified (ibid pp 274–82, esp p 281). 20 For example, J Mowbray, et al, Lewin on Trusts, 17th edn (London, 2000) 734. 21 Ibid; G Thomas, Powers (London, 1998) 25–33, 605. Just as it is possible that someone who is not a trustee holds a power in a fiduciary capacity: Mettoy Pension Trustees Ltd v Evans [1990] 1 WLR 1587. 22 See, eg, DJ Hayton, Underhill and Hayton: Law Relating to Trusts and Trustees, 16th edn (London, 2003) 29.

72 Lionel Smith duties without designating any legal person as the holder of the correlative right.23 This objection does not arise in the case of a power for purposes, held in a non-fiduciary capacity. There are no duties. We may say that the holder has a duty to exercise it only within its scope, but this is not really a duty; it is a disability. If the power is to appoint to the children of X, the donee of the power is disabled from appointing to X’s nephew. But no one has any rights, strictly speaking, against the donee relating to the exercise of the power. X cannot be impleaded for doing nothing. Hence, a power for a purpose seems unobjectionable. On the other hand, if the power is held in a fiduciary capacity, there are real duties on the donee. The donee is not only disabled from appointing to X’s nephew, he must positively address his mind to whether he should appoint to X’s children, and if so to which, and in what amounts.24 And those children hold the correlative rights.25 But if a power for an impersonal purpose was granted in a fiduciary capacity, there would be obligations without any right-holders. The only possible ‘enforcer’ is the taker in default. It is not clear that this provides any solution, since the interest of the taker in default is in the non-exercise of the power.26 Although there is no direct authority on the point, it seems to follow that a power for an impersonal purpose cannot be valid if held in a fiduciary capacity.27

V : APPLICATION

We can leave out the case of administrative powers, since the power in Lord Millett’s understanding of the Quistclose trust does not seem to be such a power. This allows a two-dimensional portrayal of the possibilities.

23 DJ Hayton, ‘Developing the Obligation Characteristic of the Trust’ (2001) 117 LQR 96 argues that the presence of an ‘enforcer’ can solve this problem. In response, P Matthews, ‘From Obligation to Property, and Back Again?’, in DJ Hayton (ed), Extending the Boundaries of Trusts and Similar Ring-Fenced Funds (London, 2002) 203, argues that this cannot solve the problem, because the proprietary nature of the trust means that only a person with a beneficial interest (and who therefore can suffer from a breach of trust) can meaningfully enforce the trust. 24 Turner v Turner [1984] Ch 100. 25 See Mettoy Pension Trustees Ltd v Evans [1990] 1 WLR 1587, 1617, addressing possible ways in which a court could ensure that those rights were respected. 26 If an ‘enforcer’ can validate a trust for an impersonal purpose, by providing a person with standing to enforce the trust even though having no personal interest in its due performance, then presumably there is no problem with the taker in default fulfilling the role of enforcer for the power. See n 23 above. 27 Bearing in mind that an executer holds his powers in a fiduciary capacity, one relevant authority is Chichester Diocesan Fund v Simpson [1944] AC 341. Moreover, has been held more than once that it is not possible to construe a void purpose trust as a power: IRC v Broadway Cottages Trust [1955] Ch 20, 36; Re Shaw [1957] 1 WLR 729, 746; Re Endacott [1960] Ch 232, 246. Some authors (eg, J Penner, The Law of Trusts, 3rd edn (London, 2002) 84) have questioned why a benevolent construction could not have been used to validate the trust as a power, but if the argument in the text is correct, the power would have been just as void as the trust.

Understanding the Power 73 The object of the power is: The capacity in which the power is held is:

A purpose

One or more persons

Fiduciary

Case A

Case C

Non-fiduciary

Case B

Case D

Case A It appears that the power in Case A will be void, as an attempt to create duties without rights.28 Lord Millett’s view is that a Quistclose trust in which the power is for a purpose should be valid. This will be possible only if (a) a power for a purpose held in a fiduciary capacity is valid, contrary to the argument above, or (b) the appropriate construction is that the power is held in a nonfiduciary capacity (Case B below). If the power itself was valid in Case A, we could consider the possibilities for the collapse of the arrangement. A trust can be terminated extrajudicially when all of those holding or potentially holding beneficial interests, being fully capacitated, agree on the disposition of the trust property.29 If there is only one beneficiary, he can terminate the trust if he is fully capacitated and his interest is indefeasible. Lord Millett’s interpretation is that once the purpose for which the power was granted fails, the power determines, leaving the lender holding an indefeasible beneficial interest. Clearly, the lender can then demand the trust property and terminate the trust. More interesting is the question whether the trust can be terminated before the purpose of the power has failed. In that situation, the lender’s beneficial interest is defeasible, because there is an outstanding power. The effect is that the lender cannot simply demand the termination of the trust.30 There are two solutions for extrajudicial termination. One 28

See text to nn 23–27. See, eg, J Mowbray, et al, Lewin on Trusts, 17th edn (London, 2000) ch 24. This chapter does not address the possibility of an application to the court under the Variation of Trusts Act 1958; that legislation generally only permits the court to consent on behalf of incapacitated or unascertained parties. 30 Schmidt v Rosewood Trust Ltd (Isle of Man) [2003] UKPC 26 para 41, [2003] 3 All ER 76. It is perfectly clear that the interest of a beneficiary is defeasible if it is subject to a power (see n 18 above), and it is also clear that one who holds only a defeasible interest cannot, alone, demand the termination of the trust. In Re Park [1932] 1 Ch 580 there was a power of appointment over a trust fund, the taker in default being a charity. The litigation was about the validity of the power and the trust. The charity was a party, and actively argued that the power was invalid, while the trust was valid, with the result that the charity was entitled absolutely. The power and the trust were held to be valid. Much of the proceeding would have been pointless if a taker in default could demand the trust property where his interest is subject to a dispositive power; the charity would have been entitled whether or not the power was valid; and indeed, would have been entitled to the trust property, having lost the case. Similar is Hughes v Footner [1921] 2 Ch 208. See also Re Sharp’s ST [1973] Ch 331: the beneficiaries of a trust were held not to be entitled ‘absolutely’, within the meaning of Trustee Act 1925, s 31(2)(i)(b), where their interests were defeasible by a power of appointment. My thanks to Paul Matthews for citations to Re Sharp’s ST and to Schmidt. 29

74 Lionel Smith is release: if the power is released, the problem disappears. However, a power held in a fiduciary capacity cannot be released. The other is unanimous consent: if the object or objects of the power also consent, then all possible beneficial interests are accounted for and the trust can be terminated.31 If the power is for a purpose, it is not clear how the objects can consent to termination. It seems that the only way to find that such a power is valid, when it is held in a fiduciary capacity, is by saying that the taker in default operates as a kind of enforcer.32 It may be that if this is the basis on which such a power is valid, then this person’s consent is enough to allow the trust to be terminated. This solution, however, underlines the unsatisfactory nature of the idea that the taker in default is the enforcer; it is in his interests that the power not be exercised, or that the trust be collapsed, and so he hardly looks like a useful enforcer. Although Case A raises problems of principle, we can say that if powers for purposes held in a fiduciary capacity are valid, and if a Quistclose trust was interpreted as creating such a power, then the arrangement could probably be collapsed on the instructions of the lender at any time, regardless of the wishes of the borrower/trustee.

Case B This case seems unobjectionable as far as the validity of the power is concerned, because, although it is for a purpose, it is held in a non-fiduciary capacity. This also means that it can be released. It would seem to follow that the trust could be collapsed by the agreement of the lender (as sole beneficiary) and the borrower, because the borrower can release the power, leaving the lender with an indefeasible beneficial interest. There remains the question whether a Quistclose trust could reasonably be interpreted as falling into Case B. Normally, when a trustee holds a power, he is presumed to hold it in a fiduciary capacity unless there is some express stipulation to the contrary.33 There are two ways around this. One is to observe what must be true, that this presumption is really only a matter of construction, and what really matters is the intention of the settlor in setting up the trust.34 We might well say that in a commercial arrangement, it is reasonable to understand the lender as impliedly stipulating (qua settlor) that the power to apply the money for an abstract purpose is held by the borrower/trustee in a non-fiduciary capacity.35 The other way is to ask whether the borrower/trustee is really a 31 Even though a power held in a fiduciary capacity cannot be released, the object of the power can disclaim any future possibility of benefit under it: Re Gulbenkian’s Settlements (No 2) [1970] Ch 408. 32 See n 23 above. 33 See n 20 above. 34 See n 21 above. 35 In Kelly v Cooper [1993] AC 205, for example, a modification to the normal incidents of a fiduciary relationship was based on an implied term of a contract.

Understanding the Power 75 fiduciary at all. Lord Millett seemed clearly to accept that the Quistclose trust is a normal resulting trust, qualified by the power. In at least some resulting trusts, there seem to be good reasons to doubt whether the trustee owes the fiduciary obligation of loyalty. That duty is normally imposed by the consent of the fiduciary, not by operation of law.36 However, in Twinsectra, much of Lord Millett’s reasoning was based on the fiduciary nature of the borrower’s undertaking,37 so this line of reasoning may not be relevant.

Case C This is a classic arrangement, raising no questions as to validity of the power. Applied to a Quistclose trust, however, it raises some issues. Because of the outstanding power, the beneficial interest of the lender (qua beneficiary) is defeasible.38 The power being held in a fiduciary capacity, it may not be released by the borrower/trustee. The collapse of the arrangement, therefore, would require the consent of the object of the power.39 In Twinsectra, Lord Millett considered and rejected different possibilities for the location of the beneficial interest during the currency of the arrangement: that it was in the borrower, or in the intended recipients of the money, or in suspense. Under Case C, a similar exercise is essential in order to determine who is the object of the power.40 That person or persons will have certain rights against the borrower/trustee in relation to the fiduciary exercise of the power. And, for exactly the same reason, it will not be possible to collapse the arrangement without the consent of that person. No broad rule can be laid down. It would be a question of interpretation in each case. The lender cannot be the object of the power, because that would amount to saying that the lender’s beneficial interest is indefeasible and unqualified. It would be a bare trust, a trust that simply requires the trustee to hold the property to the order of the beneficiary. If, however, it was thought that the borrower was the object, the arrangement could be collapsed by the agreement of the borrower and the lender. If the object of the power was the person to whom the money might be paid (such as the shareholders in Quistclose), then the arrangement could not be collapsed without the agreement of that person or persons.

36 R Chambers, Resulting Trusts (Oxford, 1997) 194–200; L Smith, ‘Constructive Fiduciaries?’ in P Birks (ed), Privacy and Loyalty (Oxford, 1997) 249, 263–67. 37 [2002] 2 AC 164, paras 68, 76, 95, 97. Lord Hoffmann also expressly said that the power was held in a fiduciary capacity (para 13). 38 See n 18 above. 39 Schmidt v Rosewood Trust Ltd (Isle of Man) [2003] UKPC 26 para 41, [2003] 3 All ER 76. 40 One of the possibilities considered by Lord Millett, that the trust was for a purpose, is not relevant here because that would correspond to cases A and B.

76 Lionel Smith Case D Again, here there is no difficulty of principle as to the validity of the power. One issue would be whether the arrangement could reasonably be interpreted as creating a power to be exercised in a non-fiduciary capacity; that issue was addressed above, in Case B. Another issue, as in Case C, is that it would be essential to inquire into which person or persons are the objects of the power. Differently from Case C, however, collapse of the arrangement is simpler. Just as in Case C, it could be accomplished by the consent of the lender, as beneficiary holding a defeasible interest, and the objects of the power. Alternatively, as in Case B, the borrower is free to release the power, making the lender’s interest indefeasible; effectively, therefore, even if the object of the power is neither the lender nor the borrower, those two can, together, terminate the arrangement prematurely.

VI : CONCLUSION

As a matter of commercial efficacy, the most pertinent constructions are probably Case B (if the power is for an impersonal purpose) and Case D (if for a person). The only difficulty is whether the borrower/trustee can properly be understood to hold the power in a non-fiduciary capacity. If he can, the result will be that Quistclose trusts, including the power, are valid, and can be terminated prematurely by the agreement of lender and borrower. If the borrower/trustee is thought to owe a duty of loyalty, and if the presumption that such a person holds any dispositive powers in a fiduciary capacity is too deeprooted to be shifted by implication, then the relevant constructions are Cases A and C. Case A raises a serious question of validity of the power. Case C, and possibly Case A as well, describe an arrangement of which the borrower and lender may not have effective control.

5

Restrictions on the Use of Money ROBERT CHAMBERS

a relationship that can be created when one person, A, pays money to another, B, subject to a condition that the money will be used for a specific purpose. It takes its name from Barclays Bank Ltd v Quistclose Investments Ltd,1 in which A loaned money to B, to be used only to pay a dividend due to B’s shareholders. This is the typical situation in which a Quistclose trust arises: the payment from A to B is a loan and a condition attached to that loan is that the money can be used only to pay B’s creditors, C. However, the payment to B need not be a loan, but can be a gift2 or payment of a debt,3 and the condition need not be payment to B’s creditors, but can be payment to specific persons or to achieve a particular purpose, such as ‘the acquisition of property’.4 The essential feature of every Quistclose trust is that money is paid by one person to another with a condition attached to its use.5 The money may be cash or any form of equivalent value, such as a cheque or bank account. A condition restricting the use of other assets, such as land, goods, or intellectual property, will not produce a Quistclose trust; nor will a condition that does not restrict B’s use of the money received, but merely requires B to pay an equivalent sum of money to someone or for some purpose.6 Once the money is used for the specified purpose, the Quistclose trust comes to an end. The parties may have some other relationship, but it would not be a Quistclose trust. For example, if A loaned the money to B, A would be B’s creditor for the amount due under the loan agreement. They could both have interests in assets purchased with the money, for example, if B complied with a condition to use it to buy land and mortgage that land to A. However, they would have no interest in the money once it was spent and the Quistclose trust was performed. If A’s payment to B was a conditional gift, they might have no legal relationship at all once the money was spent.

A

QUISTCLOSE TRUST IS

1 2 3 4 5 6

[1970] AC 567. Conservative & Unionist Central Office v Burrell [1982] 1 WLR 522. Carreras Rothmans Ltd v Freeman Mathews Treasure Ltd [1985] 1 Ch 207. Twinsectra Ltd v Yardley [2002] 2 AC 164, 168. Re Rogers (1891) 8 Morr 243. Guardian Ocean Cargoes Ltd v Banco do Brasil SA [1994] 2 Lloyd’s Rep 152.

78 Robert Chambers If the condition attached to the use of the money cannot be fulfilled, the Quistclose trust does not end, but the relationship changes. The purpose of the payment has failed, B is required to repay the money to A, and B is a trustee of that money (or its traceable proceeds) for A. There is no doubt that a trust exists at this stage of their relationship, but there is some debate about when and why that trust arises. This is not surprising, since there is some uncertainty over the nature of the first stage of their relationship, which begins when A pays money to B and continues so long as the condition is unfulfilled, but capable of fulfilment. Before Barclays Bank Ltd v Quistclose Investments Ltd was decided, that relationship was sometimes called a ‘quasi-trust’,7 in Quistclose it was described somewhat vaguely as ‘a relationship of a fiduciary character or trust’,8 and it now goes by the unhelpful name of ‘Quistclose trust’. Unless that relationship is clearly identified and understood, the consequences of a failure to fulfil the condition cannot be properly explained. In the first stage of a typical Quistclose trust, while B has the money and is willing and able to pay it to C, A has an equitable right to restrain B from misusing it for any other purpose. Lord Millett said that this is because B holds the money in trust for A pending payment to C,9 while I said that a trust for A was not necessary during the first stage of the relationship, so long as A could obtain an injunction restraining B’s misuse of the money.10 Some discussions of the Quistclose trust portray the issue as a choice between two irreconcilable views. However, there is no doubt that the parties can create a trust for A. The real question is whether that is the only possible relationship. It is not. There are a variety of different relationships that can be created by a payment of money with a condition attached to its use. The first step towards better understanding the Quistclose trust is to identify all the possible relationships that can be created when A pays money to B subject to the condition that it will be used only to pay C or for some other specific purpose. The second step is to determine which of those relationships is created in any given situation. Only then will it be clear why B holds the money in trust for A if the condition attached to its use cannot be fulfilled and when that trust arises. These are the issues discussed in this chapter.

I : POSSIBLE RELATIONSHIPS

When A pays money to B to be used only to pay it to C, B acquires legal ownership of it. However, beneficial ownership could belong to A, B, or C. In other 7 Re Drucker (No 1) [1902] 2 KB 55, 57; aff’d [1902] 2 KB 237; Re Watson (1912) 107 LT 96, 98; aff’d (1912) 107 LT 783. 8 [1970] AC 567, 580. 9 PJ Millett QC, ‘The Quistclose Trust: Who Can Enforce It?’ (1985) 101 LQR 269; Twinsectra Ltd v Yardley [2002] 2 AC 164, 186–93. 10 R Chambers, Resulting Trusts (Oxford, 1997) 73–77.

Restrictions on the Use of Money 79 words, B might be holding the money in trust for A or C or might receive beneficial legal ownership of the money. These three possibilities are explored in the next three sections. There is also a fourth possibility, in which beneficial ownership is shared by two or all three parties. This is discussed in the fourth section below. Admittedly, some of the relationships described below are a long way from the usual conceptions of a Quistclose trust. However, each one is a possibility that may need to be considered when trying to determine which relationship was created when A paid money to B subject to a condition that it be used only to pay C (or for some other specific purpose). Therefore, it is useful to survey the full range of relationships that could be created by that transaction before asking which relationships are most likely to be created.

1. Trust for C It is elementary that a person can create a trust without using the word ‘trust’, so long as that person intends to create the relationship which is recognised in a court of equity as a trust.11 The intention to create a trust is not an intention to benefit another, but an intention that one person should have title to or control over an asset, while another person has the right to use and enjoy the benefit of that asset.12 It is quite possible that A intends to create a trust for C when A pays money to B subject to a condition that the money can only be used to pay C. That seems to be how Lord Wilberforce understood the relationship initially created in Barclays Bank Ltd v Quistclose Investments Ltd, which he described as a primary trust in favour of the creditors: That arrangements of this character for the payment of a person’s creditors by a third person, give rise to a relationship of a fiduciary character or trust, in favour, as a primary trust, of the creditors, and secondarily, if the primary trust fails, of the third person, has been recognised in a series of cases over some 150 years.13

It is also possible that B could receive the money in trust for A (as discussed below) and that A’s beneficial ownership of the money could later be assigned to C.14 (a) Express Trust or Constructive Trust? Since a settlor can create an inter vivos trust of money without observing any formalities, if it is certain that the arrangement was intended for the immediate benefit of C, then there is no reason why it would not create an express trust for 11 12 13 14

Paul v Constance [1977] 1 WLR 527. FW Maitland, Equity (Cambridge, 1936) 71–72. [1970] AC 567, 580. PJ Millett QC, ‘The Quistclose Trust: Who Can Enforce It?’ (1985) 101 LQR 269, 289.

80 Robert Chambers C. However, if the arrangement is part of a testamentary disposition, then it could not take effect as an express trust unless it was made in writing, signed, and witnessed as required by the Wills Act 1837 or similar legislation in other jurisdictions. If those formalities are not observed, the condition to use money only to pay C could produce a constructive trust for C, provided the rules for creating secret trusts are met. For example, suppose that A made a will containing a legacy for B, A asked B to use that legacy only to pay it to C, B agreed to do so, A died, the will was probated, and B received the legacy. Although the intention to benefit C did not produce an express trust for C because it was not expressed in the required form, B would hold the money on constructive trust for C because of A’s detrimental reliance on the expectation that B would pay the money as agreed.15 (b) Identity of the Settlor If a loan from A to B creates an express trust for C, the settlor of that trust may be A or B. It is possible that A and B have a contract in which A agreed to create the trust for C in exchange for B’s promise to pay A over time for the cost of creating that trust. It is more likely that B borrowed the money from A so that B could create a trust for C. The fact that A imposes the condition on the use of the money does not mean that A must be the settlor. For example, suppose that B wants to create a trust for B’s child, C, to meet a requirement that C has enough money to cover tuition and living expenses to attend university in a foreign country. B may need to borrow that money from a bank, A, and A may attach a condition to the loan that it only be used to pay C. Although A imposed the condition on the use of the money, B is the settlor of the trust for C. Once a trust for C is created, the identity of the settlor is usually irrelevant, since the settlor becomes a stranger to the trust and has no right to interfere with the trust relationship between trustee B and beneficiary C.16 The settlor’s identity may be relevant for some purposes, such as income or capital gains taxation. Importantly in the present context, the settlor’s identity is important if the trust for C fails. If A is the settlor, then normally B would hold the remaining money on resulting trust for A. If B is the settlor, then the express trust for C ends and B’s legal ownership of the remaining money becomes beneficial ownership.17

15 American Law Institute, Restatement of the Law of Trusts Second (St Paul, 1959) [55]; G Elias, Explaining Constructive Trusts (Oxford, 1990) 57–58; R Chambers, ‘Constructive Trusts in Canada’ (1999) 37 Alberta Law Review 173, 189–93; reprinted in (2001) 15 Trust Law International 214, 226–29. 16 Re Smith (1971) 16 DLR (3d) 130. 17 AW Scott and WF Fratcher, The Law of Trusts, 4th edn (Boston, MA, 1989) para 433, (referred to below as ‘Scott on Trusts’).

Restrictions on the Use of Money 81 (c) Purpose Trusts If the condition attached to the use of the money is not payment to C, but payment for some purpose that does not benefit identifiable persons, then a trust for C is not possible. In that case, the beneficial ownership of the money will belong to A, B, or both of them, unless the arrangement creates a valid purpose trust. If the purpose is charitable, the trust for that purpose will be enforced on behalf of the Crown.18 If the purpose is one of the few acceptable non-charitable trust purposes, such as care of a grave, monument, or animal, the trust will be enforced by those entitled to the remaining money when the purpose is fulfilled or fails.19 Although they may have no interest in compelling performance of the trust, they can complain if the money is misused for any other purpose. Scott believed that those cases were merely instances of a wider principle and that B should be permitted to use the money for the specified non-charitable purpose so long as that purpose was not ‘capricious’.20 In several Canadian provinces, a ‘trust for a specific non-charitable purpose that creates no enforceable equitable interest in a specific person’ is converted by statute into a power of appointment valid for 21 years.21 This is similar in effect to a valid non-charitable purpose trust, since the power of appointment is enforced negatively by the persons entitled to the money remaining in default of appointment. If the money is subject to a charitable purpose trust, no one is the beneficial owner of the money. B’s duties as trustee correspond to the Crown’s rights to enforce those duties, but the Crown does not hold those rights for its own benefit. If the money is subject to a valid non-charitable purpose trust, it is not clear who has beneficial ownership while it remains in B’s hands. If A is entitled to the money on default of appointment, A might be regarded as its beneficial owner, subject to divestment by B’s exercise of the power. However, A would not be entitled to collapse the trust while B was willing and able to perform it, which indicates that A is not the beneficial owner of the money at that stage (or at least not its only beneficial owner). Scott left this matter in doubt. Regarding a testamentary bequest for the care of a monument, grave, or animal, he said: Even though the legatee cannot be compelled to apply the property to the designated purpose, the courts have very generally held that he can properly do so, and that no resulting trust arises so long as he is ready and willing to carry it out. The legatee will not, however, be permitted to retain the property for his own benefit; and if he refuses or neglects to carry out the purpose, a resulting trust will arise in favor of the testator’s legatee or next of kin.22 18 Charitable trusts may be enforced by the Attorney-General, Charity Commissioners, or Public Trustee, depending on the jurisdiction in which the trust is located: A-G v Alford (1855) 4 De GM & G 843; Charities Act 1993. 19 See Re Astor’s Settlement Trusts [1952] Ch 534. 20 Scott on Trusts, para 124. 21 Perpetuities Act 1990 (Ontario), s 16; Wood v R [1977] 6 WWR 273, 9 AR 427. 22 Scott on Trusts, para 124.

82 Robert Chambers Although it is clear that B is not permitted to use the money for B’s own benefit, Scott said that a resulting trust for A does not arise unless and until B fails to use the money for the permitted purpose. This suggests that, as with a trust for a charitable purpose, the beneficial ownership does not exist so long as the purpose is or will be performed.

2. Trust for A A’s payment to B, subject to a condition that the money will be used only to pay C, can create a trust for A, with B having a power or duty to pay C. This is the relationship that Lord Millett described, first in the Law Quarterly Review,23 and later in Twinsectra Ltd v Yardley.24 (a) Express Trust or Resulting Trust? The trust for A can arise in two different ways. First, it could be an express trust created directly by A’s intention to retain beneficial ownership of the money paid to B. As Lord Millett explained, this is sometimes called an illusory trust because, although it looks like a trust for C (usually A’s creditor), the arrangement is entirely for A’s benefit and under A’s control.25 Secondly, the trust for A could be a resulting trust arising, not because A intended to retain beneficial ownership of the money, but because A did not intend to benefit B. If the condition restricts B’s use of the money to the extent that B is not its beneficial owner and A did not intend to give the beneficial ownership to C (or anyone else), then a resulting trust arises at the outset to carry beneficial ownership back to A. As Potter LJ said in Twinsectra Ltd v Yardley: Express trusts are fundamentally dependent upon the intention of the parties, whereas the role of intention in resulting trusts is a negative one, the essential question being whether or not the provider intended to benefit the recipient and not whether he or she intended to create a trust. The latter question is relevant to whether the provider succeeded in creating an express trust, but its relevance to the resulting trust is only as an indication of lack of intention to benefit the recipient . . .26

Since no formalities are required to create an inter vivos express trust of money, if A does intend to keep the beneficial ownership of the money after payment to B, then the trust for A is express. Even if A did not use the word ‘trust’, A clearly intended to create a trust relationship, in which formal ownership and control belongs to B, while beneficial use and enjoyment belongs to A. There is no room for a resulting trust in this situation, since A’s intention was directly effective to 23 24 25 26

PJ Millett QC, ‘The Quistclose Trust: Who Can Enforce It?’ (1985) 101 LQR 269. [2002] 2 AC 164, 186–93. (1985) 101 LQR 269, 288–89. [1999] Lloyd’s Rep Bank 438, para 81.

Restrictions on the Use of Money 83 create a trust of the money. This is different from cases like Hodgson v Marks,27 where an intention to retain beneficial ownership of land could not create an express trust because that intention was not expressed in the form required by section 53 of the Law of Property Act 1925. In that case, the transferor’s intention to retain beneficial ownership was relevant because it showed ‘that the transfer was not intended to operate as a gift’.28 The resulting trust arose by operation of law in response to that lack of intention to benefit the transferee.29 If A did not intend to retain beneficial ownership of the money paid to B or it is not clear whether A had this intention, then a resulting trust can arise so long as it is proven or presumed that A did not intend to benefit B. The resulting trust will arise in that situation even if A clearly did not want to retain any interest in the money and had intended to dispose of it completely.30 If A does not want B to have beneficial ownership of the money, but does not give it to anyone else, it will return to A via a resulting trust. (b) Presumptions of Resulting Trust and Advancement The presumptions of resulting trust and advancement might be used to resolve uncertainty over A’s intentions, but they would not apply to most of the situations discussed in this chapter and would probably not help even when they did apply. The presumptions arise when there is an apparent gift of assets from A to B and it is not clear whether A actually intended to make a gift. The presumption of advancement is an assumption that A did intend to give and it applies if A is B’s parent or husband.31 The presumption of resulting trust is an assumption that A did not intend to give and it applies if A and B are in any other relationship. In the United States, the presumption of resulting trust does not apply to apparent gifts made by a direct transfer of assets from A to B, but applies only when A buys an asset for B as an apparent gift. In that country, a gratuitous transfer of assets from A to B is assumed to be a gift.32 27

[1971] Ch 892. [1971] Ch 892, 933 (Russell LJ). 29 P Birks, ‘Restitution and Resulting Trusts’ in S Goldstein (ed), Equity and Contemporary Legal Developments (Jerusalem, 1992) 335, 363–64; R Chambers, Resulting Trusts (Oxford, 1997) 34; cf W Swadling, ‘A New Role for Resulting Trusts?’ (1996) 16 Legal Studies 110; W Swadling, ‘A Hard Look at Hodgson v Marks’ in P Birks and F Rose (eds), Restitution and Equity (London, 2000) 61. 30 Vandervell v Inland Revenue Commissioners [1967] 2 AC 291. 31 It is not clear whether the presumption of advancement applies in England and Wales to apparent gifts from mothers, but it does in Australia, Canada, and the USA: see R Chambers, Resulting Trusts (Oxford, 1997) 28–30. Statutes dividing assets at the end of a marriage may change the application of the presumptions of advancement and resulting trust to apparent gifts between the spouses: eg Matrimonial Property Act 2000 (Alberta), s 36. 32 American Law Institute, Restatement of the Law of Trusts Second (St Paul, 1959) [405]. In England and Wales, the presumption of resulting trust might not apply to gratuitous transfers of land because of s 60(3) of the Law of Property Act 1925. There are similar statutes in British Columbia, New South Wales, Queensland, Victoria, and Western Australia. See Lohia v Lohia [2001] EWCA Civ 1691; R Chambers, ‘Lohia v Lohia’ (2001) 15 Trust Law International 26. Those statutes do not affect the presumptions relating to gratuitous payments of money. 28

84 Robert Chambers Since the presumptions apply only to apparent gifts, they would not apply if B gave consideration for A’s payment. If the transaction was a loan to B or payment of A’s debt to B, it is assumed that A intended B to have beneficial ownership of the money, except insofar as the restriction on B’s use of the money prevents B from using the money for B’s own benefit. If it is not clear whether the payment was a loan or a gift, the presumptions could be used to resolve that issue. For example, suppose that A paid money to B to be used only to pay B’s tuition fees to a university, C. After B paid it to C, A demanded repayment of the money from B and B argued that the payment was a gift. If A is B’s father, the presumption of advancement would apply and A would bear the onus of disproving that it was a gift. If A is B’s uncle, B would bear the onus of proving that it was a gift and not a loan.33 Although the presumptions could help determine whether the payment was a loan or gift, they do not help resolve uncertainty over the location of the beneficial ownership of the money pending payment to C. Whether loan or gift, it is assumed that A’s payment to B was supposed to transfer beneficial ownership unless the restriction on B’s use of the money prevented that from happening. There is no room for the presumption of resulting trust because the condition attached to B’s use of the money reveals clearly why A paid the money to B. If A did not intend to create a trust for anyone, then A wanted B to have the money for the stated purpose. All the facts are known and presumptions are not needed. The presumptions are used only to resolve uncertainty regarding A’s intention. They are not used to determine the legal effect of a transaction when that intention is known.34 An essential question is whether a condition attached to the use of money paid by A to B will always prevent B from acquiring beneficial ownership of that money, even though neither A nor B intends to create a trust. If this is true, then B can never acquire beneficial ownership of the money unless the condition is not binding on B. The transaction will always produce a trust, for A, C, or for some purpose. This is discussed further below when the possibility of B’s beneficial ownership is considered. (c) Power or Duty to Pay C? If B holds the money in trust for A, B has the power to use it for the specified purpose and may also have a duty to do so. Twinsectra Ltd v Yardley provides an example of B holding money in trust for A, with only a power to use it for a particular purpose. B had agreed that the ‘loan moneys will be utilised solely for the acquisition of property . . . and for no other purpose.’35 Although this appears to be a promise to use the money for the stated purpose, it only makes 33 34 35

Seldon v Davidson [1968] 2 All ER 755. R Chambers, Resulting Trusts (Oxford, 1997) 32–33. [2002] 2 AC 164, 168.

Restrictions on the Use of Money 85 sense if understood as a promise not to use it for any other purpose. Neither party would benefit if B owed a duty to A to acquire property solely for B’s own benefit. The condition restricted B’s use of the money, but did not impose an obligation on B to spend the money to acquire property. If B does have a duty to pay C, that duty could be owed to A or C. It will be owed to C if C has a beneficial interest in the money. As discussed above, A could create a trust for C at the outset or assign A’s interest to C afterwards. Also, C could acquire an interest in the money through detrimental reliance on an expectation of receiving it, so that both A and C become beneficially interested in the money (as discussed below). If B holds the money in trust for A, then normally it is A, not C, who can compel B to pay C. Trustees often have duties to pay trust money to strangers for the benefit of the trust beneficiaries. For example, if B holds money in trust to be used for A’s education, B may have a duty to pay that money to a school, college, or university (C). Normally, A would be the beneficiary of that trust and able to compel B to perform the trust and pay C, while C would have no enforceable right to the trust fund. If B holds the money on express trust for A, the power or duty to pay C could be part of the trust created by A. However, B may be holding the money under a bare trust for A, under which B has no power to pay it to anyone else. As sole beneficiary of that trust, A could then give B permission to pay C, make a separate contract with B in which B has a duty to pay C,36 or assign A’s interest to C. If B holds the money on resulting trust for A, the power or duty to pay C must exist outside the trust. The resulting trust arises by operation of law in response to A’s lack of intention to benefit B and effects restitution of that money to A.37 It would not include a power or duty to pay any other person. (d) Revocable or Irrevocable? If A is the sole beneficiary of the trust, then A is free to collapse the trust and require B to return the money, regardless of whether B remains able and willing to use it for the specified purpose.38 In other words, A can revoke B’s power or cancel B’s duty to pay C at any time. Can B have an irrevocable right or duty to pay the money to C? That would be possible if B or C had a beneficial interest in the money. However, it is difficult to imagine how A could be the sole beneficial owner of the money and yet unable to revoke B’s power to pay C. Perhaps the contract between A and B could limit the exercise of A’s right, as beneficial owner of the money, to revoke the trust.39 However, there are two 36 J Glister, ‘Twinsectra v Yardley: Trusts, Powers and Contractual Obligations’ (2002) 16 Trust Law International 223, 227. 37 Sir Peter Millett, ‘Restitution and Constructive Trusts’ (1998) 114 LQR 399, 401; American Law Institute, Restatement of the Law of Restitution (St Paul, 1937) [160] p 642; R Chambers, Resulting Trusts (Oxford, 1997) 93–110. 38 Saunders v Vautier (1841) Cr & Ph 240; PJ Millett QC, ‘The Quistclose Trust: Who Can Enforce It?’ (1985) 101 LQR 269, 289. 39 PJ Millett QC, ‘The Quistclose Trust: Who Can Enforce It?’ (1985) 101 LQR 269, 291.

86 Robert Chambers difficulties with that proposition. First, although the contract may make it wrong for A to revoke the trust, it should not make it impossible for A to do so. As Glister has argued, ‘the proprietary rights of the lender/beneficiary will “trump” the contractual rights of the borrower.’40 As a trustee owing a fiduciary duty to perform the trust for A, B would have to obey A’s revocation of the power to pay C and then seek damages for any loss caused by A’s breach of contract. Although there are cases in which contractual licences to use land have been irrevocable,41 they did not involve fiduciary duties. As a resulting trustee for A, B might not owe a fiduciary duty to A.42 However, there is second reason why the contract between A and B could not restrict A’s rights as beneficiary of a resulting trust. That contract is the indirect source of the resulting trust. The reason why B holds the money on resulting trust for A is because the contract between A and B prevented B from obtaining beneficial ownership of the money. If the contract gave B an enforceable right to use the money to pay C, then B would have a beneficial interest in the money and would not hold it wholly on resulting trust for A from the outset. As Peter Gibson J said in Carreras Rothmans Ltd v Freeman Mathews Treasure Ltd, ‘I do not comprehend how a trust, which on no footing could the plaintiff [A] revoke unilaterally, and which was still capable of performance, could nevertheless leave the beneficial interest in the plaintiff which had parted with the moneys.’43

3. No Trust If A pays money to B to be used only to pay C (or for some other purpose), this might not give rise to any trust, but leave B with beneficial ownership of the money paid. This will happen if the condition does not restrict B’s use of the money. However, it can also happen even when the condition does limit B’s use of the money. These two possibilities are discussed in the next two sections. The third and fourth sections consider whether A’s right to restrict B’s use of the money is a personal right enforceable only against B or can be an equitable property right enforceable against anyone who receives the money as a donee or with knowledge of the restriction.

40 J Glister, ‘Twinsectra v Yardley: Trusts, Powers and Contractual Obligations’ (2002) 16 Trust Law International 223, 228. 41 As, eg, in Verrall v Great Yarmouth BC [1981] QB 202. 42 R Chambers, Resulting Trusts (Oxford, 1997) 196–200; L Smith, ‘Constructive Fiduciaries?’ in P Birks (ed), Privacy and Loyalty (Oxford, 1997) 249, 263–67; Sir Peter Millett, ‘Restitution and Constructive Trusts’ (1998) 114 LQR 399, 403–5. 43 [1985] 1 Ch 207, 223.

Restrictions on the Use of Money 87 (a) Unrestricted Beneficial Ownership A’s instructions regarding B’s use of the money will not impose a legal duty on B if they are intended merely as an expression of A’s wishes or of the parties’ motives for making the arrangement. Although the language used may be sufficient to create a trust in another context, if it is merely precatory and not intended to create a legal duty, B will receive unrestricted beneficial ownership of the money. For example, in Re Barrett, a testator left the money in his bank accounts to his daughter ‘for the purpose of enabling [her] to meet the immediate current expenses in connection with housekeeping.’44 Although there was $17,200 in the account (a very large sum at that time), she was entitled to keep it for her own benefit. The testator’s instructions regarding the use of the money were treated as an expression of his motive for making a gift to his daughter and not as a condition restricting her use of the money. Of course, this is not a Quistclose trust, but it is a well accepted construction of a payment from A to B to be used for a specific purpose. When B borrows money from A, it is normally with the intention of using it for a particular purpose. Usually, that purpose will be communicated to A and the parties will understand that the money will be used for that purpose. However, it often happens that B is not obligated to use the money for the stated purpose. In other words, the purpose is merely a reason for the loan and not a condition of the loan. If that use of the money is important to A, it can be assured by payment directly to C or to solicitors in trust to pay C. Another option is the Quistclose trust, in which A pays the money to B subject to an enforceable condition that it will only be used to pay C. If a formal loan agreement contains a condition that the money will only be used for a specific purpose, it might be expected that this is not precatory language but intended to impose a binding obligation on B. However, as Penner notes in his chapter in this book, that condition may be embedded in a standard form document and not intended as an actual restriction on B’s use of the money.45 In that case, A has waived the condition, B obtained unrestricted beneficial ownership of the money, and there is no Quistclose trust, despite clear language restricting B’s use of the money. (b) Restricted Beneficial Ownership If A pays money to B, subject to a binding condition that it will be used only to pay C or for some other specific purpose, can B receive restricted beneficial ownership of that money? This is the relationship described in Resulting Trusts,46 in which A has a right to restrain B’s misuse of the money, but is not the beneficial 44 45 46

(1914) 6 OWN 267, 267–68. Page 64. R Chambers, Resulting Trusts (Oxford, 1997) 73–78.

88 Robert Chambers owner of that money under a trust. According to Lord Millett, this relationship could not arise in Twinsectra Ltd v Yardley, because B had ‘a very limited use of the money, being obliged to apply it for the stated purpose or return it’ and therefore had ‘no beneficial interest in the money’.47 If A did not create an express trust for A, C, or the specified purpose, the only possibility was a resulting trust for A. There is no doubt that B may be holding the money on resulting trust for A from the outset. This may even be the most likely outcome when a binding restriction on the use of money does not create an express trust. However, this is not the only possible outcome. Although Lord Millett expressed his opinion in general terms, it was in relation to the type of restriction imposed by Twinsectra Ltd. He did not say that every restriction on the use of money removed the benefit of having that money. It must be possible for B to obtain beneficial ownership of money even though B’s use of that money is restricted. There are two main reasons for this. First, not all restrictions on the use of money limit its use to the same extent. If the restriction interferes only slightly with B’s use of the money, then beneficial ownership must belong to B. Secondly, regardless of the extent of the restriction, the location of beneficial ownership often depends on who benefits from the permitted use of the money. If that use is primarily for B’s benefit, then B may have a beneficial interest in the money. These two issues are explored in this section. The two sections that follow deal with the question whether A’s right to enforce that restriction is a personal right enforceable only against B or a property right also enforceable against persons who receive the money as donees or with knowledge of the restriction. First, it is clear that the use of things can be restricted without creating a trust. For example, a lease may restrict the tenant’s use of the premises to retail purposes only, local planning regulations may restrict the use of land to a single family residential dwelling, and a corporate constitution may restrict the corporation’s use of its assets for specific business purposes only. Although these restrictions may greatly limit the use of assets, they do so without removing beneficial ownership from their legal owners. A contract restricting the use of land can create a restrictive covenant, which is an equitable interest in land less than beneficial ownership. It is clear that the owner of the servient tenement retains beneficial ownership of that land and does not hold it in trust for the owners of the dominant tenements, even when the restriction on use is substantial. For example, in Re Ellenborough Park, the owner of the park promised to maintain it as an ‘ornamental pleasure ground’ and not to build on it, ‘except any grotto bower summer-house flowerstand fountain music-stand or other ornamental erection’.48 This created a restrictive covenant in favour of the owners of the houses surrounding the park, 47 48

[2002] 2 AC 164, 193. [1956] Ch 131, 134.

Restrictions on the Use of Money 89 who also had easements to use the park for recreational purposes. Lord Evershed MR said: We see nothing repugnant to a man’s proprietorship or possession of a piece of land that he should decide to make it and maintain it as an ornamental garden, and should grant rights to a limited number of other persons to come into it for the enjoyment of its amenities.49

By contract, the owners of land can restrict their use of their land to one purpose only, without giving up beneficial ownership of the land. If the use of money cannot be restricted without creating a trust, then every restriction on the use of money must eliminate the benefit of having it. Restrictions on the use of money tend to have a greater effect than do restrictions on the use of other things. Except for collectible notes and coins, money has value only because it can be exchanged for other things of value. There are two ways to use money: pay it to others or save it as a repository of value to be paid to others in the future. Unlike a restriction on the use of land, which may leave the owner with a thousand other beneficial uses for that land, a restriction on the use of money strikes at its only valuable purpose. If B has money which must be paid to C or returned to A, then it is likely that B is not the beneficial owner of that money. However, some restrictions on the use of money are more limiting than others. There are cases in which B was allowed only to pay the money to specific persons and other cases in which B was permitted to use the money for a fairly broad range of purposes. For example, in Twinsectra Ltd v Yardley, money was lent on condition that it ‘be utilised solely for the acquisition of property’.50 Even if the term ‘property’ is defined to mean interests in land, the borrower was free to use the money for any number of different land transactions, including payment of the purchase price, legal fees, and disbursements. This restriction on his use of the money was relatively minor, especially considering that his business was buying and developing land. If money was loaned to a business subject to a condition that it be used only for business purposes, this would not eliminate the borrower’s beneficial ownership of it. A trust cannot be the automatic effect of every restriction on the use of money, regardless of the extent of that restriction. Suppose A paid money to B, not on condition that it only be paid to C, but on condition that it not be paid to C (or not be used for some other specific purpose). For example, A may be happy to lend or give money to B on condition that it is not used to buy alcohol or gamble or is not paid to a particular organisation which A despises. Restrictions on the use of borrowed money might be desirable in jurisdictions which impose liability on those who finance certain activities. For example, if responsibility for environmental harm to land was shared by the lender of money used to buy that land, regardless of whether the 49 50

Ibid p 176. [2002] 2 AC 164, 168.

90 Robert Chambers lender held a security interest in that land, A might make it a condition of a loan to B that the money not be used to purchase land. If such restrictions are enforceable, they would not eliminate B’s beneficial ownership of the money, since B is otherwise free to spend or even destroy the money. Secondly, the number of permitted uses is not the only factor that determines whether assets are beneficially owned. A more important factor is whether those uses provide a direct benefit to the legal owner. For example, money held in trust for charity might be used properly in a wide variety of different ways, such as payment of salaries or rent, buying goods or land, or making investments or gifts. Indeed, trustees are not allowed to accept restrictions on their use of trust assets which are not authorised by the trust.51 Although the trustees may have the right to pay trust money to almost anyone, they are trustees and not beneficial owners of the money because none of the permitted uses is directly for their own benefit. If A pays money to B to be used only to pay C, this restriction can and probably will create a trust. This must occur when that use of the money does not benefit B in any way. For example, if C is A’s creditor, B will not benefit from payment to C and must be holding it trust for A or C, who are the only persons who can benefit from that arrangement.52 However, this is not true when the payment to C is for B’s benefit. If C is B’s creditor or a supplier of goods, land, or services to B, the primary benefit of paying C accrues to B, not A. By paying C, B will personally enjoy the full value of the money in the normal way, by exchanging it for something of value to B. Although the restriction on B’s use of the money is for A’s benefit, the permitted uses of the money are not. Suppose that my son asks me for money to pay his tuition fees and I give or lend it to him on the condition that he uses it only to pay those fees. This restriction reduces, but does not necessarily eliminate his beneficial ownership of the money. The payment was made at his request for a purpose beneficial to and chosen by him. By telling him that he can only do the very thing he wants to do, I have not interfered with his use of the money in a substantial way. It is interesting to consider how payments of money are treated in the law of unjust enrichment, where the concept of enrichment is carefully defined and limited out of respect for individual freedom of choice. People should not be required to pay for unrequested benefits unless those benefits are undeniably enriching. If A paid money to B by mistake, B would be enriched because the receipt of money is an incontrovertible benefit. No reasonable person would deny that B is enriched.53 The same would be true if A paid B’s creditor, C, by mistake, thus reducing B’s debt to C. Having been saved a necessary expenditure, B incontrovertibly benefits from that payment. If A’s payment either to B or C incontrovertibly benefits B according to the law of unjust enrichment, 51

Cowan v Scargill [1985] Ch 270; Harries v Church Commissioners for England [1992] 1 WLR

1241. 52 53

PJ Millett QC, ‘The Quistclose Trust: Who Can Enforce It?’ (1985) 101 LQR 269, 288–89. P Birks, An Introduction to the Law of Restitution (Oxford, 1989) 116–24.

Restrictions on the Use of Money 91 which takes a narrow view of what counts as enrichment, it is odd that, in another context where B’s freedom of choice is not in issue, a payment of money to B on condition that it be used only to pay B’s creditor, C, could be regarded as producing no benefit at all for B. In the cases leading up to Quistclose, in which A loaned money to B to be used only to pay C, it was clear that A had a right to restrain B’s misuse of the money for any other purpose. However, the courts never said that A was the beneficial owner of the money. Although, as we have seen, the relationship was sometimes called a trust, it was not identified as a trust for A, but referred to as a ‘specific trust’54 or ‘quasi-trust’55 to use the money only for the specified purpose. In Gibert v Gonard,56 North J said that the money could be treated ‘as if it had been trust money’, clearly assuming that it was not actually held in trust: [A]lthough the money was lent by way of loan, and was to be repaid, and was a sum not intended to go back in specie in any way to the person who lent it, yet still there was a duty cast upon and undertaken by the person who received the money, and he, as a matter of law, was bound to carry out that duty and give effect to the undertaking and representation which the receipt of the money under those circumstances had imposed on him. That seems to me ample to create such a ‘fiduciary relation’ as is necessary (if that is the correct way of defining what is necessary) to enable the person who advanced that money to follow it and get it back in the same way as if it had been trust money, the obligation of the person receiving which is well defined.57

In Barclays Bank Ltd v Quistclose Investments Ltd itself, the arrangement was described by Lord Wilberforce as ‘a relationship of a fiduciary character or trust, in favour, as a primary trust, of [C], and secondarily, if the primary trust fails, of [A]’.58 Again, it was assumed that A was not the beneficial owner of the money before the purpose failed. In subsequent cases, A had a right to restrain B’s use of the money without being the beneficial owner of that money. In Carreras Rothmans Ltd v Freeman Mathews Treasure Ltd, Peter Gibson J said: I doubt if it is helpful to analyse the Quistclose type of case in terms of the constituent parts of a conventional settlement, though it may of course be crucial to ascertain in whose favour the secondary trust operates (as in the Quistclose case itself) and who has an enforceable right. In my judgment the principle in all these cases is that equity fastens on the conscience of the person who receives from another property transferred for a specific purpose only and not therefore for the recipient’s own purposes, so that such person will not be permitted to treat the property as his own or to use it for other than the stated purpose.59

54 55 56 57 58 59

Edwards v Glyn (1859) 2 El & El 29, 50–51 (Crompton J). Re Drucker (No 1) [1902] 2 KB 55, 57 (Wright J); Re Watson (1912) 107 LT 96, 98 (Phillimore J). (1884) 54 LJ Ch 439. Ibid p 440–41. [1970] AC 567, 580. [1985] 1 Ch 207, 222.

92 Robert Chambers A’s interest in the money was viewed in a similar way by Potter LJ, when Twinsectra Ltd v Yardley was before the Court of Appeal: In the ordinary way, a borrower has the full benefit of money lent to him at common law and there is no reason or basis for equity to interfere. However, when a loan is made for a special purpose, equity will interfere in appropriate cases to prevent the borrower from using that money for any other purpose. The purpose imposed at the time of the advance creates an enforceable restriction on the borrower’s use of the money. Although the lender’s right to enforce the restriction is treated as arising on the basis of a ‘trust’, the use of that word does not enlarge the lender’s interest in the fund. The borrower is entitled to the beneficial use of the money, subject to the lender’s right to prevent its misuse; the lender’s limited interest in the fund is sufficient to prevent its use for other than the special purpose for which it was advanced.60

A’s right to restrain B’s misuse of the money was first attributed to A’s beneficial ownership of the money by Lord Millett (then as P J Millett QC) in an article in the Law Quarterly Review. That analysis was adopted by the New Zealand Court of Appeal in General Communications Ltd v Development Finance Corp of New Zealand Ltd61 and used by Lord Millett himself in Twinsectra Ltd v Yardley. Lord Millett explained the Quistclose trust as ‘simply an example of what is sometimes called an “illusory trust”.’62 However, there is an important difference between the two relationships. The typical illusory trust arises when C is A’s creditor and payment to C will benefit A and C, but not B. Under a typical Quistclose trust, C is B’s creditor and payment to C will benefit B and C, but not A. If payment to C is primarily for B’s benefit (and there is no express trust), B should be regarded as the beneficial owner of the money or at least as having a beneficial interest in it. This seems to have been the prevailing view of the relationship prior to Lord Millett’s analysis. In Twinsectra Ltd v Yardley, Lord Millett said: The borrower’s interest pending the application of the money for the stated purpose or its return to the lender is minimal. He must keep the money separate; he cannot apply it except for the stated purpose; unless the terms of the loan otherwise provide he must return it to the lender if demanded; he cannot refuse to return it if the stated purpose cannot be achieved; and if he becomes bankrupt it does not vest in his trustee in bankruptcy. If there is any content to beneficial ownership at all, the lender is the beneficial owner and the borrower is not.63

These factors indicate that beneficial ownership belongs to A, not B. However, there are other relevant factors to consider relating to the benefits and burdens of beneficial ownership. Who is entitled to the interest earned with the money? Who is responsible for the tax paid on that interest and the taxes, duties, and other charges relating to the deposit of that money in a bank account? Who 60 61 62 63

Twinsectra Ltd v Yardley [1999] Lloyd’s Rep Bank 438, para 75. [1990] 3 NZLR 406. (1985) 101 LQR 269, 288. [2002] 2 AC 164, 188.

Restrictions on the Use of Money 93 bears the risk of loss if the money is stolen or misappropriated without B’s fault? If B holds the money in trust for A, it is A (as sole beneficial owner of the money) who enjoys the benefits and bears the burdens and risks of ownership. So long as B performs the trust properly, B should neither benefit nor be out of pocket because of that performance. In many Quistclose trust cases, these factors were not assessed, but it is likely that the benefits and burdens of ownership would have belonged to B, not A. Most importantly, if the money was used as permitted, it was B, not A, who benefited from its use. If A’s restriction on B’s use of money does not always prevent B from obtaining beneficial ownership of that money, then a resulting trust for A is not the only possible response when that restriction does not create an express trust. At least, the entire beneficial ownership of the money does not have to return to A under a resulting trust. Beneficial ownership could be shared by A and B, as discussed below. It should also be possible for A to have a right to restrain B’s use of the money without having a beneficial interest in it. A difficult question is whether that right is enforceable only against B or can be enforced against others as well. (c) Personal Right to Restrict the Use of Money There is nothing objectionable about a personal right to restrict the use of money belonging to another. If A pays money to B in exchange for B’s promise to use it only to pay C and the parties do not want to create a trust, but want B to have beneficial ownership of the money subject only to A’s personal right to enforce the restriction on B’s use of the money, the parties should be free to create this relationship (unless, as discussed above, it creates a resulting trust for A). There is no reason why this contract would not be valid. If A’s payment to B is a loan, the payment is good consideration, not only for B’s promise to repay the loan, but also for B’s promise to use the money only to pay C. A’s payment of a debt due to B for services performed can also provide consideration for B’s promise to use the money only to pay C, at least when that promise is made before the debt arises.64 Despite suggestions to the contrary,65 A’s payment to B must also be good consideration for that promise when the payment is made as a gift. It would be absurd if B’s promise to use the money only to pay C was enforceable only when coupled with another promise to repay A, provide a service, or do something else in exchange for the money. In Conservative and Unionist Central Office v Burrell,66 which concerned the legal status of a political party, the Court of Appeal considered the basis on which the

64

Carreras Rothmans Ltd v Freeman Mathews Treasure Ltd [1985] Ch 207. L Ho and P St J Smart, ‘Re-interpreting the Quistclose Trust: A Critique of Chambers’ Analysis’ (2001) 21 OJLS 267, 279–80; Twinsectra Ltd v Yardley [2002] 2 AC 164, 121. 66 [1982] 1 WLR 522. 65

94 Robert Chambers treasurer of the party received donations from contributors. Although the money was donated, the contributors had the right to prevent their donations from being misused. Brightman LJ said: [T]he contributor has no right to demand his contribution back, once it has been mixed with other money under the authority of the contributor. The contributor has no legal right to require the mixed fund to be unscrambled for his benefit. This does not mean, however, that all contributors lose all rights once their cheques are cashed, with the absurd result that the treasurer or other officers can run off with the mixed fund with impunity. I have no doubt that any contributor has a remedy against the recipient (ie the treasurer, or the officials at whose direction the treasurer acts) to restrain or make good a misapplication of the mixed fund except so far as it may appear on ordinary accounting principles that the plaintiff’s own contribution was spent before the threatened or actual misapplication.67

The court called the relationship between contributor and treasurer a mandate, but this was simply a contract regarding the use of the money paid. As Professor Birks has said, ‘To say that he holds under a mandate to apply it does little more than add an extra word, for the fact is that “mandate” here means nothing more than contract, though it may indicate a contract with particular terms and characteristics.’68 (d) Property Right to Restrict the Use of Money If A has a right to restrain B’s misuse of the money and is not the beneficial owner of that money, is that right enforceable only against B or can it be enforced against others as well? In other words, is it a personal right or a property right? The cases do not provide a clear answer to this question. Not every right to use or control a thing can be a property right. The law developed a finite list of recognised property rights and, although new rights do get added to the list from time to time by courts or by statute, there is a reluctance to expand it. By limiting the categories of possible property rights, assets are less likely to be encumbered in ways that reduce their utility and marketability, while conveyances and commercial transactions are simpler and less costly.69 If people try to create a property right that is not on the list, unless a court is willing to take the exceptional step of expanding the list, the right created is merely personal. For example, an attempt to make an easement that does not benefit a dominant tenement (in a jurisdiction where that is not permitted by statute) will create only a licence to use the land.70 67

[1982] 1 WLR 522, pp 529–30. P Birks, ‘Restitution and Resulting Trusts’ in S Goldstein (ed), Equity and Contemporary Legal Developments (Jerusalem, 1992) 335, 349. 69 Keppell v Bailey (1834) 2 My & K 517, 535–36; B Rudden, ‘Economic Theory v Property Law: The Numerus Clausus Problem’, in J Eekelaar and J Bell (eds), Essays in Jurisprudence Third Series (Oxford, 1987) 239; TW Merrill and HE Smith, ‘Optimal Standardization in the Law of Property: The Numerus Clausus Principle’ (2000) 110 Yale Law Journal 1. 70 Hill v Tupper (1863) 2 H & C 121; Clapman v Edwards [1938] 2 All ER 507. 68

Restrictions on the Use of Money 95 The recognised property rights to money fall into four main categories. The first is beneficial ownership, either at law or in equity. Secondly, a person can have possession of money belonging to another, for example, by finding a lost cheque or stealing a wallet. The third category consists of security interests, such as legal title or possession taken for security purposes (for example, a deposit to cover possible hotel charges), equitable or statutory charges, and equitable liens. Fourthly, there are powers to obtain beneficial ownership of money through rescission.71 A right to money based on tracing may be beneficial ownership,72 a security interest,73 or a power to obtain an ownership or security interest in it.74 If A is not the beneficial owner of the money, A’s right to prevent B’s misuse of it does not fall into any of the recognised categories of property rights to money. It is merely a right to restrict the use of money belonging beneficially to another person, which does not secure the performance of any other obligation and does not give A any power to obtain ownership of that money. Although A’s right to restrain B’s misuse of the money can be specifically enforced by injunction,75 that does not make it property. An injunction would be available in this situation even if A’s right was personal and enforceable only against B. The early Quistclose cases established that A’s right to restrain B’s use of the money was enforceable not just against B, but also against B’s personal representatives,76 B’s trustee in bankruptcy,77 and a sheriff who seized the money from B.78 However, that does not mean that A had a property right to the money, because those officials obtained only B’s right to use the money and no more. They stepped into B’s shoes and were subject to the same restraint on its use.79 As Lindley LJ said in Re Rogers: The trustee is endeavouring to affirm the transaction in part and to repudiate it in part. He wants to claim the money as the bankrupt’s because it came into his hands and at the same time to reject the terms and conditions on which alone the bankrupt procured it. This is manifestly unjust and contrary to principle . . .

We have already seen how in the first half of the nineteenth century, the Quistclose trust was not regarded as a trust for A. B was the beneficial owner of the money, subject to A’s right to restrain its misuse, and that right could be enforced against people standing in B’s shoes. At that time, the restrictive 71 Allcard v Skinner (1887) 36 Ch D 145; Lady Hood of Avalon v Mackinnon [1909] 1 Ch 476; El Ajou v Dollar Land Holdings plc [1993] 3 All ER 717 (Ch D), rev’d [1994] 2 All ER 685 (CA); Hunter BNZ Finance Ltd v CG Maloney Pty Ltd (1988) 18 NSWLR 420. 72 FC Jones & Sons v Jones [1997] Ch 159; Foskett v McKeown [2001] 1 AC 102. 73 Re Hallett’s Estate (1879) 13 Ch D 696. 74 Lipkin Gorman v Karpnale Ltd [1991] 2 AC 548; P Birks (ed), English Private Law (Oxford, 2000) para 15.213; LD Smith, The Law of Tracing (Oxford, 1997) 320–39. 75 Conservative and Unionist Central Office v Burrell [1982] 1 WLR 522. 76 Hassall v Smithers (1806) 12 Ves 119. 77 Edwards v Glyn (1859) 2 El & El 29. 78 Re Watson (1912) 107 LT 783. 79 Taylor v Wheeler (1706) 2 Ver 564; Ex parte Dumas (1754) 2 Ves Sen 582.

96 Robert Chambers covenant was at a similar stage of its development. Restrictions on the use of things belonging to others, including land, goods, and money, could be enforced against the persons who consented to those restrictions (and their personal representatives, etc), but not generally against other members of society. In 1848, Tulk v Moxhay established that a restrictive covenant over land bound a purchaser with notice of the covenant.80 In 1859, in De Mattos v Gibson, it was decided that mortgagees of a ship, who obtained that mortgage knowing that the ship had been chartered, could be restrained from interfering with that charter.81 The Quistclose trust never made that same transition from a personal right to an equitable property right to restrict the use of something belonging to another person. In Barclays Bank Ltd v Quistclose Investments Ltd, A’s right to the money was enforced not just against B or someone standing in B’s shoes, but against a bank that received the money with knowledge of the restriction on its use. That was not possible unless A had a property right to that money. However, Lord Wilberforce, as we have seen, described the arrangement as ‘a relationship of a fiduciary character or trust, in favour, as a primary trust, of [C], and secondarily, if the primary trust fails, of [A]’.82 The enforcement of A’s right took place after the purpose failed, at a time when it was clear that B held the money on express or resulting trust for A. Therefore, that case does not identify the nature of A’s right to the money, if any, while the purpose was capable of fulfilment. Although the case established the Quistclose trust as a property right, it left in doubt the nature of that right. Twinsectra Ltd v Yardley concerned liability for dishonestly assisting the breach of a Quistclose trust at a time when it was still possible to use the money for the specified purpose of acquiring property. The House of Lords decided that the money was held in trust for A from the outset and, therefore, there had been a breach of an actual trust. The Court of Appeal thought that A had only a right to restrain B’s misuse of the money and that the stranger was liable for dishonestly assisting a breach of that duty. The Court of Appeal’s decision does not depend on A having a property right to the money. People can be liable for dishonestly assisting a breach of fiduciary duty even in the absence of a trust.83 This is also true of knowing receipt. People can be liable for knowingly receiving corporate assets transferred by directors in breach of their fiduciary duty to the corporation, even though those assets were not held in trust prior to their misappropriation.84 Since B has a fiduciary duty to abide by A’s restriction on the use of the money,85 it would be possible for others to be liable to A for 80

(1848) 2 Ph 774. (1859) 4 De G & J 276; S Gardner, ‘The Proprietary Effect of Contractual Obligations under Tulk v Moxhay and De Mattos v Gibson’ (1982) 98 LQR 279. 82 [1970] AC 567, 580. 83 Consul Development Pty Ltd v DPC Estates Pty Ltd (1975) 132 CLR 373; C Mitchell, ‘Assistance’ in P Birks and A Pretto (eds), Breach of Trust (Oxford, 2002) 139, 160–69. 84 Belmont Finance Corp v Williams Furniture Ltd (No 2) [1980] 1 All ER 393, 405. 85 Twinsectra Ltd v Yardley [2002] 2 AC 164, 186. 81

Restrictions on the Use of Money 97 dishonestly assisting B’s breach of that duty or for receiving that money with knowledge or notice of the breach, regardless of whether B held the money in trust for A prior to its misuse. So far, no court has established clearly whether it is possible to have a property right to restrict the use of money belonging beneficially to another person. The opportunity to resolve this issue may never arise for two reasons. First, restrictions on the use of money normally give rise to a trust. Secondly, even if B had beneficial ownership of the money, subject only to A’s right to restrain its misuse, no problem would arise so long as B used the money as agreed or returned it to A. If B wrongly paid the money to someone else (X), a resulting trust for A should arise when X received it (as discussed below in the section on failure of the purpose). The only time A might need to enforce the bare right to restrain misuse of the money against someone other than B (or someone standing in B’s shoes) is if the money was paid properly to a bank pending payment for the agreed purpose and the bank wanted to exercise a right of set off, as it did in Barclays Bank Ltd v Quistclose Investments Ltd. If the bank received the money with knowledge of the restriction, a court may have to decide whether A’s right to enforce that restriction against B was a property right that could also be enforced against B’s bank. The court may well be reluctant to expand the list of recognised property rights to money. However, the addition of this property right would not interfere unduly with the transfer of money. The difference between a restriction that creates a resulting trust for A and one that does not can be subtle. In either case, most recipients of the money would be well protected by the defence of bona fide purchase86 and innocent donees of the money should receive the protection they need from the defence of change of position.87

4. Shared Ownership When A pays money to B to be used only to pay C, beneficial ownership could be shared by A and C, A and B, B and C, or A, B, and C. The first situation is a typical trust in which the trustee, B, has no beneficial interest in the money. In the other situations, B does have a beneficial interest in the money, which can be described in two different ways. We could say that B is both the trustee and one of the beneficiaries. A trustee can also be a beneficiary of the trust, so long as he or she is not the sole trustee and sole beneficiary. Alternatively, we could say that the trust does not attach to the entire beneficial ownership of the money. B’s

86 Ilich v The Queen (1987) 162 CLR 110, 128; D Fox, ‘Bona Fide Purchase and the Currency of Money’ (1996) 55 CLJ 547. 87 Lipkin Gorman v Karpnale Ltd [1991] 2 AC 548; National Westminster Bank plc v Somer International (UK) Ltd [2002] QB 1286; R Nolan, ‘Change of Position’ in P Birks (ed), Laundering and Tracing (Oxford, 1995) 135, 179–85.

98 Robert Chambers legal ownership is not bare legal ownership, but entitles B to some of the benefit of the money. The rest of the beneficial ownership is held in trust for A or C. (a) A and C The arrangement could create an express trust for C, with the remainder (if any) belonging to A. This seemed to be what Lord Wilberforce meant, in Barclays Bank Ltd v Quistclose Investments Ltd, by a primary trust for C and a secondary trust for A. As discussed above, A’s right to the remainder could be part of the express trust created by A or it could be a resulting trust arising because the express trust for C failed to dispose of the entire beneficial ownership of the money and A did not intend B (or anyone else) to have it. Although A or C may never receive the money from B, they would each have the right, as a trust beneficiary, to prevent B from misusing the money in breach of trust.88 If the arrangement initially created a trust only for A, C could later acquire a beneficial interest in the money through detrimental reliance on an expectation of receiving it.89 In Smith v Hurst,90 A transferred his assets to B in trust for his creditors, C, but, since the settlement was solely for A’s benefit, the trust for C was illusory and B held the assets in trust for A. Turner V-C said: [I]n the cases of deeds purporting to be executed for the benefit of creditors, and to which no creditor is a party, the motive of the party executing the deed may have been either to benefit his creditors or to promote his own convenience; and the Court there has to examine into the circumstances, for the purpose of ascertaining what was the true purpose of the deed; and this examination does not stop with the deed itself, but must be carried on to what has subsequently occurred, because the party who created the trust may, by his own conduct, or by obligations which he has permitted his trustee to contract, have created an equity against himself.91

There are two Quistclose trust cases in which it appears that both A and C had a right to compel B to pay C, but that was not clearly established in either case. In Hassall v Smithers,92 A paid money to B to be used to answer A’s acceptances of bills drawn on B. After B died intestate, A and the bill holders, C, were able to compel B’s representatives to pay that money to C. Sir William Grant MR said: Then the bill-holders [C] desire, with the assent of Illingworth [A], to have it applied in discharge of these bills; and he joins them in that request; and that avoids the question upon the strength of their own claim to insist upon the application: for there can be no doubt, that there is in them, and him, joining them, a complete right to insist upon the application, that he originally prescribed . . .93 88

Bartlett v Bartlett (1845) 4 Hare 631. Re Northern Developments (Holdings) Ltd, 6 October 1978; General Communications Ltd v Development Finance Corp of New Zealand Ltd [1990] 3 NZLR 406. 90 (1852) 10 Hare 30. 91 Ibid p 47. 92 (1806) 12 Ves 119. 93 Ibid p 122. 89

Restrictions on the Use of Money 99 A similar situation arose in Carreras Rothmans Ltd v Freeman Mathews Treasure Ltd.94 A paid money to B (an advertising agency in charge of A’s advertising campaign) to be used to pay B’s creditors, C, for debts incurred by B for A’s campaign. When B became insolvent, A paid C directly, took assignments of C’s claims against B, and was able to recover the money paid to B. B had a duty to pay C, but it was not clear whether that duty was owed to A or C. Peter Gibson J said that ‘the plaintiff [A] as the provider of the moneys has an equitable right to an order for the carrying out by the defendant [B] of the trust’,95 but also said, ‘I cannot accept the joint submission that the third party creditors [C] for the payment of whose debts the plaintiff [A] had paid the moneys into the special account had no enforceable rights.’96 (b) A and B The contract between A and B could produce a situation in which beneficial ownership of the money is shared by both of them. A’s beneficial interest would include the rights to restrain B’s misuse of the money and recover the money if the specified purpose cannot be carried out, while B’s interest would include a right to use the money for that purpose. If the arrangement is primarily for B’s benefit or for the mutual benefit of A and B and the permitted use of the money will benefit B, then B probably has a beneficial interest in the money. If A’s right to restrain B’s misuse of the money is regarded as a beneficial interest, then beneficial ownership is shared. If A is the sole beneficial owner of the money, A will have a right to restrain its misuse by B. However, the converse need not be true. If A has a right to restrain B’s misuse of the money, that alone does not make A its sole beneficial owner. The extent of A’s beneficial interest depends on and is defined by A’s rights to that money. As Isaacs J said in Hoystead v Federal Commissioner of Taxation, a beneficiary’s ‘interest in the trust estate at any given moment is measured by the relief which equity is then prepared to give him, that is, by the rights which the due execution of the trusts as framed by the creator of the trusts will at that moment give him.’97 If A cannot prevent B from using the money for a purpose beneficial to B, then A is not its sole beneficial owner. The contract between A and B may give both parties certain rights to control and benefit from the money in B’s hands. This is somewhat similar to the relationship created by a specifically enforceable contract of sale. Between contract and conveyance, the vendor holds the land on constructive trust for the purchaser.98 However, the vendor is not a bare trustee, but has a right to possession 94 95 96 97

[1985] Ch 207. Ibid p 224. Ibid p 223. (1920) 27 CLR 400, 425; P Parkinson, ‘Reconceptualising the Express Trust’ (2002) 61 CLJ 657,

663. 98 Holroyd v Marshall (1862) 10 HLC 191; Shaw v Foster (1872) LR 5 HL 321; Lysaght v Edwards (1876) 2 Ch D 499.

100 Robert Chambers and to retain title until the purchase price is paid. Beneficial ownership of the land is shared by both parties.99 A Quistclose trust can be similar in that the legal owner’s beneficial ownership is reduced, but not eliminated by a contract. (c) B and C If the arrangement creates a trust for C, it is likely that B is not entitled to retain any of the money for B’s own benefit. The condition restricting B’s use of the money is a clear indication that A did not want B to retain any of the money and, therefore, anything not paid to C usually returns to A via resulting trust. However, a surplus of trust assets does not always give rise to a resulting trust. There are cases in which an express trustee was entitled to retain the remaining trust assets not consumed by the trust.100 In those cases, the evidence revealed that the settlor intended the trustee to retain the surplus for her or his own benefit. As Lord Langdale MR said in Cook v Hutchinson: In general, where an estate or fund is given in trust for a particular purpose, the remainder, after that purpose is satisfied, will result to the grantor, but that resulting trust may be rebutted even by parol evidence, and certainly cannot take effect where a contrary intention, to be collected from the whole instrument, is indicated by the grantor . . .101

If A intended to create a trust for C and make a gift of the remainder to B, beneficial ownership of the money would be shared by B and C. As beneficiary of that trust, C could enforce B’s duty to pay C, while A, the settlor, would have no further interest in the money. (d) A, B, and C Finally, it is possible (though unlikely) that beneficial ownership could be shared by A, B, and C. For example, if A and B shared ownership under the initial arrangement, C might acquire an interest in the money through dealings with A or B. A would have the right to restrain B’s misuse of the money, while B had a duty to pay the money to C and C had a right to enforce that duty.102 All three parties could have a beneficial interest in the money if the arrangement created a trust for C which did not exhaust the fund of money. Although the entire surplus would probably belong to A under a resulting trust, it could belong to B if admissible evidence proved that A intended B to retain it. Evidence 99 Law Commission of England and Wales, Transfer of Land: Risk of Damage After Contract for Sale (1990, Law Com, No 191) 4; Kern Corp Ltd v Walter Reid Trading Pty Ltd (1987) 163 CLR 164, 191–92. 100 Cook v Hutchinson (1836) 1 Keen 42; Croome v Croome (1888) 59 LT 582; In re Foord [1922] 2 Ch 519; Moffit v Moffit [1954] 2 DLR 841. 101 (1836) 1 Keen 42, 50. 102 Cf General Communications Ltd v Development Finance Corp of New Zealand Ltd [1990] 3 NZLR 406; R Chambers, Resulting Trusts (Oxford, 1997) 82–83.

Restrictions on the Use of Money 101 of A’s intention could partially displace the resulting trust in A’s favour. For example, if A wanted B to have a life interest in the surplus, that money would result to A only after B’s death and completion of the trust for C. As Aickin J said in Napier v Public Trustee (Western Australia), ‘a resulting trust need not necessarily relate to the entire interest in the property’.103 The resulting trust attaches only to that portion of the money that was not held in trust for C or given to B. Therefore, it is possible that beneficial ownership is shared by all three parties under an express trust for C and a resulting trust of only some of the surplus for A.

II : WHICH RELATIONSHIP ?

When A pays money to B to be used only to pay C (or for a specific purpose), this transaction may give rise to one of a variety of different relationships, as discussed above. The relationship created will depend primarily on the intentions of A and B, but C’s intention may also be important. Intention can be relevant in two different ways. First, the parties may intend to create a particular relationship and do what is necessary to give effect to that intention. For example, A may create an express trust for A or C or make an absolute gift to B. Secondly, their intentions may be relevant as facts which give rise to rights by operation of law. For example, A’s intention not to benefit B may give rise to a resulting trust for A or C’s reliance on the existence of the fund may give C a right to receive payment. As Professor Birks has noted: There is a fine but important distinction between intent conceived as creative of rights, as in an express trust or a contract, and intent conceived as a fact which, along with others, calls for the creation of rights by operation of law.104

Where possible, the law should give effect to people’s intentions. Unless their intentions are defective in some way (for example, because of incapacity, mistake, duress, or undue influence), it is better that they have the legal relationship they have chosen than one imposed on them by law. If an intention to create a legal relationship does not create that relationship directly (for example, because of lack of compliance with formalities), the law may be able to perfect a detrimentally relied upon expectation of obtaining that relationship thereby producing something similar. Finally, if it is not possible to give direct effect to intentions or to perfect expectations, the law should intervene to reverse any unjust enrichment produced by the defective transaction. This preference for fulfilling intentions and expectations should guide the interpretation of any transaction in which A paid money to B to be used only to pay C or for some specific purpose. First, what relationship did the parties 103 104

(1980) 32 ALR 153, 158. P Birks, An Introduction to the Law of Restitution (Oxford, 1989) 65.

102 Robert Chambers intend to create and is it possible to give direct effect to that intention? Secondly, are there any expectations which did not create rights directly but can and should be perfected by operation of law? Thirdly, if the transaction did not produce the intended relationship, was B unjustly enriched at A’s expense?

1. Relationships Created Directly by Intention If A paid money to B gratuitously, either as a gift or to be held in trust, the relationship created by that payment will depend on A’s intentions. Since a gift can be completed without the donee’s knowledge105 and a trust can be created without the knowledge of the trustees or beneficiaries,106 it does not matter whether B or C shared A’s intentions. If the money was paid pursuant to a contract between A and B, as a loan, repayment of a debt, or payment for goods, services, etc, then their relationship will depend on their mutual intentions. C’s intentions will have no direct effect on this relationship, whether C is a stranger to the transaction or the beneficiary of a trust created by that transaction. However, C’s expectation of receiving that money can lead to C obtaining an interest by operation of law, as discussed below. The relationships created directly by intention when A pays money to B can be organised into three main categories according to the nature of B’s right to that money: (a) unrestricted beneficial ownership, (b) express trust, or (c) restricted beneficial ownership. (a) Unrestricted Beneficial Ownership B will receive unrestricted beneficial ownership of the money if the apparent condition attached to that payment does not restrict B’s use of it. If that condition was merely an expression of A’s wishes or motive for making the payment, B may feel morally obligated to use the money as contemplated, but will be the sole beneficial owner of the money and have no legal duty to follow A’s wishes. This relationship is more likely where the specified use is for B’s benefit or where A and B are close friends or relations and A is content to rely on the bonds of love or friendship instead of the force of law. Even if the condition attached to the payment does impose a legal obligation on B, it might not restrict B’s use of the money. If the obligation can be satisfied by payment of an equivalent sum of money to C, then B is the beneficial owner of the money, possibly owing a debt to C or a duty to A to make sure that C gets paid. For example, I may give my son enough money to pay his tuition fees, but not care whether he uses that money or his own money to pay those fees, just so long as they get paid. 105 106

Standing v Bowring (1885) 31 Ch D 282. Mallott v Wilson [1903] 2 Ch 494; Rose v Rose (1986) 7 NSWLR 679.

Restrictions on the Use of Money 103 In Guardian Ocean Cargoes Ltd v Banco do Brasil SA,107 A was negotiating to buy a ship from C and obtain refinancing from B, C’s banker. A paid $600,000 to B to be used to pay C’s promissory notes to B when negotiations were complete. When negotiations broke down five years later, A had a right to repayment from B, but there was no Quistclose trust (and therefore A was not entitled to compound interest). If negotiations had been successful, B would have been required to reduce C’s debt to B by the amount of money received from A, but B did not have to use that money in any particular way. In Twinsectra Ltd v Yardley, the trial judge (Carnwarth J) decided that B’s undertaking as a solicitor to use the money ‘solely for the acquisition of property on behalf of our client’ was not intended to be a meaningful restriction on B’s use of the money.108 A had no possible interest in the property acquired by B’s client, but had relied on B’s undertaking to repay the loan personally. As Lord Hoffman said: Twinsectra [A] was not asking for any security over the property. . . . So it is hard to see why it should have mattered to Twinsectra whether the immediate use of the money was to acquire property. The judge thought it might have been intended to give some protective colour to a claim against the Solicitors Indemnity Fund if Sims [B] failed to repay the loan in accordance with the undertaking.109

Both the Court of Appeal and the House of Lords treated the undertaking as a binding restriction on B’s use of the money. In most cases, a negotiated and formally documented undertaking will be effective according to its terms. However, in this unusual case, the trial judge’s interpretation was not unreasonable. B had undertaken both to restrict his use of the money and to repay the loan personally. The restriction on use may well have been a sham intended only to create an appearance of a normal solicitor’s undertaking. (b) Express Trust If the condition does impose a duty on B to use or not use the money in some way, then at least one other person has a right to restrain B’s use of the money. B might be the sole beneficial owner of the money, subject only to A’s right to restrain its misuse (as discussed below), but it is far more likely that B is a trustee of the money, with beneficial ownership belonging to A or C, shared by the parties, or devoted to some purpose. If a trust was intended and it is possible to give effect to that intention, then B holds the money under an express trust. The creation of an express trust requires certainty of intention to create a trust, certainty of subject matter, certainty of objects, compliance with formalities, and constitution (by transfer of the subject matter to the intended trustee). The subject of the trust is the money A paid to B, the trust will be constituted 107 108 109

[1994] 2 Lloyd’s Rep 152. [2002] 2 AC 164, 168. [2002] 2 AC 164, 169.

104 Robert Chambers when B receives that money, and there are no formalities required for the creation of an inter vivos trust of money. The issues likely to cause the most difficulty in this situation are certainty of intention and certainty of objects: did the settlor intend to create a trust and who or what are the objects of that trust? If the payment to B is a testamentary disposition from A’s estate, then the essential terms of the trust must be expressed in writing, signed, and witnessed as required by the Wills Act 1837 or similar legislation in other jurisdictions. The settlor provides the subject matter of the trust, intends to create the trust, and defines its terms. Any uncertainty is resolved by careful examination of the settlor’s intentions. It is likely that A is the settlor of any express trust created by A’s payment to B. However, if B provided consideration for the payment, then B may be the settlor. If A intended to create a trust and defined its subject and objects, then B received the money as an express trustee and A is the settlor. B cannot be the settlor unless B provided the subject matter of the trust and that cannot happen unless B received beneficial ownership of the money from A. If A had paid the money to B with a written instruction to hold it ‘in trust’ for A, C, or a specific purpose, A’s intention to create a trust and its terms would have been clear. By paying the money to B ‘to be used only’ to pay C or for a specific purpose, the matter is left in doubt. An express trust can arise even if A did not use the word ‘trust’, so long as A intended to create a trust relationship and identified its subject and objects. Since no formalities are required for the creation of an inter vivos trust of money, A’s intention may have to be gleaned from available documents, evidence of conversations, and the circumstances of the transaction. The transaction may create a trust for C, but only if it is clear that A or B intended to confer an immediate benefit on C. If B does hold the money in trust for C, then A and B cannot vary or revoke the arrangement, unless the settlor (A or B) expressly reserved the right to revoke the trust.110 Since C did not give value for the creation of the trust (even if the purpose of the transaction is payment of A or B’s debt to C), it is best to assume that A and B did not want to surrender their rights to the money gratuitously unless they clearly expressed that intention. In Re Schebsman,111 a company made a contract with its employee in which the company agreed to pay money to the employee’s widow and daughter. This arrangement did not create a trust. Du Parq LJ said: It is true that, by the use possibly of unguarded language, a person may create a trust, as Monsieur Jourdain talked prose, without knowing it, but unless an intention to create a trust is clearly to be collected from the language used and the circumstances of the case, I think that the court ought not to be astute to discover indications of such an intention. I have little doubt that in the present case both parties . . . intended to keep alive their common law right to vary consensually the terms of the obligation 110 GG Bogert and GT Bogert, The Law of Trusts and Trustees, 2nd edn (St Paul, 1984) paras 998, 1000. 111 [1944] Ch 83.

Restrictions on the Use of Money 105 undertaken by the company, and if circumstances had changed . . . injustice might have been done by holding a trust had been created and that those terms were accordingly unalterable.112

If C is B’s creditor, there is no reason why A would want to create a trust for C. Even if C is A’s creditor, A would probably not want to confer a benefit on C in advance of payment of the debt. As Professor Scott said, ‘Where the debtor [A] has not agreed with the creditor [C] to make the disposition, there is ordinarily no reason why the debtor should surrender his control over the property, and the inference is that he does not intend to do so.’113 Even if A executed a deed of trust to pay A’s creditors, that may be illusory if the arrangement was intended primarily for A’s own benefit.114 If C is not a party to the trust deed and has not relied on it, C will obtain no rights under it unless A made the deed intending to benefit C. C is even less likely to acquire an interest in money paid by A to B under a contract in which B agreed to use it only to pay C. If A intends to retain beneficial ownership of the money until B uses it for the agreed purpose, then B will hold it on express trust for A. This is probably A’s intention when the contemplated use of the money is for A’s benefit, such as payment of A’s creditors or purchase of goods, land, or services for A. Also, this is probably what A intends when A pays money to B’s solicitor rather than directly to B. The money is paid to B’s solicitor to reduce the risk that it will be misused. A does not want B to have control over the money pending payment to C and B’s solicitor will hold it in trust, not for B, but for A.115 Of course, if A was happy to pay the money to B, but paid it to B’s solicitor on B’s request, the use of a solicitor says nothing about A’s intentions. In Twinsectra Ltd v Yardley, the House of Lords decided that money paid by A to a solicitor, subject to the solicitor’s undertaking to use it ‘solely for the acquisition of property on behalf of our client’, was held in trust for A until it was used for that purpose. As Lord Hoffman said, ‘Money in a solicitor’s client account is held in trust. The only question is the terms of that trust.’116 The normal purpose of paying money to a solicitor subject to her or his undertaking to use the money in a particular way is to prevent anyone else from obtaining beneficial ownership of that money until it is used as required. Therefore, the arrangement indicates strongly that A intended to retain beneficial ownership. Unless the undertaking was a sham, as the trial judge thought, the solicitor held the money on express trust for A, with a power to pay to use it for the specified purpose.

112

[1944] Ch 83, 104. Scott on Trusts, para 126.1. 114 Smith v Hurst (1852) 10 Hare 30. 115 Bristol & West Building Society v Mothew [1998] Ch 1, 22; Barclays Bank plc v Weeks Legg & Dean [1999] QB 309, 324; Twinsectra Ltd v Yardley [1999] Lloyd’s Rep Bank 438, paras 86–87 (CA). 116 [2002] 2 AC 164, 168. 113

106 Robert Chambers If A pays money to B to be used only for a charitable purpose, then normally B would hold the money under an express trust for that purpose. For example, if A paid a research grant to a university researcher, B, to be used only for a particular research project, that money would be held in trust for that purpose, which is charitable because it benefits the public through the advancement of education and is not for private gain.117 The fact that the purpose chosen by A is charitable reveals two things about A’s intentions. First, A probably did not provide the money for B’s personal benefit (although B may benefit indirectly through advancement and recognition as a researcher), but wanted the money used only for the public good.118 Secondly, A probably did not want to retain any control over or ownership of the money. Otherwise, A could lose one of the benefits of giving to charity: a reduction of A’s income tax liability. If the purpose is not charitable, but one of the few acceptable non-charitable trust purposes, such as care of a grave or specific animal, then normally B would hold the money in trust for that purpose. The selected purpose is unlikely to be directly beneficial to B, which indicates that A does not want B to have beneficial ownership of the money. The law can give effect to A’s intention by allowing B to use the money for the specified purpose and no other. Enforcement of the trust does not require A to retain any interest in the money, since misuse of the money can be restrained by the person entitled to the money remaining after the purpose is achieved or fails. What happens when A pays money to B to be used for a purpose that does not benefit B or any other specific person, is not charitable, and is not an acceptable non-charitable purpose? A might not appreciate the difference between a payment that creates a valid purpose trust and one that does not. In both cases, A probably had the same intention: that B would not use the money for B’s own benefit, but would be required to use it for the purpose chosen by A. The law can give direct effect to that intention only if the purpose is a permissible charitable or non-charitable trust object. If not, the law will intervene to prevent B’s unjust enrichment. Since A did not intend to benefit B and did not create a valid express trust for anyone else, B will hold the money on resulting trust for A.119 As beneficiary of that trust, A can give B permission to use that money for the stated purpose. If A has a beneficial interest in the money, A can assign that interest to another person (C). If B holds the money on express trust for A, the assignment of A’s subsisting interest must be made in writing and signed by A or A’s agent as required by section 53(1)(c) of the Law of Property Act 1925 and similar statutes in other jurisdictions.120 However, if B holds the money on resulting trust for A,

117

Re Hopkins’ Will Trusts [1965] Ch 669. Benefit to the public is the essence of charity, whether A had the general charitable intention required to amend the trust cy près or wanted the money used only for the chosen purpose. 119 As discussed below, text to nn 130–37. 120 Grey v Inland Revenue Commissioners [1960] AC 1. 118

Restrictions on the Use of Money 107 then writing is not required.121 This is because the assignment of the interest under a resulting trust can be regarded, not as a transfer of that interest by the trust beneficiary, but as a delayed declaration of express trust by the settlor.122 The statutory writing requirements do not apply to the creation of a new inter vivos express trust of money. (c) Restricted Beneficial Ownership As discussed above, A can have a right to restrain B’s use of the money without being the beneficiary of a trust of that money. If neither A nor B intends to create a trust and the contract between them restricts B’s use of the money, there are three possibilities. First, the restriction may prevent B from obtaining beneficial ownership of the money and, therefore, it will be held entirely on resulting trust for A from the outset. Secondly, the restriction might not eliminate B’s beneficial ownership of the money, but reduce it to the extent that part of it is held on resulting trust for A. In other words, beneficial ownership may be shared by A and B. Thirdly, B may receive beneficial ownership of the money, subject only to A’s right to restrain its misuse. In each case, the parties have the same basic intention that B should have beneficial ownership of the money subject to an agreed restriction on its use. The difficulty is deciding when the law can give direct effect to that intention and when it must intervene to return some or all of the beneficial ownership of the money to A. This is discussed below in the section on restitution of unjust enrichment.

2. Perfection of Expectations As discussed above, C may become the beneficiary of an express trust when A pays money to B to be used only to pay C. That interest is created directly by the intention of A or B to confer a benefit upon C, whether it arises at the outset when the money is paid to B or later through an assignment of A’s interest. C can also acquire an interest in the money by operation of law if A relied on B’s promise to use the money only to pay C or C relied on an expectation of receiving it. In those cases, the expectation that the money would be paid to C was not effective to create rights directly, but detrimental reliance on that expectation was sufficient to justify legal intervention to give effect to it. C became the beneficiary of a constructive trust which arose by operation of law to perfect that expectation.

121 122

Re Vandervell’s Trusts (No 2) [1974] Ch 269. JE Penner, The Law of Trusts, 3rd edn (London, 2002) 153.

108 Robert Chambers (a) A’s Expectations If A pays money to B intending to benefit C, this usually produces an express trust for C. As discussed above, no formalities are required to create an inter vivos trust of money. Therefore, if it is certain that A intended to create a trust for C, that intention will be effective to create that trust. If that intention is not effective for any reason (such as a failure to identify C), B will hold the money on resulting trust for A unless admissible evidence shows that A wanted B to keep any money not paid to C. Normally, A’s intention to benefit C produces one of two consequences: an express for C (because the law gives direct effect to A’s intention) or a resulting trust for A (because there is no express trust and A’s intention to benefit C shows that A did not intend to benefit B). The secret trust is an exceptional situation in which A’s intention to benefit C produces neither an express nor a resulting trust, but a constructive trust for C. If A’s payment to B is a testamentary disposition and A’s intention to benefit C is not written in a form which complies with the Wills Act 1837 or similar legislation in other jurisdictions, an express trust will not arise. However, instead of a resulting trust for A’s estate, B will hold the money on constructive trust for C if the arrangement meets the requirements for making a secret trust. The constructive trust for C is fully secret if there are no testamentary documents which reveal that A did not intend to benefit B. It is half secret if A’s will shows that B was supposed to be a trustee of the money, but fails to identify the objects of the trust. The fully secret trust is valid if A communicated the terms of the trust to B and B accepted the trust (expressly or by acquiescence) before A’s death. For half secret trusts in England and Wales, communication must occur before A executed the will that revealed the existence of the trust.123 However, that rule is often criticised and does not apply in Australia, Ireland, or the United States.124 Secret trusts (whether fully or half secret) are testamentary constructive trusts: they take effect on A’s death and arise by operation of law to perfect A’s expectation that B would pay the money to C as agreed. This response is justified by A’s detrimental reliance on B’s undertaking. As Oosterhoff and Gillese explain, ‘What is surely the basis of these trusts is the fact that the deceased has relied to his or her detriment upon the intended trustee’s acceptance of the trust and died in the expectation that his or her wishes would be carried out.’125 If A had intended but failed to create an inter vivos trust for C, there would be no constructive trust for C. Instead, a resulting trust would arise to prevent the unjust enrichment of B and provide A with another opportunity to create the intended trust. 123

Re Bateman’s Will Trusts [1970] 1 WLR 1463. Ledgerwood v Perpetual Trustee Co Ltd (1997) 41 NSWLR 532; Re Browne [1944] IR 90; American Law Institute, Restatement of the Law of Trusts Second (St Paul, 1959) [55] p 143. 125 AH Oosterhoff and EE Gillese, Text, Commentary and Cases on Trusts, 5th edn (Toronto, 1998) 557. 124

Restrictions on the Use of Money 109 (b) C’s Expectations Normally, C has no right to the money unless A or B created a trust for C. However, if A or B represents to C that the fund has been created for C’s benefit and C detrimentally relies on that representation, then C may obtain a right to receive payment.126 For example, in Re Northern Developments (Holdings) Ltd,127 B’s creditors (C) were told about the fund to obtain their forbearance. In General Communications Ltd v Development Finance Corp of New Zealand Ltd,128 C supplied video equipment to B with 90 days to pay. That debt was supposed to be secured by a letter of credit, but C accepted instead a letter from B’s solicitors confirming that they would pay C when they received the money from A. In both those cases, C had a right to payment of the money. Both cases might be explained on the basis that A’s interest in the money was assigned to C.129 If that occurred, then C’s interest was created directly by A’s intention to benefit C and, after the assignment, A no longer had any interest in the fund. However, there are two difficulties with that explanation. First, the assignment of A’s subsisting equitable interest to C should have been made in writing in compliance with section 53(1)(c) of the Law of Property Act 1925 or its New Zealand equivalent, section 49A(3) of the Property Law Act 1952. That did not occur in either case and there was no discussion of this issue. Secondly, there was nothing to indicate that A had given up the right to prevent B from misusing the money. C’s interest in the money can also be explained as a new right created by operation of law to perfect C’s detrimentally relied upon expectation of receiving that money. It does not depend on writing and can co-exist with A’s right to restrain B’s misuse of the money. Although A cannot demand return of the money so long as payment to C remains possible, A’s rights have not been transferred to C. Therefore, if C later waives the right to payment from that fund, B does not thereby receive unrestricted beneficial ownership of the money. A would still have the right to insist that the money be paid to C or returned to A.

3. Restitution of Unjust Enrichment There is a significant possibility of unjust enrichment at the second stage of the relationship, when B cannot or will not use the money in compliance with A’s restriction on its use. In most cases, B is not permitted to use the money for any other purpose, but must return it to A. Therefore, unless B holds it on express 126

Smith v Hurst (1852) 10 Hare 30. 6 October 1978. 128 [1990] 3 NZLR 406. 129 PJ Millett QC, ‘The Quistclose Trust: Who Can Enforce It?’ (1985) 101 LQR 269, 289; General Communications Ltd v Development Finance Corp of New Zealand Ltd [1990] 3 NZLR 406, 433. 127

110 Robert Chambers trust for A, B will hold it on resulting trust for A. That trust arises by operation of law to effect restitution of what would otherwise be the unjust enrichment of B at A’s expense.130 The second stage of the relationship is considered briefly below. Discussed here is the possibility of unjust enrichment in the first stage of the relationship, while B still has the money or its traceable proceeds and is able and willing to use it in accordance with A’s wishes. At this stage, B would be unjustly enriched at A’s expense only if A did not intend to transfer beneficial ownership of the money to B, but failed to give it to anyone else. There is no problem if A wanted B to have unrestricted beneficial ownership of the money or if A created a valid express trust for A, C, or a specific purpose. In either case, A has created the relationship A intended to create and B is not unjustly enriched. If A intended but failed to create an express trust, B would not be unjustly enriched if the law intervened to perfect A’s expectations, for example, by making B a secret trustee for C. If B holds the money on constructive trust for C, B received nothing more than A wanted B to have. If A intended but failed to create a trust and there was no constructive trust perfecting A’s expectations, then B would be unjustly enriched at A’s expense and would hold the money on resulting trust for A from the outset. Since an inter vivos trust of money can be created without formality, A’s intention to create a trust is likely to be effective. However, the intended trust will fail if the trust objects are not identified properly131 or it is a testamentary trust and the proper formalities are not observed (or the requirements for a secret trust are not met).132 Unjust enrichment is more likely to occur in cases where A did not intend to create a trust, but wanted B to have beneficial ownership of the money, subject only to A’s right to restrain B’s misuse of it. If that restriction interferes substantially with B’s beneficial ownership of the money, then B will hold it wholly or partially in trust for A, even though A did not intend to retain it. Although unexpected, the resulting trust does not defeat A’s intentions. A’s desire to control B’s use of the money shows that A does not want B to have full beneficial ownership of the money. The greater the desired control, the smaller the beneficial interest that B was intended to have. There are three factors which should be used to determine the extent to which a restriction on the use of money prevents B from receiving beneficial ownership of it: who benefits from the permitted use of the money, whether B has a right to use it for that purpose, and the extent of the restriction. First, if B will not benefit from the permitted use of the money, then B cannot be its beneficial owner. For example, if C is A’s creditor or the specific purpose was chosen by A 130 P Birks, An Introduction to the Law of Restitution (Oxford, 1989) 58–59; R Chambers, ‘Resulting Trusts in Canada’ (2000) 38 Alberta Law Review 378, 396–98; reprinted in (2002) 16 Trust Law International 104, 120–22. 131 Vandervell v Inland Revenue Commissioners [1967] 2 AC 291. 132 Re Boyes (1884) 26 Ch D 531.

Restrictions on the Use of Money 111 as something A wants to achieve, B will not benefit directly by using the money as agreed. If the arrangement did not create an express trust, B must be holding the money on resulting trust for A from the outset. However, if the permitted use of the money is primarily for B’s benefit, such as payment to B’s creditors or the purchase of goods, land, or services for B, then B may be its beneficial owner and the other factors must be considered. Secondly, does B have a right to use the money as agreed or merely A’s permission to do so? If A is free to demand the return of the money or substitute a different use at any time, then the money belongs beneficially to A, not B. If the contract gives B the right to use the money for the agreed purpose, then B may be its beneficial owner. However, as discussed above, B’s contractual right to use the money will not override A’s right to repayment of the money if it is held in trust solely for A. While B’s contractual right to use the money indicates that B is the beneficial owner of the money or at least has a beneficial interest in it, it may give way to other factors that lead to the conclusion that A is the sole beneficiary of a trust of the money. Thirdly, if the permitted use will benefit B and B has a right to use the money for that purpose, then the extent of the restriction must be considered. If it is minor, such as a loan to a business to be used only for business purposes or an agreement not to pay the money to C, then B must own the money beneficially. The greater the restriction, the more likely that A has a beneficial interest in the money or is its sole beneficial owner. For example, suppose that A lent money to B to be used only to pay B’s creditor (C), the contract gave B a right to use the money to pay C, and the parties did not intend to create a trust for A or C. B should have a beneficial interest in the money, but might not be its sole beneficial owner. Since A can restrain B from doing anything with the money other than paying C or returning the money to A, A may also have a beneficial interest in the money. In other words, B may hold some, but not all of the beneficial ownership of the money on resulting trust for A. The application of these principles can be difficult, as Twinsectra Ltd v Yardley demonstrated. However, they were not properly tested in that case because B held the money on express trust for A and, therefore, was not unjustly enriched. The House of Lords accepted the transaction on its face as a loan advanced to the borrower’s solicitor, subject to the solicitor’s undertaking not to disburse the funds except in accordance with the lender’s instructions. A’s insistence that the money be advanced to the borrower’s solicitor, subject to an express undertaking controlling its disbursement, showed clearly that A intended to retain beneficial ownership of the money until it was disbursed in accordance with A’s instructions. The law gave direct effect to that intention and the solicitor held the money on express trust for A, with a power to use it as agreed. Twinsectra Ltd v Yardley was a difficult case because of the very unusual nature of both the solicitor’s undertaking, in which the solicitor promised to repay personally the money loaned to his client, and the relationship between

112 Robert Chambers the solicitor and his client, in which the solicitor assumed primary responsibility to repay the loan as a way to retire his prior debt to the client.133 Although most of the law lords seemed to regard it as an ordinary express trust for A, other judges involved in the case had different views of the relationship. The trial judge thought that the undertaking to use the money only to acquire property for the client was not intended to restrict the client’s beneficial ownership of the money.134 On this view, there was no unjust enrichment of the solicitor or the client, either at the outset or later when some of the money was used for other purposes. Both Lord Millett in the House of Lords and the Court of Appeal viewed the relationship, not as an express trust for A, but as a typical Quistclose trust. On their view, the undertaking that the money would be used only to acquire property was intended as a binding restriction on the use of the money. Although A had insisted on the use of a solicitor, it was not for the usual reason of keeping the money out of the hands of the borrower. The solicitor was required to guarantee the loan, possibly because solicitors are more likely to pay their debts or because the solicitor had a partner who was also liable to pay, but probably because their liability may have been insured by the Solicitors Indemnity Fund.135 Lord Millett approached the problem on the basis that the solicitor’s ‘status as a solicitor had nothing to do with it.’136 The usual inference that A intended to retain beneficial ownership could not be drawn from A’s insistence that the loan be paid to the borrower’s solicitor. Therefore, the relationship depended on the effect of the restriction that had been placed on B’s use of the money. Twinsectra Ltd [A] had paid the money to a solicitor subject to his undertaking that, ‘The loan moneys will be utilised solely for the acquisition of property on behalf of our client and for no other purpose.’137 Unless the solicitor held that money in trust for A, he would hold it in trust for his client. According to the trial judge, the Court of Appeal, and Lord Millett, the solicitor was not involved for the purpose of keeping beneficial ownership away from his client. Therefore, the normal division of legal and equitable ownership between solicitor and client did not affect A’s interest in the money and they can be regarded together as one entity (B) for the purpose of understanding the effect of the undertaking on their use of the money. The Court of Appeal and Lord Millett took very different views of the legal effect of that restriction on B’s use of the money. While the Court of Appeal decided that B had received beneficial ownership of the money, subject only to A’s right to restrain its misuse, Lord Millett thought that B held it entirely on resulting trust for A. If A was free at any time to revoke B’s permission to use the money to acquire property and demand repayment, then A was the sole 133 134 135 136 137

[2002] 2 AC 164, 181. [1999] Lloyd’s Rep Bank 438, para 45. Ibid paras 32–33, 45. [2002] 2 AC 164, 186. Ibid p 168.

Restrictions on the Use of Money 113 beneficial owner of the money. However, this did not seem to be the case. Under their contract, the money was due to be repaid in four months. If B had a right to use the money for the specified purpose, then B must have had at least some beneficial interest in it. The permitted use of the money was chosen by B, was solely for B’s benefit, and did not affect A’s interests in any way. The requirement to use the money ‘solely for the acquisition of property’ did not limit B’s use of it to any great extent, since B was a property developer and free to use it for a wide variety of purposes in the ordinary course of his business. B was required to pay interest at a rate of £493.15 per day from the outset and it is likely that the usual benefits and burdens of beneficial ownership belonged to B, not A. If the condition restricted B’s use of the money and there was no express trust for A, then their relationship was more accurately described by the Court of Appeal than by Lord Millett. If A had a beneficial interest in the money under a resulting trust, it should have been a partial interest only and not full beneficial ownership of the money.

III : FAILURE OF THE PURPOSE

The discussion so far has concerned the first stage of the relationship between the parties, while B has legal ownership of the money and remains able and willing to use it to pay C (or for a specific purpose). If B becomes unable or unwilling to use the money as agreed, their relationship reaches a second stage which is usually different from the first. The two stages are linked, with the nature of the second stage depending on the nature of the first. Although a wide variety of relationships are possible at the first stage (as discussed above), the second stage will be one of three relationships: (1) no trust, (2) express trust, or (3) resulting trust. The first two are relationships chosen by the parties, while the third arises by operation of law to effect restitution of unjust enrichment.

1. No Trust If B received unrestricted beneficial ownership of the money at the outset, that ownership is not affected by B’s willingness or ability to use the money for any particular purpose. Although B may disappoint A or even breach a contract with A, B will be entitled to keep the money for B’s own benefit. If B held the money in trust for C or a specific purpose, B’s unwillingness to use the money as required does not affect the existence of the trust, but B’s inability to do so may mean that the trust is at an end. If B still has some or all of the money when the trust fails or is fully performed, normally that money is held on resulting trust for the settlor, A. However, if A wanted B to keep the surplus or if B was the settlor, then a resulting trust will not arise. B will be entitled to keep the remaining money.

114 Robert Chambers 2. Express Trust If an express trust was created when A paid the money to B, that express trust may continue after B becomes unwilling or unable to use the money as contemplated. B’s unwillingness to use the money for that purpose will not affect the trust. If B had a trust duty to pay C or use it for a specific purpose, B is in breach of trust and can be compelled to perform the trust or be replaced as trustee. If B held the money in trust for A, with only a power to use the money in some way, that trust will continue despite B’s non-exercise of that power. The express trust may provide for the possibility that the money cannot be used to pay C or for the specific purpose. For example, the money may be held under an express trust for both C and A, first to pay for C’s education and then pay the remainder to A. The trust does not fail if all the money cannot be used for C’s education, since it provides for that possibility. From the outset, the entire beneficial ownership of the money was allocated by the express trust between its two beneficiaries, A and C. 3. Resulting Trust There are three situations in which B will hold the money on resulting trust for A. First, if B receives the money on express trust for C (or a specific purpose) and some of that money remains after the trust fails or is fully performed, then normally the surplus will be held on resulting trust for A. Secondly, if B holds the money on resulting trust for A from the outset, that trust will continue regardless of B’s willingness or ability to use the money to pay C or for the specific purpose. Thirdly, if B holds the money subject only to A’s right to restrain B’s misuse of the money and B becomes unwilling or unable to use the money as agreed, the remainder will be held on resulting trust for A. All three of these situations are similar in two important respects. First, A wants B to use the money only for a specific purpose and no other. If the money cannot (or will not) be used for that purpose, B is not allowed to keep the money to use for any other purpose, but must return it to A. Secondly, B never gets unrestricted beneficial ownership of the money. From the moment of receipt to the time at which it must be repaid to A, B is never free to spend the money for any purpose whatsoever. These two factors are important because they show both that B was unjustly enriched at A’s expense and that the resulting trust is the appropriate method of effecting restitution of that unjust enrichment. There are many cases in which A paid money to B for a specific purpose and, when it became impossible to achieve that purpose, A was entitled to repayment. In most of those cases, A had a personal right to restitution of the value of the money, traditionally on the basis of money had and received.138 What sets 138 Chillingworth v Esche [1924] 1 Ch 97; Guardian Ocean Cargoes Ltd v Banco do Brasil SA [1994] 2 Lloyd’s Rep 152.

Restrictions on the Use of Money 115 the Quistclose trust cases apart is A’s property right to restitution of the money by way of resulting trust. The difficulty is in knowing why A has a personal right in some cases and a property right in others. In all of those cases, A clearly specified the conditions under which B was entitled to the money and those conditions failed to arise or failed to continue. Since A did not want B to retain the money in the events that occurred, B would be unjustly enriched at A’s expense if B kept the money.139 In the Quistclose trust cases, B did not obtain unrestricted beneficial ownership of the money before A’s right to restitution arose. The restraint on B’s use of the money showed that A did not want B to have that money unless it would be used as permitted. Therefore, if the purpose failed, B was required to return the money itself (or its traceable proceeds) and not merely repay its value to A. In other cases in which B received unrestricted use of the money, A was concerned, not with what happened to the money itself, but with its value. If the purpose for the payment failed, B was required to repay that value, but had no obligation to return the money received from A. Before the purpose failed, B was free to spend or even destroy the money. Even if B still had the money when the purpose failed, B would not have to return it to A. Its continued existence was merely a fortuitous event, which would not entitle A to property restitution. As Millett J (as he then was) said in a different context, ‘the mere fact that the moneys are still identifiable . . . does not of itself form a basis for any proprietary claim’.140 The Quistclose trust cases are not the only ones in which A paid money to B for a specific purpose and was entitled to property restitution of the money when the purpose failed. However, all of them are like the Quistclose trust cases in one important respect: B never obtained unrestricted beneficial ownership of the money before the purpose failed. That was true whenever B received the money under an express trust which failed to dispose of the entire beneficial ownership of that money. It was also true in Re Nanwa Goldmines Ltd,141 where A paid money to B as a deposit for company shares to be issued by B to A. The purpose of the payment was not related to B’s use of the money, but B had promised that the money would ‘be retained in a separate account’ until the shares were issued.142 Therefore, B never obtained unrestricted beneficial ownership of the money before it became impossible to issue the shares and A was entitled to recover the money itself and not just its value. Absent that promise to retain the money in a separate account, A would have been entitled only to personal restitution.143 139 Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour Ltd [1943] AC 32, 65; P Birks, An Introduction to the Law of Restitution (Oxford, 1989) 223–26. 140 Eldan Services Ltd v Chandag Motors Ltd [1990] 3 All ER 459, 461. 141 [1955] 1 WLR 1080. 142 Ibid p 1081–82. 143 Moseley v Cressey’s Co (1865) LR 1 Eq 405; Re Goldcorp Exchange Ltd [1995] 1 AC 74; R Chambers, Resulting Trusts (Oxford, 1997) 149–51.

116 Robert Chambers A broader survey of the cases in which A was entitled to proprietary restitution of unjust enrichment from B reveals the same two basic elements: first, the enrichment was an asset which could be subject to property rights and, secondly, B did not receive unrestricted beneficial ownership of that asset before the right to restitution arose. This is not true of the many Canadian family property cases in which an unjustly enriched (married or de facto) spouse was said to hold the family home on constructive trust for the spouse who provided the enrichment.144 However, those cases are excepted because the trust did not effect restitution of the unjust enrichment (which may be pure services), but arose to perfect an expectation of receiving an interest in the family home.145 When A does obtain proprietary restitution of unjust enrichment, the right to restitution often arises at the moment the enrichment is received by B.146 Sometimes, B holds the enrichment in trust between receipt and the time at which A obtains the right to restitution.147 In both situations, B never receives beneficial ownership of the enrichment. In many cases, A has maintained a beneficial interest in the enrichment throughout. A began with legal beneficial ownership and acquired an equitable beneficial interest when the enrichment was transferred to B, because A did not intend to transfer full beneficial ownership to B and failed to give it to anyone else.148 In Twinsectra Ltd v Yardley, Lord Millett suggested that all resulting trusts work this way: Like all resulting trusts, the trust in favour of the lender arises when the lender parts with the money on terms which do not exhaust the beneficial interest. It is not a contingent reversionary or future interest. It does not suddenly come into being like an eighteenth century use only when the stated purpose fails. It is a default trust which fills the gap when some part of the beneficial interest is undisposed of and prevents it from being ‘in suspense’.149

This is undoubtedly true of most resulting trusts. However, resulting trusts can arise subsequently so long as B does not receive unrestricted beneficial ownership of the subject of the resulting trust before it arises. In many cases, A was not a beneficial owner of the enrichment in B’s hands before the resulting trust arose, but had some other right to it. For example, in Ryall v Ryall,150 an execu144

Peter v Beblow [1993] 1 SCR 980, 101 DLR (4th) 621. Pettkus v Becker [1980] 2 SCR 834, 117 DLR (3d) 257, 274; Sorochan v Sorochan [1986] 2 SCR 35, 29 DLR (4th) 1, 12; G Elias, Explaining Constructive Trusts (Oxford, 1990) 157; R Chambers, ‘Constructive Trusts in Canada’ (1999) 37 Alberta Law Review 173, 201–3; reprinted in (2002) 16 Trust Law International 2, 5–7; M McInnes, ‘The Measure of Restitution’ (2002) 52 University of Toronto Law Journal 163, 204–10. 146 Re Berry (1906) 147 F 208; Chase Manhattan Bank NA v Israel-British Bank (London) Ltd [1981] Ch 105; Nesté Oy v Lloyds Bank plc [1983] 2 Lloyd’s Rep 658. 147 Re Ames’ Settlement [1946] Ch 217. 148 Vandervell v Inland Revenue Commissioners [1967] 2 AC 291; DKLR Holding Co (No 2) Pty Ltd v Commissioner of Stamp Duties (1982) 149 CLR 431. 149 [2002] 2 AC 164, 193. 150 (1739) 1 Atk 59. 145

Restrictions on the Use of Money 117 tor used assets from the testator’s estate to buy land in his own name and he held that land on resulting trust for the people entitled to legacies under the testator’s will. Lord Hardwicke LC said, ‘the means of coming at this by way of resulting trust is excepted out of the statute of frauds; if the estate is purchased in the name of one, and the money paid by another, it is a trust notwithstanding there is no declaration in writing by the nominal purchaser’.151 The money used to buy the land was not held in trust for the legatees, but the executor did not have unrestricted beneficial ownership of that money either: he owed a fiduciary duty to the legatees to administer the testator’s estate properly.152 The same thing happened in Re Diplock, where the beneficiaries of an estate had an equitable property right to restitution of money improperly paid to charities by the executors, even though the estate beneficiaries were not beneficial owners of the money before it was paid.153 There are also cases in which A transferred an asset to B and A had a right to rescind the transaction and thereby recover that asset. If the election to rescind did not restore legal title to A,154 it caused beneficial ownership to return to A in equity,155 which Millett J (as he then was) called ‘an old fashioned institutional resulting trust’.156 If A has a right to rectify a transaction and recover part of an asset, B will hold the recoverable portion in trust for A (although it is not clear when that trust arises).157 In the rescission cases, A does not have beneficial ownership of the asset between A’s transfer to B and A’s election to rescind. As the same author (now writing extra-judicially) said: [T]he beneficial interest passes, but the plaintiff has the right to elect whether to affirm the transaction or rescind it. If he elects to rescind it, it is usually assumed that the beneficial title revests in the plaintiff, and the authorities suggest that it does so retrospectively. But the recipient cannot anticipate his decision. Pending the plaintiff’s election to rescind, the recipient is entitled, and may be bound, to treat the payment as effective . . . In the meantime, the plaintiff’s right to rescind has been classified as a mere equity. Although this has been criticised there is much to commend it. Pending rescission the transferee has the whole legal and beneficial interest in the property, but his beneficial title is defeasible.158

151

Ibid p 59–60. US v Jones (1915) 236 US 106; Commissioner of Stamp Duties (Queensland) v Livingstone [1965] AC 694. 153 [1948] Ch 465; aff’d Ministry of Health v Simpson [1951] AC 251. 154 Car & Universal Finance Co Ltd v Caldwell [1965] 1 QB 525 is an example of a case where rescission restored the legal title. 155 Stump v Gaby (1852) 2 De GM & G 623; Dickinson v Burrell (1866) LR 1 Eq 337; Melbourne Banking Corp v Brougham (1882) 7 App Cas 307; American Law Institute, Restatement of the Law of Restitution (St Paul, 1937) [160] p 650. 156 El Ajou v Dollar Land Holdings plc [1993] 3 All ER 717, 734; rev’d [1994] 2 All ER 685 (CA). 157 Taitapu Gold Estates Ltd v Prouse [1916] NZLR 825; Blacklocks v JB Developments (Godalming) Ltd [1982] Ch 183; Tutt v Doyle (1997) 42 NSWLR 10; Malory Enterprises Ltd v Cheshire Homes (UK) Ltd [2002] Ch 216. 158 Sir Peter Millett, ‘Restitution and Constructive Trusts’ (1998) 114 LQR 399, 416. 152

118 Robert Chambers Until A elects to rescind, A does not have beneficial ownership of the recoverable asset, but has a power to recover it. As Lord Millett said, this power is often called a ‘mere equity’, because it is less durable than other equitable property rights, such as equitable beneficial ownership, equitable mortgages, and restrictive covenants. While most equitable interests take priority over equitable interests that arise later in time,159 a right to recover an asset through rescission is subject to competing equitable interests acquired subsequently for value without notice of the right to rescind.160 Nevertheless, the right to recover an asset through rescission or rectification is a property right to that asset that can be enforced against someone who acquires it as a donee or with notice of that right. The Quistclose trust can operate in a similar fashion. In most cases, B will hold the money on express trust or resulting trust from the outset. However, if B had beneficial ownership of the money, subject only to A’s right to restrain its misuse, a resulting trust for A would arise if that money could not or would not be used as agreed. Since A did not want B to have the money in that event, A has a right to be repaid and, since B never had unrestricted beneficial ownership of the money before A’s right to restitution arose, A has a property right to restitution of the money by way of resulting trust. If the money was not held in trust before B improperly paid it to someone else (X), a resulting trust should arise at that moment, unless X obtained the money for value and without knowledge that B’s use of it was restricted. Although B was not a trustee of the money prior to its misuse, B owed a fiduciary duty to A to use it only as agreed. X would be unjustly enriched at A’s expense and as a consequence would hold the money (or any asset purchased with the money) in trust for A from the moment of receipt. This is similar to the trust that can arise when executors improperly transfer estate assets in breach of their fiduciary duties to the estate beneficiaries or when corporate officers improperly transfer corporate assets in breach of their fiduciary duties to the corporation. Although the assets were not held in trust prior to their misappropriation, a trust arises when they are misappropriated.

IV : CONCLUSION

When one person, A, pays money to another, B, to be used for a specific purpose, a wide variety of relationships are possible, ranging from express trust to absolute gift. The Quistclose trust is not a particular relationship, but a range of possible relationships. Under a typical Quistclose trust, A has the right to restrain B’s misuse of the money and is entitled to its return if it cannot or will not be used as agreed. However, while B remains able and willing to use the money as agreed, beneficial ownership of the money could belong to A or B or 159 160

Abigail v Lapin [1934] AC 491, 504. Latec Investments Ltd v Hotel Terrigal Pty Ltd (1965) 113 CLR 265.

Restrictions on the Use of Money 119 be shared between them and, if B does hold the money in trust for A, that trust could be express or resulting. It is important to pay close attention to what the parties want and, if possible, let them have the relationship they have chosen. Since no formalities are required for the creation of an inter vivos trust of money, it should be possible to give effect to their intentions if they are known. Of course, if the trust objects are unknown or unacceptable, A’s intention to create a trust will not be effective. However, it will show that A did not intend to transfer beneficial ownership to B and therefore B should hold the money on resulting trust for A. Although that resulting trust may be unexpected and unwanted, it does not operate to defeat A’s intentions. It merely prevents what would otherwise be the unjust enrichment of B at A’s expense. A potential difficulty occurs when A does not want to retain beneficial ownership of the money and does not want to create a trust for anyone else, but wants B to have the money subject only to A’s right to restrain its misuse. If the restriction on use eliminates the benefit of having that money, B will hold it on resulting trust for A. This trust does not defeat A’s intentions, since A’s desire to control B’s use of the money shows that A does not really want B to be its beneficial owner. However, if every restriction on the use of money prevents B from having beneficial ownership of it, regardless of the extent of that restriction or the parties’ intentions, resulting trusts will arise which have the effect of defeating their intentions. Some trusts do defeat people’s intentions. For example, employees who receive bribes to breach their fiduciary duties to their employers will hold those bribes on constructive trust for their employers, even though the employees and the people paying the bribes to them wanted beneficial ownership to belong to the employees.161 This trust arises regardless of the intentions of the parties to prevent the wrongful enrichment of the employees. Statutory trusts are sometimes imposed on people against their will as a form of consumer protection. For example, in many jurisdictions, security deposits paid by residential tenants are held by the landlords in trust for those tenants, regardless of the intentions of the parties.162 Resulting trusts are different. Although they are not created directly by intention, but arise by operation of law, they should never defeat the intentions of the parties. Like other rights to restitution of unjust enrichment, they provide a solution when a transaction has unintended legal consequences. If A does not want to benefit B, but has failed to create a trust for anyone else, the beneficial ownership of the money will return to A. The resulting trust is the best solution when the intended relationship has not been achieved. It is never the reason why that relationship could not be achieved.

161 162

A-G for Hong Kong v Reid [1994] 1 AC 324. As, eg, in the Residential Tenancies Act 2000 (Alberta), s 46(2).

120 Robert Chambers In this situation, where there is no intention to create a trust, the resulting trust arises because A’s restriction on B’s use of money prevents B from obtaining beneficial ownership of it. That trust must be commensurate with the restriction which produces it. If the restriction eliminates the benefit of having the money, then B will hold it entirely on resulting trust for A. If the restriction merely reduces that benefit, then beneficial ownership will be shared by A and B. If the permitted uses of the money are for B’s benefit and B has a right to use it for those purposes, B must have at least some beneficial interest in the money and, if the restriction on B’s use is minor, then B should be regarded as its sole beneficial owner, subject only to A’s right to restrain its misuse.

6

Retrieving Tied Money PETER BIRKS

is a single hypothetical case, which runs like this. An announcement is made that a new road has been approved. The map shows the line running straight through a thriving neighbourhood. A local councillor assumes the leadership of the campaign to prevent this disaster. All the residents give generously in response to his appeal for funds ‘to fight the road’. Six months later, when only one tenth of the fund has been spent, two things happen. First, the proposal for the road is withdrawn. Second, the councillor’s family business collapses, leaving many unpaid creditors. £300,000 at that moment stands in the account which he had opened to hold the campaign funds. He accepts that he owes that £300,000 to the subscribers. It is money paid on a basis which has failed, so that, until he repays, he is unjustly enriched at the subscribers’’ expense. He is anxious to repay. His unsecured creditors maintain that the subscribers must stand in the queue waiting to receive, pari passu with themselves, whatever is left when the secured creditors have been paid off. On these facts the unsecured creditors now appear to have the wind behind them. Three cases combine to obstruct the subscribers: Foskett v McKeown,1 because it seems to say that no proprietary interests arise from unjust enrichment; Westdeutsche Landesbank Girozentrale v Islington,2 because it seems to say that no proprietary interest arises even for the transferor of value under a void contract; and Twinsectra v Yardley,3 because the consent-based model by which it explains proprietary entitlement to money tied to a purpose which fails will almost certainly not fit the subscribers’ facts. This chapter nevertheless says, echoing the now overruled Sinclair v Brougham,4 that the unsecured creditors are wrong. This £300,000 is held on a resulting trust arising from unjust

T

1 2 3 4

HIS CHAPTER’S FOCUS

[2001] 1 AC 102. [1996] AC 669. [2002] UKHL 12, [2002] AC 164. [1914] AC 398, overruled in Westdeutsche, above, n 2.

122 Peter Birks enrichment.5 As beneficiaries under the resulting trust, the subscribers have priority over the unsecured creditors. Whether they have priority over any other secured creditors is not a question to be visited here. We do not know what other secured creditors there are.

I : WISHES AND OTHER TIES

Ties come in three shades, wish, condition, and obligation. It is not always obvious which is in play. That can only be decided by an often difficult exercise of construction. Central cases are easily illustrated. ‘Now that you are leaving school, I have decided to give you £20,000. I want you to use it to help you through university. Save some for the master’s degree which you will certainly need after your BA.’ The wish imposes no more than a moral obligation. You may feel strongly bound and may think it right to keep the gift separate from your other money, but, if in the end the money is spent on wine and song, there will be no legal consequences. A gift caught by such a wish is absolute and absolutely irrecoverable. If the money in this example had been a loan, it would from start to finish have been a simple untied loan, recoverable as such without regard to the purposes on which it had been spent. The lender would have had his personal claim under the contract of loan and no more. This is intended to be a clear example, but the line between wish and condition is often very fine, and it becomes finer still when account is taken of the distinction between ties and mere conditionality which is introduced immediately below. Sometimes, moreover, the exercise of construction which arrives at the conclusion that the tie is merely a wish is highly artificial.6 When the maxim of construction ‘ut res magis valeat quam pereat (better valid than void)’ is in the air, one knows that principles are being stretched and blind eyes turned to keep some boat afloat. The second example is different and more complex. ‘I am giving you £50,000 for your DPhil. This is solely for your fees and anything else which is wholly necessary for the completion of the doctorate.’ This tie is now the whole basis of the gift and operates as a condition. It is a non-obligating condition, in the 5 In this paper ‘resulting trust’ is used of all trusts under which the beneficial interest ‘results’ ie ‘jumps back’: Oxford English Dictionary under the word ‘result’; Oxford Latin Dictionary under the words ‘resulto’ and ‘resilio’. All trusts either ‘re-sult’ or ‘pro-sult’ (ie the beneficial interest either jumps back to the transferor or forward from him to a beneficiary). This usage means that it is possible to have a resulting trust which arises from an express declaration of trust or, by operation of law, from some other event. ‘Jumping back’ does not identify any causative event. Hence, in the sentence in the text, ‘resulting’ indicates the jumping back, and ‘from unjust enrichment’ indicates the causative event. ‘Resulting’ in this Latinate sense is almost synonymous with ‘restitutionary’, and restitutionary rights are likewise multi-causal: they arise from a plurality of causative events, of which unjust enrichment is one. In a narrower sense, so to say with a capital ‘R’, resulting trusts have been those which, whatever may be the case now, were formally both resulting in pattern and established with the aid of a presumption. 6 Re Osoba [1978] 1 WLR 791; cf Re Bowes [1896] 1 Ch 507.

Retrieving Tied Money 123 sense that, although you will lose the money if you do not spend it as specified, you are free to decide not to spend it. You will commit no breach of duty owed to me if you prefer not to do the DPhil and become a merchant banker instead. At this point there is immediately a crucial distinction to be made between mere conditionality and a tie in the form of a non-obligating condition. A tie supposes the segregation of the fund from the recipient’s own money, which will normally imply the opening of a separate bank account. The tie of the kind currently in view is non-obligating in not obliging the recipient to pursue the designated purpose, but there is no tie at all unless the recipient should in the circumstances understand that he must separate the money he is receiving from his own free money. In this example, you could not reasonably believe that there was no requirement of a separate account. This is implied in the money’s being ‘solely for’ particular applications. The same is true of the fund for the campaign against the road. The councillor who collected the money could not reasonably believe that he did not have to keep a separate account. By contrast, if I give you £1000 because you are marrying my niece next month, my intent to benefit you is qualified but the £1000 is not tied money. You can pay it straight into your account, but, if no marriage occurs, the basis of my payment will fail and the law of unjust enrichment will compel you to repay me. This can be the correct construction even when the condition relates to the destination of the money or, more accurately, of the value which it represents. In Roxborough v Rothmans of Pall Mall Australia Ltd 7 retailers had bought cigarettes from wholesalers on the basis that a certain percentage of the price was paid in respect of tax which the wholesalers would be paying to the government of New South Wales. It turned out that there was no such tax. The High Court of Australia held that the basis of the payment had failed and the sum could be recovered. There was no tied fund in that case. The strongest tie is this third case: ‘In response to your application we are giving you £100,000 in support of your research project. In accepting this support you undertake to complete the project within two years and to apply the money solely in the manner and according to the timetable set out in the schedule to your proposal.’ Here there is an obligation to lay the money out in the specified manner. This and the previous illustrations are presented as tied gifts or grants. For present purposes it would make no significant difference if they were presented as tied loans.

II : NON - OBLIGATING CONDITIONS

In our hypothetical case the money is tied in either the second or the third way, by condition or obligation. That is to say, either the councillor who collected the fund to fight the road received it subject to a non-obligating condition that it be 7

[2001] HCA 68, (2002) 76 ALJR 203.

124 Peter Birks applied to the campaign but with no obligation so to apply it, or he received it subject to an obligation so to apply it. In reality the truth, as between these possibilities, must be that he received subject to an obligation to apply the money. The irate residents would have been shocked by the suggestion that he was not bound immediately to use his best efforts to apply the fund to fight the most effective campaign which it made possible. Exercises in construction are not wholly predictable. Since it is not impossible that the councillor might be regarded as having received subject to a nonobligating condition we must briefly consider the consequences of that construction. It is now uncontroversial that a transferor who transfers on that basis will have priority over the transferee’s unsecured creditors. The leading case is concerned with tied loans, but the same law must apply to gifts. After Twinsectra v Yardley8 we know that a loan given for a particular purpose is often to be explained as a trust for the lender himself, subject to a power vested in the borrower to apply the money lent to that purpose. In this chapter, this is called ‘the Twinsectra construction’. The effect of the Twinsectra construction is to tidy up and stabilize the way in which Quistclose trusts have been working ever since the eponymous case.9 ‘Quistclose trusts’ include all those cases in which, usually in emergencies, money is borrowed exclusively for a particular purpose. In the Twinsectra case the question arose obliquely. Twinsectra made a loan to Yardley via his solicitor exclusively to buy property. If this created a trust, it became a live issue whether a third party might be liable for knowing assistance in a breach of that trust. The answer was that it did. The form of the trust as being a resulting trust for the lender subject to a power in the borrower is perfectly clear, but the explanation of the genesis of the trust is not itself completely stable and requires a moment’s attention. Lord Hoffmann and Lord Millett both explain the trust, the latter at greater length. In Lord Hoffman’s analysis, which technically commands the concurrence of the majority of their Lordships, the trust is one which arises by the manifestation of the intentions of the parties, albeit without the use of the language of trust. It is in other words a Monsieur Jourdain trust.10 Such a trust, if it is not an express trust, is implied in fact and not merely in law and is therefore juridically identical to an express trust. Lord Millett’s more extended treatment seems for the most part to follow the same lines. Indeed, Monsieur Jourdain is present, without being named, in these lines: ‘A settlor must, of course, possess the necessary intention to create a trust, 8

[2002] UKHL 12, [2002] AC 164. Quistclose Investments Ltd v Rolls Razor Ltd [1970] AC 567. For the background, see R Stevens, ch 1 in this volume. Earlier literature is reviewed by M Bridge, ‘The Quistclose Trust in a World of Secured Transactions’ (1992) 12 OJLS 333; J Payne, ‘Quistclose and Resulting Trusts’ in P Birks and F Rose (eds), Restitution and Equity (London, 2000) vol 1, 77. 10 [2002] AC 164 paras [9], [13]–[17]. Monsieur Jourdain was a character in Molière’s Le Bourgeois Gentilhomme who spoke prose without knowing it, elegantly invoked by du Parq LJ in Re Schebsman in showing that by manifesting the necessary intentions one could create a trust without knowing what one was doing: [1944] Ch 83, 104. 9

Retrieving Tied Money 125 but his subjective intentions are irrelevant. If he enters into arrangements which have the effect of creating a trust, it is not necessary that he should appreciate that they do so. It is sufficient that he intends to enter them.’11 Later, however, Lord Millett refers to the trust for the lender as a resulting trust.12 That is perfectly compatible with the wide use of ‘resulting’, for this trust, if it is a Monsieur Jourdain trust, is a consent-based trust, whether express or implied, which is resulting in pattern, not prosulting. Although in one paragraph Lord Millett toys with the analogy of an express trust which fails to dispose of the whole beneficial interest,13 and hence with resulting trusts in their narrower sense, that analogy is not in place in a case in which in the absence of the Monsieur Jourdain trust there would be no trust to fail. On the whole it seems best not to magnify the possible difference between Lord Millett and Lord Hoffmann and to accept that the trust for the lender himself is, without equivocation, a Monsieur Jourdain trust. Where money is borrowed for a particular application, the recipient therefore receives it as a trustee for the transferor but has a power to apply the sum received to, and only to, the specified purpose. There is an intriguing question whether it is only as he applies the money to the purpose to which it is tied that the borrower ceases to be a trustee of it and turns himself into a mere borrower and his transferor into a mere lender. The contract will invariably run the interest from the date of the transfer, but that is not conclusive. The better view must be that there can be no loan while the property in the money to be lent remains in the lender, even if it does so only in equity. This is a problem of the kind which Gaius encountered with gladiators taken at 20 for those who come back unharmed, 1000 for those unreturnable. This, he says, is hire of the survivors, sale of the others, the characterization depending on what happens.14 Two further features of the Twinsectra construction require notice. First, the purpose to which money is tied may or may not be abstract. The power is indifferent. By contrast there can be no trust for an abstract purpose unless that purpose is charitable. An abstract purpose is one the execution of which will not redound to the benefit of any identifiable human being or class of human beings, as for instance the suppression of vivisection or, in our case, a campaign against an unwanted road. In another context a loan or gift for the benefit of a particular class of creditors could be an express trust for those creditors, but a loan to a business solely to fund lobbying to bring about the deregulation of its product could not be a trust for that purpose. The next section will show that it is very important that the Twinsectra construction is indifferent to the nature of the 11

[2002] AC 164 para [71]. Ibid paras [101]–[102]. 13 Ibid para [102]. 14 Gaius, Institutes 3.146. This kind of problem sometimes produces a different kind of answer: tertium quid. Sale-or-return was not a mutually conditional sale or hire but tertium quid, the contract of aestimatum: WW Buckland, P Stein (ed), A Textbook of Roman Law, 3rd edn, (Cambridge, 1963) 323. 12

126 Peter Birks purpose, but that trusts for a purpose are not. It creates an awkward gap between what can be done through the Twinsectra resulting trust and a prosulting trust for the object. Secondly, the Twinsectra construction as understood above is in addition entirely independent of the law of unjust enrichment. A Monsieur Jourdain trust is an express trust or a genuinely implied trust. Between these there is no juridical difference. Both are consent-based trusts as opposed to trusts imposed by operation of law. ‘Consent-based’ is used to bridge the gap between express and genuinely implied, because both are brought into existence by manifestations of the consent of the parties. Under the Twinsectra construction the transferor is the sole beneficiary under a consent-based resulting trust and, under Saunders v Vautier,15 he can call back the legal title whenever he pleases, unless and to the extent that he is bound by contract with the trustee not to do so. By ‘recall’ we do not mean that he can give himself the legal interest. He has no power in rem immediately to vest it in him. We mean only that he has a right that the legal title be conveyed to him. It is not usual to find the Saunders v Vautier right fettered by contract, but under the Twinsectra construction it must be. Otherwise the transfer would be instantly revocable. In the absence of any express contract there must be an implied contract not to attempt to recall the legal title so long as the tie remains in place. However, if there is a genuinely implied contract under which the lender agrees not to invoke his Saunders v Vautier right it certainly will not extend beyond the point at which the trustee ceases to be able or willing to exercise the power. So, under the Twinsectra construction, if the tie fails and the money is called back it will be called back on the strength of rights inherent in full equitable ownership originating in a consent-based trust and with the priority attaching to that ownership. It will have nothing to do with unjust enrichment, not because property rights cannot arise from unjust enrichment but because in this case the relevant causative event, that is to say, the event from which the right relied upon arose, was not an unjust enrichment but a transfer upon a consent-based resulting trust. On the fragile assumption that, as a matter of construction, the councillor in our case might be understood to have received subject to no more than a non-obligating condition that the money be applied solely to the campaign, the subscribers are assured of their priority over the unsecured creditors. They are the beneficiaries under a consent-based resulting trust. If they were bound in the meantime not to demand the return of the money, that fetter on their rights has been dissolved by the unexpectedly early victory. We now turn to the more probable premiss that the councillor received under an obligation to apply the money to the campaign.

15

Saunders v Vautier (1841) 4 Beav 115, aff’d Cr & Ph 240.

Retrieving Tied Money 127

III : OBLIGATION

In a fine article which met with the approval of Lord Millett in the Twinsectra case,16 Lusina Ho and P St J Smart cautiously took issue with the analysis of Quistclose ties proposed by Professor Chambers.17 Their article played a considerable part in persuading Lord Millett that he too should abide by his own first thoughts18 and reject the Chambers analysis, according to which the tie can always be understood in contract, without at the first stage entailing any invocation of trust. In the second stage, when the tie fails, the consequences of the failure of the tie, including the proprietary consequences and the priority of the lender of a tied loan, are all equally explicable, on the Chambers analysis, as the normal equitable reaction to this kind of unjust enrichment.19 We will have to come back to the Chambers analysis. At one point, Ho and Smart correctly draw the distinction between cases in which the defendant may but need not pursue the purpose and others where he must.20 It is puzzling that they suggest that the approach through contract cannot give expression to such an obligation. That it can and does is its principal merit. The authors appear mistakenly to infer too much from the fact that the discussion is usually of conditions not to be exceeded rather than obligations to be performed.21 But that is no more than a reflection of what actually happens in the typical Quistclose case. It certainly is not true that the contract-plusunjust-enrichment model proposed by Chambers can cope only with situations in which the recipient may but need not pursue the purpose. Whatever may be true of that model, one point on which all protagonists will agree is that it is the Twinsectra construction, based as it is on a power grafted upon a resulting trust, that more obviously cannot cope with the situation in which the recipient of the tied money is under an obligation to apply it to the object. In our example of the unwanted road, it would be at best artificial to suggest that the councillor was not intended to be obliged to expend the money on the purpose to which the residents subscribed. If the exercise of construction once admits that reality, the Twinsectra construction collapses and the prospects for the subscribers in their competition with the other creditors are, on the face of things, much worse. That is startling, for an obligating tie is more peremptory than a tie which relies on a non-obligating condition.

16

[2002] UKHL 12, [2002] AC 164, para [95]. L Ho and P St J Smart, ‘Re-Interpreting the Quistclose Trust: A Critique of Chambers’ Analysis’ (2001) 21 OJLS 267. 18 PJ Millett QC, ‘The Quistclose Trust: Who can Enforce it?’ (1985) 101 LQR 269. 19 R Chambers, Resulting Trusts (Oxford, 1997) 70–89. 20 Ho and Smart, above, n 17, 278–79. 21 Ho and Smart, ibid. 17

128 Peter Birks 1 Trust for Objects In the paragraphs which follow the words ‘object’ and ‘purpose’ are used synonymously of the application to which the money is tied, whether it be a person to be benefited or some other goal to be pursued. ‘Abstract purpose’ is used to denote an object which has no human beneficiaries, such as suppressing vivisection. In our hypothetical case, the object is an abstract purpose, the campaign against the proposed road. The Twinsectra construction sees the transferee as holding on resulting trust for the transferor subject to a power, if he so chooses, lawfully to deploy the fund for the object. In Twinsectra itself a speculator received money lent exclusively for the purchase of property, meaning real property. It is clear that he was not obliged to find property to buy. There was therefore no objection to his being contemplated as holding for the transferor with power to spend on property if he so chose. A trust tie, by contrast, is an obligatory tie, not merely in the sense that its limits must be respected, but in the sense that it must be actively complied with and pursued. The question whether the donor intended a trust or a power is not easy to restate. It is again a matter of construction. One has to ask whether the transferee was to be bound to apply the fund to or within the object stated. Or was he to have some choice in the matter? 22 The Twinsectra construction cannot reflect an obligating intention. Moreover, when that intention is found to exist, it is impossible to fall back on the Twinsectra power. The obligating intention once found, the premiss is that the recipient received money which he must apply to the purpose. We cannot say, simply ut res magis valeat, that a power will do perfectly well to keep the transferor’s intended boat afloat. If we did that, we would lose our grip on the difference between a power and a trust.23 Power and obligation are in contradictory conflict. Where there is an obligating intent there is no doubt that a prosulting trust for the object in question does achieve the obligatory dedication to the purpose, reflecting perfectly the intention of the donor. Unfortunately, however, our subscribers, going down that path, immediately encounter an immoveable obstacle. If the Monsieur Jourdain trust which is the foundation of the Twinsectra construction cannot cope with obligating intent, the trust-forobjects construction, which can, is utterly defeated by an abstract object. The reason is the same as that which prevents us invoking a power. A trust for an abstract purpose would recognize an illusory obligation. Such a trust has to be void. An obligatory tie in favour of a purpose which has no mind or body and 22 More elaborate formulations always come down to this: Burroughs v Philcox (1840) 5 Myl & Cr 72, 92; Re Perowne [1951] Ch 785. 23 Commissioners of Inland Revenue v Broadway Cottages Trust [1955] Ch 20, 36 (Jenkins LJ), applied by Harman J in Re Shaw [1957] 1 WLR 729. The literature urges a softening of this approach but it is difficult to see how it could be done without stultifying an exercise of construction on which rights recurrently depend.

Retrieving Tied Money 129 cannot enforce the trust is an obligation tied with rotten ropes. Equity does not act in vain. So a trust for an abstract object is void. The case of the road to be prevented cannot properly be reached by either the Twinsectra construction or a trust for the objects. The councillor received subject to an obligation, which cannot be reflected in a power. Hence no Twinsectra construction. And the stopping of the road was a non-charitable abstract purpose. Hence no trust for that object. It is true that on these particular facts it would serve the subscribers very well to conclude that there was a void private purpose trust. The trust would have failed ab initio, creating a resulting trust arising directly from that failure of basis. This is exactly what the subscribers want. We will not snatch at that solution to their problem, because a court would almost certainly resist being drawn along that path. The reason is that, whatever the interest of these subscribers, on a wider canvas nullity would be a disaster. The broader interest is ut valeat.

2 Contract For the wider interest in validity of ties to purposes, the contract model operates as a welcome longstop. For the interest in priority represented by our subscribers, contractual validity appears to threaten disaster. Under the contractual model the property in the money passed to the councillor who collected the fund, caught by his promise to every subscriber to apply that fund to the campaign to stop the road.24 We will confine ourselves to this simple model. There is a more complex contract model which, for reasons of space, we will leave on one side, in which as between donor and beneficiary the tie is a non-obligating condition, the content of the condition being that the beneficiary accept that the gift be taken into a fund caught by a contract between him and others for the pursuit of some purpose. This is the Re Recher construction, constantly applied to explain how unincorporated associations receive and hold property.25 Wherever the dedication to a purpose is secured only by contract, there, if the contract goes, and for whatever reason it goes, the basis of the transfer fails. So, in our case the councillor received the fund subject to his promise to every subscriber to apply it to the campaign against the road. The contract became impossible to perform, because the project to build the road was cancelled. The basis for holding the fund therefore failed. The fund in the holder’s hands thereby became an unjust enrichment. At the very least the subscribers have a right in personam to be repaid or, synonymously but seen from the other end, the councillor came under an obligation arising from unjust enrichment to 24 Conservative and Unionist Central Office v Burrell [1982] 1 WLR 522. In the case of a will, the simple contract explanation cannot work, since there can be no contract between the testator and his donee, but the Re Recher version will work (see next note and text thereto). 25 Re Recher’s Will Trusts [1972] Ch 526, which is derived from Neville Estates v Madden [1962] Ch 832.

130 Peter Birks repay, subject to an allowance in respect of any disenrichment. With solvent defendants, that suffices. With insolvent defendants it becomes a crucial question whether the claimant has a right in rem, a property right. If he has and can identify the relevant res, he will achieve priority over the queue of unsecured creditors. So, in our situation it becomes essential to know whether this species of unjust enrichment generates a right in rem in some identifiable res. To simplify matters, let us suppose that the surplus money has been paid into court. Does this money belong to the subscribers or is it merely owed to the subscribers? The next section argues that in this regard the law of unjust enrichment has in recent cases been gravely misunderstood. It now appears to give an unequivocal no to the question whether the enrichment creditor obtains a proprietary right in the enrichment in the hands of the enrichee. The true answer is that, subject to legislative reform, he does obtain a proprietary right in all cases of ‘initial failure’. By ‘initial failure’ is meant the case in which the enrichment of the defendant at the expense of the claimant is unjust from the very moment of its receipt, so that the claimant’s restitutionary rights take effect immediately. By contrast, cases of ‘subsequent failure’ are those where, for however short a time, the defendant had the enrichment fully and freely at his disposition before the basis for its receipt failed. A subsequent failure normally generates only personal claims. In the last part of the section the argument is that our case is an exceptional instance of subsequent failure which falls within the rationale of the cases on initial failure and should have their consequences, or, alternatively, that the rule as to the consequences should be reformulated more accurately to reflect its rationale. Such a reformulation would include our case.

IV : PROPRIETARY RIGHTS FROM UNJUST ENRICHMENT

The line between initial and subsequent failure depends on whether it is possible to say that the enrichment is unjust at the very moment of its receipt. It is convenient to begin with a central case of subsequent failure, since at that point all are agreed that there is no proprietary response to the unjust enrichment.

1 Subsequent Failure: The Simple Case If the basis of a payment fails after the receipt, so that, for however short a time, the money has been held without any liability in unjust enrichment, there will be no proprietary right. If I pay money to you on the basis of a contract binding you to make some reciprocation, as for instance to build me a garage, a later repudiatory breach on your part will invalidate the contract in that it will render it terminable by me. I will have a personal right to be repaid. I will never

Retrieving Tied Money 131 have any proprietary right in the money which I paid. If this were otherwise there would be no such thing as an unsecured creditor. Re Goldcorp Exchange Ltd 26 illustrates. Many New Zealanders had invested heavily in a scheme run by Goldcorp under which the gold which they bought from the company was supposed to become their gold but be safely kept for them and insured. No gold was ever appropriated to any contract and no attempt was made to maintain the promised store of safe, insured customer gold. Goldcorp kept some gold in hand, enough to honour the demands of those investors who from time to time requested physical delivery. By the time the company became insolvent, the majority of the investors, having paid for gold and further services, had received nothing. They undoubtedly had a personal claim for the amount of their payments, but in the insolvency the crucial question was whether they had any proprietary right in the money which they had paid over. As unsecured creditors they would get nothing. They needed priority, not only over the unsecured creditors, but over the Bank of New Zealand’s now crystallized floating charge. They had no proprietary right. There was no point in even beginning a tracing exercise to find out whether there were substitutes still in Goldcorp’s hands because, at the moment that the basis of the payment failed, the property in the money had already passed to Goldcorp and the money had been freely at the company’s disposition. On the day after any payment it could not be said that the money received was already an unjust enrichment. Its basis had not failed. An attempt to argue that Goldcorp had obtained the money by misrepresentation and therefore voidably ab initio never got off the ground. The New Zealand Court of Appeal’s conclusion that the money had been received as ring-fenced trust money was rejected. There was nothing beyond an ordinary agreement to sell, broken by Goldcorp. This case stands implacably for the proposition that once the enriching assets have become freely at the recipient’s disposition a subsequent failure of basis will never generate a proprietary interest. By contrast where the liability in unjust enrichment bites ab initio there will always be some proprietary interest, although not always of the same kind. It may be an immediate beneficial interest or a power in rem which will allow the power-holder to give himself a vested interest in the thing, or it may be a security interest, again either immediate or subject to the exercise of a power. This diversity of possible rights in rem has not been thought out and probably needs pruning. For present purposes it can only be accepted as it is. 2 Initial Failure In Hazel v Hammersmith and Fulham LBC27 it was decided that interest swaps were beyond the powers of local authorities. Nearly every authority in 26 27

[1995] 1 AC 74. [1992] 2 AC 1.

132 Peter Birks the country had been engaged in them. Billions of pounds had passed. A series of cases then showed that the universal consequence was mutual restitution, with the effect that the party which had paid the greater sum recovered the difference. The swaps cases cast a shadow over our hypothetical case. One of the first of the lead cases to go through the system was Westdeutsche Landesbank Girozentrale v Islington LBC.28 There the courts below found not only that the claimant bank had a right in personam against its counter-party but also that every payment under its void contract had turned the recipient into a trustee and, contemporaneously and synonymously, given the payer an equitable interest in the money which the payee received. On the facts the second of these propositions was critical, not to priority in insolvency since the defendants were not insolvent, but to the rate of interest. A proprietary claim entitled the claimants to compound interest.29 In rejecting the proprietary claim and overruling the principal authority for it, namely the House’s own decision in Sinclair v Brougham,30 the House of Lords appears on the face of things to have moved a long way down the path to the elimination of the proprietary response to unjust enrichment. The combination of Westdeutsche and re Goldcorp would seem to signal the end of trusts and liens arising from unjust enrichment.31 Furthermore, outside the swaps saga, we have more recently seen in Foskett v McKeown32 that the House of Lords, adopting a position taken by Mr Virgo33 and now seemingly even by Goff and Jones,34 regards property and unjust enrichment as exclusively opposed categories. On that view property rights are alien to the law of unjust enrichment. It makes sense to say of a right that it arises in the law of property, not the law of unjust enrichment, and vice versa. Finally, in Twinsectra v Yardley 35 the House adopted a model for the retrieval of tied money which assiduously avoided drawing on the law of unjust enrichment. That model being out of their reach, from the standpoint of the subscribers to the anti-road campaign the landscape thus looks very bleak. But beneath this unfriendly surface the truth is very different. Two of these hostile propositions will not bear weight, and the third turns out to be irrelevant, because the law of unjust enrichment will deliver the same outcome.

28

[1996] AC 669. On this aspect: F Rose, ‘Interest’ in P Birks and F Rose (eds), Lessons of the Swaps Litigation (London, 2000) 291–328. 30 [1914] AC 98 (HL). 31 A move urged in WJ Swadling, ‘Property and Unjust Enrichment’ in JW Harris (ed), Property Problems from Genes to Pension Funds (London, 1997) 130. 32 [2001] 1 AC 102, 127, 132 (Lord Millett); cf 108–9 (Lord Browne-Wilkinson) and 115 (Lord Hoffmann). 33 G Virgo, The Principles of the Law of Restitution (Oxford, 1999) 15–17, 592–601. 34 G Jones (ed), Goff and Jones on Restitution, 6th edn, (London, 2002) paras [2–005]–[2–007]. The pages which follow suggest cautious and questioning transition, not unequivocal endorsement. The taxonomic doctrine of Foskett (n 32 above) cannot be accommodated without disruption. 35 [2002] UKHL 12, [2002] AC 164, esp paras [90]–[100], introduced in text from n 8 above. 29

Retrieving Tied Money 133 (a) The error in Foskett v McKeown It is not true that there is a logical opposition between property and unjust enrichment any more than between unjust enrichment and obligations. Obligations and property are co-ordinate categories of response to events. Obligations, from the other end, are rights in personam, rights demandable only against the person against whom they arose. Rights in personam arise from events which happen in the world. Obligations and rights in personam are synonyms. You could not oppose tort and obligations or contracts and obligations. Contract and tort are events from which obligations arise. No more can you oppose unjust enrichment and obligations, for the same reason. If you run over my foot, my claim arises in the law of obligations. I have a right in personam that you pay me damages and you have a correlative obligation to pay them. At the same time my claim arises in the law of tort, because it is from a tort that your obligation arises. Similarly, if by mistake I pay a debt to you which in fact I do not owe, my claim to restitution arises in the law of unjust enrichment and in the law of obligations or rights in personam. This is very simple. The parallel propositions for rights in rem are no more complicated. The law of property is the law of rights in rem, rights demandable wherever a thing (res) is found. Rights in rem are property rights, and property rights are the subject of the law of property. All rights, and hence all property rights too, arise from events. Property rights very frequently arise from manifestations of consent, as from a conveyance of land or immediately from a sale of goods, but they also arise non-consensually from other events, by operation of law, as where wine is made from grapes (specificatio) or a tree roots in land (accessio). There is no logical reason whatever why a property right should not arise from unjust enrichment. It is empirically observable that in systems derived from Roman law they do not do so. A system may choose not to allow unjust enrichment to give rise to property rights, just as it may choose not to allow such rights to arise from wrongs. English law does in a few cases recognize property rights from wrongs.36 As we shall see immediately below, in rather more cases it allows such rights to arise from unjust enrichment. (b) The flaw in Westdeutsche Landesbank Girozentrale v Islington BC When the Westdeutsche case overruled Sinclair v Brougham it failed to clear up a crucial ambiguity in both itself and the case it overruled. This is a fatal flaw, aggravated by omission of the very difficult task of reviewing the whole field of unjust enrichment to ensure consistency. We know now, above all from the closed swap in Guinness Mahon & Co Ltd v Kensington and Chelsea Royal London BC,37 not only that the swaps contracts were void ab initio but that that 36 37

Attorney General of Hong Kong v Reid [1994] 1 AC 324. [1999] QB 215.

134 Peter Birks initial nullity was in itself a sufficient reason for restitution of value which had passed under them. All the swaps cases are instances of initial failure of basis. At the time when the Westdeutsche case was finally decided, however, it was still not clear whether it was a case of initial or subsequent failure. Hobhouse J at first instance had before him both a closed and an interrupted swap.38 He was emphatic that the same initial failure afflicted both. The Court of Appeal upheld him, adding, however, that in the interrupted swap, which alone had been appealed, the ground could equally have been subsequent failure of basis due to the interruption of the contractual reciprocation.39 In the House of Lords the only issue was compound interest. The orthodox view, from which the majority would not depart, was that that turned on the nature of the claimant’s right. The conclusion was that this claimant had only a right in personam and hence was entitled only to simple interest. The House did not regard the interest question as requiring examination of the precise reason why the enrichment was unjust. Hence it is not knowable whether the House of Lords regarded the Westdeutsche case as an instance of initial or of subsequent failure. It involved an interrupted swap. Performance had been abandoned when the nullity of the contract was discovered. On the premiss that it was a case of subsequent failure, from want of full reciprocation, it belonged alongside Re Goldcorp Exchange Ltd.40 On that assumption there was indeed no proprietary right. This flaw infects the overruling of Sinclair v Brougham,41 the facts of which present the identical ambiguity. The depositors with the Birkbeck Bank lent their money to the Bank. The loans were ultra vires and therefore void. They were not repaid. We cannot tell whether the Westdeutsche House of Lords thought the depositors had been claiming because the contractual reciprocation had not been forthcoming, subsequent failure, or because their contract had been void ab initio. On the one view, Sinclair v Brougham too was a Goldcorp case and needed to be overruled because subsequent failure of that kind can never give rise to a proprietary interest. On the other view, it was a case of initial failure and should certainly not have been overruled without a much fuller survey of cases of initial failure. (c) Behind the swaps cases The House of Lords never inspected the line between initial and subsequent failure of basis. Even if Sinclair v Brougham is treated as ambiguous and is therefore laid aside, there remain two prominent cases whose strength is not entirely their own but comes from two other groups of case-law which must be regarded 38 Kleinwort Benson Ltd v Sandwell BC was a closed swap (decided and reported with the Westdeutsche case): [1994] 4 All ER 890. 39 [1994] 4 All ER 890, 924 (Hobhouse J), 960–961 (Dillon LJ, with whom Kennedy LJ agreed). 40 [1995] 1 AC 74. 41 [1914] AC 348.

Retrieving Tied Money 135 as invulnerable and will be mentioned immediately below. In Chase Manhattan Bank NA Ltd v Israel-British Bank (London) Ltd 42 the claimant bank paid the defendant bank $2m and then, by mistake, paid it again. The recipient bank became insolvent. Goulding J held that the effect of the mistaken payment was to turn the recipient into a trustee and thus give the claimant bank an equitable proprietary interest in the money paid. Provided it could trace the payment into assets held by the liquidator it could therefore take its money out of the insolvency before the unsecured creditors got anything. That proviso goes to the identification issue. No proprietary claim can ever be asserted except in relation to an identified specific thing in which the property is claimed. Rights in rem follow their thing. In the case itself the proviso was simply left hanging. An inquiry to satisfy curiosity later revealed that the bank did in fact afterwards get back its mistaken payment ahead of the unsecured creditors. In Nesté Oy v Lloyds Bank43 five payments had been made in advance in respect of services to be rendered to ships arriving in port. The payments were made under a contract. They were payments in advance under that contract. The services were not rendered. Bingham J held, in relation to the first four payments, that the failure of basis gave only personal claims. The basis there failed after the payment, when the contractual reciprocation was not forthcoming. There was a ‘failure of consideration’ in the sense of a failure of contractual reciprocation. The basis of the payment, the contract, was not invalidated until that reciprocation failed. Meanwhile the money had been freely at the disposition of the recipients. The fifth payment was different. The recipient was turned into a trustee because at the time of the payment it was already certain that the service would not be forthcoming. The payee had already decided to cease trading. From the standpoint of the payer the invalidity had already supervened. The contract was already terminable. The basis had failed ab initio. The payer had an equitable proprietary interest in that payment. There is no substantial difference between these cases. Both could be pleaded as cases of mistake or as cases of failure of basis.44 But their real strength comes from the proximity of, and their compatibility with, all the law of voidability. It ought to be immediately apparent that there is a prima facie inconsistency in saying that a party led into a voidable contract obtains a proprietary right but a party to a void contract does not. Wherever a transfer is voidable the transferor immediately has a power in rem which is in itself a weak proprietary interest 42 [1981] Ch 105, criticized and explained in terms of fault in Westdeutsche Landesbank Girozentrale v Islington LBC [1996] AC 669, 714 (Lord Browne–Wilkinson). Compare Lord Millett: Sir Peter Millett, ‘Restitution and Constructive Trusts’, (1998) 114 LQR 399, 412–13. 43 Nesté Oy v Lloyds Bank (1983) 2 Lloyd’s Rep 658 (Bingham J), subjected to a fault-based analysis in Triffit Nurseries Ltd v Salads Etcetera Ltd [2000] 2 All ER Comm 737. 44 In the same way David Securities Pty Ltd v Commonwealth Bank of Australia (1992) 175 CLR 353 and Roxborough v Rothmans of Pall Mall Australia Ltd (2002) 76 ALJR 203 are indistinguishable despite the former having been argued and decided in mistake, the latter in failure of basis. A shared basis need not be a future basis and misperception of a supposed present basis can be a causative mistake.

136 Peter Birks but, being easy to exercise, quickly turns into a much stronger one.45 That is to say, when he avoids the contract, the transferor gives himself, depending on whether the transfer is voidable at law or in equity, a legal or equitable beneficial interest in the res. In the avoidance of a voidable contract he brings about the nullity which is characteristic of a void contract from the outset. But the voidable claimant, if we may so call him, ends with ownership of the res, while the void claimant ends with only a personal claim. That is hard to accept. In more concrete terms this curiosity means, unless voidability is to be heavily pruned, that on the Chase Manhatten facts an innocent telephone call from the Israel-British Bank would have made an inexplicable difference. Suppose that Bank, unaware that it had already received the money, had telephoned to complain that the expected $2m had not come and must do so within twelve hours. This would have turned the case into one of induced mistake rather than spontaneous mistake. The context was not a bargaining situation where parties take the risk of their own mistakes but not of induced mistakes. In nonbargaining situations it is impossible to see why an innocent misrepresentation, or indeed innocent undue influence or pressure, should be treated differently from a spontaneous mistake. An attack on Chase Manhatten is therefore an attack on the whole law of misrepresentation, pressure, and undue influence, all of which provoke a proprietary response, first power in rem and then full beneficial interest. Imitating Lord Browne-Wilkinson’s critique of Chase Manhattan in the Westdeutsche case, the Court of Appeal has sought to narrow Nesté Oy by confining it to instances in which the recipient had acted with a high degree of improbity.46 But improbity is not material, as the law of innocent misrepresentation and undue influence shows. Timing, not fault, is the key. The fault-based approach moves the proprietary outcome into the law of wrongs, for want of confidence in unjust enrichment. Quite apart from destroying large areas of equitable intervention, it has the curious consequence of allowing wrongful retention by the debtor to alter the priority of the creditor in a situation in which, to repay, would anyhow be a voidable preference. The fault-based approach will prove to be a dead end. By contrast, although different choices might have been made and may be made in the future as to which deserving

45 At law: Car & Universal Finance Co Ltd v Caldwell [1965] 1 QB 525; in equity: Lonrho Plc v Fayed [1992] 1 WLR 1, 11–12 (Millett J); Bristol and West BS v Motthew [1998] Ch 1, 22–23, followed in Twinsectra Ltd v Yardley [1999] Lloyd’s Rep Bank 348, 461–62, aff’d on other grounds [2002] UKHL 12, [2002] AC 164. The US Restatement of Restitution assumes an older model which dispenses with the power. In that model a transfer which is voidable in equity produces an immediate trust for the transferor, who is then able on ordinary principles to recall the legal title: A Scott and W Seavey (reporters), Restatement of the Law of Restitution: Quasi Contracts and Constructive Trusts (St Paul, 1937) sections 163, 166, with comments thereto. The old model was defended by R Chambers, Resulting Trusts (Oxford, 1997) 170–84 (cf R Chambers, ‘Constructive Trusts in Canada II’ (2002) 16 TLI 2, 15) but that battle may now have been lost, although the immediate trust resurfaced in Collings v Lee [2001] 2 All ER 332 (CA). 46 Triffit Nurseries Ltd v Salads Etcetera Ltd [2000] 2 All ER Comm 737.

Retrieving Tied Money 137 claimants must go to the back of the queue, there is nothing repugnant or perverse in holding, as was being held, that where the law of unjust enrichment bites from the moment of receipt, so that the enrichment is not for one minute freely at the disposal of the recipient, the enrichment should be withdrawn from the pot available for division between the unsecured creditors. It is ex hypothesi money that ought never to have been there. Chase Manhatten and Nesté Oy reflect that conviction. They fit naturally beside cases in which a transfer is so extremely vitiated as to prevent the property passing even at law, as for instance where there is a fundamental mistake of identity. There is one further group to be taken into account. There are many cases in which an express trust fails ab initio. Here the basis of the transfer to the recipient is that he shall hold upon trust. If that basis fails, it usually fails immediately. The simplest example is the settlor’s omission to nominate any beneficiaries.47 There are many other reasons for immediate failure. In a recent case a pension fund had been set up in disastrous breach of the rule against perpetuities.48 The outcome is always an immediate restitutionary trust for the settlor. It will in the end have to be admitted that this is not an express or genuinely implied trust. There is no presumption of an intent to create a trust. If there were it would be constantly rebutted by evidence that the settlor never thought about consequences of failure, which, as was acknowledged by Harman J in Re Gillingham Bus Disaster Fund,49 is on the balance of probabilities commonly the truth. The failure of the trust is a straightforward failure of basis. The resulting trust is not ‘automatic’. It is not a case of simple proprietary arithmetic, with the transferor retaining whatever he failed to transfer. Lord Browne-Wilkinson rightly observed in the Westdeutsche case that the transferor’s equitable interest is obtained, not retained.50 As Professor Chambers showed in Resulting Trusts,51 there is a remote possibility that the settlor intended an alternative basis by default, as for instance that the trustee should take beneficially or that the asset be abandoned, but, the balance of probability being the other way, it is for the one who alleges such things to prove them. The onus naturally falls in such a way as to render a presumption redundant. To speak of a presumption against animus donandi—against an intention to give a beneficial gift to the trustee—is only to restate or reinforce the natural onus. 47

Vandervell v IRC [1967] 2 AC 291. Air Jamaica Ltd v Charlton [1999] 1 WLR 1399. 49 [1958] Ch 300, 310, aff’d [1959] Ch 62. A fortiori where a trust for himself was the last thing the transferor wanted, as in Vandervell v IRC, above, n 43; cf R Chambers, Resulting Trusts (Oxford, 1997) 47–50. 50 Westdeutsche Landesbank Girozentrale v Islington LBC [1996] AC 669 707. Mr Swadling appears to adhere to the proprietary arithmetic approach of the ‘automatic’ resulting trust: W Swadling, ‘Property’ in P Birks and F Rose (eds), Lessons of the Swaps Litigation (London, 2000) 242, 265–71; with less commitment: W Swadling, ‘A Hard Look at Hodgson v Marks’ in P Birks and F Rose (eds), Restitution and Equity (London, 2000) vol 1, p 61, 71. 51 R Chambers, above, n 49, 45–49. 48

138 Peter Birks When the express trust fails, the basis of the transfer to the intended trustee fails too. To reverse the trustee’s unjust enrichment, the law responds with an immediate restitutionary trust. Once one has confidence in the law of unjust enrichment and escapes the need to explain every outcome in terms of consent or wrongs, this becomes perfectly straightforward. Neither fictions nor presumptions are needed. This resulting trust is no more than one more illustration of the fact that every time the law of unjust enrichment cuts in from the moment of receipt, there is a restitutionary trust. ‘Restitutionary’ and ‘resulting’ are near-synonyms.52 Unjust enrichment has never been looked at as whole and free from alien matter. An attempt to see it in that way shows that the most significant line drawn across it divides initial failure from subsequent failure. All cases of initial failure should be treated the same way. It is an embarrassment, but one which can be ironed out, that the fractured vision of the past has left us with a proprietary response which is not uniform, now a power, now an immediate beneficial interest, now a security interest. These divergences can be brought to order. The starting point is that all cases of initial failure should be regarded as generating at least a power in rem. The claimant has, if nothing more, a power to give himself an interest in a res in the defendant’s hands. He may on some facts have an immediately vested interest. Those who want to move to the civilian position in which there is no proprietary response to unjust enrichment must look to the legislature or set out on the arduous interpretative task of dismantling the law of voidability. It is not rational to attack the cases which give an immediate interest without at the same time attacking the far greater number which confer on the claimant a power to give himself such an interest.

3 Our Case Again The case of the surplus arising from the campaign to stop the road is not a case of initial failure. On the one hand, it resembles Re Goldcorp53 in being a case of subsequent failure: money was given to the leader of the campaign, in return for a contractual obligation to apply it to the campaign; later the campaign collapsed in unexpectedly early victory; the contractual reciprocation was never forthcoming; the obligation to repay was triggered by that subsequent failure of basis. But, on the other hand, the case strongly resembles all instances of initial failure in that the money was never at the disposition of the leader to whom it was paid. Goldcorp was not a case of tied money. Goldcorp was not a case in which the counter-performance to which the recipient was contractually bound was an application of the money which was transferred. In our case the money was ring-fenced from the outset, not by trust, but by contract. The contractual 52 53

Cf n 5 above. [1995] 1 AC 74 (text to n 28 above).

Retrieving Tied Money 139 obligation was to apply the money to a purpose. The question is therefore whether it should be grouped with cases of initial failure or with subsequent failure of basis. There are three related reasons why this case of subsequent failure must be placed with the initial failure cases, which do generate a proprietary right. First, the underlying rationale which explains why initial failure of basis always generates a proprietary right is that in cases of initial failure the enrichment never becomes freely at the disposition of the enrichee. In other words the line with real meaning is that between having the money, for however short a time, freely at one’s disposition, and never so having it. Where the fund is all along ringfenced, then, even though the basis does not fail till subsequently, it remains true that the money is not at any moment freely at the recipient’s disposition. Second, this alignment is necessary in order to reflect the unity of the lay practice which the law in this field is striving to uphold. To the layman there is one single practice, the tying of money to purposes. If the law is compelled to use different models to uphold slightly different manifestations of that practice, it must at the same time do everything possible to prevent their giving rise to substantially different consequences. A restitutionary trust will in this case give the subscribers much the same outcome as they would have if their case fitted the Twinsectra model or the trust-for-objects. We already noticed that a tie which is obligatory is if anything more peremptory than a tie which reduces to a nonobligating condition, which gives rise to the Twinsectra construction. It would be curious, to say the least, if the more peremptory tie yielded markedly weaker rights. Third, if money came as cash in envelopes and the envelopes were kept in chests, and if the law of trusts had never had to be invoked to cope with the sophistication of bank accounts and clearing systems, we would probably conclude that, in all these cases of money tied to a particular purpose, the packet of tied money was only deposited with the transferee until applied to the specified purpose, so that no property passed until it was so applied. It seems likely that the lay perception, so far as it is underpinned at all, rests on that crude structure. The Twinsectra construction imitates it. So far as possible other supplementary constructions ought also to do the same. These arguments are underlined by cases within the trust-for-objects model in which it is almost impossible to say whether one is looking at an initial or a subsequent failure. In Re Abbott 54a fund had been subscribed to care for two disabled ladies. After they died it turned out that the fund had not been exhausted and that no provision had been made for the surplus. Similarly, in Re Gillingham Bus Disaster Fund55 money was raised after a patrol of sea cadets had been crushed by a bus. The terms of the appeal included provision for the event in which there was a surplus. That provision proved to be void. In both these cases the basis of the transfer failed, and the funds were held on resulting 54 55

[1900] 2 Ch 326. [1959] Ch 62.

140 Peter Birks trust. They are almost identical to our hypothetical, except that, since the trustfor-objects model is used, it can be argued that technically they are examples of initial failure, in that there was no valid provision made in the express trust for any surplus that might appear. The alternative analysis would say that there was no failure till the surplus appeared. On that analysis such cases show that subsequent failure of a ring-fenced fund is as a matter of authority to be treated in the same way as an initial failure or, better, that the rule is not a rule about initial failure but about the money never having been at the disposition of the recipient, a fact commonly but not invariably instantiated in initial failure. In summary: (i) behind the swaps cases, which failed to see it, a crucial line runs across unjust enrichment, between initial and subsequent failure, such that initial failure always gives rise to proprietary rights of some kind, and subsequent failure does not; but (ii) a subsequent failure after a period of ringfencing resembles an initial failure in that the fund has then likewise never been at the recipient’s disposition; and (iii) where the ring-fencing itself takes the form of a trust, such a failure undoubtedly gives rise to the same consequence as an initial failure; therefore (iv) where the ring-fencing takes the form of contract a subsequent failure should be treated in the same way and not be assimilated to the general model which is applied to subsequent failure of contractual reciprocation; with the result that (v) the councillor in our case should be found to hold the £300,000 on a restitutionary trust for the subscribers. This conclusion need not be said to fly in the face of the swaps cases, which so far as they rejected the claimant’s proprietary claim must be taken to have done no more than underline Re Goldcorp. It does mean, however, that, if the issue of interest were re-argued on the basis of initial failure, all claimants would probably be seen to have been entitled to compound interest. It is not certain, because it is not certain what precise kind of proprietary claim would be recognized.

V : CONCLUSION

There are more general implications. The long-term question about priorities lies in the hands of the law reformers. It is not the kind of issue which should ever have attracted attempts at interpretative development from case to case. For the moment, notwithstanding the Westdeutsche case, people with claims in unjust enrichment do have priority over unsecured creditors so long as the enrichment in question was not for an instant freely at the enrichee’s disposition. In other words, there must have been no moment of time during which it could not be said of their enrichment that it was unjust. The one case of subsequent failure which falls within the same rule is that in which in the period between receipt and failure of basis the enrichment was ring-fenced by trust or contract for application to a particular purpose. All this is subject to the invariable rule that a proprietary right cannot be asserted except where the claimant can identify the res to which it is attached.

Retrieving Tied Money 141 The exact nature of the proprietary right and hence the strength and timing of the priority which it carries remains to be stabilized, the weaker version being born as a power rather than as an immediately vested interest. In the great majority of cases the attention of the claimant is in practice directed to a traceable substitute for the asset originally received by the defendant. This paper has not investigated that complication. It seems likely that interests in traceable substitutes always begin as a power in rem analogous to the right to rescind.56 The difficulties of the picture presented in this paper stem from the fact that, even in the new world into which we were led by Goff and Jones in 1966, it has not been possible to see the law of unjust enrichment as a whole, unmixed with alien matter. Unless it is separated from the law of restitution, it will always seem more of a jumble than it actually is. Two bad consequences have followed. Important adjustments have been made in particular areas without the benefit of a view of the surrounding landscape. The overruling of Sinclair v Brougham is a notable example. And, worse, it has not been possible to rely confidently on unjust enrichment as a sufficient explanation of important consequences. The attempt to shuffle the proprietary consequences of unjust enrichment into wrongs is only the most recent manifestation of the inveterate tendency to prefer a familiar explanation to a correct one. Imaginary contracts and imaginary declarations of trust have done most of the work in the past. False calls on the law of wrongs are a relatively new phenomenon. In Chase Manhatten Goulding J still felt under strong pressure to hang his conclusion on a traditional equitable peg. He was forced into a circular argument to show that the recipient bank became a fiduciary. It is more than evident that he would have invoked unjust enrichment directly if it had not been, in his view, forbidden fruit.57 Equitable fraud was wide enough in earlier days to justify equitable intervention in almost any disapproved outcome. To invoke that phrase now is to encourage the flight into fault and wrongs. The braver course is to do as Goulding J could not quite do two decades ago and say simply and directly that, in cases of initial failure and failure after ring-fencing, equity responds to unjust enrichment by turning the enrichee into a trustee. It may turn out that the Twinsectra construction is itself no more than a symptom of want of confidence in the law of unjust enrichment. There is a tension between trust and contract in the treatment of tied money. This is most obvious in the question why the contract model should be forced into a residual, gap-filling role. That uncomfortable question becomes more troubling in the

56 Lipkin Gorman v Karpnale Ltd [1991] 2 AC 548, 573. The other view, that there is a vested interest in every link of the chain, still has support, even though it leads to grave practical difficulties: LD Smith, The Law of Tracing (Oxford, 1997) 358–61, preferring Cave v Cave (1880) 15 Ch D 639, a decision of first impression of Fry J, criticized in Re ffrench’s Estate (1887) 21 LR Ir 283. This view may also have been assumed, without argument, in Halifax Plc v Omar [2002] 2 P & CR 26. 57 [1981] Ch 105, 118–19.

142 Peter Birks light of the fact that, although the trust models, whether resulting or prosulting, cannot do the work of the contract model, which is why we find the contract model in its residual role, the reverse is not in fact the case. The contract model can do all the work. There is nothing in it which confines it to abstract purposes. The reason it now mops up the residue of cases which trusts cannot reach is precisely because it is able to cope with all ties. The trust models are to that extent superfluous. At the first level, when only validity is in question, contract can ensure that all inter vivos ties are respected, whether as non-obligating conditions or as active obligations. And, at the second level, when the tie fails, the law of unjust enrichment will confer both personal and proprietary restitutionary rights, as we have argued above. In short, if the outcomes of the contractplus-unjust-enrichment model are as we have described, there was never any pressing need to invoke Monsieur Jourdain. That is what Professor Chambers argued in Resulting Trusts.58 He went further. He said that the trusts which have especially attracted the name ‘resulting’ have always been responses to unjust enrichment.59 His approach breaks into two parts. The first shows that the resulting trust, in the narrower traditional usage, was always a response to unjust enrichment, the second that equity’s response to unjust enrichment inside and outside the traditional categories which have especially attracted the name could be unified. The second part of his book was devoted to the latter limb of his programme.60 It was retailed to me while writing this chapter that an Australian judge had characterized Professor Chambers’ book on resulting trusts as embodying ‘a worthless theory’. The truth could hardly be more different. It is very difficult in the law to perceive a truth hidden in historically determined doctrine. In this field Professor Chambers was the one scholar who succeeded in describing the truth hidden in the fog of outdated language of resulting and constructive trusts. He not only revealed the equitable side of the law of unjust enrichment but, coming to particulars, he saw both that the Westdeutsche case had failed to notice the significance of the line between initial and subsequent failure and that, when that line was reinstated, the law of unjust enrichment would explain the proprietary consequences attaching to tied money if and when the tie failed, without any need for the tie itself to be explained, on the first level, in terms of either a resulting or prosulting trust.61 This was and remains a major advance in the understanding of our law and, in particular, of our law of unjust enrichment. The Twinsectra construction has been laid down on top of it, as an alternative capable of securely explaining some cases. But the Twinsectra construction cannot be said to have displaced the Chambers vision. Twinsectra’s reach is shorter, and it in the long run it is likely to prove less robust. 58

Chambers, above, n 49, 71–89. Ibid, 104–5 (summary). Update: R Chambers, ‘Resulting Trusts in Canada I’ (2002) 16 Trust Law International 104. 60 Update: R Chambers, ‘Resulting Trusts in Canada II’ (2002) 16 Trust Law International 138. 61 Chambers, above, n 49, esp 143–70. 59

Retrieving Tied Money 143 Common lawyers are still divided between those who accept and those who deny that unjust enrichment is an essential and wholly independent category of causative event. Those who deny have to bat on a very sticky wicket. They turn their backs on comparative law and find no way of handling the strict liability arising from the mistaken payment of a non-existent debt. Those who accept already know that Professor Chambers’ book showed more vividly than any other how many problems we have for centuries made worse by suppressing one of the three great explanations of rights realizable in court. Before natural selection, other hypotheses served to account for the origin of species and even now, but with a dying voice, pretend to do so. In a hundred years’ time there will still be someone willing to describe Darwin’s discovery as worth nothing at all. .

7

Commerce EWAN McKENDRICK

easy task to ascertain the commercial significance of the decision of the House of Lords in Barclays Bank Ltd v Quistclose Investments Ltd.1 The reason is the absence of a detailed empirical survey of the impact which Quistclose and the subsequent case-law it has generated have had on the world of practice, or certain segments of it.2 While such a study has been undertaken in the context of retention of title clauses,3 no such work has been done in relation to Quistclose itself. It is possible to obtain anecdotal evidence about Quistclose from legal practitioners, but there are two difficulties with such evidence. First, it is not statistically reliable and, second, it is itself inconsistent. Some senior practitioners have made use of Quistclose, while others have not. In the absence of statistically reliable evidence, it is necessary to look to other sources in an attempt to locate information about the impact of Quistclose on commercial practice. Two sources present themselves. The first is academic analysis of the case. Quistclose has aroused a substantial degree of interest, and controversy, in the law reviews.4 But the fact that the case has been the subject of extensive academic discussion does not mean that it is of importance in practice. The reason for Quistclose being the subject of considerable academic analysis is, principally, that the case is difficult to accommodate within existing principles or categories. However, these difficulties do not necessarily translate into the world of practice; the fact that a case is of great interest to academic lawyers does not mean that it is of significance in practice. The second source is the case-law that Quistclose has generated. While subsequent case-law is probably a more reliable indicator of the commercial

I

T IS NO

1

[1970] AC 567. For example, it might be interesting to discover whether Quistclose trusts are more common among the major law firms, medium sized firms or high street firms. The information is likely to be particularly interesting in relation to the use of Quistclose trusts at the planning stage of a transaction. The invocation of Quistclose at the litigation stage is likely to be more haphazard. 3 S Wheeler, Reservation of Title Clauses: Impact and Implications (Oxford, 1991). 4 See, eg, R Chambers, Resulting Trusts (Oxford, 1997) ch 3; S Worthington, Proprietary Interests in Commercial Transactions (Oxford, 1996) ch 3; M Bridge, ‘The Quistclose Trust in a World of Secured Transactions’ (1992) 12 OJLS 333; CEF Rickett, ‘Different Views on the Scope of the Quistclose Analysis: English and Antipodean Insights’ (1991) 107 LQR 608; PJ Millett QC, ‘The Quistclose Trust: Who Can Enforce It?’ (1985) 101 LQR 269. 2

146 Ewan McKendrick significance of a case than academic analysis, it is not entirely reliable. The fact that a case has been cited on numerous occasions may give rise to an inference that the case is of considerable significance in practice.5 But the absence of citations is not necessarily indicative of a lack of practical significance. In some cases decisions are simply accepted and implemented by commercial practice and are not the subject of further judicial challenge. A LEXIS search made in March 2003 revealed that Quistclose has been cited in 107 cases.6 This cannot be dismissed as an insignificant figure. In a number of these cases Quistclose is cited to the court but is not discussed in the judgments,7 and there is a further group of cases in which the reference to Quistclose is no more than a fleeting or passing one.8 But there are a number of cases in which the discussion of Quistclose cannot be dismissed as insignificant.9 There are two particular contexts in which the decision has been invoked.10 The first is insolvency: typically, money has been advanced to a recipient who is now insolvent and the payor wishes to recover its payment in priority to the claims of other creditors of the insolvent. Secondly, Quistclose has been cited in a number of tax cases.11 The aim of this paper is not to examine the fiscal consequences of Quistclose and so the tax cases can, for present purposes, be laid to one side.

5 A recent example may be Lord Hoffmann’s restatement of the principles by which contract documents are to be interpreted in Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896. The case has been cited on numerous occasions and this does underline the practical significance of the rules relating to the interpretation of commercial contracts. See further E McKendrick, ‘The Interpretation of Contracts: Lord Hoffmann’s Re-statement’, in S Worthington (ed), Commercial Law and Commercial Practice (Oxford, 2003), ch 7. 6 Some cases appear more than once in that appeals have been recorded separately from the first instance judgment. A case could appear on the list on three occasions (first instance, Court of Appeal and House of Lords) but no case in fact does so. The maximum is two. There are likely to be other unreported cases in which reference has been to Quistclose which do not appear on the list. Thus the list should be seen as a minimum not a maximum. The case has also been cited in a number of Commonwealth decisions, particularly from Australia, New Zealand and Canada. An analysis of Quistclose from an Antipodean perspective has been provided by Rickett, above n 4. For an analysis from a Canadian perspective, see DR Klinck, ‘The Quistclose Trust in Canada’ (1994) 23 Canadian Business Law Journal 45. 7 Approximately 30 cases. 8 Approximately 20 cases. 9 The extent of the analysis varies as between the remaining cases. In some of these cases, Quistclose is cited as authority for a particular proposition, for example, the co-existence of the relationship of debtor and creditor and trustee and beneficiary, whereas in others the analysis is much more extensive, involving a careful analysis of the basis and/or the scope of the decision in Quistclose. 10 This division is not exhaustive. Cases can be found which do not fit neatly into either category. An obvious example is the decision of the House of Lords in Twinsectra Ltd v Yardley [2002] 2 AC 164. Another is Anthony v Wright [1995] 1 BCLC 237 where, perhaps rather bizarrely, Quistclose was cited in the context of a professional negligence action. 11 See, eg, Morley-Clarke v Jones (Inspector of Taxes) [1986] Ch 311, where it was argued, in the event unsuccessfully, that money paid by a husband to his former wife for the maintenance of their child meant that the money was paid ‘for the purpose of maintaining the child’ so that the wife held the money in trust for her child. It was held that the effect of the scheme was not to give the child an entitlement to the money but to increase the income of the mother so as to enable her to maintain the child out of the money paid to her by her husband.

Commerce 147 What has been the fate of Quistclose in the case-law? It has received a mixed welcome. In some cases it has received a positive response. Thus it has been cited as authority for the co-existence of contractual and fiduciary relationships between two parties12 and for the co-existence of the relationship of debtor and creditor and trustee and beneficiary.13 There is also a group of cases in which the courts have applied Quistclose and held that money paid was, in fact, held on trust.14 But there is also a group of cases in which the courts have held that Quistclose was not applicable to the facts of the case. The principal grounds on which Quistclose has been distinguished are that the relationship between the parties was purely contractual,15 there was no intention to create a trust,16 and that the money was not kept in a separate fund and so became part of the general assets of the recipient.17

I : THE FEATURES OF QUISTCLOSE CASES

What features do Quistclose cases exhibit? Here I do not intend to make reference to the constituent elements of a Quistclose trust: these are discussed elsewhere in this book. Rather, my focus is on the ‘transactional’ background to the case or, more broadly, the circumstances which led to the attempt, whether successful or unsuccessful, to invoke Quistclose. A number of features can be identified. The first is that the lender has chosen, for one reason or another, not to take out a conventional security, such as a mortgage or a charge, in order to protect itself against debtor default or debtor insolvency. A simple example is provided by the case of R v Common Professional Examination Board, ex p MealingMcLeod.18 The terms of the loan agreement between the bank and its customer contained the following condition:

12 See, eg, Bristol and West Building Society v May, May and Merrimans (a firm) [1996] 2 All ER 801, 815; Cleveland Shoe Co Ltd v Murray Book Sales (Kings Cross) Ltd [1973] EGD 335; Burt v Claude Cousins & Co Ltd [1971] 2 QB 426. 13 R v Clowes (No 2) [1994] 2 All ER 316, 324. 14 See, eg, Twinsectra Ltd v Yardley [2002] 2 AC 164; Re Niagra Mechanical Services International Ltd (Canary Wharf Contractors (DS6) Ltd v Niagra Mechanical Services International Ltd [2000] 2 BCLC 425; Re English & American Insurance Co Ltd [1994] 1 BCLC 649; Re Marwalt [1992] BCC 32; Stanlake Holdings Ltd v Hammoud, Financial Times, 25 June 1991; Re EVTR [1987] BCLC 646; Carreras Rothmans Ltd v Freeman Mathews Treasure Ltd [1985] Ch 207. 15 See, eg, Re Holiday Promotions (Europe) Ltd [1996] 2 BCLC 618; In re Goldcorp Exchange Ltd [1995] 1 AC 74. 16 See, eg, Stocznia Gdanska SA v Latreefers Inc (No 2) [2001] 2 BCLC 116. 17 See, eg, Schulman v Hewson [2002] EWHC 855 (Ch) ; Stocznia Gdanska SA v Latreefers Inc (No 2) [2001] 2 BCLC 116; Box v Barclays Bank plc, The Times, 30 April 1998; Guardian Ocean Cargoes Ltd v Banco do Brasil SA (Nos 1 and 2) [1994] 2 Lloyd’s Rep 152, 160; Royal Products Ltd v Midland Bank Ltd [1981] 2 Lloyd’s Rep 194. 18 The Times, 19 April 2000. The case is discussed in detail by Penner, at p 64.

148 Ewan McKendrick You must use the cash loan for any purpose specified overleaf (see ‘The Loan’). You will hold that loan, or any part of it, on trust for us until you have used it for this purpose.

The loan agreement did contain a section for security but the bank had not, on this occasion, required its customer to provide it with any security. This is an important point. A bank which is seriously concerned about the solvency of its customer, or the extent of its exposure in the event of debtor default, is unlikely to rely on Quistclose in order to protect its position: it is more likely to rely on a mortgage or a charge, whether fixed or floating. On this basis, it seems probable that Quistclose will be invoked in the case where the creditor does not see fit initially to take security, either because the size of the loan is low or the likelihood of debtor default is perceived to be small, but circumstances change, for example the debtor becomes insolvent or the size of the loan creeps up, and the creditor finds it necessary to take steps to protect its position. Professor Bridge has drawn attention to two further features of the Quistclose cases, namely ‘the emergency aspect of the matter, as well as (sometimes) the non-professional character of the arrangements.’19 The ‘emergency aspect of the matter’ is important. It is clear that, in a number of the cases, speed is of the essence because the debtor has an immediate need for financial assistance in order to enable it to continue in business.20 The emergency nature of the transaction may also suggest that Quistclose-type arrangements are not particularly common in practice. Where parties have sufficient time to plan their transaction, they are more likely to make use of other tried and tested devices in order to protect their positions, in particular the position of the creditor. This is not to say that the existence of some form of emergency is an inevitable feature of a Quistclose trust. It is not. There does not appear to have been any particular emergency on the facts of Twinsectra Ltd v Yardley21 but the parties nevertheless chose, for reasons which do not emerge with any clarity, to resort to a Quistclose trust. The ‘non-professional character of the arrangements’ is also worth noting. This is perhaps most typically a feature of the cases in which Quistclose has been invoked unsuccessfully. An example might be In re Goldcorp Exchange Ltd.22 The collapse of Goldcorp Exchange Ltd, dealers in gold and other precious metals, left a number of disappointed customers whose contracts with Goldcorp for the supply of gold bullion remained unperformed. The customers sought to establish that they had a proprietary interest, either in the bullion they had contracted to purchase, or in the purchase money they had paid in order to acquire the bullion. The latter claim gave rise to a Quistclose point, but was quickly dismissed by the Privy Council. Lord Mustill accepted that money paid 19 20 21 22

M Bridge, ‘The Quistclose Trust in a World of Secured Transactions’ (1992) 12 OJLS 333, 345. Quistclose itself would appear to fall into this category. [2002] 2 AC 164. [1995] 1 AC 74.

Commerce 149 by a purchaser under a contract of sale is capable in principle of being the subject of a trust in the hands of the vendor but, in order to establish such a trust, he stated that it is necessary to show ‘either a mutual intention that the moneys should not fall within the general fund of the company’s assets but should be applied for a special designated purpose, or that having originally been paid over without restriction the recipient has later constituted himself a trustee of the money.’23 On the facts neither requirement was satisfied. In all probability, the customers had not taken the trouble to consult their lawyers before agreeing to purchase the bullion. The absence of legal advice effectively made it impossible for them to establish the existence of a Quistclose trust. Indeed, it would appear that a Quistclose trust is more likely to be found where the parties have had at least some access to professional advice. For example, in Carreras Rothmans Ltd v Freeman Mathews Treasure Ltd24 the scheme which led Peter Gibson J to find the existence of a Quistclose trust was devised by the in-house lawyer employed by the creditor, Carreras Rothmans.25 He drafted a letter for the managing director of Carreras Rothmans. The latter thought that the wording of the letter was ‘rather legalistic’,26 but he signed it nevertheless. Peter Gibson J thought it unlikely that the debtors had taken legal advice on the content of the letter, although he noted that the debtors did have solicitors acting for them. The picture that emerges from Carreras Rothmans may not be one of high-powered lawyers, acting for both parties, setting up a carefully structured transaction. But it would be wrong to conclude that lawyers did not have a hand in the structure of the transaction. The letter sent on behalf of the creditor was a carefully thought out letter which sought to protect the position of a creditor who was faced by a debtor whose financial position was becoming increasingly precarious. Similarly, in Re EVTR27 the creditor advanced the money after taking advice from his accountant and the money was paid over to solicitors acting for the debtor who were given permission to release the money ‘for the sole purpose of buying new equipment.’ Professional advice, albeit occasionally somewhat limited, would therefore appear to be an important element in establishing the existence of a Quistclose trust. A fourth feature of Quistclose trusts, albeit one which appears less frequently, is the unusual form or structure of the transaction that has been concluded between the parties. The best example in this category is probably Twinsectra Ltd v Yardley itself.28 Lord Hoffmann stated that the terms of the undertaking given by the solicitors, which formed the basis of the Quistclose trust, were ‘very unusual’, and that the ‘purpose of the undertaking was unclear.’29 Against this 23 24 25 26 27 28 29

Ibid 100. [1985] Ch 207. [1985] 1 All ER 155, 160. Ibid. [1987] BCLC 646. [2002] 2 AC 164. Ibid p 169. To similar effect is Lord Millett p 181.

150 Ewan McKendrick background, it is very difficult to speculate as to the precise reasons which led to the undertaking being given in the form in which it was made. But the essential point to be made is that this is not an example of a standard commercial practice. On the contrary, it is a departure from standard practice, an unusual transaction. The final feature of some Quistclose cases is that they contain within them an element of desperation; that is to say, Quistclose is invoked by a claimant who wishes to avoid being classified as an unsecured creditor and so maintains that he has a proprietary interest in the money that has been paid over to its recipient. Goldcorp30 is an example in this category. Another is Re Holiday Promotions (Europe) Ltd.31 Customers paid refundable deposits of £150 to a holiday company which subsequently went into liquidation. The customers submitted that the money was held for them on trust. The submission was rejected, it being held that the relationship between the customers and the company was one of debtor and creditor, not trustee and beneficiary. The invocation of Quistclose on the facts of Goldcorp and Holiday Promotions suggests that Quistclose is perhaps better seen as part of the armoury of a litigation lawyer rather than a transactional lawyer. In other words, a transactional lawyer, concerned to protect the position of a creditor, is likely to rely on Quistclose only in cases where there is no better alternative reasonably open to him: and in most cases there will be such an alternative, such as a charge or a mortgage. Litigation lawyers, by contrast, must take matters as they find them. If the lender has not taken a conventional security, and faces the prospect of being held to be an unsecured creditor, the litigation lawyer must endeavour to find a way of improving the position of the lender and the invocation of Quistclose may be one way of doing so. Quistclose has not brought much by way of joy to litigators who find themselves in this position, but it may, in an exceptional case, prove to be of inestimable value. II : WHO IS LIKELY TO INVOKE QUISTCLOSE ?

Who is most likely to rely on Quistclose? The short answer is that it is invoked by lenders of money or by those who advance money to another party (for example, as a pre-payment of the purchase price or as the price for services to be performed). The principal lenders are banks. Yet it is a curious feature of Quistclose litigation that banks have rarely, if ever, relied upon Quistclose. Banks that wish to protect their own position probably rely on more traditional forms of security. The clearest example of a bank invoking Quistclose is probably the decision of the Court of Appeal in R v Common Professional Examination Board, ex p Mealing-McLeod.32 The case is potentially significant, 30 31 32

[1995] 1 AC 74. [1996] 2 BCLC 618. The Times, 19 April 2000. The terms of the loan are set out above, text to n 18.

Commerce 151 because it demonstrates that Quistclose can be incorporated into standard form documentation. But it should be noted that the bank was not actually a party to the litigation. The litigant was the borrower and she submitted that she was ‘under an equitable obligation to return the money to the bank.’ So this is a rather unusual situation in that the debtor, who was herself no stranger to litigation,33 took steps in order to protect her own position and the position of the creditor bank. Far from benefiting from Quistclose, banks appear to have been the losers. This was the case in Quistclose itself and in a number of other cases. Thus Penn and Wadsley have stated that the rule laid down in Quistclose: is an unhappy rule, so far as banks are concerned, for the right to combine or to setoff is a reason for allowing companies to continue with a debt on one account, if money is available elsewhere. Under the Quistclose rule, however, the payer of money can defeat the bank’s priority on the insolvency of its customer merely by ensuring that the bank knows of the purpose of the payment. On the other hand, third party finance for companies suffering from difficulties is made easier if the third party knows that the bank or receiver or liquidator may not take the money if the company fails before it is paid out.34

The winners have been customers, other than banks, who have advanced money to companies that are trading on the verge of insolvency35 or financiers, other than banks, who have been prepared to put up money in order to enable a company to continue trading.36

III : WHY INVOKE QUISTCLOSE ?

Why might a party seek to place reliance upon Quistclose? The obvious answer is to obtain priority on the insolvency of the party to whom the money was paid. But here it has to be remembered that there are many other ways of obtaining priority in the event of insolvency. The most obvious alternatives are traditional forms of security, such as a mortgage or a charge. Quistclose will not displace these traditional securities and, indeed, it was never intended that it should. While Quistclose is a decision of the House of Lords (and, as such, can only be overruled in the unlikely event that the House of Lords invokes the 1966 Practice Statement37 in order to depart from its own decision), there are simply too many uncertainties surrounding the scope and basis of the decision38 for it to be 33 She was involved in on-going litigation with the Common Professional Examination Board which had involved a number of hearings before the courts. 34 G Penn and J Wadsley, The Law of Domestic Banking, 2nd edn, (London, 2000) para 9–048. 35 As in Carreras Rothmans Ltd v Freeman Mathews Treasure Ltd [1985] Ch 207. 36 As in Quistclose itself and Re EVTR [1987] BCLC 646. 37 Practice Direction (Judicial Precedent) [1966] 3 All ER 77. 38 A fact illustrated by the numerous theories, explored in this book, which seek to explain the reasoning in Quistclose.

152 Ewan McKendrick invoked by practitioners on a regular basis with any degree of confidence. It is more likely to be used where time does not allow resort to more traditional forms of security or where, as in Carreras Rothmans, a transaction, or a relationship, has got into difficulties and a Quistclose trust presents itself as the most obvious solution to the problems that confront the parties. The question whether the difficulties created by Quistclose outweigh the benefits which it produces on the rare occasions on which it is invoked is discussed at various points in this book. It is not necessary to enter into this debate here. It suffices to say that Quistclose does have a role to play in modern commercial practice, albeit that it is difficult to ascertain the exact extent of that role. However, it would appear that it is seen principally as a residual device, to be invoked where traditional forms of security are, for one reason or another, unavailable or unattractive.

8

Insolvency ROBERT STEVENS

T FIRST SIGHT,

the Quistclose trust does not raise any controversial insolvency issues. Where a company holds an asset on trust for the benefit of another, that asset does not form part of the company’s estate available for distribution to creditors. For bankrupt individuals this proposition is expressly stated in the Insolvency Act 1986,1 but it is clearly also true of insolvent companies.2 In the typical Quistclose trust situation, A lends money to B to be used to pay some of B’s creditors.3 The intention is that if upon B’s insolvency the creditors have not been paid, the money is to be held on trust for A. The most controversial issue is the location of the beneficial interest in the money before the failure of the purpose for which the money was lent. The options appear to be that B is:

A

(a) a trustee of the money for A, with the power to use the money to pay C;4 (b) entitled to the money beneficially, subject to A’s (proprietary) right to prevent misuse of the money;5 (c) a trustee of the money for C;6 or (d) a trustee of the money, with the beneficial interest in suspense7.

1

Insolvency Act 1986, s 283(3)(b). Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567; Re Kayford Ltd [1975] 1 WLR 279; Carreras Rothmans Ltd v Freeman Mathews Treasure Ltd [1985] Ch 207; Re EVTR (1987) 3 BCC 389. 3 Re Rogers (1891) 8 Morr 243; re Drucker [1902] 2 KB 237; re Watson (1912) 107 LT 783; re Hooley [1915] HBR 181. 4 PJ Millett QC, ‘The Quistclose Trust: Who Can Enforce it?’ (1985) 101 LQR 269; Twinsectra v Yardley [2002] 2 AC 164, 186–93, (Lord Millett); see also Re Australian Eliazabethan Theatre Trust (1991) 102 ALR 681, 692 (Gummow J) ; General Communications v DFCNZ [1990] 3 NZLR 406, 432–33; Mr Justice LJ Priestly, ‘The Romalpa Clause and the Quistclose Trust’ in P Finn (ed), Equity and Commercial Relationships (Sydney, 1987) 217, 237; MJ Bridge, ‘The Quistclose Trust in a World of Secured Transactions’ (1992) 12 OJLS 333; A Tettenborn, ‘Resulting Trusts and Insolvency’ in FD Rose (ed), Restitution and Insolvency (London, 2000) 156; L Ho and P St J Smart, ‘Reinterpreting the Quistclose Trust: A Critique of Chambers’ Analysis’ (2001) 21 OJLS 267. 5 R Chambers, Resulting Trusts (Oxford, 1997) ch 3. 6 Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567, 580, (Lord Wilberforce); re Northern Developments (Holdings) Ltd, 6 October 1978 (Megarry V-C). 7 Twinsectra v Yardley [1999] Lloyd’s Rep Bank 438, 456, (Potter LJ). 2

154 Robert Stevens Of the four options, the first two appear options to be the most plausible. They will be described respectively as the Millett and the Chambers models. On the assumption that we wish to validate such trusts (ie that the decision of the House of Lords in Barclays Bank Ltd v Quistclose Investments Ltd is correct)8 insolvency law may assist in establishing the preferable solution. Other reasons for choosing one solution over another will be left to others. It will also be necessary to consider other reasons why a Quistclose trust may be invalid upon B’s insolvency and the risks run by providing funds in this way.

I : WHERE IS THE BENEFICIAL INTEREST PRIOR TO THE FAILURE OF THE PURPOSE ?

(i) Invalid Attempts to Contract Out of the Collective Regime The ‘most fundamental’9 principle of winding up or bankruptcy is that of pari passu10 distribution: the assets of the company in liquidation or of a bankrupt individual are to be distributed in proportion to the size of the admitted claims.11 In practice, however, this principle is more theoretical than real as an unsecured creditor will only be paid out of the assets remaining after those with a proprietary claim to the fund (generally, security holders) have had first bite. The recognition of a beneficial interest under a trust does not, in itself, offend the pari passu rule. However, the prejudice to unsecured creditors means that the courts should not be overly ready to discern the existence of an intention12 to create a trust. One aspect of the pari passu principle is said to be that any attempt by contract to prefer one creditor by removal from the estate of an asset of the company upon winding up which would have otherwise been available for the general body of creditors is invalid. For example, an agreement that an unsecured debt shall become secured upon a company’s liquidation is invalid.13 It is clear that an agreement that an asset is to be held on trust upon a company’s winding up would similarly be invalid. If under a Quistclose trust the money borrowed is held on trust before the failure of the purpose, this presents no difficulty. The borrower never has any beneficial interest in the money and the trust would therefore be effective in the winding up. The estate of the borrower is not being divested of an asset upon the borrower’s insolvency; the asset never was the borrower’s beneficially. 8

An argument that it was wrongly decided is made by Swadling in ch 2 of this volume. RM Goode, Principles of Corporate Insolvency, 2nd edn (London, 1997) 141. 10 Continental legal systems use a different Latin tag for the same rule: paritas creditorum. 11 Insolvency Act 1986, ss 107, 328(3); Insolvency Rules 1986, r 4.181. 12 Not all would agree that Quistclose trusts arise because of a manifestation of consent: see, eg, the discussions of Swadling and Penner in this volume. 13 Ex p Mackay (1873) 8 Ch App 643; re Harrison ex p Jay (1880) 14 Ch D 19. 9

Insolvency 155 If, however, the beneficial interest is in the borrower, with the trust only arising upon the borrower’s winding up, there may be a difficulty. The estate of the borrower is being divested of an asset upon winding up. On the Chambers model, even if the lender’s interest is proprietary, it is a lesser interest than full beneficial title. Prior to insolvency, all the lender has is a right to prevent misuse of the fund. After insolvency, the lender has a full beneficial interest. It may be asked, therefore, whether Professor Chambers’ model is consistent with the collective insolvency regime. It might be argued that it does not offend the pari passu rule as the money lent was never an asset of the estate freely available for the benefit of the company and its creditors as it could only be used for one purpose. The lender’s proprietary right to restrain the misuse of the money might be seen as analogous to that held by the holder of a floating charge prior to its crystallisation. A floating charge which crystallises upon a debtor’s winding up is valid. Alternatively, it may be argued that on the Chambers’ model the trust does not arise upon the liquidation of the borrower but on the failure of the purpose for which the money is lent and is not therefore an attempt to contract out of the collective regime.14 However, in cases such as Quistclose itself the only occasion upon which the purpose would fail is the borrower’s insolvency.

(ii) A Trustee in Bankruptcy’s Title to the Money Paid In a series of cases15 forming the basis of the decision in Quistclose,16 money was lent to the borrower for the specific purpose of paying certain creditors, who in turn were paid using these funds before the borrower was declared bankrupt. The trustee in bankruptcy sought to recover the money paid. He did not attempt to do so on the basis that the payment was a fraudulent preference.17 Rather, he sought to rely upon the doctrine of relation back. Under the Bankruptcy Acts,18 the trustee’s title to the bankrupt’s estate related back to the commencement of the bankruptcy. Bankruptcy was deemed to commence at the date of the first available act of bankruptcy three months prior to the presentation of the petition. The act of bankruptcy relied upon would normally have been judgment obtained by a creditor.19 Dispositions from the estate made by the bankrupt after this date would be void.20 Creditors who did not have notice of an act of 14

Re Garrud, ex p Newitt (1880) 16 Ch D 522. Toovey v Milne (1819) 2 B & A 683; re Rogers (1891) 8 Morr 243; re Drucker (No 1) [1902] 2 KB 237; re Hooley [1915] HBR 181; see also re Watson (1912) 107 LT 783. 16 Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567, 580–81, (Lord Wilberforce). 17 Quistclose Investments Ltd v Rolls Razor Ltd [1968] 1 Ch 540, 558, (Russell LJ); contra Chambers, above n 5, 72; In Edwards v Glyn (1859) 2 El & El 29 fraudulent preference was relied upon as an alternative (if inconsistent) ground of recovery. 18 Bankruptcy Act 1883, s 43; Bankruptcy Act 1914, s 37; see now, Insolvency Act 1986, s 284. 19 Bankruptcy Act 1883, s 4(1)(g); Bankruptcy Act 1914, s 1(1)(g). 20 Cf Insolvency Act 1986, s 127; s 284. 15

156 Robert Stevens bankruptcy were given a defence in an action to recover payments made to them, but this would clearly not apply to those creditors who had obtained a judgment against the borrower.21 Therefore, in order for the creditors to resist the trustee’s claim for repayment, it was necessary for the creditors to establish that the bankrupt did not have title to the money at the time the payment was made to them. If the money had always been held on trust, this presents no difficulty. The trustee in bankruptcy would have no better claim to the return of the money than the bankrupt. If, however, the money were beneficially the bankrupt’s at the time of the disposition, the payment would be of no effect as against the trustee in bankruptcy. The mere right in the lender to restrain the misuse of the money lent would not appear to prevent the money from forming part of the bankrupt’s estate. Though the payment was one the bankrupt was entitled to make, this is irrelevant to the operation of the doctrine of relation back. Admittedly, any money recovered would be held on trust for the lender, but this would be the equivalent of funds recovered by a liquidator accruing to the benefit of a security holder.22

(iii) Set Off As will be recalled, in Barclays Bank v Quistclose the bank sought to set off the no 4 ordinary dividend share account against Rolls Razor’s overdraft. The bank only attempted to exercise its right of set off in relation to this account after Rolls Razor had gone into winding up. It was attempting to rely upon its statutory right of insolvency set off.23 At this point, there was no mutuality between the money owed to the bank under the overdraft and the money owed to Rolls Razor in the share account. The share account was held on trust for the lender and was not beneficially Rolls Razor’s. It was therefore not available for set off. If the bank had had no notice of the existence of the trust it might have been able to avail itself of the defence of bona fide purchase but as they were expressly told the purpose and source of the deposit this was unarguable.24 The bank’s decision not to attempt to combine the share account with other accounts prior to winding up was the correct one. Outside insolvency, a bank has the right to combine its customer’s accounts into a single balance. However, this right to combine accounts cannot be exercised where an account has been separated out by agreement,25 as was the case in Quistclose. All of the proposed models can therefore explain the inability of Barclays Bank to set off the no 4 ordinary share dividend account. 21 22 23 24 25

Bankruptcy Act 1883, s 49; Bankruptcy Act 1914, s 45. Mond v Hammond [2000] Ch 40. At that time, the Bankruptcy Act 1914, s 31. See now, Insolvency Rules 1986, r 4.90. Re Marwalt [1992] BCC 32, 38; Nesté Oy v Lloyd’s Bank plc [1983] 2 Lloyd’s Rep 658, 666. R Derham, Set Off, 3rd edn, (Oxford, 2003) 645.

Insolvency 157 Professor Chambers may, however, obtain support for his model of the Quistclose trust from a line of cases in which an obligation to account for money paid for a specific purpose was held to be unavailable for the purpose of set off.26 In re Pollitt, a solicitor was (rightly) concerned that his client was not creditworthy and demanded and received £15 in advance payment for future work. The work was not done and the client was declared bankrupt. The solicitor sought to set off the amount he was obliged to repay against the sum owed to him for earlier work. Set off was denied on the basis that money paid for a specific purpose was not available for set off. It may be objected, that money is always lent with a purpose in mind and that the only justification for denying set off is that the money provided for a specific purpose was held on trust so that there was no mutuality between the claims.27 The cases do not, however, use the terminology of the trust in concluding that set off is excluded.28 In National Westminster Bank v Halesowen 29 Lord Kilbrandon explained the cases as giving rise to a ‘quasi-trust . . . sufficient to destroy mutuality.’30 By contrast, Lord Simon explained the result in language very similar to that employed by Professor Chambers: Every payment of money, every contractual provision, is for a specific purpose in the ordinary sense of the words: something more is required to take the transaction out of the concept of ‘mutual dealings’. It was suggested . . . that the situation only arises when the transaction gives rise to a payment on which a quasi-trust is imposed. My only quarrel with this way of putting it is that quasi-anything gives uncertain guidance in the law. I would prefer to say that money is paid for a special or specific purpose so as to exclude mutuality of dealing . . . if the money is paid in such circumstances that it would be a misappropriation to use it for any other purpose than that for which it is paid.31

II : WHEN WILL QUISTCLOSE TRUSTS BE INVALIDATED UPON THE BORROWER ’ S INSOLVENT WINDING UP ?

(i) Preference A preference is an act of a company which has the effect of putting a creditor or guarantor ‘into a position which, in the event of the company going into insolvent liquidation, will be better than the position he would have been in if that

26 Re Pollitt [1893] 1 QB 455; re Mid-Kent Fruit Factory [1896] 1 Ch 567; re City Equitable Fire Insurance Co Ltd [1930] 2 Ch 293. 27 R Derham, above n 25, p 435. 28 Re City Equitable Fire Insurance Co Ltd [1930] 2 Ch 293, 314; cf [1930] 2 Ch 293, 303 (Maugham J). 29 [1972] AC 785. 30 Ibid p 821. 31 Ibid p 808.

158 Robert Stevens thing had not been done.’32 In England, the preference will not be open to attack unless the company giving the preference was influenced by a desire to prefer the person against whom recovery is sought.33 Only a preference made at a relevant time will count, viz, within six months of the commencement of the winding up or within two years where the defendant is a connected person.34 A declaration of a trust in favour of a creditor may be reversible as a preference. The reversal of preferential transactions reinforces the collective regime by reversing payments made in the twilight period before the onset of the insolvency proceeding. In re Kayford35 money paid by mail order customers in advance when ordering goods was put into a trust account for their benefit to be released to the company only on delivery of the goods. After the supplier went into insolvent winding up, the declaration of a trust was held not to be a preference. It is possible to argue that the result reached is correct as a matter of policy. Protecting a body of creditors who by their payments are swelling the assets of the company, in ignorance of the risk they are running and without the means to bargain for security, may be commendable. It seems unacceptable, however, that the decision as to which class of creditor is given preferential status should be determined by the choice of the directors of the insolvent company. Preferential status should only be determined by operation of law. Further, as the company had no contractual obligation to declare the trust, it is difficult to escape the conclusion that the declaration of the trust was a preference according to the wording of the leglisation, regardless of whether the result can be justified in policy terms.36 Megarry J’s claim that ‘one is concerned here with the question not of preferring creditors but of preventing those who pay money from becoming creditors, by making them beneficiaries under a trust’37 seems unpersuasive. The customers were clearly creditors, at least in the sense that the company was obliged to supply them with goods. The act of the company in declaring the trust was to put the customers in a better position than the other unsecured creditors. Megarry J’s claim that the result may have been different were the creditors trade creditors is inexplicable on the wording of the legislation. Even greater difficulty arises from the decision of Bingham J in Nesté Oy v Lloyds Bank plc.38 A shipping company agreed to pay its agent in advance for expenses incurred. The agent became insolvent and the company sought a declaration that funds paid for expenses not yet incurred were held on trust. A 32

Insolvency Act 1986, s 239(4). Insolvency Act 1986, s 239(5). Insolvency Act 1986, s 240(1)(a). 35 [1975] 1 WLR 279; cf re Chelsea Cloisters (1981) 41 P&CR 98; re Lewis’s of Leicester Ltd [1995] BCC 514. 36 At the time, the preference provisions were found in Companies Act 1948, ss 302, 320; W Goodhart and GH Jones, ‘The Infiltration of Equitable Doctrine into English Commercial Law’ (1980) 43 MLR 489, 496–8. 37 [1975] 1 WLR 279, 281; cf Westdeutsche Landesbank Girozentrale v Islington London Borough Council [1996] AC 669, 716, (Lord Browne-Wilkinson). 38 [1983] 2 Lloyd’s Rep 658. 33 34

Insolvency 159 Quistclose trust was unarguable, as the sums were not paid for a specific purpose.39 Five of the six payments were said by Bingham J not to be held on trust. However, the sixth payment was caught by a constructive trust in favour of the company, on the ground that it was received after the agent had decided to stop trading. If the agents themselves had declared this payment to be held on trust it is submitted that this would have been a preference. Once this is accepted, it seems strange that the court itself should be declaring such a preferential trust to exist when one was never intended. The justification given, that it would be ‘sharp practice’ or ‘contrary to fairness’40 for the defendant to retain the fund, confuses the parties to the dispute. The competition to the sum in question is between the shipping company and the agent’s general body of creditors. The fairness as between them is not affected by the sharp practice of the agent company itself, which is commercially dead. It might be argued that, whilst it is objectionable to have the decision as to who obtains priority upon insolvency determined by a choice of the directors, no such objection may be made to the courts making such a policy choice. However, where the legislature has laid down rules as to who is deserving of preferential status in a bankruptcy or winding up, it seems unjustifiable for the courts to subvert them.41 The result in Nesté Oy v Lloyd’s Bank can possibly be justified on the basis that the payors were making a mistake which gave rise to a non-consensual trust (resulting or constructive) in their favour, although this is controversial.42 Clearly, the usual effect of a Quistclose trust is not to put the lender in a better position upon winding up than he would otherwise have been.43 On any view, the Quistclose trust is not a case where the borrower beneficially receives a payment which he then declares himself to hold on trust for the lender. The settlor of the trust is the lender. (Although, on the facts established in Quistclose this is problematic, as there was no direct evidence of what the settlor, Quistclose, intended).44 Where the purpose fails, therefore, there is no objection on the grounds of a preference to the lender enforcing the trust. It is usually argued that the beneficial interest in the money cannot have vested in the shareholders prior to Rolls Razor’s winding up because, if it did, there would have been no failure of the purpose for which the money was lent.45 The

39

Ibid p 665. Ibid p 666. 41 Re Polly Peck International plc (in administration) (No 2) [1998] 3 All ER 812. 42 Chase Manhattan Bank NA Ltd v Israel-British Bank (London) Ltd [1981] Ch 105; cf In re Dow Corning Corporation (1996) 192 Bankruptcy R 428. 43 Cf Carreras Rothmans Ltd v Freeman Mathews Treasure Ltd [1985] Ch 207, discussed below, text to nn 61–6. 44 See the discussion by Swadling in Chapter 2 of this volume. 45 W Goodhart and GH Jones, above n 36, p 494 n 28; PJ Millett QC, above n 4, p 275–76; J Payne, ‘Quistclose and Resulting Trusts’ in FD Rose (ed), Restitution and Equity (London, 2000) 77, 83–85; A Tettenborn, ‘Resulting Trusts and Insolvency’, in FD Rose (ed), Restitution and Insolvency (London, 2000) 156, 162. 40

160 Robert Stevens shareholders could all along have demanded that the money be paid to them. Lord Wilberforce’s46 view that there was a trust in favour of the creditors is therefore rejected. However, it was at least arguable that even if the beneficial interest had vested in the shareholders, the liquidator could have stopped payment to them, on the ground that such payment would have been a preferential transaction. It is usually, if not always, the case that the purpose for which the money is lent under a Quistclose trust is the payment of other creditors of the borrower in order to allow the borrower to fend off bankruptcy or winding up.47 Where that purpose is carried out, are the creditors who are paid preferred? The transfer by a trustee of trust assets to a beneficiary cannot, in itself, be a preference. As the trust would be recognised upon winding up, the effect of the transfer is not to place the beneficiary in a better position than he would have been in the trustee’s winding up. However, when considered in its entirety, the transaction involved in the typical Quistclose trust does prefer those creditors who are paid. Take the following two examples: Transaction 1: B Ltd owes C £100. B Ltd draws a cheque in favour of C on its overdrawn account with A Bank. C is paid. B Ltd goes into insolvent winding up, Transaction 2: D Ltd owes E £100. F Bank lends D Ltd £100 under a Quistclose trust for the purpose of paying E. E is paid. D Ltd goes into insolvent winding up. When carried out, the effect of both transactions is the same: the original creditor is preferred and the equivalent sum is now owed to the bank. It might be argued that the Quistclose situation is different as the creditor prejudiced, the bank, has consented to the transfer. It is, however, difficult to see how this alters the result on the wording of the Act.48 Whilst the effect upon payment is to prefer the creditors paid, this may be said to be unobjectionable as all that happens is that one unsecured creditor (the lender) is substituted for another.49 Professor Goode has said that a preference only arises if the creditor is placed in a better position ‘at the expense of other creditors’.50 This is, however, a gloss on the wording of the statute. In James v Commonwealth Bank of Australia,51 one creditor paid off another. The liquidator of the debtor company attempted to reclaim the money so paid as a preference. One of the grounds for the decision that the payment was not preferential was that ‘what one has to do is to consider the situation of the creditors 46 47

[1970] AC 567, 580. For example, re Drucker [1902] 2 KB 237; re Watson (1912) 107 LT 783; re Hooley [1915] HBR

181. 48 49 50 51

Above, text to n 32. For example, re Rogers (1891) 8 Morr 243. RM Goode, above n 9, p 391. (1995) 13 ACLC 1604.

Insolvency 161 generally before the transaction, and then look at the situation afterwards and see whether other creditors, that is the general creditors, have been disadvantaged.’52 However, this case concerned a provision differently worded from the English legislation, which referred to a ‘preference . . . over other creditors’.53 The earlier English law on preferences had used the same wording,54 but this is no longer to be found in the modern law in the Insolvency Act 1986. The only way in which the general body of creditors would be prejudiced by the typical Quistclose transaction would be if the lender were to rank higher upon insolvency than those creditors who were paid off. Take the example of A, the sole director and shareholder of B Ltd, which has declared a large dividend in his favour, who enables the company to pay by lending the company the funds under a Quistclose trust. The transaction is fully performed and B Ltd goes into insolvent winding up. If permitted, this would enable A, in a risk free manner, to improve his position upon B Ltd’s winding up at the expense of the general body of creditors. Instead of having a claim to a dividend which would be deferred to the claims of the unsecured creditors55 and so give rise to no distribution, he ranks as an unsecured creditor and so may receive some payment. The observant reader will have noticed that this bears some resemblance to the facts of Quistclose itself. John Bloom was no longer the majority shareholder of Rolls Razor Ltd, but he was the largest single shareholder and many shares were held by his associates. If the transaction had been completed, its effect would have been to substitute one group of creditors, who would receive nothing in an insolvent winding up, for another, who would receive a dividend. This would have prejudiced other creditors. Even if preferential, the payment will only be capable of reversal if it was influenced by a desire to prefer. Sometimes it may be argued that it was not: the only desire is to rescue the company and prevent winding up. Perhaps surprisingly, the harder a creditor presses for payment, the less likely a payment to him is to be a reversible preference. English law does not, therefore, necessarily prevent the aggressive creditor from escaping the collective regime by obtaining payment before the commencement of the proceeding. The debtor’s desire will be to get the creditor off his back rather than prefer him. If the facts of Quistclose were to recur today and the dividend was paid, it would be arguable that Rolls Razor was influenced by a desire to prefer and that the liquidator could consequently recover the payments made. At the time of the transaction in Quistclose, however, a preferential transaction could only be reversed if it was made ‘with a view’56 to prefer. This was interpreted as requiring a dominant intention to prefer. The change in the language of the provision means that

52 53 54 55 56

Ibid p 1606 (Young J). Australian Companies Code, s 451, incorporating s 122 of the Bankruptcy Act 1966. Bankruptcy Act 1914, s 44. Insolvency Act 1986, s 74(2)(f); see above, Companies Act 1948 s 212. Bankruptcy Act 1914, s 44(1).

162 Robert Stevens the old authorities are no longer a useful guide.57 The current wording is both narrower and wider than the old, wider because the desire need be only one of the influencing factors and not the predominant one, narrower because it is possible to intend something without desiring it. I may intend to make a payment whilst not desiring to do so, eg if I am robbed at gun point. ‘Desire’ may also be contrasted with ‘purpose.’ If something is my purpose, I have some control over the bringing about of the result. If it is merely my desire, this need not be true. The Cork Committee, whose recommendations formed the basis of the modern law set out in the 1986 Insolvency Act, was divided on the issue whether to retain a requirement of a purposive element.58 Prior to the Bankruptcy Act 1869, English law had had no such requirement; it has never been required in the United States and is no longer required in Australia. In those jurisdictions which look at the effect of the transaction rather than the purpose behind it, Quistclose transactions may be more readily attacked. The only substantive justification for the retention of a purposive requirement in English law is the protection of an innocent and diligent creditor who is ignorant of the preferential nature of the payment. Where the money received has been innocently spent, the need for protection is clear. Unfortunately, the requirement that the debtor was influenced by a ‘desire to prefer’ is ill-suited to this goal. The creditor may be wholly unaware of the debtor’s motives in making the payment. Alternatively, the creditor may know that the transaction is preferential, not have spent it, but be allowed to keep it because the debtor did not have the requisite desire. In other examples of the recovery of misdirected funds, the law has adopted different and, it is submitted, better solutions for the protection of the innocent defendant. For example, it is sometimes required that the defendant be at fault (eg, knowing receipt) or that he has a defence where his position has changed since the time of the receipt of the money.59 If a state of mind is relevant at all, it should be the state of mind of the defendant upon receipt, not the state of mind of the commercially dead company. It is to be regretted that the minority view of the Cork Committee did not prevail.60 An example of the abuse of the Quistclose trust to prefer a particular class of creditors occurred in Carreras Rothmans Ltd v Freeman Mathews Treasure Ltd.61 A was a manufacturer of cigarettes. B placed the manufacturer’s advertisements. B acted as principal in the agreements and incurred substantial liabilities to media creditors. A then became obliged to reimburse B. B got into financial difficulties and A became concerned that B might fail, leaving the creditors unpaid. In this event, A foresaw that in the middle of a major campaign such creditors could compel payment by A even though A was not legally liable. 57

Re MC Bacon [1990] BCC 78. Sir Kenneth Cork, Insolvency Law and Practice, Report of the Review Committee (Cmnd 8558, 1982) 285 para 1256. 59 Lipkin Gorman v Karpnale Ltd [1991] 2 AC 548. 60 PJ Millett QC was a member of the Cork Committee. His view is unknown. 61 [1985] Ch 207. 58

Insolvency 163 Accordingly, at A’s suggestion, B opened a special account at its bank into which A promised to pay the sums it owed each month. B agreed that the moneys paid in should be used to pay the media creditors and for no other purpose. B went into insolvent liquidation with unsecured creditors unpaid and money present in the designated account. A paid the media creditors and took an assignment from them of their rights against B. A did not claim that the money was held on trust for them in their own right. This would have been of no use, for it would have meant that once they were repaid they would once again be indebted to B for the same sum. Further, A did not claim as the assignee of the media creditors’ rights, as it was thought that this could be characterised as a charge on book debts and consequently void for want of registration.62 Rather, A successfully claimed in their capacity of lender that B, in insolvent winding up, could be compelled to pay the media creditors. If A’s right to compel performance was purely personal, it should not have been given effect in the winding up.63 To do so would be to give a personal claim a priority it does not possess. It is arguable that a negative right to restrain the improper application of a fund gives rise to a proprietary right which survives winding up.64 But there is no authority for the proposition that the right to compel performance in favour of a third party is proprietary and survives winding up. Further, the effect of B’s agreeing that A’s payment of what it owed was not to be at the free disposition of B but was to be used solely for the purpose of paying off the media creditors, was to prefer those creditors.65 Instead of a neutral transaction where one creditor is substituted for another, the media creditors were paid off using an ‘asset’ of B: the claims for reimbursement of earlier payments that B had against A. The general body of creditors were therefore prejudiced by the arrangement. It is strange that the court put its seal of approval on this transaction by compelling its completion in the winding up of B. Trust money being paid over to a beneficiary is not preferential. Declaring that an asset is to be held for the benefit of a particular class of creditors is. The most that can be said in favour of Carreras Rothmans Ltd v Freeman Mathews Treasure Ltd is that it is a testament to the advocacy skills of leading counsel for the lender.66

62 Companies Act 1948, s 495; see now Companies Act 1985, s 395; PJ Millett QC, above n 4, p 280, (although the plaintiffs succeeded on this alternative basis). 63 MacJordan v Brookmount [1992] BCLC 350. 64 See the discussion by Chambers in chapter 5 of this volume. 65 Arguably it was the lender who was preferred as, at the end of the day, the media creditors would have been paid anyway and the lender escaped having to pay twice. 66 PJ Millett QC.

164 Robert Stevens (ii) Fraudulent Trading Fraudulent trading is a criminal offence, whether or not the company is in winding up.67 It gives rise to civil liability if in the course of winding up of a company it appears that any business of the company has been carried on with intent to defraud creditors of the company. The court may on the application of the liquidator declare that any persons knowingly parties to the fraudulent trading are liable to make such contributions (if any) to the company’s assets as the court thinks proper.68 Liability is not confined to the directors or management of the company. If a loan is made under a Quistclose trust with the intent to create a false appearance of solvency, with the effect that others continue to extend credit, the lender will also run the risk of liability for fraudulent trading. That creating the impression of solvency may be the reason for choosing this method of financing is demonstrated by the alternative financing options available. Instead of providing the money under a Quistclose trust, the lender could pay off the creditors directly and take an assignment from them of their claims against the borrower. The disadvantage of this approach is that it would disclose the source of the funds and, consequently, the borrower’s shaky financial state. That is why the Quistclose trust was employed in Carreras Rothmans Ltd v Freeman Mathews Treasure Ltd.69 Creditors will not be defrauded where all that is being disguised is a cash flow crisis in an otherwise sound company. However, this will not always be the case. The whole purpose of the loan in Quistclose itself was to create a false appearance of solvency. By July 1964, Rolls Razor Ltd was hopelessly balance sheet insolvent.70 If the payment had been made, the directors of Quistclose Investments Ltd and Rolls Razor, and even the bank itself, ran the risk of being found liable for fraudulent trading. The loan from Sir Isaac Wolfson which was in prospect might have postponed the day of reckoning, but it would not have improved Rolls Razor’s balance sheet position. If the dividend had not been paid, Rolls Razor’s parlous state would have become apparent and it would have collapsed. This explains why Sir Isaac Wolfson stipulated as a condition of any loan that the dividend first be paid. This was not an attempt to maintain confidence in an inherently sound company with a cash flow problem. Rather, it was an attempt to prop up a company which was ‘rotten through and through.’71 As the dividend was never paid, no creditors were ever deceived and no fraud took place. The only creditor aware of the loan, the bank, knew of its purpose and knew of the trust arrangement. It is unknown whether the circumstances 67 68 69 70 71

Companies Act 1985, s 458. Insolvency Act 1986, s 213. PJ Millett QC, above n 4, p 280. See pp 4–5 of this volume. Benson, Accounting for Life (London, 1989) 143.

Insolvency 165 surrounding the Quistclose transaction formed part of the prosecution’s case in the trial of the directors of Rolls Razor in 1969. If the same events were to occur today, the directors of Rolls Razor would also run the risk of liability for wrongful trading. Wrongful trading was introduced as a result of the recommendations of the Cork Committee. Where a director knows or ought to know that there is no reasonable prospect of the company avoiding insolvent liquidation he must show that he has taken every step which he ought to have taken with a view to minimising loss to creditors.72 If this provision had been in force in the early 1960s, it might have helped concentrate the minds of the directors of Rolls Razor at an earlier stage on the question whether the company should be put into liquidation.

(iii) Illegality? When bankruptcy is pending, the transfer of an asset by the debtor to a third party in an attempt to hide the asset from the trustee in bankruptcy is an illegal transaction.73 Similarly, it is suggested that it is unlawful to transfer an asset on trust to a party over whom the shadow of insolvency has fallen in order to create a misleading impression of balance sheet solvency. It would have been at least arguable by the liquidator of Rolls Razor that the transfer was for an illegal purpose, and that Quistclose Investments Ltd needed to rely upon that illegal purpose as evidence of the trust. If established, the trust may then have failed for illegality.74

(iv) A Security Interest? It cannot be a sufficient objection to the Quistclose trust that it is a ‘hidden’ proprietary right. If I lend you my Rolls Royce for the weekend, my title is hidden to any creditor foolish enough to lend you money on the basis of the expensive car you are driving. It has been suggested, however, that the Quistclose trust is in substance a security right.75 But even if it was to be characterised as a charge, it would not be a registrable charge in England today. Though charges on book debts are registrable, a bank account is not seen as a book debt.76 The trust over the bank account would not therefore be registrable. But if English law were to move to a more rational system of registration, would the Quistclose trust then 72

Insolvency Act 1986, s 214. Tinsley v Milligan [1994] 1 AC 340; Tribe v Tribe [1996] Ch 107. 74 Tinsley v Milligan [1994] 1 AC 340. 75 MJ Bridge, above n 4, p 000. In Twinsectra itself, Lord Millett said that a Quistclose trust was ‘akin to a retention of title clause’: [2002] 2 AC 164, 187. 76 Northern Bank Ltd v Ross [1990] BCC 883; re BCCI (No 8) [1998] AC 214, 227, (Lord Hoffmann). 73

166 Robert Stevens be seen as functionally a charge and void unless registered? In those jurisdictions (eg, Canada) which have adopted a version of Article 9 of the Uniform Commercial Code, is it already registrable?77 The labelling of an interest as a trust clearly does not prevent it from being a charge.78 The Law Commission in their Consultation Paper, Registration of Security Interests: Company Charges and Property other than Land,79 state, without argument, but it is submitted correctly, that a Quistclose trust is not the functional equivalent of a charge.80 Where the right asserted is ‘that is mine to the extent that I remain unpaid’ this is functionally a security right. A retention of title clause is, therefore, functionally a security right as the title to the goods supplied will be lost when the purchase price is paid. If Lord Millett’s characterisation of the Quistclose trust is adopted, then it may be doubted whether the trust operates as a security right properly so called. A simple, if childish, example may illustrate the point: A hands over a box of chocolates to B, saying ‘These chocolates are mine. If, however, you choose to eat some or all of them, you must pay me 10 pence per chocolate.’ B agrees.

This is essentially Lord Millett’s model for the Quistclose trust. It is not possible, of course, to give possession of a bank account. Consequently, the borrower is a trustee rather than a bailee of the account. At the moment A hands over the chocolate, B owes A nothing. If he eats three chocolates he will owe A 30 pence; the remainder of the chocolates will still be A’s. A’s interest in the chocolates remaining in B’s hands does not secure B’s performance. A’s interest in the chocolates remaining is not defeasible upon B paying the sum he owes. The debt arises only as the chocolates are eaten. On Lord Millett’s model, a Quistclose trust operates in the same way. When the lender transfers the money to the borrower, the borrower does not owe the lender this sum. Only if he uses the sum for the designated purpose does the obligation arise. The lender’s assertion is not ‘that is mine to the extent that I remain unpaid’ but rather ‘that is mine to the extent that you have not used it for the designated purpose.’ The debt arises as the trust assets are dissipated. The trust is not substantively a charge on the account.

III : THE FUTURE

Following the passing of the Enterprise Act 2002 the holders of qualifying floating charges created after its enactment will lose the power to appoint 77

MJ Bridge, above n 4, p 361. Re Bond Worth [1980] Ch 228. 79 Law Commission (CP 164), Registration of Security Interests: Company Charges and Property other than Land (London, 2002). 80 Carreras Rothmans Ltd v Freeman Mathews Treasure Ltd [1985] Ch 207, 227, (Peter Gibson J). 78

Insolvency 167 administrative receivers.81 The effect will be to deprive the floating charge holder of control over the timing of enforcement. The floating charge will consequently become a less attractive form of security. This will provide further incentives for lenders to look to other means to protect themselves in a debtor’s insolvency. On Lord Millett’s model of the Quistclose trust, there appears to be no limit to the purposes for which the money may be advanced. So, money could be advanced to be held on trust for the lender, with the borrower granted the power to use the money in the ordinary course of business. To the extent that the money advanced remains unspent, the lender will be secure. Unlike a fixed charge, it would not be necessary that the subject matter of the ‘security’ be replaced if it were dissipated. Unlike a floating charge, the trust would not be registrable, would be easily enforceable and would not be deferred to preferential creditors. There appears to be no reason why such a trust device could not be coupled with a charge, with the debt arising upon dissipation of the trust assets being secured by a charge. By contrast, on Professor Chambers’ model, the money advanced must be tied to a specific purpose which would enable the lender to restrain its misapplication. Whilst the purpose could be very wide, it could not be ‘anything the borrower wants to do with the money.’ How widespread the use of the Quistclose trust remains or becomes may, therefore, turn upon the construction of its operation adopted.

81

Insolvency Act 1986, s 72A, inserted by the Enterprise Act 2002, s 250.

9

Scotland GEORGE GRETTON

systems,1 Scots law does not have ‘equity’. Like other mixed systems, it does have the trust.2 So: trusts without equity.3 The Scottish express trust is similar in its practical effect to the English express trust, though the underlying software is different, a difference inevitable given the absence of equity. But outside the field of the express trust everything is different. English influence on Scottish trust law was at its strongest in the late nineteenth and early twentieth centuries. Had Quistclose4 happened then, perhaps it would have been received, as many other English trust decisions were in that period. But Quistclose was not decided then, and has not been received. As far as I know, it has only once been cited in a Scottish case, and even then the citation was by counsel, not by the court.5 And academic writers have ignored Quistclose.6 So, no Quistclose trusts in Scots law? Yes, that seems to be the case.

L

IKE OTHER MIXED

I : THE LAW OF OBLIGATIONS

The Scottish and English law of obligations have, over time, tended to converge. Whether the civilianisation of English, or the Anglicisation of Scottish, law has played the larger role is an intriguing question that cannot be addressed here. Despite the convergence, differences remain, and these differences—significant today, more significant yesterday—help to explain, at least in part, why the 1 For the concept of a mixed system - a mix of the common law and civil law traditions - see VV Palmer (ed), Mixed Jurisdictions Worldwide: the Third Legal Family (Cambridge, 2001). 2 See JM Milo and JM Smits (eds), Trusts in Mixed Legal Systems (Nijmegen, 2001). 3 The theme of G Gretton, ‘Trusts without Equity’ (2000) 49 ICLQ 599. 4 Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567. 5 Mercedes-Benz Finance Ltd v Clydesdale Bank plc 1997 SLT 905, 1996 SCLR 1005, [1998] Lloyd’s Rep Banking 249, an Outer House (ie, first instance) decision. 6 The standard text, WA Wilson and AGM Duncan, Trusts Trustees and Executors, 2nd edn (Edinburgh, 1995) mentions the case (as does the 1975 edition), but only once, in a footnote, and prefixed by the words ‘see also’. Other texts do not mention Quistclose at all: K McK Norrie and EM Scobbie, Trusts (Edinburgh, 1991); RRM Paisley, Trusts (Edinburgh, 1999); J Chalmers, Trusts (Edinburgh, 2002). Nor do the insolvency texts, such as DC Coull, The Law of Bankruptcy in Scotland (Edinburgh, 1989); JB St Clair and JE Drummond Young, The Law of Corporate Insolvency in Scotland, 2nd edn (Edinburgh, 1992); WW McBryde, Bankruptcy, 2nd edn (Edinburgh, 1995); D McK Skene, Insolvency Law in Scotland (Edinburgh, 1999).

170 George Gretton English doctrines of constructive and resulting trusts gained little foothold in Scotland. Consider some of the differences: no doctrine of consideration, but instead a commitment to the principle of pacta sunt servanda; no strict doctrine of contractual privity, but instead a recognition of the jus quaesitum tertio;7 and a civilian inheritance of unjustified enrichment law, including both the condictio indebiti and the condictio causa data causa non secuta.8 The implications are not difficult to discern. When faced by a problem the Scots lawyer traditionally has had a better chance than the English lawyer of finding a workable solution in the toolbox marked ‘obligations’. There has thus been less need to hunt about in other boxes. The ‘proprietary rights’ box contains tools which work as between the parties but which also have third party effects. That, after all, is the nature of proprietary rights (or, to put the kilt on them, real rights). The ‘obligations’ box contains tools that, on the whole, do not have third party effect. The historic nature of the Scottish ‘obligations’ box may thus explain why Scots law tends to produce results less favourable, in the context of insolvency, than English law— less favourable, that is, to the claimant. For, by the same token, the results in Scotland tend to be more favourable to other parties, namely the ordinary unsecured creditors. Or one could express the same thought the other way round: the historic nature of the English ‘obligations’ box meant that in many types of case solutions could be found, if at all, only in other boxes, with all the inevitable consequences, such as third party effect. Of course, in Quistclose, the reason why the House of Lords found a trust was not the absence of a purely personal remedy. After all, Quistclose Investments Ltd was the creditor in a contract of loan of money, and English law is as willing as any other legal system to recognise and enforce such contracts. But legal systems develop their own ways of thinking. When Scots lawyers have problems about a contract of loan of money, they reach into the ‘obligations’ box and are unlikely to think about other boxes. The fact that a loan is made for a purpose is no puzzle: the purpose is a term of the loan contract. What could be less problematic? English lawyers react differently. Already having the habit of looking in the ‘proprietary rights’ box, they are willing to do so even for something as apparently purely contractual as the loan in Quistclose. In general, personal rights are not insolvency-proof. There can be exceptions. If a jus quaesitum tertio is created, that can sometimes be insolvency-proof, at least in a certain limited sense. It depends on who becomes insolvent. Let Alan owe money to Colin, and let Alan give the money to Beth for onward payment

7 Or, in spoken language, a JQT. But the importance of the JQT should not be exaggerated, because the courts have in practice been reluctant to apply the doctrine except in clear cases. For examples of such reluctance, see Baird v Murray’s Crs (1744) Mor 7737 and National Bank of Scotland v MacQueen (1881) 18 SLR 683. At the risk of making this piece look like a course-pack, these and a few other cases will be found at the end of this chapter. 8 Of course, English law has its own tradition of enrichment law.

Scotland 171 to Colin. Before she does so, Alan becomes bankrupt. If the Alan/Beth agreement confers a jus quaesitum tertio on Colin, then he is safe, for Beth must pay him, and not Alan’s trustee in bankruptcy.9 This is rather like a trust, with Beth as the trustee. But it is not a trust. Suppose that Beth becomes bankrupt while she has the money, Alan also being bankrupt. If she held as trustee, Colin would be safe.10 But if Colin’s right against her is jus quaesitum tertio, then that is simply a personal right and gives no priority. So a jus quaesitum tertio does not work like a Quistclose trust. Had the facts of Quistclose happened in Scotland, might an argument have been developed that the arrangement between Rolls Razor and Barclays Bank was sufficient to constitute a jus quaesitum tertio in favour of Quistclose Investments Ltd, binding Barclays? (It should be noted that such an argument would not need, as its basis, a segregated fund. The jus quaesitum tertio is part of the law of obligations, and funds have nothing to do with it.) Such an argument would surely have failed: it is difficult to see anything in the reported facts from which one could discover an agreement by Barclays that, if the purpose of paying the dividend failed, the money would be paid by Barclays to Quistclose Investments Ltd.

II : THE OBSCURE DOCTRINE OF SPECIAL APPROPRIATION

Before looking at the law of trusts, it is necessary to mention the doctrine, or alleged doctrine, of ‘special appropriation’. This doctrine asserts that assets which are ‘appropriated’ for a ‘special purpose’ are protected from creditors.11 That sounds like Quistclose: a Quistclose loan is appropriated for special purposes and is thus protected from the creditors of the borrower. But, in fact, the Scottish doctrine is probably illusory. The main source is a late nineteenth century classic, Stewart on Diligence.12 Indeed, outside Stewart’s pages, the doctrine never had much more than an anaemic existence. Little trace of the doctrine can be found today.13 Professor Wilson observed, in his laconic style, that ‘few of the cases usually cited on this matter are satisfactory.’14 I would go further, and say not ‘few’ but ‘none’. The cases seem to be explicable in terms of better, and more orthodox, doctrines. 9

In Scots law called the trustee in sequestration. For sequestration this rule is statutory: Bankruptcy (Scotland) Act s 33(1)(b). For liquidation, and for what is curiously known as ‘diligence’ (ie, forced execution) the rule is simply one of common law. 11 The doctrine is generally traced back to Souper v Smith 1756 Mor 744. 12 JG Stewart, A Treatise on the Law of Diligence (Edinburgh, 1898). 13 It can be found in the last edition of Goudy on Bankruptcy: H Goudy, TA Fyfe (ed), A Treatise on the Law of Bankruptcy in Scotland, 4th edn (Edinburgh, 1914). I cannot see it in later books on bankruptcy. In G Maher and D Cusine, Law and Practice of Diligence (Edinburgh, 1990) it gets three sentences (at p 123). The Laws of Scotland (Edinburgh, 1992) vol 8, from my own hand, has a more extensive treatment, but I would not today handle the material as I did then. 14 WA Wilson, The Scottish Law of Debt, 2nd edn (Edinburgh, 1991) 194. 10

172 George Gretton Some of the cases said to illustrate this doctrine concern corporeal moveables (roughly, chattels) and are really just cases where ownership had already passed from the debtor, so that the bankruptcy did not catch the property in question.15 No doctrine of ‘special appropriation’ is needed to explain such a result. The more interesting cases, for present purposes, of ‘special appropriation’ are those where Tom gives funds to Dick to be paid to Harry, and Tom becomes bankrupt before Harry receives the money, or where creditors of Tom arrest16 in the hands of Dick while the money is still in Dick’s hands. Stewart himself offers the following analysis: ‘Where . . . funds have been destined to a particular purpose they cannot be arrested by the depositor’s creditors, so as to defeat the purpose of the appropriation. The effect of the appropriation is to vest the creditor for whose benefit the deposit or consignation is made the jus quaesitum.’17 Stewart himself thus gives the true theory. The third party acquires a jus quaesitum tertio against the fundholder. The result is explicable, but there is no need to have recourse to a separate doctrine of ‘special appropriation’. Lastly, some cases to which the label of ‘special appropriation’ has been attached have been decided on the basis of the law of compensatio (set-off). Alan owes money to Beth and Beth owes money to Alan. If Alan is sequestrated, can Beth compensate (set off) the debts? The answer is: usually, but not always. One of the situations where compensatio is excluded is where one of the debts is a ‘deposit’. This exception was received from Roman law,18 by the second half of the seventeenth century, if not before.19 What precisely was meant by ‘deposit’ is perhaps unclear, but the Roman doctrine, as understood, or misunderstood, has been applied in practice. A good example is Middlemas v Gibson,20 where money was deposited with a solicitor for certain purposes, which were never fulfilled. The depositor becoming bankrupt, the solicitor’s claim to deduct outstanding fees was disallowed. Another example is Mycroft, Petitioner,21 a somewhat similar case, though involving an accountant rather than a solicitor. In both of these cases the term ‘special appropriation’ was used: the term in this context signals the doctrine into which Codex 4, 34, 11 has mutated. In this form, the doctrine is an interesting one, but distant from Quistclose: for instance, the doctrine gives no assurance that the money so protected from set-off will be used by the liquidator or trustee in sequestration for any particular purpose.

15 16 17 18 19 20 21

See Stewart, above n 12, p 84 et seq. Similar to garnishment in England. Stewart, above n 12, p 82. Codex 4, 34, 11. James Dalrymple, Lord Stair, Institutions of the Law of Scotland, 1, 18, 6. 1910 SC 577. 1983 SLT 342.

Scotland 173 III : TRUSTS : TAXONOMY

Now for trusts. The first issue is taxonomy. Scots law has not yet thought through the ways in which a trust comes into existence: such terms as ‘express’ and ‘implied’ and ‘resulting’ and ‘constructive’ and ‘arising by operation of law’ are often encountered, but little has been done to fix terms and demarcate boundaries. In short, the taxonomy of Scottish trust law has been neglected. Here is an attempt at a taxonomy, but any such attempt can only be tentative.22 Scots law took the expression ‘resulting trust’ from English law. But though the term is the same, the meaning is not. A resulting trust is not a sort of trust. It is an implied-in-law term of all express trusts and some express public trusts. It makes the truster23 the implied long-stop beneficiary of such trusts. With resulting trusts out of the way, one way of arranging the field would be by a threefold taxonomy of a type that is occasionally used in civilian systems: (a) express, (b) tacit (implied), and (c) judicial. ‘Judicial’ means judicially created, either on the basis of statutory or common law powers. Tacit (implied) trusts can be divided into (a) implied in fact and (b) implied in law. The latter are called ‘trusts arising by operation of law’, and if they arise by force of common law, rather than by statutory provision, they can be called ‘constructive trusts’. Trusts are implied in fact when the parties can fairly be considered to have intended to create a trust, even though they did not use the language of trust. Trusts are implied in law when the law imposes a trust without reference to the wills of the parties. The reference to judicial trusts is not a reference to the ‘remedial constructive trust’, which is unknown in Scots law. The only significant example of a judicial trust is sequestration, where a court vests a bankrupt’s estate in the trustee in sequestration. Trusts Express

Tacit (implied)

Implied in fact

Implied in law

Implied by common law25 (constructive trust) 22

Judicial24

Implied by statute26

In writing this section I have benefited from suggestions by Professor Kenneth GC Reid. Equivalent to the English settlor. 24 For instance sequestration (bankruptcy) is a judicial trust. That it rests on statutory powers does not make it an implied-by-law trust. 25 Using this term in its Scottish sense. 26 For instance, s 27 of the Conveyancing and Feudal Reform (Scotland) Act 1970, providing that the proceeds of sale by a standard security holder are held in trust. The fact that the statute is express in its terms does not mean that such trusts are express trusts. However, there is a case for saying that statutory trusts are a fourth kind of trust, alongside express, tacit and judicial trusts. 23

174 George Gretton The boundary between implied-in-fact and implied-in-law trusts is inevitably fuzzy in practice. In the Heaven of Concepts, the distinction between the willed and the unwilled is clear. But in the sublunary world, it is usually rather unclear. Indeed, some of the other boundaries likewise can in practice be fuzzy, such as that between express trusts and implied-in-fact trusts. But the concept of the tacit is not unproblematic, and it might be better to adopt, as the summa divisio, another civilian approach, the distinction between the voluntary (ex voluntate) and the legal (ex lege). Express trusts and impliedin-fact trusts would be sub-types of the former, and implied-in-law trusts would fall on the legal side. Thus: Trusts Voluntary

Legal

Express

Implied in fact

Implied by common law (constructive trust)

Implied by statute

Judicial

Which of these taxonomies is preferable, and, indeed, whether some other taxonomy might not be better than either, is arguable. Scots law has not yet done the work. The first taxonomy has at least one advantage for present purposes: it throws together the implied trusts into one heap. That is useful, because Scots law seems to dislike all implied trusts, of whatever kind.

IV : IMPLIED TRUSTS : THE PREDOMINANT SCOTTISH ATTITUDE

Scots law is usually—not invariably—reluctant to admit implied trusts. ‘I confess an almost instinctive abhorrence of the notion of constructive trust’, said one judge in 1997, though at the same time admitting that it did have a toehold in the law.27 ‘A concept [ie constructive trust] not familiar in Scots law’, said another judge in 1998.28 In another case, the question arose whether a pension fund of a public body was held on trust.29 There had never been anything of the nature of a trust deed. It might be supposed that this would be a fairly strong case for an implied-in-fact trust. Nothing of the sort: it was held that there was no trust at all. Even implied-by-statute trusts seem to have less appeal north of the border. Here is a curious example. The Estate Agents Act 1979 applies in Scotland as 27 28 29

Mortgage Corporation v Mitchells Roberton 1997 SLT 1305, 1310, (per Lord Johnston). Bank of Scotland v Macleod Paxton Woolard & Co 1998 SLT 158, 274, (per Lord Coulsfield.) Bain Petitioner 2002 SLT 1112.

Scotland 175 well as in England. Section 13(1) applies to the whole of the United Kingdom other than Scotland and says: ‘It is hereby declared that30 clients’ money received by any person in the course of estate agency work . . . is held by him on trust. . . .’ Section 13(2) applies to Scotland and is identical, except that the words ‘on trust’ are replaced by ‘as agent’.31 Implied trusts may be disliked, but they do have at least a shadowy existence at the margins of the law. By the end of the nineteenth century, solicitors had come to be regarded as trustees of client moneys.32 Whether the constructive trust exists outside that one situation is uncertain. Whilst several reported cases have been claimed as examples of constructive trust, and whilst some cases have actually adopted that terminology, it is open to doubt whether any of them have been genuine cases of constructive trust.33 But whilst a reluctance to admit implied trusts is the predominant attitude, it is not universal. It is certainly possible to cite cases where the approach was very different.34

V : WHY THE RELUCTANCE ?

Why the reluctance? The question perhaps presupposes that trust-based responses are normal. It all depends on your legal presuppositions, and here the ‘why?’ question can be met by the simple response: ‘why not?’ Indeed, reluctance to admit implied trusts seems to be the norm in the mixed legal systems. But if the ‘why?’ question is nevertheless to be addressed, the answer must be mainly twofold, but with a third reason also peeking in. The first reason lies in the different history of the law of obligations. The second lies in different views as to insolvency policy. The third reason, standing at the margins but still deserving mention, is a feeling that trusts and trustees on the one hand, and loans and borrowers on the other hand, are different beasts, which cannot readily be made to mate.

30

These first five words are odd. Was it felt that a trust needed a declaration? Which raises the question whether an agent who has money for his principal holds as trustee. Presumably the parliamentary draftsperson thought not, for otherwise the difference in wording would be rather pointless. The issue is difficult and unsettled. 32 Macadam v Martin’s Trustee (1872) 11 M 33; Jopp v Johnston’s Trustee (1904) 6 F 1028. 33 Sutman International v Herbage, 2 August 1991, noted at 1991 GWD 30–1772, is arguably the only decision where someone other than a solicitor has truly been held to be a constructive trustee. See further, G Gretton, ‘Constructive Trusts’ [1997] Edinburgh Law Review 281 and 408. 34 Such as Tay Valley Joinery Ltd v CF Financial Services Ltd 1987 SLT 207 and Style Financial Services Ltd v Bank of Scotland 1996 SLT 421 and 1998 SLT 851. On Tay Valley, see KGC Reid at 1987 SLT (News) 113. 31

176 George Gretton The first reason The first reason for the reluctance to admit implied trusts has already been discussed. Issues that could not readily be handled within the four corners of the English law of obligations—at any rate if one stresses the word ‘law’—could be handled by the Scottish law of obligations. The structural pressure that in English law has tended to give rise to implied trusts has not existed in Scotland. That pressure is the law/equity interface. Where law is insufficient, equity intervenes, and equity begets trusts. In Scotland, everything is ‘law’. Trusts themselves belong to ‘law’. Property law is all ‘law’ and no ‘equity’. In England that would be unacceptable: it would lead to unconscionable results. But if justice must be within the ‘law’, then the law must be just, and Scots law is not unjust. So this first reason is mainly a negative one: an absence of a reason for implied trusts, rather than the presence of a reason against implied trusts.

The second reason The second reason for the reluctance to admit implied trusts is that, underlying specific differences in rules, there are differences in legal culture—even in policy ideals. That the two systems of private law sometimes have important differences at the level of basic policy has attracted little attention. Such differences often go unnoticed because they go so deep that they tend to be unspoken: they form the unspoken presuppositions that make the fabric of a legal culture, a fabric often (some would say always) more important than specific rules themselves. I will quote from Lord Wilberforce’s speech in Quistclose and then juxtapose it with another speech in another House of Lords’ case, this time coming from Scotland. Never mind the words: listen to the music. That is to say, listen out for the presuppositions, for what is ‘obvious’. Legal culture is to be found in the ‘obvious’. In these two speeches, we are in the borderland between legal rules and legal cultures. First, Lord Wilberforce in Quistclose: The second, and main, argument for the appellant was of a more sophisticated character. The transaction, it was said, between the respondents and Rolls Razor Ltd, was one of loan, giving rise to a legal action of debt. This necessarily excluded the implication of any trust, enforceable in equity, in the respondents’ favour: a transaction may attract one action or the other, it could not admit of both. My Lords, I must say that I find this argument unattractive. Let us see what it involves. It means that the law does not permit an arrangement to be made by which one person agrees to advance money to another, on terms that the money is to be used exclusively to pay debts of the latter, and if, and so far as not so used, rather than becoming a general asset of the latter available to his creditors at large, is to be returned to the lender. The lender is obliged, in such a case, because he is a lender, to accept,

Scotland 177 whatever the mutual wishes of lender and borrower may be, that the money he was willing to make available for one purpose only shall be freely available for others of the borrower’s creditors for whom he has not the slightest desire to provide. I should be surprised if an argument of this kind—so conceptualist35 in character— had ever been accepted. In truth it has plainly been rejected by the eminent judges who from 1819 onwards have permitted arrangements of this type to be enforced, and have approved them as being for the benefit of creditors and all concerned. There is surely no difficulty in recognising the co-existence in one transaction of legal and equitable rights and remedies: when the money is advanced, the lender acquires an equitable right to see that it is applied for the primary designated purpose . . .: when the purpose has been carried out (ie, the debt paid) the lender has his remedy against the borrower in debt: if the primary purpose cannot be carried out, the question arises if a secondary purpose (ie, repayment to the lender) has been agreed, expressly or by implication: if it has, the remedies of equity may be invoked to give effect to it, if it has not (and the money is intended to fall within the general fund of the debtor’s assets) then there is the appropriate remedy for recovery of a loan. I can appreciate no reason why the flexible interplay of law and equity cannot let in these practical arrangements, and other variations if desired: it would be to the discredit of both systems if they could not.36

Now for Lord Shaw of Dunfermline in a leading case from 1914, Bank of Scotland v Hutchison Main:37 The right of the bank . . . was a right resting upon nothing more than this, namely, an unfulfilled promise. And when one analyses the idea, that is the simple category under which we may presume that 99 per cent of every bankrupt’s obligations could be ranged.38 All his creditors, down to the humblest tradesmen, relied on his promise, expressed or implied, that he would pay for accommodation given, services rendered, or goods received. Upon what principle is one of these creditors to be preferred to another? The whole law of equitable39 distribution would be destroyed and the whole security for mercantile dealings would be much impaired it were open to an individual creditor to say: ‘I got no assignment of my debtor’s goods,40 either by delivery or by deed, but he promised to me that he would not part with certain of them except in my favour.’ After bankruptcy or liquidation, things still standing on that footing, all these nuda pacta disappear, and the one question which remains is: Was the property—whatever promises were made with regard to it before—was the property at the time of bankruptcy or liquidation in bonis of the debtor or not?41 35

This seems to be a derogatory adjective. [1970] AC 567, 581–82. 37 1914 SC 1. 38 The word ‘promise’ is evidently used here in a broad sense. 39 The word is not being used in the sense of English equity. 40 An odd expression. ‘Assignation’ is the Scottish form of the word, but, more to the point, only incorporeals can be assigned, whereas ‘goods’ in its narrow sense is limited to corporeals. In its broad sense, it means any asset, and it is this broad sense that Lord Shaw probably had in mind, especially given his use of the Latin equivalent in the phrase in bonis, the Latin word having the broad meaning. 41 And later he goes on to speak of ‘the well-settled principle that a contractual obligation with regard to property which has not effectually and actually brought about either a security upon it or a conveyance of it is not per se the foundation of a trust or of a declarator of trust.’ 36

178 George Gretton English and Scots law are divided not merely by this rule or that rule, but by basic perceptions. The sort of thing that to an English judge seems obviously wrong, so obviously that a remedy must be found, seems to a Scottish judge obviously right. The English judge recoils from a violation of the right of the innocent and suffering plaintiff: the Scottish judge recoils at a violation of the rights of innocent and suffering third parties. Detailed rules come later: first comes the soil, and then come the crops. Different soils, different crops: different legal cultures, different legal rules. Catching the difference in the net of words is not easy. One might observe that Scottish legal culture stresses the distinction between the real and the personal, between the absolute and the relative, between property and obligation. But that distinction is neither unknown nor unimportant in English law. One might say that in Scots law there is a numerus clausus of absolute rights. But is English law really otherwise? One might note that Scots law is serious about the publicity principle—the principle that the third-party effect of a right presupposes publicity of that right. But that principle also has a substantial degree of acceptance in English law, at least in recent times. Perhaps it is simply that such ideas, though they may be shared, are taken more seriously in one culture than the other. They certainly have a more prominent place in legal education. And there is another thing: insolvency law has always been regarded in Scotland as of central importance to private law. Here, Scottish legal culture differs not only from English legal culture but also from all other legal cultures of which I have any knowledge. No one enters the profession without having studied the subject. The result is that Scots lawyers (or at least the better ones) are at home in the Alice world of bankruptcy. They know the curious fact that whereas a right against a solvent debtor is a right against the debtor, a right against an insolvent debtor is not a right against the debtor but a right against the other creditors, the fellow victims. The point is obvious enough—to those who have been brought up to it. But it would be wrong to oversimplify. In questions of legal culture, shades of grey are common, blacks and whites rare. Perhaps no decision in the history of Scottish private law has so convulsed professional and academic opinion as Sharp v Thomson,42 where the House of Lords, reversing a unanimous Court of Session, held that a buyer who has paid the price and taken possession of land, and received a deed of conveyance, but who has not registered it, has nothing to fear from the subsequent receivership of the seller. The decision in substance, though not in form, says that the seller in such circumstances holds for the buyer on constructive trust. Most (but not all) Scottish commentators have condemned it. The Justice Minister issued a reference to the Scottish Law Commission. The Commission’s response was that Sharp be overruled by legislation.43 The Court of Session has been unen42

1995 SC 455, reversed 1997 SC 66. Discussion Paper on Sharp v Thomson (Scot Law Com DP, no 114). This contains references to much of the vast literature. 43

Scotland 179 thusiastic too, and in Burnett’s Tr v Grainger 44 has declined to follow Sharp. How this saga will end, time will tell, but it illustrates legal-cultural attitudes, attitudes significantly different from those that prevail in England.45

The third reason The third reason for the reluctance to admit implied trusts, though intellectually an important one, has historically played only a minor role. Indeed, it seems not to have been articulated until quite recently, in a 1981 appellate case, Clark Taylor & Co Ltd Quality Site Development (Edinburgh) Ltd.46 X sold and delivered goods to Y, on credit, reserving ownership until payment. As a protection against the danger that Y might sell to a good faith buyer before Y had paid X, the contract provided that if that were to happen the price paid or payable by the third party to Y would be held on trust by Y for X. These were much the same facts as in the English Romalpa case.47 But the Scottish court took a different view. The purported trust was held to fail for three reasons. One was a drafting question, which need not concern us. The second was policy. The trust was abusive. It was intended to defeat the legitimate rights of other creditors. The third reason was that debtors and trustees are different, and cannot easily be superimposed. What, wondered the court, would X receive if the second price were less than the first price? What if the second price were more than the first price? Such questions are, perhaps, easy to answer in English law. They are not easy to answer in Scots law.48 The liability of a debtor is different from that of a trustee. It may be greater, or it may be less. If a debtor loses the money, the liability remains the same, whereas if a trustee loses the money the liability sinks with the value of the fund (assuming, of course that there has been no breach of trust). And if the debtor invests the money profitably, the liability is not thereby increased, whereas if the trustee invests the money profitably the liability rises with the value of the fund. The liability of debtors and the liability of trustees behave in utterly different ways—so different, that it is difficult, at least in Scots law, to see how one can be, at the same time, both debtor and trustee. Though the logic of Clark Taylor seems hard to resist, it would be misleading to suggest that that logic has been universally accepted. It has never been controverted, but equally it has been little discussed. 44

2002 SLT 699. The decision has been appealed to the House of Lords. Once again, I would stress that one must sketch in shades of grey. After all, the two judges who spoke in the House of Lords in Sharp were both Scottish, and the decision does have its supporters. 46 1981 SC 111. 47 Aluminium Industrie Vaassen BV v Romalpa Aluminium Ltd [1976] 1 WLR 676. Romalpa has been virtually overruled by later decisions, but that story need not concern us here. 48 Whether this is a ‘civil law’ issue is unclear. French law and (depending on the facts) German law give priority to X, though by different means, and neither by means of the trust. The French approach uses the doctrine of real subrogation, which actually comes quite close to the trust idea, and may be subject to similar objections. 45

180 George Gretton

VI : CAN A BANK BE LIABLE AS A CONSTRUCTIVE TRUSTEE ?

In Quistclose, Rolls Razor was trustee of the money, and that meant that the bank with which the money had been deposited was also trustee. In general, if a trustee lends or deposits money, and then becomes insolvent, the beneficiaries are protected whether or not the bank or borrower is regarded as a constructive trustee of the money, because the money is simply trust money. The question of the status of the bank or borrower becomes acute only in special cases, such as where the trust money is paid into a non-trust account that is overdrawn, or where there are two accounts and the bank seeks to invoke set-off. It cannot be said that Scots law is clear and settled about such issues. In the normal case, a person who acquires a trust asset onerously, even in bad faith, has no liability.49 A person who acquires a trust asset gratuitously, even in good faith, will, it seems be liable: the basis of liability is unclear. Constructive trust (if there is such a thing) is one possibility. Enrichment is another. A bank that receives a deposit is not a donee and is not enriched by the deposit, for a deposit creates a contractual liability to repay. To speak of a bank being liable in respect of a deposit is rather uninformative: a bank is liable on every deposit, by definition. Moreover, from a bank’s standpoint, a deposit is not an asset but a liability. Is the bank supposed to be a constructive trustee of a liability? The real issue in such cases seems to be one of set-off: whether or not the bank can set off an account in credit against an account in debit, and whether it can set off debits and credits within a single account. Whatever the answers may be (and they will turn primarily on the issue whether or not there is true concursus crediti et debiti), they have nothing to do with ‘constructive trust’ or ‘tracing’. Such, at any rate, is the view of one Scots lawyer.

APPENDIX : SOME CASES

This appendix summarises some cases for the benefit of those without ready access to the Scottish law reports. None of them is a Scottish Quistclose, but some are slightly similar, while others show how facts that in England might be suggestive of trust tend to be handled without any mention of trust. The selection is inevitably rather arbitrary. Some of the cases are objectively of little value but are included because they have often been cited. Except where indicated, they are first-instance cases.

49 Trusts (Scotland) Act 1961, s 2. Before 1961, the bad faith onerous acquirer could be liable, but it is doubtful whether he was a ‘constructive trustee’.

Scotland 181 Souper v Smith50 Smith, in financial difficulties, requested Watson to auction some of his assets and to apply the proceeds ‘for behoof of’ his creditors. After Watson had sold but before he distributed, Souper, a creditor of Smith, arrested in the hands of Watson. In the ensuing litigation between Souper and Smith’s other creditors, Souper argued that the instruction was a mere revocable mandate, while the other creditors pled both jus quaesitum tertio and trust. The creditors won, no reasons being recorded.51 The words ‘for behoof of’ mean, in Scotland, ‘in trust for’, so this seems a straightforward case, but nevertheless it came to be regarded as the origin of the alleged doctrine of special appropriation.

Baird v Murray’s Crs52 A man gave his solicitor some money to be paid to a particular creditor. Was the money arrestable by his other creditors? That depended on whether or not the favoured creditor had acquired a jus quaesitum tertio. It was held, on the facts, that he had not. There was no suggestion of any trust.

National Bank of Scotland v MacQueen53 A company placed funds in a special account with their bank for the purpose of paying debenture holders. A creditor of the company arrested this account. The issue was whether a jus quaesitum tertio had been created in favour of the debenture holders. The answer was negative and so the arrester prevailed. There was no suggestion of any trust.

British Linen Company v Kansas Investment Co54 Kansas Investment Co (KIC) needed money to pay its debenture holders. Another company, City Real Estate Company of America (CRECA), which had some link with KIC, sent a draft to the latter company’s bank, with a letter instructing the bank ‘to apply the proceeds of the draft to the payment, on account of CRECA, of the interest coupons of the 51⁄2 per cent. Secured Debenture Bonds of the KIC (series two) due to-day.’ The bank credited the 50 51 52 53 54

(1756) Mor 744. As was usual at that time. (1744) Mor 7737. (1881) 18 SLR 683. (1895) 3 SLT 138, aff’d without reasons (1895) 3 SLT 202.

182 George Gretton draft to the KIC’s account. The debenture holders were not in fact paid (we do not know why) and a creditor of KIC arrested the account. It was held that the money should be returned to CRECA. The ratio is unclear, but it seems that the bank erred in crediting the money to KIC instead of to CRECA. The bank, it seems, owed the money not to KIC but to CRECA. Trust was not mentioned. There was no suggestion that the debenture holders might have acquired a jus quaesitum tertio. There is, however, much that is mysterious about this case. If things had gone according to plan, how was the money to actually reach the debenture holders? Would it have passed to them without ever reaching the hands of the KIC? Would the money have been a debt by that company to CRECA? If so, on what basis? On the basis of the obligation to indemnify the person who has paid a debt for you? (In other words, not on the basis of loan?) The case leaves many such questions dangling. It is a curiosity, but is hardly reliable authority for anything. But it has an eerie similarity to Quistclose.

Dixon & Wilson v McIntyre55 Messrs Gray, Sons, & Co (GSC) lent money to McKerracher to enable him to buy a house, on condition that he granted them a security over it. McKerracher handed the money to his solicitors, but because of problems with the title, the purchase never went ahead. (It should be observed that the money passed through McKerracher’s hands before it reached the law firm, and also that GSC were not clients of the law firm.) McKerracher was then sequestrated and the question was whether the money in the hands of the law firm should be paid to GSC or to McKerracher’s trustee in sequestration. The law firm had written to them that ‘we shall, of course, take care not to part with the money in our hands until all the questions raised in reference to the titles have been cleared up.’ GSC were successful. The decision is weak, the mysterious ratio apparently being that the law firm was a ‘stakeholder’, whatever that means. The decision may possibly be defensible on the basis that the McKerracher/law firm contract conferred a jus quaesitum tertio on McKerracher, but this would be a long shot. The case does not mention trust.

Cameron v Neil56 The solicitor for a debtor (Neil) wrote to the solicitor of the creditor (West): ‘In the event of Mr West delaying to do diligence, I undertake to pay to your client through you, out of the first funds that come into my hands, the amount of the decree and expenses incurred.’ This was accepted. Neil’s solicitor later got funds 55 56

(1898) 6 SLT 188. 1926 SLT 56 (Sh Ct).

Scotland 183 from his client, but, before he could pay out the money, his client was sequestrated. It was held that the money was to be paid to West. The doubtful doctrine of ‘special appropriation’ was referred to. The solicitor made a promise, and, in Scots law, promises, seriously given, bind. That bit is easy. But it might be argued that whilst Neil’s solicitor had to pay in terms of his own obligation, he was bound to hand his client’s money to the trustee in sequestration, thereby suffering loss. And it might be argued that, since that result did not follow, there must have been some sort of a trust. But trust was not mentioned and indeed the case is weak.

Smith v Liquidator of James Birrell Ltd57 A company provided a pension scheme for its employees. It decided to close it, and the financial institution paid to the company the value of the whole invested fund. (This is a rather odd tale, and the report gives no details.) It seems that the company was the sole trustee of the pension fund. The company paid the money into a bank account. The bank did not know the source of this money. The company later went into insolvent liquidation. One of its accounts with the bank was in credit, and the other was overdrawn: the former was the one into which the pension money had been paid. The employees sued the liquidator to compel him to apply the money in the second account for their benefit. The liquidator admitted that the money was trust money but argued that the bank’s right of setoff meant that the money no longer existed as an identifiable trust fund. The employees were successful. The bank was not a party to the litigation, and so there was no determination of its rights. It does not seem to have been held that the bank was a constructive trustee. It seems that the bank in fact never attempted to operate set-off between the accounts58 and so it is hard to see why any litigation was called for.

Sutman International Inc v Herbage59 A company incorporated in the Cayman Islands claimed that its sole shareholders and directors, one of whom had become bankrupt, had bought land in Scotland with embezzled funds, and it was held that their claim that the land 57

1968 SLT 174. The judge (Lord Fraser of Tullybelton, sitting in the Outer House) said: ‘It may be that, if the bank had wished to do so, it could have insisted upon setting off the sum at credit of No 2 account against the sum at debit of No 1 account, and thereby reduced the total amount of the company’s indebtedness. But the bank did not in fact do so, and the two accounts remained distinct until several months after the liquidation had begun.’ This is puzzling, for if the accounts ceased to be distinct, that would suggest that set-off was attempted. But our knowledge of the details is zero, and so the first part of the sentence, which is clear, must be accepted. 59 2 August 1991, noted at 1991 GWD 30–1772. 58

184 George Gretton was held on constructive trust was relevantly pled.60 Apart from the case of client funds held by solicitors, this is arguably the sole known example of a true constructive trust.

Style Financial Services Ltd v Bank of Scotland61 A finance company (S) provided credit for customers of Goldbergs (G). Customers would pay off the credit to G, which then remitted the money to S, which deposited the money with the Bank of Scotland (BS), the defender. G became insolvent, indebted to both S and BS. S sued BS, arguing that G had held the money as agent for S, that the money was thus held on implied trust, and that since BS allegedly knew of the position they were bound. The action failed. The moneys were not held on trust. But this conclusion was arrived at by construction of the contract rather than by questioning the logic of the claim. Much English and Commonwealth authority was accepted as relevant.

Mercedes-Benz Finance Ltd v Clydesdale Bank plc62 A finance company, Mercedes-Benz Finance Ltd, sold cars to a dealer, Glen Henderson (Stuttgart) Ltd, and there was a complex arrangement whereby sums of the money received by the latter on re-sale were deposited in an account with Clydesdale Bank out of which the finance company could reimburse themselves direct. When the dealer became insolvent, the finance company claimed the sums in the account: the bank resisted, arguing (as did Barclays Bank in Quistclose) that it was entitled to set off that account against another, overdrawn, account. The finance company’s argument that the account was subject to an implied trust in its favour was rejected without hesitation. But an alternative argument based on jus quaesitum tertio was accepted as relevantly-pled: whether it ultimately prevailed is not disclosed in the report.

Mortgage Corporation v Mitchells Roberton63 This case has a curious similarity to Twinsectra.64 The story, as averred by the pursuers, was as follows. They had agreed to lend money against a first-ranked security over certain property. They instructed Messrs Mitchells Roberton (MR) to act for them. The borrower was represented by Messrs Franchi Wright 60 61 62 63 64

In Scottish legal language this verb’s conjugation is ‘strong’. 1996 SLT 421 and subsequently 1998 SLT 851. 1997 SLT 905, 1996 SCLR 1005, [1998] Lloyd’s Bank Rep 249. 1997 SLT 1305. Twinsectra Ltd v Yardley [2002] 2 AC 164.

Scotland 185 & Co (FW). The pursuers paid the money to MR, who paid it to FW without obtaining the security. FW paid the money to their client, again without the security. Eventually, a security was obtained, but it was postponed, and was over just part of the property. The borrower defaulted. The pursuers sued both law firms. The case against FW was based alternatively on delict (tort) and constructive trust. (Since the first defenders would presumably have been good for any decree pronounced against them, it is not clear why it was thought necessary to convene FW as additional defenders.) It was held that the case in delict was relevantly made out: The law does not in general terms admit to the duty of care between a solicitor on one side of a transaction and the client on the other. However this is not such a case being special in its circumstances. What we have here is transfer of money by cheque which the recipient, namely the second defenders, is bound to know belongs to or is at least stemming from the pursuers who have legitimate interests in relation to it as regards protection by way of security. Accordingly, on a purely ad hoc basis, this proximity in my view creates a duty of care as between the pursuers and the second defenders in respect of how the second defenders intromit with the money.65

The court also held that the case of constructive trust had also been relevantly made out, though it did so reluctantly: ‘I confess an almost instinctive abhorrence of the notion of constructive trust.’66 This aspect of the decision seems dubious. The parties whose interest it would have been to deny such a trust, the creditors of FW, were unable to do so. Suppose that FW had been insolvent. Would their creditors have been bound by a prior decision as to the existence of a constructive trust? Evidently not. Hence, the issue of trust was never in fact tested. Indeed, it could never have been tested, for after disbursement to the client there was no fund which could have been claimed as a trust fund. Thus, this was a case where the language of constructive trust was being used as a basis for a simple personal claim.

65 66

1997 SLT 1305, 1309 (per Lord Johnston). 1997 SLT 1305, 1310 (per Lord Johnston).

Index administrative powers 68–8 bankruptcy, trustee in, title to money paid 155–6 banks 150–1 as constructive trustees 180 beneficial ownership restricted see restricted beneficial ownership unrestricted see unrestricted beneficial ownership Benson, Henry 6 Birks, Peter 38, 39 Bloom, John 1–7 Bridge, M 148 cases Quistclose 145–50 decision 9–10, 38–8 fact pattern 41–2 role 151–2 Scotland 180–5 Chambers, Robert 42, 43 equitable right of restraint 30–2, 38 passim, 127, 137, 142 resulting trusts 50–6 set off 157 commercial features litigation significance 150 non-professional nature 148–8 security absent 147–8 speed of transaction 148 structure of transaction 149–50 commercial litigants 150–1 commercial role 151–2 constructive trusts 173 and banks 180 contract and obligation 127, 129–30, 141–2 Quistclose obligation 44 contract of loan primary trust, consent 15–17 rights transferred pursuant to 15–17 Cork, Sir Kenneth 2, 7 creditor’s trust 27 see also no trust relationships; shared ownership expectations 109 express v constructive 79–80 power/duty to pay 84–5 purpose trusts 81–2 settlor’s identity 80

defeasible powers 49 dispositive powers 68–8 fiduciary obligations 70–2 personal v impersonal object 69–70 dividend creditors 27 duties, and powers 67–8 Electromatic Washing Machine Company Ltd 1–2, 7 equitable liability 48–50 equitable right of restraint 30–2 expectations creditor’s 109 payer’s 108 perfection 107–8 express trusts created by intention 103–7 creditor’s 79–80 payer’s 82–3 purpose 114 Quistclose 50–6 Scotland 164, 173–4 express v resulting trusts 50–6 fiduciary obligations dispositive powers 70–2 non-fiduciary obligations 71–2 where not a trust beneficiary 71 fiduciary relationship, inappropriateness 17–19 Finer, Morris 6 floating charges 166–7 fraudulent trading 164–5 General Guarantee Corporation 5 Ho, Lusina 127 Hutber, Patrick 4 imperfect gift 22 implied trusts, in Scotland 173–5 reluctance to use 175 incompatibilities 179 insolvency policy 176–8 obligations 176 insolvency 153–67 beneficial interest 154–7 contracting out, attempts 154–5 floating charges 166–7 fraudulent trading 164–5 illegality 165

188 Index insolvency (cont.): invalidation of Quistclose trust 157–66 preference 157–63 security interest 165–6 set off 156–7 trustee in bankruptcy’s title to money paid 155–6 intention express trusts 103–7 importance 101, 119 primary trusts, consent, parties 19 relationships 102–7 restricted beneficial ownership 107 unrestricted beneficial ownership 102–3 jus quaesitum tertio 170–1 litigants 150–1 Miller, Claude 5 mixed systems 169n money, ties 121–3, 138–40 non-obligating conditions 123–6 personal right to restrict use 93–4 property right to restrict use 94–7 Quistclose restrictions 77–8, 118–20 trustee in bankruptcy’s title to money paid 155–6 Twinsecra construction 124–6 mutual wills 22 no trust relationships 86–7 purpose 113 restricted beneficial ownership 87–3 unrestricted beneficial ownership 87 non-feasance 44 obligation 127–30 and contract 127, 129–30, 141–2 Scotland 169–71 trust for objects 128–8, 139–40 ownership beneficial 87–3 shared see shared ownership parties, intentions 19 payer’s trust see also no trust relationships; shared ownership creditors, power/duty to pay 84–5 expectations 108 express v resulting 82–3 resulting and express trust 82–3 presumptions 83–4 revocable v irrevocable 85–6 personal duties 46–7 powers

administrative 68–8 dispositive 68–8 and duties 67–8 fiduciary obligations 70–2, 73–4, 75, 76 impersonal 69–70, 71–2 non-fiduciary obligations 71–2, 74–5, 76 powers and duties 45–6 preference 157–63 primary trust causative event 10–27 consent contra-indications 15–19 contract of loan, rights transferred pursuant to 15–17 fiduciary relationship, inappropriateness 17–19 no duty of segregation 17 parties, intentions 19 presumed 12–13 proven 13–15 dividend creditors 27 identification 11–12 lender 27–8 no trust situation equitable right of restraint 30–2 quasi-trusts 30 non-consent 19–27 imperfect gift and detrimental reliance 22 mutual wills 22 pre-Quistclose case-law 25–7 right of restraint 24–5 rule in re Rose 22 specifically enforceable promise to transfer rights 23–4 transfer on trust failing to exhaust beneficial interest 22–3 unauthorised substitution 23 unjust enrichment 21 wrongs 20–1 purpose 28–30 proprietary rights initial failure 131–8 property 133 subsequent failure 130–1, 139 Swaps cases 133–40 unjust enrichment 130–40, 140–3 purpose creditor’s trust 81–2 express trust 114 no trust 113 primary trust 28–30 resulting trust 114–18 quasi-trusts 30 Quistclose Investments Ltd 5

Index 189 relationships 78–8, 101–2 created by intention 102–7 fiduciary 17–19 no trust 86–7 restitution 109–13 restricted beneficial ownership 87–3 created by intention 107 resulting trusts definition 122n and intention 119–20 payer’s 82–4 purpose 114–18 Quistclose 50–6 Scotland 173 Rolls Razor Ltd 1–7, 9–10 Scotland see also implied trusts cases 180–5 express trusts 164, 173–4 obligation 169–71 and Quistclose 169 special appropriation 171–2 trusts, taxonomy 173–4 secondary trust causative event 34–8 not consent situation 35–8 objects 33 presumed consent 34–5 proven consent 34 security interest 165–6 set off 156–7

shared ownership 97–8 payee and creditor 100 payer and creditor 98–8 payer and payee 99–100 payer, payee and creditor 100–1 Smart, P St J 127 special appropriation 171–2 tacit trusts 173–5 third party rights 170–1 ties 121–3 transfer on trust failing to exhaust beneficial interest 22–3 trust banks as constructive trustees 180 for objects 128–8, 139–40 Quistclose 41–2 trustees’ obligations 43–50 trustee in bankruptcy, title to money paid 155–6 unauthorised substitution 23 unjust enrichment 21, 109–13 see also under proprietary rights unrestricted beneficial ownership created by intention 102–3 no trust relationships 87 wishes 121–3 Wolfson, Sir Isaac 3, 4, 5, 9 wrongs 20–1