QUISTCLOSE TRUSTS
FUNDAMENTALS OF LOAN CONTRACTS
Quistclose used on loan contracts gets lender protection against borrower’s insolvency, by a term
in loan that loan moneys are only to be used for specified purpose, if used for something else
than a trust imposed automatically over money to benefit lender equitable interest to lender
Loan contracts: lender agrees to pay an amount to borrower, borrower agrees to repay at given
date in future and pay rate of interest – happens at common law, no need for trusts
Lender transfer ownership of money outright when paid into borrower’s back account so
borrower outright owner, obligation pay with interests, money repaid is different from original
Different types of protection: security, guarantee from reputable third party, Quistclose
Quistclose created by inserting term into loan contract states use money for specific purpose
FUNDAMENTALS OF QUISTCLOSE TRUSTS
Gives lender security against insolvency of borrower by inserting clause for specific purpose
If use money for other purpose, trust is imposed to benefit lender treats money as being held
on trust for lender so cannot be distributed for insolvency proceedings
Even if borrower remains solvent, lender had right to recover money or trace money into any
third parties who has received in breach on loan contract
Problem of Quistclose trust is unclear is work as resulting, express or other sorts of trusts
Barclays Bank v Quistclose [1970]*
Company’s overdraft with bank was almost twice its permitted limit, company sought £1 million
loan, lender willing for use to pay dividends, got loan, money held in share dividend bank account
separate from all other moneys, before paid dividends went into liquidation held bank
successful, as acquired right for no use of other purposes, held on trust
Lord Wilberforce 2 trusts: ‘primary trust’ (use money to pay dividends) and ‘secondary’ (hold on
resulting trust for bank if not used for dividends) Quistclose has 2 level structure
Remedies of equity is the secondary trust, loan money is held on trust if not used specific
purpose prevents ownership of loan money being passed to third party if misused
Form of trust most likely resulting
Twinsectra v Yardley [2002]* (Twinsectra Quistclose= resulting trust)
Moneys lent by Twinsectra to Yardley, Twinsectra wanted security of knowing money used for
specific purposes as stated in loan contract, Yardley’s solicitor gave formal notice of use of
money, first solicitor replaced by second, Leach, who paid away loan moneys in accordance to
Yardley’s instructions, but instructions in breach on terms of loan + first solicitors formal notice,
loan money spent and Yardley unable to repay, Twinsectra sought to recover, held arrangement
created quistclose trust as contractual limitation to use of money
Solicitor permitted loan moneys used by his client in breach of express terms of loan contract
Lord Millett ownership remains lender even if possession passed to borrower
Lord Millett upheld theory quistclose being resulting trust
Issue of resulting trust: resulting trust even though ownership of money remains with lender as
money returned to lender (lender retains equitable interest), borrower has merely power to use
money for described purpose, if not power disappears infers express trust (Re Kayford)
Gabriel v Little [2012]*: Loan ‘of £200k which will be made available as a contribution to the costs of
development of the property’ held Quistclose, does not need to state ‘sole’ or ‘exclusive’ use
Examples of Quistclose trusts
1
FUNDAMENTALS OF LOAN CONTRACTS
Quistclose used on loan contracts gets lender protection against borrower’s insolvency, by a term
in loan that loan moneys are only to be used for specified purpose, if used for something else
than a trust imposed automatically over money to benefit lender equitable interest to lender
Loan contracts: lender agrees to pay an amount to borrower, borrower agrees to repay at given
date in future and pay rate of interest – happens at common law, no need for trusts
Lender transfer ownership of money outright when paid into borrower’s back account so
borrower outright owner, obligation pay with interests, money repaid is different from original
Different types of protection: security, guarantee from reputable third party, Quistclose
Quistclose created by inserting term into loan contract states use money for specific purpose
FUNDAMENTALS OF QUISTCLOSE TRUSTS
Gives lender security against insolvency of borrower by inserting clause for specific purpose
If use money for other purpose, trust is imposed to benefit lender treats money as being held
on trust for lender so cannot be distributed for insolvency proceedings
Even if borrower remains solvent, lender had right to recover money or trace money into any
third parties who has received in breach on loan contract
Problem of Quistclose trust is unclear is work as resulting, express or other sorts of trusts
Barclays Bank v Quistclose [1970]*
Company’s overdraft with bank was almost twice its permitted limit, company sought £1 million
loan, lender willing for use to pay dividends, got loan, money held in share dividend bank account
separate from all other moneys, before paid dividends went into liquidation held bank
successful, as acquired right for no use of other purposes, held on trust
Lord Wilberforce 2 trusts: ‘primary trust’ (use money to pay dividends) and ‘secondary’ (hold on
resulting trust for bank if not used for dividends) Quistclose has 2 level structure
Remedies of equity is the secondary trust, loan money is held on trust if not used specific
purpose prevents ownership of loan money being passed to third party if misused
Form of trust most likely resulting
Twinsectra v Yardley [2002]* (Twinsectra Quistclose= resulting trust)
Moneys lent by Twinsectra to Yardley, Twinsectra wanted security of knowing money used for
specific purposes as stated in loan contract, Yardley’s solicitor gave formal notice of use of
money, first solicitor replaced by second, Leach, who paid away loan moneys in accordance to
Yardley’s instructions, but instructions in breach on terms of loan + first solicitors formal notice,
loan money spent and Yardley unable to repay, Twinsectra sought to recover, held arrangement
created quistclose trust as contractual limitation to use of money
Solicitor permitted loan moneys used by his client in breach of express terms of loan contract
Lord Millett ownership remains lender even if possession passed to borrower
Lord Millett upheld theory quistclose being resulting trust
Issue of resulting trust: resulting trust even though ownership of money remains with lender as
money returned to lender (lender retains equitable interest), borrower has merely power to use
money for described purpose, if not power disappears infers express trust (Re Kayford)
Gabriel v Little [2012]*: Loan ‘of £200k which will be made available as a contribution to the costs of
development of the property’ held Quistclose, does not need to state ‘sole’ or ‘exclusive’ use
Examples of Quistclose trusts
1
