A Normative Approach to the Quistclose Trust
| Author | Emily Hudson |
| DOI | http://doi.org/10.1111/1468-2230.12288 |
| Published date | 01 September 2017 |
| Date | 01 September 2017 |
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THE
MODERN LAW REVIEW
Volume 80 September 2017 No. 5
A Normative Approach to the Quistclose Tr u st
Emily Hudson∗
This is the first article to undertake a sustained analysis of normative justifications for the
Quistclose trust. Whilst much of the existing writing on this topic has focused on the better
classification of such trusts – for instance, whether they are express, resulting, constructive or
sui generis – this article asks why the law should recognise a trust in addition to any underlying
legal relationship. Four key justifications are addressed, based on respecting party intention,
unconscionability, fairness, and the incentivisation of desirable transactions. It will be argued
that: (i) there are difficulties with each of these justifications, although an intention-focused
explanation is probably the most convincing; and (ii) the existing law and commentary lacks
coherence and consistency, as seen in the mismatch between normative and doctrinal analysis,
and the failure to properly address the ramifications of the Quistclose trust during insolvency.
INTRODUCTION
This article explores justifications for the Quistclose trust. Such trusts are named
after the famous decision of the House of Lords in Quistclose Investments Ltd
vRolls Razor Ltd1(Quistclose) and have been held to arise where money is
transferred on terms that it may only be used by the recipient for a specific
purpose.2If the money is applied for the permitted purpose, the trust dissolves
and – if the transfer was by way of loan, which is often the case – a relationship of
debtor and creditor remains. If, however, performance of the purpose becomes
impossible or is not carried out, the lender may enforce rights to the money
under a trust, an option that is particularly attractive if the borrower becomes
insolvent.3In Quistclose, Lord Wilberforce held that there were two trusts that
∗Senior Lecturer, Dickson Poon School of Law, King’s College London and TC Beirne School of
Law, University of Queensland. I would like to thank Joshua Thomson for his research assistance;
Robert Burrell, Joshua Getzler and Ann Mumford for their comments on drafts of this article; and
attendees at seminars convened at the University of Sheffield and University of Queensland at which
ideas from this article were presented.
1Quistclose Investments Ltd vRolls Razor Ltd [1970] AC 567.
2 Such purposes have extended from the payment of creditors to include the purchase of property
or equipment: For example, Twinsectra Ltd vYa rd le y [2002]2 AC 164 (Twinsectra); Re EVTR Ltd
(1987) 3 BCC 389 (Re EVTR).
3 This assumes that prior to the money being applied for the designated purpose, there is a trust
that: (i) takes the money outside the general assets of the borrower; and (ii) is not caught by
C2017 The Author.The Moder n Law Review C2017 The Modern Law Review Limited. (2017) 80(5) MLR 775–811
Published by John Wiley& Sons Ltd, 9600 Garsington Road, Oxford OX4 2DQ, UK and 350 Main Street, Malden, MA 02148, USA
A Normative Approach to the Quistclose Tru s t
arose sequentially: a ‘primary’ trust in favour of the shareholders, and when
that trust failed due to Rolls entering voluntary liquidation, a ‘secondar y’
trust in favour of the lender.4Whilst some cases have applied a two-trust
characterisation, other explanations have also been presented, most notably
that Quistclose scenarios involve a single express or resulting trust for the lender,
subject to a power allowing the bor rower to apply the funds for the designated
purpose.
There is a sizeable body of literature considering the better characterisation
of the Quistclose trust. Significantly, however, this characterisation exercise typ-
ically rests on unstated and untested assumptions that a trust should arise. But
why ought the law to recognise a trust in addition to any underlying legal
relationship? This article focuses on this prior question through a normative
analysis that critiques the key values or goals that might be said to underpin the
Quistclose trust. It does not suggest that existing classification efforts are irrele-
vant but rather that many court judgments and academic contributions either
lack an explicit normative framework or deal too swiftly with contentious as-
sertions regarding the basis and effect of the Quistclose trust.5Emphasis of these
normative matters is important not just to explain the existence of a trust but
to explore how, if at all, Quistclose trusts ought to be regulated.
As seen in the next part of this article, one explanation for the Quistclose
trust is a ‘methodological’ approach that looks to its form, most notably by
referenc e to inten t.6For instance, Jamie Glister, discussing the possibility that
Quistclose scenarios involve an express trust in favour of the lender, has ob-
served that ‘as long as the necessary intention to create a trust can be inferred
from the parties’ agreement, there is no reason to deny them the relationship
that they objectively intended.’7As a normative matter, this statement would
seem to rest on the proposition that the rules regarding the creation of trusts are
the product of decisions about when trusts ought to arise. If the prerequisites
for the creation of an express trust are met, it may therefore be unnecessary to
invoke any additional normative justification for a Quistclose trust. This second
prohibitions on preferences or other unlawful attempts to contract out of insolvency rules. The
relevance of insolvency lawto the Quistc lose trust will be considered throughoutthis ar ticle,and
especially in the fourth section.
4Quistclose n 1 above, 580, 582.
5 Pier re Schlag, writing in relation to American academic legal scholarship, has stated that the
‘orientation of [such scholarship] is pervasively and overwhelmingly normative’,although some-
times this normative agenda ‘is a covert “should” – hidden beneath layers of legal positivism’: P.
Schlag, ‘The Critique of Normativity (1991) 139 U Pennsylvania LR 801, 808. As Schlag notes,
there is much in the argument that the distinction between descriptive and normative analysis
is often illusory because ‘many of the categories uncritically adopted in [descr iptive work] are
already normatively charged’ (ibid, 813). To illustrate, some judicial and academic defences of
the Quistclose trust place weight on following outcomes in the prior case law. This can be seen
as normative, to the extent it values goals such as continuity and predictability. Difficulties arise
in a number of ways, for example, because the relevant values are not stated explicitly, because
only some values are considered, or through incoherence in the way the stated values translate
to the legal reasoning.
6 C. E. F. Rickett, ‘Different view on the scope of the Quistclose analysis: English and antipodean
insights’ (1991) 107 LQR 608, 646-647.
7 J. A. Glister, ‘The natureof Quistc lose trusts: classification and reconciliation’ (2004) 63 CLJ 632,
645.
776 C2017 The Author. The Modern Law Review C2017 The Modern Law Review Limited.
(2017) 80(5) MLR 775–811
Emily Hudson
part describes how intention is used in the case law in relation to express and
resulting trust models, and describes two key problems with a form-justifying-
existence approach. One problem is empirical: in many cases, the conclusion
that the transaction exhibited trust-consistent features was tenuous or counter-
factual. A second issue is philosophical, and relates to the degree to which
justifications for the express trust are often based on its characteristics and po-
tential applications rather than the desirability of any particular application. It
may be that the trust is, on balance, a desirable instrument, despite the costs
associated with some uses, such as aggressive tax planning. However, we must
take care in pressing any normative justification of the Quistclose trust that re-
lies solely or mainly on the settlor having satisfied the prerequisites for trust
formation.
It is therefore necessary to consider other rationales that might justify the
Quistclose trust. Three possibilities are discussed in the third part of this article.
The first focuses on the conscience of the recipient being bound such that she
cannot accept the money from the lender and disregard the restrictions on use,
consistent with the Quistclose trust preventing unconscionable conduct. It has
also been suggested that fairness demands that the lender get back her money
upon failure of the purpose, for instance because this will prevent the borrower
or her other creditors from receiving a windfall. Still another possibility, albeit
one not seen explicitly in the case law, is that the quasi-security provided by a
Quistclose trust serves to incentivise desirable transactions, in particular lending
to entities in financial difficulty. This article argues that that there are difficulties
with each of these justifications, raising doubts as to whether any of them help
bolster the case for Quistclose trusts.
In the fourth part, the article tur ns to consider the regulatory consequences
of the foregoing analysis. It argues that whilst an intention-focused explanation
is the most compelling normative justification for the Quistclose trust, we have
not pressed such a characterisation to its logical conclusion. For instance, there
is widespread acceptance that in insolvency situations, Quistclose trusts function
like security interests.8If this is correct, one might ask whether they ought to
be a target of regulation, for instance by being required to be reg istered. This
section explores these points by reference to the Personal Property Secur ities
Act 2009 in Australia, which despite adopting a functional definition of security
interest expressly excludes Quistclose trusts from its ambit.9It also notes other
possibilities for regulation of the Quistclose trust, in particular as an unlawful
preference.
The ultimate conclusion is that we need a clear, consistent and principled
approach to the recognition of Quistclose trusts. There are two main possibilities
that are not mutually exclusive: first, they are intentional trusts that function
like security interests; and secondly, they are imposed by courts as construc-
tive trusts. However, these characterisations are based on different normative
underpinnings, result in different doctrinal tests for creation, and will produce
8 For example,Mr Justice Pr iestley, ‘The Romalpa Clause and the Quistclose Trust’ in P. D. Finn (ed),
Equity and Commercial Relationships (Sydney: Lawbook Co, 1987); M. Bridge, ‘The Quistclose
Trust in a World of Secured Transactions’ (1992) 12 OJLS 333.
9 Personal Property Securities Act 2009 (Cth), s 8(1)(h).
C2017 The Author. The Modern Law Review C2017 The Modern Law Review Limited.
(2017) 80(5) MLR 775–811 777
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