Legal Tip 203: What is a Quistclose Trust?

The term ‘Quistclose’ comes from the name of a company (Quistclose Investments Ltd) involved in litigation in 1970 in the UK (Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567; [1968] 3 All ER 651) , and it refers to a specific kind of trust relationship that is something like this:


If X lends money to Y for a specific purpose and Y becomes insolvent and cannot apply the money what they intended, then Y will be considered to be holding the money on trust for X – and the money won’t thereby be available to the general creditors of Y.


It is really a resulting trust, and not that different to the situation where X provides funds for Y to buy a house and Y becomes bankrupt. It is considered that Y is acting for X as trustee in holding the house so it won’t be available to Y’s creditors unless there is evidence that it was intended as a gift.


Example
Bart lends Bob the builder $500,000 to construct a property on land owned by Bob and to sell the completed project and return $600,000 to Bart. Bart has no security for the loan. Bart hands over the $500,000 and Bob’s other project fails and leaves him $500,000 in debt. Creditors take the $500,000

Bart gets legal advice and argues that the $500,000 lent to Bob is actually held on trust for Bart as it was lent to Bob for a specific purpose and it should not be available for Bob’s general creditors for something unrelated.

Will Bart succeed? That is a different story…

 

@Terry_w - does that then become a commercial arrangement and considered as the source and application of funds for treatment on the (Bob) company's balance sheet?

 

Scott not sure what you mean, but if it is a trust relationship then it was never an asset on Bob's balance sheet. Even if it was a loan, i guess it would be on the balance sheet as a debt.

but I am not an accountant so not sure about balance sheets.

 

As an accountant I would be reluctant to disclose it on a balance sheet as an asset without a offsetting liability. You need to consider the Accounting Standards which define what a asset and a liability are for the entity. I believe in this case the company is merely a conduit for a loan between Bart and Bob. Bobs company is holding the funds on trust for Bob. The nature of how the description is given may be important. eg Liability is Funds held on trust for Bart rather than a debt owing to Bob

I'm no lawyer but an example can likely occur when a business fails. A travel agency may have a client trust account. Until such time that the trust monies become company money they may be protected. I have audited travel and event management companies and the typical accounting rules are to disregard trust money as a separate "trust" to that of the business. Only when trust moneys move to the business (usually when travel is taken OR a sale has been made depending on the issue) is it accounted for by the company. Lawyers trust monies are the same. The law firm doesnt account for it within their records but within their separate trust account records.

Co-mingling funds poses a concern that is best addressed as a legal issue. In cases of insolvency all sorts of parties will try to argue rights of possession etc. Many trade suppliers have T&Cs in their sales invoices that hold a lien over unpaid stock. eh hardware store and power tools. They supplier then needs to satisfy the liquidator that it is valid. The liquidator may then allow them to recover the unpaid items and nothing more. So a unsecured creditor becomes a partially secured creditor to rank ahead of general creditors.

I read endless stories about construction contractors being ripped off yet the Security of Payments laws in many states provides a FREE way to make a debt more enforceable.

All the above are legal ways to avoid being a unsecured creditor to get your hand into the limited pot of funds when the music ceases. The importance of legal advice cant be under-estimated

 

If you really are worrying about a Quistclose trust just do a PPSR over the asset. You can do it for cash.

A damn sight easier than waiving around a trust deed after the fact. Good in theory. A nightmare to prove.