Quistclose trust and the requirements for its creation Essay

Quistclose trust and the requirements for its creation - Essay Example It is whether his conduct renders him liable for having assisted in a breach of trust.† Lord Millett in Twinsectra Ltd v Yardley and Others [2002] 2 AC 164 at paragraph 52. Definition of a Quistclose trust A Quistclose trust is created when a creditor extends a loan to a debtor with the condition that the money lent should be used for a particular purpose. In commercial parlance, a Quistclose trust is â€Å"a means by which a lender of money can retain a ‘security interest’ in loan moneys only for specified purposes†.1 If the money is used by the borrower for a purpose other than that specified in the loan agreement, a trust is then imposed on the money in favour of the lender. How this works in the lender’s favour is best appreciated at such instance that the borrower is rendered insolvent. During insolvency or bankruptcy proceedings, the insolvent borrower’s estate is distributed according to the procedure specified by law. If a trust were no t created on the loan amount, then the creditor who extends such loan is an unsecured creditor, and his claim on the borrower’s assets will be included and classified among the other claims from other creditors. It shall therefore be settled pursuant to the hierarchy of claims, of which such unsecured loans have a low priority and may remain unsatisfied due to insufficiency of the estate.2 On the other hand, the Quistclose trust creates a security interest on the loan, meaning that such may not be distributed in the insolvency proceedings from the borrower’s remaining estate. Even if the borrower is not rendered insolvent after the loan is contracted, the lender retains the right to recover the loan amount, even to trace the loan money into the hands of third parties to whom it was given in breach of the loan contract.3 First Issue: Nature of the Quistclose trust and the requirements for its creation The Quistclose trust (from the judgement rendered in Barclays Bank Lt d v Quistclose Investments, Ltd. in 1970) gives rise to several legal requisites: (1) It is important to precisely identify the sort of â€Å"security interest† the lender acquires. (2) It is important to know whether the lender â€Å"retains† a right in the original loan moneys throughout the life of the loan contract, or whether the right is created for the first time only at such time the borrower disobeys the terms of the loan contract, or whether the right comes into existence in some other ways. (3) It is important to categorize which kind of trust the Quistclose trust is – whether it is an express trust, resulting trust, constructive trust, or another type of construct. (4) It is important to consider how the precise terms of any loan contract alter the appropriate analysis on the facts of any given case.4 The difficulty with defining Quistclose trusts in terms of the foregoing is that Quistclose trusts are created by operation of law, arising out of any situation involving a loan where the creditor insists that the borrower use the money only for a stated purposes, in a manner which seems to imply that the borrowed sum is not at the borrower’s free disposal. If this were the case, then the determination of the three certainties of express trust (intention, subject matter and objects) which would normally justify a finding that a trust existed, would have to be proved. As it is, in finding that a Quitclose trust existed from the mere intention