Equity and Trusts " Quistclose"

EQUITY AND TRUSTS " QUISTCLOSE"

Term Paper

April 24, 2015

845 words

Name

Institution

Introduction

A Quistclose trust is a credit financial service provided by creditors to business corporations. The difference between a Quistclose and other credit facilities is that the money borrowed can only be used for a specific use that is specified in the agreement (Burns, 2004). In essence therefore, the more remains the asset of the lender until the borrower uses it for the specified use.

The trust and name was derive from the decision by the House of Lords in the Barclays Bank Ltd versus Quistclose Investments where Lord Wilberforce concluded that in Quistclose cases, the intended use for creating a secondary trust must be for advantage of the lender if the borrower does not use the money for the intended use.

A Quistclose can be conceived in different ways. To begin with, using a banker’s point of view, when the term is included in the contract, it gives the lender equitable interest on money lent. This interest ceases t exist until the money is used for a specific use. Hence it acts as a form of security. This was used in the case of Twinsectra Vs Yardly.

Trust lawyers analyze a Quistclose on the basis of the probability that the borrower becomes insolvent, a trust would be created over the lent money to ensure that the loaned money is held on trust and hence cannot be distributed to the borrower’s estate. On the Barclays Vs Quistclose Investments, Quistclose lent money to Rolls Razor Limited on condition that the money was only to be used for pay dividends. The money was held by Barclays. However, Rolls became insolvent before the payment of the dividend and hence the jury determined that the moneys could not be distributed to the insolvent partners as the money was secured by an equitable interest.

Types of Quistclose Trusts

There are several types of Quistclose. They include:

Express Trust

Quistclose trust is regarded as an express trust if the provision of using the money borrowed for a specific use is clearly stated in the loan agreement between the borrower and the lender. Using the money for any other use other than the one stated in the agreement is a big violation on trustee responsibilities and the contract becomes void (Burns, 2004). For this type of quistclose trust, the trust is created immediately as soon as the contract is signed (Richard, 2007). This ensures that the trust is validly created. In the court case between Lloyds Bank versus Swiss Bank, both parties failed to follow the required guidelines by not stating expressly the use of the borrowed money and hence the Court of Appeal declined to return the money or form a trust on the basis that the parties failed to include in the agreement the use of the money awarded.