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Justin Santiago, BAppSc (Hons), MBA, LLB (Hons) comes from a journalism, market research, intellectual property and strategic communications consulting background. Now based in Melbourne he spends his time advising businesses on how to communicate to their customers as well as writing on various subjects of interest in this blog.

Sunday, April 5, 2009

Infiltration of Trusts into Commercial Law

What differentiates the Quistclose trust from other trusts, is the existence of the specific purpose for which the sums on credit must be applied, and the failure of which gives rise to the trust. - Justin Santiago

Quistclose Investments Ltd v Rolls Razor Ltd held that a trust situation could arise in situations where money that is owed becomes the subject matter of the trust provided that the money had been segregated for the purpose of repaying the debt. The extra ingredient required to elevate a loan to such a Quistclose trust is an intention that the money advanced be used for a particular purpose rather than being at the general disposal of the borrower. In Quistclose itself this extra ingredient was supplied by the bank's stipulation that the loan be employed in paying a dividend to shareholders.

However there are other differences between a Quistclose trust and a normal trust. Following Knight v Knight (1840) 3 Beav 148 a trust is created if the words used are imperative and if the property and objects (i.e. persons intended to be benefited) are sufficiently identified. This dictum is usually reduced to the phrase that the three certainties must be present: certainty of intention, subject matter and objects.

To determine certainty of intention we have to examine the words and conduct of the proposed settlor to see if these conform to an intention to create a trust.This is provided by the requirement that the money be used only for the stipulated purpose.
Furthermore there was segregation of the loan monies from the borrowers' other assets.

As for certainty of subject matter it is the debt that is clearly the subject matter.

The difference of a Quistclose trust lay in its lack of certainty of objects The 'beneficiary principle' requires of a trust that it have ascertainable human beneficiaries in order to be valid : Morice v Bishop of Durham. The permitted exceptions are charitable trusts and a limited number of non-charitable purpose trusts. At first sight the Quistclose trust appears to offend against the beneficiary principle. The trust seems to fall into the category of non-permitted purpose trust, the purpose of which is to pay off a debt.

The Quistclose trust has been argued to be a resulting trust in favour of the person who originally advanced the credit, and the person to whom the sums were advanced holds them as trustee. The resulting trust occurs because the purpose of the trust to pay dividends to shareholders could not be fulfilled.

Additionally proof that the Quistclose turst it is not an express trust is the lack of formality requirements of section 52(1)(b) of the Law of Property Act 1925 which requires that a declaration of a trust must be manifested and proved by some writing and signed by some person who is able to declare a trust.

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