Twinsectra Ltd v Yardley [2002] 2 AC 164

Key point

  • Lord Millett argued that the Quistclose trust is merely an orthodox resulting trust that arises whenever there is an ‘absence of intention to benefit’ the transferee of money

Facts

  • T intended to lend money to Y for the purchase of property without specifying which property
  • S, a solicitor acting for Y, had given an undertaking to T in the following terms: “The loan moneys will be retained by us until such time as they are applied in the acquisition of property on behalf of our client. The loan moneys will be utilised solely for the acquisition of property on behalf of our client and for no other purposes”
  • T paid over the loan amount to S who then paid it over to L, another solicitor acting for Y
  • Y used the loan for purposes other than the purchase of property
  • T claimed that the payment from S to L amounted to a breach of the undertaking and thus a breach of trust which L had assisted

Twinsectra Diagram

Held (House of Lords)

  • The money was held by S on Quistclose trust for T
  • S had acted in breach of trust
  • L had acted reasonably and not in assistance of the breach of trust

Lord Millett

Overview

Lord Millett critiques the two prevailing theories of Quistclose trusts by Lord Wilberforce in the Quistclose case and Robert Chambers in Chambers, Resulting Trusts (OUP 1997), lays out the flaws he observes in each, before proposing his own theory that Quistclose trusts are no more than orthodox examples of a resulting trust

Lord Wilberforce’s theory

Summary of the theory

  1. The money is handed over on  a primary trust by the lender to the borrower, the purpose of the trust being for the payment of third party creditors
  2. When the borrower becomes bankrupt, the purpose of the primary is frustrated and a secondary trust arises in favour of the lender

Problems

Problem 1: it is unclear where the beneficial interest lies under the primary trust

  • It cannot be with the borrower since he does not have free disposal nor with the contemplated beneficiaries
  • The beneficial interest cannot be in suspense without a resulting trust arising

Problem 2: the primary trust could not have failed

  • The primary trust could not have failed in cases such as Quistclose since performance was still possible
  • If the purpose was to save the borrower from bankruptcy, but a trust does not fail merely because the purpose is frustrated, performance must become illegal or impossible

Problem 3: the primary trust cannot be a private purpose trust

  • In Re Northern, Sir Robert Megarry V-C held that the primary trust was a Denley purpose trust enforceable by the creditors, but Lord Wilberforce stated in Quistclose that the equitable right of creditors is not a mandatory order to compel performance but a negative injunction to restrain improper application
  • The object of the arrangements was to enable the subsidiary to continue trading, the application of funds is not confined to existing creditors
  • The bank’s object is not to benefit the creditors except indirectly, they had their own commercial interests to protect, thus the primary trust cannot be an express purpose trust
  • If the primary trust is not for identifiable persons but an abstract purpose it is not clear where the beneficial interest lies

Chambers’ theory

Summary of the theory

  1. The borrower receives the entire beneficial ownership subject to a contractual right to prevent the money from being used otherwise than for the stated purpose
  2. If the purpose fails, a resulting trust springs into effect

Problems

  • It offers no solution to cases of non-contractual payment
  • It is inconsistent with Lord Wilberforce’s description of the borrower’s obligation as fiduciary and not contractual
  • It cannot easily be reconciled with the availability of proprietary remedies against third parties
  • The existence of a mere equity to prevent misapplication would not prevail over secured creditors who would have priority in the event of the borrower’s insolvency

Lord Millet’s resulting trust analysis

  • The beneficial interest always stays with the lender through a resulting thrust that arises immediately money is transferred to the borrower
  • As Chambers argues, a resulting trust responds to the absence of intention on the part of the transferor to pass the entire beneficial interest not a positive intention to retain it
  • The borrower is authorised (or directed) to apply the money for a stated purpose, but this is a mere power and does not constitute a purpose trust
  • When the purpose of the power fails the money returns to the lender not under a new resulting trust but because the resulting thrust is no longer subject to a power
  • On this analysis it is proven that the Quistclose trust is “an entirely orthodox example of the kind of default trust known as a resulting trust”

Commentary

Lord Millett’s theory is an adaptation of Chambers’ theory of resulting trusts, with the difference being that the resulting trust arises immediately when the money is transferred rather than when the purpose fails.

In 2004, Chambers updated his account in Robert Chambers, ‘Restrictions on the Use of Money’ in William Swadling, The Quistlcose Trust: Critical Essays (Bloomsbury Publishing 2004) 89. In it he argues that there two possible types of resulting trusts that can arise when the purpose fails, the first type of resulting trust will place beneficial interest entirely in the hands of the lender, while the second types of resulting trust will place beneficial interest in both the hands of the lender and borrower. The second type of resulting trust applies when the restrictions on the use of money placed on the borrower are minor.