2UCLJLJ1 - Quistclose Trusts - 2

10.14324/111.2052-1871.
001
THE ENIGMA OF THE QUISTCLOSE TRUST

Brandon Dominic Chan
Abstract - The Quistclose trust is an invaluable commercial device for lenders in view of
its unique quasi-security element. It is the product of equity's flexibility in navigating the
strict rigours of the common law. Unfortunately, since its inception and recent resurgence
in Twinsectra v Yardley, it has been an eternally baffling subject. This mystery is largely
caused by the unconventional principles upon which the Quistclose trust is founded and
its strategic straddle between the realm of trusts and insolvency law. However, its
increasing importance in commercial contracts and international finance transactions such
as securitisations sparks renewed interest in the subject. Analysing the doctrinal
difficulties which confounds both equity scholars and legal practitioners alike, this paper
argues that this trust device is too useful in commercial practice to be abandoned and
ultimately lends support to the restitution-inspired arguments of Lord Millett in
rationalising the juridical conundrums that afflict the trust.
A. INTRODUCTION
The institution of the Quistclose trust is a peculiar creature. It arises when a
sum of money, on loan or otherwise is advanced to a recipient with a
specific purpose stated as to the use of such monies. When this purpose fails
or if it is not complied with, the Quistclose trust fastens on the monies,
crucially conferring proprietary interest upon the transferor instead of a mere
personal right which is contractual in nature.
It also represents a paradigm example of the conflicting tensions and
inter-relationship between English trusts, security and insolvency law. This
explains why the Quistclose trust has always attracted legal and academic
analysis, not least because its enigmatic existence challenges the established
principles of trusts law and seeks to extend its boundaries, which in turn has
very practical commercial implications in the event of corporate
insolvencies.
This has led many to criticise the lack of precise identification of the
Quistclose trust as a convenient form of judicial law-making and some to
view it as a legal anomaly which seeks to achieve only short-term justice on
the facts but a doctrine which is incoherently applied to the wider range of
LL.B (Hons), University of London, LL.M (University College London), C.L.P.

(Malaya). I am grateful to Professor Ian Fletcher for his insightful comments. The
opinions and any errors herein are my sole responsibility. This paper is the original
version of my Corporate Insolvency dissertation written in partial fulfilment of my
Masters specialisation in International Banking and Finance law at University College
London.
The Enigma of the Quistclose Trust
commercial scenarios especially in the world of secured lending and

advancement of credit.
This paper will attempt to unlock the juridical secrets surrounding this
unique trust device and discuss the difficulties surrounding its existence
which, in the author's view, is nevertheless a valuable trump card during
insolvency situations and which serves as one of the most important yet
unsung equity developments in English law over the past decades. The
application of the Quistclose trust in other Commonwealth jurisdictions,
particuarly Malaysia, will also be explored.
B. THE GENESIS OF THE QUISTCLOSE TRUST

Just as with the Romalpa clause, which derives its name from a judicial
pronouncement in relation to retention of title clauses', the Quistclose trust is
borne out of the seminal decision of the House of Lords in Barclays Bank v
Quistclose Investments Ltd.
In this case, Rolls Razor Ltd. was a company, which declared
dividend payments but then lacked the necessary funds to satisfy such
payments to shareholders. Therefore, the company sought to obtain a loan
from Quistclose Investments. Quistclose duly advanced the requested loan
monies but added specifically in the accompanying letter that the monies be
employed only for the purposes of paying the dividends to shareholders.
The monies were paid into a special account the company had with
Barclays. It is relevant to note that the company had an overdrawn overdraft
facility owing to Barclays. Unfortunately, upon receipt of the loan monies
but before the payments could be made to the shareholders, Rolls Razor Ltd.
lapsed into insolvent liquidation.
Barclays then claimed the loan monies by exercising its rights of set-
off vis-a-vis the amount owed to it against the company's indebtedness. The
lender, Quistclose Investments, brought an action to challenge this outcome,
claiming that it had equitable interests in the loan monies and this could not
be absorbed to pay the company's creditors.
On appeal to the House of Lords, Lord Wilberforce held in favour of
Quistclose Investments. At common law, the specified purpose is treated as
merely an ordinary contractual term, non-compliance of which constitutes a
breach of contract. However, recognising the weakness of this right in
1Aluminium Industrie Vaassen BVv Romalpa Aluminium Ltd [1976] 1 WLR 676.
2 [1970] AC 567.
2
UCL JournalofLaw and Jurisprudence
personam, which is non-exercisable against third parties, Lord Wilberforce

felt that equity was able to imply a trust from the arrangements of the parties.
Capitalising on the fact that the loan monies were paid into a separate
account and that a sole purpose was specified as to its usage, Lord
Wilberforce was convinced that they were held on trust. Consequently, his
Lordship held that it was an implied term of the loan contract that the monies
were to be returned to the lender if the purpose could not be carried out, one
way or the other3 . Since Barclays had notice of it, they cannot now exercise
any rights of set-off with respect to the loan monies.
To give effect to this, his Lordship held that there is first a primary
trust, which arises by virtue of the purpose expressed as to the usage of the
loan monies, which is meant to pay the dividend. When this primary trust
fails, a secondary trust arises in favour of the lender.
With this crisp reasoning, the Quistclose trust is born.
C. THE QUISTCLOSE TRUST AS A SECURITY DEVICE

In order to understand the practical value of the Quistclose trust as a valuable
security device for lenders, one must first grasp the treatment of trust assets
during insolvency. When a company is insolvent, the liquidator has a duty to
assemble the pool of assets owned by the insolvent company and distribute
them to unsecured creditors in accordance to the paripassu rule4 subject to
the legal exceptions', if any are applicable.
Secured creditors, on the contrary, are an elite class of creditors set
apart from the rest because, by virtue of their security, they are not subjected
to the paripassu principle of distribution. Instead, secured creditors can rely
upon their security and enforce the debtor to realise the debts owed to them.
Inter se, the equitable principle 'qui prior est tempore potior est jure' or
literally interpreted as 'where the equities are equal, the first in time shall
prevail', governs the order of priority6 . This position of priority is not borne
out of some privileged birthright but rather is the product of extensive and
furious negotiations that relate to the relative bargaining strength of the
parties.
3 Toovey v Milne [1819] 106 ER 514.

4 BritishEagle v Compagnie NationaleAir France[ 1975] 1 WLR 758.
5 For example, the commercial practice of debt subordinations and the resulting tranches
of debts commonly structured in securitisation and bond issue transactions.
6 Hugh Beale, Michael Bridge, Louise Gullifer and Eva Lomnicka, The Law of Security
and Title-BasedFinancing(2nd edn, OUP 2012).
3
Thus, to all practical intents and purposes, an unenviable situation is

created amongst unsecured creditors. This is embodied by the phrase 'the
race goes to the swiftest' whereby the first who can obtain and enforce a
judgment debt from the courts before the company lapses into insolvency,
wins . Metaphorically, one can imagine it as the pivotal moment before the
doomed ship sinks.
Hence, there is every motivation for creditors to avoid being classified
amongst this class of the unsecured who hold no form of security. Yet, in
practice, although English law is notably liberal relative to most jurisdictions
in allowing for the creation of security interests -in terms of less hassle and
administrative convenience, it is simply not possible for every creditor to
obtain security in order to safeguard its position. Broadly, there are two
reasons for this.
Firstly, the corporate debtor may lack sufficient assets to grant
security to all its creditors. Usually, it would be the largest financial
institutions such as banks who will hold the best form of security. Secondly,
some creditors may not command a sufficiently strong bargaining position
vis-a-vis the corporate debtor to negotiate for a grant of security from it.
Therefore, the importance of quasi-security interests 8 assumes
practical importance because it surpasses the distinction between secured
and unsecured creditors. Assets subjected to a trust are one such classic
example, which is the subject of discussion in this paper.
The English concept of a trust is derived from equity whereby there is
a split in the ownership of titles in a particular asset - viz. the legal and
equitable title. The legal title is vested in the trustee who is, at law, the owner
and as such, commands all rights incidental to a legal owner while the trust
subsists. On the contrary, the equitable title to the asset in question is held by
another person, called the beneficiary. This person is quintessentially the
true owner of the asset in question 9 because he can claim a proprietary
interest in the property as opposed to a mere personal right to pursue a
judgment debt.
7 This explains the careful drafting of cross-default clauses and negative pledge clauses in
international loan contracts as unsecured creditors wish to obtain the comfort of being
able to enforce judgments ahead of their counterparts or rather have the chances of them
doing so considerably improved.
8There are many types of quasi-security interests such as the retention of title clauses.
9 Pursuant to the Saunders v Vautier rights, a beneficiary of a bare trust can demand that
the trust be collapsed and compel the trustee to transfer the legal title to the asset in
question to him.
4
Therefore, following this structure, it is trite law that assets subjected

to a trust cannot be claimed by liquidators for the purposes of distribution to
creditors because the corporate debtor in question does not own the
propertyo. It is only acting in its capacity as a trustee for the beneficiary-
creditor.
This explains why trust assets constitute one of the prominent quasi-
security devices immune from insolvency proceedings" and why many seek
to claim this status. In order to illustrate this practical importance, two cases
are often analysed in comparison to the Quistclose trust.
In Re Kayford Ltd.12, a mail order company, which was in the twilight
of insolvency, opened a separate account upon the advice of its accountant
and paid customers' monies into it. When the company lapsed into
subsequent insolvency, the customers brought claims to recover their
monies, arguing that they were held on trust by the company. Megarry J was
convinced that the courts are able to imply an intention to create a trust from
'3
the circumstances when the monies were paid into a separate account
The case of Paul v Constance'4 is also illustrative of the situation
whereby the requisite intention to create a trust need not be clearly expressed
by the parties but yet can be found from the totality of one's conduct. Mr
Constance and his mistress were avid gamblers and they set up a joint bank
account to pay in the proceeds of their winnings. However, the account was
registered under the sole name of Mr Constance. When Mr Constance died,
a dispute arose between his wife and mistress in relation to the ownership of
the monies in the account.
Scarman U reasoned that since Mr Constance repeatedly told his
mistress that the money was as much his as it was hers and that the parties
had always operated the account jointly, an intention to create a trust was
sufficiently manifested although there were no clear words to that effect.
This case is crucial to the analysis of the Quistclose trust because
Scarman U's reasoning emphatically indicates that one can create a trust
without knowing or understanding the legal concept itself. Mr Constance
himself was described to be an unsophisticated person who was not well-
10 Hamish Anderson, 'The treatment of trust assets in English insolvency law' in Ewan
McKendrick and The Norton Rose Group, Commercial Aspects of Trusts and Fiduciary
Obligations (OUP 1992).
1 Per Lord Devlin, Chow Yoong Hong v Choong Fah Rubber Manufactory [1962] AC
209.
12 [1975] 1 All ER 604.
13 This reasoning was adopted in Re Chelsea Cloisters [1980] 41 P & CR 98.
14 [1977] 1 WLR 527.
5
versed with the law, let alone a person who would realise that his actions and
words constituted the key indicia of an express private trust. Hence, equity's
way of finding an intention to create a trust is by way of substance rather
than by form".
In addition, these cases share one important similarity with that of
Quistclose, namely the fact that the monies were segregated into separate
accounts. Most importantly, they illustrate the drastic impact of a trust on
assets during insolvency. A creditor who can successfully claim that he is a
beneficiary of a trust is essentially rendered a super-priority creditor.
Although there is no contemplation, negotiation or holding of any
security, such creditors will enjoy the same privileges as though they are
secured creditors during the insolvency of the corporate debtor. It is this dual
effect of ownership in the assets, which confers upon the trust device its
unique security element.
Even so, the role played by the Quistclose trust as a form of security
device is unique to say the least because it is the failure of the purpose
expressed in relation to the use of the loan monies which is being secured in
effect rather than the failure to repay the monies itself, which is common in
most conventional security arrangements. In other words, the trust serves to
secure the execution of the debtor's promise to perform the purpose
entwined in the advance of the monies. Once that purpose is executed, the
lender will be treated as an unsecured creditor. It is this feature which gives
rise to its peculiarity as a security device 16 .
The second point to note from trust assets is the availability of
tracing 1 whenever the assets are misapplied or misappropriated. It is
apparent that a beneficiary who has proprietary interests in the trust assets
can trace it into the hands of third parties who are in receipt of it with the
exception of the bona fide purchaser for value'. Tracing is a powerful and
far-reaching remedial process, which allows a beneficiary of trust assets to
follow their property in specie or trace the value thereof beyond the hands of
the trusteel 9.
In the context of a Quistclose trust, this affords the lender in such
circumstances an additional recourse should their credit advancement be
1 Alastair Hudson, Equity and Trusts (7th edn, Routledge-Cavendish Publishing 2012).
16 Gerard McCormack, Registration of company charges ( rd edn, Jordans
3 Publishing,
2009).
17 Re Diplock's Estate [1948] Ch 465.
18 See Agip (Africa) Ltd v Jackson [1990] 1 Ch 265, per Millett J in relation to equitable
tracing of monies paid into a mixed account.
19 Lionel Smith, The Law of Tracing (Clarendon Press 1997).
6
abused from the terms of what was originally agreed upon. This must be
contrasted from an ordinary debtor-creditor relationship because a
judgement debt obtained is only in essence a personal remedy against the
debtor. During insolvency, such a personal remedy is practically valueless,
as the paripassu rule of distribution will grip hold on the entitlements of
unsecured creditors.
This explains why the juridical basis of the Quistclose trust is debated
to its full fury as legal practitioners and academics alike are keen to divine its
true mechanics and how such a trust comes to existence in the first place.
One's understanding of how this trust arises in turn becomes crucial to the
requisite clarity needed when drafting the clauses in legal documentation. In
addition, commercial certainty is required insofar as practitioners are
concerned when advising the lending community of the intricacies involved
in loan transactions.
D. THE EXPANSION IN TWINSECTRA

In many ways, Twinsectra v Yardley20 represents a valuable decision insofar
as the jurisprudence of the Quistclose trust is concerned, primarily because it
marks the expansion of the trust to a different set of facts involving a distinct
scenario than originally envisioned.
Twinsectra advanced a loan to companies owned by a Mr Yardley for
the specific purpose of acquiring properties. Yardley's solicitor, Mr Leach
refused to give an undertaking that the loan monies would be released only
for the stated purpose but introduced Yardley to a fellow solicitor, Mr Sims
who was prepared to give the undertaking. Twinsectra advanced the loan on
the strength of this undertaking and paid it into the client account of Mr
Sims's firm.
However, upon Leach's fraudulent instructions, Sims paid out the
funds to the companies owned by Yardley contrary to the stated purpose as
stipulated in the undertaking given. The funds were also utilised to pay off
Leach's legal fees. When this fraudulent breach was exposed, Twinsectra
brought a claim against Yardley and the solicitors. The success of the claim
against Mr Sims depended heavily on the finding of a breach of trust and
fiduciary duty.
Although the point on appeal involved the issue of dishonest
assistance, the judgemnent contains a valuable exposition of the Quistclose
20 [2002] 2 All ER 377.
7
trust by Lord Millett upon which the secondary liability of the solicitors
depended.
This decision entrenches the Quistclose principle into the corpus of
English trust cases. Whilst the facts of Quistclose involved a purpose, which
is frustrated and could no longer be carried out, Twinsectra concerned
misappropriation of monies and a malfeasant act done contrary to the stated
purpose.
E. THE ENIGMA AND CRITIQUES

The enigma of the Quistclose trust is primarily borne out of the difficulties
relating to its classification within the realms of trust law. From a doctrinal
perspective, its existence seems to elude orthodox trust principles.
The seminal decision of Lord Wilberforce sets out a dual trust
structure to explain how the Quistclose trust comes into being.
Unfortunately, the judgement was silent as to the nature of the primary trust
and which party holds the beneficial interest pursuant to this trust. Thus, it is
this failure to define clearly the nature of this primary trust that causes the
vagueness, which in turn represents a fundamental flaw in this double trust
structure.
An intelligent and logical guess by many equity scholars would be
that this primary trust is an express private trust as this accords with first
principles. It is trite law that a failure of an express private trust will cause
the beneficial interest to revert back to the settlor on an automatic resulting
trust . Nonetheless, to truly explain how this can arise in the first place from
the facts of Quistclose is a challenge.
22
In a brilliant essay capturing these potential difficulties, Swaddling
made some powerful criticisms against Lord Wilberforce's employ of the
primary trust which is vague at best, and at worst objectionable. In a
structured attack on the primary trust inter alia, there are two compelling
arguments to be noted. As mentioned above, although the judgment was
silent to the nature of this trust, there can only be one logical conclusion -
that it is a form of express private trust.
Firstly, Swaddling was critical of the fact that there can be an express
private trust without certainty of intention. This objection is borne out of
equity's traditional refusal to give effect to precatory words, let alone no
21Re Vandervell's Trusts (No 2) [1974] Ch 269.

22William Swaddling, 'Orthodoxy' in William Swaddling (ed), Quistclose Trust: Critical
Essays (OUP 2004).
8
words at all 2 3 . On the facts of Quistclose, the parties did not pronounce their
intention to create a trust.
Even if one can defend this criticism by arguing that it is not
uncommon for the courts in the past to imply the requisite intention from the
conduct of the parties, Swaddling found it objectionable that this can be
implied from a mere purpose expressed by the lender attached to the use of
24
the loan monies . He finds the facts of Quistclose unexceptional, as it is
outright ordinary in creating only a debtor-creditor relationship.
The debate is whether a specified purpose sufficient for the courts to
infer such an intention. When Lord Wilberforce answered this in the
affirmative, it creates legal shockwaves simply because it was clear that the
lender never understood what a trust is and its implications, let alone
contemplating creating one.
It is apparent that his Lordship was keen to offer some measure of
protective justice to the lender who was adamant that their advancement of
credit be applied only to a specific purpose as agreed upon, the breach or
frustration of which would allow the lender to gain the advantage of some
sort during the event of the corporate debtor's insolvency. On its face, this
seems to be the policy underpinning the tenor of Lord Wilberforce's
judgement.
However, in terms of trust doctrines, this was hugely disappointing
because the weight of precedent on certainty of intention points otherwise.
Even if the certainty of intention hurdle can be surmounted, the primary trust
still faces a formidable obstacle relating to the requirement of certainty of
objects. Distinct from the other trust cases whereby there were human
beneficiaries, the same cannot be said of the primary trust which does not
arise in favour of any one but to carry out the purpose specified by the
lender25 .
This leads to the second criticism which questions, not without force
whether the Quistclose is in effect a purpose trust. Swaddling argues that the
Quistclose is a disguised purpose trust not to benefit the lender but the object
was to achieve the purpose attached to the loan advancement.
23 Lamb v Eames [1871] L.R. 6 Ch. 597; Re Adams Kensington Vestry [1884] 27 ChD
394; cfComiskey v Bowring-Hanbury [1905] AC 84.
24 Re Sanderson's Wills Trusts [1857] 3 K
& J 497.
25
Sarah Worthington, 'Equitable ownership: Quistclose trusts and related transactions' in
Sarah Worthington, 'Proprietary interests in commercial transactions' (Clarendon Press
1996).
9
This is a strong argument because the peculiar feature of the

Quistclose trust is the heavy focus on this purpose. It is the very pivot upon
which all the analyses of the trust depended upon. In fact, the execution of
this purpose is the all-or-nothing element in the success of the trust as a
security device. If it is executed accordingly, there is no secondary trust
arising, which will confer upon the lender the vital proprietary interest in the
loan monies during insolvency.
Yet, unfortunately, if it is true that the Quistclose trust is indeed a
form of purpose trust, this offends one of the most established trust
principles, the beneficiary principle 2 6 . This principle states that if a trust is
created for a purpose, it is void as there is no one to enforce it against the
2172
trustees . The only exception is if the trust is for the benefit of individuals2 8
or it is a charitable trust. Nonetheless, the Quistclose trust is clearly too
personal to be one.
With the shortcomings of the primary trust as an express private trust
exposed and yet if it is not one, then what can it possibly be? To leave it
without any clear classification is undesirable because it is important to
29
locate the beneficial interest in the loan monies at all times.
It is this flaw, which Alastair Hudson criticises about the dual trust
structure. He argues that there is a disturbing time gap between the primary
and secondary trusts which could not satisfactorily point out where the
beneficial interest in the loan monies resides at this interval.3 0
Because the resulting trust, which is the secondary trust, only arises
much later upon the failure of the primary trust, there appears to be a time
gap between the two trusts, leaving the beneficial interest in suspense. This
beneficial vacuum is an objectionable flaw 31 because if the borrower who
holds the monies lapses into insolvency, it would be too late for the
secondary trust to now arise to avail the lender. This is because when
insolvency occurs, the debtor's assets are automatically absorbed by the
26 Morice v Bishop of Durham [1804] 9 Ves Jr 399.

27 Re Astor's Settlement Trusts [1952]
Ch 534.
28 Re Denley's Trust Deed [1969]
1 Ch 373.
29 Gerard McCormack, 'Conditional Payments and Insolvency
- the Quistclose trust'
(1994) 9 Denning Law Journal 93.
30 Ibid footnote
15.
31 As Lord Upjohn held in Vandervell v IRC [1967] 2 AC 291, 'equity abhors a beneficial
vacuum'.
10
liquidator with immediate effect without affording any break in time for the
resulting trust to grip hold of the monies. 3 2
Therefore, it is these jurisprudential difficulties coupled with the
ironical fact that the Quistclose trust remains a useful security device in
practice, which give the trust its enigma. These conceptual problems have
led many equity scholars to doubt the legal foundations underpinning its
very existence. Their common sentiment is that, surely trite law represented
in the precedents dating back a century cannot be wrong or overruled by a
mere freak of a judicial decision, albeit one from the highest appellate court
of the land.33
F. THE ENLIGHTENING MAGIC OF MILLETT'S PREQUEL

In light of the damaging criticisms directed at Lord Wilberforce's analysis of
the Quistclose trust and the convincing manner in which its flaws are being
exposed, this necessitates a search for an alternative theory.
In an article in 198934, Peter Millett QC (as he then was) attempts a
gallant defence of the Quistclose trust when he defended the trust from
criticisms that it is a purpose trust offending conventional trust principles.
His citation of authorities supporting the Quistclose is a prior refutement of
Swaddling's insistence that existing case law indicates that an intention to
create a trust cannot be implied from a mere statement of purpose.
In doing so, Millett departed from Wilberforce's analysis and
explained that if it was the transferor's intention not to benefit the transferee
absolutely, the correct legal analysis was to treat the stated purpose as
leaving the beneficial interest in the fund in the transferor throughout,
subject to the transferee's obligation to apply the monies for the stated
purpose. This stated purpose by the transferor is the mandate given to the
transferee to apply the monies as instructed.
This analysis enjoys the advantage of having explained clearly where
the beneficial interest in the loan monies resides and eschews the
problematic issues relating to the creation of express private trusts. However,
Millett's employ of the concept of a mandate is innovative to say the least
and many are not convinced by this new equitable design.
32 This conceptual difficulty is explained in detail by Robert Stevens, 'Insolvency' in

Swaddling (n 22).
33 For a defence of Lord Wilberforce's views, see Jonathan Edwards, 'Quistclose Trusts:
was Lord Wilberforce right after all?' (2013) 19 Trusts & Trustees 176.
34 Peter Millett, 'The Quistclose trust: Who can enforce it?' (1985) 101 Law Quarterly
Review 269.
11
G. THE GENIUS OF MILLETT'S SEQUEL

In a sequel to his stunning arguments a decade ago, Lord Millett formulated
a slightly tweaked but more developed view of the Quistclose trust in his
dissenting judgement in Twinsectra. This time, his views are stated in a
judicial capacity, which gives it the requisite authority of a statement of law.
Employing a single trust analysis, Lord Millett explained that the Quistclose
trust is a kind of default trust known as the resulting trust, which arises from
the outset. It follows that the beneficial interest in the loan monies belongs to
the lender throughout, from the moment the monies are advanced but
subjected only to the borrower's power 35 to apply the monies in
conformation with the stated purpose.
If the purpose is satisfied, the power is exhausted and the trust is
extinguished as the monies being the subject matter of the trust has been
disposed of accordingly as instructed. However, if the purpose fails for one
reason or another, the monies shall revert back to the lender under a resulting
trust. If the borrower should misapply the monies contrary to the stated
purpose, Millett is adamant that this amounts to a breach of trust. The crucial
point about this resulting trust is that unlike most automatic resulting trust
cases, it does not give effect to a contingent reversionary interest which
arises only upon the failure of the stated purpose but one which arises from
the outset to ensure that there is continuity in the beneficial interest of the
monies 36
Another interesting point to note is that the power to apply the monies
for the stated purpose is irrevocable by the lender so long as that purpose can
be carried out. Thus, it is Millett's fondness of using a qualification when
explaining the Quistclose trust, which characterises his view. His Lordship
conceptualises the trust, which arises as being subjected to a power and that
functions like a switch, which turns on and off the lender's beneficial
37
interest. But when it is turned on, it has always been there
35 Per Lord Upjohn in Re Gulbenkian 's Settlement Trusts [1968] Ch 785 which sets out
the 'any given postulant' test to establish certainty of objects in trust power cases.
36 Paragraphs [100] - [102] of Twinsectra v Yardley [2002] 2 All
ER 377.
37 To conceptualise the power, perhaps one can draw an analogy with condition
precedents in commercial contracts whereby an agreement is in principle a valid contract
provided certain conditions are satisfied. See Trans Trust v. Danubian Trading [1952] 2
QB 297 and Ravi Tenekoon, 'The Law and Regulation of InternationalFinance' (Tottel
Publishing 1991).
12
The distinctive feature of Millett's exposition in Twinsectra is that it

firmly classifies the Quistclose as a resulting trust. At para 100, Lord Millett
held that:
"I would reject all the alternative analyses.. .and hold the Quistclose
trust to be an entirely orthodox example of the kind of default trust
known as a resulting trust. The lender pays the money to the borrower
by way of loan, but he does not part with the entire beneficial interest
in the money, and in so far as he does not it is held on a resulting trust
for the lender from the outset... When the purpose fails, the money is
returnable to the lender, not under some new trust in his favour which
only comes into being on the failure of the purpose, but because the
resulting trust in his favour is no longer subject to any power on the
part of the borrower to make use of the money...
Earlier, at para 92, Lord Millett commented:

"The central thesis of Dr Chambers's book is that a resulting trust
arises whenever there is a transfer of property in circumstances in
which the transferor (or more accurately the person at whose expense
the property was provided) did not intend to benefit the recipient. It
responds to the absence of an intention on the part of the transferor to
pass the entire beneficial interest, not to a positive intention to retain
it. Insofar as the transfer does not exhaust the entire beneficial interest,
the resulting trust is a default trust, which fills the gap and leaves no
room for any part to be in suspense. An analysis of the Quistclose
trust as a resulting trust for the transferor with a mandate to the
transferee to apply the money for the stated purpose sits comfortably
with Dr Chambers' thesis..."
This is an unconventional view by trusts standards as it engages the

refreshing restitutionary ideas of Birks and Chambers in order to reconcile
the Quistclose trust within resulting trust doctrines. In turn, Birks and
Chambers argue that all resulting trusts arise because of a fact, namely that
the transferor does not intend to benefit the transferee. This fact may be
38
presumed or proven . In cases which are identified by the Vandervell
38 See Peter Birks, 'An Introduction to the Law of Restitution' (Clarendon Press
1989);
Peter Birks, 'Restitution and Resulting Trusts' in S. Goldstein, 'Equity and Contemporary
Legal Developments' (Jerusalem: H & M Sacher Institute 1992); Robert Chambers,
'Resulting trusts' (ClarendonPress 1997); Robert Chambers, 'Resulting trusts' in Andrew
Burrows and Alan Rodger, 'Mapping the Law. Essays in Memory of Peter Birks' (OUP
2006).
13
categorisation as 'automatic resulting trust', the fact is proven, whilst in

cases such as the Quistclose trust, the fact may be presumed.3 9
To elaborate, this intention not to benefit the transferee which Birks
and Chambers designate in their theory of resulting trust does not necessarily
mean a positive intention but instead could arise from a circumstance
whereby it is no longer possible to benefit the transferee.
A classic example of this theory can be seen in mistaken payment
cases. The locus classicus for discussion is Westdeutsche v Islington BC40 .
The bank made a mistaken payment to the local council when it
subsequently realised that the underlying contract was ultra vires. The bank
argued for a resulting trust to recover the monies. Although Lord Browne-
Wilkinson rejected that, Birks and Chambers viewed the resulting trust as
the best vehicle to effect the restitution in question.
Millett supports this view in Twinsectra when he explained that what
is relevant to raise the presumption of non-beneficial transfer is not an
expression of positive intention from the transferor to retain his beneficial
interest in the property but rather an absence of an intention to pass the entire
beneficial interest in the property to the transferee absolutely. Hence, it
follows that a mere condition or purpose stated to the loan advance would
satisfy this view.
This lack of consciousness on the part of the transferor is best
captured by Harman J's statement of principle in Re Gillinghaim Bus
Disaster Fund4", a case on automatic resulting trust where the judge stated
that:
"The general principle must be that where money is held upon trust
and the trusts declared do not exhaust the fund it will revert to the
donor or settlor under what is called a resulting trust. The reasoning
behind this is that the settlor or donor did not part with his money
absolutely out and out but only sub modo to the intent that his wishes
as declared by the declaration of trust should be carried into
effect... This doctrine does not, in my judgment, rest on any evidence
of the state of mind of the settlor.. .The resulting trust arises where
that expectation is for some unforeseen reason cheated of fruition, and
is an inference of law based on after-knowledge of the event..."
39 See William Swaddling, 'Explaining Resulting Trusts' (2008) 124 Law Quarterly
Review 72.
40 [1996] AC 699.
41 [1958] Ch 300.
14
Although Harman J dismissed the methodology of presumed intent

vis-ai-vis automatic resulting trusts, it is important to note that according to
Lord Millett's exposition in Twinsectra, the Quistclose trust is not an
automatic resulting trust because the resulting trust arises from the outset. In
this respect, one can say that Lord Millett is proposing an innovative form of
resulting trust, premised on the restitutionary idea of non-beneficial transfer.
Indeed, this strand of reasoning was previously reflected in Lord Millett's
own decision in the Privy Council case of Air Jamaica v Charlton4 2 ,
concerning the surplus of pension funds following the dissolution of an
airline company. The tricky issue in this case was an express provision in the
trust deed, which stated that no monies were to be returned to the company
in any circumstances.
Nevertheless, his Lordship held that this is of no consequence and
convincingly advised that a resulting trust of the pension monies arose in
favour of the company with the result that the Crown could not take the
benefit bona vacantia. Almost by way of legal fiction, Lord Millett
explained that although intention is relevant and crucial in giving rise to a
resulting trust, a resulting trust can still arise regardless of whether the
transferor positively intended to retain a beneficial interest:
"Like a constructive trust, a resulting trust arises by operation of law,
though unlike a constructive trust it gives effect to intention. But it
arises whether or not the transferor intended to retain a beneficial
interest - he almost always does not - since it responds to the absence
of any intention on his part to pass a beneficial interest to the
recipient. It may even arise where the transferor positively wished to
part with the beneficial interest..."
In this context, Lord Millett also commented on the judicial approach in Re
Vandervell No 243 and explained that although Mr. Vandervell clearly did
not intend the share option to result to him, at the same time he did not
intend to make an outright gift to the trustee company.
His Lordship added that only if there is no evidence that there was an
intention to create a trust, make a gift or a loan of the property to the
transferee, can a presumption in favour of the transferor be made. Hence,
although the transferor may not envisage the return of his property, this is
immaterial if the circumstances inadvertently give rise to a resulting trust,
which is a default trust arising by operation of law.
42 [1999] UKPC 20.

4 [1974] Ch 269.
15
In other words, according to this view, all resulting trusts including

the Quistclose trust arise as equity's response to the intention of the
transferor - not to benefit the transferee. In the case of the Quistclose, that
intention is presumed.
H. MILLETT'S NAYSAYERS
1. Penner's Criticisms
Whilst Millett's views are neat and accords with conventional trust doctrines
in principle, they are not immune from criticisms. Professor Penner in a
thought-provoking essay teased Millett's analysis on two aspects. 44
Firstly, Penner attacks the weakest point in Millett's views in
Twinsectra, which is the power. It is notable that Millett jettisons the concept
of a mandate in favour of a more established trust concept known as a
'power'. In a penetrating analysis, Penner argues that the power which the
transferor imposes on the transferee to carry out a stated purpose must be
personal and not under a trust because otherwise, it will have the effect of
dislodging Millett's analysis. The first reason being contrary to what Millett
argues, the imposition of trust duties will displace the transferor's beneficial
interest in the loan monies. Secondly, the power to apply the loan monies
was for an abstract purpose and if this is in a context of a trust, that would
offend the beneficiary principle4 5
Unfortunately, the tenor of Millett's analysis in Twinsectra has been
hesitant on this point. It remains the least clear aspect of his analysis. At
several parts of his judgement, he hinted of trust duties. The most crucial
was his description of the transferee's duties as a fiduciary whereby
undoubtedly, this will involve a duty under a trust. Yet, at the conclusion of
his analysis, Lord Millett clearly stated that the borrower's authority to apply
the monies for a specific purpose is only a mere power. This is
contradictory.
To reinforce this point, Chambers suggested as Penner did that the
best way was to treat the Quistclose arrangements as contractually personal
superimposed on a trust structure4 6 . This was expressly rejected by Lord
Millett in Twinsectra. Hence, it undesirably seems that Millett's analysis
44 James Penner, 'Lord Millett's Analysis' in Swaddling (n 22).

45 In all the cases concerning a 'power' under a discretionary trust, it was to appoint an
object and not to carry out a purpose.
46 Lusina Ho and PJ Smart, 'Reinterpreting the Quistclose trust: a critique of Chambers'
analysis' (2001) 21 Oxford Journal Legal Studies 267.
16
views the Quistclose structure as a trust essentially incorporating a power but

unconvincing in his explanation whether that power is personal.
However, the only saving grace is that the effect is less severe in
application because the test for mere power is applied the same for certainty
of objects in relation to powers under a trust, courtesy of the judgement in
McPhail v Doulton . Nonetheless, in terms of trust principles, the
contradiction in terms threatens the viability of Millett's analysis to a certain
degree.
Secondly, Penner argues that Millett's subscription to the theory of
resulting trust by Birks and Chambers makes his Quistclose analysis
unstable4 8 . There is some force in this argument because till today, there is
no consensus or authority to settle the juridical debate surrounding the
resulting trust. It follows that there is no way of finding out if the theory is
correct and to hinge an important trust analysis such as the Quistclose on an
unproven theory is indeed flimsy.
However, having said that, Millett's views, like that of Birks and
Chambers, enjoys one significant merit - they are logically effective and
share an uncanny ability to explain the most conceptual of trust conundrums.
Hence, in the absence of an alternative superior view, rather than drastically
banishing the Quistclose as an outcast of equity, why should we not
subscribe to this view and save it?
Thirdly, Penner rightly points out that Millett's analysis has changed
from his views a decade ago in a non-judicial capacity. The concern is that
Millett no longer views the Quistclose trust as a product of positive
intentions between the parties to create a trust but one which arises by
operation of law as a matter of presumed intention.
This presents an obstacle because the Quistclose factual situation does
not readily fit within the categorisation of resulting trusts set out by Megarry
J in Re Vandervell's Trust (No.2)4 9 . It is important to note that this neat
categorisation is a summary of the House of Lords decision in Vandervell v
IRCo, whereby many equity scholars and judges have accepted the speeches
of Lords Upjohn and Wilberforce in that case as representing the current
authority on resulting trusts. Therefore, if Millett's exposition of the
47 [1970] 2 All ER 228.

48 Jamie Glister, Review of 'The Quistclose Trust: Critical Essays' by William
Swaddling (2004) 67 Modern Law Review 1032.
49 [1974] Ch 269.
50 [1967] 2 AC 291.
17
Quistclose trust is to gain valid acceptance, it must overcome the hurdle of

being consistent with this categorisation.
In order to respond to Penner's argument, the exact words of Megarry
J's categorisation will be reproduced in verbatim for analysis:
"...Where A effectually transfers to B (or creates in his favour) any
interest in any property, whether legal or equitable, a resulting trust
for A may arise in two distinct classes of case...
(a) The first class of case is where the transfer to B is not made on any
trust... The question is not one of the automatic consequences of a
dispositive failure by A, but one of presumption: the property has
been carried to B, and from the absence of consideration and any
presumption of advancement B is presumed not only to hold the entire
interest on trust, but also to hold the beneficial interest for A
absolutely... Such resulting trusts may be called "presumed resulting
trusts."
(b) The second class of case is where the transfer to B is made on
trust, which leaves some or all of the beneficial interest undisposed of.
Here B automatically holds on a resulting trust for A to the extent that
the beneficial interest has not been carried to him or others.
The resulting trust here does not depend on any intentions or
presumptions, but is the automatic consequence of A's failure to
dispose of what is vested in him. Since ex hypothesi the transfer is on
trust, the resulting trust does not establish the trust but merely carries
back to A the beneficial interest that has not been disposed of. Such
resulting trusts may be called "automatic resulting trusts..."
On a careful reading of this excerpt, it is apparent that Lord Millett's
exposition of the nature of the Quistclose trust is irreconcilable with Megarry
J's categorisation of the resulting trust because the former cannot be readily
fitted into any of the two categories set out above.
Firstly, Megarry J rigidly concludes that an automatic resulting trust
only arises if property is transferred on trusts, which fails to exhaust the
beneficial interest therein. To be exact, this 'trusts' refers to an express
private trust. On the facts of Quistclose, the monies were advanced as a loan
and not on trusts.
The second most important point is that Megarry J made no room for
intentions or presumptions to operate in the context of an automatic resulting
trust. One can appreciate Penner's doctrinal concerns based on this simple
18
logic. If the first category of resulting trusts is based on presumptions", then

surely, the second category cannot also be based on presumptions.
Otherwise, the distinction between the two categories would be one without
a difference.
Therefore, when Millett identifies the Quistclose trust as a resulting
trust that arises based on the presumed intention of the transferor not to
benefit the transferee as evidenced by the stated purpose in the loan advance,
this becomes inconsistent with Megarry J's categorisation.
In fact, Millett's exposition of the Quistclose trust places it as a hybrid
resulting trust in an entirely new category of its own. This is because it is not
one of the 'automatic' resulting trust cases since equity presumes an
intention of non-beneficial transfer from the outset. At the same time, it does
not fall within the category of 'presumed' resulting trust because the fact
presumed is not one of a declaration of trust owing to an evidential gap, but
rather one of a non-beneficial transfer.
Further, Lord Millett described it as a resulting trust, which arises
from the outset with a power attached to perform the stated purpose. Indeed,
there are hardly any conventional resulting trust cases that match all these
features in Millett's exposition. This is where the engima of the Quistclose
trust emerges again as it eludes trust orthodoxy. In this sense, Penner's
argument is valid.
However, having said that, it is argued that this is not a considerable
concern because the law of resulting trust has never been an established area
of equity. It is vague and its juridical nature continues to be a source of
debate5 2 . Suffice to say, the facts of Quistclose itself are unconventional and
hard cases do justify an innovative approach.
In view of the current development of case law on resulting trusts and
the potentially novel circumstances which may give rise to the trust since
Megarry J's decision in Re Vandervell Trusts (No.2), it is respectfully
suggested that this categorisation needs to be revisited 5 3 . There are three
reasons for this suggestion.
5 1See The Venture [1907] 77 L.J.P. 105; Fowkes v Pascoe [1874-80] All ER Rep 521; Re
Vinogradoff [1935] WN 68; Tinker v Tinker [1970] 2 WLR 331; Tinsley v Milligan
[1993] 3 WLR 126; Tribe v Tribe [1995] 4 All ER 236; McGrath v Wallis [1995] 2 FLR
114; Lowson v Coombes [1999] Ch 373.
52 See William Swaddling, 'A new role for resulting trusts' (1996) 16 Legal
Studies 110.
53 See Laskar v Laskar [2008] EWCA Civ 347.
19
Firstly, although one can appreciate that this classification of resulting

trusts has offered valuable guidance in understanding resulting trusts, it has
also imposed an equally significant barrier to a more rational understanding
of resulting trust cases over the years. This is a direct consequence of its
overly formalistic approach by merely fitting cases into rigid categories but
failing to explain the essence of the categories satisfactorily.
One classic example is the very concept of the 'automatic' resulting
trust, which continues to defy convincing legal analysis. Whilst Megarry J
insists that in the category of 'automatic' resulting trust, there can be no
room for intentions and the operation of presumptions, such a rigid
designation goes no further than to explain anything meaningful. In fact, the
only reason why the Vandervell judges came to this conclusion was because
they were solely driven by the need to draw a factual distinction from the
other line of cases they called 'presumed' resulting trusts.
Although one can understand such a motivation and grasp the simple
differences on its surface, in substantive terms, the Vandervell categorisation
offers no content in explaining why automatic resulting trusts arise. At best,
it only identifies factual circumstances as to when such a trust arises.
This lack of understanding of the 'automatic resulting trust' is best
captured by Swaddling in an article where he questions with force the
accuracy and logical truth of Lord Upjohn's retention theory in Vandervell.
According to Lord Upjohn's explanation of the automatic resulting trust,
"If the beneficial interest was in A and he fails to give it away
effectively to another or others or on charitable trusts it must remain
in him. Early references to Equity, like Nature, abhorring a vacuum,
are delightful but unnecessary".
It is observed that this statement is a result of his Lordship presupposing the
division of legal and equitable title in a property prior to the trust coming
into being. However, this amounts to a misconception of fundamental trust
understandings because surely one can appreciate that prior to the trust
coming into being, the settlor has the absolute title in the property. As such,
there is no division of legal and equitable title as of yet until the trust comes
into fruition.
Therefore, it follows that nothing results 'automatically' back to the
settlor if the trust is not established for either want of the three certainties
because ownership of the property basically remains throughout with the
settlor. Hence, if the express trust fails for whatever reason, nothing ever left
the settlor and most certainly there is nothing to retain.
20
This same flaw was also judicially criticised by Lord Browne-

Wilkinson in Westdeutsche:
"This argument is fallacious.. .A person solely entitled to the full
beneficial ownership of money or property, both at law and in equity,
does not enjoy an equitable interest in that property. The legal title
carries with it all rights. Unless and until there is a separation of the
legal and equitable estates, there is no separate equitable title.
Therefore to talk about the [transferor] 'retaining' its equitable interest
is meaningless. The only question is whether the circumstances under
which the money was paid were such as, in equity, to impose a trust
on the [recipient]. If so, an equitable interest arose for the first time
under that trust".
In stark contradistinction from the weaknesses of the strict and formalistic
Vandervell categorisation, the presumption of non-beneficial transfer
proposed by Birks and Chambers, which is employed by Lord Millett in his
Quistclose trust analysis neatly avoids these conceptual flaws. Unlike the
Vandervell categorisation, it enjoys the advantage of being able to offer a
unifying and coherent view as to why all resulting trusts arise. In other
words, there is content in the theory rather than mere categorical distinctions.
As such, it can be applied to a wider range of resulting trusts cases because
the intention not to benefit the transferee is a fluid concept that can manifest
in a variety of ways in practice. It can occur in situations whereby a person
conveys property to another in gratuitous circumstances and there is no other
possible explanation as to why there should be a gift. It can also occur in
situations whereby an express trust fails for one of the three certainties or in
situations such as the Quistclose trust when a purpose attached to the loan
advance is not carried out to fruition. In all these cases, there is one common
factor - the intention in question need not necessarily be one, which is borne
out of conscious thought or express words to that effect. If need be, equity
retains the ability to presume objectively from the totality of a given set of
facts that the transferor did not intend to benefit the transferee.
Thus, there are two fundamental differences that one can appreciate
between the Vandervell categorisation and the restitutionary approach
exemplified in Millett's exposition of the Quistclose trust. Firstly, the
content of the fact presumed is different. In cases of 'presumed resulting
trust' under the Vandervell categorisation, the presumption is one of
declaration of trust caused by an evidential gap to explain a certain transfer
21
or conveyance of property. 54 This is best explained by Lord Upjohn himself

in Vandervell:
"In reality the so-called presumption of a resulting trust is no more
than a long stop to provide the answer when the relevant facts and
circumstances fail to yield a solution"
On the contrary, the restitutionary approach promotes the fact of non-

beneficial transfer, which may be presumed or proven.
Secondly, under the Vandervell categorisation, the methodology of
presumption is not consistently applied to all cases of resulting trusts. In fact,
this methodology is used to distinguish between different cases of resulting
trusts. As a result, as described above, the Vandervell categorisation suffers
from a weakness in that it could not satisfactorily explain the category of
cases it classifies as 'automatic'. The same cannot be said of the unifying
restitutionary idea of non-beneficial transfer which is the sole fact
underlying all resulting trust cases.
It is thus observed that whilst the restitutionary approach can extend
and apply to all conventional resulting trust cases, the existing trust
orthodoxy as represented by the Vandervell categorisation cannot capture the
Quistclose trust. This itself presents sufficient reason to revisit the
categorisation especially when the retention theory set out by Lord Upjohn
has been exposed to be a fallacy in explaining the automatic resulting trust.
In view of these differences, it is argued that whilst categorisations are
helpful in law because they provide certainty and focus one's minds to the
different factual scenarios in cases, such advantages can only emerge if the
categorisation itself is supported by sound underlying theories and doctrines
as to why the cases are drawn to the categories in the first place. Otherwise,
a categorisation without content is a hollow one indeed and the area of
resulting trusts continues to be riddled with ambiguity and debate precisely
because of this reason.
Therefore, although the Vandervell categorisation may contain some
fundamental truths, to entrench it as the exhaustive gospel for all resulting
trust cases that is being surveyed is woefully inappropriate to say the least
because its inadequacies regettably fail to explain the principles underlying
the law of resulting trusts.
Secondly, the area of 'presumed resulting trusts' identified by
Megarry J is not without its own set of problems. It has come under heavy
54See William Swaddling, 'Explaining Resulting Trusts' (2008) 124 Law Quarterly
Review 72.
22
criticisms in recent years for being anachronistic. 5 This argument is

reinforced by the fact that Parliament has just partially reformed the law in
this area.5 6
Further, Chambers presents a more serious doctrinal objection to this
category of 'presumed' resulting trust by attacking the content of fact it
presumes - namely a declaration of trust . It is trite law that intention to
create a trust should not be lightly presumed by the courts and the fact
presumed in the Vandervell categorisation seems to run counter to existing
law. As du Parcq L.J. reminded in Re Schebsman :
"Unless an intention to create a trust is clearly to be collected from the
language used and the circumstances of the case, I think the court
ought not to be astute to discover indications of such an intention."
It is indeed interesting to observe that this criticism is analogously similar to
the objections presented against the primary trust in Lord Wilberforce's dual
trust structure, which Lord Millett skilfully avoided with a single trust
analysis. Therefore, it is argued that the Vandervell categorisation be
overhauled rather than allowing hotch-potch reforms to take place within a
formal yet inadequate structure.
Thirdly, the proposal to overhaul the Vandervell categorisation
presents itself as a viable way to restore coherence in the law of resulting
trusts because at present, there exists an unsettled line of cases, which have
developed within the categorisation over the years.
These cases mainly concern the beneficial ownership of surplus funds
from anonymous subsription to funds and the dissolution of unincorporated
associations. The legal issue litigated in these cases is whether the Crown
takes the surplus funds bona vacantia or should the funds revert back to the
donors on an automatic resulting trust? Whilst the courts have been adopting
divergent views on this matter, this demonstrates the possibility of other
types of factual circumstances that may give rise to an automatic resulting
trust beyond the strict Vandervell categorisation. 5 9
5 See for example, Lord Diplock's famous lament of the presumption of advancement in
Pettitt v Pettitt [1970] AC 777.
56 s.199 of the Equality Act 2010 now abolishes the presumption of advancement.
5 See further the comments in William Swaddling, 'ExplainingResulting Trusts' (2008)

124 Law Quarterly Review 72.
58 [1944] Ch
83.
59 See Cunnack v Edwards [ 1896] 2 Ch. 679; Re Printersand Transferrers [1899] 2 Ch
184; Re Trusts of the Abbott Fund [1900] 2 Ch 326; Re HobournAero Components Ltd 's
Air Raid DistressFund [1946] Ch. 194; Re West Sussex Constabulary'sWidows, Children
23
Although the facts of these cases, unlike the Quistclose trust, can be
fitted within the Vandervell categorisation, there is a lack of any discernible
principle underlying these cases, which creates a sort of 'blackhole' within
the area of automatic resulting trust. To a certain extent, this questions the
very existence of the automatic resulting trust because there are doubts as to
when and in what situations exactly does an automatic resulting trust arise.
Therefore, in light of Penner's doctrinal concerns, it is argued that the
Vandervell categorisation is ripe for an overhaul instead of being construed
as causing a serious dent to Millett's analysis of the Quistclose trust in
substantive terms. Rather, the acceptance of Millett's analysis of the
Quistclose trust will serve to expedite this overhaul sooner rather than later
and this enjoys the advantage of resolving the uncertainty in these two areas
of equity.
Whilst it is conceded that Millett's analysis of the Quistclose trust
cannot be fitted within the existing Vandervell categorisation, this does not
necessarily mean that Millett's analysis is wrong. It only indicates that the
Vandervell categorisation may no longer be an accurate description of all
possible circumstances, in which a resulting trust may arise. As such, it may
have outlived its usefulness in guiding future trusts development in this area.
On a final note to this doctrinal contest, the answer to Penner's argument on
this point is to view the existing Vandervell categorisation as being
authoritative but not exhaustive, thus leaving the possibility that there might
be judicial modification of that categorisation in the near future especially if
Millett's views of the Quistclose trust are accepted as law.
Although Vandervell v IRC is a decision of the highest appellate
authority, the development of equitable principles must not remain static and
the law must be flexible to change in favour of improvement. This is
necessary and inevitable because the cases on resulting trusts continue to
develop and the categories need to expand accordingly to accomodate them.
Although Lord Milllett has not expressly challenged the Vandervell
categorisation of resulting trusts in Twinsectra, this approach moving
forward can achieve reconciliation with existing trust cases. At the least, for
the benefit of a more coherent development of trust doctrines, one should
subscribe to this approach as Lord Millett had skilfully shifted the focus
from the problematic issues concerning certainty of intention to the
and Benevolent Fund Trusts [1971] Ch. 1; Re Bucks ConstabularyFund (No 2) [1979] 1
WLR 936; Re Osoba [1979] 1 WLR 247; Air Jamaicav Charlton [1999] 1 WLR 1399.
24
application of restitutionary ideas proposed by Birks and Chambers. This has

sparked new life into the juridical debate surrounding the resulting trust.
As the search for coherence in this area of law continues, it is thus
argued that should the rigid and unpurposeful Vandervell categorisation be
allowed to invalidate Millett's view of the Quistclose trust, equity stands to
be the biggest loser because to cling on to an authority which proves
inadequate in explaining the conundrums surrounding the juridical nature of
the resulting trust is tantamount to subscribing to an unproductive hindrance
to a better rationalisation of resulting trusts as a whole.
Nevertheless, it is acknowledged that from a precedent perspective, it
would require a decision of the Supreme Court to give effect to Millett's
views, as Vandervell v IRC is a House of Lords decision that remains good
law at present time 60
(2) Smolyansky's crticisms

Michael Smolyansky, in a separate article, also launches scathing criticisms
at Millett's analysis, calling it "wrong" 61. Firstly, he was critical of the fact
that Millett's resulting trust analysis implies intention too loosely, even
looser than in Paul v Constance.
However, Smolyansky failed to realise that the reason Millett employs
a single trust analysis was to avoid the conceptual problems riddling Lord
Wilberforce's primary trust structure. Hence, the arguments relating to
certainty of intention hold no weight, as that is a requirement of an express
private trust. Thus, it follows that Paul v Constance has no comparative
significance at all in this respect.
Smolyansky's caption on intention is a misinterpretation of Lord
Millett's exposition because what his Lordship was discussing is the
presumption of non-beneficial transfer proposed by Birks and Chambers.
Therefore, the intention not to benefit the transferee in resulting trust terms
cannot be equated to an intention to create a trust in the express private trust
sense. The failure to appreciate this fundamental distinction is apt to cause
confusion as surely one can appreciate that a resulting trust is not dependent
on the intention of the parties manifestly expressed to create a trust but
rather, it is an implied trust arising by operation of law.
60See the Practice Statement [1966] 3 All ER 77 set out by Lord Gardiner L.C.
61Michael Smolyansky, 'Reining in the Quistclose trust: a response to Twinsectra v
Yardley' (2010) 16 Trusts and Trustees 558.
25
Indeed, the juridical argument offered by Millett is that the resulting

trust is equity's response to the transferor's lack of intention to benefit the
transferee. Applying the Quistclose facts within this structure, the fact that
the lender attaches a purpose to the loan advance is evidence not of a
positive intention to retain his beneficial interest in the monies but rather
evidence of an intention not to transfer his beneficial interests in the monies
absolutely to the borrower. This remains the logical beauty of Millett's
analysis and should not be argued out of context. As such, Smolyansky's
criticism of the low threshold in which equity presumes intention to give rise
to a resulting trust is misplaced becase he is implicitly measuring it to the
high threshold of finding certainty of intention in the express private trust
sense.
Secondly, Smolyansky argues that Millett contradicted himself when
he classified the Quistclose trust as a resulting trust on the basis of his
approval of Lord Browne-Wilkinson's categorisation in Westdeutsche. It is
submitted that this accusation is at best, careless, and at worst, naive.
If Lord Millett's judgement in Twinsectra is read carefully, his
analysis was the conclusion of his explanation of the various views on the
Quistclose trust. Lord Millett had a distinct style of writing in Twinsectra.
He first discusses all the possible explanations of the Quistclose trust,
pointing out their respective advantages and flaws before presenting his own
exposition. By doing so, his Lordship only adopts those elements, which he
thinks are the best points. For example, although he generally supported
Chamber's views, he later objected to some of its flaws.
Similarly, Lord Millett was merely approving Lord Browne-
Wilkinson's categorisation as examples of how resulting trusts arise. It may
be 'authoritative' but it is certainly not conclusive of all factual
circumstances that give rise to a resulting trust. Therefore, this cannot be
taken to have been subscribed to by Lord Millett as the all-or-nothing truth
in the absence of clear words to that effect.
Secondly, it is helpful to note that Lord Millett's evident support of
the restitutionary views of Birks and Chambers lies at the heart of his
exposition of the Quistclose trust in Twinsectra. In turn, this view of the
resulting trust as a vehicle to effect restitution is diametrically opposite to
Lord Browne-Wilkinson's own juridical view that all resulting trusts arise
because the transferor intends to create a trust for himself.
Hence, it is inconceivable that someone as experienced and brilliant a
judge as Millett to have failed to realise the stark divergence in these
26
62
views . Smolyansky's failure to explain this fundamental point is indicative
of his misinterpretation. Thus, there is no contradiction as Smolyansky
exaggerates, because the Quistclose trust can be added to the existing
jurisprudence of resulting trust cases and Lord Millett is aware of that.
I. A SPECIES OF CONSTRUCTIVE TRUST?

Whilst the focus of Millett's arguments above, were directed at the
Quistclose being a species of resulting trust, there are some views which
hold that it would be better to classify the Quistclose as a constructive trust.63
In fact, this seems to be the approach of the Canadian courts. 64 The basis of
this is it would be unconscionable for the borrower in any event to apply the
loan monies contrary to the stated agreed purpose associated with the
advancement of loan monies. 6 5
At first glance, this view seems to be more coherent as
unconscionability is a well-known doctrine in trusts law, which often
supports the imposition of constructive trusts by the courts. 6 6 This can be
seen especially in breach of trust and breach of fiduciary cases. One such
notable use of the constructive trust as a punitive measure to punish
wrongdoing fiduciaries can be seen in Lord Templeman's decision in AG for
Hong Kong v Reid 67 whereby a constructive trust was imposed on the
proceeds of bribes received by a Crown Prosecutor in Hong Kong. This
proprietary remedy led to a successful tracing for the Crown to recover those
properties bought in Australia with the proceeds of bribes. 6 8
Nonetheless, it is argued that it is undesirable for the Quistclose to be
absorbed into the classification of a constructive trust for two reasons.
Firstly, there are unsettled fundamental criticisms directed at the
doctrine of unconscionability being employed as a basis to impose a
62 Lord Millett himself has responded to Smolyansky's criticisms, see Peter Millett, 'The
Quistclose trust - a reply' (2011) 17 Trusts & Trustees 7.
63 Charles Rickett, 'Different views on the scope of the Quistclose analysis:
English and
Antipodean insights' [1991] 107 Law Quarterly Review 608.
64 Pettkus v Becker [1980] 2 S.C.R.
834.
65 Robert Chambers, 'Resulting trusts' (ClarendonPress 1997).
66 For a more thorough explanation of the subject, see the monograph of
essays by
Charles Mitchell, 'Constructive and Resulting Trusts' (Hart Publishing 2010).
67 [1994] 1 AC 324.
68 Note that Lord Neuberger M.R.'s leading judgement in Sinclair Investments
v
Versailles Finance Ltd [2011] EWCA Civ 347 has today reversed this position.
27
constructive trust, let alone the Quistclose trust.69 This is primarily because
unconscionability is essentially a vague concept, void of any true meaning
unless important judicial guidelines can be formulated.7 0 The consistent
failure of the courts to set out a precise meaning to the term would
necessarily mean that judges are always required to subjectively interpret its
meaning on a case-by-case basis.7 1 Therefore, being uncertain and contrary
to the rule of law7 2 , if the Quistsclose trust is rooted on the doctrine of
unconscionability, this will only create an unsatisfactory ground for further
development of trust principles.
Secondly, Lord Millett's views of the Quistclose trust have offered
rare judicial support to the modem restitutionary ideas of Birks and
Chambers which convincingly gave the resulting trust, an area which has
been fraught with juridical difficulties, a sense of purpose. This helps to
create a more structured jurisprudence of case laws in this area. Hence, it is
argued that the classification of the Quistclose trust as a resulting trust within
these principles will be more purposeful insofar as the future development of
trust doctrines are concerned.
J. THE ENIGMA UNRAVELS

Although no consensus has yet been achieved, an equity scholar and an
insolvency practitioner can chose to view the Quistclose trust from either
two perspectives. Firstly, as a legal commentator noted, one can chose to
ignore the obsession of precise classification of the trust itself, safe in the
knowledge that it is a product of equity's intervention to protect well-
deserved lenders in certain defined circumstances 73
Alternatively, one can adopt the reasoning of Lord Millett who
brilliantly captures the phenomenon of the Quistclose trust by subscribing to
the restitutionary ideas of Birks and Chambers who in turn argued
convincingly that the resulting trust arises because the transferor does not
intend to benefit the transferee.
69 John Dewar, 'The Development of the Remedial Constructive Trust" (1982) 60 Can Bar
Rev 265; Robert Chambers, 'Constructive trusts in Canada', Pt 1 (2001) 15 Trusts Law
International214; Pt 2 (2002) 16 Trusts Law International 2.
70 See the criticisms of Margaret Halliwell [2003] Conveyancer 192 regarding Arden LJ's
employ of this doctrine in Pennington v Waine [2002] 4 All ER 215 as an exception to the
rule in Milroy v Lord [1862] 45 ER 1185.
n1 See also the criticisms of Nourse LJ's judgement in BCCI v Akindele [2000] 4 All ER
221 relating to the legal test establishing the equitable wrong of knowing receipt.
72Charles Rickett, 'Unconscionability and commercial
law' in John Lowry and Loukas
Mistelis, 'Commercial law: Perspectives and Practice' (LexisNexis Butterworths 2006).
73 Alastair Hudson and Geraint Thomas, 'The Law of Trusts' ( 2nd edition, OUP 2010).
28
From a doctrinal perspective, this analysis excels because it neatly

circumvents the cumbersome conceptual difficulties of the primary trust,
which is inherent in Lord Wilberforce's dual trust structure. Secondly, the
element of continuity of beneficial interest in the single trust analysis
overcomes the tricky insolvency issues identified by Hudson as the resulting
trust arises from the beginning prior to any possible breach of the purpose to
which the monies are advanced. Thus, the flaw of a beneficial vacuum does
not arise.
Thirdly, Millett's analysis of the Quistclose trust develops the
jurisprudence of resulting trust by offering invaluable judicial support to
Birks and Chambers' restitutionary view that all resulting trusts arise based
on the presumption of non-beneficial transfer. Whilst the criticisms launched
at Wilberforce's dual trust structure has alienated the Quistclose trust, Millett
views the resulting trust as the body, which will absorb it.
In this way, it is able to explain the nature of the Quistclose trust in a
coherent fashion whereby one can no longer criticise it as the product of
palm-tree justice. Instead, it is now a purposeful addition to existing
resulting trust cases. This is where a wider reconciliation of trust doctrines is
achieved.
The employ of fresh restitutionary ideas also helps to bind and give
the resulting trust a firm juridical foundation and unity of purpose. It is no
longer a vague implied trust, which merely fills in a beneficial vacuum from
a conveyance. Most importantly, restitutionary principles are usefully
extended to capture new situations. 74
Restitution itself is a common law cause of action premised on the
concepts of unjust enrichment and total failure of consideration. It is unique
in that it also straddles in-between the boundaries of trusts law as unjust
enrichment itself is an equitable concept. Millett has always been a supporter
of this thesis75 , which enjoys the distinction of being able to explain some
76
very odd resulting trust cases , the Quistclose now being one of them with
Millett's judicial support.
In the final note to this section, I would now discuss the possible
implications of recognising the Quistclose trust from Lord Millett's
perspective. Firstly, the paripassu rule will be further displaced. It can be
74 See Lipkin Gorman v Karpnale [1991] 2 AC 548 relating to unjust enrichment and
Kleinwort Benson v Lincoln CC [1998] 4 All ER 513 concerning recoveries of monies
paid out of a mistake of law.
75
Air Jamaicav Charlton [1999] 1 WLR 1399.
76 Hodgson v Marks [1971] 2 All ER
684.
29
appreciated that Millett's analysis has extended the application of the

Quistclose trust further to gifts and is not confined to loan monies. This will
inevitably dent further the entitlements of unsecured creditors.
In addition, unlike the express private trust in Re Kayfordn, the
Quistclose trust is not vulnerable to the claw-back provision in section 239
of the Insolvency Act 1986 for voidable preference. This is because it cannot
logically be established that the debtor desires to prefer one creditor to
another since the trust springs into existence from the beginning as a result
of the lender's stated purpose.
Thus, with more circumstances being captured by the Quistclose trust,
the fate of unsecured creditors as governed by the general rule of distribution
looks extremely bleak indeed. Perhaps the final death knell for the pari
passu rule will have to be pronounced soon79
This supports the argument that the courts have offered
disproportionate protection to some classes of creditors at the expense of
those holding no security at all.80 This is a valid point for legal thought
amidst the brilliance of Millett's judicial innovation in defending the
Quistclose trust.
Secondly, Lord Browne-Wilkinson's views of the resulting trust in
Westdeutsche will be further displaced. Indeed, if Lord Millett's analysis is
taken as the dominant view of the Quistclose trust, it will indirectly serve as
a powerful impetus for the decision in Westdeutsche and the juridical views
of the resulting trust expressed therein to be revisited if coherence in the law
is not to be compromised. 8 '
With Millett's views analysed in totality, the enigma of the Quistclose
trust is now being unravelled, the orthodoxy restored and the uncertainty 82 , if
any, is being resolved. If there are still any residues of doubts remaining, as
7 Sarah Worthington, 'Personal property law: text and materials' (Hart Publishing
2000).
78 K. Loi, 'Quistclose trusts and Romalpa clauses: substance and
nemo dat in corporate
insolvency' (2012) 128 Law Quarterly Review 412.
79 Riz Mokal, 'Priority as pathology: the pari passu myth' (2001) 60 Cambridge Law
Journal 581.
8o Roy Goode, 'Is the law too favorable to secured creditors?' (1983) Modern Law
Review 53; M. Gronow, 'Secured creditors of insolvent companies: do they get too good
a deal?' (1993) 1 Industrial Law Journal 169.
81 Lord Browne-Wilkinson's obiter views of the resulting trust is inconsistent with the
authority of the House of Lords key judgment in Vandervell v IRC [19 67] 2 AC 291 as his
presumption of a declaration of trust underlying all resulting trusts fails to explain the
phenomenon of the automatic resulting trust.
82 Deepa Parmar, 'The uncertainty surrounding the Quistclose Trust' (2012) 9
International Corporate Rescue 137.
30
Lord Millett states in Twinsectra quoting Sherlock Holmes, "when you have
eliminated the impossible, whatever remains, however improbable, must be
the truth".
K. THE PRACTICAL RELEVANCE OF QUISTCLOSE

In view of the rearguard defence led by the wizardry of Lord Millett's
arguments, powered by the refreshing restitutionary ideas of Birks and
Chambers, the practical relevance underlying the Quistclose trust must now
be considered.
Notwithstanding the force of Penner's arguments, it is submitted that
they are not sufficient to destroy the essence of Millett's view and thus
cannot be adopted in their entirety because this will restrict the expansion of
trust doctrines and hinder the relevance of the jurisprudence of equity to
accommodate the needs of contemporary business realities.
The foremost consideration is the justifiability of offering protection
to a lender who specifies a purpose attaching to the advancement of monies.
From a commercial perspective, it makes for efficient business when monies
are needed to be advanced immediately and a split-second decision needs to
be made. There is simply no scintilla in time, which allows for the more
cumbersome creation of security, let alone the negotiation of it from the
corporate debtor.
In such circumstances, the law needs to offer protection to lenders
who are not able to obtain security for one reason or another. If such lenders
are deprived of the protection offered by the Quistclose trust, their financial
interests stand to be prejudiced. This will inevitably result in the
emasculation of credit, which may have deep resonance in economic reality.
Businesses will only suffer if the flow of temporary bridging finance is
impeded.
Let us not forget the often underestimated reality that short-term credit
provides a valuable means for any corporate entity to survive the day when
faced with unexpected financial pitfalls83 . Hence, without the Quistclose
trust, it is companies who will be the ultimate losers when credit is withheld
from them in crucial times and the grant of security is not feasible.
The facts of Quistclose itself are illustrative. Rolls Razor's more
established banker, Barclays refused to extend further credit due to the
83 For example, credit enhancement facilities in securitization transactions with the status
of senior creditor being conferred upon such lenders in the waterfall of payments as
reflected in the tranches of debt.
31
overdrawn overdraft the company owed. Indeed, it was a less prominent

lender who agreed to save the day for the company, but only to suffer the
disappointing reality of its debtor entering into voluntary liquidation.
Instead, its well-intentioned loan monies are now being claimed by another
fellow lender in satisfaction of the company's debts. What a measure of
commercial injustice!
Therefore, this justifies the protection of the Quistclose trust, which is
being afforded to such bona fide lenders who advanced credit. Their
stipulation of a purpose attached to the advance is evidence of their
contractual bargain and thus merits equity's protection.
When unscrupulous recipients breached that condition as
demonstrated in Twinsectra, it is only right for the lender to have recourse in
equity. This is a classic situation whereby trusts law, especially the doctrine
of a resulting trust can intervene and prove its usefulness. After all, equity
looks at substance and not form.
The argument that this will cause prejudice to other creditors cannot
be sustained simply because the lender who is claiming the protection of the
Quistclose trust is furnishing cash consideration upfront and this is further
reinforced by the condition stated, which reflects his contemplation of how
his monies should be employed. Surely, this cannot amount to an undeserved
protection conferred to such a lender in question.
The second point to note is the advantage of the Quistclose trust in
terms of convenience and simplicity in its creation. The effect of its security
can be created by simply including a term in the loan contract stating the
purpose of the advance. This is invaluable as an effective quasi-security
device when time is of the essence in commercial transactions and where the
cumbersome procedures associated with the creation of security is simply
not feasible.
Today, the importance of the Quistclose trust in secured lending
cannot be underestimated. In view of the ongoing financial crisis and
emasculation of credit facilities, equity must be sufficiently flexible to adapt
to the needs of the business community.
This echoes with greater resonance in current business conditions
because banks and financial institutions are often unwilling to lend large
sums over an extended period of time, since the global economic crisis hit.
Instead, it is the non-mainstream lenders such as pension funds and
insurance companies, which have stepped up to the fore.
Therefore, the grant of quasi-security interests such as the Quistclose
trust assumes greater importance than before, as these non-mainstream
32
commercial lenders are keen to obtain some form of legal protection to

safeguard their financial interests against the potential insolvencies of
corporate entities before agreeing to advance credit.
English commercial law needs to defend the advantage it has built up
all these years, such as the relative convenience in the creation of security,
which has always provided sublime trade conditions. This liberal attitude,
which it assumes towards effective security creation, is also a key factor why
English law has always been the governing choice of law in high-level
financial contracts. The Quistclose trust is a device, which can help to
84
further that aim, giving it an edge over its continental counterparts
Seen in this light, there is no room for old-fashioned sentiments.
Hence, the criticisms by Penner, whilst one can appreciate their doctrinal
concerns, cannot be absorbed to legal reality. It must be processed and the
intellectual challenges taken to improve trusts law. However, the objections
must be abandoned in favour of modernity.
L. QUISTCLOSE FROM A COMMONWEALTH PERSPECTIVE

Although the Canadian and New Zealand courts seem to subscribe to the
view that the Quistclose trust be classified as a species of the constructive
trust premised on the doctrine of unconscionability 8' , other eminent
Commonwealth jurisdictions such as Malaysia continue to follow the
English approach.
In a gesture of international comparative perspective, the decision of
the Malaysian Court of Appeal in Perman Sdn Bhd. v European
Commodities 86 will now be discussed. The claimants were two private
companies controlled by a wealthy businessman, Rangoonwala. He wanted
to use the business connections of one Raja Zainal and they promptly
engineered a joint venture with two other entities.
A new company, Fimaly Sdn Bhd was incorporated to achieve the
objectives of this joint venture. 3% of shares in Fimaly were held by Raja
Zainal through Perman Sdn. Bhd. Although Perman is wholly owned by
Raja Zainal and his wife, Rangoonwala provided the cash consideration for
Perman's subscription of the Fimaly shares through his private companies
because Raja Zainal lacked the requisite cash to subscribe for the shares.
84
The English concept of a 'trust' is alien in continental civil law systems practiced in
most European countries.
85 Fiona Burns, 'The Quistclose Trust: Intention and the Express Private Trust' (1992)
18
Mon. LR 147.
86 [2006] 1 MLJ
97.
33
Raja Zainal and his wife then died in an accident, which prematurely
ended the joint venture. The Fimaly shares have now appreciated in value
and Rangoonwala claims ownership of the 3% shares through his claimant
companies.
The claimants argued that Raja Zainal held the Fimaly shares under a
trust. The argument was based on the claimants' provision of the purchase
price for the Fimaly shares. The trial judge held that the shares were held
under a resulting trust and the defendants appealed the decision.
Gopal Sri Ram JCA delivering the sole judgement of the court held in
favour of the defendants stating that the trial judge had erred in holding that
a resulting trust arises in favour of the claimants. It was important to
determine in what capacity the claimant companies advanced the monies. If
they were indeed purchasers and Raja Zainal was merely a proxy doing their
bidding, then a presumption of resulting trust will indeed arise.
However, his Lordship held that since the evidence only pointed to the
claimants' being lenders in advancing the money for Raja Zainal to
subscribe to the Fimaly shares, a presumption of a resulting trust cannot
arise. Since the loan advance was made for the specific purpose of
subscription to the Fimaly shares, the monies were held on a Quistclose trust
by Raja Zainal. It follows that since the purpose had been accordingly
carried out, applying Millett's analysis in Twinsectra, the judge held that
only a debtor-creditor relationship exists. Therefore, the claimants can only
assert a personal claim for the monies and not proprietary rights over the
shares.
Although the application of the legal principles in this case is fairly
straightforward, this decision represents a rare affirmation of support to Lord
Millett's analysis in Twinsectra. In addition, it entrenches the Quistclose
trust into Malaysian jurisprudence, thereby offering valuable inter-judicial
support8 for the viability of Millett's efforts to lodge the Quistclose firmly
within the realms of the resulting trust. Further, as demonstrated in this case,
the application of the Quistclose trust in emerging economies across the
Commonwealth serves to highlight its value in commercial transactions.
87 Contrast with Gummow J's decision in Re Australian Elizabethan Theatre Trust [1991]
102 ALR 681.
34
UCL Journal ofLaw and Jurisprudence
M. POSTSCRWT
In view of the analysis above, it would be helpful to examine two recent

decisions, which represent the latest developments in this ever-dynamic area
of law.
In the Court of Appeal case of Beiber and others v Teathers Linited' ,
the Quistclose trust was engaged in a challenging commercial scenario. The
defendant promoted a scheme called 'The Take 3 TV Partnerships' and
presented an information memorandum to invite subscriptions to it. The
claimant was attracted by the scheme and paid subscription monies into a
settlement account at HSBC. Once the minimum threshold of subscription
monies is reached, the defendant then transferred the monies into a separate
partnership account at Barclays Bank for the purposes of investing in the
Take 3 Scheme projects. This was done pursuant to the terms of the
subscription agreement.
The scheme failed and the defendant lapsed into insolvency. In order
to claim their monies back, the claimant argued that they advanced the
monies for the specific purpose of enabling the defendant to invest the funds
for the Take 3 Scheme.
When the defendant did not carry this out, they argued that a
Quistclose trust arose in their favour. Crucially, if this argument succeeded,
this would put the claimant in a favourable position to recover their monies
ahead of the defendant's other unsecured creditors. However, the Court of
Appeal rejected this argument to the relief of most unsecured creditors and
explained that a Quistclose trust only arises when a person loans money to
another for a specified purpose. On the facts, the subscription monies do not
constitute a loan.
Further, Arden U traced the chronology of events in which the
monies were being paid into and transferred between the two accounts.
When the claimant first made the payment into the HSBC account, the court
was prepared to accept that it was held on a Quistclose trust because it was
paid pursuant to the purpose of subscription thereof. However, when the
monies were then transferred to the Barclays partnership account, this was
done in accordance with the terms of the subscription agreement.
From that moment, the claimant's rights in the monies were regulated
by the partnership deed. The Quistclose trust, if any, lapses and the
88[2012] EWCA Civ 1466.
35
beneficial interest of the claimant in the monies cease to exist. At that point,
they only had a contractual right to share in the profits of the partnership and
in its net assets upon dissolution.
Arden U also agreed with the first-instance decision that a Quistclose
trust did not fasten onto the monies in the partnership account because the
specific purpose crucial for the trust to arise was not objectively certain
during the time of the transfer. This is because the specific purpose for
which the funds are advanced viz., the pursuit of profitable investments was
not sufficiently clear to enable detennination as to whether the purpose was
actually satisfied. This casts doubts as to whether the Quistclose trust had
arisen in the first place.
This decision reinforces the integrity of the trust device by holding
that although a Quistclose trust may arise without the positive knowledge
and intention of the parties, provided monies are advanced for a specific
purpose, at the same time the courts are unwilling to allow the trust to be
conveniently argued in vague circumstances as a measure of last resort in
order to save a party's entitlement from the undesirable effects of
insolvency.
In addition, Beiber offers a glimpse of the possible factual complexity
in which a Quistclose trust can be argued in commercial practice.
Fortunately, the judges demonstrated that they are up to the challenge to deal
competently with the issues and to ensure certainty prevails in the law.
Therefore, in this regard, this decision must be applauded because it seeks to
prevent any disrepute in the law.
In the second case of Gabriel v Little89 , the High Court further
clarified the factors which trigger a Quistclose trust, in particular,
emphasising the need to specify the purpose as clearly as possible. The facts
of this case are atypical. A Mr. Gabriel advanced a loan intended as an
investment to a property venture company headed by a close friend, Mr.
Little, which then lapsed into insolvency. In asserting a claim to recover his
monies, Mr Gabriel seeks to establish that the monies were held on a
Quistclose trust which in turn supports his claim against Mr. Little for the
equitable wrongdoing of knowing receipt.
The argument for a Quistclose trust was predicated on a ten in the
facility letter, which states that the purpose of the loan was 'to assist with the
costs of development of the Property'. Instead of being used for property
89 [2012i EWHC 1193 (Ch); this case was heard in the Court of Appeal on 26 June 2013,
which currently awaits the results of a reserved judgment.
36
UCL Journal ofLaw and Jurisprudence
development, the loan monies were misapplied contrary to the stated

purpose which prompted Mr. Gabriel to sue.
The High Court accepted that a purpose specified, indeed merited the
possiblity of a Quistclose trust arising. However, the judge concluded that
the word 'development' was vague and too uncertain on the facts to mean
anything. Therefore, this lack of clarity in the purpose specified means that
no Quistclose trust arises.
This case sheds important light onto the willingness of the court to
find a Quistclose trust and it is clear that the threshold in which such a trust
arises is indeed high. The mere fact that a purpose is specified is insufficent
to give rise to a Quistclose trust although the court did make a concession
that the description of the purpose as being 'sole' or 'exclusive' is not a
prerequisite. Nonetheless, the court did seem to hint that these words may be
crucial and would strengthen a case for a Quistclose trust. Therefore, this
decision reveals the judicial approach in finding the requisite precision in the
words used to specify the purpose. This greatly improves the clarity in the
drafting of clauses in legal documentation especially loan transactions.
In addition, banking and security lawyers would be well-advised to
elaborate in as much detail as possible, the purpose for which the loan is
advanced, fitting into and considering the context of the transaction and its
surrounding circumstances so as to enable a court to find a sufficiently
workable and clear purpose.
A second material point that transaction lawyers may derive from this
decision is the need to segregate the loan monies from the general funds of
the borrower. The discussion of this factor revisits the unique factual
similarities shared in Paul v Constance, Quistclose and Tvinsectra whereby
the monies were paid into a designated bank account. In trusts parlance, this
factor has often held sway amongst equity judges because it establishes the
certainty of subject matter, which is a traditional characteristic strongly
indicative of the presence of a trust.
Therefore, upon an examination of the authorities, the High Court
explained that although segregation of the monies ipso facto is not a
prerequisite to the finding of a Quistclose trust, it could operate as a crucial
element, which reinforces the finding of a trust especially if the surrounding
factors in a case are equal and balanced.
For example, if the purpose on a given set of facts is identified but
insufficiently precise, had the monies been deposited into a specific bank
37
account, this may help to persuade the court to hold that a Quistclose trust
attaches to the monies.
In the aftennath, these cases ensure better clarity in the drafting of
contracts by specifying the degree of precision, which the court expects in
the purpose attached to the loan advance, and highlight the need to segregate
monies into a specific account. One can also conclude that the Quistclose
trust is not a second fiddle trust device of sorts, which functions to save a
creditor from the damnation of its debtor's insolvency. The circumstances in
which it arises are strictly regulated by the courts and for the trust to be
triggered, the specific purpose in question must be sufficiently identified and
capable of detenniantion when the monies are advanced.
N. CONCLUSION: THE WAY FORWARD

As discussed in the foregoing, the Quistclose trust serves as a valuable
commercial device employed in favour of lenders when such lenders
advanced credit without security. The insolvency impact of a trust is
evidently far-reaching as it preserves the proprietary interest of the lender
and it is this crucial advantage offered by this unique quasi-security device
which fuels the debate to unravel the enigma of the Quistclose trust.
Despite its robust classification within the realms of the resulting trust
which is itself plagued with the uncertainties surrounding its juridical basis9 0 ,
the commercial utility of the Quistclose trust cannot be denied especially to
lenders in times of insolvency.
Therefore, its peculiarity should not lead one to be overly critical of its
existence. If its inconsistencies with conventional trust doctrines are to be of
any concern, it only serves to illustrate the ingenuity of equity to deal
flexibly with the commercial needs of the lending community. Thus, when
viewed in this simplicity, one should accept the Quistclose trust as an
established part of trusts law. It might be peculiar but it is certainly not an
anomaly.
In the final analysis, it must be appreciated that Lord Millett's twin
analysis over the span of two decades has helped legal scholars and
practitioners alike, truly grasp the nature of this unique trust device. To a
large extent, this helps to facilitate the drafting of commerical contracts and
allows one to understand better the legal implications, which results from
such transactions.
90 See William Swaddling, 'A new role for resulting trusts' (1996) 16 Iegal Studies 110;
William Swaddling, 'Explaining Resulting Trusts' (2008) 124 Law Quarterly Review 72.
38
Commercial certainty thus becomes a crucial legal commodity here

and it is time that the enigma of the Quistclose trust be unravelled for all to
91
see or be allowed to disappear forever as a legal heresy
91 See for example, the Court of Appeal decision in Re New Bullas [1994] 1 BCLC 485
which has been overruled by the House of Lords in Re Spectrum Plus [2005] UKHL 41 in
relation to the divisibility of charges over book debts and its proceeds.
39

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What is a Quistclose trust and how did it originate?

What is a Quistclose trust and how did it originate?

What are some of the difficulties surrounding the existence of a Quistclose trust?

What are some of the difficulties surrounding the existence of a Quistclose trust?

10.14324/111.2052-1871.

THE ENIGMA OF THE QUISTCLOSE TRUST

LL.B (Hons), University of London, LL.M (University College London), C.L.P.

commercial scenarios especially in the world of secured lending and

B. THE GENESIS OF THE QUISTCLOSE TRUST

personam, which is non-exercisable against third parties, Lord Wilberforce

C. THE QUISTCLOSE TRUST AS A SECURITY DEVICE

3 Toovey v Milne [1819] 106 ER 514.

Thus, to all practical intents and purposes, an unenviable situation is

Therefore, following this structure, it is trite law that assets subjected

D. THE EXPANSION IN TWINSECTRA

20 [2002] 2 All ER 377.

E. THE ENIGMA AND CRITIQUES

21Re Vandervell's Trusts (No 2) [1974] Ch 269.

This is a strong argument because the peculiar feature of the

26 Morice v Bishop of Durham [1804] 9 Ves Jr 399.

F. THE ENLIGHTENING MAGIC OF MILLETT'S PREQUEL

32 This conceptual difficulty is explained in detail by Robert Stevens, 'Insolvency' in

G. THE GENIUS OF MILLETT'S SEQUEL

The distinctive feature of Millett's exposition in Twinsectra is that it

Earlier, at para 92, Lord Millett commented:

This is an unconventional view by trusts standards as it engages the

categorisation as 'automatic resulting trust', the fact is proven, whilst in

Although Harman J dismissed the methodology of presumed intent

42 [1999] UKPC 20.

In other words, according to this view, all resulting trusts including

44 James Penner, 'Lord Millett's Analysis' in Swaddling (n 22).

views the Quistclose structure as a trust essentially incorporating a power but

47 [1970] 2 All ER 228.

Quistclose trust is to gain valid acceptance, it must overcome the hurdle of

logic. If the first category of resulting trusts is based on presumptions", then

Firstly, although one can appreciate that this classification of resulting

This same flaw was also judicially criticised by Lord Browne-

or conveyance of property. 54 This is best explained by Lord Upjohn himself

On the contrary, the restitutionary approach promotes the fact of non-

criticisms in recent years for being anachronistic. 5 This argument is

5 See further the comments in William Swaddling, 'ExplainingResulting Trusts' (2008)

application of restitutionary ideas proposed by Birks and Chambers. This has

(2) Smolyansky's crticisms

Indeed, the juridical argument offered by Millett is that the resulting

I. A SPECIES OF CONSTRUCTIVE TRUST?

J. THE ENIGMA UNRAVELS

From a doctrinal perspective, this analysis excels because it neatly

appreciated that Millett's analysis has extended the application of the

K. THE PRACTICAL RELEVANCE OF QUISTCLOSE

overdrawn overdraft the company owed. Indeed, it was a less prominent

commercial lenders are keen to obtain some form of legal protection to

L. QUISTCLOSE FROM A COMMONWEALTH PERSPECTIVE

In view of the analysis above, it would be helpful to examine two recent

88[2012] EWCA Civ 1466.

development, the loan monies were misapplied contrary to the stated

N. CONCLUSION: THE WAY FORWARD

Commercial certainty thus becomes a crucial legal commodity here

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