8th February 2016
An issue that regularly comes before the courts in insolvency situations is whether a lender, who has advanced money to a now insolvent borrower, has retained a “security interest” in the money advanced so that it is held on trust for the lender (called a “Quistclose trust”). A consequence of a ruling that a Quistclose trusts exists is that the money advanced is not available for distribution in the insolvency proceedings as part of the borrower’s estate. Rather than ranking as an unsecured creditor, the lender has a proprietary claim and would have a cause of action against a third party – solicitors, for example, holding the money in their client account – who parted with the money.
Two recent cases have clarified the requirements for the establishment of a Quistclose trust. In each case the issue concerned monies transferred to a solicitors’ client account.
In Gore v Mischon de Reya , the claimants were investors who had transferred money to the defendant solicitors which they intended was to secure a bank guarantee which could then be used to procure a loan facility to refinance a property development and to acquire a property development. The solicitors released the money to their client, a Mr Shepherd, who kept the money for himself. The investors claimed the solicitors had acted in breach of trust. The High Court rejected this argument. It attached importance to the absence of any express terms creating a trust. The only communications concerning the transfer of the money were express statements that the monies were to be held to Mr Shepherd’s order, statements which the court considered to be manifestly inconsistent with the establishment of a Quistclose trust.
In Bellis v Challinor , the claimants transferred money to the defendant solicitors which they intended to be used to develop an airport. The solicitors acted for the investment vehicle which had acquired the land and the money was used to reduce the borrowings of that company. The scheme failed and the company went into administration. There had been no dealings between the claimants and the defendants but the claimants relied on previous schemes in which both parties had been involved and where the solicitors had acted as escrow agent under express escrow terms and which, the claimants maintained, supported the conclusion that the monies advanced were held by the solicitors subject to a Quistclose trust. The Court of Appeal found that there was no Quistclose trust. In most cases the existence or otherwise of a Quistclose trust would be determined according to the words used; in this case, no words had been used so reference must be made to the surrounding circumstances. Payment to a solicitor’s client account constituted evidence of an intention that the monies be held for the solicitors’ client rather than to the order of the transferor and there was nothing in the factual matrix to supplant this presumption.
The lesson from these two cases is that a Quistclose trust will only be found to exist where there is clear evidence of an objective intention on the part of the transferor to establish a trust. This is best shown by the existence of clear wording establishing the trust, stating that the funds are advanced for the sole or exclusive purpose stipulated by the transferring party. Where monies are transferred to a solicitors’ client account, in most cases the monies advanced will be held on trust for the client and the transferor will need to express very clearly the contrary intention, perhaps by completing a declaration of trust.
  EWHC 164 (Ch)
  EWCA Civ 59