Quistclose trusts

Saturday, April 5, 2014

When monies are lent for specific purpose and it were used for something other than given purpose, disposal of such monies is in breach of Quistclose Trust.

The name of Quistclose trust has its origin from the case of Barclays Bank v Quistclose Investments, Ltd [1968] 3 All ER 651.

In that case, a company by the name of Roll Razor Ltd needed money to pay dividend to its shareholder. Quistclose Investment Ltd agreed to loan £209,719 on the condition that the monies will be used only to pay dividend and such monies to be put in separate account. 

The separate account was opened at Barclays Bank. At the same time, Rolls Razor Ltd owed Barclays Bank £484,000. Before the dividend was paid, Rolls Razor Ltd went into voluntary liquidation, or in a layman term - wound up. 

Quistclose Investment Ltd sought from Rolls Razor and Barclay Bank the monies given for the purpose of paying dividend be returned, for the purpose of such monies is given ceases to exist with winding up of the company. They claim Roll Razor Ltd took the money on trust to pay the dividend and Barclay Bank held such monies in the separate account as trustee.

The Barclays Bank's answered that even if Quistclose is right in saying that the money lent became impressed with the trust to pay the dividend (which is disputed), the company's obligation to repay the money to Quistclose is no more than the contractual obligation of a borrower to repay his lender. Since the company was indebted to the bank in a sum in excess of the amount in the separate account, the bank has  right to set-off the money standing to the credit of that account against the company's indebtedness.

The High Court dismissed Quistclose's claim for the monies.It held there was no such trust and the bank was not a trustee of the money in the separate account for Quistclose.

The Court of Appeal reversed the decision of the High Court and held, inter alia, that the money being lent for a specific purpose, a trust had arisen that the money lent should be applied only in payment of the dividend and also for repayment of the money lent if it were not so used. The bank accepted the money with knowledge of the facts which made it trust money, not the free assets of the Rolls Razor Ltd, and that it cannot therefore retain it against Quistclose's claim.

The case went to the House of Lords. The House of Lords affirmed the decision of the Court of Appeal, which gave effect that the monies which were not used to pay dividend should be paid back to Quistclose Invesment Ltd.

It appears in the news where borrower seeks not only from financial institutions, but also government agencies, facilities which are design for specific purpose, like cultivating agriculture activities and small and medium entrepreneur. I must say, many had misused this opportunity and used the money in other than the purpose it was given. A trial is going on, on the misuse of monies given to National Feedlot Corporation (NFC scandal). The fund was given for development of livestock farming and beef production. But allegation that the monies were used to buy properties. When I read the news, the case of Quistclose flashed in my mind.

I heard about this case for the first time during a tutorial session held for Judicial Officers at the library of the Federal Court of Malaysia. The tutor was His Lordship Dato' Gopal Sri Ram. I was sitting at the back since I came late. Before His Lordship started the session, he yelled, "THOSE AT THE BACK, COME TO THE FRONT!!" and I was literally sitting under his nose. The 2 hours session was very beneficial and fruitful. I did learn a lot and it was a rare occasion, though not so conducive, to learn law and to be taught personally by a Judge of the Federal Court and that judge is Gopal Sri Ram.

While discussing the law of constructive trust and the case of Takako Sakao, His Lordship post a question - what if monies are given for specific purpose and it was disposed of for anything other than the given purpose? The question echoed and deep silence struck the air, while everybody was lowering their head and looked down, not sure out of being humble or not knowing the answer or too scare to look at His Lordship bold face! A person then gave the answer and that person was none other than His Lordship himself (HAHAHAHA). He told us about the case of Quistclose and when monies are used for anything other than the specific purpose it were given, the person who had done that, is in breach of Quistclose Trust which might be a criminal breach of trust, an offence under section 405 of Malaysian Penal Code.


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