Quistclose trusts in English law

A Quistclose trust is a trust created where a creditor has lent money to a debtor for a particular purpose. In the event that the debtor uses the money for any other purpose, it is held on trust for the creditor. Any inappropriately spent money can then be traced, and returned to the creditors. The name and trust comes from the House of Lords decision in Barclays Bank Ltd v Quistclose Investments Ltd (1970), although the underlying principles can be traced back further. There has been much academic debate over the classification of Quistclose trusts in existing trusts law: whether they are resulting trusts, express trusts, constructive trusts or, as Lord Millett said in Twinsectra Ltd v Yardley, illusory trusts.

A Quistclose trust is a method by which a creditor can hold a security interest in loans, through inserting a clause into the contract which limits the purposes for which the borrower can use the money. If the funds are used for a different purpose, a trust is created around the money for the benefit of the moneylender. This allows the moneylender to trace any inappropriately spent funds, and, in the case of the borrower's insolvency, prevents the money from being taken by creditors. The name and trust comes from the House of Lords decision in Barclays Bank Ltd v Quistclose Investments Ltd, in which Lord Wilberforce maintained that in Quistclose situations, the intention must be to create a secondary trust for the benefit of the moneylender, arising if the "primary trust" (the appropriate use of the money) is not fulfilled. The idea of a primary and secondary trust comes from Toovey v Milne, where money was lent by A to B, to pay off his debts. When B went bankrupt and returned the money to A, the courts held that the creditors could not recover this money, as it was held in a form comparable to a trust. Most situations in which a trust will arise require that a specific use of the money is identified by the contract.

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