An explanation of what a quistclose trust is and when one will be formed.
What is a Quistclose trust?
Finding its origins in the case of Barclays Bank v Quistclose (1970), a Quistclose trust is a ‘purpose trust’ placed on loan monies that are for the use of a specific purpose.
A typical scenario in which a Quistclose trust could arise is in the event that a borrower borrows money from the lender, for a specific purpose. If the money is used for a reason other than the one specified at the time of the loan being approved, the borrower will have breached the contractual conditions of the loan.
In the event that the borrower become insolvent, the decision in Quistclose ensures that the amount for the specific purpose is held as an automatic resulting trust on behalf of the lender; thus the fund cannot be divided amongst the borrower’s creditors. Therefore, the loan monies or the trust property would be returned to the lender in the case of insolvency.
It is to be noted that Quistclose trusts arise secondarily to the primary trust not (fulfilling the contractual obligations of the loan) being carried out. Thus a Quistclose trust is a ‘secondary’ trust that arises in the event that the primary trust “cannot be carried out”.