Trusts and equitable relationships in utility to commerce.

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‘Trusts in a commercial setting require treatment that differs from that given to traditional trusts. Some modification is essential if trusts and equitable relationships are to be of utility to commerce.’

Critically evaluate the above view, with reference to case law and literature on both the nature of a beneficiary’s interest under a trust and on the nature of Quistclose trusts.

Traditionally trusts were private family arrangements. Historically much of trusts law emerged out of the desire of settlors to preserve family wealth, tying up property so that it could be enjoyed by successive generations.[1] In the twentieth century however, trusts have been used more and more in a commercial setting to the point that it is estimated that less than 10 per cent of trust assets are comprised in family and charitable trusts.[2] Therefore, it is clear that the most important feature of the trust concept is as an instrument of commerce, with the key attributes of protection against insolvency, the protective regime of fiduciary trust law and the flexibility of provisions that can be inserted in trust instruments. The key to the efficient commercial use of trusts is the idea of the trust fund owned by the trustee but segregated from his own estate and thus protected from the claims of the trustee’s creditors and available to satisfy the claims of the beneficiary.[3] In the commercial context the trust usually results from a contract rather than a gift meaning that often commercial trusts seem to straddle the line between the two systems of exchange, gifts and bargains which in the eyes of some commentators has blurred the line between trust law and contract law. Rudden’s account of the orthodox trust as "essentially a gift, projected on the plane of time and so subjected to a management regime,"[4] does not fit for trusts in commercial settings. The commercial trust, by contrast does not effect a gift and often has financial benefits for the lendor. For example in Northern Developments Holdings Ltd[5], where the banks had an interest separate and distinct from that of the debtor in seeing that Kelly’s debts should be paid. There has been much controversy over the nature of a beneficiary’s interest under a trust, based upon the difference between in personam rights against trustees and in rem rights against trust property[6]. In the commercial world, Goode suggests that it is upon the debtor's insolvency that the distinction between ownership and a personal right to an asset becomes of crucial significance.[7] This mainly because it is a basic policy of insolvency law to respect proprietary rights held by another prior to the debtor’s bankruptcy. So in a way, a finding of a trust can be a means of protecting an unsecured creditor because the estate available for distribution among the general body of creditors is limited to the debtor’s own assets. Therefore the degree to which the law is willing to recognise rights as proprietary rather than merely personal is of great import to unsecured creditors, for every extension of the concept of ownership erodes the debtor's estate. With the trust concept being expertly manipulated by lawyers to fit more and more commercial scenarios, it becomes increasingly unclear what the nature of the beneficiary’s interest in equitable property rights are. The widely held understanding of the beneficiary’s interest being a form of property ownership reflects the origins of the trust.[8] The trust of land provided the model, it is this paradigm of the trust which has subsequently influenced the way in which rights under trusts have been conceptualised.[9] It is often assumed that the existence of a legal estate vested in a trustee necessarily means that the beneficiary has a proprietary interest in it. This view was demonstrated by Lord Browne-Wilkinson, in Westdeutsche, who stated that “Once a trust is established…the beneficiary has in equity a proprietary interest in the trust property.”[10] To counter the argument that beneficiaries must have a proprietary interest in the trust, Parkinson argues that beneficiaries under discretionary trusts do not gain proprietary interests. In McPhail v Doulton,[11] consideration was given to the validity of a discretionary trust in which the potential beneficiaries listed were numerous making it difficult to say that they had proprietary rights. The significance of this argument is that it challenges objections to decisions based upon the proprietary nature of the trust, and opens up the possibility of accepting developments in the law without complex attempts to reconcile these cases with pre-existing assumptions and definitions of the trust. Parkinson states that because trusts now arise in so many different contexts and features of the trust vary correspondingly, it is a futile exercise to try and find a definition of the trust which is both comprehensive and accurate. [12] McFarlane and Stevens argue that the beneficiary’s interest is neither proprietary nor in personam but propose a new theses that equitable property rights are best understood as rights against rights.[13] They submit that by understanding the beneficiary’s interest in this way, the trust can be accommodated within legal systems that have not experienced the productive paradox of two rival court systems.[14] The conventional view that an equitable property right is a right against a thing suggests that such rules cannot possibly be exported to those prosaic civil jurisdictions that do not share English law’s colourful history.[15] That perception is unfortunate in a jurisdiction where the courts of common law and equity have long been ‘fused’, let alone in a world where the law is increasingly harmonised. Fortunately, as far as equitable property rights are concerned, that perception can be resisted as they depend not on the tradition of equity but rather upon the exportable concept of rights against rights. One example of how the traditional view of a trust has been modified to make it applicable in the commercial setting is Quistclose trusts. A Quistclose trust is a trust which arises where a creditor has lent money to a debtor for a particular purpose. The trust is formed in the creditor’s favour but is defeasible by the exercise of the power vested in the debtor to apply the money to the specified purpose. The name and trust comes from the House of Lords decision in Quistclose, [16]although the underlying principles can be traced back further. One of the great difficulties with the Quistclose decision is reconciling it with the orthodox principles of trust law. It would seem that the Quistclose trust is given different treatment than traditional trusts. Quistclose trusts straddle the line between trusts and contract. This is evidenced by the fact that the rights which form the subject matter of the trust were transferred to Rolls Razor pursuant to a contract of a loan. This meant that Rolls Razor was contractually obliged to repay the amount it received to Quistclose from the moment of receipt. So even if there was no trust found, Rolls Razor would still have to repay the value; the liability did not arise purely on rights transferred on trust. Therefore the consequence of finding a trust meant that the lender neither bore the risk of the destruction of the subject-matter of the trust (as would a normal trust-beneficiary) nor the risk of the borrower’s insolvency (as would a normal lender). A number of commentators such as Birks and Chambers take the view that the debt only arises at the moment of application of the money to the purpose for which it was lent or failure of the purpose. This would solve the problem of the double benefit in favour of the lender, although Swadling disputes this as he states that this does not square with the facts as the contract of the loan held no such provision.[17] Also the fact that the lender imposed no obligation on the borrower to keep the funds separate from its own assets suggested that the money was not in fact held on trust but became a part of the borrower’s estate. Although the presence of such a requirement is not necessary to determine whether or not there was intention to create a trust, its absence is a good indicator that the funds were to be held absolutely by their recipient. In Henry v Hammond, it was said by Channell J that if the recipient is not bound to keep the money separate but is entitled to mix it with his own money and deal with it as he pleases then, he is not a trustee of the money but merely a debtor.[18] Another feature of the Quistclose decision which puts it at odds with the orthodox view of trusts is that a trust must have certainty of objects. There are grave difficulties in identifying the objects of the trust in Quistclose. It could not be the creditors for a number of reasons, the most prominent of which is that it would allow them to be paid twice over. For almost identical reasons it could not be the lender. Nor could it be the purpose because the purpose was a private purpose and English law does not tolerate trusts for private purposes. It is on this basis that Swadling argues that no trust should have been found in Quistclose and the funds should have been held to be a part of Roll Razor’s assets and treated accordingly. [19] This begs the question of why Quistclose trusts exist at all seeing as they seem to depart so from the orthodox principles of trust law. Quistclose trusts are often invoked by the lendor in place of conventional security, such as mortgages or charges, in order to protect against debtor default or debtor insolvency.[20] Bridge suggested two recurring features of Quistclose cases; the emergency aspect of the matter as well as sometimes the non-professional character of the arrangements.[21] The emergency aspect of the matter is important in a number of cases where speed is of the essence because the debtor has an immediate need for financial assistance in order to continue in business. This is not always the case though, in Twinsectra Ltd v Yardley[22], on the facts there does not appear to have been any emergency but the parties still chose to resort to a Quistclose trust. The key point to be taken from this, that this is not an example of standard commercial practice but rather an unusual transaction. Quistclose trusts often contain within them an element of desperation; that is to say Quistclose is invoked by a claimant who wished to avoid being classified as an unsecured creditor and so maintains that he has a proprietary interest in the money that has been paid over to its recipient. Goldcorp[23] and Re Holiday Promotions (Europe) Ltd[24] are both examples of this. It has been submitted that the decision Quistclose is too uncertain in scope and basis, to be invoked by practitioners on a regular basis with any degree of confidence.[25] It is more likely to be used where time does not allow resort to more traditional forms of security or like in Carreras Rothmans[26], a transaction has got into difficulties and a Quistclose trust presents itself as the most obvious solution. It suffices to say that Quistclose does have a role to play in modern commercial practice, although it is difficult to determine the exact extent of that role. However, McKendrick argues that it appears to be principally a residual device, to be invoked where traditional forms of security are, for one reason or another, unavailable or unattractive.[27] Penner backs this view up by stating that in commercial transactions, the initial analytical impulse should be towards the contractual, at least in circumstances where the use of the trust device is not expressly intended.[28] Parkinson suggests that the Quistclose trust will come to be understood as an umbrella term for a variety of kinds of trusts concerned with limitations of an equitable character placed on the use of money by lenders and which do not always share the same structural characteristics. [29] The existence of the Quistclose trust does not seem to conform to ordinary traditional trust rules shows that the courts are willing to treat trusts in a commercial setting differently. Conclusion Judicial statements have been made from time to time that equity has merely an unsettling effect when transplanted into the field of commercial law.[30] However it has been shown that trusts can have great use in the commercial sphere. Although wider application of the trust model may lead to some confusion over the irreducible core of the trust concept, in particular with regard to the beneficiary’s interest, the practical potential commercial benefits namely; protection against insolvency, the protective regime of fiduciary trust law and the flexibility of provisions that can be provided by the trust instrument mean that use of trusts in a commercial setting should be encouraged. Even if this means they require treatment different from traditional trusts because they are often difficult to accommodate within existing principles or categories.
[1] Hayton and Mitchell, Commentary and cases on the law of Trusts and Equitable Remedies (2010) p.16 [2] ibid [3] ibid [4] Rudden B (as cited in Langbein J.H., The Secret Life of the Trust: The Trust as an Instrument of Commerce (1997)) [5] Northern Developments Holdings Ltd (1978) [6] Scott A.W., The Nature of the Rights of the Cestui que Trust (1917), 17 Col. L. Rev. 269, pp 269-283 [7] Goode R.M., Ownership and Obligation in Commercial Transactions (1987) LQR [8] Parkinson P, Reconceptualising the Express Trust, Cambridge Law Journal 2002, pp 657-683. [9] ibid [10] Westdeutsche Landesbank Girozentrale v Islington Borough Council [1996] AC 669, 705 [11] McPhail v Doulton [1970] UKHL 1 [12] Parkinson P, (as n.8 above) [13] McFarlane and Stevens, The Nature of Equitable Property (2010) 4 Journal of Equity 1 [14] ibid [15] Hayton D, English Trusts and their Commercial Counterparts in Continental Europe (2002) [16] Barclays Bank Ltd v Quistclose Investments Ltd (1968) UKHL 4 [17] Swadling W, Orthodoxy In: Swadling W, The Quistclose Trust (2004) [18] Henry v Hammond [1913] 2 K.B. 515, 521 [19] Swadling W (as n.17 above) [20] McKendrick E, Commerce In: Swadling W, The Quistclose Trust (2004) [21] Bridge M, The Quistclose Trust in a World of Secured Transactions (1992) OJLS 333, 345 [22] Twinsectra Ltd v Yardley (2002) UKHL 12 [23] Goldcorp [1995] 1 AC 74 [24] Re Holiday Promotions (Europe) Ltd [1996] 2 BCLC 618 [25] McKendrick E (as n.20 above) [26] Carreras Rothmans Ltd v Freeman Mathews Treasure Ltd [1985] 1 All ER 155 [27] McKendrick E (as n.20 above) [28] Penner J, Lord Millet’s Analysis, In: Swadling W, The Quistclose Trust (2004) [29] Parkinson P, (as n.8 above) [30]
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