THE QUISTCLOSE TRUST
27 To reject the suggestion that the relationship between the company and a client would be merely a debtor/creditor relationship, Mr Strawbridge relied on the decision of the House of Lords in Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567. In that case Quistclose lent a company, Rolls Razor Ltd, a sum of money ("the loan") for the express purpose of enabling Rolls Razor to pay a dividend that had earlier been declared in favour of its shareholders. Rolls Razor acquainted its banker, the appellant, with the purpose of the loan and, by arrangement, a special account was used to receive the loan. Then the unexpected occurred; Rolls Razor went into liquidation and the bank applied the money in the special account in partial satisfaction of the moneys owing to it on Rolls Razor's overdraft account. Lord Wilberforce, with whom the other Law Lords agreed said:
"It is not difficult to establish precisely upon what terms the money was advanced by the respondents to Rolls Razor Ltd. There is no doubt that the loan was made specifically in order to enable Rolls Razor Ltd. to pay the dividend. There is equally, in my opinion, no doubt that the loan was made only so as to enable Rolls Razor Ltd. to pay the dividend and for no other purpose. This follows quite clearly from the terms of the letter of Rolls Razor Ltd. to the bank of July 15, 1964, which letter, before transmission to the bank, was sent to the respondents under open cover in order that the cheque might be (as it was) enclosed in it. The mutual intention of the respondents and of Rolls Razor Ltd., and the essence of the bargain, was that the sum advanced should not become part of the assets of Rolls Razor Ltd., but should be used exclusively for payment of a particular class of its creditors, namely, those entitled to the dividend. A necessary consequence from this, by process simply of interpretation, must be that if, for any reason, the dividend could not be paid, the money was to be returned to the respondents:" (pp 579-580)
28 The decision in Quistclose, which was followed in Stephens Travel v Qantas, also made it clear that a mutual debtor/creditor relationship did not exclude, in appropriate circumstances, the creation of a trust in favour of the creditor. Lord Wilberforce addressed that issue in this manner:
"The second, and main, argument for the appellant was of a more sophisticated character. The transaction, it was said, between the respondents and Rolls Razor Ltd., was one of loan, giving rise to a legal action of debt. This necessarily excluded the implication of any trust, enforceable in equity, in the respondent's favour: a transaction may attract one action or the other, it could not admit of both.
My Lords, I must say that I find this argument unattractive. Let us see what it involves. It means that the law does not permit an arrangement to be made by which one person agrees to advance money to another, on terms that the money is to be used exclusively to pay debts of the latter, and if, and so far as not so used, rather than becoming a general asset of the latter available to his creditors at large, is to be returned to the lender. The lender is obliged, in such a case, because he is a lender, to accept, whatever the mutual wishes of lender and borrower may be, that the money he was willing to make available for one purpose only shall be freely available for others of the borrower's creditors for whom he has not the slightest desire to provide.
I should be surprised if an argument of this kind - so conceptualist in character - had ever been accepted. In truth it has plainly been rejected by the eminent judges who from 1819 onwards have permitted arrangements of this type to be enforced, and have approved them as being for the benefit of creditors and all concerned. There is surely no difficulty in recognising the co-existence in one transaction of legal and equitable rights and remedies: when the money is advanced, the lender acquires an equitable right to see that it is applied for the primary designated purpose (see In re Rogers, 8 Morr. 243 where both Lindley L.J. and Kay L.J. recognised this): when the purpose has been carried out (i.e., the debt paid) the lender has his remedy against the borrower in debt: if the primary purpose cannot be carried out, the question arises if a secondary purpose (i.e., repayment to the lender) has been agreed, expressly or by implication: if it has, the remedies of equity may be invoked to give effect to it, if it has not (and the money is intended to fall within the general fund of the debtor's assets) then there is the apropriate remedy for recovery of a loan. I can appreciate no reason why the flexible interplay of law and equity cannot let in these practical arrangements, and other variations if desired: it would be to the discredit of both systems if they could not. In the present case the intention to create a secondary trust for the benefit of the lender, to arise if the primary trust, to pay the dividend, could not be carried out, is clear and I can find no reason why the law should not give effect to it." (pp 581-582)
29 Relying on the principles enunciated by Lord Wilberforce, the TCF has argued that the sole intention of a client in paying money to a travel agent for an airline ticket was for the agent, in turn, to apply that money only for the purpose for which it was paid: e.g. for the purpose of acquiring an airline ticket. That therefore represents, so it was claimed, the creation of a trust of which the client was the beneficiary; if the purpose of the trust fails, the money belongs to the client and is to be refunded to the client - or, on the principle of subrogation, to the TCF. Mr Strawbridge further submitted that it could never have been the intention of the client, nor of the company, that the client's money would become part of the general assets of the company. And, he added, it is necessary for the purpose of IATA's trust that this be so: otherwise, if the money, when paid by the client to the company, becomes part of the general assets of the company, there would be no trust in favour of IATA.
30 Gibbs ACJ considered that the decision in Quistclose was authority for a proposition in these terms:
"That case is authority for the proposition that where money is advanced by A to B, with the mutual intention that it should not become part of the assets of B, but should be used exclusively for a specific purpose, there will be implied (at least in the absence of an indication of a contrary intention) a stipulation that if the purpose fails the money will be repaid, and the arrangement will give rise to a relationship of a fiduciary character, or trust."
Australasian Conference Association Ltd v Mainline Constructions Pty Ltd (In liq) (1978) 141 CLR 335 at 353.
31 Mr Keen, counsel for the liquidator, submitted that these remarks were obiter and that I should not follow them. I decline that invitation. I think that Mr Keen went too far when he submitted that the concept of a "purpose" trust or "the Quistclose trust" has not been accepted under Australian law.
32 The decision in Quistclose was analysed in depth by Gummow J in Re Australian Elizabethan Theatre Trust: Lord v Commonwealth Bank of Australia (1991) 30 FCR 491. Pursuant to the Income Tax Assessment Act 1936 (Cth), specified gifts to the Australian Elizabethan Theatre Trust ("the Trust") were allowable deductions for income tax purposes. By agreement with the Commissioner of Taxation, the Trust also received tax deductible donations that were unconditional but incorporated a request that "preference" in their allocation be given to arts bodies associated with the Trust. Before the appointment of a provisional liquidator of the Trust, money received from donors stipulating a preference for appropriation to associated bodies had been deposited to the Trust's overdrawn account with the respondent bank, but no appropriation had been made. The question for determination was whether the money so received by the Trust was held by it upon trust for the associated bodies.
33 In concluding that no trust existed, Gummow J had regard to the factual matrix that surrounded the payments that had been made to the Trust. Those facts, which militated against a finding that a trust existed, were:
· The donations were expressed by the donors as being given "unconditionally";
· The donations were not received on terms that they be earmarked by the Trust and, for example, kept separate from its other funds by being placed in a separate bank account.
· Gifts that had been received by the Trust, but not "processed" and "allocated" were included in its annual accounts (with other moneys) as "donations" received in advance.
34 His Honour sought to minimise the effect of the decision in Quistclose, saying that it would be an error to treat the references to "purpose" as "characterising an express trust which did not have to satisfy the ordinary requirements for any private (as distinct from public) trust". His Honour said:
"There was, on Lord Wilberforce's analysis of the facts, a trust fund held by a trustee on certain terms for a class of ascertained beneficiaries, with a limitation (whether as an express or resulting trust) back to the settlor in specified circumstances. The expression 'purpose' was apt to describe the end sought to be achieved by the settlor, Quistclose, and accepted by the trustee, Rolls Razor. This was formulated in the terms stipulating the conditions upon which the shareholders might take a beneficial interest in the fund. The use of the expression 'purpose' should not be read as heralding a new era for the non-charitable purpose trust. This is a concept which has not struck deep roots in this country: see, for example, Tidex v Trustees Executors & Agency Co Ltd [1971] 2 NSWLR 453 at 465-4666." (p502)
35 Gummow J emphasised that the question as to the existence of any express trust will always have to be answered by reference to intention and the relevant intention is to be inferred from the language employed by the parties in question. (pp 502-503, 504-505)
36 The importance of the parties' state of mind or intention is emphasised in Jacobs' Law of Trusts in Australia (6th Ed., 1997) p 13.
"The answer to the question whether a debt or trust was created in any particular case depends upon the intention of the parties. If the parties intended that the one receiving the money should hold that money for the benefit of the other or for the benefit of a third party, then it will be a trust because there is actual trust property. If the payee was entitled to use the money as his own, being under an obligation merely to repay the same amount of money at a future time, then he is merely a debtor."
37 The relevant intention is to be inferred from the language employed by the parties; for that purpose the Court is entitled to look into the nature of the transaction and the circumstances of the relevant parties and their relationship: see Walker v Corboy (1990) 19 NSWLR 382; Re Australian Elizabethan Theatre Trust at 503.
38 In Re Miles; Ex parte National Australia Bank Ltd v Official Receiver in Bankruptcy (1988-89) 85 ALR 216 Pincus J took a more restrictive view of the decision in Quistclose. He was of the opinion that it would not be right to apply the Quistclose principle "beyond the field defined by the House of Lords" (p 221). He described it as being the "actual payment of money by the party claiming to be the beneficiary of a resulting trust, for the purpose of discharge of debts by the payee, that purpose having failed."
39 With respect, this seems to me to be an unnecessarily restrictive approach. I favour the view that Quistclose merely stands as authority for the proposition that an apparent debtor-creditor relationship can incorporate a trust relationship when such a trust relationship accords with the mutual intentions of the parties. This, I think, is a reflection of the views of Gummow J in Re Australian Elizabethan Theatre Trust.
40 Stephens v R (1978) 21 ALR 680 is an earlier example of a case where moneys that were paid over to a builder were held to be impressed with a trust. The appellant, Stephens, had been convicted on five counts of fraudulent conversion in the following circumstances; as a builder, he entered into contracts with clients to build houses for them. Each contract required the client to pay a "deposit"; the client had thirty days within which to obtain finance for the building and if finance was not obtained within that time Stephens was required to refund the deposit, less any amount spent by him in applying for or obtaining consent to build the house. In each of the five cases the deposit was taken and used by Stephens for purposes unconnected with the contracts. Finance was not obtained but no money was repaid. On an application for special leave to appeal to the High Court, it was held by the majority that the moneys that had been paid by way of a deposit could not be regarded merely as payments in advance or on account, to be used by Stephens as he saw fit. The payments had been made on terms that they were to be returned (less any amount that had been expended on the customer's behalf in obtaining building consent). In other words, the deposits had been ear-marked by their respective contracts for a particular purpose. Leave to appeal was refused.
41 However, a different result had occurred in the United Kingdom in R v Hall (1973) QB 126. In that case, a travel agent, Hall was convicted of the theft of moneys. He had received the moneys, in the course of his business as a travel agent, as the costs of airline travel to the United States. However, no tickets were issued and no money was refunded. The defendant successfully argued on appeal that the moneys had become his property, that he had applied them in the conduct of his firm's business and that he was not therefore guilty of theft. The Court held that although the clients had an expectation that the travel agent would provide the airline tickets, there was no evidence that any arrangement had been struck whereby the defendant was to retain and deal with their moneys in a particular way. Barwick CJ in his dissenting judgment in Stephens v R had referred to the decision in Hall's case with approval. Gibbs J also referred to it at p 696 saying:
"… in the two earlier cases it was held that there was nothing more than a payment on account, whereas in the later case it was held that the money was entrusted to the accused for the particular purpose of buying the materials. In every case the decision must depend on its own facts. Similarly, where a deposit is paid to an agent, it will be right to hold that it was entrusted to him within the section if it was paid to him to hold and refund if a particular event did not occur (see R v Brownrigg [1933] NZLR 1248 at 1254; R v Pilkington (1958) 42 Cr App R 233 at 236) but it will depend on all the circumstances whether the agent was under that obligation which must exist before he can be said to have been entrusted with the money (cf R v Hall [1973] 1 QB 126; [1972] 2 All ER 1009, a case under s 5(3) of the Theft Act 1968 (UK)."
42 A reading of the decision in Hall's case does not suggest that there was any agreement or arrangement that could have constituted the necessary "entrusting". Edmund Davies LJ who delivered the judgment of the Court of Appeal said at pp 130-131:
"But in our judgment, what was not here established was that these clients expected them 'to retain and deal with that property or its proceeds in a particular way,' and that an 'obligation' to do this was undertaken by the defendant."