“Quistclose Trusts Will Make You Jump Jump”
The recent decision of Justice North, sitting as a single judge, in Rambaldi v Commissioner of Taxation (Rambaldi) revisited Quistclose trusts in Australia and how they may assist in protecting advances for specific purposes where an insolvency intervenes.
The Quistclose trust is a form of express trust, which is used to describe the transfer of assets for a specific primary purpose, the transfer however is impressed with a secondary trust should the primary purpose fail.
The Trustees were appointed the joint and several trustees of the bankrupt estate of Ms Alex (Bankrupt).
The Trustees sought to claw back the sum of $118,071.62 from the respondent, the Commissioner of Taxation (Commissioner), as a preference under section 122 of the Bankruptcy Act 1966 (Cth) (Bankruptcy Act).
- The Bankrupt failed to comply with a bankruptcy notice issued by the Deputy Commissioner whereupon the Deputy Commissioner presented a Creditors’ Petition seeking a sequestration order against the estate of the Bankrupt;
- Quality Australia Investments (QAI) entered into a loan agreement with the Bankrupt and City Nominees by which QAI agreed to lend the Bankrupt and City Nominees $131,000.00;
- The loan agreement recorded, amongst other things:
- the Deputy Commissioner is in the process of serving the Bankrupt with a Creditors Petition. Negotiations were on foot between the Bankrupt’s solicitor and the Deputy Commissioner to reach a settlement;
- the Bankrupt wanted to borrow $126,000.00 to pay a debt to the Deputy Commissioner;
- Clause 4 of the loan agreement entitled “Purpose” contained terms that “the Bankrupt must only use the loan for the purpose presented to QAI, namely the payment of the Deputy Commissioner’s Debt and payment to the Bankrupt’s solicitor.”
- The Bankrupt and City Nominees signed an authority directing QAI to pay the sum of $126,000 to the Deputy Commissioner;
- The Deputy Commissioner received a bank cheque for $118,071.62 which was applied in payment of income tax owed by the Bankrupt. There was no explanation why the cheque was less than the authorised amount; and
- A sequestration order was made against the estate of the Bankrupt and the Trustees were appointed.
The issue at trial
The parties’ positions were:
- The Trustees argued that the loan money was property of the Bankrupt and City Nominees, paid by QAI at their direction to the Commissioner; and
- The Commissioner argued that the loan money was not property of the Bankrupt and City Nominees, but rather was held on a Quistclose trust for payment to the Commissioner, and, in default, on trust to be repaid to QAI.
Barclays Bank Limited v Quistclose Investments Limited1
The origin of the term Quistclose trust may be found in Barclays Bank Limited v Quistclose Investments Limited (Quistclose). In Quistclose, Rolls Razor Ltd (Rolls Razor) declared a dividend but did not have funds to pay it to the shareholders. Quistclose Investments Ltd (Quistclose) agreed to lend the necessary funds to Rolls Razor for the purpose of paying the dividend. Quistclose drew a cheque payable to Rolls Razor for the sum in question. Rolls Razor sent the cheque to Barclays Bank. It was agreed between the bank and Rolls Razor that a special account be opened and the cheque deposited into that account. The bank agreed with Rolls Razor that the funds would only be used to pay the dividend. On the same day, Rolls Razor was placed into voluntary liquidation. The bank successfully resisted the funds being clawed back. Lord Wilberforce found “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”.2
Justice North’s distillation of the authorities affirmed that for a Quistclose trust to be established more is needed than just circumstances where funds were advanced for a specific purpose, such as the payment of debt. There needs to be a transfer of property made for a particular purpose, where the mutual intention of the parties impressed that property with a trust, importantly in Rambaldi, the trust provided a secondary purpose being the repayment of the funds to the third party if the primary purpose failed.
The court ultimately found that the loan funds paid by QAI were held on a Quistclose trust and did not become the property of the Bankrupt and City Nominees. The money was accordingly not able to be clawed back by the Trustees.
In Rambaldi, the value of a written agreement recording the parties’ intentions was unquestionable. The agreement (as it should have done) recorded how the loan was to be used and therefore the court could be satisfied of the parties’ intentions. Critically in terms of the parties’ intentions, the agreement evidenced that the Bankrupt, agreed to use the loan money for one purpose only, being the payment to the Commissioner and to their solicitors. This finding took the transaction beyond merely being a loan to pay some debts.
The court observed when traversing the Trustees arguments that the relevant question was not whether there was a need for a trust at the point of the initial transfer, but rather what the parties intended the position to be at that point. The written agreement was found to have left little doubt that the parties intended the loan money to be provided only for the purpose of payment to the Commissioner and the Bankrupt’s solicitor.
The decision highlights the value in circumstances where a transaction is being contemplated under the shadow of a potential insolvency:
- Of obtaining legal advice;
- Formulating a clear strategy; and
- Documenting in clear and unequivocal language the specific purposes of the advance.
This article was written by Kyle Somann Crawford, Partner, in our Hobart office. Publication Editor: Grant Whatley.
1  AC 567.
2 Ibid at 582.