Court clarifies ‘Quistclose’ Trust

In Bieber v Teathers Ltd the central issue was whether a Quistclose trust had arisen and so investors could claim a tax concession. The defendants, Teathers, had marketed an investment vehicle (“the Take Partnerships”) in which the claimants invested, which sought to exploit a tax concession. However The Take Partnerships failed to make money and furthermore often did not allow the claimants to qualify for tax relief. Teathers then became insolvent.

The claimants sought to recover their moneys by arguing that the defendants held their investments on trust, as a Quistclose trust. If the claim succeeded it would mean they could recover their investments before the other creditors in the insolvency.

A Quistclose trust comes into existence where a person advances money to another for a pre-specified purpose. For example, in a conveyancing transaction, where a bank advances funds to a solicitor for the specified purpose of acquiring title and placing a charge over the particular property. In the event that the solicitor becomes insolvent before the purpose is achieved, the funds will be held on resulting trust to the bank, and the bank will be able to recover its money prior to the other creditors.

The Court held that in order for a Quistclose trust to come into existence it must be objectively clear from the transaction that the funds transferred should not be part of the general assets of the recipient, but should be used exclusively for a particular purpose, so that if the money cannot be so used then it is to be returned to the payer.

In this case it was held that a stipulation to pursue profitable investments cannot create a Quistclose trust because, at the time the money is applied, it is not known for certain whether or not the investments would be profitable. Although the parties had agreed investment criteria, at the time the money was paid into the Take Partnerships it could not be known for definite whether the investment criteria (e.g. the tax relief) would be available or not.

Geoff Kew

Published on 25/05/2012

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