In the case of Mario Salvo and Ors v New Tel Limited handed down in August, the New South Wales Court of Appeal examined a form of “Quistclose Trust”. A “Quistclose Trust”, named from a UK case, is a trust created when a lender lends funds for a particular purpose – for example, to pay dividends, or to buy particular equipment. If the “Quistclose Trust” is successfully created, the lender maintains a beneficial interest in the loan monies until they are applied to the purpose. This elevates the lender above an unsecured status if the borrower becomes subject to an insolvency administration, so long as borrowed funds have not been applied and are traceable. A partial fulfilment of the purpose will not necessarily defeat the trust.
As Spigelman J commented in this case:
“Equity has often intervened to ensure that funds advanced for a particular purpose are not applied otherwise.”
The creation of such a trust depends upon the parties’ mutual intentions. The intention to create a trust, can either be express, or inferred from:
(a) the circumstances of the transaction;
(b) the words used; and/or
(c) the relationship of the parties.
In this case, the plaintiffs lent New Tel money for the sole purpose of New Tel buying shares in another entity. The loan was originally to be paid out from New Tel’s solicitor’s trust account, to the vendor, on completion. By agreement, the loan monies moved from the relative safety of the trust account of New Tel’s solicitor, to a share vendor’s solicitor stakeholder account, to become part of a large deposit required under varied share sale terms. Thereafter the sale collapsed, and the deposit monies were returned to New Tel. New Tel argued that the funds had been applied for their purpose, so the trust had ceased to exist. The court held that the movement of the loan funds out of the trust account, to the vendor’s solicitor and then back again, did not defeat the trust. The purpose had not been fulfilled, as the shares were never purchased.
Two of the appeal judges characterised this “Quistclose Trust” as an express trust, one as a resulting trust. The end result was the same however.
For more information contact James Hamilton on (02) 9018 6403 or jhamilton@rbhm.com.au
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