Quistclose Trusts: Primacy of Purpose?

Federal Court upholds Quistclose trust in favour of corporate trustee.


The imposition of trusts of a proprietary nature in a purely commercial context has always been a controversial issue. Competing and conflicting policies, such as commercial certainty and the security of settled transactions, protecting the interests of secured and non-secured creditors and the fair distribution of assets in the event of insolvency, inform a legal system’s approach towards the recognition and enforceability of the concept of the trust.

In a commercial context, generally speaking ordinary loans do not give rise to any proprietary trust. The relationship between the lender and the borrower is one of creditor and debtor. Unless the loan is secured, on the insolvency of a borrower the lender’s claim ranks pari passu i.e. equally with other unsecured creditors.

There is however one notable instance in which what would otherwise be an ordinary commercial loan may give rise to a proprietary trust in favour of a lender or intended beneficiary over the loan money which ranks first in priority to the detriment of all other creditors. This is where a commercial loan is made on the agreed condition that it would be used solely or exclusively for a specific purpose. In such circumstances, not one, but two trusts come into play. First, a primary trust is created in favour of the intended beneficiary of the primary designated purpose to receive the said moneys. However, if the borrower fails to give effect to the primary designated purpose, a secondary trust in the nature of a resulting trust arises in favour of the lender. This type of trust is known as a “Quistclose trust, named after the landmark decision of the House of Lords in Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567, the leading judgment of which was delivered by Lord Wilberforce, one of the greatest English judges of the 20th century.

The primary-secondary trust analysis of Lord Wilberforce has not been free from controversy and has divided academic opinion. In Twinsectra Ltd v Yardley [2002] 2 All ER 377, Lord Millett, widely acknowledged to be one of the foremost experts on equity and trusts in modern times, sought to reinterpret the Quistclose trust (albeit by way of obiter) as “an entirely orthodox example of the kind of default trust known as a resulting trust“, which analysis suggested that only the lender or provider of the money was entitled to enforce such a trust, whereas no “primary” trust arose in favour of the intended beneficiary at all.

In the recent decision of PECD Berhad (in Liquidation) v AmTrustee Berhad (Civil Appeal No. 02(f)-59-08/2012(W), 17 October 2013), the Federal Court in a landmark decision has followed and applied the primary-secondary trust analysis of Lord Wilberforce as the proper legal basis of the Quistclose trust in Malaysia, and has rejected Lord Millett’s analysis in Twinsectra.

In PECD, the appellant company’s wholly-owned subsidiary had executed an Islamic Finance loan facility agreement under which the subsidiary issued Islamic Notes of up to RM200 million in value, which were subscribed by a syndicate of 14 Noteholders. The respondent was the trustee appointed under a trust deed to act for the Noteholders collectively in relation to the loan facility.

The subsidiary subsequently defaulted in its repayment obligations under the Notes. At the request of the appellant, the respondent and the Noteholders refrained from commencing legal proceedings against the subsidiary to enforce their rights and remedies under the trust deed. In consideration for the indulgence given, the appellant agreed to earmark RM30 million out of the proceeds of a proposed rights issue of the appellant to be paid to the respondent towards partial redemption of the Notes, which was confirmed by way of a letter of undertaking.

The subscribers of the appellant’s rights issues were aware of the proposed utilisation of the proceeds to partially redeem the notes, which was also disclosed to the Securities Commission and Bursa Malaysia and in the prospectus for the rights issue. Although a sum in excess of RM100 million was raised through the rights issue exercise, the appellant failed to pay the respondent the sum of RM30 million as agreed, and the appellant soon thereafter became insolvent. The appellant then audaciously proposed several restructuring schemes in which the RM30 million was proposed to be distributed to all of the appellant’s creditors including the respondent. These proposals were rejected by the appellant’s creditors.

The respondent then commenced an action against the appellant seeking a declaration that the RM30million was held on trust for the respondent. The High Court allowed the respondent’s claim on the basis that a Quistclose trust was created in favour of the respondent. The decision of the High Court was upheld by a majority of the Court of Appeal on other grounds, whereas the minority would have upheld the High Court judge’s Quistclose trust analysis.

The Federal Court dismissed the appellant’s appeal, ruling that the RM30 million was indeed held on a Quistclose primary trust in favour of the respondent, even though the respondent did not provide or pay for the said sum of money. After discussing the relevant authorities including Quistclose and Twinsectra as well as numerous academic articles, the Federal Court observed that:-


The Appellant had earmarked the said monies (specific property) which it received before it became insolvent and before the order of winding up was granted. The said monies came from the subscriptions of the shareholders of the Appellant for the Rights Issue shares. Further, the shareholders were well informed of the intended purpose of the said monies through the Circular and the letter to entitled shareholders dated 30.10.2007. In other words, even the shareholders knew that the intended purpose of a portion of the subscriptions received by the Appellant would be for the Respondent. Thus the intention was made clear …

… the Respondent is a specific creditor and thus an identified creditor to receive the said monies as the trustee of the Noteholders. And it is still capable of receiving the said monies … In other words the primary trust was and is ‘still capable of being carried out’ …

As such, for the above reasons and applying the [primary-secondary Quistclose trust principle] discussed above we are of the view that the Respondent has acquired the beneficial interest in the said monies. The ‘primary trust was a purpose trust enforceable’ by the Respondent as the trustee of the Noteholders, the actual creditors, ‘for whose benefit the trust was created’.

The effect of PECD is that where under a commercial loan agreement the parties agree that a specified sum of money shall be applied solely or exclusively for a designated purpose, a primary trust is created over that sum of money in favour of the intended beneficiary of the designated purpose, even though the intended beneficiary has not provided or contributed any part of the said sum of money. Where the borrower becomes insolvent, the intended beneficiary is entitled to assert its proprietary beneficial interest over the said sum of money, which will be withdrawn from the assets of the borrower available for distribution to its creditors in liquidation.

The significance and implications of the Quistclose trust in such cases can clearly be seen from the facts of PECD itself, where the trustee was held to be entitled to recover the sum of RM30 million for the benefit of the Noteholders, even though neither the trustee or the Noteholders had contributed any money towards the said RM30 million, which came from the subscribers of the appellant’s rights issue. In this regard, it is arguable that the decision of the Federal Court in PECD is easily one of the most important legal decisions to date under Malaysian law affecting borrowers, lenders and trustees.