Quistclose Trusts: Lending For Specific Purposes The Right Way
January 24, 2022
The content of this article is intended to be informational only. We caution you against using or relying upon any information contained in this article without first seeking legal advice regarding your matter. All matters arising from the use of our website, including this article, shall be governed by Alberta law and shall be within the exclusive jurisdiction of the courts of Alberta.
By Hong Feng
Quistclose trusts (or otherwise known as ‘purpose trusts’ in Alberta) have been around since 1968 after it was first created by the old English case Barclays Bank Ltd v Quistclose Investments Ltd [1968] UKHL 4. Today, Quistclose trusts are particularly useful for parties who transfer funds for a specific and exclusive purpose, because if, for whatever reason, the purpose for that transfer fails, the transferor may repossess those funds. The basic premise behind a Quistclose is that funds which are advanced for a specific purpose are impressed with a trust in favour of the provider until those funds can be used for their specific purpose. If something intervening occurs, such as an insolvency, a Quistclose trust may allow the original payor to re-claim the funds advanced instead of letting them fall into a bankrupt’s general estate.
While the notion of a Quistclose trust appears favourable, they often lack success because the transaction is not properly set up. In the most recent Alberta case, Viet Tran Professional Corp. v. Premiere Airport Facilities Inc., [2019] A.J. No. 1009, the plaintiff, Dr. Tran, sought return of his investment in a start-up air charter business, Premiere Airport Facilities Inc. Dr. Tran agreed to invest $40,000 into the start-up but because there was no business account set up yet, the money was deposited into the general business account of Northern Alberta Estates Inc. (“NAE”) which is owned by business partner, Mr. Ryan. Mr. Ryan and NAE agreed that they would hold the money in trust for Dr. Tran and only use it for the purpose of the proposed air charter business. However, the business failed to take off and that Dr. Tran’s investment funds were gone and had In court, Dr. Tran argued to establish a Quistclose but was unsuccessful because the court found that Dr. Tran’s funds had been co-mingled with the general funds of NAE. Having clearly identifiable trust funds is a requirement for Quistclose trusts and Dr. Tran ought to have imposed an obligation on NAE to keep the funds separate. Though unsuccessful in his claim for a Quistclose trust, Dr. Tran was ultimately able to re-claim his funds on the basis of breach of contract and unjust enrichment.
In another recent Alberta decision, SWAT Consulting Ltd. v. Canadian Western Bank, [2018] A.J. No. 1250, the plaintiff SWAT Consulting Ltd. (“SWAT”) seeks the payment of their invoices from the defendants, Canadian Western Bank (“CWB”) and Energy Insurance Group Ltd. (“Energy Insurance”). Anterra Energy Inc (“Anterra”) is an energy company who was involved in two oil spills after which it instructed SWAT to initiate clean up work. Anterra received insurance proceeds from Energy Insurance which were deposited with their banker, CWB, who used those proceeds to pay off loans owed to it by Anterra. Anterra has since filed for CCAA, and a stay was issued. Instead of applying for a lift of the stay, SWAT brought a claim alleging that Energy Insurance ought to have paid the proceeds directly to SWAT and that CWB knowingly assisted in a breach of trust. SWAT argued that a Quistclose trust arose when the insurer paid insurance proceeds to Anterra with the specific purpose of paying suppliers such as SWAT. The court disagreed and said there is no evidence of such intent to create a trust or that funds are to be kept in a separate trust account. As a result, SWAT’s claim was summarily dismissed, and their only recourse is to recover as a general creditor of Anterra in the CCAA proceedings.
As you can see, Quistclose trusts arise by implication and can easily fail if they are not structured properly. The key to setting up a successful Quistclose trust is satisfying the following three elements:
Certainty of intent - There must be evidence of mutual intent to create a trust, and that the beneficial interest remains with the lender.
Certainty of subject matter – There must be an obligation to keep trust funds separate from the payee’s general funds.
Certainty of objects – There must be evidence of a clear purpose to the funds and for their return if not used.
At a minimum, this means that when advancing funds for a specific purpose, documentation should reflect that the funds are to be held as trust funds, that the funds are allocated for a specific purpose and must be returned if that purpose fails, and that there is an obligation for the payee to hold them in a separate account.
That said, Quistclose trusts should not be your primary line of defense against intervening events. Contract and express trust conditions are far more reliable tools for determining how funds shall be dealt with in case the intended purpose for the funds fails. However, if set up correctly, Quistclose trusts can be powerful as an additional line of defense.
This is important in insolvency or bankruptcy law because if the payee becomes insolvent and the payor is a debtor without a secured interest, the payor is forced to claim as a general unsecured creditor of the payee. But if the payor is a trustee, the payor remains the beneficial owner entitled to return of the funds rather than having the funds fall to the part of assets available to be shared among other creditors.
Given that many COVID-19-related government funding have ceased and there is a recent uptick in insolvencies in Alberta, it is increasingly important to consider the consequences of payees going under on your money or business. Consider getting legal advice before advancing funds for specific purposes to ensure the transaction and documentation are properly set up to deal with unexpected events.
For further information, please do not hesitate to contact us.