Published on 29/05/2007

Resulting Trusts

Classification

Re Vandervell (No 2) [1974] Ch 269
Held: Megarry J identifies two categories:

•    Presumed: Where A transfers (or directs a trustee to transfer) the legal estate in property to B otherwise than for valuable consideration, and there is no presumption of advancement, and no evidence that A intended that B should take the property beneficially, then it is presumed that B holds the estate on trust for A

•    Automatic: Where A attempts to give away a beneficial interest and transfers the legal estate or bare ownership to trustees, but by some mistake or accident or failure to comply with formalities, A fails to effectively part with all or part of that beneficial interest, there will be a resulting trust for A of the beneficial interest which A failed effectively to dispose.

(A)    Non-Disposal of Beneficial Interest
“Automatic”: Non disposal of a beneficial interest

•    This is where a settlor attempts to create an express trust, but fails to completely exhaust the trust property in favour of the beneficiaries, or alternatively, where a surplus arises after the original purpose of the trust has been achieved or no longer exists

Re Gillingham Bus Disaster Fund [1958] Ch 3000
Facts:    This was a memorial fund raised from donations to pay funeral expenses and assist disabled victims of a bus crash. The question was what should be done with the surplus after all the charitable objects of the trust were satisfied? There were two alternatives. It could either go back to the people who gave the money, or it could go to the Crown as “bona vacantia” (money without an owner).

Held:    The donors (even the anonymous donors of small change to street collectors) had not been shown to have given the money “out-and-out”. The surplus was therefore to be held upon a resulting trust for those donors. The trustees would just have to put an add in the paper to find out who those donors were.

Re West Sussex Constabulary’s Widows, Children & Benevolent Trust Funds [1971] Ch 1
Facts:    This was a fund for the widows and orphans of police killed in duties. The police ran this fund, but they actually collected it from various sources:
(a)    Members subscriptions
(b)    Police balls, raffles and football sweepstakes
(c)    Collection boxes
(d)    Other donations, including legacies
After the amalgamation of the constabulary in Sussex, the members sought to wind up the fund and distribute the fund among members. The question was who owned the fund? The court had to work out who had the beneficial interest in the money. They had to decide whether any of it resulted back to the people who provided it.

Held:

(a)    Members subscriptions
o    These members had given these subscriptions on a contractual basis, not on trust. Any surviving members would have a claim in contract based on frustration or failure of consideration. These members could claim back reimbursement for the subscriptions
o    Former members have already received the benefit contracted for (i.e. payments to their widows and orphans)

(b)    Entertainments
o    Only the profit component of the price paid by participants went into the trust fund. The price was paid on a contract basis, and the participant received the entertainment bargained for, so there could be no resulting trust

(c)    Collection boxes
o    It is inconceivable that a person contributing a coin in a street collection should intend that it should be returned. Hence, there was no resulting trust

(d)    Donations and legacies
o    The proportion of the fund attributable to specific donations and legacies was held on resulting trust for donors or their estates. The remainder of the fund was bona vacantia

•    A resulting trust arises when someone gives money and they have not effectively given it away, so it results back to them
•    If they have effectively given it away, there is no resulting trust. If they have got consideration for it, there is no resulting trust
•    Only if they have intended to give it to a particular source, and that fails, will they be able to get it back

Re British Red Cross Balkan Fund [1914] 2 Ch 419
Facts:    This was a fund raised by the Red Cross from known subscribers to provide relief during the Balkan War. Some subscribers agreed to allow the Red Cross to apply the surplus to general funds, while other requested a refund. The question was how much of their donation should be refunded, given that a large amount of the total donated money had been spent on war relief?

Held:    The court held that the balance of the fund belonged to all subscribers on a resulting trust in proportion of their subscriptions.

(B)    The Quistclose Trust
Commercial applications: The Quistclose trust

•    Quistclose trust – a special purpose trust by which it is recognised that money held by one person is held on trust for a special purpose
o    If the money is paid for the special purpose, the person becomes a debtor of the settlor
o    If the purpose fails, a resulting trust arises in favour of the settlor

•    Where money is advanced upon a condition that it will be used for a certain purpose, and that purpose becomes impossible to fulfill, the money loaned will be held on a resulting trust for the lender and will not be treated as part of the general assets of the borrower: Barclays Bank Ltd v Quistclose Investments

Barclays Bank Ltd v Quistclose Investments [1970] AC 567
Facts:    Rolls Razor Ltd owed the bank a large sum of money. Rolls was in financial trouble and wanted to issue shares to existing shareholders to raise money. Before doing so, the company declared a dividend to shareholders (which constitutes a debt to shareholders), but had not paid it yet. Quistclose was a private company which had an interest in Rolls surviving. Quistclose provided funds to Rolls for the dividend payment only. Rolls went into voluntary liquidation prior to paying out the dividend. The question was who owned the dividend fund?

The bank argued that Quistclose had lent money to Rolls, and so Quistclose was just another unsecured creditor. As an unsecured creditor, it would rank behind the bank’s secured charge. Quistclose argued that the money never belonged to Rolls. It was held on trust for a purpose (to pay the dividend to shareholders), and when that purpose failed, the money resulted back to Quistclose.

Held:    The court found in favour of Quistclose. The loan funds were held on trust to pay the dividend. When that trust became impossible, there was a resulting trust back to the lender (Quistclose).

Here, the money held by Rolls is held on trust for a special purpose (to pay the dividend to shareholders). If that purpose is fulfilled, the trust no longer exists, and Rolls simply becomes a debtor of Quistclose. If that purpose fails, there is a resulting trust in favour of Quistclose.

The conceptual problem with Quistclose’s arrangement was that this was a trust for a purpose which was not charitable. This problem was solved in the Carreras Rothmans case.

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Carreras Rothmans Ltd v Freeman Mathews Treasure Ltd [1985] 1 All ER 155
Facts:    Rothmans was an advertiser. FMT was a media agent. Rothmans gave money to FMT, and FMT paid Rothman’s media creditors (e.g. TV stations, for the space that Rothmans would be advertising in). To avoid problems arising from FMT’s potential insolvency, Rothmans paid money to FMT on the basis that those payments would be held in a dedicated bank account. The question was who was entitled to the money paid by Rothmans to FMT, but not yet forwarded to Rothman’s creditors, when FMT became insolvent? (i.e. Should Rothmans get their money back? Or should it be paid to creditors of the media agent?)

Held:    This solved the problem of a non-charitable purpose trust in Quistclose. We say that instead of there being a trust for a purpose, there is a private trust instead. The money paid (by Quistclose or Rothmans) is to be held on trust for a class of beneficiaries who are sufficiently certain. In Quistclose, the shareholders entitled to the dividend payout are the class of beneficiaries of the private trust. In Rothmans, the TV stations who were owed money by Rothmans for the space they had provided are the class of beneficiaries of the private trust. The trust exists until such time as the purpose is fulfilled. Once it is fulfilled, the trust disappears.

This analysis raises its own problems. The shareholders (in Quistclose) and TV stations (in Rothmans) will also claim that they have an interest (as beneficiaries).

Re Australian Elizabethan Theatre Trust (1991) 102 ALR 681
Facts:    Here, there was a charitable trust arrangement with a complication. The AETT was a charity. However, the AETT was accepting donations indicating a preference for nominated arts organisations. The question was whether these donations were held by the AETT on trust for those nominated organisations. In order to get a tax deduction from your donation, you had to give the funds absolutely and outrightly (you could not get them back on any resulting trust).

Held:    The court held that there was no trust.

See Gummow’s J analysis of the “Quistclose” trust. Is it in fact a “resulting” trust? Or is it an express trust with two limbs?

Gummow J:    He deals directly with the problem of a purpose trust. He says there cannot be a trust for a purpose which is not charitable. Hence, we have to understand a Quistclose trust as an express trust with two limbs.

The first trust is an express trust (where money is given to be held on trust for a sufficiently certain class of beneficiaries whom the lender nominates as the necessary recipients). The second trust arises when the first trust fails, and usually results in money going back to the lender.

How to create a Quistclose type trust?

Twinsectra v Yardley [2002] 2 AC 164
Facts:    A solicitor was given money for a transaction. He provided an undertaking (which was breached) as follows:

“Dear Sirs, In consideration of your providing a loan in the sum of $1 million to a client of this firm for the purpose of temporary bridging finance in the acquisition of property to be acquired by such client, we hereby personally and irrevocably undertake that:
1)    The loan monies will be retained by us until such time as they are applied in the acquisition of property on behalf of our client
2)    The loan monies will be utilised solely for the acquisition of property on behalf of our client and for no other purpose”

Held:    There was clearly an express intention that the money was being handed over to the solicitor as a trustee, and that there was a particular purpose as to how to spend the money (and for no other purpose).

Hence, if you want to create a Quistclose type trust, you need to use these kinds of very clear words to separate it from other commercial arrangements.

Lord Millett:

“A Quistclose trust does not necessarily arise merely because money is paid for a particular purpose. A lender will often inquire into the purpose for which a loan is sought in order to decide whether he would be justified in making it. He may be said to lend the money for the purpose in question, but this is not enough to create a trust; once lent, the money is at the free disposal of the borrower. Similarly, payments in advance for goods or services are paid for a particular purpose, but such payments do not ordinarily create a trust. The money is intended to be at the free disposal of the supplier and may be used as part of his cash flow. Commercial life would be impossible if this were not the case.

“The question in every case is whether the parties intended the money to be at the free disposal of the recipient. His freedom to dispose of the money is necessarily excluded by an arrangement that the money shall be used exclusively for the stated purpose”

A Quistclose trust is a trust for the lender, subject to a power in the trustee to do something limited with the money. The money is never handed over beneficially to the trustee. The trustee has a power, limited because they cannot commit a fraud on it. They can only do certain things (i.e. pay certain people).

This is not a purpose trust at all. It is a consent-based resulting trust, allowing the trustee to disperse funds according to a set of instructions. Here, it is still Twinsectra’s money. They gave it to someone else (the solicitor) to hold on trust for them. Twinsectra has a beneficial interest in the property. Here, the beneficiaries themselves created the trust (contracting away their own Saunders v Vautier rights). They cannot call for the money to be reconveyed to them if the purpose is fulfilled. This avoids the problem of the purpose trust in Quistclose.

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(C)    Presumed Resulting Trusts
“Presumed” Resulting Trusts

The Presumption of Resulting Trust v the Presumption of Advancement

•    The presumption of resulting trust refers to an assumption that a person who pays for property intends to own that property beneficially, even if they authorise another person to take legal title to the property

•    The presumption of advancement refers to an assumption that fathers and husbands intend to make outright gifts to their children and wives when they provide the money for the purchase of property

•    Both presumptions can be rebutted by evidence

•    The presumption of advancement overrides the presumption of resulting trust

Do these presumptions apply today?

Calverley v Green (1984) 155 CLR 242
Facts:    A de facto couple bought a house in joint names. He paid a deposit. The remainder of the purchase price was borrowed on a mortgage, also in joint names. He alone made repayments of the loan. They spit up. Legally, it is a jointly owned house (50:50 split). What conclusion will equity reach regarding who owns the property?

If they were married, there would be a presumption of advancement, so the wife would have had a half interest in the house. However, there is no presumption here, as they are de facto.

Held:    The man does not get the whole house.

First, the presumption of resulting trust says that he who pays owns. He has paid a deposit (say 10%). The balance is paid by both of them, because the loan itself is in both names (and she was jointly liable for that). He would get the proportion of property equating to the deposit plus half the remaining balance (55%), and she would get 45%.

The fact that he had made the repayments was a matter of accounting between them separately, and did not go to who owned the property (he would have to claim restitutionary damages for unjust enrichment or find that it was a partnership).The resulting trust reasoning does not resolve these problems. It only looks at who paid the money up front on day one.

Russell v Scott (1936) 55 CLR 440
Facts:    An aunt and nephew held a joint bank account, which she alone operated during her life (she alone deposited funds into the account, and she alone withdrew funds). She intended the nephew to have the account by right of survivorship on her death. When she died, her estate claimed that fund belonged to the her on a resulting trust.

There is no presumption of advancement between an aunt and nephew. Hence, the nephew had to prove his case, even though he was the legal owner.

Held:    There is a presumption of a resulting trust. However, here, that presumption was overridden by clear implications of her behaviour all the way through. It was clear that she intended that she should have the benefit of the money while she lived, but that he should have it when she died.

Hence, you can disprove the presumption of resulting trust on the facts of the case.

(D)    Resulting Trusts and Illegality
Illegality

•    The question is whether you can you plead the existence of a resulting trust, if to do so, you must confess to some illegality (equity demands “clean hands”)

Nelson v Nelson (1995) 184 CLR 538
Facts:    A mother paid the purchase price for a house, but registered it in the names of her son and daughter to take advantage of a benefit she was not entitled to (a subsidised loan under the Defence Service Homes Act 1918 to buy another home). She received a subsidised loan on the basis of an application in which she declared that she did not own or have a financial interest in any other house.

The first house was sold. The daughter claimed her share of the deal. The mother (supported by the son) claimed the whole price on the basis of a resulting trust. The daughter argued for a presumption of advancement, and also that her mother committed an illegality

Held:
(1)    There is a presumption of advancement in gifts from mothers (and not only fathers) to children.

However, the presumption was rebutted by evidence in this case that the mother only registered the house in the names of her son and daughter to take advantage of the subsidised loan

(2)    Equity does NOT let the loss lie where it falls in a case involving illegality (Tinsley v Milligan was not followed)

To prove what the mother’s intentions were, the mother had to plead an illegal purpose. The court said that this did not matter. The mother could still plead her case

(3)    The mother was declared to have a beneficial interest in the proceeds of sale. Three of the five judges held that this declaration should be subject to a requirement that she restore the subsidy to the Commonwealth.

•    This case demonstrates how illegality will be treated in an Australian court. You can plead the existence of a resulting trust, even if you have to confess to some illegal act

Note:    Tinsley v Milligan involved two women who formed a joint venture to run a boarding house. They purchased a house in the plaintiff’s name, so that the defendant could receive social security payments, which went into their joint household kitty. Subsequently, they quarreled, the plaintiff moved out, and then served notice on the defendant to quit the house, and brought an action for possession, claiming that she (the plaintiff) was the sole legal owner.
The defendant counter-claimed for a sale of the property and sharing of the proceeds, on the basis that it was held on a resulting trust.
The defendant succeeded on all levels. By majority, the HOL held that the illegality did not defeat the defendant’s claim, because she did not have to bring evidence of the illegal purpose to succeed.