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- The Nature of Trusts and the Creation of Trusts
The Nature of Trusts and the Creation of Trusts
- By Student at Law
- Published 20/03/2008
- LPAB 2007-2008
-
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The creation of trusts
6.4 The three certainties
An express trust can be created by anyone possessing adequate legal capacity, provided the necessary formal requirements are satisfied.
Those requirements involve 3 certainties: certainty of intention to create a trust, certainty of the subject matter of the trust, and certainty as to the object of the trust.
a. Certainty of intention to Create a Trust
Usually where there is a deed, it is unlikely that a trust was not intended.
However, in other situations, no formal or technical words are required, provided that a sufficiently clear intention to create a trust is shown.
Where a person opens a bank account supposedly as trustee for someone else, the question of whether a trust has actually been created will depend upon the intention of the person opening the account, notwithstanding any words used. If the person wanted to open the account for his or her own benefit, no trust will be created: Commissioner of Stamp Duties (Qld) v Joliffe.
The matter will turn to the facts of each case: Kauter v Hilton.
The effectiveness to create a trust will also depend on the circumstances. A trust purportedly created by a debtor within 6 months of the presentation of a Bankruptcy petition will not be upheld, as it would constitute a voidable preference in favour of the beneficiary under s122 of the Bankruptcy Act 1966 (Cth), or possibly an unfair preference voidable at the suit of the liquidator, if the ‘settlor’ of the trust is a company under the Corporations Act 2001.
A trust will only arise in such an even where the circumstances are sufficient to cast obligations of a fiduciary nature on the recipient. It will depend on the intentions of the parties, the nature of the legal obligation imposed on them in the transaction. It will also depend on whether the agent is obliged to keep the principal’s money separate, or whether the agents obligation is simply to account to the principle for the money or other property from general funds.
Walker v Corboy (1990) involved fruit sold through an agent at Flemington. The quesiton was did the money received by the agent from the purchasers of the fruit go on trust for the growers? Crt held no trust is created as:
- none of the words of consignment used the word trust.
- sales were mostly by credit
- the money from the sale did not go into a common fund and thus the fruit sellers were considered to have incurred a debt and not a trust relation
- Thus the relationship between that of the grower and agent was one of creditor/debtor only.
Where one party places money with another, or advances money to that other in a commercial situation, the two will become creditor and debtor rather than beneficiary and trustee, unless the circumstances are sufficient to cast obligations of a fiduciary nature on the recipient: Barclays Bank Ltd v Quistclose Investments.
Facts: Rolls Razor Ltd, in serious financial difficulties, borrowed funds on the condition that they found a certain sum to pay a dividend which had been declared in July. Rolls Razor obtained the loan for the purpose of paying that dividend and a cheque for the necessary amount was paid into an account opened especially for the purpose. Before the dividend was paid, Rolls Razor went into voluntary liquidation and the respondent claimed that the amount was held by the company on trust to pay the dividend and, as the trust had failed, the money should be repaid. The appellant claimed that the money was part of the general funds of the company.
Held: Their Lordships decided that the funds were held on a resulting trust for the lender. Arrangements of this character, for the payment of a person’s debt by a third person, gave rise to a fiduciary relationship of a fiduciary character in favour, as a primary trust, of the creditors and, secondarily, if the primary trust fails, of the third person. Once the purpose is carried out, the lender has only a remedy in debt. Until then, the lender has an equitable right to see that the money is applied for the specified purpose.
Quistclose is authority for the rule that where one party advances money to another with the mutual intention that it should not become part of the assets of the borrower but should be used for some specific purpose, then a trust of moneys will be implied if the purpose fails: Australian Conference Association Ltd v Mainline Constructions Pty
Ltd.
Re Kayford Ltd demonstrated a different principle.
A mail order company set up a trust account into which it deposited customers’ payments pending consignment to them of the goods ordered. On winding up, it was held that the moneys in that account were held on trust for the customers and did not form part of the general assets of the company. The trust in this case was formed unilaterally by the company rather than by mutual intention.
Re Fada (Australia) Ltd
It was held that payment into a ‘trust account’ did not, of itself, create any trusts in favour of the applicants. The question of whether a trust is created will turn on the intention of the alleged settlor.
The proposition that Quistclose trusts are founded on is, where A pays money to B for a specified purpose, such as the payments of certain debts of B, and B sets those moneys aside upon receipt, a trust of those moneys for the fulfilment of that purpose is created and, failing that, there is a resulting trust in favour of A.
Quistclose was also applied in Carreras Rothmans Ltd v Freeman Mathews Treasure Ltd (in liquidation) as authority for the principle that a trust arose whenever money was transferred from one person to another for a specific purpose which was made known to that other person. The money was not received by the payee beneficially and the payee was not entitled to use the money for any other purpose.
In Australian Conference Association Ltd v Mainline Constructions Pty Ltd (in liquidation) where an advertising agency received money from client into a special account for sole purpose of paying bills incurred in the advertising arrangement of the client, it was stated that Quistclose is authority for the proposition that where money is advanced by A to B, with the mutual intention that it should not become part of the assets of B, but should be used exclusively for a specific purpose, there will be implied (at least in the absence of an indication of a contrary intention) a stipulation that is the purpose fails the money will be repaid, and the arrangement will give rise to a relationship of a fiduciary character, or trust.
Lyell v Kennedy
“A man who receives the money of another on his behalf, and places it specifically to an account with a banker ear-marked and separate from his own moneys, though under his control, is in my opinion a trustee of the fund standing to the credit of that account. For the constitution of such a trust no express words are necessary; anything which may satisfy the Court of Equity that the money was received in fiduciary character is enough. It is not requisite that any acknowledgment of such a trust should be made to the cestui que trust or his agent; to whomsoever made it is evidence against the trustee.
If A pays money to B upon a primary trust to pay the money to C upon the happening of some event, a trust in C’s favour will be created, but will only be enforceable by C upon the happening of the event. B may be required to hold the money on a secondary trust in favour of A, a resulting trust which will come into play in the event of the failure of the primary trust.
Both the primary and secondary trust above will be enforceable by A. Once the primary trust is fulfilled (that is, once B pays C), both trusts will be discharged and a relationship between debtor and creditor will exist between A and B.
If A pays money to B to be applied for some purpose, such as payment to C upon the happening of some event, with the intention that C gives an administrative and not a beneficial receipt for the money, so that the money’s never become B’s beneficially, but A does not intend to create a trust for C, B will hold the money subject to a fiduciary power to pay it in accordance with A’s wishes or, failing that, upon trust for A. C will have no standing to enforce the arrangement.
• Precatory trusts
Where words are used by the settlor or testator, the court must consider whether they display the necessary intention to bind the alleged trustee, whether they simply confer a power which is not binding, or whether they are no more than words of mere request.
In West v Federal Commissioner of Taxation (1949), a testatrix’s words ‘it is my will and desire’ that shares of a deceased estate be settled on the testator’s daughters in a certain way were held to be binding on the trustee.
However in Re Alston, a testatrix’s words ‘it is my express wish’ that Newman Spielvogal be granted a lease of two properties for 10 yrs at 2 pounds per week, with a right to terminate were held not to constitute a binding direction to the trustee to grant such a lease, although they clearly gave the trustee authority to do so.
6.4 The three certainties
An express trust can be created by anyone possessing adequate legal capacity, provided the necessary formal requirements are satisfied.
Those requirements involve 3 certainties: certainty of intention to create a trust, certainty of the subject matter of the trust, and certainty as to the object of the trust.
a. Certainty of intention to Create a Trust
Usually where there is a deed, it is unlikely that a trust was not intended.
However, in other situations, no formal or technical words are required, provided that a sufficiently clear intention to create a trust is shown.
Where a person opens a bank account supposedly as trustee for someone else, the question of whether a trust has actually been created will depend upon the intention of the person opening the account, notwithstanding any words used. If the person wanted to open the account for his or her own benefit, no trust will be created: Commissioner of Stamp Duties (Qld) v Joliffe.
The matter will turn to the facts of each case: Kauter v Hilton.
The effectiveness to create a trust will also depend on the circumstances. A trust purportedly created by a debtor within 6 months of the presentation of a Bankruptcy petition will not be upheld, as it would constitute a voidable preference in favour of the beneficiary under s122 of the Bankruptcy Act 1966 (Cth), or possibly an unfair preference voidable at the suit of the liquidator, if the ‘settlor’ of the trust is a company under the Corporations Act 2001.
A trust will only arise in such an even where the circumstances are sufficient to cast obligations of a fiduciary nature on the recipient. It will depend on the intentions of the parties, the nature of the legal obligation imposed on them in the transaction. It will also depend on whether the agent is obliged to keep the principal’s money separate, or whether the agents obligation is simply to account to the principle for the money or other property from general funds.
Walker v Corboy (1990) involved fruit sold through an agent at Flemington. The quesiton was did the money received by the agent from the purchasers of the fruit go on trust for the growers? Crt held no trust is created as:
- none of the words of consignment used the word trust.
- sales were mostly by credit
- the money from the sale did not go into a common fund and thus the fruit sellers were considered to have incurred a debt and not a trust relation
- Thus the relationship between that of the grower and agent was one of creditor/debtor only.
Where one party places money with another, or advances money to that other in a commercial situation, the two will become creditor and debtor rather than beneficiary and trustee, unless the circumstances are sufficient to cast obligations of a fiduciary nature on the recipient: Barclays Bank Ltd v Quistclose Investments.
Facts: Rolls Razor Ltd, in serious financial difficulties, borrowed funds on the condition that they found a certain sum to pay a dividend which had been declared in July. Rolls Razor obtained the loan for the purpose of paying that dividend and a cheque for the necessary amount was paid into an account opened especially for the purpose. Before the dividend was paid, Rolls Razor went into voluntary liquidation and the respondent claimed that the amount was held by the company on trust to pay the dividend and, as the trust had failed, the money should be repaid. The appellant claimed that the money was part of the general funds of the company.
Held: Their Lordships decided that the funds were held on a resulting trust for the lender. Arrangements of this character, for the payment of a person’s debt by a third person, gave rise to a fiduciary relationship of a fiduciary character in favour, as a primary trust, of the creditors and, secondarily, if the primary trust fails, of the third person. Once the purpose is carried out, the lender has only a remedy in debt. Until then, the lender has an equitable right to see that the money is applied for the specified purpose.
Quistclose is authority for the rule that where one party advances money to another with the mutual intention that it should not become part of the assets of the borrower but should be used for some specific purpose, then a trust of moneys will be implied if the purpose fails: Australian Conference Association Ltd v Mainline Constructions Pty
Re Kayford Ltd demonstrated a different principle.
A mail order company set up a trust account into which it deposited customers’ payments pending consignment to them of the goods ordered. On winding up, it was held that the moneys in that account were held on trust for the customers and did not form part of the general assets of the company. The trust in this case was formed unilaterally by the company rather than by mutual intention.
Re Fada (Australia) Ltd
It was held that payment into a ‘trust account’ did not, of itself, create any trusts in favour of the applicants. The question of whether a trust is created will turn on the intention of the alleged settlor.
The proposition that Quistclose trusts are founded on is, where A pays money to B for a specified purpose, such as the payments of certain debts of B, and B sets those moneys aside upon receipt, a trust of those moneys for the fulfilment of that purpose is created and, failing that, there is a resulting trust in favour of A.
Quistclose was also applied in Carreras Rothmans Ltd v Freeman Mathews Treasure Ltd (in liquidation) as authority for the principle that a trust arose whenever money was transferred from one person to another for a specific purpose which was made known to that other person. The money was not received by the payee beneficially and the payee was not entitled to use the money for any other purpose.
In Australian Conference Association Ltd v Mainline Constructions Pty Ltd (in liquidation) where an advertising agency received money from client into a special account for sole purpose of paying bills incurred in the advertising arrangement of the client, it was stated that Quistclose is authority for the proposition that where money is advanced by A to B, with the mutual intention that it should not become part of the assets of B, but should be used exclusively for a specific purpose, there will be implied (at least in the absence of an indication of a contrary intention) a stipulation that is the purpose fails the money will be repaid, and the arrangement will give rise to a relationship of a fiduciary character, or trust.
Lyell v Kennedy
“A man who receives the money of another on his behalf, and places it specifically to an account with a banker ear-marked and separate from his own moneys, though under his control, is in my opinion a trustee of the fund standing to the credit of that account. For the constitution of such a trust no express words are necessary; anything which may satisfy the Court of Equity that the money was received in fiduciary character is enough. It is not requisite that any acknowledgment of such a trust should be made to the cestui que trust or his agent; to whomsoever made it is evidence against the trustee.
If A pays money to B upon a primary trust to pay the money to C upon the happening of some event, a trust in C’s favour will be created, but will only be enforceable by C upon the happening of the event. B may be required to hold the money on a secondary trust in favour of A, a resulting trust which will come into play in the event of the failure of the primary trust.
Both the primary and secondary trust above will be enforceable by A. Once the primary trust is fulfilled (that is, once B pays C), both trusts will be discharged and a relationship between debtor and creditor will exist between A and B.
If A pays money to B to be applied for some purpose, such as payment to C upon the happening of some event, with the intention that C gives an administrative and not a beneficial receipt for the money, so that the money’s never become B’s beneficially, but A does not intend to create a trust for C, B will hold the money subject to a fiduciary power to pay it in accordance with A’s wishes or, failing that, upon trust for A. C will have no standing to enforce the arrangement.
• Precatory trusts
Where words are used by the settlor or testator, the court must consider whether they display the necessary intention to bind the alleged trustee, whether they simply confer a power which is not binding, or whether they are no more than words of mere request.
In West v Federal Commissioner of Taxation (1949), a testatrix’s words ‘it is my will and desire’ that shares of a deceased estate be settled on the testator’s daughters in a certain way were held to be binding on the trustee.
However in Re Alston, a testatrix’s words ‘it is my express wish’ that Newman Spielvogal be granted a lease of two properties for 10 yrs at 2 pounds per week, with a right to terminate were held not to constitute a binding direction to the trustee to grant such a lease, although they clearly gave the trustee authority to do so.
Continued on page 6