Resulting Trusts

One issue that is often examined in essay form is the role of intention in the creation of resulting trusts. This material will briefly summarise some of the issues which you can consider. There are differing academic views; to get the best essay marks you do not need to agree with any particular view but comment and appreciate the merits and weaknesses of their arguments.

Starting Place

A good place to begin is with the distinction made by Meggary J in Vandervell #2; the automatic and presumed intention resulting trust. A presumption is a matter of evidence/proof and on the proof of primary facts, e.g. a voluntary transfer of property to another, then the burden shifts to other party to rebut the presumption on contrary evidence, secondary facts.

Automatic or ‘failed formalities’ resulting trusts. This will occur when there has been an intention to declare a valid charitable trust which is declared invalid; Morice v Bishop of Durham (1805) 10 Ves Jr 522 or where the objects are uncertain; Vandervell #2. In both these cases there was clear intention that the settlor or testator did not want to retain any beneficial interest in the property. Lord Wilberforce was clear that they arose regardless of intention in his decision in Vandervell v IRC; they arose automatically by consequence of failure.

Lord Browne-Wilkinson in Westdeutsche Landesbank Girozentrale v Islington LBC, that all resulting trusts arise by intention (obiter).

There are problems with Lord Browne-Wilkinson’s view on this. The intention is a matter of evidence; as Megarry J said in Vandervell #2, an ‘unexpressed intention in breast of owner does nothing’. With the presumed resulting trust (below) the presumption takes the place of ‘manifest’ evidence and can be rebutted by contrary ‘manifest’ evidence. There is no such gap of evidence in the failed formalities, so it is unlikely that his view can be supported here. There is intention NOT to retain a beneficial interest and a clear intention to benefit another with that interest.

Birks & Chambers suggest that the trust arises because the settlor/testator never intended the transferee to be absolute owner but to only be trustee, and therefore the beneficial ownership is not transferred. This may have merit as to why there is a resulting trust but why it is held for the settlor is not clear. This shares the principlesof Lord Browne-Wilkinson. As Hudson states the beneficial interest must be held by someone and it is (in Vandervell particularly) reluctantly held by the settlor.

Vandervell v IRC [1967] 2 AC 291 Lords Upjohn & Wilberforce base it on the notion of retaining a beneficial interest when the intended trust fails. This can be said to be flawed as there is no separate beneficial interest to be retained until a trust is declared. It may be justified as failed trusts clearly show an intention to create a trust, it is just not for the benefit of the ‘original’ intended object. Is this really a constructive trust?

A presumed resulting trust arises in two situations: a) when there is a voluntary transfer of property or b) when property is purchased in the name of another person. Both these are based on certain presumptions which can be seen dating back to the seventeenth century (Grey v Grey).

These presumptions can be rebutted on contrary evidence. We will not consider here the alternative presumption of advancement, which is based on similar principles of presumed intention and evidence.

Lord Browne-Wilkinson suggests that all resulting trusts operate because the presumption is that there is an intention to create a trust. In the absence of this intention then it is not a trust, which can be adduced on evidence. So in Twinsectra there was no evidence of trust, everything showed a clear intention to give absolutely. This is the reason there is a presumption, if there is lack of manifest evidence of intention then a trust will be presumed.

Birks & Chambers – that the fact which is proved by the presumption is that there was no intention to benefit the other person (i.e. not a presumption to retain a beneficial interest). This is to safeguard against unintended loss of assets and protect property rights (perhaps at the expense of security of transaction). For Birks this failure of intention can be based on mistake or a defect in judgement. This brings the resulting trust into the area of restitution and obligations. However, this was not the view taken by Lord Browne-Wilkinson in Westdeutsche where although there was a mistake in law there had been an intention to benefit the recipient, so no intention to retain an interest. As Swadling says, there are two intentions, to create a trust or make a gift. Where there is a clear intention to create a gift then a trust will not be imposed because of some failure.

In Vandervell v IRC [1967] 2 AC 291 the House of Lords felt that the trust arose to fill the evidential gap based on the presumptions in the voluntary transfer or purchase in the name of another. This really means there is no ‘manifest’ evidence of intentionbut based on proof of primary facts. Lords Upjohn & Wilberforce base it on the notion of retaining a beneficial interest. As noted above with Lord Browne-Wilkinson this may be said to be flawed as there is no separate beneficial interest until a trust is declared.

Quistclose Trusts

The main facts – money was lent to RR by Q for a particular purpose (paying dividends to shareholders). RR went in liquidation before the purpose could be carried out. BB claimed the money in the bank was theirs, to meet debts owed to it by RR.

The Issues

A loan agreement is a contractual arrangement, and if not repaid then the remedy is personal. This would place Q as an unsecured creditor of RR. If however they could prove that the money lent was theirs they had a proprietary claim, which would that property from any claim be creditors.

Lord Wilberforce in the leading judgment said that the fact that there was a loan agreement did not mean that there could not be a trust. The liability to pay interest would arise when the money was used to pay dividends (the purpose) and the relationship would be only contractual, but if there was a failure then it was a resulting trust (see Chapter 9) for the lender. He talked of two trusts, one for the paying of dividends (the primary trust) and a second, in suspense, until the purpose fails.

As a matter of trusts you could use your knowledge to criticise this reasoning. All trusts need the three certainties: subject matter; intention; and objects.

The subject matter of the trust is the money lent for the purpose, which is usually not an issue. Although it was difficult to identify in Farepak Foods & Gifts Limited [2006] EWHC 3272. It is often mentioned in student answers that this case states that as the money was not segregated it was uncertain subject matter. The problem for the court in Farepak was the particular way the money was collected. It was collected weekly by collectors, who may have held for several weeks before paying to Farepak. This meant it was impossible to say who the existing customers were, who cannot be given an unlawful preference by the trust mechanism (Insolvency Act) and those who were new customers and could be protected by this mechanism.

The intention to create a trust was not evident on the facts. Although there is no need to use the word trust it is not clear on what facts there could be one found, as there was in Paul v Constance (see Chapter 5). One way that later cases have considered the intention to be evident is the separation of the money into a separate account (see Re Kayford [1975] 1 All ER 604). The confusion can come from the judgment in the case itself, with a lack of clarity about the exact nature of the first transaction.

The issue of intention in a Quistclose trust has been considered by many academics and could be usefully used to illustrate an argument in an essay on this topic.

Lord Wilberforce in Quistclose considered that BB had notice of the ‘common intention of [Q] and [RR] that … the sum advanced was not to become part of the assets of RR’. This could be compared to the intention arguments raised in cases such as Re Andrews and Re Osaba. However, in these cases the purpose was carried out and Lord Millett has said that commercial situations need more certainty.

Lord Millett in Twinsectra Ltd v Yardley and Others [2002] UKHL 12, considered that there was a loan, with the benefit held on resulting trust (although this is not certain) for the lender, with the borrower having a power to use (apply) for a particular purpose. This may show you that later in the course you will see that the simplified identification of trusts and powers we begin our studies with it more complicated as we progress.

Millett has talked of them being resulting trusts but his article (referenced below) has focussed on the role of intention at the outset, favouring Chambers view that the resulting trust arose because of the absence of intention to benefit the borrower, rather than the intention to retain a benefit for himself, see the discussion in Air Jamaica v Charlton [1999] 1 WLR 1399. There was a good deal of such evidence in the actual case.

James Penner has rejected that it is based on an intention not to benefit, as there was a clear intention to retain an interest so perhaps more in line with the arguments of Lord Browne-Wilkinson in Westdeutsche. There is no resulting trust as the lender has intended to retain a beneficial interest until the purpose is carried out, that it is not for the free use of the borrower. This would suggest that it is an express trust.

The objects of the trust are also problematic if we take Lord Wilberforce’s view. If there is a (primary) trust for the payment of dividends, then it would appear that the shareholders are the beneficiaries; if so, when the dividends are not paid they should have a remedy. However, it was considered that the failure to pay the dividends then engaged the ‘secondary’ trust for the lender. This would perhaps be fine in Quistclose itself but if the money was lent to buy materials or land the beneficiary of the ‘primary’ trust are not human but for a purpose, and therefore offends the beneficiary principles; see Twinsectra v Yardley and Re EVTR. You will see in chapters 6 and 7 that the courts do not generally enforce purpose trusts. William Swaddling has discounted it being a purpose trust or as a Re Denley type trust; (The Quistclose Trust – Critical Essays (Oxford: Hart Publishing, 2004) [ISBN 978741134120]).

However, if we take the explanation advanced in Twinsectra this problem is overcome. The money is lent, with the beneficial ownership being retained by the lender, who gives the borrower a power to use for the purpose of paying dividends, buying land or anything else. As there is a power, which can be a purpose, and a trust for the lender then there are no problems with the beneficiary principle. The lender is a human beneficiary who can enforce the trust.

The area is not certain, in Carreras Rothman v Freeman Matthews Treasure Ltd [1985] Ch 207 has said that money was held in suspense for a purpose until the purpose fails.

For a very comprehensive discussion see - The Quistclose Trust – Critical Essays (Oxford: Hart Publishing, 2004) [ISBN 978741134120], particularly the essay by (the now) Lord Millett ‘The Quistclose Trust: who can enforce it’ (1985) 101 LQR 269 and the other essays.

Also Swadling, W., ‘Orthodoxy’ in Swadling, W. (ed.) The Quistclose Trust – Critical Essays (Oxford: Hart Publishing, 2004) [ISBN 978741134120] and J. Penner, ‘Lord Millett’s Analysis’, ibid.