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Bellis v Challinor – the Quistclose trust explained

Published November 2015

Ian Croxford Q.C. and Clare Stanley Q.C. acted for the successful appellant in this hard fought and long-running Quistclose trust case. The main judgment given by Briggs LJ (with whom Moore-Bick and Underhill LJ agreed) is characteristically didactic, and contains a coherent and very welcome exposition of the test for a Quistclose trust.

Practical points to note are:

  • The test for a Quistclose trust requires evidence of a positive intention, by words or conduct of the putative settlor, to create a trust
  • The test is objective – a person who does subjectively intend to create a trust may fail to do so if his words and conduct, viewed objectively, fall short of what is required
  • Whilst the factual background will be relevant, that context must be used as a tool for the construction of the words spoken / written, rather than as a means of subverting their true meaning
  • Commercial counterparties wishing to secure a loan/investment by way of trust should do so expressly. The Courts are unwilling to recast their bargain to take effect in the way in which, with hindsight, they would have preferred it to operate

The claimants’ application for permission to appeal to the Supreme Court was dismissed on 7 July 2015.


This was a case arising out of a failed property investment scheme, in which the investment vehicle became insolvent and the investors, as so often happens, sought to blame the professional – in this instance the solicitor acting for the investment vehicle.

The claimants were investors in a property investment scheme in relation to an intended development of Fairoaks Airport in Surrey.  The defendant solicitor acted for the investment vehicle (“AFL”) a single purpose vehicle which had acquired the land in question.  The 21 claimants each remitted monies to the client account of the solicitor further to written invitations to invest.  Each claimant paid between £10,000 and £250,000 in connection with the investment opportunity presented to them. Most of the money so remitted was then paid out by the solicitor to reduce AFL’s bank borrowing.

The investment scheme was ultimately unsuccessful and AFL went into administration.  The claimants sued the solicitor for breach of trust alleging that the monies they had remitted were held on trust by the solicitor for them. The claimants asserted this notwithstanding the rather stark facts that (a) they were not the clients of the solicitor; the solicitor acted not for them, but for AFL, (b) there were no dealings of any kind between the solicitor and the investors, and (c) when remitting monies to the client account, the investors expressed no restrictions on the use to which the monies could be put, nor did the solicitor proffer any undertaking.

At first instance the Judge held that the payment of money by the claimants had created a resulting trust analogous to a Quistclose trust. Unlike the conventional Quistclose trust arrangement, where the monies are held on trust for the payer with a mandate/power in the trustee to use the funds for a specified purpose, the Judge held that there was no such purpose in this case; rather, the solicitor was to hold the funds for the investors to their order until it was “safe” to release the funds to the investment vehicle.  This condition of “safety” was incapable of precise definition.

The Court of Appeal disagreed with the Judge and overturned his decision ([2015] EWCA Civ 59). In a detailed judgment Briggs LJ (with whom Moore-Bick and Underhill LJJ agreed) allowed the solicitor’s appeal and rejected the existence of a resulting / Quistclose trust, finding that the claimants as the putative trustees had not done enough to create a trust in their own favour.


The eponymous trust arising out of the decision of the House of Lords in Barclays Bank v Quistclose [1970] AC 567 actually has its origins in the 19th century, in cases where the Court would enforce the fiduciary obligation of a recipient of monies which received those monies on terms that it would only apply them for a specified purpose (see e.g. Hassall v Smithers (1806) 12 Vesey Junior 119; Toovey v Milne 106 E.R. 514; (1819) 2 B. & Ald. 683).  In so doing the Court treated the money as being held on trust for the payer unless and until that purpose was fulfilled.

Better reported examples occurred during the 20th century, most notably in insolvency situations.  Thus, in Re Nanwa Gold Mines Ltd [1955] 1 WLR 1080 (Harman J) an application form was sent out by a company inviting subscriptions for a further issue of capital, which contained a statement that if certain conditions were not fulfilled “application moneys will be refunded and meanwhile will be retained in a separate account.” A circular letter sent out with the form was to the same effect. The question was whether the money subscribed which was held in a separate account formed part of the general assets of the company, so that the subscribers ranked with the other creditors of the company, or whether it was returnable to the subscribers.  Harman J, treating the matter as one purely of construction of the documents, held that they were trust monies which had to be returned to the subscribers (see similarly Re Kayford Ltd (in liquidation) [1975] 1 WLR 279).

Quistclose followed a similar pattern. In that case, Quistclose lent money to Rolls Razor in order to enable it to pay a dividend that Rolls Razor had declared when in significant financial difficulties.  The money was paid into a separate new bank account with Barclays, on the basis of an express agreement between Rolls Razor and Quistclose that the money was to be used “only” to pay the dividend.  After Rolls Razor went into liquidation, Barclays set off the amount in this dividend account against Rolls Razor’s other indebtedness to it.  The question was whether Barclays was entitled to do this, which in turn depended upon whether these were trust monies.

Barclays argued that they were not trust monies, relying on a number of earlier authorities, beginning with Moseley v Cressey’s Co. (1865) LR 1 Eq 405, which held that payments made for specific purposes were not held on trust, and that the funds so transferred became the absolute property of the recipient, thus divisible amongst its creditors on a winding up.  In Moseley company promoters received money accompanying applications for shares, but the shares were never allotted.  Sir W Page Wood VC held that there was no trust, partly because it was not contended “that the plaintiffs said or did anything whatever when they paid in these monies or that the bank constituted themselves trustees” (p. 410).

Lord Wilberforce distinguished such earlier cases as mere “examples which show that, in the absence of some special arrangement creating a trust… payments of this kind are made upon the basis that they are to be included in the company’s assets” (emphasis supplied).  Lord Wilberforce found that there was such a “special” arrangement in relation to the moneys advanced by Quistclose:

“It is not difficult to establish precisely upon what terms the money was advanced by the Respondents to Rolls Razor Ltd.  There is no doubt that the loan was made specifically in order to enable Rolls Razor Ltd to pay the dividend.  There is equally, in my opinion, no doubt that the loan was made only so as to enable Rolls Razor Ltd to pay the dividend and for no other purpose.  This follows quite clearly from the terms of the letter of Rolls Razor to the bank… The mutual intention of the respondents and Rolls Razor Ltd, and the essence of the bargain, was that the sum advanced should not become part of the assets of Rolls Razor Ltd, but should be used exclusively for payment of a particular class of its creditors, namely, those entitled to the dividend.  A necessary consequence from this, by process simply of interpretation, must be that if, for any reason, the dividend could not be paid, the money was to be returned to the respondents: the word “only” or “exclusively” can have no other meaning or effect.” (pp. 579H- 580D)

It followed that the monies advanced by Quistclose were trust monies and could not be the subject of the claimed set off by Barclays.

Thereafter, numerous examples of similar contractual trusts appeared in the law reports, with practitioners, especially in an insolvency context, looking for ways to elevate their clients’ status from being an unsecured loan creditor, to that of a beneficiary under a trust.  (See e.g. Re Chelsea Cloisters Ltd (in liquidation) (1980) 41 P. & C.R. 98; Carreras Rothmans Ltd v Freeman Mathews Treasure Ltd [1985] Ch. 207; Re EVTR [1987] B.C.L.C. 646.)


In Twinsectra v Yardley [2002] 2 AC 164 the Quistclose trust was used for a yet further purpose, namely the foundation for a dishonest assistance claim.  Readers will know that it is an essential prerequisite for such a claim that the defendant has assisted with a breach of trust, and thus the first condition to be satisfied is that there is a trust.  If money is simply loaned by lender (L) to borrower (B), there is no basis for a trust claim, let alone a claim against a third party for dishonest assistance. (However, and depending on the terms of the loan, there may be room for a claim in tort for procuring a breach of contract.)  However, if the terms of the agreement between L and B are such that, properly construed, B owed to L a fiduciary obligation to use the loan monies in a particular way, then the monies may well then be held on trust for L pending the fulfilment of that purpose.

That is precisely what was alleged and found in Twinsectra: monies were paid by Twinsectra to a solicitor’s client account subject to the solicitor’s undertaking that “1. the loan moneys 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 moneys will be utilised solely for the acquisition of property on behalf of our client and for no other purpose…”  The monies were paid out by that solicitor (Mr Sims) to another solicitor (Mr Leach), following an assurance by the client (Mr Yardley) that the monies would be so used.  In fact, Mr Leach then paid out the monies to the client, who did not use the monies for the acquisition of property.  The question for decision by the House of Lords was whether (a) Mr Sims held the monies on trust for the lender, and if so (b) did Mr Leach dishonestly assist in a breach of that trust.  (It is not clear why it was not simply alleged that Mr Leach himself became the trustee for the lender; a claim for breach of trust would have been much more straightforward than alleging dishonest assistance.)

Only the first question is relevant for present purposes.  The House of Lords held that a Quistclose trust had been created.  Although Lord Millett’s speech was a dissent, on the Quistclose trust issue it is regarded as being the authoritative exposition of the law in this area (see Challinor per Briggs LJ at para. 54).

“68 Money advanced by way of loan normally becomes the property of the borrower. … But it is well established that a loan to a borrower for a specific purpose where the borrower is not free to apply the money for any other purpose gives rise to fiduciary obligations on the part of the borrower which a court of equity will enforce. In the earlier cases the purpose was to enable the borrower to pay his creditors or some of them, but the principle is not limited to such cases.

69 Such arrangements are commonly described as creating “a Quistclose trust”… When the money is advanced, the lender acquires a right, enforceable in equity, to see that it is applied for the stated purpose, or more accurately to prevent its application for any other purpose. This prevents the borrower from obtaining any beneficial interest in the money, at least while the designated purpose is still capable of being carried out. Once the purpose has been carried out, the lender has his normal remedy in debt. If for any reason the purpose cannot be carried out, the question arises whether the money falls within the general fund of the borrower’s assets, in which case it passes to his trustee in bankruptcy in the event of his insolvency and the lender is merely a loan creditor; or whether it is held on a resulting trust for the lender. This depends on the intention of the parties collected from the terms of the arrangement and the circumstances of the case….

75 In the present case paragraphs 1 and 2 of the undertaking are crystal clear. Mr Sims undertook that the money would be used solely for the acquisition of property and for no other purpose; and was to be retained by his firm until so applied. It would not be held by Mr Sims simply to Mr Yardley’s order; and it would not be at Mr Yardley’s free disposition. Any payment by Mr Sims of the money, whether to Mr Yardley or anyone else, otherwise than for the acquisition of property would constitute a breach of trust.”

It was argued by Mr Leach that the lender, Mr Ackerman, had not intended to create a trust obligation, and that should therefore negative the creation of any such trust.  The House of Lords disagreed.  Lord Hoffmann shortly rejected this submission, on the grounds that “Whether a trust was created and what were its terms must depend upon the construction of the undertaking. Clauses 1 and 2 cannot be ignored just because Mr Ackerman was not particularly interested in them” (para. 17).  Lord Millett’s reasoning was broadly the same:

“71 …. A settlor must, of course, possess the necessary intention to create a trust, but his subjective intentions are irrelevant. If he enters into arrangements which have the effect of creating a trust, it is not necessary that he should appreciate that they do so; it is sufficient that he intends to enter into them. Whether paragraphs 1 and 2 of the undertaking created a Quistclose trust turns on the true construction of those paragraphs.

72 The fact that Twinsectra relied for its security exclusively on Mr Sims’s personal liability to repay goes to Twinsectra’s subjective intention and is not relevant to the construction of the undertaking, but it is in any case not inconsistent with the trust alleged. Arrangements of this kind are not intended to provide security for repayment of the loan, but to prevent the money from being applied otherwise than in accordance with the lender’s wishes. If the money is properly applied the loan is unsecured. This was true of all the decided cases, including the Quistclose case itself.”

Therefore, as in Quistclose itself, the terms of the documents were decisive as to what the parties intended, namely that they intended their relationship to be more than that of simple lender/borrower, and that the borrower should be under a fiduciary obligation not to apply the money otherwise than in accordance with the stated purpose.

This approach is of course entirely consistent with the position in contract, and it is relevant that in both Quistclose and Twinsectra the core relationship was contractual, i.e. a contract of loan.  It is suggested that the real question in such cases is whether, as a matter of contractual interpretation, the parties intended their bargain to include a fiduciary element.  That necessarily involves a process of analysis of the documents, together with any relevant extrinsic background material, but ignoring the subjective intentions of the parties; hence the irrelevance of the intention of the lender in Twinsectra.

One of the cardinal rules in contractual situations is that the Court should look only at the facts which were known / available to both of the parties (the “common facts”) to ascertain the terms of their bargain.  As a result of that process the Court will be able to divine the shared intentions of the parties as to the terms on which they dealt.  Thus in Twinsectra Lord Millett emphasised that the Court’s task is to gather “the intention of the parties collected from the terms of the arrangement and the circumstances of the case” (para. 69 quoted above).  In a similar vein, but again involving a contractual situation, the Court of Appeal in Bieber v Tethers [2013] 1 BCLC 248 focussed on the mutual intention of payer and payee(adopting the undisputed exposition of the principles by Norris J at first instance):

“16 the question in every case is whether the payer and the recipient intended that the money passing between them was to be at the free disposal of the recipient…

18 …. it must be clear from the express terms of the transaction (properly construed) or must be objectively ascertained from the circumstances of the transaction that the mutual intention of payer and recipient (and the essence of their bargain) is that the funds transferred should not be part of the general assets of the recipient but should be used exclusively to effect particular identified payments, so that if the money cannot be so used then it is to be returned to the payer…”

(Emphases supplied)


What then of the case where the parties’ relationship is not contractual? How does the Court decide when a Quistclose trust has been created?

This question was answered by the Court of Appeal in Challinor.  It held that the relevant test to determine whether a Quistclose trust has been created is one of intention, however this is not (at least not necessarily) to be judged by the common or shared intention of the parties, but by the intention of the putative settlor, i.e. the payer.

Briggs LJ identified the basic principles applicable to the creation of Quistclose trusts as follows.

“56 There must be an intention to create a trust on the part of the transferor. This is an objective question. It means that the transferor must have intended to enter into arrangements which, viewed objectively, have the effect in law of creating a trust: see Twinsectra at paragraph 71.

57 In this respect, Quistclose -type trusts are no different from any other trusts. In particular, they are not presumed to exist unless a contrary intention be proved, as in the case of the traditional type of resulting trust where a person makes a gratuitous transfer of property to an apparent stranger.

58 A person creates a trust by his words or conduct, not by his innermost thoughts. His subjective intentions are, as Lord Millett said, irrelevant. In the Twinsectra case, a Quistclose trust was established despite the transferor having no subjective intention to create a trust. But the objectivity principle works both ways. A person who does subjectively intend to create a trust may fail to do so if his words and conduct, viewed objectively, fall short of what is required. As with the interpretation of contracts, this process of interpretation is often called the ascertainment of objective intention. In the contractual context the Court is looking for the objective common intention, whereas in the trust context the search is for the objective intention of the alleged settlor.”

In other words, the test for formation of a Quistclose trust is the same as that for an express trust – the “three certainties” for the creation of a trust must be satisfied.  The key question will usually be that of certainty of intention, namely has the putative settlor sufficiently manifested an intention to create a trust of the fund?

Where the putative settlor records in writing his wishes/instructions as to the use of the money to be transferred, it will usually be the confines of the four corners of this document which determine whether he has sufficiently manifested an intention to create a trust.  Another scenario (that which arose in Challinor) is that the putative settlor has paid money further to a written invitation from another.  In that event it will be the construction of the terms of that invitation which will / will not supply evidence of an intention to create a trust:

“59 Usually, the question whether the essential restrictions upon the transferee’s use of the property have been imposed (so as to create a trust) turns upon the true construction of the words used by the transferor. But where, as in Twinsectra and indeed the present case, the transferor says or writes nothing but responds to an invitation to transfer the property on terms, then it is the true construction of the invitation which is likely to be decisive.”

Just as in contractual interpretation, the Court must construe the written material objectively, against the material background facts and context in which the document(s) came to be prepared.  However, whilst the material factual background will be important, the Court of Appeal sounded the warning that:

“70 … the context must be used as a tool for the proper interpretation of the invitations to which they responded, rather than as a means of subverting their meaning.”

In Challinor Briggs LJ construed the invitation in that case as inviting the claimants to make loans to AFL and not as asking them to remit monies to the solicitor to be held to their order (i.e. on trust as they alleged).

One point which had strongly influenced the Judge at first instance was the fact that the claimants had been specifically invited to direct their payments to AFL’s solicitor’s client account, rather than to AFL direct.  They argued that this was consistent with / evidence of an objective intention that monies were to be held by the solicitor to their order.  Briggs LJ disagreed.  He held that the payment of monies to a counterparty’s solicitor was evidence of an intention that the monies should be held for the solicitor’s client:

“79 …where a party to a transaction pays money at the other party’s request to that other party’s solicitor, then the default position is, and has been for over a century, that payment to the solicitor is equivalent to payment to the solicitor’s client, so that the money is held on trust for the client: see Ellis v Goulton [1893] 1QB 350….”

The result was that the claimants had not done enough to create a trust and their claim for breach of trust against the defendant solicitor accordingly failed.


The juridical basis of the Quistclose trust, as interpreted by Lord Millett (writing judicially, in Twinsectra and Air Jamaica v Charlton [1999] 1 WLR 1399, and extra-judicially), has remained something of an enigma.  Whilst this has given academic commentators a wonderful opportunity to debate it ad nauseam (see e.g. W Swadling, ed, The Quistclose Trust: Critical Essays (Hart 2004)), it has nonetheless created real practical problems for lawyers seeking to advise their clients as to their rights and interests when monies have been remitted on terms as to their application.

In Australia the Quistclose trust has long been recognised as a species of express trust (see Lord v Australian Elizabethan Theatre Trust [1991] FCA 344) meaning that the Court will apply the well-established test of the “three certainties” to determine whether such a trust has been created.  As a result of the decision in Challinor it is a relief for practitioners to know that the English Courts are moving in the same direction.  Briggs LJ’s judgment provides welcome clarification and much needed certainty in this notoriously difficult area of the law.

Written by Clare Stanley QC

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