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Resulting and constructive trusts — SQE1 Trusts question

A worked single-best-answer question on resulting and constructive trusts, with why each wrong option is wrong — the way SQE1 traps candidates.

Resulting and constructive trusts

Brightway Ltd was in financial difficulty and unable to pay its staff. Fenwick lent it £80,000 under a written agreement stating that the money was to be used 'solely for the payment of the March wages and for no other purpose'. Brightway paid the money into a new account opened for that purpose. Before the wages were paid, Brightway went into insolvent liquidation. The liquidator says the £80,000 is available to all of Brightway's creditors.

Which of the following best describes Fenwick's position?

  1. AFenwick is an unsecured creditor for £80,000, because a loan transfers ownership of the money to the borrower.
  2. BFenwick is entitled to the return of the £80,000 ahead of the general creditors, because it is held on trust for him once the stated purpose has failed.
  3. CThe employees are entitled to the £80,000, because the money was held on a trust enforceable by them.
  4. DFenwick is entitled to the £80,000 only if he registered the loan agreement as a charge at Companies House.
  5. EFenwick is entitled to the £80,000 only if the agreement expressly declared that the money was held on trust.
Show answer and reasoning
B is the best answer. Where money is lent for an exclusive stated purpose and is not to be at the free disposal of the borrower, the borrower holds it on trust; if the purpose fails, it is held for the lender (Barclays Bank v Quistclose Investments). Twinsectra v Yardley confirms that the beneficial interest remains with the lender throughout. The £80,000 is therefore not available to Brightway's general creditors.

Rule: Money lent for an exclusive purpose and not at the borrower's free disposal is held on trust, and if the purpose fails it must be returned to the lender.

  • A A loan normally makes the lender a creditor, but a Quistclose trust arises where the money is not at the borrower's free disposal. (right rule, wrong facts)
  • C In a Quistclose trust the beneficial interest remains with the lender; the purpose does not give the employees enforceable rights. (wrong rule)
  • D A Quistclose trust is not a charge created by the company, so registration is irrelevant. (wrong rule)
  • E The intention may be inferred from the exclusive purpose and the arrangements; the word 'trust' need not be used. (wrong rule)

Source: Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567; Twinsectra Ltd v Yardley [2002] UKHL 12

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