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Cyprus: Risks for advancing money by way of a loan and the protection offered by the Quistclose trust

 

The rule in relation to money advanced by way of a loan, is that generally they become the property of the borrower, giving him the discretion to apply the money as he thinks fit, and leaving the lender vulnerable to the risk of the borrower’s insolvency.

The Quistclose trust which emerged from the case of Barclay’s Bank Ltd v Quistclose Ltd constitutes a kind of exception to this rule. The House of Lords in this case decided that money lent for a purpose is held by the borrower on trust for the lender, if that purpose is not achieved. A Quistclose trust is said to give rise to a two-pronged trust. First, an express trust in favour of the creditors, based on the mutual intention of the lender and the borrower that the sum advanced should be used solely for the purpose stated, and a second, in favour of the lender, that only arises upon the failure of the first one.

 

Retention of Title clauses (ROT’s), extent to cover past and previous debts owed to the seller and allow the buyer to manage the goods however he likes. Unlike them, the Quistclose trust only covers the one debt and provides strict instructions that regulate the funds’ use.

 

It is a convenient tool for corporate rescue, due to the fact that by providing security to the lender of an insolvent company, it means that lenders are more inclined and willing to agree to give such loans that can many times be fundamental in extricating a company from financial difficulties. This is because a lender under a Quistclose trust has priority over the unsecured creditors to recover the owed sum, and he does not await a pari passu distribution of the available assets.

 

The 2002 decision of the House of Lords in Twinsectra v Yardley has refocused attention on the Quistclose trust and made it a type of trust of a more general application. Lord Millet in this case held that the duty arising is not a contractual one but a fiduciary, since it is unconscionable for a party to obtain money on terms as to its application and then disregard them. In these situations a relationship of trust and confidence is created, based on the assumption that the money will be applied by the recipient for the proper, or otherwise agreed purpose.

 

The conclusion reached from Lord Millet’s statements in Twinsectra is that there is no need for an express trust to be set up to be able to prove the intended purpose, and that in the absence of it a resulting trust may arise in favour of the lender, thus broadening the circumstances in which the court may be inclined to find a Quistclose trust to exist.

 

As it was affirmed in 2015 by the Court of Appeal in Bellis v Challinor, taking into consideration inter alia the above authorities, the Court when examining whether a Quistclose trust arises, will focus on the true construction of the words used by the transferor, and if no such words exist, but he responds to an invitation to transfer the property on terms, then the true construction of the invitation will likely be the decisive factor.

 

Nevertheless, it is important to note that this vehicle is a creation of equity that exists in common law jurisdictions including Cyprus, and therefore it is in the discretion of the judiciary whether on the facts of the case a Quistclose trust may arise.

 

For further information on this topic please contact

Mr. Kyriakos Pittas (kpittas@pittaslegal.com) at SOTERIS PITTAS & CO LLC,

by telephone (+357 25 028460) or by fax (+357 25 028461)

 

 

The content of this article is intended to provide a general guide to the subject matter. Specialist advise should be sought about your specific circumstances.

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