Introduction
The irony behind a simple definition of ‘[t]rusts for the transfer of money or other property for a specified purpose’Footnote 1 is that, in continuing to name them after Barclays Bank v Quistclose Investments,Footnote 2 the doctrine seems to be as elusive as ever.Footnote 3 In China Life Trustees v China Energy Reserve and Chemicals Group Overseas Company,Footnote 4 the task of throwing light on the Quistclose trust fell to the Hong Kong Court of Final Appeal (HKCFA) for the first time.
On its face, China Life was just another attempt at reaffirming ‘the core analysis of Quistclose trusts’Footnote 5 contained in Lord Millett’s judgment in Twinsectra v Yardley. Footnote 6 But a deep dive into this decision reveals that it in fact left plenty to reflect on vis-à-vis the content of the intention requirement and its role in Quistclose-type situations. In particular, China Life left some food for thought on two important issues. The first concerns the necessary intention for a Quistclose trust to arise. As we shall see, there was a subtle attempt by the HKCFA to introduce a slightly refocused approach whereby the expression ‘specific purpose (and no other)’ was made central to the intention enquiry. The second issue relates to the nature of such a trust. On a theoretical level, one could sense tension respecting the nature of the Quistclose trust between Cheung CJ and Ribeiro PJ, on the one hand, and Gummow NPJ, on the other. It is suggested that, notwithstanding the plurality’s view that the trust created is generally resulting in nature, the analysis proffered lends greater support to an express trust model.
1. Background
The case arose from the issuance of bonds by two special purpose vehicles (SPV1 and SPV2), belonging to the same corporate group, in 2015. First, a series of HK$-denominated bonds were issued by SPV1 to mature in 2022. Second, a series of US$-denominated bonds were issued by SPV2 to mature in 2018. The latter bonds thereafter matured, making payable US$350 million and interest which the group did not have. The group scrambled to get hold of the amount to satisfy the payment obligation, but assembled only US$120 million. That US$120 million was paid in tranches – through the group’s treasury arm – into an account opened by SPV1, but utilised by SPV1 and SPV2 for transactions vis-à-vis the 2022 and 2018 bonds respectively. It was so used by SPV1 and SPV2 because that account was conveniently split into two sub-accounts, one denominated in HK$ and the other denominated in US$. The failure to stave off default on the 2018 bonds set off a cross-default on the 2022 bonds.
The plaintiff, the sole holder of the 2022 bonds, laid claim to the US$120 million. Its premise was that the funds were sitting in an account maintained under SPV1’s name, such that they were beneficially owned by SPV1 and capable of being the subject of a garnishee order in the plaintiff’s favour. SPV1 and an Ad Hoc Committee comprising 2018 bondholders countered with an argument that a Quistclose trust favouring the group existed over the funds. The suggestion of a Quistclose trust was refuted by the courts below, but the HKCFA unanimously held otherwise. Before the HKCFA were two questions of law.Footnote 7 The first concerned the necessary intention for a Quistclose trust to exist. The second asked how, if at all, the fact of an intra-group relationship would affect the analysis. This commentary focuses on the issue of intention (Question 1).
The two main judgments came from Gummow NPJ and Ribeiro PJ, with Cheung CJ also contributing a short concurring judgment. Appreciating the inherent lack of understanding which comes with labelling a concept after a case,Footnote 8 Gummow NPJ noted that the Quistclose trust possesses ‘at least three possible meanings’: ‘a new species of trust’; ‘an instance of co-existence and interaction of legal and equitable institutions, in Quistclose those of contract of loan and express trust’; and ‘whenever a person provides assets to another for the purpose of paying debts under arrangements which create a trust’.Footnote 9 The issue in this appeal was whether the facts supported the existence of a Quistclose trust in the third sense.Footnote 10
For a Quistclose trust in this sense to arise, Gummow NPJ considered the key question to be ‘whether, on the evidence, X and Y intended that the money should be applied by Y only for a specific purpose and, if that fails, returned by Y to X’.Footnote 11 He noted that the logical corollary of this being so satisfied would be that ‘the money was not intended to form part of [Y’s] general assets or to be at [Y’s] free disposal’.Footnote 12 In turn, equity would intervene to preclude using the money for another purpose.Footnote 13 Equipped with this key question, Gummow NPJ was left with no doubt that the facts straightforwardly supported a Quistclose trust arising. To hold otherwise would, he said, contradict the evidence and the surrounding circumstances of the case.Footnote 14
Though there was the occasional treatment of a lack of free disposal as a component of the requisite intention,Footnote 15 Ribeiro PJ (whose analysis Cheung CJ closely mirrors in his short judgmentFootnote 16) similarly settled on the view that the core minimum was an intention to apply the money for a ‘specific purpose and no other’.Footnote 17 Like Gummow NPJ, Ribeiro PJ suggested that a simple analytical framework flowed from establishing this intention. He continued:
Since the money may only be applied for a specific purpose and no other, it follows logically that the money is not intended to become part of the recipient’s general assets and that the recipient may not freely use it. It means, as a matter of legal analysis, that beneficial ownership of the money is not transferred to the recipient who takes it in a fiduciary capacity to apply it only for the aforesaid purpose.Footnote 18
Expressly endorsing Gummow NPJ’s conclusion,Footnote 19 Ribeiro PJ reasoned that funds were transferred into the account with a clear, albeit implicit, stipulation that those sums should be applied towards the undischarged obligation under the 2018 bonds only.Footnote 20 Established for issuing and servicing the 2022 bonds and with ‘no other material operations or assets’,Footnote 21 SPV1 was not realistically free to use funds – which it then did not need – for its own benefit.Footnote 22 Those funds notably represented the countermeasure for the group’s financial predicament, and were ‘de facto segregated’ within the account by their being paid into the US$ sub-account that was in fact used solely by SPV2 for its bonds.Footnote 23 Because the funds acquired were inadequate, such that the purpose for which they were amassed failed, the group was entitled to have the US$120 million returned.Footnote 24
2. ‘Specific purpose (and no other)’
While the authorities consistently reinforce the centrality of intention to the Quistclose trust, its content is expressed slightly differently at times.Footnote 25 Lord Millett, favouring a resulting trust model of this trust in Twinsectra, explained that it ‘responds to the absence of an intention on the part of the transferor to pass the entire beneficial interest’.Footnote 26 But in Prickly Bay, Lady Arden took the view that the payer should at least intend to keep hold of some beneficial interest.Footnote 27 There is said to be a conceptual discrepancy between the two formulations: the former reflects a negative intention, whereas the latter is framed as an intention positively held.Footnote 28 Reflecting this supposed distinction, Question 1 was binary: either what was needed was an intention (1) for the payee not to have free disposal of the assets or (2) for the payer to retain the beneficial interest in them.Footnote 29
The significance of China Life lies in the rejection of what Ribeiro PJ referred to as ‘a confused dichotomy’,Footnote 30 in favour of situating ‘specific purpose (and no other)’ at the heart of the intention enquiry. An approach which establishes the phrase ‘specific purpose (and no other)’ as the necessary intention, and perceives the expressions ‘lack of free disposal’ and ‘retention of the beneficial interest’ as logical and legal corollaries of having an intention to that effect, is a bold shift from Lord Millett’s orthodoxy. This is because it is not apparent that the earlier cases have framed that as the nub of the enquiry. The fundamental issue is whether there is an intention that the money should constitute the recipient’s general assets and be at his free disposal, which in principle can but need not be evidenced by a transfer only for a specific purpose.Footnote 31 The orthodoxy, in other words, views ‘specific purpose (and no other)’ as an ‘indicia’ of the trust,Footnote 32 not a feature of the required intention. It is ‘lack of free disposal’ which forms part of the objectively discernible intention which the courts must be satisfied about.
This restatement of the approach to intention, though markedly distinct in its focus, is not intended to operate much differently in practice. While the analytical framework gives the impression that any transfer expressed as being only for a specific purpose would purportedly be enough to trigger the logical and legal consequences described above, the HKCFA’s application to the facts suggests otherwise. Indeed, it did not simply stop at establishing that the US$120 million was paid into the account just to discharge the payment obligation under the 2018 bonds. It then turned to satisfy itself that SPV1 did not acquire the freedom to dispose of those funds and took into consideration a combination of additional factors, particularly the factual segregation of the funds within the account, the fact that SPV1 had no need for such moneys at the relevant time and, most importantly, the scene-setting financial emergency.Footnote 33 The general tenor of the HKCFA’s reasoning was therefore to remain faithful to the spirit of Lord Millett’s core analysis, and should not be viewed as an invitation to circumvent the ‘question in every case’: was there an intention for the money to be at the recipient’s free disposal?Footnote 34
Of course, elevating ‘specific purpose (and no other)’ to the key criterion does little to definitively separate the exceptional cases in which the recipient is duty-bound to employ the funds for the purpose from the run-of-the-mill cases in which he is ‘merely at liberty to do so’.Footnote 35 So, in this respect, one might look on China Life as a missed opportunity. Yet, it is unlikely that any formulation of the test would be able to pinpoint precisely where the dividing line should be drawn. Even Lord Millett’s core analysis, which centred around a lack of free disposal and emphasised the proposition that not every arrangement styled as a transfer for a purpose automatically creates a Quistclose trust,Footnote 36 could not overcome the suspicion that ‘any loan which is expressed to be used only for a stated purpose should give rise to a Quistclose trust’.Footnote 37
Overall, China Life contains welcome analysis and repays close reading. It commendably puts forward a pragmatic approach, which recognises that the necessary intention should reflect the fact that the trigger in Quistclose scenarios is essentially the payment of money solely for a specific purpose. At the same time, the analysis shows caution in the application to the facts, thus reminding that the deployment of Quistclose trusts should be kept within reasonable bounds. That is to say, it would be wrong to think that identifying a specific purpose for the payment and none other is enough. This is best viewed as simply a starting point, from which the court must then positively satisfy itself that the extent to which the payer is seeking to regulate the recipient’s ability to utilise the funds has the effect of making their use conditional.Footnote 38 Only then can it be said that the payment over for the specific purpose bears the logical and legal consequences described above.
3. Nature of the trust
Despite the practical insignificance of classification in this appeal,Footnote 39 the HKCFA unsurprisingly also made some reference to the longstanding academic discourse on whether the trust arising in a Quistclose situation is generally express or resulting. Behind the semblance of a consensus, there was a noticeable disagreement on the nature of the trust, which was not addressed in any of the judgments. Ribeiro PJ clearly preferred to label the trust arising on the purpose failing as a single resulting trust.Footnote 40 Though the possibility that the trust may sometimes be express was acknowledged, Cheung CJ suggested that the core minimum for a Quistclose trust to come into being was not, as would be the case for express trusts, an intention to create a trust.Footnote 41 This reveals that Cheung CJ similarly understood the Quistclose trust to be naturally resulting, and this, he said, was ‘a generally accepted judicial analysis’.Footnote 42
One could glean from Gummow NPJ’s judgment, however, a preference to conceptualise the Quistclose trust as an orthodox express trust. Noting the apparent pursuit by the Court of AppealFootnote 43 of ‘a positive statement’ illustrating the payer’s intention to retain some beneficial interest, he considered that this, however, misunderstood ‘the general proposition as to the intention to create an express trust’.Footnote 44 He furthermore stated that the ‘essence of a Quistclose trust involves the restricted purpose for which the money may be applied’, with that purpose being ‘the product of the payer’s intention’.Footnote 45 Moreover, having indicated that the ‘trust’ is a label which ‘at a level of abstraction [distinguishes] express trusts from resulting or constructive trusts’,Footnote 46 he then proceeded to say that ‘to the extent that the specific purpose fails, the recipient holds the money on trust to return it to the payer’.Footnote 47 This express trust model sits comfortably with Gummow J’s earlier understanding of Quistclose trusts in Re Australian Elizabethan Theatre Trust. Footnote 48
In the context of China Life, the choice by Cheung CJ and Ribeiro PJ to characterise such a trust as resulting is odd, since all Judges provided analysis which in fact fits better with an express trust model. The Judges, for example, unanimously continued to root the Quistclose doctrine in intention-based reasoning: the stated requirement was an intention, assessed objectively and by reference to the surrounding circumstances, to constrain the use of the moneys to the stipulated purpose.Footnote 49 Gummow NPJ correctly alluded to the fact that this approach was, in substance, no different from that which applies to express trusts.Footnote 50
The standard counterargument is that intention-based reasoning does not necessarily render the Quistclose trust express, for the resulting trust model also envisages a role for intention ‘but in a negative sense’.Footnote 51 The force of the resulting trust model is thus premised on recognising a meaningful difference between positive and negative intentions. Yet, significantly, the Judges supporting the resulting trust model did not double down on this distinction. Instead, as noted, Ribeiro PJ specifically rejected the dichotomy between ‘lack of free disposal’ and ‘retention of the beneficial interest’ – a manifestation of the negative and positive divide – regarding them as essentially two sides of the same coin.Footnote 52 Cheung CJ, while indicating that the bar for evidencing an intention to retain some beneficial interest would be higher, nevertheless deemed such an intention to be ‘the legal consequence’ of ‘an objective intention that the property shall not be at the free disposal of the transferee but shall or may only be applied for the specific purpose’.Footnote 53 These dicta are tantamount to saying that proving a missing intention to benefit the recipient will concurrently establish the transferor’s intention to keep hold of the beneficial interest.Footnote 54 Read in this light, China Life should be viewed as a tacit step forward for the view, widely mooted within academic circles, that the Quistclose trust is generally best viewed as a species of express trusts.Footnote 55
Conclusion
China Life offers a fresh perspective on the approach to intention in Quistclose scenarios, the unpacking of which unearthed deeper questions warranting further reflection. This commentary targeted two points, namely the emphasis on the phrase ‘specific purpose (and no other)’ and the close alignment of the analysis with an express trust model. Authoritative guidance from the HKCFA on Quistclose trusts was eagerly anticipated, and China Life certainly left us with plenty to think about going forward.
