In CCM Industrial Pte Ltd (in liquidation) v Chan Pui Yee [2016] SGHC 231 (CCM Industrial), the liquidators of CCM Industrial Pte Ltd (the Company) brought a claim for the recovery of certain payments (the Payments) to the defendant, Madam Chan Pui Yee, in the lead up to the Company's liquidation. The defendant attempted a defence which was discussed by the court in three paragraphs and although dismissed as "an afterthought and a non-starter", such defence may have practical implications which might affect unsecured lenders and borrowers and thus, may impact on the purpose clauses in lending agreements.

Quistclose trust

The Quistclose trust is essentially a principle that is derived from the decision in Barclays Bank Ltd v Quistclose Investments [1970] AC 567 – namely, that moneys advanced by a lender to a borrower for a specific purpose were impressed with a trust for that purpose and does not become part of the borrower's estate. The lender is entitled to a right that such moneys are applied towards the specified purpose and to prevent the use of the moneys for any other purpose. Once the moneys have been applied for that specified purpose, the lender has the normal remedy in debt.

The defendant in CCM Industrial attempted to argue that the Payments arose from a S$3 million loan (the Loan) made by the Company's managing director to the Company, of which S$1 million was intended to be set aside for the Payments, and that as a result, a Quistclose trust was created over the Payments. On the facts, the court found that as the Loan had not been segregated for the specific purpose of repaying the defendant and had been deposited into and commingled with other moneys in the Company's general account, which in turn had been overdrawn and from which numerous withdrawals had been made, the whole of the Loan had been fully withdrawn before the cheques comprising the Payments were made to the defendant and as such, the moneys used to make the Payments could not be considered to have been held under a Quistclose trust.

In arriving at this conclusion, the court applied the principles governing Quistclose trusts which were discussed by the High Court in the recent case of Attorney-General v Aljunied-Hougang-Punggol East Town Council [2015] 4 SLR 474 (AHPETC) in the Singapore context. In AHPETC, the court adopted the model of the Quistclose trust set out by Lord Millett in Twinsectra v Yardley [2002] 2 AC 164 (Twinsectra) as the law in Singapore.

While much academic and judicial ink have been spilled on the nature and description of a Quistclose trust, two points are certain:

  1. The Quistclose trust is a resulting trust for the lender who retains the beneficial interest in the moneys, subject to the borrower's right to apply the moneys towards the specified purpose in accordance with the lender's instructions, and if the purpose fails, the borrower is obliged to return the moneys to the lender since the resulting trust is no longer subject to any power on the part of the borrower to make use of the moneys (Proposition 1).
  2. Notwithstanding (i) above, the same analysis should apply to those situations in which parties enter into a commercial arrangement which permits one party to have a limited use of the other's moneys for a specified purpose such that the first party does not have the freedom to apply the moneys for any other purpose and that party must return the moneys if for any reason the purpose cannot be fulfilled (Proposition 2).

In order to constitute a Quistclose trust:

  1. The subject matter must be clear, i.e., it must be made clear what property is or is not subject to the trust.
  2. The objects must be certain, i.e., the beneficiary of the trust must be clearly identified and the right to apply the trust moneys for the stipulated purpose must be sufficiently clarified so that one can determine whether the purpose is still capable of being fulfilled or if the moneys had been misapplied. If the purpose is not made clear, case law would seem to suggest that this would work to the benefit of the lender and the borrower will have to return the moneys to the lender under the trust since the borrower has no authority to apply the moneys for any other purpose.
  3. There must be a clear intention to create a Quistclose trust, which is discussed in more detail below.

What intention is required?

In Twinsectra, the court had held that "[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." In applying this, it would be the mutual intention of the parties as expressly stated in the terms of the transaction, or as objectively ascertained from the circumstances of the transaction, that justifies the creation of a Quistclose trust.

In applying Twinsectra, the court in AHPETC gave the following guidance as to what constitutes a clear intention to create a Quistclose trust:

  1. In all Quistclose trusts, only the intention (or lack thereof) of the lender (as donor) is relevant and a trust may therefore be created even if no contract is made.
  2. In an express trust, it must be clear that the lender (as donor) intends to "constitute the [borrower] as [a] trustee" thereby imposing on the borrower the full suite of duties incident to a trusteeship. In such instance, in the absence of explicit clauses creating a trust, a segregation of the moneys advanced by the lender will be crucial in determining whether the moneys amounted to trust property. If the moneys were commingled with the borrower's other funds, it may be hard to argue that a trust had been created.
  3. In a resulting trust, it must be clear that the lender (as donor) only grants the borrower the right to apply the moneys towards a specific purpose. In order to constitute a resulting trust therefore, there must be certainty that the moneys advanced by the lender cannot be freely applied by the borrower and that such moneys do not fall within the borrower's general funds.
  4. A Quistclose trust does not arise simply because the moneys were paid for a particular purpose (for example, a buyer making payment for goods or a lender advancing sums for earning interest), as it would not make commercial sense that each payment made in the ordinary course of business would create a trust.

While the above guidance may appear helpful, it could be argued that the court's observations lean towards a conservative interpretation of Twinsectra. In particular:

  1. While the court held that a Quistclose trust "may be either express or resulting", it is clear from the analysis that followed that the question of whether a Quistclose trust arises will be a retrospective construction by the court based on the facts of the case and not an exhaustive statement on the type of Quistclose trust created (for example, there may be situations in Proposition 2 which cannot be characterised as falling within Proposition 1, where a Quistclose trust is created but such trust is neither an express trust nor a resulting trust).
  2. Although the segregation or commingling of moneys may be helpful in determining the intention of the lender (as donor), this does not necessarily imply that a Quistclose trust has been created and a broader examination of the facts at hand has to be taken to determine the lender's intention. If such intention can be established, the principles of equity then apply to make it unconscionable for the borrower to obtain money on terms as to its application and then to disregard the terms on which it received from the lender who had placed trust and confidence in the borrower to ensure that the moneys advanced were properly applied.

In applying the above, it would appear that excessive weight has been placed on the lender's intention as donor and the statement that "only the intention (or lack thereof) of the donor is relevant" by the court in AHPETC may seem to be a step too far in light of the emphasis on mutual intention in the cases that preceded AHPETC. This is particularly so in the context of a financing transaction where the parties are sophisticated and have the benefit of legal advice and the question remains as to why the purpose clause in the underlying loan agreement, negotiated between sophisticated commercial parties, should not be sufficient to bind a borrower without the parties having to apply their minds to the concepts of "trusteeship" or "beneficial interest".

Unfortunately, since the judgment in AHPETC on this point was not examined or discussed on appeal and the Court of Appeal had merely held that "[i]t is not appropriate, on the facts of the present case, to add such private law overlays to the statutory relationship between the Minister and the Town Councils", it is unclear whether the defence of a claim of beneficial interest under a Quistclose trust would be upheld.

Lenders beware

Without further scrutiny by the Court of Appeal, lenders should be advised that while the segregation of moneys into separate accounts may be helpful in determining whether a Quistclose trust has arisen, this is not necessarily conclusive. Additionally, the more tightly drafted a purpose clause is, the easier it would be to justify the existence of a Quistclose trust. Where the moneys are to be used for a sole or express purpose and to the exclusion of all other purposes, the requisite intention may be found. However, the absence of restrictive words, together with other factors such as the lack of fund segregation, may suggest that no Quistclose trust was intended. Such absence of restrictive words in the purpose clause itself is not fatal, however, as there may be other factors which exist which may be sufficient to evidence the requisite intention. The presence or absence of undertakings to apply the moneys to the specified purpose, and whether application of the moneys to other purposes amounts to a default, may also be relevant in such enquiry. It is also noteworthy that the courts usually undertake a holistic examination of all the circumstances in determining whether a Quistclose trust has arisen and it would therefore be prudent for lenders (in particular, unsecured lenders) to seek advice in connection with the purpose clauses to be incorporated into the lending agreements if they are concerned with the issues raised above.

Dentons Rodyk acknowledges and thanks Associate Hong Chengyi for his contribution to the article.

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