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Transplant of the Quistclose trust into Chinese law: a critical assessment

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Abstract

The Quistclose doctrine is a relatively recent creature of equity representing the application of a trust as a device for the purpose of conferring priority to lenders against an insolvent’s pre-existing creditors. Due to the lack of a comparable model in the existing Chinese regimes, recent proposals have been made for the transplantation of the Quistclose trust into Chinese law. Yet there is a widespread misconception in the reasoning among many Chinese academics as to the notion of ‘split ownership’. Another theoretical problem is that no category of trusts under Chinese legislation would be able to contain the Quistclose sub-category. Explanations on the nature of the Quistclose trust also contradict orthodoxies in English trust law, whether it is explained as an express trust with third party beneficiaries, an express purpose trust enforceable by third party creditors, a resulting trust subject to borrower’s power, or a constructive resulting trust. Although the use of trust to achieve conferment of priority of the aforementioned type of lenders remains problematic, the intrinsic idea of priority-conferring in such cases is nevertheless commendable, because priority-conferring generates an incentive for corporate rescue creditors, and it creates no negative externality to the existing unsecured creditors under any circumstances. It is proposed that an explanation based on the theory of retention of title, or one based on a new level of priority in insolvency distribution order would be ideal alternatives that could provide for the theoretical basis of a law that is more favourable to lenders in such circumstances without resorting to the contrivance of trusts.

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Notes

  1. Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567 (House of Lords). Followed in Carreras Rothmans Ltd v Freeman Mathews Treasure Ltd [1985] Ch 207 (Chancery Division); Re Chelsea Cloisters (1981) 41 P & CR 98 (Court of Appeal); Re EVTR [1987] BCLC 646 (Court of Appeal); In re Northern Developments (Holdings) Ltd, Chancery Division, 6 October 1978; Twinsectra Ltd v Yardley [2002] 2 AC 164 (House of Lords).

  2. Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567, 580 (House of Lords). See further below, text to n 44.

  3. Toovey v Milne (1819) 2 B & Ald 683 (Court of King’s Bench); Re Rogers, Ex p Holland and Hammond (1891) 8 Morr 243 (Court of Appeal); Edwards v Glyn (1859) 2 El & El 29 (Court of Queen’s Bench); Re Drucker [1902] 2 KB 237; Re Hooley, ex p Trustee [1915] HBR 181 (Chancery Division).

  4. For discussion on economic and financial distress, see Baird 1998.

  5. See Kripke 1985, p. 930.

  6. Re Chelsea Cloisters (1981) 41 P & CR 98 (Court of Appeal).

  7. Re Kayford Ltd [1975] 1 WLR 279 (Chancery Division).

  8. Insolvency Act 1986, s 239.

  9. The tenants in Chelsea Cloisters were in fact better off for they paid on an unsecured basis first and the company segregates the deposits afterwards. But in Kayford the court found that the intention to segregate was there at the moment of receipt, so they never were unsecured creditors. Facts regarding timing issue similar to Kayford can be found in Quistclose as well, for the loan was received and deposited into the No.4 account which is segregated initially.

  10. McKendrick 2004, p. 152.

  11. Insolvency Act 1986, ss 283(1)(a) and 283(3)(a). As for Chinese law, see 中华人民共和国企业破产法 (Enterprise Bankruptcy Law of the People’s Republic of China) 27 August 2006, art 30; 中华人民共和国信托法 (Trust Law of the People’s Republic of China) 28 April 2001, art 16.

  12. Goode 2011, pp. 94, 117.

  13. Ideally the retention of title mechanism, which China does not legally recognise, may help the lender. This point will be dealt with later.

  14. 中华人民共和国物权法 (Real Rights Law of the People’s Republic of China) 16 March 2007, art 5.

  15. 中华人民共和国物权法 (Real Rights Law of the People’s Republic of China) 16 March 2007, arts 208 and 230.

  16. 中华人民共和国物权法 (Real Rights Law of the People’s Republic of China) 16 March 2007, arts 185, 188 and 228.

  17. 中华人民共和国合同法 (Contract Law of the People’s Republic of China) 15 March 1999, art 203.

  18. See Zimmermann 1996, chap 26.

  19. See e.g. Chen 2007; Chen 2009; He 2013, pp. 131–33, 570–72.

  20. See Payne 2000, p. 77; He 2001, p. 131.

  21. See Maitland 1913, p. 57; Swadling 2010. Arguably, section 7 of the Statute of Frauds 1677 and section 53(1)(b) of the Law of Property Act 1925 are in fact evidential rules rather than validity rules. Although there still exists debate in England, it will not be delivered in detail in this article.

  22. He 2004, p. 80.

  23. [1960] Ch 232 (Court of Appeal).

  24. Zhou 2012, p. 55.

  25. 中华人民共和国信托法 (Trust Law of the People’s Republic of China) 28 April 2001, arts 9 and 10.

  26. Of course, charitable purpose trusts are valid due to specific rules regulating charitable trusts in Chapter 6 of the Trust Law 2001.

  27. Zhang 2009, p. 56.

  28. 中华人民共和国信托法 (Trust Law of the People’s Republic of China) 28 April 2001, arts 54 and 55.

  29. 中华人民共和国信托法 (Trust Law of the People’s Republic of China) 28 April 2001, art 72.

  30. Paton and Grosso 1994; Schenkel 2009; Alexandra 2013. For the current situation in the East Asia academia, see generally Wu 2010.

  31. General Information on Trust Law by Ministry of Justice of Taiwan (February 1993).

  32. Fratcher 1973, vol 6, ch 11, para 1.

  33. DKLR Holding Co (No 2) Pty Ltd v Commissioner of Stamp Duties [1980] 1 NSWLR 510, 520 (Supreme Court of New South Wales, Australia). MCC Proceeds v Lehman Brothers [1997] EWCA Civ 3068. Leigh & Sullivan v Aliakmon Shipping Co Ltd (The Aliakmon) [1986] AC 785 (House of Lords).

  34. Tettenborn 1996; McFarlane 2010; McFarlane and Stevens 2010.

  35. Smith 2008.

  36. Maitland 1913, p. 30.

  37. Maitland 1913, pp. 17–18.

  38. Re Transphere Pty Ltd (1986) 5 NSWLR 309, 309 (Supreme Court of New South Wales, Australia). Brennan J has similar statements in DKLR. DKLR Holding Co (No 2) Pty Ltd v Commissioner of Stamp Duties (NSW) (1982) 149 CLR 431, 474 (High Court of Australia).

  39. Goodright v Wells (1781) 2 Doug KB 771 (Court of King’s Bench); Harmood v Oglander (1803) 8 Ves 106 (High Court of Chancery).

  40. Vandervell v IRC [1967] 2 AC 291 (House of Lords).

  41. Westdeutsche Landesbank Girozentrale v Islington LBC [1996] 2 AC 669 (House of Lords).

  42. Re Transphere Pty Ltd (1986) 5 NSWLR 309, 311 (Supreme Court of New South Wales, Australia).

  43. Smith 2008; Honoré 2003.

  44. Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567, 580 (House of Lords).

  45. Nathan 2012.

  46. Re Adams and the Kensington Vestry (1884) 27 Ch D 394 (Court of Appeal).

  47. This includes the lender’s board note and Rolls Razor’s statement with respect of the Barclays bank account (imperative words like ‘only’, ‘solely’, ‘exclusively’ and ‘on condition that’).

  48. See Swadling 2004, pp. 14–15.

  49. Re Bowes [1896] 1 Ch 507 (Chancery Division); Re Andrew’s Trust [1905] 2 Ch 48 (Chancery Division); Re Lipinski’s Will Trusts [1976] Ch 235 (Chancery Division); Re Osoba [1979] 1 WLR 247 (Court of Appeal).

  50. Duke of Norfolk v Brown (1697) Pr Ch 80 (Court of Chancery); Re Vinogradoff [1935] WN 68 (Chancery Division).

  51. William and Glyn’s Bank Ltd v Boland [1981] AC 487 (House of Lords).

  52. Dyer v Dyer (1788) 2 Cox Eq Cas 92 (Exchequer Court).

  53. In re Northern Developments (Holdings) Ltd, Chancery Division, 6 October 1978.

  54. Re Denley’s Trust Deed [1969] 1 Ch 373 (Chancery Division).

  55. Twinsectra Ltd v Yardley [2002] 2 AC 164, 184 (House of Lords).

  56. (1805) 10 Ves 522 (Court of Chancery).

  57. Re Endacott [1960] Ch 232, 246 (Court of Appeal).

  58. Armitage v Nurse [1997] EWCA Civ 1279 (Court of Appeal).

  59. Re Gulbenkian’s Settlement Trusts [1970] AC 508 (House of Lords).

  60. (1841) 4 Beav 115 (Court of Chancery).

  61. See Swadling 2004.

  62. Insolvency Act 1986, s 239(4)(b).

  63. Air Jamaica Ltd v Charlton [1999] 1 WLR 1399, 1412 (Privy Council); Millett 2011, p. 15.

  64. See Millett 2011; see also his Lordship’s judgment in Twinsectra Ltd v Yardley [2002] 2 AC 164 (House of Lords).

  65. See Millett 1985.

  66. See Penner 2004.

  67. Priestley 1987; Re Australian Elizabethan Theatre Trust (1991) 102 ALR 681 (Federal Court of Australia).

  68. Twinsectra Ltd v Yardley [2002] 2 AC 164, 187 (House of Lords). See also Payne 2000.

  69. Twinsectra Ltd v Yardley [2002] 2 AC 164, 193 (House of Lords).

  70. See Chambers 1997, Chap 3; Chambers 2004.

  71. Carreras Rothmans Ltd v Freeman Mathews Treasure Ltd [1985] Ch 207 (Chancery Division).

  72. See e.g. Ho and Smart 2001.

  73. Twinsectra Ltd v Yardley [2002] 2 AC 164, 190 (House of Lords).

  74. See Chambers 1997, p. 3.

  75. Cook v Fountain (1676) 3 Swanst 585 (High Court of Chancery); Grey v Grey (1677) 2 Swanst 594 (High Court of Chancery).

  76. See Swadling 2008; Swadling 2013.

  77. For details, see Birks 2004.

  78. Neste Oy v Lloyds Bank Plc [1983] 2 Lloyd’s Rep 658 (Queen’s Bench Division).

  79. Armour v Thyssen Edelstahlwerke AG [1991] 2 AC 339, 342 (House of Lords).

  80. See Goode 2010, p. 648.

  81. Twinsectra Ltd v Yardley [2002] 2 AC 164, 187 (House of Lords).

  82. Westdeutsche Landesbank Girozentrale v Islington LBC [1996] AC 669, 706 (House of Lords); Re Bond Worth Ltd [1980] 1 Ch 228 (Chancery Division). For details see Worthington 1997, section 2.3.

  83. Article 9-102 of the United States Uniform Commercial Code is different; articulating that a right based on ROT is deemed as a security right and therefore must be registered if it is to bind third party creditors.

  84. Law Commission, Company Security Interests (Law Com No 296, 2005) para 1.62.

  85. Goode 2011, p. 458.

  86. Insolvency Service 2009.

  87. Insolvency Act 1986, sch B1, para 3(1).

  88. Insolvency Act 1986, sch B1, para 99(4)(b); Insolvency Rule 1986, r 2.67(1).

  89. See Goode 2008, p. 149.

  90. Insolvency Act 1986, sch B1, para 70(1).

  91. Maitland 1913, p. 372.

  92. Zweigert and Kötz 1998, p. 17.

  93. However, it still could be argued that the bank account, a chose in action in this case, should be treated differently from ‘money’ in its ordinary sense: cash (banknotes and coins). Indeed, legal title definitely passes when the lender deposits £50 note to the bank. The lender simply exchanges his title for a right in personam to sue the bank for the payment of £50. But if the lender remits a certain sum of money to a segregated account in the bank and solely for a special purpose, the bank account is then ring-fenced and never freely at the disposition of the bank. It is a de facto relationship of bailment. Thus, under such circumstances the title to money could be retained by the lender.

  94. See Tan 2005, p. 394 ff.

  95. See Chen 2010, p. 35 ff.

  96. See Xing 2007, p. 342 ff.

  97. See generally Birks 1992; Swadling 1996.

  98. See Birks 2005, Chap 8. But the main idea, scil granting proprietary remedies to reverse unjust enrichment is still contentious even within the English legal academia: Rotherham 2002, Chap 15.

  99. Birks 2004, p. 139.

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Acknowledgments

The author would wish to thank Mr William Swadling for his valuable advice on an earlier draft of this article. The author would also wish to thank Mr Winky So and Ms Kinsey Kang for their dedicated proofreading and helpful comments.

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  1. Faculty of Law, University of Oxford, Brasenose College, Radcliffe Square, Oxford, OX1 4AJ, England, UK

    Zhicheng Wu

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Wu, Z. Transplant of the Quistclose trust into Chinese law: a critical assessment. China-EU Law J 3, 253–274 (2014). https://doi.org/10.1007/s12689-014-0044-x

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