It also held that there is no need to show that there was any express stipulation or intention on the payer's part to retain some beneficial interest in the property transferred.
Key takeaways
Quistclose trusts often arise in day-to-day commercial transactions. Examples include funds transferred by a lender to a borrower in a loan transaction, funds invested by a party in a joint venture, funds paid into an escrow account for a corporate acquisition or a deposit paid by a purchaser in a real estate transaction.
One should pay close attention to the terms of their agreements, correspondences and other documentary records. In particular, both the transferor and the recipient should be cautious of the presence or absence of terms restricting the use of the relevant funds.
Thought should also be given as to where and how funds are kept (e.g., whether there are segregated accounts and whether there is any mixing of funds).
In more detail
This litigation concerns bonds issued by certain special purpose vehicles (SPVs) of the China Energy Group ("Group"). There are two series of these bonds that are material for current purposes. The first series were HKD bonds issued by SPV1, with a maturity date in 2022 ("2022 Bonds"). The second series were USD bonds issued by SPV2, with a maturity date in 2018 ("2018 Bonds").
The funds raised were to finance the operations of the Group. The SPVs had no other material operations or assets. A default on a series of bonds would trigger cross-defaults on the other series of bonds.
The Group had a "treasury subsidiary" whose account held the funds generated from the bonds ("Treasury Account").
SPV1 opened two bank accounts that were denominated in HKD and USD respectively. SPV1 itself had no use for the USD account.
SPV2 did not open its own bank account. It used SPV1's USD account for transactions relating to the 2018 Bonds, which were denominated in USD. This USD account was a segregated account.
When the 2018 Bonds matured, the Group did not have sufficient funds to pay the amounts due. As part of its fundraising efforts, a total of USD 120 million was remitted from the Treasury Account to SPV1's USD account. SPV1's account ledger contained an entry specifying that this sum did not form part of the general assets of SPV1.
The Group's refinancing plans ultimately failed. It defaulted on the 2018 Bonds, and cross-defaults on the other bonds then followed.
The bondholder of the 2022 Bonds obtained judgment against SPV1 and later obtained a garnishee order in respect of the funds in SPV1's account. This order required the bank in issue to pay over the funds in that account to the bondholder to satisfy the judgment debt owed by SPV1.
Soon after, a group of bondholders of the 2018 Bonds obtained judgment against SPV2 and sought to set aside the garnishee order. They argued that a Quistclose trust existed and that the USD 120 million was held on trust by SPV1, such that those funds could not be used to settle SPV1's judgment debt.
Court of First Instance (CFI) and Court of Appeal (CA)
The CFI held that the funds belonged to SPV1 and that there was no trust. The CA upheld the CFI's decision.
The CA emphasized the fact that that the payments into SPV1's account were not accompanied by any restrictive stipulation, and that no express restrictive communication could be found in the accounting entries.
It also emphasized the fact that these were sister companies within the same group, which were not parties at arm's length.
Court of Final Appeal (CFA)
The CFA unanimously allowed the appeal and discharged the garnishee order.
- The CFA held that the CA had erroneously sought to search for some express indication that the payer intended to retain a beneficial interest in the funds.
- The correct approach is to look at the objective circumstances. The intention requirement is satisfied by an objective intention that the property is not at the transferee's free disposal, and that it may only be applied for the specific purpose.
- The restrictive intention may be implied from an objective assessment of the circumstances. The CFA held that in this case, the USD 120 million in SPV1's USD account was intended for the sole purpose of funding the redemption of the 2018 Bonds. Hence, the funds were held on trust by SPV1 (i.e., they did not form part of SPV1's assets and were not available for satisfying SPV1's judgment debt).
This case illustrates the importance of paying attention to expressing (or negating) any intention on the use of funds being held by a party. It serves as a reminder of having carefully drafted agreements, trust documents, accounting records and correspondences that evidence how certain funds or property is meant to be used.
A Quistclose trust can take many forms and arise in many day-to-day transactions. In many commercial arrangements, there will be transfers of funds from one party to another party, with the latter holding the funds for certain purposes. Depending on the intention of the parties, the funds may be clothed with a Quistclose trust.
