Insolvent borrowers: is there a trust?

An issue that commonly comes before the courts in insolvency situations is whether a lender that has advanced money to the now insolvent borrower has retained a ‘security interest’ in the monies advanced, so that the monies are held in a trust for the benefit of the lender (termed a Quistclose trust). This would mean, therefore, that the monies held in the trust are not available for distribution in the insolvency proceedings as part of the insolvent borrower’s estate. This in turn involves a consideration of the detailed provisions of the loan agreement. A recent case has emphasised the importance of getting the drafting right.

In Gabriel v Little, the lender had advanced money to a property developer. The relevant provision of the facility letter in issue defined the term ‘loan’ as ‘the sum of £200,000, which will be made available as a contribution to the costs of development of the property, such sum to be advanced on the drawdown date’. The stipulated purpose of the loan was ‘to assist with the costs of development of the property’…

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