Quistclose and turnover trusts: are different things. Quistclose trusts are clearly excluded from the PPSA – they are not security interests1.
A quistclose trust often takes the form of a loan made with a strict purpose as to how the funds may be used, such as a loan made strictly to allow a borrower to pay off a certain debt. If the borrower fails to use the money for that purpose, then the borrower holds the borrowed money on trust back for the lender, which trust back is called a quistclose trust2.
A turnover trust is a technique to supplement the subordination of one creditor’s claim to that of another creditor. If there are multiple creditors of one borrower, sometimes one creditor agrees to subordinate its debt claim against the borrower (the subordination will create what is called junior debt) until the other creditor has been paid in full (senior debt), in return for a higher interest rate or similar. Subordination agreements are often contained in what are called intercreditor agreements or priority agreements, and supplemented by a turnover trust.
A turnover trust complements the subordination of junior debt to senior debt by providing that if the junior creditor receives any funds from the borrower before all amounts owing to the senior creditor are repaid, the junior creditor must not only turnover those funds to the senior creditor, but also hold the amounts on trust for the benefit of the senior creditor until turnover.
The PPSA is silent as to whether turnover trusts are security interests. It is fairly clear that turnover trusts can be security interests – they are a declaration of trust (a trust creates an interest in personal property – here money) to secure a turnover obligation.
To the extent that turnover trusts are security interests, they should ideally be registered. However, the PPSA excludes turnover trusts from a major consequence of non-perfection, being the security interest vesting in the grantor (becoming void) upon any bankruptcy, administration or liquidation of the grantor. See paragraph 12.2.1 of Chapter 12 (Perfection) for a broader discussion of the consequences of non-perfection. This means that unperfected turnover trusts can remain unperfected and survive a bankruptcy, administration or liquidation of the grantor.
The grantor under a turnover trust is most likely to be a junior creditor - a bank, finance company or mezzanine lender which has taken a junior debt position. The key risk of not registering a turnover trust is likely to be that other perfected security interests granted by the junior creditor may take priority. Large banks very rarely grant security, but small finance companies which often take junior debt positions may well grant other security interests. In short, turnover trusts should still be registered (perfected) to mitigate these risks.
Turning to trusts in general, it is an interesting question as to whether the PPSA applies to trusts in general. The PPSA is completely silent on the point, which is surprising given how frequently trusts are used in Australian commercial practice. Where trusts are used to secure obligations, for example as an alternative mechanism to an equitable mortgage to convey an interest in personal property to a secured party to secure obligations, the answer should be yes, the PPSA applies, because the PPSA applies to all transactions which “in substance” secure obligations.
Notes:
1 PPSA section 8(1)(h)
2 Twinsectra Limited v Yardley and Others [2002] UKHL 12, following and applying Quistclose Investments Ltd v Rolls Razor Ltd [1970] AC 567