Facility letters often contain a clause stating that the facility is to be used for a specific purpose or project, in order to avoid a claim by the borrower or any guarantor that the lender has consented to any misuse of loan funds or has a duty to ensure the money is properly applied.
If the clause specifies that the loan is for a specific and exclusive purpose, a trust known as a Quistclose trust may arise. If it does, the loan remains the property of the lender unless the borrower applies it for the specified purpose. If the borrower becomes insolvent, any loan funds that remain in its hands cannot be used to satisfy its creditors. In trust law, there is a resulting trust for the lender and the borrower merely has a power to apply the funds for the specified purpose.
In Gabriel v Little and others  EWHC 1193 (Ch) the court considered whether the borrower had received loan monies as a trustee under a Quistclose trust. In this case, clause 1.5 of the facility letter stated: "Loan: The sum of £200,000.00 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 purpose clause also stated that the loan’s purpose was: "To assist with the costs of development of the Property."
Although a document creating a Quistclose trust does not have to use words such as "sole" or "exclusive" to describe the purpose or require that the loan monies be placed in a segregated bank account, the absence of both these factors was material in determining that no such trust was created in this case. Additionally, a wide range of matters could constitute "development" so that it would be difficult to determine what use of the loan monies was in accordance with the trust, if one had been found to exist. As a result no trust had been created.
This case highlights the fact that, while requiring segregation of loan monies and using words such as "sole" or "exclusive" in the purpose clause of a facility agreement are not absolute requirements, a lender will find it easier to establish that loan monies are subject to a Quistclose trust if those factors are present.