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ARTICLE · 18 JANUARY 2023

Important lesson for borrowers of funds for a specific purpose

McMahon Clarke
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The Court said the advances made to the borrower were made on trust, only to be applied for the approved purpose.

AustraliaFinance and Banking
Selina Nutley
Selina Nutley
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Are funds under a loan agreement for an approved purpose held on trust for the lender and is their use for another purpose a breach of trust? Here, partner Selina Nutley discusses a recent Supreme Court of Victoria decision which is an important lesson for all borrowers under loan agreements for specific purposes in dealing with the funds advanced.

KEY TAKEAWAYS

  • An advance under a loan agreement for a specified purpose may be considered to be made on trust and can only be applied for the approved purpose.
  • If the purpose cannot be achieved, the funds should be returned to the lender unless there is a subsequent arrangement made.
  • Transmission of those funds to third parties if there is found to be a trust will be a breach. Third parties who knowingly accept such funds may be liable to pay equitable compensation to the lender.

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