Barclays Bank Ltd v Quistclose Investments Ltd [1968] UKHL 4



A “Quistclose trust” arises when an asset is given to somebody for a specific purpose and if for whatever reason the purpose for the transfer fails, the transferor may take back the asset.

If a debtor undertakes to use a loan in a particular way, and segregates the creditor’s money from his general assets, and if the debtor becomes insolvent, the creditor’s money is refundable, and not available to pay the debtor’s other creditors. If the trust fails (because the purpose is not, or cannot be, fulfilled), then the sums become subject to a resulting trust in favour of the person who originally advanced the credit, and the person to whom the sums were advanced holds them as trustee.

Rolls Razor Ltd owed £484,000 to Barclays Bank Ltd. The company needed yet more funds to pay a dividend which it had declared to shareholders on 2 July 1964. Quistclose Investments Ltd agreed to a loan of £209,719 on the condition that the dividend would be paid with it, and the money would be put in a separate account (also with Barclays Bank).

The money was paid into the account, but before the dividend was distributed, Rolls Razor Ltd went into voluntary liquidation.

Quistclose sought to recover the money, contending that its agreement meant Rolls Razor Ltd held the money on trust. Barclays contended that the account was part of the general assets of the company and that they were entitled to exercise a set-off of the money in the account against the debts that Rolls Razor owed with respect of Barclays.

The money was held on trust for Quistclose. Rolls Razor was supposed to have used the funds for payment of dividends. That purpose having failed, would then be held on trust.

Although the transaction was a loan which did not exclude the implication of a trust, legal rights (to call for repayment) and equitable rights (to claim title) could co-exist. Barclays, having notice of the trust, could not retain the money.

The liquidator of Rolls Razor could not claim title to the money, as the assets did not form part the beneficial estate of Rolls Razor.

There was unanimous consensus with the opinion of Lord Wilberforce.

Here Lord Wilberforce discusses the nature of the loan as a debt:

“The second, and main, argument for the appellant was of a more sophisticated character. The transaction, it was said, between the respondents and Rolls Razor Ltd., was one of loan, giving rise to a legal action of debt. This necessarily excluded the implication of any trust, enforceable in equity, in the respondents’ favour: a transaction may attract one action or the other, it could not admit of both.

My Lords, I must say that I find this argument unattractive. Let us see what it involves. It means that the law does not permit an arrangement to be made by which one person agrees to advance money to another, on terms that the money is to be used exclusively to pay debts of the latter, and if, and so far as not so used, rather than becoming a general asset of the latter available to his creditors at large, is to be returned to the lender. The lender is obliged, in such a case, because he is a lender, to accept, whatever the mutual wishes of lender and borrower may be, that the money he was willing to make available for one purpose only shall be freely available for others of the borrower’s creditors for whom he has not the slightest desire to provide.

I should be surprised if an argument of this kind – so conceptualist in character – had ever been accepted.

In truth it has plainly been rejected by the eminent judges who from 1819 onwards have permitted arrangements of this type to be enforced, and have approved them as being for the benefit of creditors and all concerned.

There is surely no difficulty in recognising the co-existence in one transaction of legal and equitable rights and remedies: when the money is advanced, the lender acquires an equitable right to see that it is applied for the primary designated purpose (see In re Rogers, 8 Morr. 243 where both Lindley L.J. and Kay L.J. recognised this): when the purpose has been carried out (i.e., the debt paid) the lender has his remedy against the borrower in debt: if the primary purpose cannot be carried out, the question arises if a secondary purpose (i.e., repayment to the lender) has been agreed, expressly or by implication: if it has, the remedies of equity may be invoked to give effect to it, if it has not (and the money is intended to fall within the general fund of the debtor’s assets) then there is the appropriate remedy for recovery of a loan. I can appreciate no reason why the flexible interplay of law and equity cannot let in these practical arrangements, and other variations if desired: it would be to the discredit of both systems if they could not. In the present case the intention to create a secondary trust for the benefit of the lender, to arise if the primary trust, to pay the dividend, could not be carried out, is clear and I can find no reason why the law should not give effect to it.

The decision of the Court of Appeal was correct on all points and the appeal should be dismissed.


Full case on Bailii.

Categories: Trusts: Case Summaries

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