Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567 establishes the “Quistclose trust”: money lent for a specific purpose may be held on trust, reverting to the lender if the purpose fails.

Facts of the Case

The case arose from the collapse of Rolls Razor Ltd. Despite trading profits, the company lacked the funds to pay a declared dividend of about £209,719, and was heavily overdrawn at Barclays. It borrowed from Quistclose Investments Ltd specifically “for the purpose of… paying the final dividend”, depositing it in a special “No. 4 dividend account” at Barclays, with correspondence stating it would “only be used to meet the dividend”. Rolls Razor went into liquidation before paying the dividend, and Barclays tried to set off the account balance against the company’s debts. Quistclose claimed the money was held on trust and, the purpose having failed, on a resulting trust for it as lender.

Key Details and Legal Principles

  • Primary and secondary trust: such arrangements create a primary trust for the creditors (the shareholders) and, if that purpose fails, a secondary trust for the lender.
  • Co-existence of contract and trust: a transaction can be both a loan and a trust; the lender has a contractual right to repayment and an equitable right to ensure the money is used for its purpose.
  • Notice and the bank’s liability: Barclays had notice of the trust (informed by phone and letter), so it was bound and could not treat the money as a general asset to satisfy the overdraft.

Criticisms of Quistclose Trusts

Julius A.W. Grower argues the device is problematic in commerce: it is a “quasi-security interest” giving a lender priority on insolvency, yet — unlike formal charges — it requires no registration, undermining transparency and creating an “unprincipled unfairness” to other creditors by bypassing the pari passu rule. Drawing on Re Bond Worth Ltd (disguised charges), he suggests it is “time to call time” on such arrangements, which let parties negotiate “get-out clauses” from insolvency principles without the oversight required for other securities.

Related Cases

  • Twinsectra Ltd v Yardley (2002): Lord Millett held the borrower holds the money on a resulting trust for the lender, subject to a revocable power/duty to apply it for the purpose.
  • Challinor v Juliet Bellis & Co (2015): the beneficial interest remains in the transferor unless and until the purpose is fulfilled.
  • Re Australian Elizabethan Theatre Trust (1991): suggests an express trust with two limbs rather than a resulting trust.
  • Re EVTR (1987): where the sole purpose failed (“the final whistle should not be blown at half time”), the recovered money was held on resulting trust for the lender.
  • Cooper v PRG Powerhouse (2008): a Quistclose trust upheld over money paid to complete a car purchase just before insolvency.