Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567...

Facts

• Quistclose Investments Ltd agreed to lend £209,719 to Rolls Razor Ltd, a company facing financial difficulties, specifically for the purpose of paying dividends to shareholders.
• The funds were deposited into a separate account with Barclays Bank, which was informed of the specific purpose of the loan.
• Before the dividends were paid, Rolls Razor Ltd went into liquidation.
• Barclays Bank claimed the funds as part of the company’s general assets.
• Quistclose Investments asserted the funds were held on trust for them given that the specified purpose could not be fulfilled.

Issues

1. Whether funds advanced for a specific purpose and segregated in a separate account are held on trust if that purpose is not fulfilled.
2. Whether the lender (Quistclose) is entitled to the return of such funds upon the failure of the intended purpose, or if the funds become part of the general assets available to creditors in the recipient’s insolvency.

Decision

• The House of Lords ruled in favour of Quistclose Investments Ltd.
• It was held that where money is advanced for a specific purpose, and that purpose fails, the funds are held on trust for the lender.
• The decision established that in such cases, a fiduciary relationship arises to keep the funds separate from the recipient’s general assets.
• The arrangement creates a primary trust for the stated purpose, and a secondary trust arises for the lender if the purpose is not fulfilled.

Legal Principles

• A "Quistclose trust" arises when funds are advanced for a specific purpose, requiring clear intention and segregation of the funds.
• The primary trust is for the specified purpose; should that fail, a secondary trust arises in favour of the lender.
• To establish a Quistclose trust, there must be evidence of intention to segregate funds and to restrict their use to a particular purpose.
• Where such a trust arises, funds are excluded from the recipient’s general assets in insolvency.
• Criticism includes possible uncertainty in the creation of the trust and prioritisation of lenders over other creditors upon insolvency.

Conclusion

Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567 established the Quistclose trust, confirming that segregated funds advanced for a specific purpose are held on trust for the lender if that purpose fails, offering protection in cases of the recipient’s insolvency and shaping English trust and insolvency law.