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Free Law Essays - A Case Note on: Barclays Bank Ltd v Quistclose Investments Ltd

House of Lords
[1970] AC 567, [1968] 3 All ER 651, [1968] 3 WLR 1097

Introduction:

The case of Barclays Bank Ltd v Quistclose Investments Ltd explained the key legal issues that arise when a lender lends money to a company for a particular purpose, but the company goes into liquidation before the loan is repaid.

What follows is an analysis of this case, which will explain the key issues arising from it, delivered under the following subheadings:

Facts of the Case;
The Decision of the Court & the Legal Issues Raised;
Implications of the Decision of the Court; and
Conclusions.

Facts of the Case:

A company, Rolls Razor Ltd (RR), declared a dividend that it did not have sufficient funds to pay. Quistclose Investments Ltd (Quistclose) was willing to lend RR £1m so that RR could pay that dividend. The advance was made on the condition that it would be deposited in a separate bank account with Barclays Bank Ltd (Barclays) and that it would only be used to pay the dividend. Notice of that arrangement was given to Barclays. RR went into voluntary liquidation before the dividend was paid. As a result, Quistclose sought to recover the funds in the dividend account from Barclays. However, Barclays claimed that it was entitled to set off the credit balance in the dividend account against part of the debit balance on RR’s other accounts held at Barclays. This dispute lead to the subsequent legal proceedings, which ultimately ended in the House of Lords (HL).
Two questions arose for the HL to consider which, if answered in the affirmative, would allow Quistclose to recover the loan:

The first question was whether, as between Quistclose and RR, the terms on which the loan was made were such as to impress a trust in Quistclose’s favour in the event of the dividend not being paid.

The second was whether, in that event, Barclays had such notice of the trust or of the circumstances giving rise to it as to make the trust binding on it.

The Decision of the Court & the Legal Issues Raised:

Was a trust created in Quistclose’s favour?

HL held that, because of the exclusive purpose for which the loan was made, RR received the money in the fiduciary character of a trust to repay the dividend. Since that purpose had failed, there was a resulting trust in favour of Quistclose. The principle was explained by Lord Wilberforce:

“There is… in my opinion, no doubt that the loan was made only so as to enable RR to pay the dividend and for no other purpose…. The mutual intention of [Quistclose] and RR, and the essence of the bargain, was that the sum advanced should not become part of the assets of RR, but should be used exclusively for payment of a particular class of creditors, namely, those entitled to the dividend. A necessary consequence from this… must be that if, for any reason, the dividend could not be paid, the money was to be returned to [Quistclose]: the word “only” can have no other meaning or effect…. That arrangements of this character for the payment of a person’s creditors by a third person, give rise to a relationship of a fiduciary character or trust, in favour, as a primary trust, of the creditors, and secondarily, if the primary trust fails, of the third person, has been recognised in a series of cases over some 150 years.

The ‘essence of the bargain’ between RR and Quistclose, as described by Lord Wilberfore, was a clear indication of the mutual intention of the two parties to create a trust. This mutual intention was especially evident from the terms of the loan since Barclays was aware that it was to hold the funds solely for the purpose of paying a dividend. In fact, Barclays even opened an ordinary dividend no.4 account into which the money paid by Quistclose was credited. This provided the court with strong evidence of the parties’ intention to create a trust.

Lord Wilberforce was also quick to dismiss Barclays’ assertion that a trust, enforceable in equity, could not exist in this case since the loan made to RR only gave rise to a legal action of debt. His Lordship declared:

“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: when the purpose has been carried out… 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….”

It should be noted that Lord Wilberforce never used the term ‘resulting trust,’ but this is the analysis of his judgment in the later cases of Westdeutsche Landesbank Girozentrale v Islington London Borough Council and Twinsectra Ltd v Yardley.

Did Barclays have sufficient notice of the trust to be bound by it?

Barclays argued that it was necessary to show that it had notice of the trust, or of the circumstances giving rise to the trust, at the time when it received the money (i.e. on 15 July 1964) and that notice at a later date was not sufficient. However, although HL accepted that a request to put the money into a separate account did not constitute sufficient notice, the Court declared that a letter which accompanied the cheque to Barclays, and a telephone conversation between representatives of RR and Barclays, clearly stated that the money was a loan from a third party and that it was to be used specifically to pay a dividend. This was sufficient to give Barclays notice that it was trust money and not an asset of RR. The fact that Barclays was unaware of the lender’s identity was of no significance. Consequently, Barclays was bound by the trust.

Hence, the two questions outlined above were answered in the affirmative and judgment was given in favour of Quistclose.

Implications of the Decision of the Court:

The rule in the Barclays v Quistclose case (i.e. that, where money is given to a debtor for a specific purpose, the debtor can hold the money on trust as a trustee of the creditor) is very powerful. The rule is particularly important, for example, as a means of providing a safeguard in loan asset restructuring.

The principle in this case has been developed and applied in subsequent cases, and HL considered whether such a trust was operative in Twinsectra Ltd v Yardley.5 In this case a finance company agreed to lend £1m to the prospective purchaser of residential land. The money was paid into the client account of the purchaser’s solicitor, subject to an express undertaking that the moneys be utilised ‘solely for the acquisition of property on behalf of our client and for no other purpose.’ Contrary to the terms of this undertaking £358,000 of the money was used for other purposes. One question was whether the arrangement had given rise to a trust of the money, a crucial prerequisite of the claim of dishonest assistance in a breach of trust which was being maintained by the finance company. HL held that the money was subject to a trust because it had been paid subject to an undertaking that it would only be used for a specific purpose.

Although the clearest implication of the Barclays v Quistclose case is firmly established, i.e. that a trust will arise where money is lent for a specific purpose that fails, the exact nature of such a trust has been the subject of academic controversy. In particular it has been difficult to determine when the trust comes into existence, the identity of the beneficiary, and how the existence of the trust can be reconciled with the beneficiary principle, since it appears to require the existence of a primary trust under the terms of which money is held for the carrying out of a purpose. These theoretical problems were not explored by HL in Barclays v Quistclose itself.

In other jurisdictions, Lord Wilberforce’s analysis of the case has been somewhat modified. In Australia, for example, the courts have avoided relying on his Lordship’s two-trust approach. In Australian Conference Association Ltd v Mainline Constructions Pty Ltd, for example, Gibbs CJ interpreted Quistclose to mean:

“where money is advanced by A to B, with the mutual intention that it should not become the assets of B, but should be used exclusively for a specific purpose, there will be implied a stipulation that if the purpose fails the money will be repaid, and the arrangement will give rise to a relationship of fiduciary character, or trust.”

Hence, in Australia the two-trust approach has been abandoned in favour of a clearer, and easier to follow, single express trust model that is based predominantly on the mutual intention of the borrower and lender. Such a trust will only be deemed to exist if the intentions of the parties dictate that it should exist. Intention will be judged depending on the language used by the parties, the nature of the transaction etc, Conversely, where there is no evidence that the transferor of moneys or property intended to transfer only legal ownership in that money or property, a Quistclose trust cannot exist.

Conclusion:

The precise criteria that need to be satisfied in order to give rise to a Qistclose trust are generally agreed, although their precise import will depend upon which theoretical understanding of the nature of the trust is preferred.

Loan made for a specific purpose: A Quistclose resulting trust will only arise if the loan was made for an agreed specific purpose that was identified with sufficient certainty. The requirement of certainty will clearly be satisfied where the money was to be used in a precisely identified way, for example for the payment of specific debts or classes of debts. In Quistclose the purpose was the payment of a share dividend. In Carreras Rothmans Ltd v Freeman Mathews Treasure Ltd a resulting trust was held to arise where a loan had been made by Rothmans to its advertising agency, which was in financial difficulty, for the purpose of paying third parties with whom Rothmans’ adverts had been placed.

Money kept in a separate bank account? In both Quistclose and Carreras Rothmans the money lent was kept in a separate bank account. However, whilst this is extremely clear evidence that the money is intended for the specified purpose only, it is not essential. In Re EVTR a resulting trust was found even though the loan had been paid into the company’s general account, and in Twinsectra Ltd v Yardley a trust was found even though the money lent was held in the solicitor’s general client account rather than a separate account.

The purpose has failed: In cases prior to Twinsectra Ltd v Yardley it was held that the resulting trust in favour of the lender only arises where the purpose, and thereby the primary trust, fails. In Quistclose and Carreras Rothmans this was when the borrower went into liquidation. The meaning of ‘failure’ was further considered by the Court of Appeal in Re EVTR. In that case the money had been advanced to purchase new machinery. The money was paid to the manufacturers, but before the machinery could be delivered EVTR went into receivership. The machines were never delivered and the manufacturers refunded the purchase price less an amount to compensate for their loss under the breach of contract. Reversing the decision at first instance, the Court of Appeal held that the purpose had not been completed at the moment the money was paid over to the manufacturer therefore excluding a resulting trust. If the explanation of the Quistclose trust adopted by Lord Millet in Twinsectra Ltd v Yardley is accepted, then it might be better to say that the trust subsists for as long as the purpose has not been carried out, since the resulting trust will simply remain in effect until the money is properly applied.

REFERENCES

Cases Consulted:

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

Westdeutsche Landesbank Girozentrale v Islington London Borough Council [1996] 2 All ER 961
Twinsectra Ltd v Yardley [2002] 2 All ER 377
Carreras Rothmans Ltd v Freeman Mathews Treasure Ltd [1985] Ch 207
Re EVTR [1987] BCLC 646
Australian Conference Association Ltd v Mainline Constructions Pty Ltd (1978) 141 CLR 335
Re Australian Elizabethan Theatre Trust

Texts Consulted:

Dal Pont, G. & Cockburn, T. - Equity and Trusts in Principle, Lawbook Company, Sydney (2005);
Pearce, R. & Stevens, J. - The Law of Trusts and Equitable Obligations (3rd Edition), Butterworths LexisNexis (2002), pp.529-530

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