Barclays Bank v Quistclose

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Barclays Bank v Quistclose [1970] AC567

  Introduction The following essay will study the case of Barclays bank v Quistclose[1] (hereafter Quistclose). The case of Barclays Bank Ltd v Quistclose Investments Ltd explained certain legal matters that arise when a lender lends money to a business for a specific purpose, but the company becomes bankrupt before they are able to repay the loan. When the company goes into insolvency a trust is implied on the money on the basis that the money can only be used for the lender and not for the bankrupt person.

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The facts of the case cast a doubt over certain areas of trust law. Questions were raised enquiring about the nature and status of the trust. All judges do not have the same opinions on Quistclose trusts. It was viewed from a banking law perspective because of further cases. Moreover it enabled judges to giver fairer judgements in cases relating to insolvency.[2] The Quistclose trust only allows the borrower to use the loan money for a “specific purpose”, the provision is known as a trust because the borrower retains the legal title in the money borrowed but the equitable interest remains with the lender[3]. Moreover Quistclose trusts have a significant resemblance to Romalpa clauses. Therefore case study will identify the purpose of Quistclose trusts and whom it may benefit. Also it will try to identify the validation of Quistclose trusts as there is a similar law in place already in the form of Romalpa clauses. Facts In July 1964 Quistclose had lent money to Rolls Razor (hereafter RR) a company who were already in great financial difficulties at the time. To meet a dividend payment of £209,000 to its shareholders they had to borrow the money, upon receiving the amount, RR instructed Barclays Bank to put the money into a separate account with the condition on the loan that the money should only be used to pay dividend payments. RR went into insolvency before they payment was made; furthermore they had exceeded their overdraft limit of £250,000 with the bank. Barclays Bank argued that the money RR had borrowed from Quistclose should be used to pay off the overdraft. On the other hand Quistclose argued that the loan was held on trust for them as the money had not been used for the specific purpose set out in the condition. The House of Lords held that the money was held on trust for Quistclose as the loan which was granted had not been used to pay for the dividends; therefore Quistclose maintained the equitable interest. The House of Lords ruled that the money cannot be used to pay of unsecured creditors, who in this case were Barclays Bank[4].

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