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. 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]. Toovey v Milne[5] The case of Toovey v Milne which dates back to the year 1819 had already addressed an issue concerning bankruptcy and this sort of trust.[6] In this case the bankrupt had borrowed £120 from his brother in law to pay off creditors. However before he could repay all of his creditors he became bankrupt. He had paid of £95 to some of his creditors. The defendant then sought to reclaim the remaining £95. The counter argument was that the repayment could not be protected. The leading judge Abbott CJ rejected the claim stating “… The fair interference from the facts proved was that this money was advanced for a special purpose, and that being so clothed with a specific trust, no property in it passed to the assignee of the bankrupt. Then the purpose having failed, there is an implied stipulation, that the money shall be repaid. That has been done in the present case; and I am of the opinion that the repayment was lawful …[7]” This case is very similar to the Quistclose as in both cases the key point was that the bankrupt companies had not carried out the specific purpose of the loans. Conversely in both cases there was no express stipulation that the bankrupt was to repay the money unless the specific purpose is carried out. However there becomes an implied condition when the specific purpose has not been carried out. Lord Wilberforce used this idea in his judgement for Quistclose; however this judgement has created confusion and criticism from lawyers. The division between the views of academics is notorious[8]. It is a certain area of law that splits opinion. Intention The first point of criticism to consider is the intention of the parties involved. In his speech Lord Wilberforce raised a point on the matter of intention: “The mutual intention of the respondents and of Rolls Razor Ltd., and the essence of the bargain, was that the sum advanced should not become part of the assets of Rolls Razor Ltd., but should be used exclusively for payment of a particular class of its creditors, namely those entitled to the dividend.” Furthermore he stated that if for any reason the dividend could not be paid, then the money should be returned to the respondents”[9] This quote highlights the importance of intention when analysing Quistclose trusts. This was reaffirmed in the case of Re Multi Guarantee[10][11] where it was held that the settler must have intention to create a trust. In this case no “permanent intention” had ever reached.[12] The case of Re Kayford[13]considered the problem of intention to create a trust[14]. It was held that the opening of a separate bank account for money deposited by customers was enough to show there was intention. Lord Millet in his analysis also suggests that the difference between and traditional l loan structure and a trust structure must depend upon the parties intention”[15] however Hudson disagrees with this point and believes “due regard must be given to substance as well as form”, it argues at what point of time is the trust made. If the primary trust fails, then there is a time gap between primary and secondary, it asks where the beneficial interest lays at this point.[16]. In Quistclose there was no express intention between the parties, as to; if the specific purpose failed the money should be repaid back to Quistclose; this consequently questions where the parties intentions came from. Nature of the trust – when is it a trust and not a bank contract The first criticism that arises in relation to Quistclose trusts is; whom is the trust created for. The argument from Barclays ban was that there was a loan contract between Quistclose and RR and that contracts for banks do not create a trust[17]. The case of Foley v Hill also states that once money is deposited into a bank, the bank becomes the owner of the money and you become a creditor[18]. Lord Wilberforce said there would be a trust where the contract contained a specific purpose for which the money should be used for, this was backed up by the previous case of Re Rogers.[19]This was the case in Quistclose so it is a trust. For who is a trust created for and what type of trust is created The next factor of uncertainty in Quistclose trusts is determining what nature of trust a Quistclose trust forms. Lord Wilberforce introduced the dual-trust structure in his statement. This structure suggests that initially a party other than the lender or borrower has the beneficial interest, but when the specific purpose of the trust is not carried out, the secondary trust comes into effect and the lender then holds the beneficial interest.[20] This two-tier criterion has created confusion and it has become hard to assess which trust has arisen. The first trust to analyse is express trust; this is created when it is clearly stated on a written document, it is created when the settler declares the specific purpose of the trust and who the beneficiaries of the trust are. Next are resulting trusts, resulting trusts are created by the court and in cases where they cannot be fulfilled; they revert back to the settler. Thirdly constructive trusts are created by the courts to benefit a party that has been wrongfully denied off its rights. In the case of Quistclose, the dual-trust structure was applied, initially there was a primary trust, and this was the loan that was paid to pay off the dividends. The next limb was the secondary trust; it had reverted back to its settler. There is a difference of opinion on the secondary trust that arises: Kelry loi in his journal states that “If the contract unequivocally indicates an attempt to create a trust in substance, the arrangement may even be properly classified as an express trust”[21] This is important as unlike resulting trusts express trust requires the intention to find a positive beneficiary. This helps the lender avoid the parri passu rule which is translated as “ranked equally” or “have an equal footing.” This rules states when a business becomes insolvent all the creditors must be treated equally. However Quistclose gives creditors a higher form of security.[22] on the other hand, Robert chambers argues that Quistclose trusts are not trusts at all but rather the borrower receives beneficial ownership of the funds subject only to a contractual right from the lender that when enforced will prevent the loan being used for anything other than the specified purpose.[23] Then there is Jamie Glister who argues that before classifying the trust, an analysis has to be carried out on the agreement between the parties[24]. This emphasises the earlier point I had made on academics having a split opinion on this area of law. After the case of Quistclose, further cases arose that required the analysis of Quistclose trusts. In Re Northern Developments Holdings ltd[25]money was paid into a separate account for the express purpose of "Providing money for the subsidiary's unsecured creditors over the ensuing weeks" and for no other purpose. The banks' object was to enable the subsidiary to continue trading” Sir Robert Megarry V-C held that the primary trust was a purpose test and was enforceable[26]. Lord Millet agreed with the decision but not with the reasoning, he argued that usually under a Quistclose primary trust the beneficiary is the lender. But communications of the arrangement to the creditors from Northern Developments was a feature that made this case different from others; in his view. The next explanation of the nature of trusts is that Quistclose trusts could be seen as a constructive trust. This principle was stated in the case of Carreras Rothmans ltd v Freeman Mathews Treasure Ltd[27] Peter J Gibson stated: “... equity fastens of the conscience of the person who receives from another property transferred for a specific purpose only and not therefore for the recipient’s own purposes.”[28] The word “conscience” instantly associates itself to a constructive test. However Hudson states that the some academic commentators may not give importance to the expression as the judgement was given immediately at the end of the trial, where as it is more usual to “to retire to reflect on the judgement at the end of a complex trial” [29] Nevertheless Lord Brown-Wilkinson also considered the factor of a constructive trust in the case of Westdeutsche Landesbank v Islington LBC[30]. He stated that the courts will consider a trust to be constructive where the behaviour of the borrower is unconscionable. He believed that a resulting trust would be unfair and a constructive trust should be the way forward.[31] This view however contradicts with Quistclose, Quistclose is when a trust fails and does not depend on the unconscionable behaviour of the follower. Hudson also argues with this approach as it believes that it will give the impression that the trust is created on the unconscionable behaviour of the borrower.[32] The two different opinions show the previous explanation of a Quistclose trust by Peter Gibson J was unsuccessful. Lord Millet[33] however believed that Quistclose trusts are structured to be an “illusory trust”.[34] In the case of Twinsectra v Yardley[35] the specific purpose was not carried out in full effect, [36]some of the money was used for other purposes. A Quistclose trust was formed when it was settled that the money would be used for a “specific purpose”. His lordship stated that a trust had been created after the failure of the primary trust. His lordship stated: “Insofar as the transfer does not exhaust the entire beneficial interest, the resulting trust is a default trust which fills the gap and leaves no room for any part to be in suspense. An analysis of the Quistclose trust as a resulting trust for the transferor with a mandate to the transferee to apply the money for the stated purpose sits comfortably with Dr Chambers' thesis, and it might be thought surprising that he does not adopt it.” This approach suggests resulting trusts arise when primary trusts fail. The courts will try to imply a trust when the primary trust fails. Michael Smolyanski stated that Quistclose applications need to be more narrow therefore interpreting them as constructive trusts[37][38]. Romalpa Clauses and Quistclose trusts Although the two may not be identical, there is a remarkable resemblance between the two. Hudson explains that in common law they are so similar that the legal title is able to retain the rights in property[39]. But the key difference is that in Romalpa the absolute title remains, whereas in Quistclose it is the equitable title that remains. Beneficiary Principle The last point of consideration is the beneficiary principle. The purpose of the principle is that for a trust to be valid there must be a beneficiary in favour of the trust for the trust to be valid.[40] The case of Morice v Bishop of Durham[41] added that every trust must have a definite object. In Quistclose the shareholders were the initial beneficiaries but as the specific purpose had failed, the sum was returned to the lenders as a resulting trust. This demonstrates the fact that the Quistclose trust has not followed the ruling of the beneficiary principle. This raises a question on the validity of the Quistclose trust. Conclusion It can be concluded that Quistclose provide a particular form of security for lenders and put borrowers to a slight disadvantage in a commercial setting. It is extremely hard to describe the exact nature of the Quistclose trust. However the scope of Quistclose trust has been tested, as the law has been consistently looked for developments to try and identify a reasonable definition of the trust. It could be suggested that the law needs a reform though as it only acts when the specific purpose is not carried out. Also the aspect of intention needs to be given more importance, this has not been the case in the past. Bibliography Cases
  • Aluminium Industrie Vassen BV v Romalpa Aluminium Ltd (1976) 1 WLR 676
  • Barclays Bank v Quistclose (1970) AC 567
  • Carreras Rothmans Ltd v Freeman Matthews Treasure Ltd [1985] Ch 207, 223
  • Morice v. Bishop of Durham (1804) 9 Ves. 399
  • Re Denley’s Trust Deed[1969] 1 Ch 373
  • Re Multi Guarantee Co[1987] BCLC 257
  • Re Northern Developments Holdings Ltd(unreported) 6 October 1978
  • Re Kayford [1975] 1 WLR 279
  • Toovey v Milne (1819) 2.B. & Ald. 683.
  • Twinsectra v Yardley[2002] 2 AC 164
  • Westdeutsche Landesbank Girpcentrale v Islington Borough Council[1996] AC 669
  • * Glister, J. A. ‘the nature of Quistclose trusts: classification and reconciliation.’ Cambridge law journal. (2004) 63 (3). pp. 632-655.
  • * Smolyansky M, ‘Reining in the Quistclose Trust: a Response to Twinsectra v Yardley’, (2010) 16(7) Trusts & Trustees 558–568
  • * Millett P, ‘the Quistclose Trust: Who Can Enforce It?’ (1985) 101 LQR 269
  • * Chambers R, Resulting Trusts (Oxford 1997), ch. 3.
  • * Parmer D, The uncertainty surrounding the Quistclose trust: Part 1. Int. C.R. 2012, 9(2), 137-144.
  • * Thomas G, Hudson AS. The Law of Trusts.Oxford University Press (Oxford) (2004)
Books Websites 1
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