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

Rolls Razor Ltd needed money to pay a declared dividend. Quistclose Investments lent it £209,719 on the express condition that the money be used only for that dividend. The sum was placed in a separate account at Barclays Bank, which knew about the intended purpose and was also substantially overdrawn by Rolls Razor. Before the dividend was paid, Rolls Razor entered voluntary liquidation. Barclays sought to set the balance against the company's indebtedness. Quistclose claimed that the money was not beneficially Rolls Razor's because it had been transferred solely for the dividend and, once that purpose failed, was held for Quistclose.

Was the loan money part of Rolls Razor's general assets and available for bank set-off, or was it held on trust because it had been advanced exclusively for a purpose that failed?

The House of Lords held that Quistclose was entitled to the money. Lord Wilberforce treated the arrangement as creating a primary trust to use the fund to pay the dividend, with a secondary trust for Quistclose if that purpose failed. The loan relationship did not prevent equitable obligations arising at the same time. The parties' common intention, the restriction to one purpose and the separate account showed that Rolls Razor was not free to use the money as part of its general assets. Because the dividend was never paid, the beneficial interest returned or remained with Quistclose. Barclays could not exercise set-off against money that Rolls Razor did not own beneficially.

Where money is transferred for an exclusive and sufficiently defined purpose, the recipient may hold it subject to a trust rather than beneficially. If the specified purpose fails, the fund is held for the transferor, commonly analysed as a resulting trust. The parties' objective intention and freedom to use the money are decisive.

Quistclose trusts protect purpose-limited funds from a recipient's insolvency and are important in both trusts and commercial law. Their precise conceptual basis has been debated. Twinsectra Ltd v Yardley later described the beneficial interest as remaining with the lender subject to the borrower's power to apply the money for the stated purpose. The label does not mean that every earmarked loan creates a trust. Courts examine the agreement as a whole, including whether the recipient was genuinely prohibited from using the money otherwise.