Quistclose Investments Ltd v Rolls Razor Ltd

Money advanced for a stated purpose may remain subject to a trust where the parties intend that it should be used exclusively for that purpose and should not become part of the borrower’s general assets. The lender then has an equitable right to require its application to the primary purpose. If that purpose fails, an express or implied secondary trust may require repayment to the lender.

The existence of a loan and a legal debt does not exclude concurrent equitable rights. A recipient with notice that the money was supplied by a third party for the exclusive purpose is bound by the trust and cannot set the fund off against the borrower’s general indebtedness.

Quistclose Investments Ltd v Rolls Razor Ltd concerned money lent to Rolls Razor Ltd solely to fund a declared dividend. The money was credited to a separate dividend account with Barclays Bank Ltd. Before the dividend was paid, Rolls Razor Ltd entered voluntary liquidation. The bank then set the credit balance against the company’s indebtedness on other accounts.

Quistclose sought repayment from the bank. The Court of Appeal held for Quistclose, and the bank appealed to the House of Lords. The issues were whether the advance was held on trust for Quistclose if the dividend could not be paid and whether the bank had sufficient notice of the trust to be bound by it.

Appeal dismissed unanimously. Lord Wilberforce delivered the leading speech. Lord Reid, Lord Morris of Borth-y-Gest, Lord Guest and Lord Pearce agreed with it.

1. Per Lord Wilberforce, the mutual intention and the essence of the bargain were that the advance should be used exclusively to pay the dividend and should not become part of Rolls Razor Ltd’s general assets. As a necessary implication, failure of that purpose required the money to be returned to Quistclose.

2. Per Lord Wilberforce, arrangements by which a third party supplies money to pay designated creditors may create a fiduciary relationship. The money is held on a primary trust for those creditors. If that purpose fails, a secondary trust may arise for the provider. The established line of authority beginning with Toovey v Milne (1819) 2 Barn. & Ald. 683 was applied.

3. Per Lord Wilberforce, the legal loan and the trusts were capable of co-existing. On advancing the money, the lender obtained an equitable right to require its application to the designated purpose. Once that purpose was carried out, the lender retained its remedy in debt. If it could not be carried out and repayment was agreed expressly or by implication, equity would enforce the secondary trust. On these facts, the secondary trust for Quistclose was clear.

4. Per Lord Wilberforce, the share-allotment cases did not displace that principle. They showed that, without a special trust arrangement, subscription money entered a company’s assets. They did not deny a trust where the parties mutually intended that the money should remain outside those assets.

5. Per Lord Wilberforce, the bank had notice when it received the cheque. The covering letter and preceding telephone conversation informed it that a third party had lent the money and that it could be used only for the dividend. That was sufficient notice that the fund was trust money. The lender’s identity was immaterial. The bank therefore could not set the fund off against Rolls Razor Ltd’s general indebtedness.

Lord Reid added, without deciding the point, that he was not satisfied that notice acquired after receipt of the money could never be effective.

• House of Lords: Dismissed the bank’s appeal unanimously and affirmed the Court of Appeal’s decision.
• Court of Appeal: Decided the trust and notice issues in Quistclose’s favour. The citation is not stated in the judgment.