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The Quistclose Trust

The Quistclose trust establishes that when a creditor lends money to a debtor for a specific purpose, if the debtor uses the money for another purpose, it is held in trust for the creditor. This case involved Quistclose lending money to Rolls Razor Ltd specifically to pay dividends, but when Rolls Razor went into liquidation before paying dividends, the money was ruled to be held in trust for Quistclose. The House of Lords decided in favor of Quistclose, establishing that money provided for a specific purpose creates a fiduciary relationship where the money is held in trust if the purpose fails or is not fulfilled. This created the concept of a Quistclose trust for money provided for

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54 views2 pages

The Quistclose Trust

The Quistclose trust establishes that when a creditor lends money to a debtor for a specific purpose, if the debtor uses the money for another purpose, it is held in trust for the creditor. This case involved Quistclose lending money to Rolls Razor Ltd specifically to pay dividends, but when Rolls Razor went into liquidation before paying dividends, the money was ruled to be held in trust for Quistclose. The House of Lords decided in favor of Quistclose, establishing that money provided for a specific purpose creates a fiduciary relationship where the money is held in trust if the purpose fails or is not fulfilled. This created the concept of a Quistclose trust for money provided for

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LIA170033 STUDENT
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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The Quistclose trust (3 persons, 10 mins).

A Quistclose trust is a trust created where a creditor has lent money to a debtor for a particular
purpose. In the event that the debtor uses the money for any other purpose, it is held on trust for
the creditor. Any inappropriately spent money can then be traced, and returned to the creditors
Quistclose case, as it is generally called, represents the concept of commercial form of trust.
The principle established in this case is the equity requiring that person receiving a property from
another person for a specific purpose cannot treat it as his or her own and should use it only for
that specific purpose.
Facts of cases –
 Quistclose lent money to a company Rolls Razor Ltd for a specific purpose of payment of
dividends to its shareholder at time when Rolls Razor was having overdrawn facilities from
Barclays Bank almost twice its limit.
 Quistclose willing to lend the company money, provided the company with the appellants
which was used to pay ordinary share dividends
 Company succeeded in obtaining the loan and for the specific purpose from the
respondent(Quistclose)
 Barclays held money for Rolls Razor in different account for the dividend
 The company went into voluntary liquidation before dividend was paid.
 Quistclose sought to recover the money, contending that its agreement meant Rolls Razor
Ltd held the money on trust.
 The Barclays Bank contended that the account is art of the general assets of the company
and it was entitled to get that mone in the account against the debts of Rolls Razor against
Barclays Bank.
 The respondents brought an action against the company and the appellants claiming the
money in the special account.
Extra information -
The House of Lords :
Decided in favour of the lender Quistclose For the reason that such an arrangement for payment
of creditors (here shareholders) by a third party (Quistclose) gave rise to a fiduciary relationship
or trust in favour of the creditors failing, that is, in favour of the third party. This principle has
been recognized in lots of cases prior to this decision. Among this cases are, Edwards v Glynn
(1859) 121 E.R and in Sherwood v Walker (1843) 49 E.R in Toovey v Milne (1819) it was held
that the assignee of the bankrupt company was not entitled to recover money repaid by the
bankrupt, which it had held on trust resulting from a failure to repay certain debts for repayment
of which the money was paid to the bankrupt company. The reasoning was that "money advanced
for the specific purpose did not become part of the bankrupt estate".
The Quistclose Trust has become a special purpose trust by which it has been recognized that a
fund held by a person for specific purpose is money held on trust. If the money is paid for specific
purpose, the holder of the money becomes a debtor or settler. Eventually, if the specific purpose
fails, it becomes a resulting trust in favour of the settlor.

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