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Barclay's Bank v Quistclose Investments (1970)

Last modified: Thu Feb 23 16:37:37 2006

[1970] AC 1 (HL). Quistclose lent money to a manufucturer called RollsRazor (RR) to declare a dividend on its shares. The money was held separately and provided expressly for that purpose. The loan was made so that Quistclose could prevent RR becoming insolvenet, and thereby protect its other investments in the same company.

In the event, RR did become insolvenet, and never paid the divided, and the loan was returned to Quistclose. Barclay's Bank, another of RR's creditors, sought to recover its presumed share of the money from Quistclose, on the basis that the loan should have become part of RR's general assets, and available to pay of creditors in order of priority.

The House of Lords held, however, that RR was holding the money on ResultingTrust for Quistclose, and that the beneficial interest in that money was therefore not the property of RR at all, and not available to its other creditors. In support of this decisiona arguments were advanced that the loan was held in a separate account, and that the loan was to carry out a specific purpose of the Lender, not the manufacturer. Against this, it has to be noted that the usual principles of insolvency law do not allow an insolvent company to favour one creditor over another. Nevertheless, as a matter of policy, it can be argued that lending money to a company to protect it from bankruptcy is a laudable objective (even if done for selfish motives), and that the law should allow a lender to make such a loan with a degree of protection.

See QuistcloseTrust for discussion.

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