Trinity Term [2016] UKSC 47 On appeal from: [2014] EWCA Civ 215

JUDGMENT
Bailey and another (Respondents) v Angove’s PTY
Limited (Appellant)
before
Lord Neuberger, President
Lord Clarke
Lord Sumption
Lord Carnwath
Lord Hodge
JUDGMENT GIVEN ON
27 July 2016
Heard on 8 June 2016
Appellant Respondents
Stephen Moriarty QC Jamie Riley
Francis Reynolds QC (Hon) Philip Hinks
Nicholas Craig
(Instructed by APP Law
Solicitors
)
(Instructed by Shoosmiths
LLP
)
Page 2
LORD SUMPTION: (with whom Lord Neuberger, Lord Clarke, Lord
Carnwath and Lord Hodge agree)
1. This appeal raises two important and controversial questions of commercial
law. The first is: in what circumstances will the law treat the authority of an agent
as irrevocable. The other is whether the receipt of money at a time when the recipient
knows that imminent insolvency will prevent him from performing the
corresponding obligation, can give rise to liability to account as a constructive
trustee.
Introduction
2. Angove’s Pty Ltd is an Australian winemaker, which for many years
employed an English company called D&D Wines International Ltd as its agent and
distributor in the United Kingdom. D&D acted in both capacities. It bought wines
from Angove’s in its own right and it sold wines on Angove’s behalf to UK
customers, generally retailers. Both activities were governed at the relevant time by
an Agency and Distribution Agreement (or “ADA”) dated 1 December 2011. Under
clause 34, the ADA was terminable by either side on six months’ notice, or, under
clause 36, by notice with immediate effect in a number of events, including the
appointment of an administrator or liquidator.
3. On 21 April 2012, D&D went into administration, and on 10 July 2012
moved into creditors’ voluntary liquidation. At the commencement of the
administration, there were outstanding invoices amounting altogether to
A$874,928.81, representing the price of wine which D&D had sold to two UK
retailers, but which the latter had not yet paid. On 23 April 2012, Angove’s gave
written notice terminating the ADA and any authority of D&D to collect the price
from these two customers. The notice declared that Angove’s proposed to collect
the price directly from the customers and would account separately to D&D for their
commission.
4. In due course, the liquidators objected to this course. They claimed to be
entitled to collect on the outstanding invoices, deduct commission due to D&D, and
leave Angove’s to prove in the winding up for the rest of the price. The liquidators
have never denied that Angove’s was entitled to terminate the ADA or that their
notice of 23 April 2012 had that effect. But they contended that the relationship
between D&D and Angove’s in relation to the transactions covered by the invoices
was that of buyer and seller, not agent and principal, and that accordingly the
company’s liability to Angove’s at the commencement of the administration was a
Page 3
simple debt for goods sold and delivered. Angove’s disputed this contention. They
also argued that any moneys held by D&D for their account were held in trust for
them. By agreement between the parties, the sums paid to D&D on the invoices after
the notice of termination were held by the liquidators in an escrow account pending
the resolution of the dispute, and the sums paid directly to Angove’s were held in
their solicitors’ client account on the same terms.
5. The matter came before His Honour Judge Pelling QC, sitting as a judge of
the High Court, on an application under section 112 of the Insolvency Act 1986
[2013] EWHC 215 (Ch). He held that in the relevant respects the relationship
between Angove’s and D&D was that of principal and agent only, and that D&D’s
authority to collect the price from customers came to an end upon service of
Angove’s termination notice. In the Court of Appeal, the liquidators did not
challenge the judge’s finding that D&D acted as agents. Their case was that if D&D
acted in the relevant respects as agents, their authority to collect the price of goods
which they had sold on Angove’s behalf survived the termination of the ADA
because they needed it in order to recover their commission. The Court of Appeal
(Patten, Lewison and Sharp LLJJ) accepted this argument and allowed the appeal
on that basis [2014] EWCA Civ 215; [2014] 2 BCLC 129; Angove’s alternative case
that the proceeds of the invoices were held in trust for them failed at both stages,
although for different reasons.
The revocability of an agent’s authority
6. The general rule is that the authority of an agent may be revoked by the
principal, even if it is agreed by their contract to be irrevocable. The revocation is
effective to terminate the agent’s authority, but gives rise to a claim for damages.
Powers of attorney were said by Lord Kenyon to be “revocable from their nature”:
Walsh v Whitcomb (1797) 2 Esp 565, 566. In Story’s Law of Agency, 2nd ed (1864),
p 598, at para 463, the rule was said to be “so plain a doctrine of common sense and
common justice that it requires no illustration or reasoning to support it.”
Nonetheless, its basis has never really been in doubt. An agent is empowered to
commit his principal within the limits of his authority as if the principal had agreed
personally. This is a confidential relationship importing a duty of loyalty, and
normally of undivided loyalty, on the part of the agent. As Lord Atkinson observed,
delivering the advice of the Privy Council in Frith v Frith [1906] AC 254, 261, to
allow the agent to exercise his authority after it has been revoked would amount to
the specific enforcement of a relationship which is by its nature not specifically
enforceable.
7. The main exception to the general rule is the case where the agent has a
relevant interest of his own in the exercise of his authority. The exception applies if
two conditions are satisfied. First, there must be an agreement that the agent’s
Page 4
authority shall be irrevocable. Secondly, the authority must be given to secure an
interest of the agent, being either a proprietary interest (for example a power of
attorney given to enable the holder of an equitable interest to perfect it) or a liability
(generally in debt) owed to him personally. In these cases, the agent’s authority is
irrevocable while the interest subsists.
8. Both conditions are now reflected in section 4(1) of the Powers of Attorney
Act 1971, as regards authority conferred by a power of attorney. The first condition
is perhaps self-evident, but so far as authority is required, it is supplied by the
decisions of the Privy Council in Esteban de Comas v Prost and Kohler (1865) 3
Moo PC NS 158 and Frith v Frith [1906] AC 254. The second condition was
established in Walsh v Whitcomb, supra, where the exception was said to apply in
“every case where a power of attorney is necessary to effectuate any security”. In
Smart v Sandars (1848) 2 CB 895, 917-918, commonly regarded as the leading case,
Wilde CJ, delivering the judgment of the Court of Common Pleas, declared that:
“where an agreement is entered into on a sufficient
consideration, whereby an authority is given for the purpose of
securing some benefit to the donee of the authority, such an
authority is irrevocable. This is what is usually meant by an
authority coupled with an interest, and which is commonly said
to be irrevocable. But we think this doctrine applies only to
cases where the authority is given for the purpose of being a
security, or, as Lord Kenyon expresses it, as a part of the
security; not to cases where the authority is given
independently, and the interest of the donee of the authority
arises afterwards, and incidentally only.”
These cases demonstrate that an agreement that the agent’s authority is to be
irrevocable may be inferred, but not from the mere co-existence of the agency and
the interest. It is necessary that the one should be intended to support the other. The
exception thus stated follows from the logic of the rule. Where the parties agree that
the agent is to have a personal financial interest in the performance of his agency,
over and above the receipt of his remuneration, his duty of loyalty is to that extent
compromised. The reason for declining to enforce his right to act for the principal
therefore falls away.
9. The ambit of the exception for authority coupled with an interest is more
narrowly defined by the editors of Bowstead and Reynolds on Agency, 20th ed
(2014), para 10-007. They say that it applies
Page 5
“where the notion of agency is employed as a legal device for
a different purpose from that of normal agency, to confer a
security or other interest on the ‘agent’. In such a case it is
intended that the agent use the authority not for the benefit of
his principal but for his own benefit, to achieve the objects of
the arrangement.”
This would appear to confine the exception to cases where the authority exists solely
in order to secure the agent’s financial interest, and is in reality no more than the
commercial equivalent of an assignment. In such a case, the editors suggest, the law
of agency is not really engaged at all, because the beneficiary of the authority is only
nominally an agent. In my opinion, this is too narrow. It is no doubt a fair description
of the simplest cases, but I do not accept that it can be a general principle of law. At
one extreme lie cases such as Walsh v Whitcomb, supra, where a power of attorney
was granted solely to enable the grantee to satisfy a pre-existing debt owed to the
agent, or Gaussen v Morton (1830) 10 B&C 731, where an owner of land gave a
power of attorney to a creditor to sell the land to satisfy the debt. No one doubts that
the exception applies in such cases. At the opposite extreme, it does not apply where
the agent’s only interest is a commercial interest in being able to earn his
commission. The reason is that in that case, the authority is not properly speaking a
security at all: Doward, Dickson & Co v Williams & Co (1890) 6 TLR 316; Temple
Legal Protection Ltd v QBE Insurance (Europe) Ltd [2009] Lloyd’s Rep IR 544, at
para 50. But there are situations lying between these polar positions where the
relationship of principal and agent is broader than the mere collection of money to
satisfy the agent’s debt, so that the agent may be said to act both for himself and his
principal. In Smart v Sandars, supra, for example, the agent was a grain factor and
the advances said to be secured by the agent’s authority were made against the
proceeds of sale of unsold grain. It is clear that the agent would have succeeded but
for the fact that the advances had been made after and independently of the agency
agreement so that the latter could not be construed as securing them. There is no
principled reason why a true agent employed on his principal’s affairs should not
also be regarded as having a personal interest in the exercise of his authority
sufficient to make it irrevocable. Thus although, as I have said, the agent’s
commercial interest in continuing to act in order to earn commission is not enough
to make his authority irrevocable, his interest in recovering a debt in respect of
commission already earned may well be. There is no reason to distinguish a debt
arising in this way from any other debt, provided that it is sufficiently clear that the
parties intended that the agent’s authority should secure it.
10. There are a number of special cases in which the authority of an agent has
been held to be irrevocable on what appears to be a wider basis. They include the
irrevocable authority conferred on the promoter of a public share offering to
subscribe for shares (In re Hannan’s Express Gold Mining and Development Co;
Carmichael’s Case [1896] 2 Ch 643), the irrevocable authority conferred by a bidder
Page 6
on an auctioneer of land to execute the memorandum of sale if it is knocked down
to him (Van Praagh v Everidge [1902] 2 Ch 266, reversed on other grounds [1903]
1 Ch. 434), and the irrevocable authority conferred by a Lloyd’s name on his
managing agent to underwrite (Daly v Lime Street Underwriting Agencies [1987] 2
FTLR 277, Society of Lloyd’s v Leighs [1997] CLC 759 decided on other grounds
in the Court of Appeal The Times, 11 August 1997). The result in these cases was
undoubtedly convenient, but they do not lend themselves to analysis along the lines
discussed above. Nothing that I have said should therefore be taken to refer to them.
Application to the present case
11. At this point, it is necessary to look more closely at the terms of the ADA.
Clause 10 provided that where D&D took Angove’s products as their agents for sale,
the terms of any sale should be the standard terms set out at Annexure A. These were
drafted on the footing that the parties to the contract of sale were Angove’s and “the
customer”, defined as “the person … who acquires goods from Angove.” They
provided for the purchaser to pay the price within 90 days of the bill of lading date.
12. D&D’s right to commission is governed by clause 21:
“21. Angove will pay to D&D commission:
(a) in such amounts as shall be agreed between
Angove and D&D based on the Net Selling Price of
every sale of Products or Angove PBPs to a customer in
D&D’s allocated sectors within the Territory arranged
by D&D during the term of this Agreement (other than
on its own account);
and
(b) on any Bulk Wine supplies made by Angove, or
by any company or entity wholly owned by Angove
pursuant to clause 17 during the term of this
Agreement.”
13. Clauses 20 and 22 deal with the procedure for the payment of the price:
Page 7
“20. Payment for Products ordered by or on behalf of D&D
must be made, whether by D&D or the customer, on or before
90 days from the date of bill of lading, or otherwise as may be
agreed, by direct credit in Australian dollars into the bank
account nominated from time to time by Angove.

22. Commission due under clause 21(a) shall be paid to
D&D as follows:
(a) Angove will issue an invoice addressed to D&D
(identifying the customer as consignee) for the relevant
goods, together with a credit note for the amount of
D&D’s commission on that sale;
(b) D&D will be responsible for collecting payment
of the amount of Angove’s invoice from the customer;
(c) D&D will pay the amount of Angove’s invoice,
less the amount of the credit note, on or before the due
date in accordance with clause 23.”
It is common ground that the combined effect of clauses 20 and 22(c) was to require
D&D to account to Angove’s within 90 days of the bill of lading date for the price
of the goods sold to customers on Angove’s behalf, whether or not the price had by
then been received from the customers.
14. Finally, it is necessary to refer to clause 37, which deals with certain of the
consequences of termination. This provides, so far as relevant:
“37. Upon termination of this Agreement for any reason
whatsoever:
(a) each party must pay to the other all money owing
up to and including the date of termination in respect of
the sale of Products and Angove PBPs and/or
commission thereon, without any deduction,
withholding or set-off for any reason whatsoever;
Page 8

Termination of this Agreement does not affect the accrued
rights or remedies of either party. Obligations expressed to
arise or continue on or after termination of this Agreement
survive its termination.”
15. The Court of Appeal held that D&D’s authority was irrevocable because the
general rule that authority can be revoked “must yield to what the parties have
agreed should be their respective legal rights and obligations on the termination of
the agency” (para 25). Construing the ADA, they held that a continuing right to
collect the price from the customer was implicit in (i) D&D’s right to deduct
commission from the price before remitting it to Angove’s, and (ii) D&D’s
obligation to account to Angove’s for the price within 90 days of the bill, whether
or not it had by then been received from the customer. This was because these
features of the agreement gave rise to liabilities of Angove’s to D&D, which could
be set off against sale proceeds in D&D’s hands. It will be apparent from this that
the Court of Appeal applied only part of the test. The general rule is that an agent’s
authority is revocable even if it is agreed to be irrevocable. It cannot therefore be
enough to exclude the general rule that the authority is agreed to be irrevocable.
What has to be agreed is not just that the authority is to be irrevocable but that it is
intended to secure the financial interest of the agent. Both are questions for the
construction of the agreement. The Court of Appeal did not address the latter
criterion.
16. It is convenient to deal with both conditions together. In my opinion, neither
of them was satisfied, for the following reasons:
(1) D&D had express authority to collect from the customer under clause
22(b), and it would have been simple enough to provide in terms that it was
irrevocable. But it is not expressed to be irrevocable or to survive the
termination of the agreement. So far as the language offers any indication, it
is to the opposite effect. By virtue of the final paragraph of clause 37,
authority to collect the price would survive the termination of the agreement
only if it constituted an “accrued right or remedy” of the agent. But it is
described in clause 22(b) as a responsibility, not a right. I would accept that
for the purpose of clause 37 a provision may be “expressed” to survive
termination if, although not spelled out in so many words, it is nevertheless a
sufficiently clear implication from the express terms. But for the following
reasons I consider that no such implication is possible.
Page 9
(2) The first point to be made is that while D&D assume the
“responsibility” of collecting payment from customers to whom they sell as
Angove’s agent, there is nothing to stop the customer from paying Angove’s
directly. Under the standard terms required to be agreed with the customer
the price is payable to “Angove”, which “means Angove Pty Ltd, and
includes D&D Wines International Ltd, where it acts as agent for Angove Pty
Ltd.” This is consistent with clause 20, which envisages that payment may be
made to Angove’s by D&D or directly by the customer. This makes it, as it
seems to me, difficult to regard collection from the customer as a right, as
opposed to a function of D&D, and even more difficult to regard it as a
security.
(3) It is correct that D&D’s right to commission under clause 21 survives
the termination of the agreement, because it accrues unconditionally when
the sale is made, therefore before termination. But the question is whether the
right to deduct it from the price under clause 22(c) is a mere procedural
mechanism or a security. It is not the only way of recovering it. If the price
is paid directly by the customer to Angove’s, the commission is payable by
Angove’s directly. In that event D&D would lose the ability to set off the
commission against any sale proceeds in their hands. But the irrevocability
of D&D’s authority cannot be inferred from the mere fact that D&D would
to some extent and in some circumstances benefit if it was so.
(4) Much the same point may be made about D&D’s obligation under
clauses 20 and 22(c) to account to Angove’s for the price within 90 days of
the bill of lading date. This was a right of Angove’s. It accrued when the
goods were shipped, albeit that payment would not be due until later. It
follows, as the Court of Appeal held, that in relation to goods shipped before
the termination of the ADA it survived that event, just as it would have done
if D&D had bought the goods in their own right. Clause 20 applies in both
cases. It does not, however, follow that D&D had the continuing authority of
Angove’s to collect the price from the customer. Once they had paid the price
to Angove’s, they were entitled at common law to collect it from the customer
on the ground that they had compulsorily discharged the customer’s liability
for the price: Moule v Garrett (1872) LR 7 Ex 101; Ibrahim v Barclays Bank
Plc [2013] Ch 400. The source of this right is the law of unjust enrichment.
It is not the authority of Angove’s, who have no further standing in the matter
once they have been paid.
(5) It is inherently improbable that the parties should have intended the
authority to be irrevocable. They had expressly envisaged the possibility of
insolvency and provided for a mutual right of termination in that event. For
an exporter in particular, there are particular problems associated with
financial dealings with an insolvent agent for sale, which Angove’s clearly
Page 10
wished to avoid. If the agent’s authority to collect money from third parties
survives termination the effect would be to secure D&D’s right to 5%
commission in the event of the insolvency of Angove’s, but at far greater cost
to Angove’s in the event of the insolvency of D&D. They would have to
prove as unsecured creditors in the liquidation for the remaining 95%.
17. I conclude that Angove’s notice of 23 April 2012 was immediately effective
to terminate D&D’s authority to collect on the outstanding invoices.
Trust
18. This means that it is strictly speaking unnecessary to deal with the second
point, namely whether the funds paid by customers to D&D since the
commencement of the administration are held in trust for Angove’s. But since the
point is of some general importance and has been fully argued before us, I think it
right to deal with it. I do so on the assumption that (contrary to the conclusion that I
have reached) Angove’s notice of termination was not effective to terminate D&D’s
authority to collect on the invoices.
19. An agent has a duty to account to his principal for money received on his
behalf. It is, however, well established that the duty does not necessarily give rise to
a trust of the money in the agent’s hands. That depends on the intentions of the
parties derived from the contract, or in some cases from their conduct. As a broad
generalisation, the relations between principal and agent must be such that the agent
was not at liberty to treat as part of his general assets money for which he was
accountable to his principal. This will usually, but not invariably, involve
segregating it from his own money. The editors of Bowstead and Reynolds on
Agency, 20th ed (2014), 219, para 6-041, put the matter in this way:
“the present trend seems to be to approach the matter more
functionally and to ask whether the trust relationship is
appropriate to the commercial relationship in which the parties
find themselves; whether it was appropriate that money or
property should be, and whether it was, held separately, or
whether it was contemplated that the agent should use the
money, property or proceeds of the property as part of his
normal cash flow in such a way that the relationship of debtor
and creditor is more appropriate.”
The judge held that in principle any liability of D&D to account for money collected
from customers under the ADA gave rise to a purely personal liability sounding in
Page 11
debt, and not to a proprietary claim; whereas money collected outside the ADA,
after their authority had been terminated, would be held in trust for Angove’s.
However, he concluded that none of this mattered because the proceeds of the
invoices fell to be dealt with in accordance with the escrow arrangements. There is
no longer any issue on these points.
20. In the Court of Appeal matters took a different turn. Before the hearing of the
appeal the court wrote to the parties drawing their attention to a passage from the
18th edition of Lewin on Trusts (2006), which suggested that the proceeds of the
invoices might be held on a constructive trust for Angove’s even if there was a
continuing authority to collect it. In the 19th ed (2015), the corresponding passage
reads:
“Unconscionable assertion of title to money payments by
agents
Money received by an agent, though not held on an express
trust for his principal, nor on a Quistclose trust, may be held on
a constructive trust for his principal on the ground that it would
be unconscionable for the agent to assert a title to the money
having regard to the circumstances of the agent at the time of
receipt. Such a constructive trust has been held to arise where
the agent receives money from his principal for application by
the agent under a contract which the agent will be unable to
perform because of his pending insolvency, or where the agent
receives money from a third party for onward transmission to
his principal which he is unable to do in view of his insolvency,
even though the contract with the principal negatives an
express trust.”
The authorities cited for these propositions are the decisions of Bingham J in Neste
Oy v Lloyd’s Bank Plc [1983] 2 Lloyds Rep 658 and Nicholas Warren QC, sitting
as a deputy High Court Judge in In re Japan Leasing Europe Plc [1999] BPIR 911.
21. Neste Oy v Lloyd’s Bank Plc concerned the right of the bank to combine the
accounts of an insolvent shipping agent called Peckston Shipping Ltd (or “PSL”).
PSL settled on behalf of their shipowner clients bills payable to harbour authorities,
pilots, fuel merchants, and other providers of goods and services. The shipowners
sometimes put them in funds in advance and sometimes reimbursed them in arrears.
The plaintiff shipowners claimed that the unspent balance of six payments made by
them to a general account of PSL were held for them in trust. Their primary case
was that the payments were subject to an implied trust to pay the money to the
Page 12
suppliers. This arose either by virtue of the agency relationship or as a special
purpose (or Quistclose) trust: see Barclays Bank Ltd v Quistclose Investments Ltd
[1970] AC 567. Bingham J rejected this, but held that there was a constructive trust
of the sixth payment, which had been received after the directors of PSL had
concluded that their company was insolvent. The judge took as his starting point a
quotation from Story’s Commentaries on Equity Jurisprudence, 2nd ed (1839), vol
2, para 1255, which had been cited by Goulding J in Chase Manhattan Bank NA v
Israel-British Bank (London) Ltd [1981] Ch 105, 117-118 as being “in accord with
the general principles of equity as applied in England”:
“the receiving of money which consistently with conscience
cannot be retained is, in equity, sufficient to raise a trust in
favour of the party for whom or on whose account it was
received. This is the governing principle in all such cases. And
therefore, whenever any controversy arises, the true question
is, not whether money has been received by a party of which
he could not have compelled the payment, but whether he can
now, with a safe conscience, ex aequo et bono, retain it.”
Applying this statement to the facts before him, he held, at p 666:
“Given the situation of PSL when the last payment was
received, any reasonable and honest directors of that company
(or the actual directors had they known of it) would, I feel sure,
have arranged for the repayment of that sum to the plaintiff’s
without hesitation or delay. It would have seemed little short of
sharp practice for PSL to take any benefit from the payment,
and it would have seemed contrary to any ordinary notion of
fairness that the general body of creditors should profit from
the accident of a payment made at a time when there was bound
to be a total failure of consideration. Of course it is true that
insolvency always causes loss and perfect fairness is
unattainable. The bank, and other creditors, have their
legitimate claims. It nonetheless seems to me that at the time of
its receipt PSL could not in good conscience retain this
payment and that accordingly a constructive trust is to be
inferred.”
22. In re Japan Leasing Europe Plc [1999] BPIR 911 concerned what was in
effect a hire purchase agreement for an aircraft between four leasing companies and
Olympic Airways. The contract documentation provided for the payment of the
price in instalments to designated accounts in various currencies of one of the
lessors, Japan Leasing. Japan Leasing was to receive the money on behalf of itself
Page 13
and the other three lessors. Japan Leasing went into administration, and a month
later received an instalment into the designated accounts. The issue was whether the
money was held in trust to pay their shares to the three other lessors. The deputy
judge rejected the primary argument of the three solvent lessors that there was an
express trust, but held that the last instalment was held on a constructive trust for the
other lessors. The judge referred to an observation of the editors of Bowstead and
Reynolds (currently the 20th ed (2014), at p 219) immediately after the passage
which I have quoted above:
“a central question, really one of policy, … is whether the rights
of the principal are sufficiently strong and differentiable from
other claims, for him to be given priority in respect of them in
the agent’s bankruptcy.”
This had been quoted with apparent approval by Lord Goff of Chieveley in Lord
Napier and Ettrick v Hunter [1993] AC 713, 744, although it was not the ground on
which he decided that case. The deputy judge then referred, at pp 922-923, to
Bingham J’s decision in Neste Oy. He was invited to distinguish it on the ground
that in Neste Oy the agent had no contractual right to the sixth payment. The money
had been destined for the payment of service-providers who were not beneficiaries
of the trust. The only consideration which the agent gave was its performance of its
general obligations as a shipping agent, and that was the consideration for its
charges, not for the sixth payment. Japan Leasing, by comparison, was contractually
entitled to receive the money. Although it was accountable for most of it to the other
three lessors, it had given consideration for its share of the instalments. The deputy
judge rejected this distinction because it was irrelevant to Bingham J’s reasoning:
“The constructive trust is imposed because it would be
unconscionable for the company, as agent, to receive money as
agent knowing that it could not account for it to its principal.
In this context, the passage from Bowstead quoted in Napier
(see above) is relevant and in my judgment the only answer
which could be given to the question there posed is that the
rights of the vendors are sufficiently strong, and differentiable
from other claims, for the vendors to be entitled to a prior
position in respect of them on the company’s insolvency
(whether the question arises in an administration, a voluntary
arrangement or a liquidation). The joint administrators have
not, of course, acted unconscionably: they have, quite properly,
brought the matter before the court. But it would, in my
judgment, be unconscionable for them to continue to assert any
claim to the moneys.”
Page 14
23. The distinction which Nicholas Warren QC rejected was, however, accepted
by the Court of Appeal in the present case. They justified the result in Neste Oy on
the ground that the payments to PSL were “essentially gratuitous”, and that the
treatment of the sixth payment as part of the insolvent estate would have been a “real
windfall for the creditors”. The position in Japan Leasing, they thought, was
different, for the reason unsuccessfully submitted to Nicholas Warren QC. The
Court of Appeal therefore doubted whether the decision was right. On the footing
that D&D had a contractual right to collect the proceeds of the invoices in order to
recover their commission on the sales, they thought that it could not have been
unconscionable for D&D to retain the money and that there was no constructive
trust.
24. I agree with the Court of Appeal that there was no constructive trust in this
case. But this conclusion does not in my view depend on whether D&D gave
consideration for the money. There are, I think, more fundamental objections to the
constructive trust proposed by Angove’s.
25. At the time when the money was paid by the customers to D&D it was not
impressed with any trust in favour of Angove’s. If, therefore, a constructive trust
came into being, it did so for the first time upon its reaching the hands of the payee.
The money would thereafter be traceable for as long as it remained identifiable in
the hands of any third party other than a bona fide purchaser for value without notice.
It would not form part of the insolvent estate, thereby conferring priority on
Angove’s over other creditors, including many whose position would otherwise be
no different from theirs. This is elementary, and fundamental. The statutory rules
for the distribution of insolvent estates represent an important public policy designed
to achieve a pro rata distribution of the company’s estate between its creditors. For
that purpose it is necessary to assess claims as at a fixed and common point of time,
namely when the company went into liquidation. The arbitrary character of any cutoff date is to some extent mitigated by statutory provisions for adjusting prior
transactions prejudicial to creditors, such as preferences and transactions at an
undervalue, and imposing liabilities for fraudulent or wrongful trading, but these
provisions operate in their current form to restore the insolvent estate for the benefit
of creditors as a whole.
26. It is inherent in the statutory scheme of distribution in an insolvency that
apparently arbitrary results may follow from the adventitious timing of the
commencement of the liquidation, especially in the case of deferred obligations. In
principle, an advance payment to a company made before the commencement of the
liquidation for an obligation performable afterwards will form part of the company’s
estate, notwithstanding that its supervening insolvency means that the obligation
will not be performed, at any rate in specie. The payer must prove in the liquidation
for damages for the breach of contract. Likewise, a contractor providing goods or
services on credit will have to prove in the liquidation for the price if the other party
Page 15
becomes insolvent before paying. The rule is the same for money received for his
principal’s account by an agent who becomes insolvent before accounting for it,
unless (contrary to the unchallenged finding of the judge in this case) the relations
between the parties were such as to make the agent an express trustee of money in
his hands. The money will form part of the agent’s insolvent estate, and the principal
must prove in the liquidation. In the nature of things, these consequences involve a
detriment for the payer, attributable to the timing of the company’s insolvency; and
a windfall for the general creditors, since the estate available for distribution will be
increased by the payment without being reduced by the cost of performance. As
Professor Goode has remarked,
“It is when [scholars] seek to … argue for a proprietary right
when there is no proprietary base that the line is crossed
between what is fair and what is not, for it is the defendant’s
unsecured creditors who are then at risk. If the court wishes to
show its disapproval of the defendant’s conduct by making a
personal restitutionary order, no harm is done. If the defendant
is not in bankruptcy the order will be complied with and
enforced for the plaintiff’s benefit, if the defendant does
become bankrupt before then, the plaintiff is properly required
to compete with other unsecured creditors. To accord the
plaintiff a proprietary right to the benefit obtained by the
defendant, and to any profits or gains resulting from it, at the
expense of the defendant’s unsecured bankruptcy creditors
seems completely wrong, both in principle and in policy,
because the wrong done to the plaintiff by the defendant’s
improper receipt is no different in kind from that done to
creditors who have supplied goods and services without
receiving the bargained for payment”: Goode, ‘Ownership and
Obligation in Commercial Transactions’ (1987) 103 LQR 433,
444.
What in effect Bingham J decided in Neste Oy was that the position was different
where at the time of the receipt of the money the payee knew that there was bound
to be a total failure of consideration. In that event, he would have not just a personal
but a proprietary restitutionary claim for the money.
27. English law is generally averse to the discretionary adjustment of property
rights, and has not recognised the remedial constructive trust favoured in some other
jurisdictions, notably the United States and Canada. It has recognised only the
institutional constructive trust: Westdeutsche Landesbank Girozentrale v Islington
London Borough Council [1996] AC 669, 714-715 (Lord Browne-Wilkinson), FHR
European Ventures LLP v Cedar Capital Partners LLC [2015] AC 250, at para 47.
Page 16
In the former case, the difference was explained by Lord Browne-Wilkinson in the
following terms:
“Under an institutional constructive trust, the trust arises by
operation of law as from the date of the circumstances which
give rise to it: the function of the court is merely to declare that
such trust has arisen in the past. The consequences that flow
from such trust having arisen (including the possibly unfair
consequences to third parties who in the interim have received
the trust property) are also determined by rules of law, not
under a discretion. A remedial constructive trust, as I
understand it, is different. It is a judicial remedy giving rise to
an enforceable equitable obligation: the extent to which it
operates retrospectively to the prejudice of third parties lies in
the discretion of the court.”
28. Bingham J’s point of departure in Neste Oy was that the recipient of money
may be liable to account for it as a constructive trustee if he cannot in good
conscience assert his own beneficial interest in the money as against some other
person of whose rights he is aware. As a general proposition this is plainly right. But
it is not a sufficient statement of the test, because it begs the question what good
conscience requires. Property rights are fixed and ascertainable rights. Whether they
exist in a given case depends on settled principles, even in equity. Good conscience
therefore involves more than a judgment of the relative moral merits of the parties.
For that reason it seems to me, with respect, that Bingham J’s observation in Neste
Oy that any reasonable and honest director would have returned the sixth payment
upon its receipt begs the essential question whether he should have returned it. It
cannot be a sufficient answer to that question to say that it would be “contrary to
any ordinary notion of fairness” for the general creditors to benefit by the payment.
Reasoning of this kind might be relevant to the existence of a remedial constructive
trust, but not an institutional one. The observation of the editors of Bowstead and
Reynolds and of Nicholas Warren QC in Japan Leasing that a proprietary claim
should be recognised whenever the claim is “sufficiently strong and differentiable
from other claims” to warrant giving it priority over other claims in an insolvency,
seems to me to be open to the same objection.
29. In English law, one of the essential requisites for a trust of whatever kind is
that there must be identifiable trust property (or its traceable proceeds) in the hands
of the recipient which are not available to him as part of his general assets: see
Westdeutsche Landesbank Girozentrale v Islington London Borough Council [1996]
AC 669, 705. The only true exception to this (which did not arise in Neste Oy) is the
case of a person liable to account as a constructive trustee on the ground of his
dishonest assistance in a breach of trust. The difficulty about the decision in Neste
Oy concerning the sixth payment is that Bingham J had rejected the argument that
Page 17
the agency relationship between the shipowners and PSL was such as to impose the
status of a trustee on the agents, and had declined to find that the payments were
subject to a special purpose trust. He had rejected these submissions mainly because
the agent was not expected to keep the funds remitted to it by the shipowners
separate from its own, but was entitled to treat them as part of its general assets: see
pp 664-665. It follows that in paying money to PSL the shipowners intended to part
with any interest in the money, subject only to a purely personal obligation of PSL
to account to them for what they had done with it and to repay any balance due as a
debt. The judge made a similar finding in the present case.
30. The exact circumstances in which a restitutionary proprietary claim may exist
is a controversial question which has given rise to a considerable body of judicial
comment and academic literature. For present purposes it is enough to point out that
where money is paid with the intention of transferring the entire beneficial interest
to the payee, the least that must be shown in order to establish a constructive trust is
(i) that that intention was vitiated, for example because the money was paid as a
result of a fundamental mistake or pursuant to a contract which has been rescinded,
or (ii) that irrespective of the intentions of the payer, in the eyes of equity the money
has come into the wrong hands, as where it represents the fruits of a fraud, theft or
breach of trust or fiduciary duty against a third party. One or other of these is a
necessary condition, although it may not be a sufficient one. Neither of them was
satisfied in Neste Oy. In particular, the prospect of a total failure of consideration,
however inevitable, is not a circumstance which could have vitiated the intention of
the shipowner to part with its entire interest in the money. The right to the restitution
of money paid on a consideration which has wholly failed is simply a process of
contractual readjustment, giving rise like the contract itself to purely personal
obligations. If an actual total failure of consideration does not give rise to a
proprietary restitutionary right, I do not see how a prospective one can do so.
31. In my view, the decision in Neste Oy cannot be justified, at any rate on the
ground on which it was decided. Japan Leasing was in my view wrongly decided,
not just for that reason, but for the reason given by the Court of Appeal, namely that
the recipient having a contractual right to the money, it could not be unconscionable
for them to receive it into their account.
32. Mistake was not argued in Neste Oy. Bingham J had refused to allow the
shipowners to rely on it because they took the point too late. But it has subsequently
been suggested that since the shipowners presumably paid the money in the belief
that PSL was in a position to disburse it to the service-providers, mistake would have
been a better basis for the decision: In re Farepak Food and Gifts Ltd [2008] BCC
22, at paras 39-40 (Mann J). Whether that is correct is not a question which arises
on this appeal. The money was paid to D&D by the customers, not by Angove’s.
They no doubt paid it in the belief that D&D was authorised to collect it, or at least
that payment to them would discharge their liability for the price. The question of
Page 18
trust arises on the hypothesis that D&D was authorised to collect the proceeds of the
invoices, and on that hypothesis their belief was not mistaken.
Conclusion
33. I would allow the appeal and declare that the fund representing the proceeds
of the invoices is payable to Angove’s.