Security over Goods
Cases
Buhr & Ors v Barclays Bank Plc
[2001] EWCA Civ 1223 [2001] 31 EGCS 103, [2002] 1 P & CR DG7, [2002] BPIR 25, [2001] NPC 124
Arden LJ
In Commercial Law, Professor Sir Roy Goode says this:
“(iv) Security in an asset and security in its proceeds
Unless otherwise agreed, security in an identifiable asset carries through to its products and proceeds, in accordance with the equitable principle of tracing. It is quite possible for the creditor to have rights in the same item of property both as proceeds and as original security, as where he takes a charge over the debtor’s stock in trade and receivables and the debtor then sells items of stock, producing receivables. The strength and quality of a security interest in an asset is not necessarily the same as in its proceeds. The debtor who gives a charge over his stock and receivables may be allowed full freedom to dispose of the stock in the ordinary course of business free from the charge without reference to the creditor but be required to hold the proceeds separate from his own monies and pay them to the creditor or to an account which the creditor controls. Such a charge will be a floating charge as regards the stock but a fixed charge as regards the receivables. The security interest in proceeds, unless separately created, is not a distinct security interest but is part of a single and continuous security interest which changes its character as it moves from asset to proceeds. Moreover, a security interest in a debt cannot co-exist with a security interest in its proceeds, for upon collection debt ceases to exist.
There are dicta which on a superficial reading suggest that an obligation on the debtor to apply the proceeds of his asset towards discharge of the debt, and not for any other purposes, creates an equitable charge not merely over the proceeds but over the asset itself. But the dicta must be taken in context and are not, it is submitted, intended to lay down any such rule, which would lead to great confusion. A security interest in an asset carries forward to proceeds: …” (page 667-8).
In Legal Problems of Credit and Security, Professor Sir Roy Goode says this:
“Security in an asset and in its proceeds
Security in an asset will almost invariably carry through to the proceeds of an unauthorised disposition by the debtor and will also extend to proceeds of an authorised disposition where it is effected on behalf of the creditor rather than for the debtor’s own account. The relationship between a security interest in an asset and a security interest in its proceeds has not been fully developed in English law. Three particular issues require examination:
(1) Can the creditor claim a security interest in the asset and its proceeds concurrently?
Suppose that C has taken a specific mortgage of D’s motor car and wrongfully sells the car to E. In the absence of any applicable exception to the nemo dat rule C can recover his vehicle from E. Alternatively he can adopt the wrongful sale and treat his security interest as attaching to the proceeds received by D. But can he claim security in both the car and the proceeds at the same time? No, because the remedies are inconsistent. C’s equitable tracing claim to the proceeds rests on his implied adoption of the wrongful sale. He cannot have his cake and eat it. He must elect which right to pursue.” (page 16).
The appellants’ submissions
Mr Alastair Norris QC, for Thrings, rejects each of the grounds on which the judge found for Barclays and submits that:
(i) Barclays did not automatically obtain a proprietary interest in the proceeds of sale by virtue of its unregistered charge over the property.
(ii) Barclays did not obtain a beneficial interest in the proceeds of sale by virtue of its having an equitable charge over the proceeds of sale.
(iii) Barclays did not have an interest in the proceeds of sale under a constructive trust arising on the sale of the property.
The judge’s proceeds point
As to his first submission, Mr Norris distinguishes the statements by Professor Sir Roy Goode relied on by the judge as having been written in the context of charges on chattels and choses in action. He submits that charges over book debts and chattel mortgages continue to be created today as they were before 1925, that is in the case of book debts by an absolute conveyance coupled with a proviso for reconveyance.
Mr Norris submits that there is a well-established distinction between property and the proceeds of sale: see Agnew v The Commissioner of Inland Revenue, Privy Council, 5 June 2001. Lord Millett, giving the advice of the Privy Council, states that “Property and its proceeds are clearly different assets. On a sale of goods, the seller exchanges one asset for another” (para 43). Moreover, unlike fixed securities over tangibles or intangibles, the Barclays charge did not prevent Mr and Mrs Buhr from selling the Rectory Farm. Barclays cannot adopt the sale by them of Barclays’ interest in Rectory Farm because all the Buhrs could sell and accordingly all that they sold was their own interest in Rectory Farm. The mortgage would continue until discharged (Samuel Keller Ltd v Martins Bank [1971] 1 WLR 43, 47H). The reason why Barclays lost its proprietary interest was its own failure to register its charge. The fact that after 1925 the mortgagor can sell the mortgaged property makes a critical difference: before 1925 only the mortgagee could convey the legal title. Since 1925 the legal estate has remained vested in the mortgagor so clearly he can now pass the legal estate. It is significant that there is no parallel provision to section 105 of the Law of Property Act 1925 dealing with proceeds of sale received by a mortgagor. Mr Norris further submits that the fact that a mortgagee’s interest (if duly registered) is preserved as against purchasers and that he is given the protection of holding the title deeds shows that there is no automatic interest in the proceeds of sale. He further submits that the beneficial interest in the proceeds of sale is in any event fundamentally different from an interest by way of security.
Professor Sir Roy Goode expresses the view that the creditor with security has an equitable right to trace into the proceeds of sale of a security. However, for this to be correct there would have to be a fiduciary duty. There was no fiduciary relationship between the Buhrs and Barclays. Accordingly no right to trace can exist: Agip (Africa) Ltd v Jackson [1991] Ch.547, 566h.
The judge’s all estate clause point
The judge held was that section 63 of the Law of Property 1925 operated to confer a charge over the Buhrs’ equitable interest in Rectory Farm, which was “of necessity” a charge over the proceeds of sale on the statutory trusts. Mr Norris submits that there is no authority for the proposition that the all estate clause can be used to support partial performance where the intended bargain was in fact fully performed (cf First National Securities v Hegerty [1985] QB 850). The fact that Barclays failed to obtain a fully enforceable charge was Barclays’ fault for failing to register its charge properly.
Mr Norris submits that it is wrong in principle to introduce by implication equitable charges of equitable interests simultaneously with undoubtedly effective legal charges of legal interests. Once the entire legal interest intended to be conveyed is conveyed (the charge by way of legal mortgage) so that there is no separation of legal and beneficial ownership (but only the division of legal interest in accordance with the Law of Property Act 1925) it is unnecessary to analyse the transaction in equity. Indeed a merger of the lower in the higher security occurs (see Fisher & Lightwood Law of Mortgage (10 ed) (1988) page 618-9).
In any event an equitable charge does not result in a change of ownership either at law or in equity: see for example Megarry & Wade, Law of Real Property (6th ed) (2000) paras. 19-005,19-040. Accordingly the existence of an equitable charge could not support a declaration that Barclays had a proprietary interest by way of constructive trust.
The judge’s analogy with section 105
Prior to section 21(3) of the Conveyancing Act 1881 a constructive trust was imposed in equity in the circumstances indicated by the judge simply on the surplus proceeds of sale. The position was codified by statute. However, the constructive trust was not imposed as a safety net to protect a mortgagee who had not taken the steps open to him to protect his interest in the property. The fact that under the Law of Property Act 1925 the mortgagor retains the legal estate and that no statutory trust would be imposed on him selling the estate vested in him means that there would be a requirement to impose a constructive trust only if equity demanded that Barclays’ rights should be preserved notwithstanding that it has failed to protect the charge by registration. The sale by the Buhrs was not unauthorised. The effect of the sale was to crystallise their contractual obligation to repay Barclays. It did not create a charge over the proceeds of sale. That is why a proprietor of an unregistered puisne mortgage will seek an undertaking that the proceeds of sale be paid to him before agreeing to release the deeds.
Respondent’s submissions
Miss Elizabeth Gloster QC, for Barclays, makes the following preliminary submissions. First, it is irrelevant that Barclays’ charge was inappropriately registered. That only affects the mortgagee’s position vis-a-vis a purchaser. She submits that the disposition was unauthorised. Second, in contradistinction to Mr Norris she submits that it makes no difference to the legal analysis that the sale was by the chargor with the concurrence of UCB. The position is exactly the same: section 105 applies. The appellants’ case is premised on the notion that it is critical to their case that the sale was by the mortgagor and not by the first mortgagee or chargee. If UCB had sold as first mortgagee, section 105 would have applied and the proceeds would have been held on trust for Barclays as a person entitled even though its charge was unregistered. Likewise, under the Insolvency Act 1986, the position of first and second mortgagees of a bankrupt is protected. There is no question of the proceeds of sale becoming available for the bankrupt mortgagor: see Insolvency Rules 6.197 to 6.199. The problem with which this case is concerned would not have arisen prior to 1881 and probably did not cross the minds of the draftsmen in 1925. Before the introduction of charges by way of legal mortgage, there was no need for a provision dealing with sale by the mortgagor because the chargee had a proprietary interest in the property and its proceeds and accordingly the exact same reasons would indicate that the mortgagor should hold the proceeds on sale on trust for an unregistered mortgagee. The principle applies in exactly the same way. Third she submits that it is irrelevant here that the solicitor received the proceeds of sale as opposed to the mortgagor. He stands in the same position given his knowledge. Fourth, the notion that all Mr and Mrs Buhr were doing was selling a limited interested in the property is incorrect. They sold as beneficial owners free from encumbrances. Mr Norris submits that they were just selling their equity of redemption i.e. selling what interest they had. However what they were really selling was the fee simple.
The judge’s proceeds point
Miss Gloster submits the charge expressed to be by way of mortgage confers a legal interest in land. She refers to section 1 and section 205(1)(x) and (xvi) of the Law of Property Act 1925, Halsbury’s Laws of England, Volume 32, para 304 and Megarry and Wade, Law of Real Property (6 ed) (2000), paras 19-019 to 19-026.
Miss Gloster submits further that a chargee has an immediate proprietary interest in the property charged whatever the nature of the property charged. This is also the case in relation to equitable mortgages. She disputes Mr Norris’ submission that Barclays had no proprietary interest in the property charged. An equitable chargee has no legal right to possession or legal right of property but can require that the property charged in his favour should be made available to pay the debt due to him: see for example National Provincial and Union Bank of England v Charnely [1924] I KB 431 at 449-450 per Atkin LJ; Re Cosslett (Contractors) Ltd [1998] Ch 495, 508 per Millett LJ
Miss Gloster also submits that a chargee can by virtue of his proprietary interest trace his interest into the proceeds of sale of land to the extent of his security interest. In support of this she relies on Foskett v McKeown [2000] 2 WLR 1299 at 1304 to 1305. In the course of this passage Lord Browne-Wilkinson held that “Like any other equitable proprietary interest [the equitable proprietary interests of the purchasers] which originally existed in the monies paid to Mr Deasy now exists in any other property which, in law, now represents the original trust assets.” Accordingly Barclays has the right to elect to trace its interest in the proceeds of sale. For this purpose it does not matter if Barclays’ charge is purely equitable. Barclays had the right to sell the property themselves. She submits that this right of election would have subsisted whether or not the charge was registered. However Barclays would have to permit the Buhrs to redeem the charge. She submits that it would be contrary to commercial sense if Barclays had no right to trace. For what, she asks, is a mortgage if it is not to obtain repayment out of the proceeds of sale of the mortgaged property?
The appellants’ assertion that a constructive trust is needed only if a mortgagee has failed to protect his interest by registration is on Ms Gloster’s submission erroneous because a registration only affects the mortgagee’s position as against third parties. Some interests cannot be protected by registration. If the mortgagee mistakenly handed over the title deeds to the mortgagor who sold the property to a bona fide purchaser for value, it cannot be right that the mortgagee has only a personal claim as against the mortgagor. The appellants’ case amounted to a submission that the claim of a mortgagee against a mortgagor would be a personal claim both with respect to a deficiency in the proceeds of sale and in respect of improper retention of the proceeds of sale. On the respondent’s case, the mortgagee has a proprietary interest in the proceeds of sale.
The judge’s all estate clause point
Miss Gloster submits that the mortgagors have charged their equitable interests. Under the Trusts of Land and Appointment of Trustees Act 1996, their interests in land are equitable interests and accordingly by virtue of section 63 of the Law of Property Act 1925 Barclays has a charge over equitable interests as well and the Hegarty case is authority for the proposition where the chargee is able to rely on a charge of equitable interests.
Miss Gloster also submits that the doctrine of merger does not apply. This is a situation in which Barclays contends that a legal charge of an equitable interest subsists alongside a legal charge over a legal interest.
Miss Gloster also submits that Mr Norris’s submission that reliance on section 63 introduces the risk of liability being imposed through notice is incorrect. Barclays is simply trying to establish who is entitled to the proceeds.
The judge’s analogy with section 105
Miss Gloster submits that the Buhrs were selling assets in which Barclays has a legal proprietary interest and accordingly they stand in a fiduciary relationship to Barclays with respect to the proceeds of sale. This she submits is how equity gives effect to the existing proprietary interest. The Buhrs hold the proceeds on constructive trust for the chargee. They are not free to deal with the proceeds without giving effect to the proprietary or security interest of Barclays. This is an exact mirror of section 105. There is no case law authority for this. It is self evident. These submissions are supported by the extracts from Professor Sir Roy Goode’s work set out above.
With respect to Agnew case, Miss Gloster rejects Mr Norris’ submission that this case contradicts unity of ownership: see para. 28 of the report. So far as book debts are concerned it is possible to have either an assignment by way of charge or simply a charge.
Miss Gloster’s submission is that even if there is a separate charge over the assets and proceeds, the same principle as is manifest in section 105 dictates that where property is sold by the mortgagor, the proceeds of sale should be held on trust in order give effect to the proprietary interest of the second mortgagee. Section 105 merely codified the law. The same principles inform the present situation. Otherwise the unsecured creditors receive a windfall. Such a trust should now be imposed on the mortgagor because, as the judge pointed out, the 1925 legislation had altered the balance of power between a mortgagor and mortgagee in that the mortgagor retains the legal estate. The appellants’ argument would lead to anomalous results where the statutory trust on insolvency intervenes.
Miss Gloster submits that in an insolvency creditors with charges over land are protected even if their charges were not registered under the Land Charges Act 1972. If the court ordered the land to be sold, the net proceeds of sale would be applied in repayment of the monies owed to the mortgagees.
General
Miss Gloster accepts that an alternative approach might be that when the mortgaged property was sold without the consent of Barclays, Barclays could ratify that sale and thus claim a security interest in the proceeds.
In conclusion Miss Gloster submits that “any sensible system of property law” must avoid the result for which the appellants contend.
Conclusions
Consequences of non-registration
The starting point is section 4(5) of the Land Charges Act 1972 (re-enacting sections 14(2) of the Land Charges Act 1925):
“(5) … a land charge of class C … shall be void against a purchaser of the land charged with it, or any interest in such land, unless the land charge is registered in the appropriate register before the completion of the purchase.”
An unregistered land charge is thus void only against a purchaser. This makes it clear that the position as between the parties to the charge is unaffected by non-registration if the mortgaged property is sold and completion takes place. The charge remains valid between the parties. Their bargain is not affected. On Mr Norris’s submission, under section 4(5), on completion of the sale the charge continues to exist as a legal estate, even though it is unenforceable. On his submission unenforceability flows from non-registration and is to be presumed to be Parliament’s intention. In my judgment neither submission is correct. An estate is an interest in land, and thus cannot subsist without the property to which it attaches. It cannot subsist in that property because it is ousted by the absolute interest which the purchaser acquires. The authority relied on by Mr Norris (Samuel Keller Ltd v Martins Bank, above) is distinguishable because there was no disposition of the mortgaged property in that case and thus the question of what happened to the legal estate in that situation did not arise. Mr Norris’ argument that all the Buhrs conveyed was their equity of redemption thus cannot successfully meet the point that the conveyance destroyed Barclays’ unregistered proprietary interest in Rectory Farm.
The position of unregistered charges under the Land Charges Act 1972 can be compared with that of charges required to be but not duly registered under the Companies Act 1985. Registrable, charges executed by companies but not registered at Companies House are void as against a liquidator and any creditor, but not as against the company itself (see Companies Act 1985, section 395(1)). Accordingly if the property subject to a charge is not so registered and the property remains after all the costs of the winding up and debts payable in the liquidation have been paid the property will continue to be encumbered even though the charge was not registered at Companies House: see Independent Automatic Sales Ltd v Knowles & Foster [1962] 1 WLR 974 per Buckley J.
Moreover if Mr Norris’s submission is a complete statement of the lender’s position the lender has lost any effective proprietary right. There is nothing in the Land Charges Act 1972 which indicates that this is to be the result of non-registration. Since Parliament has not expressly taken away any proprietary right of the unregistered chargee, it must be assumed that he retains any proprietary right conferred on him by the general law.
The general principle: the mortgagee has a right to accretions to and substitutions for the mortgaged property
In my judgment the judge reached the right conclusion. He relied on the passages from the work of Professor Sir Roy Goode. Although Professor Sir Roy Goode does not cite authority for his statements about the proceeds of sale of an unauthorised disposition, his conclusions are in my judgment supported by principle and authority.
So far as principle is concerned, equity has for a long time taken the view that the mortgagee is entitled to a security interest in the fruits of the mortgaged property. Thus if (for example) a mortgagor grants security over a lease and he then surrenders the lease and takes a new lease, the mortgagee has a security interest in the new lease (Hughes v Howard (1858) 25 Beav. 575). Where a mortgagor renews a lease the mortgagee obtains a security interest in the new lease without express mention in the mortgage deed (Leigh v Burnett (1885) 29 Ch.D 231). Mr Norris submits that these cases are distinguishable because this case is concerned with proceeds of sale, rather than the renewal or grant of a lease. In my judgment this is not a valid distinction. In all these cases, the mortgagee is entitled to the fruits of the mortgaged property: see generally Fisher & Lightwood’s Law of Mortgage, (10 ed) (1988) at pages 55 to 57.
Likewise a mortgagee has been held entitled to a security interest in compensation monies received on a compulsory acquisition of part of the mortgaged property without express mention in the deed (Law Guarantee and Trust Co Ltd v Mitcham and Cheam Brewery Co Ltd [1906] 2 Ch 98). That particular set of facts is in my judgment only distinguishable from the present case by virtue of the fact that the sale was compulsory. Mr Norris submits that the cases which illustrate the principle described above were cases where the mortgage was by way of assignment. If he is right, the authorities are not founded on any common or consistent principle. In my judgment that is not correct. They are founded on the simple and eminently fair proposition that the mortgagee should be entitled to accretions to the mortgaged property or property received in substitution for it, as on a renewal or further grant of a lease. That principle is reflected in legislation dealing with leasehold enfranchisement (see the Leasehold Reform Act sections 8 to 13); on compulsory acquisition and compensation for blight (see for example Town and Country Planning Act 1990 ss 117(3), 162, 250); and on disclaimer in the insolvency of the mortgagor (Insolvency Act 1986, ss 181 and 320).
We are not concerned in this case with a charge over book debts. Mr Norris has however drawn support from the authorities on this subject. The law has had a chequered history, the weight of authority in this court being that a company can create a fixed charge over book debts and a separate floating charge over its proceeds (see Re New Bullas Trading [1994] 1 BCLC 485). However the Privy Council in the Agnew case came to the contrary conclusion:
“46. While a debt and its proceeds are two separate assets, however, the latter are merely the traceable proceeds of the former and represent its entire value. A debt is a receivable; it is merely a right to receive payment from the debtor. Such a right cannot be enjoyed in specie; its value can be exploited only by exercising the right or by assigning it for value to a third party. An assignment or charge of a receivable which does not carry with it the right to the receipt has no value. It is worthless as a security. Any attempt in the present context to separate the ownership of the debts from the ownership of their proceeds (even if conceptually possible) makes no commercial sense.”
The Privy Council concluded that New Bullas was wrongly decided (report, para 50). It also held that property and its proceeds are to be treated as separate assets (see report, para 43 cited above). However I do not agree with Mr Norris that the Agnew case therefore supports his submissions. None of the observations of the Privy Council are expressed in the context of a mortgagee’s right to accretions to, and substitutions for, the mortgaged property. In that situation, the law treats the mortgagee as entitled to the property which represents the mortgaged property. That conclusion does not depend on the indivisibility of property from its proceeds, but rather on the derivation of the proceeds of sale. The authorities on book debts therefore neither assist in this case or undermine the principle which I have stated.
In most cases where a mortgagor wishes to sell the mortgaged property the problem in this case will not arise. The mortgagor will be anxious to discharge the charge over the property being sold. However, that did not happen in this case. Likewise the proprietary interest of Barclays in the proceeds could have been lost if the proceeds of sale had reached the hands of creditors who did not know of the interest of Barclays. That is not an issue which needs to be explored in this case because, whatever happened to the monies, Thrings certainly facilitated their payment out of their client account with knowledge of the material facts. Thrings accepts that it is liable as constructive trustee if Barclays establishes a proprietary interest in the proceeds of sale.
The judge’s proceeds point
I agree with the judge’s conclusion that, if, as here, the mortgagor makes a disposition of the mortgaged property in a manner which destroys the mortgagee’s estate in the mortgaged property, a security interest in the property which represents the mortgaged property automatically and as a matter of law comes into existence as from the moment that the mortgagor becomes entitled to that property. To that extent I also agree with Professor Roy Goode. In my judgment, the disposition by the Buhrs was not authorised: their authority from Barclays to sell the mortgaged property could not extend to selling Rectory Farm in a manner which destroyed Barclay’s security.
Miss Gloster’s proposition that a mortgagee has a right in every case to claim the proceeds of sale and could elect as to a security interest in the property or the proceeds of sale is wider than that accepted by the judge. Nor is it accepted by Professor Sir Roy Goode (see the second passage cited above). It is not necessary to resolve that point in this case, but I do not consider that Miss Gloster’s proposition is correct. If with the consent of all parties the property is sold subject to the mortgage the mortgagee cannot in my view elect to have a charge over the proceeds of sale.
Mr Norris submits that the mortgagor does not owe a fiduciary duty to the mortgagee. In general terms this is correct. For instance the mortgagor has no general duty to act in the interests of the mortgagee. But in the specific matter of accretions to or substitution of the mortgaged property equity has undoubtedly treated the mortgagor as a fiduciary (see Re Biss [1903] 2 Ch 40). There is no difficulty in law with a person being a fiduciary towards another in respect of some aspects only of that person’s duty to that other (New Zealand Netherlands Society”Oranje” Inc v Kuys [1973] 1 WLR 1126). I reject Mr Norris’ submission that in some way an equitable charge is insufficient to give an interest in land. I agree that no change of legal or equitable ownership takes place when an equitable charge is created. Even so, the equitable chargee obtains a proprietary interest in the property (see for example Bland v Ingrams Estate [2001] 1 WLR 1638 at 1645 G per Nourse LJ). This is sufficient to give the mortgagee a proprietary interest in property which represents the property originally mortgaged following completion of an unauthorised disposition by the mortgagor.
For my own part, I do not consider that Professor Sir Roy Goode’s statements can be limited to chattel mortgages or charges over book debts. Chattel mortgages are very different from mortgages of immovable or intangible property for a number of reasons. These reasons include the fact that it is not possible in law to have a legal estate in a chattel. So far as book debts are concerned, it has always been possible to create an equitable or floating charge over them: see, as to the former, section 136 of the Law of Property Act 1925 and the authorities decided thereunder such as Tancred v Delagoa Bay and East African Railway (1889) 23 QB 39 and Hughes v Pump House Hotel Co Ltd [1902] 2 KB 190, which distinguish absolute assignments of debts with a proviso for reconveyance, and charges on book debts; and as to floating charges, see for example Business Computers Ltd v Anglo-African Leasing Ltd [1977] 1 WLR 578. I do not therefore accept as correct Mr Norris’ submission that charges over book debts have to be effected in one of the ways in which mortgages of land could be created prior to 1925.
The same result as the judge reached could in my judgment be achieved by an alternative route. The Buhrs’ disposition was unauthorised. They purported to sell with full title guarantee and thus free from Barclays’ charge. Barclays (if indeed it has already done so by commencing these proceedings) could adopt this transaction and thus retrospectively make the Buhrs its agent. In the context of this transaction, the Buhrs would in my judgment then be bound to keep the proceeds of sale separate from their other assets and would hold them (subject to prior charges) on trust for Barclays and so would be bound to account to Barclays for the amount secured by its charge.
Professor Sir Roy Goode’s basic proposition – that security in an asset carries through to its proceeds – is also supported by common sense. If the judge’s conclusion is wrong there is a significant lacuna in the law of mortgages. If the charge had been registered, or the Buhrs had been insolvent and Rectory Farm had been sold by their trustees in bankruptcy, or if UCB had sold Rectory Farm, Barclays would have had a proprietary interest in the proceeds. This would be so in the latter two cases, even though its charge was unregistered. Both counsel correctly recognised that as between the mortgagor and the mortgagee the fact that the charge is unregistered matters not because the Land Charges Act 1972 invalidated the unregistered charge only as against a purchaser of the land charged or an interest therein. In the circumstances it would be extraordinary if Barclays had no proprietary interest in the proceeds of sale in this case when their charge was unregistered but the sale was effected by the mortgagors.
The judge’s all estate clause point
Next, as to the all estate clause, this was probably the judge’s solution to the point made by Mr Norris in this court and no doubt by counsel (Ms Tracy Angus) appearing for Thrings before the judge. The argument runs thus. All the Buhrs could do was sell their equity of redemption and accordingly they did not sell Barclays’ interest in Rectory Farm. That interest continues but is void against the purchasers of Rectory Farm. The response is the all estate clause argument: the Buhrs also had a beneficial interest in the proceeds of sale and so they must have charged that too and so Barclays is fully secured over those proceeds even though its charge continues over the property.
In my judgment the argument that the all estate clause was designed to meet proves too much. The Buhrs did not purport to sell their equity of redemption. They purported to sell with full title guarantee. Even if they could not sell the interest of Barclays in Rectory Farm they entered into a transaction to the end that Barclays’ interest in the property should be destroyed and with that effect. If they had sold simply their equity of redemption the purchasers would only have bought that equity and it is arguable that the interest of the mortgagee is not invalidated in this event so that Barclays could now register the charge and obtain a security interest in Rectory Farm. But Barclays have not chosen that route and in my judgment it would be unreasonable for the law to require Barclays to test that proposition first by pursuing what is at most at this stage only a possible course against the purchasers. After all there is no doubt that the purchasers would resist since they contracted to receive an estate in fee simple and paid a price appropriate to that transaction. But Barclays is entitled in effect to give its sanction to the sale and claim the consequences of the transaction as I have found it to be, namely that they have a security interest in the proceeds of sale. It is not necessary to take the all estate clause route which the judge took. For my own part, I would construe the charge over the property as inconsistent with a (contemporaneous) covenant for a charge over the proceeds of sale. Such a charge would under section 63 have been present from the inception of the charge. It would be odd if the result in this type of case depended on whether there was more than one mortgagor. The situation in which Barclays has a security interest in the proceeds of sale in my view does not arise unless property is substituted for the mortgaged property and that property is represented by proceeds of sale.
The judge’s analogy with section 105
The rule of equity that imposed a trust on the surplus proceeds of sale in the hands of a mortgagee exercising his power of sale is in some respects an analogous situation. However, as Mr Norris points out, in this case the trusts of surplus proceeds in favour of a mortgagor is a trust for the mortgagor absolutely whereas the interest of a mortgagee can only ever be a security interest and subject to redemption by the mortgagor. In my view it is not necessary to rely on the analogy with section 105 because the principle of substitutions described above applies. There is therefore no need to find an explanation for the fact that the Law of Property Act 1925, section 105 makes provision for the trust of the proceeds of sale when received by the mortgagee but not a trust of the proceeds of sale held by the mortgagor. The rationale for the proprietary interest of the mortgagee in the proceeds of sale in the hands of the mortgagor (not required for the discharge of prior encumbrancers) in this case has a different origin (see above).
General considerations
Miss Gloster concluded with the general submission the “any sensible system of property law” must avoid the conclusion for which the appellants contend in this case.
It is important to recall that our real property law is not simply a collection of rules inherited from the Middle Ages liable to be out of touch with modern social and economic needs. Much valuable work has been done for instance by the Law Commission and HM Land Registry to keep property law up to date: see in particular Land Registration for the Twenty-First Century A Conveyancing Revolution (Law Com. No.271) (July 2001). It is of course the case that the complexities and language of our property law reflect the length of our social history down the ages from the time of the baronial courts. But the modern approach is to concentrate not on its historical role but to see its social and economic importance, to examine any proposition in issue in that light and to continue the task of ensuring that the law meets changing social and economic needs. Mortgages, despite their roots in twelfth and thirteenth centuries, are still an important means of raising money and using assets for this purpose. Mr and Mrs Buhr like many other small entrepreneurs used their home as security for their business interests. This is a very important function of mortgages of every kind and I would have been loathe to reach a conclusion which would have exposed a significant technical gap in the protection given to mortgagees. It would in my view be contrary to expectation and common sense. That conclusion would have been liable to cause mortgagees to decline to permit sales by mortgagors without their consent. That would hamper the freedom of mortgagors or dissuade mortgagees from lending money on the security of mortgages at all. It matters that there should be appropriate incentives and protections in the law for mortgagees as well as mortgagors.
Disposition
For all these reasons, despite the persuasive and skilled manner in which Mr Norris has put Thrings’ case, the appeal should in my judgment by dismissed.
TUCKEY LJ:
I agree.
LORD CHIEF JUSTICE OF ENGLAND AND WALES:
I also agree.
In re Interview Ltd.
[1975] I.R.282
Kenny J.
There are five companies involved in this complicated story. The first is Interview Limited (“Interview”), a company incorporated in the State which carried on the retail trade of selling refrigerators and other similar domestic electrical goods (called “white goods” in the trade) and television, radio sets and other similar goods (called “brown goods” in the trade). Mr. Martin McCourt was the chairman of Interview which had a total authorised share capital of £1,500,000 divided into 1,500,000 ordinary shares of £1 each, of which £1,150,000 had been issued. On the 17th September, 1971, Interview had given a debenture to Ulster Bank Ltd. as security for its debts and on the 29th June, 1972, the bank appointed the applicant as receiver of the undertaking, property and assets of Interview. On the 11th April, 1973, Interview resolved that by reason of its liabilities it could not continue its business and that it be wound up voluntarily.
The second company is Electrical Industries of Ireland Ltd. (“EII”) which, at all relevant times to the questions in issue in this matter, manufactured and imported electrical goods of all descriptions. Interview owned one third of the issued share capital in EII and Mr. McCourt was chairman and managing director of it. EII owned a factory and warehouses at Dunleer, County Louth.
The third company is Irish Electronic and Appliances Co. Ltd. (“IEAC”) which was incorporated in February, 1972, and which had an issued share capital of £2; it was a wholly-owned subsidiary of Interview and was formed for the purposes of carrying on a wholesale business in electrical goods which would be sold by it to Interview for the purposes of resale in their retail outlets and to other companies and traders unconnected with Interview which were dealing in such goods. It was registered for wholesale-tax purposes while Interview was not. Mr. McCourt was connected with IEAC and was a director of it. The three Irish companies carried on business on a large scale and had many employees, but the effective management of all three was conducted by Mr. McCourt.
The fourth company is incorporated in the Federal Republic of Germany as Allgemeine Elektricitaets Gesellschaft A.E.G. Telefunken (“AEG”) which manufactures and exports refrigerators and other electrical goods on a very large scale and which sells goods outside Germany on printed conditions of sale referred to as “terms for deliveries abroad.”
The fifth company is Telefunken Fernsch und Rundfunk G.m.b.h. (“Telefunken”) which is also incorporated in the Federal Republic of Germany and is a wholly-owned subsidiary of AEG. It carries on the business of manufacturing and exporting television and radio sets and other similar electrical goods. The two German companies are under separate managements at Nurnberg and Hanover and are financially controlled from offices at Frankfurt.
In June, 1970, negotiations took place in Hanover between representatives of AEG and of EII in relation to the wish of EII to be appointed sole agents in the Republic of Ireland by AEG for the import and distribution of brown goods; the terms of the agreement reached between the parties are to be found in a letter of the 28th October, 1970, written by AEG to EII. Under the agreement EII were to use their best endeavours to promote the sale of radio receivers, black-and-white television receivers, palcolor television receivers, tape recorders for magnetic sound recording, and record players and record changers intended for private entertainment and exported under the trade mark “Telefunken.”
Clause 4 of this letter read:”4. Unless otherwise agreed upon (a) all our deliveries are subject to our terms for deliveries abroad which in their present form (edition April 1969) are annexed to this letter agreement . . .” Clause 5 of the letter read:”This letter agreement will be effective upon signature by both parties and continue until June 30, 1971. Thereafter it will automatically be extended unless notice of termination is given by either party hereto at least three months prior to the end of any calendar quarter.” The letter concluded:”In case you agree to the aforementioned provisions we would appreciate your confirming this letter agreement by duly signing and returning to us the attached copy thereof.” This letter was signed by Mr. McCourt under the words “accepted and agreed upon.” The terms were varied by a letter of the 9th November, 1970, but the changes are not relevant to any of the issues in this summons.
It is significant that though AEG deal in white goods, the contract made related to brown goods which were to be sold under the mark “Telefunken” and so goods manufactured by Telefunken were being sold on terms negotiated by AEG.
The terms for deliveries abroad (April, 1969, edition) is a lengthy document, but the relevant clauses of it are the only ones which have to be set out. Clause 18 of this document provided:”Reservation of ownership 18. The product supplied shall, unless otherwise agreed, remain the property of the supplier until all debts owing to the supplier or to be created in the future and arising from the business connection with the purchaser have been paid in full. With respect to a case of resale of the goods . . . in any condition whatsoever . . . the purchaser agrees to assign and assigns to the supplier, at the conclusion of the supply contract and effective up to the time of payment of all debts owing by the purchaser to the supplier, any claims against the purchaser’s customers which may have arisen or arise in future from the resale, by way of security, and undertakes to notify the supplier at his request of the names of third-party debtors and of the amount of the debts owing by these to the purchaser. So long as the purchaser complies with his payment obligation and no detrimental change occurs in his financial standing, the supplier will not collect the debts assigned. If the reservation of ownership in the foregoing form is not effective under the law of the country of destination, the purchaser must co-operate in establishing a similar security right complying with the provisions of his country. in favour of the supplier.” Clause 37 of this document read:”All contractual relations shall be governed by German law.” In an earlier part of the agreement AEG are defined as the supplier. and the terms for deliveries abroad also provided that all export business transacted by AEG is governed by the terms for deliveries abroad unless otherwise stated in the offer or in the confirmation of the order.
On the 10th February. 1972, discussions between representatives of Telefunken, Mr. McCourt as chairman and managing director of EII, and representatives of Interview took place in Hanover; these discussions resulted in an agreement of the 11th February, 1972, which was signed by Telefunken, Mr. McCourt and representatives of Interview.
The letter agreement read: “This is in reference to the conversation we had with your esteemed chairman and managing director Mr. McCourt on February 10, 1972, in Hanover in which he informed us of several changes in the organisation of Electrical Industries of Ireland. We learned that there are considerable changes in the management, especially as far as the distribution of Telefunken branded products coming under the letter agreement dated October 28, 1970, and its amendment under November 9, 1970, and the agreement concerning use of the Telefunken trade mark on locally assembled supplies from A.E.G. Telefunken is concerned. We understood that the sales manager for brown goods will leave the company and will be employed by Interview Limited. In consideration of the stocks you have . . . partly taken over before increase of import duties . . . and taking into consideration the close connections between Electrical Industries of Ireland and Interview by the personality of Mr. McCourt as well as by the capital links between the both companies we should like to ask you whether it would be advisable that Interview might enter into the existing letter agreement dated October 28, 1970, concerning distribution of Telefunken branded consumer electronic products along with Electrical Industries of Ireland. After the discussions with Mr. McCourt we came to the conclusion that this might be in the interest of all parties concerned allowing us to supply also Interview directly. If Interview enters into the agreement along with Electrical Industries of Ireland, all rights and obligations thereof would be extended also to this company. If you are in agreement with the above proposal, please let us know by signing and returning the attached two copies hereof duly signed for Electrical Industries of Ireland Limited as well as for and on behalf of Interview Limited. After having received the information that Electrical Industries of Ireland as well as Interview agree to the above proposal, we will write a letter to Merchants Warehousing Co. Limited allowing them to release T.V. receivers stored with them also to Interview according to conditions to be agreed upon.”
The effect of this letter was that Interview became (with EII) agents for the distribution of brown goods, and that Interview could be supplied directly by Telefunken.
On the 22nd February Telefunken wrote to Interview to summarise a verbal agreement reached on the 10th February, 1972, with Mr. McCourt, this letter stated:”Under cover of our letter agreement of February 11, 1972, mutually signed by Electrical Industries of Ireland Limited, Interview Limited and Telefunken G.m.b.h. we wished to confirm the following additional terms and conditions as agreed upon:1. Interview Limited will assist Electrical Industries of Ireland Limited in selling the T.V. inventory as covered by the original agreement of August 26, 1971. 2. Electrical Industries of Ireland Limited and Interview Limited will jointly safeguard . . . under the terms of the original contract and the to-days addendum . . . the withdrawal until April 30, 1972, of the inventory balance still held at Merchants Warehousing Co. Limited. 3. Merchandise will be released from the warehouse to Interview Limited against promissory notes due 45 days after date of withdrawal. All future direct deliveries from Telefunken G.m.b.h. to the contract parties will be effected against promissory notes due 90 days after end of month of delivery. Merchants Warehousing Company Limited will be instructed by us separately. Please oblige by returning one copy of this letter duly signed by you.” This letter was signed by a representative of Interview and returned to Telefunken.
In March. 1972, a representative of the two German companies visited Dublin and further discussions took place. As a result of the letters of the 11th and 22nd February. 1972, and the discussions in Ireland, EII transferred the stock of goods originally sold and delivered by AEG to them, and a purchase price of £105,935.50 was debited to the current account between Interview and EII in the books of Interview and EII. I use the term “transferred” as a neutral one at this stage of the judgment because one of the matters which has to be decided is whether this transaction was a sale by EII to Interview. There are three invoices in respect of this transaction. Each invoice was issued by EII and was addressed to Interview; all three invoices related to AEG white goods. Written on the invoices is:”I.E.A.C. stock at Dunleer. Paid in bills of £135,840.” The three invoices are for amounts of £90,916.33; £12,367.86 and £2,651.31. As Interview and IEAC had, without the consent of the German companies, arranged that the agency for white and brown goods should be handled by IEAC, it was agreed that the goods transferred by EII to Interview should then be transferred by Interview to IEAC who would then transfer them back to Interview at an increased price. This is why the words “I.E.A.C. stock at Dunleer” were written in ink on the invoices. The amount due by EII to AEG and Telefunken at this stage was £134,445 and this sum included the goods invoiced at £105,935.50. At the discussions in Germany and Ireland, Interview had agreed to make eight promissory notes in favour of AEG payable on different dates amounting in all to £134,445 in discharge of the current account of EII. Three of these notes (payable on 30th April, 15th May and 30th May, 1972) were paid but the remaining five were not.
The goods transferred by EII to Interview had been stored by EII at their warehouse at Dunleer. For the purpose of giving effect to the arrangements about the transfer of these goods, an agreement had been reached between EII and Interview that the warehouse belonging to EII at Dunleer would be leased by EII to Interview from the 1st May, 1972, at a rent of £5,268 p.a. The lease was made on the 17th May, 1972, and was for a term of 21 years.
On the 28th April, 1972, Telefunken wrote to Interview:”Confirming our various telephone conversations following the visit of the writer in March 1972 we wish to state the following:As per letters of February the 11th and February 22, 1972, Interview Limited has joined the agreement of October 28, 1970, between Electrical Industries of Ireland Limited and A.E.G. Telefunken. Under the terms of this agreement Interview Limited will sell Telefunken merchandise to be withdrawn from the T.V. inventory as covered by the agreement of August 26, 1971. Furthermore, direct deliveries to Interview Limited by Telefunken G.m.b.h. will be effected in accordance with the requirement specification as agreed upon on the occasion of the visit of the writer in Dublin on March 15, 1972, and confirmed by your letter of March 29, 1972. It is understood that according to statements by members of the board of Electrical Industries of Ireland Limited on the occasion of the aforementioned visit, E.I.I. Limited will be re-organised in such a way that there will be an industrial wholesale division and a manufacturing division. Neither division will continue to handle Telefunken brown goods after the present inventory will have been sold and all obligations will be settled. This will leave Interview Limited as active partner in importing and distributing Telefunken products within the existing agreement. As to the question of exclusiveness stipulations 2 and 3 of the aforementioned letter agreement of October 28, 1970, will apply. As you informed us, merchandise shipped to you will be imported and distributed by Irish Electronic and Appliance Co. Limited, a wholly owned subsidiary of Interview Limited. Following your instructions we will invoice our shipments accordingly, but for good order sake we would like to receive your statement to the effect that since Interview Limited is partner of our agreement it will fully guarantee the performance of Irish Electronic Appliance Co. Limited within the agreement valid between Interview Limited and Telefunken G.m.b.h. as well as settlement of all obligations towards us resulting from future business transactions. With reference to your letter of March 29, 1972, and the attached delivery specification we would appreciate to receive your official call off orders.”
A draft agreement to give effect to the introduction of IEAC was prepared in May, 1972; it was altered by Mr. McCourt but the alterations were not approved by AEG. The result was that the contractual relations between AEG and Interview were governed by the letters of the 11th and 22nd February, 1972. Although the invoices were addressed and sent to IEAC by the German companies after the 13th March, 1972, the sales which these represented were sales to Interviewbecause IEAC were only importing agents for Interview and were not purchasers. This conclusion, based upon the absence of any agreement between AEG or Telefunken and Interview and IEAC is supported by the affidavit of Mr. Michael Brady who was sales manager of EII from 1966 to February. 1972, and who in paragraph 5 of his affidavit says:”I say that I this deponent, as marketing and sales director of IEAC was aware that all goods invoiced and dispatched to IEAC by AEG and Telefunken pursuant to the said verbal arrangements and discussions were subject to the said terms for delivery abroad. and that these goods were ordered by Interview and were to be paid for by Interview.”
Evidence about German law was given by Dr. Joachim Michael and I accept all his evidence. German law distinguishes between a contractual relationship to sell goods and the property relationship involved in the sale. There is a contract for sale and a contract for the transfer of the title to the merchandise, though these two contracts may be in one document. If a person makes an unconditional agreement for sale he may agree that the passing of title will take place only on payment and that until that date, the ownership of or title to the goods remains in the vendor. He said that clause 18 of the terms for deliveries abroad which is headed “Reservation of ownership” is a very common clause in contracts in Germany where it is known as a “current account clause.” The first part of the clause is a reservation of title and the effect of it under German law is that the vendor or supplier remains the owner though possession has passed to the purchaser. His evidence was that when goods are sold outside Germany, the German law about reservation of ownership or title prevails. The purchaser is entitled to retain the goods until the vendor can prove delay in payment, and then the vendor may serve a notice of rescission. The vendor cannot take the goods back until he has served the notice of rescission but until he does this, the goods remain his and the purchaser has possession or custody only. The notice of rescission brings about a change in the legal relationship in that the vendor is entitled to take the goods back. However, when the goods are in the custody of a purchaser but the title to them is in the vendor, the effect of a sale by the purchaser is governed, under German law, by the lex loci rei sitae which in this case is Irish law. Therefore, the validity of a sale by the purchaser would be governed by Irish law. Similarly, an assignment of the debt arising out of a sale by the purchaser to another person of the goods would be governed by Irish law and not by German law. Dr. Michael said that if Irish law required the registration of the terms for delivery abroad as a condition of the validity of assignments of debts owing to the purchaser and arising out of a sale by him of goods sold under those terms, then the terms, in so far as they related to the assignment of the debt, would be invalid if they were not registered. Any assignment of a claim by the purchaser arising in Ireland would under German law be governed by Irish law if any question of its validity arose.
It is now necessary to consider the effect of clause 18 dealing with the reservation of ownership in the terms for deliveries abroad. The terms apply to the sale because they were part of the contract for sale which provided that German law was to apply. As between EII and AEG and Telefunken, the effect was that the two German companies remained owners of the goods and that EII had custody and possession of them for the purposes of the Factors Act, 1889, and the Sale of Goods Act, 1893. I have no doubt that Interview knew that the goods held by EII in March, 1972, had been delivered to EII on the terms for deliveries abroad. As I have already said, I think that IEAC never purchased any of the goods invoiced to them by the German companies and that they were importing agents only, and that the goods invoiced to them were in fact purchased by Interview. However, the effect of clause 18 was that the ownership and property in the goods remained in the German companies until the goods had been paid for. Thus EII and Interview could transfer the property and ownership in the goods to any person who bought them in good faith and without notice of the claim and right of the German companies.
Section 9 of the Factors Act, 1889, reads:
“9. Where a person, having bought or agreed to buy goods, obtains with the consent of the seller possession of the goods or the documents of title to the goods, the delivery or transfer, by that person or by a mercantile agent acting for him of the goods or documents of title, under any sale, pledge, or other disposition thereof, or under any agreement for sale, pledge, or other disposition thereof, to any person receiving the same in good faith and without notice of any lien or other right of the original seller in respect of the goods, shall have the same effect as if the person making the delivery or transfer were a mercantile agent in possession of the goods or documents of title with the consent of the owner.”
Section 2 of the Act of 1889 provides that where a mercantile agent is in possession of goods with the consent of the owner, any sale, pledge, or other disposition of the goods made by him when acting in the ordinary course of business of a mercantile agent shall be as valid as if he were expressly authorised by the owner of the goods to make the same, provided that the person taking under the disposition acts in good faith.
Section 25, sub s. 2, of the Sale of Goods Act, 1893, provides:
“(2) Where a person having bought or agreed to buy goods obtains, with the consent of the seller, possession of the goods or the documents of title to the goods, the delivery or transfer by that person, or by a mercantile agent acting for him, of the goods or documents of title, under any sale, pledge, or other disposition thereof. to any person receiving the same in good faith and without notice of any lien or other right of the original seller in respect of the goods, shall have the same effect as if the person making the delivery or transfer were a mercantile agent in possession of the goods or documents of title with the consent of the owner.”
The effect of either or both these provisions is that a purchaser in good faith from EII or Interview of the goods which they had in their possession acquired the property in them. It is not necessary to consider whether s. 9 of the Act of 1889 and s. 25, sub s. 2, of the Act of 1893 have the same effect. I confess that I have never been able to understand why s. 9 of the Act of 1889 was not repealed by the Act of 1893 when s. 25, sub s. 2, of the latter Act was inserted. It must be assumed that the draftsman saw some difference between them but fortunately it is not necessary to deal with that puzzling problem.
The next question for decision is whether there was a sale in March, 1972, by EII to Interview of goods valued at £105,935 so that, when the receiver was appointed, Interview were the owners and had the property in the goods. The view that there was a sale gets support from the fact that the goods were originally purchased by EII from AEG and Telefunken even though they were undoubtedly sold under the terms for deliveries abroad. The argument that there was a sale is also supported by the fact that the goods were stored in a warehouse owned by EII and that after the transfer there was a lease by EII to Interview made on the 17th May, 1972, of this warehouse and so possession of the goods passed from EII. The last argument in favour of a sale was that the goods were invoiced by EII to Interview by three invoices, that Interview were debited in the books of EII and of Interview with £105,935.
Against the view that there was a sale, it has been urged that the goods were paid for not by EII but by Interview who drew eight promissory notes in favour of AEG. If the goods were being purchased by Interview from EII, one would expect a payment by Interview to EII who would then have paid the German companies. However, in my view, the decisive argument against a sale is that the goods were never the property of EII or of IEAC. They had possession and custody of them but not property or ownership because the goods were sold under the AEG terms for deliveries abroadand Interview knew this. The transfer by EII of the goods to Interview did not transfer the property in the goods which remained in the German companies. Section 1 of the Act of 1893 provides that a contract of sale of goods is “a contract whereby the seller transfers or agrees to transfer the property in goods to the buyer for a money consideration, called the price.” EII could not agree to transfer the property in the goods delivered by the German companies because EII did not have it. Interview cannot rely on the Act of 1889 or the Act of 1893 to validate the transaction as a sale because they did not receive the goods in good faith and they had notice of the rights of the original sellers, the German companies, in respect of the goods.
It follows, in my opinion, that there was not a sale in March, 1972, by EII to Interview of the goods valued at £105,935. There was a transfer of possession and custody of the goods which were always the property of the German companies. This conclusion is not in any way a reflection on the applicant who has said in his affidavit that there was a sale; his reasoning is that there were three invoices showing a sale and that the entries I have described were made in the books of EII and of Interview. Both these statements are correct but, for the reasons I have indicated. it does not follow that there was a sale.
The next contention by the applicant was that the effect of the appointment of the receiver under the debenture was a crystallisation of the floating charge and that this operated as an equitable assignment of the goods in the possession of Interview to the Ulster Bank Limited. The applicant relied strongly on the judgment of Russell L.J. in Rother Iron Works Ltd. v. Canterbury Precision Engineers Ltd .7 In the passage quoted Russell L.J. was summarising the argument for the plaintiff but I think that the appointment of a receiver under a debenture which creates a floating charge on the assets of the company operates as an equitable assignment of the property and goods owned by the company to the debenture holder. A debenture creating a floating charge is, as Lord Macnaghten said in Illingworth v. Houldsworth 8, ambulatory and shifting in its nature. The charge floats over the assets of the company until some act is done which causes it to fasten on to the property and goods of the company. The appointment of a receiver has this effect. But it is an equitable assignment only of what the company owns: it is not a sale. If goods are in the possession of the company under a hire-purchase agreement under which they are to remain the property of the supplier until payment, the rights of the supplier prevail over a person claiming under the floating charge created by the company: see In re Samuel Allen & Sons Ltd. 9; In re Morrison, Jones & Taylor Ltd. 10 As the goods were not the property of Interview who had possession and custody only but not ownership, the debenture holder cannot be in a better position than the company were. It is a fallacy to say that the appointment of a receiver under a debenture creating a floating charge is a sale by the company to the debenture holder: it is an equitable assignment of the interest which the company had in the property and goods which it owned.
The next argument by the applicant related to the validity of the assignment of the debt created by a sale by EII or Interview of goods purchased under the terms for deliveries abroad. The effect of this clause was that if the goods were sold by the purchaser from the German companies, the purchaser agreed to assign and assigned to AEG any claims against the purchaser’s customers which might have arisen or would arise in the future from the resale by way of security.
Section 99, sub-ss. 1 and 2. of the Companies Act, 1963, so far as relevant, provides:
“99.(1) Subject to the provisions of this Part, every charge created after the fixed date by a company, and being a charge to which this section applies, shall, so far as any security on the company’s property or undertaking is conferred thereby, be void against the liquidator and any creditor of the company, unless the prescribed particulars of the charge, verified in the prescribed manner, are delivered to or received by the registrar of companies for registration in manner required by this Act within 21 days after the date of its creation . . .
(2) This section applies to the following charges . . .
(e) A charge on book debts of the company;”
The terms for deliveries abroad were not registered under this section. The first question is whether the clause in the terms for deliveries abroad in relation to debts created an absolute assignment (in which event it would not require registration) or was an assignment by way of security. I think it was an assignment by way of security. It was not an absolute assignment for if the purchaser had paid for the goods immediately, there would have been no assignment of the debt created by a sale by the purchaser. In addition the clause itself states that the assignment is “by way of security.” This conclusion that the assignment was not an absolute assignment but an assignment by way of security gets support from the decision of the High Court in England in In re Kent and Sussex Sawmills. 11 The debenture given by Interview to Ulster Bank Ltd. was registered and therefore it is irrelevant whether the bank had notice of the terms for deliveries abroad because an unregistered mortgage issued by a company is void against the creditor who registers his mortgage subsequently although he had notice of the unregistered mortgage: see In re Monolithic Building Co. 12 which is a decision of the Court of Appeal in England that is cited with approval in all the text-books on company law. In my opinion, it follows that, as the terms for deliveries abroad were not registered under s. 99 of the Act of 1963, they are void against any creditor in so far as they created an obligation to assign or gave a charge on the debts owing to Interview and arising out of sales of goods delivered by AEG or Telefunken.
In paragraph 11 of the applicant’s affidavit the claim of AEG is divided into a number of heads. The amount due on the five promissory notes is a simple contract debt and does not rank before the debenture holder’s claim, nor does the additional loss caused by non-payment of the notes. The unpaid price of goods sold by AEG and invoiced in the first instance to Interview is not, because it is unpaid, a claim ranking before the debenture holder. It is however a claim if it is regarded as being a claim against the proceeds of the sale of goods which were in the possession of Interview when the receiver was appointed. If the receiver sold the goods, then the amount realised by the sale ranks before the claim of the debenture holder. The same considerations apply to the unpaid price of goods sold by AEG and invoiced to IEAC and to the claim by Telefunken.
I think it is now possible to answer the numerous questions raised by the receiver. The answers were not discussed in argument as counsel said that the general principles should be decided first. [ The judge concluded his judgment by answering the specific questions posed in the summons. The order of the High Court appears on p. 384, supra
Goldcorp Exchange Ltd & Ors v Liggett & Ors
[1994] UKPC 3 [1995] 1 AC 74, [1995] AC 74, [1994] UKPC 3, [1994] 2 All ER 806
Lord Mustill
II. The issues.
As already seen, by the time the judgment m the Court of Appeal had been delivered the proprietary claims of the customers had been widened to comprise not only bullion but also the general assets of the company, to an extent representing the sums originally paid by way of purchase price. The following issues now arise for consideration:-
(i) Did the property in any bullion pass to the customers immediately upon the making of the purchases –
(a) simply by virtue of contract of purchase itself, or
(b) by virtue of the written and oral statements made in the brochures and by the company’s employees? (Although these were referred to in argument as representations their Lordships believe them to be more in the nature of contractual undertakings, and therefore call them “the collateral promises”).
(ii) Did the property in any bullion subsequently acquired by the company pass to the customer upon acquisition?
(iii) When the customers paid over the purchase monies under the contract of sale, did they retain a beneficial interest in them by virtue of an express or constructive trust?
(iv) Should the court now grant a restitutionary remedy of a proprietary character m respect of the purchase moneys?
If the answer to any of these questions is in the affirmative it will be necessary to consider the extent to which the customer’s rights in the relevant subject matter can be applied to the bullion or other assets now in the possession of the company.
III. Title to bullion: the sale contracts
Their Lordships begin with the question whether the customer obtained any form of proprietary interest, legal or equitable, simply by virtue of the contract of sale, independently of the collateral promises. In the opinion of their Lordships the answer is so clearly that he did not that it would be possible simply to quote section 18 of the Sale of Goods Act 1908 (New Zealand) (corresponding to section 16 of the Sale of Goods Act 1893 {UK}) and one reported case and turn to more difficult issues. It is however convenient to pause for a moment to consider why the answer must inevitably be negative, because the reasons for this answer are the same as those which stand in the way of the customer-s at every point of the case. It is common ground that the contracts in question were for the sale of unascertained goods. For present purposes, two species of unascertained goods may be distinguished. First, there are generic goods. These are sold on terms which preserve the seller’s freedom to decide for himself how and from what source he will obtain goods answering the contractual description. Secondly, there are “goods sold ex-bulk”. By this expression their Lordships denote goods which are by express stipulation to be supplied from a fixed and a pre-determined source, from within which the seller may make his own choice (unless the contract requires it to be made in some other way) but outside which he may not go. For example, “1 sell you 60 of the 100 sheep now on my farm”.
Approaching these situations a priori common sense dictates that the buyer cannot acquire title until it is known to what goods the title relates. Whether the property then passes will depend upon the intention of the parties and in particular on whether there has been a consensual appropriation of particular goods to the contract. On the latter question the law is not straightforward, and if i~ had been decisive of the present appeal it would have been necessary to examine cases such as Carlos Federspiel & Co. S.A. v. Charles Twigg & Co. Ltd. [1957] 1 Lloyd’s Rep. 240 and other cases cited in argument. In fact, however, the case turns not on appropriation but on ascertainment, and on the latter the law has never been in doubt. It makes no difference what the parties intended if what they intend is impossible: as is the case with an immediate transfer of title to goods whose identity is not yet known. As Lord Blackburn wrote m his treatise on The Effect of the Contract of Sale, 1st ed. (1845), pages 122-123, a principal inspiration of the Sale of Goods Act 1893:-
“The first of the rules that the parties must be agreed as to the specific goods on which the contract is to attach before there can be a bargain and sale, is one that is founded on the very nature of things. Till the parties are agreed on the specific individual goods the contract can be no more than a contract to supply goods answering a particular description, and since the vendor would fulfil his part of the contract by furnishing any parcel of goods answering that description, and the purchaser could not object to them if they did answer the description, it is clear there can be no intention to transfer the property in any particular lot of goods more than another, till it is ascertained which are the very goods sold. This rule has existed at all times; it is to be found in the earliest English law books … “
It makes no difference, although the goods are so far ascertained that the parties have agreed that they shall be taken from some specified larger stock. In such a case the reason .still applies: the parties did not intend to transfer the property in one portion of the stock more than in another, and the law which only gives effect to their intention, does not transfer the property in any individual portion”
Their Lordships have laboured this point, about which there has been no dispute, simply to show that any attempt by the non-allocated claimants to assert that a legal title passed by virtue of the sale would have been defeated, not by some arid legal technicality but by what Lord Blackburn called “the very nature of things”. The same conclusion applies, and for the same reason. to any argument that a title in equity was created by the sale, taken in isolation from the collateral promises. It is unnecessary to examine in detail the decision of the Court of Appeal in in re Wait [1927] 1 Ch, 606 for the facts were crucially different. There, the contract was for a sale ex-bulk. The 500 tons in question formed part of a larger quantity shipped on board a named vessel; the seller could supply from no other source; and once the entire quantity had been landed and warehoused the buyer could point to the bulk and say that his goods were definitely there although he could not tell which part they were. It was this feature which prompted the dissenting opinion of Sargant L.J. that the sub purchasers had a sufficient partial equitable interest in the whole to found a claim for measuring-out and delivery of 500 tons. No such feature exists here. Nevertheless, the reasoning contained in the judgment of Atkin L.J., at pages 625-641, which their Lordships’ venture to find irresistible. points unequivocally to the conclusion that under a simple contract for the sale of unascertained goods no equitable title can pass merely by virtue of the sale.
This is not, of course, the end of the matter. As Atkin L.J. himself acknowledged at page 636:-
“[The rules m the statute] have, of course. no relevance when one is considering rights 1 legal or equitable, which may come into existence dehors the contract for sale. A seller or a purchaser may, of course. create any equity he pleases by way of charge, equitable assignment or any other dealing with or disposition of goods, the subject matter of sale: and he may, of course, create such an equity as one of the terms expressed in the contract of sale. ,.
Their Lordships therefore turn to consider whether there is anything in the collateral promises which enables the customers to overcome the practical objections to an immediate transfer of title. The most direct route would be to treat the collateral promises as containing a declaration of trust by the company in favour of the customer. The question then immediately arises – What was the subject matter of the trust? The only possible answer, so far as concerns an immediate transfer of title on sale. Is that the trust related to the company’s current stock of bullion answering the contractual description; for there was no other bul1ion to which the trust could relate. Their Lordships do not doubt that the vendor of goods sold ex-bulk can effectively declare himself trustee of the bulk in favour of the buyer, so as to confer pro tanto an equitable title. But the present transaction was not of this type. The company cannot have intended to create an interest in its general stock of gold which would have inhibIted any dealings with it otherwise than for the purpose of delivery under the non-allocated sale contracts. Conversely the customer, who is presumed to have intended that somewhere in the bullion held by or on behalf of the company there would be stored a quantity representing “his” bullion, cannot have contemplated that his rights would be fixed by reference to a combination of the quantity of bullion of the relevant description which the company happened to have in stock at the relevant time and the number of purchasers who happened to have open contracts at that time for goods of that description. To understand the transaction in this way would be to make it a sale of bullion ex-bulk, which on the documents and findings of fact it plainly was not.
Nor is the argument improved by re-shaping the trust, so as to contemplate that the property in the res vendita did pass to the customer, albeit m the absence of delivery, and then merged in a general equitable title to the pooled stock of bullion. Once again the argument contradicts the transaction. The customer purchased for the physical delivery on demand of the precise quantity of bu1lion fixed by h1s contract, not a shifting proportion of a shifting bulk, prior to delivery. It is of course true that a vendor may agree to retain physical possession of the goods on behalf of his purchaser after the sale has been completed, and that there may be a constructive delivery and redelivery of possession, so as to transform the vendor into a bailee or pledgee without the goods actua1ly changing hands: See per Lord Atkinson in Dublin City Distillery Ltd. v. Doherty [1914] A.C. 823, at page 844. Lord Atkinson was there contemplating a situation, such as existed in the Dublin City case itself, where the goods held in the warehouse were already identified (by numbers on the casks: see page 825), so that the contract was one for the sale of specific goods under which the property would pass at once to the vendee. The case is, however, quite different where the sale is of generic goods. Even if the present contract had been a sale ex-bulk, in the sense that the contractual source was the bulk of bullion in the store, section 18 of the 1908 Act would have prevented the property from passing on sale: see Laurie v. Dudin & Sons [19261 1 K.B. 223 and Whitehouse v. Frost (1810) 12 East. 614. The present case is even more clear, since the customers contracted to purchase generic goods without any stipulation as to their source.
The next group of arguments for the non-allocated claimants all turn on an estoppel, said to derive from the collateral promises. Their Lordships derive no assistance from cases such as Waltons Stores (Interstate) Ltd. v. Maher [1988] 64 CLR 387 and Commonwealth of Australia.v. Verwayen (1990) 95 ALR: 321 which show that on occasion a party may estop himself from relying on the protection of the statute. No such estoppel could assist the customers here, for the problem facing them at every turn is not section 18, but the practical reality underlying it which Lord Blackburn called “the very nature of things”: namely that it is impossible to have a title to goods, when nobody knows to which goods the title relate, The same objection rules out reliance on cases such as In re Sharpe [1980 J 1 WLR. 219 concerning what is called a proprietary estoppel.
A more plausible version of the argument posits that the company, having represented to its customers that they had title to bullion held in the vaults, cannot now be heard to say that they did not. At first sight this argument gains support from a small group of cases, of which Knights v. Wiffen (870) LR 5 Q.B. 660 is the most prominent. Wiffen had a large quantity of barley lying in sacks in his granary, close to a railway station. He agreed to sell 80 quarters of this barley to Maris, without appropriating any particular sacks. Maris sold 60 quarters to Knights, who paid for them and received in exchange a document signed by Maris addressed to the station master, directing him to deliver 60 quarters of barley. This was shown by the station master to Wiffen who told him that when he got the forwarding note the barley would be put on the line. Knights gave a forwarding note to the station master for 60 quarters of barley. Maris became bankrupt, and Wiffen, as unpaid vendor, refused to part with the barley. Knights sued Wiffen in trover, to which Wiffen pleaded that the barley was not the property of the plaintiff. A very strong court of Queen’s Bench found in favour of the plaintiff. Blackburn J. explained the matter thus, at pages 655-666:-
“No doubt the law is that until an appropriation from a bulk is made, so that the vendor has said what portion belongs to him and what portion belongs to the buyer, the goods remain “in solido, and no property passes. But can Wiffen here be permitted to say, ‘I never set aside any quarters?’ …. The defendant knew that, when he assented to the delivery order, the plaintiff, as a reasonable man would rest satisfied – .. The plaintiff may well say, ‘I abstained from active measures in consequence of your statement, and I am entitled to hold you precluded from denying that what you stated was true’.”
There may perhaps be a shadow over this decision, notwithstanding the high authority of the court: see the observations of Brett L.J. in Simm v. Anglo-American Telegraph Co. (1879) 5 QED 188 at page 212. Assuming that the decision was nevertheless correct t The question is whether it applies to the present case. Their Lordships consider that, notwithstanding the apparent similarities, it does not. The agreement for sale in Knight v. Wiffen (supra) was a sale ex-bulk, or at least it must have been seen as such, for ctherwise Blackburn J’s judgment would have contradicted his treatise in the passage above quoted.
On this view, the bulk was the whole of the stock in Wiffen’ s warehouse. This stock was therefore committed to the purchase to the extent that Wiffen could not properly have sold the whole of it without making delivery of part to his buyer. Another and more important aspect of the same point is that the bulk actually existed. The effect of Wiffen’s representation was to preclude him from denying to the sub-purchaser, Knights, that he had made a sufficient appropriation from the fixed and identified bulk to give the intermediate purchaser, and hence Knights himself, the proprietary interest sufficient to found a claim in trover. The present case is quite different, for there was no existing bulk and therefore nothing from which a title could be carved out by a deemed appropriation. The reasoning of Knights v. WifJen (supra) does not enable a bulk to be conjured into existence for this purpose simply through the chance that the vendor happens to have some goods answering the description of the res vendita in its trading stock at the time of the sale – quite apart, of course, from the fact that if all the purchasers obtained a deemed title by estoppeq there would not be enough bullion to go around.
All this aside, there is another reason why the argument founded on estoppel cannot prevail. The answer is given by Mellor J. in Knights v. Wiffen itself, at pages 666-667, where quoting from Blackburn’s Contract of Sale page 162 he says:-
“This is a rule [i.e. the estoppel], which, within the limits applied by law, is of great equity; for when parties have agreed to act upon an assumed state of facts, their rights between themselves are justly made to depend on the conventional state of facts and not on the truth. The reason of the rule ceases at once when a stranger to the arrangement seeks to avail himself of the statements which were not made as a basis for him to act upon. They are for a stranger evidence against the party making the statement, but no more than evidence which may be rebutted; between the parties they form an estoppel in law”
Later, Brett L.J. was to observe in Simm v. Anglo-American TeLegraph Co. (supra) at pages 206-207:-
“It seems to me that an estoppel gives no title to that which is the subject matter of estoppel. The estoppel assumes that the reality is contrary to that which the person is estopped from denying, and the estoppel has no effect at all upon the reality of the Circumstances … A person may be estopped from denying that certain goods be10ng to another; he may be compelled by a suit in the nature of an action of trover to deliver them up, if he has them in his possession under his control; but if the goods, in respect of which he has estopped himself, really belonged to someone else, it seems impossible to suppose that … he can be compelled to deliver over another’s goods to the person in whose favour the estoppel exists against him … That person cannot recover the goods, because no property has really passed to him. he can recover only damages. in my view estoppel only creates a cause of action between the person in whose favour the estoppel exists and the person who is estopped.”
Similar statements can be found in several texts, such as for example N. E. Palmer. “Bailment” 2nd Edn. (1991), page 1374.
To this the customers respond that they are not obliged to assert the same proprietary interest against the bank as they would do if their opponents were strangers to the entire relationship. By taking a floating rather than an immediate fixed charge the bank accepted the risk of adverse dealings by the company with its assets. and when the charge crystallised the bank “stood in the shoes” of the company, taking those assets with all the detrimental features which the company had attached to them. If the estoppel binds the company, then it must bind the bank as well.
Attractive as this argument has been made to seem, their Lordships cannot accept it. The chargee does not become on the crystallisation of the charge the universal successor of the chargor. in the same way as the trustee, in bankruptcy or personal representative, who is as much subject to the personal claims of third parties against the insolvent as he is entitled to the benefit of personal claims of which the insolvent is the obligee. Rather, the chargee becomes entitled to a proprietary interest which he asserts adversely to the company, personified by the liquidator and all those general creditors who share in the assets of the company. The freedom of the chargor to deal with its assets pending the crystallisation of the charge does not entail that the chargee’s right to the assets is circumscribed by an indebtedness of a purely personal nature. The most that the Knights v. Wiffen line of authority can give to the purchaser is the pretence of a title where no title exists. Valuable as it may be where one party to the estoppel asserts as against the other a proprietary cause of action such as trover, this cannot avail the purchaser in a contest with a third-party creditor possessing a real proprietary interest in a real subject matter, whereas the purchaser has no more than a pretence of a title to a subject matter which does not actually exist.
Similar obstacles stand in the way of a more elaborate version of the same argument. This seeks to combine two principles: the first that a person who represents (by attornment or otherwise} that he has goods In his possession which he holds for a third party is in certain circumstances prec1uded from denying to that third party that he does so possess and hold the goods even if in tact he does not; the second that a bailee of goods is precluded, as against the bailor, from denying that the bailor has a good title. The result is said to be that by acknowledging itself to be a bailee the company gave its customers a good title to that which they had agreed to purchase. Whilst acknowledging the ingenuity of this argument their Lordships are unable to accept it. If correct, it would entail that a customer, who chose to bring a proprietary action [such as trover, under the former law) rather than simply claiming damages for non-delivery would be entitled to an order for delivery-up of the goods which he had purchased. But which goods? Not a portion of the goods in store, for there was no representation and the customers cannot have believed that it was from these goods alone that by a process of separation their own orders would be fulfilled. And if not these goods, there were no others to which the title could attach since the source of supply was completely at large.
Their Lordships must also reject a further variant of the argument, whereby a trust in respect of bullion came into existence as an aspect bf a bailment, so that even if title stricto sensu did not pass nevertheless the fruits of the breach of trust may be traced into the existing stock of bullion. In other circumstances it might be necessary to look more closely at those elements of the argument which seek to attach the characteristics of a trust to a relationship of bailment, which does not ordinarily have this character, and also at the feasibility of tracing. There is no need for this, however, since there was never any bailment, and no identifiable property to which any trust could attach.
IV. Title to after-acquired bullion
Having for these reasons rejected the submission that the non-allocated claimants acquired an immediate title by reason of the contract of sale and the collateral promises their Lordships turn to the question whether the claimants later achieved a proprietary interest when the company purchased bullion and put it into its own stock. Broadly speaking, there are two forms which such an argument might take.
According to the first, the contracts of sale were agreements for the sale of goods afterwards to be acquired. It might be contended that quite independently of any representation made by the company to the non-allocated claimants, as soon as the company acquired bullion answering the contractual description the purchaser achieved an equitable title, even though the passing of legal title was postponed until the goods were ascertained and appropriated at the time of physical delivery to the purchaser. In the event this argument was not separately pursued, and their Lordships mention it only by way of introduction. They will do so briefly. since it was bound to fail. The line of old cases, founded on Holroyd v. Marshall (1862) 10 H.L.C. 191 and discussed in Benjamin on Sale of Goods, 3rd Edn. (1987), pages 80, 218-219, at paras. 106 and 357 which might be said to support it, was concerned with situations where the goods upon acquisition could be unequivocally identified with the individual contract relied upon. As Lord Hanworth M.R. demonstrated in in re Wait, supra, the reasoning of these cases cannot be transferred to a situation like the present where there was no means of knowing to which, if any, of the non-allocated sales a particular purchase by the company was related. Since this objection on its own is fatal, there is no need to discuss the other obstacles which stand in its way.
The second category of argument asserts, in a variety of forms, that the collateral promises operated to impress on the bullion, as and when it was acquired by the company, a trust in favour of each purchaser. Before looking at the arguments in detail it is necessary to mention a problem which is very little discussed in the Judgments and arguments. It will be seen that the ana1vsis to date has involved two markedly different assumptions. The first relates to the expectation of the customer in the light of the collateral promises. The customer is assumed to have believed that it would make no difference whether he took immediate delivery of the bullion and put it in a bank, or left it with the company – except that in the latter case he would avoid the trouble, risk and expense of storage. 1n law this expectation could be fulfilled only by a system under which the company obtained bullion either by an outside purchase or by transfer from its own stock, and immediately stored it separately in the name of the customer, leaving it untouched until the moment of delivery or re-purchase. The second assumption relates to the obligations which the company actually undertook. It has not been suggested that this matched the customer’s expectation, for there is nothing in the collateral promises, either written or oral, entitling the customer to separate and individual appropriation of goods. Instead, as shown by the passage already quoted from the judgment of McKay ]., the arguments proceed on the basis that the company promised to maintain bullion, separate from its own trading stock, which would in some way stand as security, or reassurance, that the bullion would be available when the customer called for delivery. But what kind of security or reassurance? 1f the scheme had contemplated that, properly performed, it would have brought about a transfer of title to the individual customer before that customer’s appropriated bullion was mixed in the undifferentiated bulk, analogies could have been drawn with decisions such as Spence v. Union Maine Insurance Co. Ltd. (1868) LR 3 CP 427, South Australia Insurance Co .v. Rendell (1869) 3 App.Cas. 101, Indian 0il Corporation Ltd. v. Greenstone Shipping S.A. (Panama) [1988] Q.B. 345, and the United States silo cases of which Savage v. Salem Mills Co. (1906) 85 Pacific Rep. 69 is an example. Since, however, even if the company had performed its obligations to the full there would have been no transfer of title to the purchaser before admixture, these cases are not in point. The only remaining alternative, consistently with the scheme being designed to give the customer any title at all before delivery, is that the company through the medium of the collateral promises had declared itself a trustee of the constantly changing undifferentiated bulk of bullion which should have been set aside to back the customers’ contracts. Such a trust might well be feasible in theory, but their Lordships find it hard to reconcile with the practicalities of the scheme, for it would seem to involve that the separated bulk would become the source from which alone the sale contracts were to be supplied: whereas, as already observed, it is impossible to read the collateral promises as creating a sale ex-bulk.
This being so, whilst it is easy to see how the company’s failure to perform the collateral obligations has fuelled the indignation created by its failure to deliver the bullion under the sales to non-allocated purchasers, their Lordships are far from convinced that this particular breach has in fact made any difference.
Let it be assumed, however, as did McKay J. in his dissenting judgment, that the creation of a separate and sufficient stock would have given the non-allocated purchasers some kind of proprietary interest, the fact remains that the separate and sufficient stock did not exist.
The customers’ first response to this objection is that even if the concept of an immediate trust derived from a bailment arising at the time of the original transactions cannot be sustained, the collateral promises created a potential or incomplete or (as it was called in argument) “floating” bailment, which hovered above the continuing relationship between each purchaser and the company, until the company bought and took delivery of bullion corresponding to the claimant’s contract, whereupon the company became bailee of the bullion on terms which involved a trust in favour of the purchaser. Their Lordships find it impossible to see how this ingenious notion, even if feasible in principle. could be put into practice here, given that the body of potential beneficiaries was constantly changing as some purchasers called for and took delivery whilst others came newly on the scene, at the same time as the pool of available bullion waxed and waned (sometimes to zero as regards some types of bullion) with fresh deliveries and acquisitions. Even if this is left aside, the concept simply does not fit the facts. True, there is no difficultly with a transaction whereby B promises A that if in the future goods belonging to A come within the physical control of B he will hold them as bailee for A on terms fixed in advance by the agreement.. But this has nothing to do with a trust relationship, and it has nothing to do with the present case. sn1ce in the example given A has both title to the goods and actual or constructive possession of them before then receipt by B, whereas in the present case the non-allocated claimants had neither. The only escape would be to suggest that every time the company took delivery of bullion of a particular description all the purchasers from the company of the relevant kind of bullion acquired both a higher possessory right than the company (for such would be essential if the company was to be a bailee) and a title to the goods, via some species of estoppel derived from this notional transfer and re-transfer of possession, Their Lordships find it impossible to construct such a contorted legal relationship from the contracts of sale and the collateral promises,
Next, the claimants put forward an argument in two stages, First, it is said that because the company held itself out as willing to vest bullion in the customer and to hold it in safe custody on behalf of him in circumstances where he was totally dependent on the company, and trusted the company to do what it had promised without in practice there being any means of verification. the company was a fiduciary, From this it is deduced that the company as fiduciary created an equity by inviting the customer to look on and treat stocks vested in it as his own, which could appropriately be recognised only by treating the customer as entitled to a proprietary interest in the stock.
To describe someone as a fiduciary, without more. 15 meaningless. As Justice Frankfurter said in S.8.C. v. Chenery Corporation 318 U. S. 80, 85-86 (1943) cited in Goff and Jones on Restitution, 4th Edn. at page 644:-
“To say that a man is a fiduciary only begins analysis it gives direction to further inquiry. To whom is he a fiduciary? What obligations does he owe as a fiduciary? In what respect has he failed to discharge these obligations? And what are the consequences of his deviation from duty?”
Here, the argument assumes that the person towards whom the company was fiduciary was the non-al1ocated claimant. But what kind of fiduciary duties did the company owe to the customer? None have been suggested beyond those which the company assumed under the contracts of sale read with the collateral promises; namely to deliver the goods and meanwhile to keep a separate stock of bullion (or, more accurately, separate stocks of each variety of bullion) to which the customers could look as a safeguard for performance when delivery was called for. No doubt the fact that one person is placed in a particular position vis-à-vis another through the medium of a contract does not necessarily mean that he does not also owe fiduciary duties to that other by virtue of being in that position. But the essence of a fiduciary;.relationship is that it creates obligations of a different character from those deriving from the contract itself. Their Lordships have not heard in argument any submission which went beyond suggesting that by virtue of being a fiduciary the company was obliged honestly and conscientiously to do what it had contract promised to do. Many commercial relationships involve just such a reliance by one party on the other. and to introduce the whole new dimension into such relationships which would flow from giving them a fiduciary character would (as it seems to their Lordships) have adverse consequences far exceeding those foreseen by Atkin L.J. in In re Wait. It is possible without misuse-of language to say that the customers put faith in the company, and t ha t their trust has not been repaid. But the vocabulary is misleading; high expectations do not necessarily lead to equitable remedies.
Let it be assumed. however, that the company could properly be described as a fiduciary and let it also be assumed that notwithstanding the doubts expressed above the non-allocated claimants would have achieved some kll1d of proprietary interest if the company had done what It said. This still leaves the problem. to which their Lordships can see no answer, that the company did not do what it said. There never was a separate and sufficient stock of bullion in which a proprietary interest could be created. What the non-allocated claimants are really trying to achieve is to attach the proprietary interest, which they maintain should have been created on the non-existent stock, to wholly different assets. It is understandable that the claimants, having been badly let down in a transaction concerning bullion should believe that they must have rights over whatever bullion the company still happens to possess. Whilst sympathising with this notion their Lordships must reject it, for the remaining stock, having never been separated, is Just another asset of the company, like its vehicles and office furniture. 1f the argument applies to the bullion it must apply to the latter as well, an obviously unsustainable idea.
Finally it is argued that the court should declare in favour of the claimants a remedial constructive trust, or to use another name a restitutionary proprietary interest, over the bullion in the company’s vaults. Such a trust or interest would differ fundamentally from those so far discussed, in that it would not arise directly from the transaction between the individual claimants, the company and the bullion, but would be created by the court as a measure of justice after the event. Their Lordships must return to this topic later when considering the Walker & Hall claimants who, the trial judge has held. did acquire a proprietary interest in some bullion, but they are unable to understand how the doctrine in any of its suggested formulations could apply to the facts of the present case. By leaving its stock of bullion in a non-differentiated state the company did not unjustly enrich itself by mixing its own bullion with that of the purchasers: for all the gold belonged to the company. It did not act wrongfully in. acquiring. maintaining and using its own stock of bullion, since there was no term of the sale contracts or of the collateral promises, and none could possibility be implied, requiring that all bullion purchased by the company should be set aside to fulfil the unallocated sales. The conduct of the company was wrongful in the sense of being a breach of contract. but it did not involve any injurious dealing with the subject-matter of the alleged trust. Nor, if some wider equitable principle is involved, does the case become any stronger. As previously remarked the claimants’ argument really comes to this, that because the company broke its contract in a way which had to do with bullion the court should call into existence a proprietary interest in whatever bullion happened to be in the possession and ownership of the company at the time when the competition between the non-allocated claimants and the other secured and unsecured creditors first arose. The company’s stock of bullion had no connection with the claimants’ purchases, and to enable the claimants to reach out and not only abstract it from the assets available to the body of creditors as a whole, but also to afford a priority over a secured creditor. would give them an adventitious benefit devoid of the foundation in logic and justice which underlies this important new branch of the law.
V. Conclusion on property in bullion
For these reasons their Lordships reject, in company with all the judges in New Zealand, the grounds upon which it is said that the customers acquired a proprietary interest in bullion. in the light of the importance understandably attached to this dispute m the courts of New Zealand, and the careful and well-researched arguments addressed on this appeal, the Board has thought it right to approach the question afresh in some little detail. The question is not. however, novel since it has been discussed in two English authorities very closeto the point.
The first is the Judgment of Oliver J. (as he then was) in In re London Wine Co, (Shippers) Ltd.[1986] PCC 121. The facts of that case were not precisely the same as the present, and the arguments on the present appeal have been more far-reaching than were there deployed. Nevertheless their Lordships are greatly fortified in their opinion by the close analysis of the authorities and the principles by 01iver J., and in other circumstances their Lordships would have been content to do little more than summarise it and express their entire agreement. So also with the judgment delivered by Scott L.J. in Mac-Jordan Construction Ltd. v. Brookmount Erostin Ltd. [1992J BCLC 350 which is mentioned by Gault J. [1993] ] N.Z.L.R. 257. 284, but not discussed since it was not then reported in full. This was a stronger case than the present, because the separate fund which the contract required the insolvent company to maintain would have been impressed with a trust in favour of the other party, if in fact it had been maintained and also because the floating: charge which, as the Court of Appeal held, took priority over the contractual claim, expressly referred to the contract under which the claim arose. Once again their Lordships are fortified in their conclusion by the fact that the reasoning of Scott L.J. conforms entirely with the opinion at which they”have independently arrived.
VI Proprietary interests derived from the purchase price
Their Lordships now turn to the proposition. which first emerged during argument in the Court of Appeal. and which was not raised in the London Wine case. that a proprietary interest either sprang into existence on the sales to customers, or should now be imposed retrospectively through restitutionary remedies. in relation not to bullion but to the monies originally paid by the customers under the contracts of sale. Here at least it is possible to pin down the subject-matter to which the proprietary rights are said to relate. Nevertheless. their Lordships are constrained to reject all the various ways in which the submission has been presented. once again for a single comparatively simple reason.
The first argument posits that the purchase monies were from the outset impressed with a trust in favour of the payers. That a sum of money paid by the purchaser under a contract for the sale of goods is capable in principle of being the subject of a trust in the hands of the vendor is clear. For this purpose it is necessary to show either a mutual intention that the monies should not fall within the general fund of the company’s assets but should be applied for a special designated purpose, or that having originally been paid over without restriction the recipient has later constituted himself a trustee of the money; see Quistclose Investments Ltd. v. Rolls Razor Ltd. (In liquidation) [1970] AC 567, 581-2. This requirement was satisfied in In re Kayford [1975] I W.L.R. 279 where a company in financial difficulties paid into a separate deposit account money received from customers for goods not yet delivered, with the intention of making withdrawals from the account only as and when delivery was effected, and of refunding the payment to customers if an insolvency made delivery impossible. The facts of the present case are, however, inconsistent with any such trust. This is not a situation where the customer engaged the company as agent to purchase bullion on his or her behalf, with immediate payment to put the agent in funds, delivery being postponed to suit the customer’s convenience. The agreement was for a sale by the company to, and not the purchase by the company for, the customer. The latter paid the purchase price for one purpose alone, namely to perform his side of the bargain under which he would in due course be entitled to obtain delivery. True, another part of the consideration for the payment was the collateral promise to maintain separate cover ~ but this does not mean that the money was paid for the purpose of purchasing gold, either to create the separate stock or for any other reason. There was nothing in the express agreement to require, and nothing in their Lordships’ view can be implied, which constrained in any way the company’s freedom to spend the purchase money as it chose, or to establish the stock from any source and with any funds as it though fit. This being so their Lordships cannot concur in the decision of the learned President that the purchase price was impressed with a continuing beneficial interest in favour of the customer, which could form the starting point for a tracing of the purchase monies into other assets.
The same insuperable obstacle stands In the way of the alternative submission that the company was a fiduciary. If one asks the inevitable first question – What was the content of the fiduciary’s duty? – the claimants are forced to assert that the duty was to expend the monies in the purchase and maintenance of the reserved stock. Yet this is precisely the obligation which, as just stated, cannot be extracted from anything express or implied in the contract of sale and the collateral promises. in truth, the argument that the company was a fiduciary (as regards the money rather than the bullion) is no more than another label for the argument in favour of an express trust and must fail for the same reason.
Thus far, all the arguments discussed have assumed that each contract of sale and collateral promises together created a valid and effective transaction coupling the ordinary mutual obligations of an agreement for the sale of goods with special obligations stemming from a trust or fiduciary relationship. These arguments posit that the obligations remain in force, albeit unperformed, the claimants’ object being to enforce them. The next group of arguments starts with the contrary proposition that the transactions were rendered ineffectual by the presence of one or more of three vitiating factors: namely 1 misrepresentation, mistake and total failure of consideration. To these their Lordships now turn.
It is important at the outset to distinguish between three different ways In which the existence of a misrepresentation, a mistake or a total failure of consideration might lead to the existence of a proprietary interest in the purchase money or its fruits superior to that of the bank.
1. The existence of one or more of these vitiating factors distinguished the relationship from that of an ordinary vendor and purchaser, so as to leave behind with the customer a beneficial interest in the purchase moneys which would otherwise have passed to the company when the money was paid. This interest remained with the customer throughout everything that followed, and can now be enforced against the general assets of the company, including the bullion. in priority to the interest of the bank.
2. Even if the full legal and beneficial interest in the purchase moneys passed when they were paid-over, the vitiating factors affected the contract In such a wav as to re-vest the moneys in the purchaser. and, what is more, to do so in a way which attached to the moneys an interest superior to that of the bank.
3. In contrast to the routes just mentioned. where the judgment of the court would do no more than recognise the existence of proprietary rights already in existence, the court should by its judgment create a new proprietary interest, superior to that of the bank, to reflect the justice of the case.
With these different mechanisms in view, their Lordships turn to the vitiating factors relied upon. As to the misrepresentations these were presumably that (in fact) the company intended to carry out the collateral promise to establish a separate stock and also that (in law) if this promise was performed the customer would obtain a title to bullion. Whether the proprietary interests said to derive from this misrepresentation were retained by the customers from the moment when they paid over the purchase monies, or whether they arose at a later date, was not made clear in argument. If the former, their Lordships can only say that they are unable to grasp the reasoning for if correct the argument would entail that even in respect of those contracts which the company ultimately fulfilled by delivery the monies were pro tempore subject to a trust which would have prevented the company from lawfully treating them as its own. This cannot be right. As an alternative it may be contended that a trust arose upon the collapse of the company and the consequent non-fulfilment of the contracts. This contention must also be rejected, for two reasons. First, any such proprietary right must have as its starting point a personal claim by the purchaser to the return of the price. No such claim could exist for so long as the sale contract remained in existence and was being enforced by the customer. That is the position here. The customers have never rescinded the contracts of sale, but have throughout the proceedings asserted various forms of proprietary interest in the bullion, all of them derived in one way or another from the contracts of sale. This stance is wholly inconsistent with the notion that the contracts were and are so ineffectual that the customers are entitled to get their money back. As a last resort the non-allocated claimants invited the Board to treat the contracts as rescinded if their claims for a proprietary interest in bullion were rejected. There is however no mechanism which would permit the claimants to pause, as it were, half-way through the delivery of the present judgment and eject at last to rescind; and even if such a course were open, the remedies arising on rescission would come too late to affect the secured rights of the bank under its previously crystallised floating charge.
Furthermore, even if this fatal objection could be overcome, the argument would, in their Lordships’ opinion, be bound to fail. Whilst it is convenient to speak of the customers “getting their money back” this expression is misleading. Upon payment by the customers the purchase moneys became, and rescission or no rescission remained, the unencumbered property of the company. What the customers would recover on rescission would not be “their” money t but an equivalent sum. Leaving aside for the moment the creation by the court of a new remedial proprietary right, to which totally different considerations would apply, the claimants would have to contend that in every case where a purchaser is misled into buying goods he is automatically entitled upon rescinding the contract to a proprietary right superior to those of all the vendor’s other creditors, exercisable against the whole of the vendor’s assets. It is not surprising that no authority could be cited for such an extreme proposition. The only possible exception is In re Eastgate, Ex parte Ward [1905] 1 K. B. 465. Their Lordships doubt whether, correctly understood, the case so decides, but if it does they decline to follow it.
Similar objections apply to the second variant, which was only lightly touched upon in argument: namely, that the purchase monies were paid under a mistake. Assuming the mistake to be that the collateral promises would be performed and would yield a proprietary right, what effect would they have on the contracts? Obviously not to make them void ab initio, for otherwise it would mean that the customers had no right to insist on delivery. Perhaps the mistake would have entitled the customers to have the agreements set aside at common law or under statute, and upon this happening they would no doubt have been entitled to a personal restitutionary remedy in respect of the price. This does not, however, advance their case. The monies were paid by the customers to the company because they believed that they were bound to pay them; and in this belief they were entirely right. The situation is entirely different from Chase Manhattan Bank N.A, v. Israel-British Bank (London) Ltd. [1931] Ch. 105, to which much attention was given in the Court of Appeal and in argument before the Board. It may be – their Lordships express no opinion upon it – that the Chase Manhattan case correctly decided that where one party mistakenly makes the same payment twice it retains a proprietary interest in the second payment which (if tracing is practicable) can be enforced against the payees’ assets In a liquidation ahead of unsecured creditors. But in the present case, the customers intended to make payment, and they did so because they rightly conceived that that was what the contracts required. As in the case of the argument based on misrepresentation, this version conceals the true nature of the customers’ complaint: not that they paid the money, but that the goods which they ordered and paid for have not been delivered. As in the case of the misrepresentation, the alleged mistake might well have been a ground for setting aside the contract if the claimants had ever sought to do so; and in such a case they would have had a personal right to recover the sum equivalent to the amount paid. But even if they had chosen to exercise this right, it would not by operation of law have carried with it a proprietary interest.
Their Lordships are of the same opinion as regards the third variant, which is that a proprietary interest arose because the consideration for the purchase price has totally failed. It is, of course, obvious that in the end the consideration did fail, when delivery was demanded and not made. But until that time the claimants had the benefit of what they had bargained for, a contract for the sale of unascertained goods. Quite plainly a customer could not on the day after a sale have claimed to recover the price for a total failure of consideration, and this at once puts paid to any question of a residuary proprietary interest and distinguishes the case from those such as Sinclair v. Brougham [1914] A.C. 398, where the transactions under which the monies were paid were from the start ineffectual; and Neste Oy v. Lloyds Bank PLC [1983] 2 Lloyd’s Rep. 658, where to the knowledge of the payee no performance at all could take place under the contract for which the payment formed the consideration.
There remains the question whether the court should create after the event a remedial restitutionary right superior to the security created by the charge. The nature and foundation of this remedy were not clearly explained in argument. This is understandable, given that the doctrine is still in an early stage and no single juristic account of it has yet been generally agreed. In the context of the present case there appear to be only two possibilities. The first is to strike directly at the heart of the problem and to conclude that there was such an imbalance between the positions of the parties that if orthodox methods fail a new equity should intervene to put the matter right, without recourse to further rationalisation. Their Lordships must firmly reject any such approach. The bank relied on the floating charge to protect its assets; the customers relied on the company to deliver the bullion and to put in place the separate stock. The fact that the claimants are private citizens whereas their opponent is a commercial bank could not justify the court in simply disapplying the bank’s valid security .. No case cited has gone anywhere near to this, and the Board would do no service to the nascent doctrine by stretching it past breaking point.
Accordingly, if the argument is to prevail some means must be found, not forcibly to subtract the moneys or their fruits from the assets to which the charge really attached, but retrospectively to create a situation in which the moneys never were part of those assets. In other words the claimants must be deemed to have a retained equitable title (see Goff and Jones, op. cit., page 94). Whatever the mechanism for such deeming may be in other circumstances their Lordships can see no scope for it here. So far as concerns an equitable interest deemed to have come into existence from the moment when the transaction was entered into, it is hard to see how this could co-exist with a contract which, so far as anyone knew. might be performed by actual delivery of the goods. And if there was no initial interest at what time before the attachment of the security, and by virtue of what event, could the court deem a proprietary right to have arisen? None that their Lordships are able to see. Although remedial restitutionary rights may prove in the future to be a valuable instrument of justice they cannot in their Lordships’ opinion be brought to bear on the present case.
For these reasons the Board must reject all the ways in which the non-allocated claimants assert a proprietary interest over the purchase price and its fruits. This makes it unnecessary to consider whether) if such an interest had existed, it would have been possible to trace from the subject-matter of the interest into the company’s present assets. Indeed it would be unprofitable to do so without a clear understanding of when and how the equitable interest arose, and of its nature. Their Lordships should, however, say that they find it difficult to understand how the judgment of the Board in Space Investments Ltd. v. Canadian Imperial Bank of Commerce Trust Co. (Bahamas) Ltd. [1986] 1 W L R 1072, on which the claimants leaned heavily in argument, would enable them to overcome the difficulty that the monies said to be impressed with the trust were paid into an overdrawn account and thereupon ceased to exist: see, for example, In re Diplock [1948] Ch. 465. The observations of the Board in Space Investments were concerned with a mixed, not a non-existent, fund.
VII. The position of the bank
The claimants have sought to contend that if they fail on everything else they are still entitled to an equitable right founded on wrongful dealing on the part of the bank. Thorp J. was prepared to go this far with the argument that the bank knew at least by June 1988, and probably before, that the company’s obligations to supply bullion far exceeded its ability to do so. But the learned judge could not see, any more than the Board can see, how this could prevent the bank from claiming the normal benefits of its security. Much more than this would be required, and nothing has so far been forthcoming. Quite apart from the practical impossibility of founding any conclusion on the fragmentary written material now available, it would be quite impossible for the Board to conclude any enquiry on its own account without the benefit of an investigation by the courts in New Zealand, in the light of the full discovery and extensive oral evidence which would be essential to doing justice in the matter. Understandably, Thorp J. did not consider an application by the receivers for directions to be a suitable vehicle for such an enquiry. All that the Board can say is that if there is material in support of the more serious al1egations, nothing in this opinion will prevent its deployment In a proper manner.
VIII. Non-allocated claimants: Conclusions.
Their Lordships ful1y acknowledge the indignation of the c1aimants, caught up in the insolvency of the group of which the company formed part, on finding that the assurances of ‘a secure protection on the strength of which they abstained from calling for delivery were unfulfilled; and they understand why the court should strive to alleviate the ensuing hardship. Nevertheless there must be some basis of principle for depriving the bank of its security and in company with McKay]. they must find that none has been shown.