Analysis
BA Peters plc (the company) carried on a business consisting of activities connected with boats, including their sale or purchase both on its own account and as broker for clients. It operated two bank accounts – client and current. When the company went into administration on 14 August 2007 its current account was substantially overdrawn but there was a balance on its client account amounting to £850,544.44. KPMG LLP, whose employees were the joint administrators, concluded on an analysis of the client account that the payments in originated either from sums received on behalf of vendors selling boats or from sums paid by purchasers in respect of boats to be purchased from or through the company. As there was a substantial deficiency as regards unsecured creditors, the administrators were anxious to discover how much of the balance in the client account was subject to proprietary or trust claims and how much was available to contribute towards the costs of the administration and payment of unsecured creditors. They therefore sought directions from the court in an application, which named a number of former clients of the company as respondents, each of whom claimed that some part of the balance in the client account was subject to a trust or proprietary right in their favour. The deputy judge had concluded that, while some part of the balance in the client account was subject to proprietary or trust rights in favour of certain specified clients, there was a substantial amount left, which he held was beneficially owned by the company and, therefore, subject to the costs of administration, available for distribution amongst the unsecured creditors. Two of those claims were subject to appeal:
(1) Mr and Mrs Atkinson’s arose through a brokerage contract whereby the company sold their Gemini yacht for £97,500 on terms that the proceeds of sale, less commission, should have been paid into the client account and then used to purchase a Bavaria 34 yacht. In fact, the company only paid £17,500 into the client account while the balance of £80,000 was paid into the current account. Subsequently, £2,458.50 was transferred from client to current account and £7,291.50 paid to Mr and Mrs Atkinson. They also paid a deposit of £1,000 but did not receive delivery of the Bavaria 34 yacht.
(2) Mr and Mrs Clarke’s arose out of a contract that they entered into with the company to buy a Bavaria 31 yacht on account of which they paid a total of £28,532. Instead of being paid into the client account, this was paid into the current account but the Bavaria 31 yacht was not delivered to Mr and Mrs Clarke. The deputy judge had declared that Mr and Mrs Atkinson were beneficially entitled to £7,822 of the balance in the client account (ie the £17,500 actually paid in less the £7,201.50 paid out and the £2,458.50 transferred). However, they were not entitled to any relief in respect of the substantial balance owing to them, of which they were merely unsecured creditors. He also held that Mr and Mrs Clarke were not entitled to claim any beneficial interest in the balance on client account as they too were merely unsecured creditors in respect of the amount owing to them. In both cases, as the money that the company had received was paid into the current account, instead of the client account, there had never been a fund on which a trust obligation or proprietary claim could bite since the current account had always been in debit and the money had been used to reduce the company’s liability to Barclays Bank.
Held (dismissing the appeal)
It was common ground that, in so far as any part of the moneys belonging to either pair of clients had been paid into the client account, it would be held on trust by the company. The problem with the appellants’ case was that, because the money in issue had been paid by the company into the current account (which was always in debit), it had effectively disappeared as there was never any fund on which a proprietary claim could operate. As regards the principle that a defaulting trustee could not claim a share in an estate or trust fund in which he was beneficially interested unless and until he had made good his default (ie in this case the balance in the client account), this was of no avail – even though the principle was of general application and could apply in the present more commercial type of circumstances – because there was no trust fund for the beneficiaries to impound. The money in question had never formed part of the client account. It should have formed part and the fact that it did not do so was attributable to a breach of trust. It was unfortunate that the breach of trust occurred before, rather than after, the money in question could become part of any trust fund. Accordingly, while the appellants might have a good claim against the company for breach of trust for not having paid the money in question into the client account, this did not mean that they had a proprietary or any other sort of equitable interest or right over that account.
Obiter
The court declined an invitation to extend the circumstances in which a trust or proprietary claim could be made to insolvent situations as this would seem to conflict with, or at least be unsupported by, principle and authority. While it was true that equity treated as done that which ought to have been done, to extend the principle that a beneficiary may impound a trust fund in which the trustee is beneficially interested to the client account of a company in insolvent administration, or at least to the extent that this would not prejudice any other equitable or proprietary claim, could have far reaching consequences to unsecured creditors. In the commercial world, it would seem almost a matter of happenstance as to whether or not a particular creditor, with no formal security, had a proprietary or equitable claim. Every time such a claim was held to exist in the case of an insolvent debtor, the consequence would be that one commercial creditor got paid to the full to the detriment of all the other commercial creditors, who had no formal security, but were found to have no proprietary claim. Moreover, as each such claim was wholly independent of the other, this was not the case of an aggregate fund that could be distributed pro rata and, in the event of an insufficiency to meet all such claims, it would be necessary to establish priorities.
JUDGMENT NEUBERGER LJ: [1] This is an appeal brought by Mr and Mrs Atkinson and Mr and Mrs Clarke against the decision of Mr Nicholas Strauss QC, sitting as a deputy judge of the Chancery Division. He concluded that they were ordinary unsecured creditors of BA Peters plc (the company) which has been in insolvent …Continue reading "Moriarty v BA Peters [2008] EWCA Civ 1604"