Moriarty & Anor v Various Customers of BA Peters Plc

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 administration since 14 August 1997.

Until it went into administration the company’s business consisted of activities connected with boats and shipyards, including the sale and purchase of boats, both on its own account and as broker for clients. At all material times, the company operated two bank accounts with Barclays Bank Plc -- a client account and a current account.

In June 2007, the company acting as broker for the Atkinsons sold their yacht for £97,500. Two of the terms of the brokerage contact between the company and the Atkinsons are of significance. First and less importantly, the company was entitled to commission of £4,582.50, being 4% of the purchase price plus VAT. Secondly, the proceeds of sale should have been paid into the company’s client account; indeed the Atkinsons were assured by an employee of the company that the money would be held in that account and would be treated as the Atkinsons’ money rather than the company’s.

It was envisaged that, after it had been paid into the client account, the £97,500 less the commission due to the company would subsequently be used to pay most of the purchase price of a Bavaria 34 yacht which the Atkinsons had agreed to buy through the agency of the company. In fact, the company paid only £17,500, instead of £97,500, into the client account, and paid the balance of £80,000 into the current account. The company subsequently paid out of the client account £2,458.50 into the current account and £7,291.50 to the Atkinsons. The Atkinsons also paid a deposit of £1,000, which they understood would be paid into the client account, but it was in fact paid into the current account. The Bavaria 34 Yacht has not been delivered to the Atkinsons.

In May 2007 the Clarkes entered into a contract with a company to buy a Bavaria 31 yacht for £56,579.68, on account of which the Clarkes paid the company £5,900 in June 2007 and £22,632 in July 2007. Although Mr Clarke was assured on two occasions by an employee of the company that these sums, totalling £28,532, would be paid into the client account, they were actually paid into the current account. The Bavaria 31 yacht has not been delivered to the Clarkes.

When the company went into administration on 14 August 2007, the current account was very substantially overdrawn, as it had been at all times since before April 2007. By contrast, the client account appears always to have been in credit. At close of business on 14 August 2007 the balance in the client account was £850,554.44. The joint administrators of the company, Ms Moriarty and Mr Halley of KPMG LLP, conducted an analysis of the payments which had been made into the client account. They concluded that the money originated from sums paid by purchasers in respect of boats to be purchased from or through the company, sums received on behalf of vendors selling boats through the company, and sums unilaterally credited by the bank from various euro accounts after 17 August 2007.

There is a very substantial deficiency as regards the company’s unsecured creditors. Accordingly, the administrators were anxious to discover how much of the money in the client account was subject to proprietary or trust claims, and how much was available to contribute towards the cost of the administration and paying off deferred and unsecured creditors. In that connection, they sought directions from the court in an application which named as respondents a number of former clients of the company, each of whom claimed that some of the money in the client account was subject to a trust or a proprietary right in their favour. The application raised a number of issues relating to the beneficial ownership of the money in the client account (and also of certain boats), and the deputy judge dealt with them in a characteristically careful and clear judgment.

He concluded that some of the £850,000-odd in the client account was subject to proprietary or trust rights in favour of certain specified clients of the company. However, this left a substantial balance in the account which he held to be beneficially owned by the company and, therefore, subject to other items such as the cost of the administration, available for distribution among the unsecured creditors.

The only claims with which this appeal is concerned are those of the Atkinsons and the Clarkes. It was common ground that, insofar as any part of the £97,500 paid for the sale of the Gemini had been paid into the client account, it was held on trust by the company for the Atkinsons. Equally, it was common ground that, had any money handed over by the Clarkes been paid into the client account, it would have been held on trust for them by the company. That seems to me to be right. As the deputy judge said in paragraph 18 of his judgment:

“Where parties have agreed that money will be paid into a separate account and will be held on trust, a trust is created. Even though the parties have not expressly agreed that money should be held on trust, a trust is created if the settlor pays the money into a separate account for the benefit of specific third parties: see in re Lewis’s of Leicester Ltd [1995] 1 BCLC 428.”

(The fact that the money in question is paid into such an account which, either at that time or subsequently, has other sums paid into it, so that the money is mixed with monies which are the subject of other trusts or beneficially owned by the accountholder, does not alter the applicability of this principle. However, the fact that the money becomes mixed with other monies impressed by a trust may bring other equitable principles into play, and it may have significant financial consequences, especially if there is insufficient in the account to meet all the costs claims in full).

Accordingly, the deputy judge declared that the Atkinsons were beneficially entitled to £7,822 of the money in the client account, ie the £17,500 paid into the client account, less (a) the £7,201.50 paid out to the Atkinsons, less (b) the £2,458.50 paid into the current account, plus (c) a small amount in respect of interest. However, the deputy judge held that the Atkinsons were not entitled to any such relief in respect of the balance of the sum owing to them, namely some £88,750, in respect of which they were, he held, unsecured creditors of the company. He also held that the Clarkes were not entitled to claim any beneficial interest in the client account monies in respect of the £27,732 which they had paid to the company. They were, he said, unsecured creditors of the company in that sum.

The deputy judge’s reasoning was based on the fact that the money which the company had received on behalf of the Atkinsons and from the Clarkes had not been paid into the client account, but had been paid into the current account, which had at all times been in debit, so that the money was used to reduce the company’s liability to the bank under the current account. In those circumstances the deputy judge concluded that there had never been a fund on which a trust obligation or proprietary claim could bite so far as the appellants were concerned. The fact that the money should have been paid into the client account did not, he considered, make any difference as it did not answer the point that, as soon as the money was paid into the current account, there ceased to be any fund against which a trust or proprietary claim could be maintained.

It is against that conclusion that the Atkinsons and Clarkes now appeal. The arguments raised in support of their appeal rely on two facts. The first is that, even once all the other trust or proprietary claims against money in the client account are fully satisfied, there would be a substantial balance in that account which would, subject to any other claims, be beneficially owned by the company. The second fact relied on is that the company was a defaulting trustee as against (a) the Atkinsons and (b) the Clarkes, and its default can fairly be characterised as failing to pay (a) the £88,750-odd and (b) the £27,732 into the client account.

In those circumstances, Mr Aylwin contends on behalf of the appellants that it is not open to the company to claim that it is beneficially entitled to any of the money in the client account until it has made good its default, or, to put the same point another way, he says the company must accept that any money remaining in the client account, after all other equitable and proprietary claims have been satisfied, is subject to the appellants’ respective claims before it can be treated as beneficially the company’s property. In relation to money, such as the £17,500 received on behalf of the Atkinsons, paid into the client account which was always in credit, there was, says Mr Aylwin, a classic case for mounting a claim for a proprietary interest in a mixed fund as the client account was always well in credit.

The problem which the appellants’ case has to confront is that, because the money in issue was paid by the company into the current account (which was always in debit), it was effectively used to reduce the company’s liability with the bank and it effectively disappeared so that there was never any fund on which a proprietary claim could operate -- see in this connection Re Bishopsgate Investment Management Ltd v Holman [1995] 1 Ch. 211, 218-219B and in Re Goldcorp Exchange Ltd [1995] 1 AC 74, 104-5. In these circumstances the argument in support of the appeal has to be rather more sophisticated.

The appellants’ case primarily relies on the reasoning of in Re Whitaker v Dacre [1916] 1 Ch 344. At 346-347 Lord Cozens-Hardy MR said that there was a well-established principle:

“…that a defaulting trustee cannot claim a share in the estate unless and until he has made good his default.”

He went on to refer to what Parker J had said during argument in Re Towndrow Gratton v Machen [1911] 1 Ch 662 at 666, namely:

“…that where there is an aggregate fund in which the trustee is beneficially interested and to which he owes something, he must be taken to have paid himself that amount on account of his share.”

In Doering v Doering (1889) 42 (ChD) 203, Stirling J explained the theory on which the principle is based as being that the court treated the trustee as having received his share by anticipation.

In Dacre, an executor under a will, who was also a beneficiary under the will, had misappropriated some money from the estate; however, I accept that the principle is of general application and could apply in the present more commercial type of circumstances if justified by the facts. Unfortunately for the appellants, I do not consider that the principle can apply here unless it is to be significantly extended. The problem they face, as the deputy judge said, is that there is no trust fund for the beneficiaries to impound. Applying the formulation of Lord Cozens-Hardy, the “estate” is the client account, and the money in question never formed part of that “estate” because it was paid into the current account. Similarly, to use Parker J’s language, if there was “aggregate fund” it was the balance in the client account, and the money in question never formed part of it. It is true that, as between the appellants and the company, the money in question should have formed part of the balance in the client account, and the fact that it did not do so was attributable to the company’s breach of trust.

It is also true that equity treats as done that which ought to have been done. Accordingly, there is some attraction in the notion that, as between the company and the appellants, the client account should be treated as having received the money in question, at least to the extent that this would not prejudice any other equitable or proprietary claim to the monies in the account. However, again in agreement with the deputy judge, that seems to me to be a counter-factual assumption too far. The appellants appear to have a good claim against the company for breach of trust for not having paid the money in question into the client account, but that does not mean that they have a proprietary or any other sort of equitable interest or right over that account.

If the appellants’ argument were correct, they would plainly not be ordinary unsecured creditors, but they would not have a normal trust or proprietary claim either. That is because, as Mr Aylwin for the appellants accepts, if the client account was not sufficiently in credit to meet all trust and proprietary claims -- or only just sufficient to meet such claims -- the appellants’ alleged claim would not avail them. The alleged claim would only arise if there was more than enough in the account to meet all proprietary and trust claims. So, on their case, the appellants’ claim is one which ranks behind all secured or trust or proprietary claims but before any ordinary unsecured claims. On that basis, the appellants’ argument would seem effectively to involve the creation of a new class of preferred creditors, namely those whose money was taken by the company in breach of trust.

While I accept that Bishopsgate was concerned with a tracing claim, and that it is said that this is not a tracing claim but an impounding claim, it does seem to me that there is some force in the point that such a conclusion would appear to conflict with what Dillon LJ said in that case at 2.20 G-H.

To extend the circumstances, in which a trust or proprietary or similar claim can be justified in circumstances such as those raised by the appellants on this appeal, would seem therefore to conflict, or at least to be unsupported by, principle and authority. In my view, the court should not be too ready to extend the circumstances in which proprietary or other equitable claims can be made in insolvent situations, bearing in mind the consequences to unsecured creditors. To raise those in the commercial world, it must sometimes seem almost a matter of happenstance as to whether or not a particular creditor, with no formal security, has a proprietary or equitable claim. However, that fact is that every time such a claim is held to exist in the case of an insolvent debtor, the consequence is that one commercial creditor gets paid in full to the detriment of all the other commercial creditors, who also have no formal security, but are found to have no proprietary claim.

Ms Lexa Hillard, who appears on behalf of the administrators, has a further point, which relies on the fact that the principle in Dacre applied only to an “aggregate fund” whereas the money in the client account was subject to tracing claims in favour of a number of the clients of the company. Each such claim was wholly independent of the other and, indeed, if the money in the client account had been insufficient to meet all such claims, they would not have been paid off rateably, as would have been an appropriate to an aggregate fund, but priorities would have had to have been established. She says that, in truth, the appellants’ case effectively assumes that the monies in the client account are subject to what she calls a “single homogeneous” trust in favour of all customers with trust claims, whereas the true analysis is that the money was potentially subject to a number of individual trust claims or individual proprietary claims in favour of separate identified customers.

That may well be right, but the argument was not debated in detail and I prefer to rest my decision in this case on the simple point that the money, which was paid over by the appellants to the company, and then paid by the company into the current account, never formed part of the fund against which a claim is now sought to be made, namely the money in the client account.

It is right to mention that Mr Aylwin also relied on what was said in paragraph 28-17 of Snell’s Equity 31st Edition, where it stated that:

“If a trustee who has been guilty of a breach of trust has any beneficial interest under the trust instrument, he will not be allowed to receive any part of the trust fund in which he is equitably interested until he has made good the breach of trust.”

In my view, as Mr Aylwin realistically accepted, this is really the same point as that I have already considered, and therefore unsurprisingly I think it suffers from the same problem. The trust fund in the present case is the client account, and there has been no breach of trust in relation to any money in that account. Unfortunately for the appellants, for whom one must have sympathy, the breach of trust occurred before the money in question could become part of any trust fund. Indeed, the breach of trust complained of had the very consequence that the money never became part of the trust fund, as it “resulted in the money ceasing to exist”, to use the words of Lord Mustill in Goldcorp at 105. In other words, this way of putting the appellants’ cases also fails, as the breach of trust of which the appellants can complain did not relate to the trust fund in which they now claim a proprietary interest.

For these reasons I agree with the analysis of the deputy judge, and I would accordingly dismiss the appeals of both Mr and Mrs Atkinson and of Mr and Mrs Clarke and uphold the order made below, so far as it relates to their claim against the company and the administrators.

I agree.

I also agree.