What happens to money held on trust when a company goes into liquidation?

What happens to money held on trust when a company goes into liquidation?

The construction of an agency and distribution agreement (ADA) can be crucial when deciding whether the termination of such agreement precludes the agent from collecting money due to the principal. Peter Head, barrister at 11 Stone buildings, considers the decision in Bailey v Angove.

Original news

Bailey and another v Angove’s Pty Ltd [2014] EWCA Civ 215, [2014] All ER (D) 82 (Mar)

D&D company acted as the sole agent and distributor of the respondent company, Angove. D&D went into administration and Angove terminated its ADA with D&D. After the ADA had been terminated, third party customers paid D&D the purchase price of goods sold and delivered during D&D’s agency and distributorship (the sum). The judge ordered that the sum should be paid to Angove in its entirety and the appellant liquidators of D&D appealed. Allowing the appeal, the Court of Appeal, Civil Division, decided that, under the terms of the ADA, D&D had remained entitled to collect what had been due from customers in respect of goods ordered and delivered prior to termination and the money had therefore been payable under the ADA to the liquidators.

What is the significance of this decision?

The Court of Appeal’s decision was concerned with two key issues:

  1. whether the termination of an ADA precluded D&D (the agent)from collecting monies due to Angove (the principal), such that they were held by D&D (which was in liquidation) for Angove on trust
  2. whether, even if no trust arose as a result of the termination of the ADA, a constructive trust nevertheless arose because it would be unconscionable for the liquidators, as officers of the court, to accept payment of sums due to Angove from customers but not to account to Angove for them in full (less D&D’s commission)

The judgment is largely concerned with the first issue—the court decided that D&D was not precluded from collecting in the monies for Angove such that there was no trust. However this issue was concerned with the proper construction of the ADA, and its wider significance is therefore limited.

In relation to the second issue the Court of Appeal doubted the case of Re Japan Leasing Europe plc [2000] WTLR 301. This is likely to be of greater wider significance as it represents a narrowing of the scope for arguments by creditors in insolvencies in favour of constructive trusts on the basis of unconscionability.

What principles surrounding access to sums held in escrow can be derived from this case?

The sums in issue were placed in escrow pending the determination by the court of whether or not they were held on trust for the applicant creditor. The key principles to be derived from the case in terms of whether or not those sums should be paid to the creditor are as follows:

  1. whether or not a trust arises in favour of a principal under an agency agreement owed monies by an insolvent agent will depend on the proper construction of the agreement—including whether or not the agent’s authority to collect in monies due to the principal survives the termination of the agreement
  2. the court is unlikely to conclude that monies received by office holders on behalf of insolvent companies prior to their insolvency which are payable to a principal are held for it on constructive trust on the basis of unconscionability, unless the monies were paid for no consideration such that they represented no more than a windfall to creditors (Neste Oy v Lloyds Bank plc [1983] 2 Lloyd’s Rep 658)

How did the court approach the terms of the ADA?

It construed them in the light of the admissible surrounding factual matrix (ie in the usual way).

What was the effect of the notice of termination on D&D’s rights under the ADA?

The key effect of termination was not to preclude D&D from collecting what was due to Angove from customers in respect of goods ordered and delivered prior to the termination of the ADA.

How did the court approach the alternative argument based on a constructive trust?

Firstly, the court doubted whether Japan Leasing had been correctly decided. Secondly, it decided that D&D had been entitled to collect in sums due from customers post-termination of the ADA in order to recover the commission which it had earned on those sales. Although the insolvency of D&D had unfortunate consequences for Angove (as for all of D&D’s creditors), that fact alone was insufficient to make it unconscionable for D&D to receive payment of the monies due from the customers. It was simply the product of the contractual arrangements which both parties had agreed to.

What effect did the sole agent and distributor's administration have on the court's approach?

See directly above. Whereas the insolvency of D&D had had unfortunate consequences for Angove, that was true for all of its creditors. There was no reason to put Angove in a better position than the other creditors by means of a constructive trust.

What practical guidance should lawyers take from this case?

When seeking to allege that payments are held on trust in insolvencies (or to resist such arguments):

  1. the proper construction of the relevant contracts in their commercial context will be crucial
  2. arguments based on unconscionability constructive trusts are unlikely to succeed

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Peter Head is a barrister at 11 Stone Buildings. He has a strong commercial practice which sees him regularly instructed in complex, high-value litigation in the Commercial Court and Chancery Division as well as in international commercial arbitrations.

Interviewed by Lucy Karsten.

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

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