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Supreme Court: money owed by insolvent agent to its principal not held on constructive trust

Money which an agent personally owed to its principal at the point the former became insolvent is not held on "constructive trust" for the principal, instead forming part of the assets of the insolvent business to be divided up between all creditors in a proportionate way, the UK's highest court has ruled.

Ultimately, the point was not relevant to the Supreme Court's recent decision in a claim by an Australian winemaker against its former UK agent and distributor, as the court also found that the agency agreement automatically terminated on the latter's insolvency.

However the court's judgment on this point, which overruled two previous cases, would be of wider interest to those caught in the "always challenging interface between insolvency and contract rights", according to commercial litigation expert Craig Connal of Pinsent Masons, the law firm behind Out-Law.com.

"It is inherent, as Lord Sumption pointed out in his leading judgment, that apparently arbitrary results may follow from the adventitious timing of an insolvency, and that at first glance these may seem tinged with unfairness - for example, the advance payment for services yet to be performed which falls into the estate, leaving the payer to prove for damages," he said. "However, this is driven by 'an important public policy designed to achieve a pro-rata distribution' among creditors at one fixed point."

"In effect, the judge stressed that qualifications to the effect of the cut-off date are laid down by statute – for example, on adjusting prior transactions prejudicial to creditors - but that the courts should not go beyond these parameters to attack the perception of arbitrariness. So he overruled two previous cases at first instance and held that, if the agency had not terminated, monies collected for Angove post-administration were not held on constructive trust," he said.

The winemaker, Angove's Pty Ltd (Angove), had employed D&D Wines International Ltd (D&D), an English company, as its UK agent and distributor for a number of years. D&D acted in both capacities, buying wines from Angove in its own right and selling wines on Angove's behalf to UK customers, generally retailers. Both activities were governed by an agency and distribution agreement (ADA), which could be terminated by either side on six months notice or by notice with immediate effect if one of the parties became insolvent.

D&D went into administration on 21 April 2012, with creditors' voluntary liquidation following in the July. At the point that administration began, a number of invoices for wine sold by D&D to two UK retailers on Angove's behalf remained outstanding. On 23 April 2012, Angove gave written notice terminating the ADA with immediate effect and informed D&D of its intention to collect the amount directly from the customers. It said that it would account to D&D separately for the commission it would otherwise have been owed.

The liquidators challenged this. They claimed that the relationship between D&D and Angove in relation to these particular invoices was one of buyer and seller, not agent and principal; and that the money should therefore be collected by them leaving Angove to account for its share when the company was wound up. Angove disagreed, and also argued that any money due to them by D&D was held on trust by the agent. The trial judge found in favour of Angove on the first point and rejected the second, while the Court of Appeal ruled against the winemaker on both points.

In the Supreme Court, Lord Sumption pointed out the general rule that the authority of an agent "may be revoked by the principal, even if it is agreed by their contract to be irrevocable". Where this is the case, the agent has a claim against the principal in damages, he said.

"An agent is empowered to commit his principal within the limits of his authority as if the principal had agreed personally," he said. "This is a confidential relationship importing a duty of loyalty, and normally of undivided loyalty, on the part of the agent ... [T]o allow the agent to exercise his authority after it has been revoked would amount to the specific enforcement of a relationship which is by its nature not specifically enforceable."

"The Court of Appeal held that D&D's authority was irrevocable because the general rule that authority can be revoked 'must yield to what the parties have agreed should be their respective legal rights and obligations on the termination of the agency' ... [This term in the agreement] cannot ... be enough to exclude the general rule that the authority is agreed to be irrevocable. What has to be agreed is not just that the authority is to be irrevocable but that it is intended to secure the financial interest of the agent … The Court of Appeal did not address the latter criterion," he said.

The trust argument would only have been relevant had the agency agreement not automatically terminated in this way, the judge said. However, it was "well established" that an agent's duty to account to the principal for money received on its behalf "[did] not necessarily give rise to a trust of the money in the agent's hands", he said.

"That depends on the intentions of the parties derived from the contract, or in some cases from their conduct," he said. "As a broad generalisation, the relations between principal and agent must be such that the agent was not at liberty to treat as part of his general assets money for which he was accountable to his principal."

This was not the case here, where the money paid by the customers to D&D "was not impressed with any trust in favour of Angove's", he said. Allowing otherwise, no matter how fair it may seem, would undermine the operation of the insolvency regime, he said.

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