High Court

Carroll Group Distributors Limited
										(Plaintiff)

v.

G. and J.F. Bourke Limited (in Voluntary Liquidation) and Bourke (Sales) Limited (in Voluntary Liquidation)
										(Defendants)

No. 7401p of 1986 & No. 74810 of 1988
[4th of October, 1989]

Status: Reported at [1990] 1 IR 481; [1990] ILRM 285

Murphy J. 
	This is yet one more case of the many which have arisen in recent years concerning the interpretation and application of what have come to be known as ‘retention of title clauses’.
The plaintiffs (Carrolls) are the well known tobacco company and the two defendant companies (Bourkes) carried on a retail business in Limerick. The affairs of the two defendant companies were so intertwined that they in fact constituted one operation and accordingly have been treated for all purposes as if they constituted only one company. Between 4 February 1986 and 2 April 1986 Carrolls supplied to Bourkes goods to the value of £54,517.26. Bourkes were allowed approximately four weeks credit and it is common case that the conditions on which the goods were supplied included a reservation of title clause in the terms set out in the appendix to this judgment.
On 25 April 1986 Mr. Dermot Fitzgerald was appointed liquidator of the company in a creditors’ liquidation thereof.
The representatives of Carrolls and the liquidator identified goods supplied by Carrolls in the possession of Bourkes at the commencement of the liquidation to the value of £7,376.70. It was agreed between the parties that Carrolls were entitled to those goods in accordance with the retention of title clause and they were accordingly returned reducing the indebtedness of the company to £47,140.56.
At the time the liquidator was appointed the company maintained two accounts with its bankers. The number one account which was in credit in a sum (expressed in round terms) at £28,000 and the number two account which was overdrawn in a sum (again expressed in round terms) in the sum of £21,000. The number two account aforesaid was the account on which the bank from time to time advanced the moneys required by Bourkes to pay wages and salaries and the number one account was the only other account of Bourkes. No special account was opened for the purpose of segregating the proceeds of sale of goods supplied by Carrolls. On 7 May 1986 the bank debited the number one account with the amount due to the bank on foot of the number two account leaving a net balance due to Bourkes of a sum of approximately £7,000. The decision to set off one account against the other was made exclusively by the bank and was not the result of any disposition made by the liquidator.
The right of a vendor and purchaser to agree that the property in goods agreed to be sold should remain in the vendor notwithstanding the agreement for a sale and the delivery of the goods to the purchaser cannot be questioned. The right was recognized in Irish case law in the second part of the last century (see Bateman v Green and King (1868) IR 2 CL 166 and McEntire v Crossley Brothers Ltd  [1895] AC 457) and affirmed by the provisions of the Sale of Goods Act 1893, s. 19(1). Accordingly the liquidator was correct in returning the goods supplied by Carrolls and in the possession of Bourkes at the date when the liquidator was appointed.
The issue in the present case relates to the right of Carrolls in respect of the proceeds of sale of the goods supplied by them. In this context too the basic legal principles are well established. Where a trustee or other person in a fiduciary position disposes of property the proceeds of sale are impressed with a trust which entitle the benificiary or other person standing in the fiduciary relationship to trace such proceeds into any other property acquired therewith by the trustee. The right of tracing carries with it the presumption that where the substituted property is subsequently diminished it is presumed, notwithstanding the order of disposal and the well known rule in Clayton’s case that the trustee disposed of his own property in the first instance and encroached subsequently, if at all, upon the property of the benificiary. Whether fiduciary obligations are imposed on one party or another depends in part upon the character in which they contract and partly on the nature of the dealings in which they engage. Obviously one would be slow to infer that a vendor and purchaser engaged in an arms length commercial transaction undertook obligations of a fiduciary nature one to the other. On the other hand if one postulates that in any context one person is selling the goods of another the assumption of fiduciary obligations in relation to the sale and in particular the proceeds thereof might well be appropriate. It seems to me that the question must be asked how does a party come to sell property of which he is not the owner. Is he selling as a trustee in pursuance of a power of sale? Is he selling as the agent of the true owner? Does the sale constitute a wrongful conversion? If any of those questions were answered in the affirmative it seems to me that the law would impose a trust on the proceeds of sale which would confer on the true owner the right to recover those proceeds from the actual seller or if the proceeds were no longer in the seller’s hands to trace them into any other property acquired with them. If the new asset was acquired partly with such proceeds and partly with other moneys provided by the seller then the right of the true owner would be to a charge on the new asset or mixed fund to the extent of the proceeds of the sale of his property. This is the rule enunciated in In re Hallett’s Estate: Knatchbull v Hallett (1880) 13 Ch D 696.
In the present case clearly there was nothing wrongful about the sale by Bourkes of the goods supplied by Carrolls. Not merely was this envisaged by the circumstances of the parties but it was positively anticipated in the conditions under which the goods were sold by Carrolls. As appears from the retention of title clause it was expressly provided that in the event of the sale of goods by Bourkes that they should ‘act on their own account and not as agent for Carrolls’.
It would seem to me to follow, therefore, that no fiduciary duty was imposed by law on Bourkes or the liquidator thereof in relation to the proceeds of the sale of any of the goods in question and that if such a fiduciary obligation is to be established it must be found in the actual bargain or the trust created in respect of the proceeds by the agreement contained in the conditions of sale.
The retention of title clause expressly provided as follows:-

Notwithstanding the property remaining in the company all risks shall pass to the customer on delivery of the goods to the customer’s premises and so long as the title in the goods shall remain in the company, the customer shall hold the goods as bailee for the company and store the goods safely and suitably so as to clearly show them to be the property of the company and identifiable as such. The customer hereby authorises the company to enter upon the premises of the customer or to any other premises designated to the customer for delivery of the goods to recover possession of the goods at all reasonable times and without notice to the customer.

Clearly on a sale by Bourkes the goods would no longer be stored by them or identified in accordance with the provisions aforesaid. Obviously the parties intended that the property would pass to the sub-purchaser who would become the full owner thereof. Again it was clear that Bourkes were selling ‘on their own account’ and presumably at an increased price to provide a profit margin for the retailer. Again it was open to Bourkes to sell below cost or on credit terms so that the goods would not be immediately or necessarily replaced by assets of equal value.
The operative clause expressly provided that the property in the goods should remain in Carrolls ‘until the customer (Bourkes) shall have discharged all sums due by the customer (Bourkes) to the company (Carrolls) at the date of final handing over of possession of the goods whether such sums shall be due on foot of this transaction or shall be due on foot of some other transaction or transactions between the customer (Bourkes) and the company (Carrolls)’.
It is in this context that one must consider the crucial provisions of the retention of title clause insofar as it deals with the proceeds of sale, namely:-

…the customer (Bourkes) shall hold all moneys received for such sale or other disposition in trust for the company (Carrolls) and undertake to maintain an independent account of all sums so received and on request shall provide all details of such sums and accounts.

No separate account was opened in respect of the proceeds of any goods supplied by Carrolls and it is probable that Carrolls were aware that no such steps were taken. Instead the proceeds of sale of the goods supplied by Carrolls together with other goods dealt with by Bourkes in the ordinary course of their business were paid into the number one account aforesaid. In fact the analysis made by the liquidator would suggest that some 5% of the moneys paid into the number one account represented the proceeds of sale of goods supplied by Carrolls. If one ignores the particular facts of the case and simply analyses the bargain made between the parties it is clear that such an arrangement properly implemented would result in a bank account with sums of money credited thereto which would probably be in excess of the amounts due by Bourkes to Carrolls. This would arise partly from the fact that the goods would be resold at a marked up price and partly from the fact that the proceeds of sale would include some goods the cost price of which had been discharged and some had not. In other words the bank account would be a fund to which Carrolls could have recourse to ensure the discharge of the moneys due to them even though they would not be entitled to the entire of that fund. Accordingly the fund agreed to be credited would possess all the characteristics of a mortgage or charge as identified by Romer LJ in ln re George Inglefield Ltd [1933] Ch 1 at 27-28.
In Frigoscandia (Contracting) Ltd v Continental Irish Meat Ltd and Laurence Crowley [1982] ILRM 396 McWilliam J (at 398 dealing with the property in the goods sold rather than the proceeds of sale thereof) commented upon retention of title clauses as follows:-

A difficulty which arises with regard to clauses of this nature is that they are included in the contracts to secure the payment to the vendor of the price of the goods and therefore it may be said as has been argued that the goods once delivered, are intended to be held by the purchaser as security for such payment and that the transaction is in the category of a mortgage in that the vendor, although retaining ownership or an interest in the goods, cannot take possession of them provided that the specified instalments are paid, and that this leads to the conclusion that such a clause must be treated as creating a mortgage or a charge over the goods. In my opinion such a conclusion can have no general application to these clauses and each case must depend on its own facts.

I fully agree with that observation. The fact that a vendor may seek to protect his commercial interests and in particular his right to recover the purchase price of goods sold by him by retaining the title to property which he has agreed to sell and of which he has delivered possession to the purchaser, does not convert the contract for sale into a mortgage which may require registration in accordance with the provisions of the Companies Act 1963, s. 99. It would be wrong to infer that a particular transaction constituted a mortgage merely because the vendor structured it in such a way as to protect his commercial interests. On the other hand parties cannot escape the inference that a transaction constitutes a mortgage registrable under s. 99 aforesaid by applying particular labels to the transaction. The rights of the parties and the nature of the transaction in which they are engaged must be determined from a consideration of the document as a whole and the obligations and rights which it imposes on both parties. This is a principle of general application. Not infrequently efforts have been made to treat a document which is in truth a lease as a licence by so describing it. The description may be a material consideration but clearly it cannot be decisive. Specifically in relation to mortgages registrable under the Companies Acts it has been held that it is the substance of the transaction as ascertained from the words used by the parties and the context in which the document is executed that determines registrability under the Companies Acts (see In re Kent and Sussex Sawmills Ltd [1947] Ch 177). It seems to me that the bargain between the parties insofar as it relates to the transaction subsequent to a sale by Bourkes is in substance - though not in terms - the same as that which existed in In re Interview Ltd  [1975] IR 383 in that effectively Bourkes were creating or conferring a charge on the proceeds of sale in substitution for the right of property which Carrolls had previously enjoyed. The charge so created required registration under s. 99 of the Companies Act 1963 and in the absence of such registration was invalid.
Whilst the issue does not arise having regard to the foregoing decision it may be as well to record my view that even if Carrolls had obtained a charge over Bourkes’ number one bank account in accordance with a right to trace the proceeds of sale of their goods into that account, that such a right was necessarily defeated when and to the extent that the monies in that account were dissipated and not replaced by any other asset. It follows that in my view the total amount in respect of which a claim might have been asserted was the balance of £7,000 remaining in the number one account after the bank had exercised its right of setoff. This practical conclusion is fully supported by the decision in Roscoe v Winder [1915] 1 Ch62.
Accordingly it seems to me that the plaintiffs’ claim must be dismissed.

APPENDIX

		Reservation of Title
	Notwithstanding delivery and passing of risk the property and title in the goods shall remain in the company and shall not pass to the customer until the customer shall have discharged all sums due by the customer to the company at the date of final handing over of possession of the goods (hereinafter referred to as ‘the relevant sums’) whether such sums shall be due on foot of this transaction or shall be due on foot of some other transaction or transactions between the customer and the company.
In such circumstances the following provisions shall apply:-
The company hereby confers on the customer the right to sell or otherwise                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    dispose of the goods, subject to as hereinafter provided, in the normal course of business. If the customer (who shall in such case act on his own account and not as agent for the company) shall so sell or otherwise dispose of the goods, the customer shall hold all monies received for such sale or other disposition in trust for the company and undertakes to maintain an independent account of all sums so received and on request shall provide all details of such sums and accounts.
Notwithstanding the property remaining in the company, all risks shall pass to the customer on delivery of the goods to the customer’s premises and so long as the title in the goods shall remain in the company, the customer shall hold the goods as bailee for the company and store the goods safely and suitably so as to clearly show them to be the property of the company and identifiable as such. The customer hereby authorises the company to enter upon the premises of the customer or to any other premises designated by the customer for delivery of the goods, to recover possession of the goods at all reasonable times and without notice to the customer.
Nothing in this clause shall confer on the customer any right to return the goods. The company may maintain an action for the price notwithstanding that property and title in the goods shall not have been vested in the customer.
Prior to the payment in full of all sums due by the customer to the company under this contract the customer shall be entitled to use the goods as provided above but may not offer the goods or their proceeds where sold or otherwise disposed of as security for the performance of any obligation of the customer to any third parties. At any time prior to the customer paying all relevant sums the company may, by notice in writing delivered to the customer’s last known address or place of business, determine the customer’s right to use the said goods in the manner detailed above or at all, whereupon the customer shall forthwith return the goods to the company or the company may enter the customer’s premises at all reasonable times for the purpose of recovering the said goods or any part of them.
Further, in the happening of any of the events set out below such events shall forthwith, without any necessity for notice, determine the customer’s right to use, sell or otherwise dispose of the goods:-
(a) Any notice to the customer that a receiver or manager is to be or has been appointed;
(b) Any notice to the customer that a petition to wind up is to be or has been presented or any notice of any resolution to wind up the customer (save for the purpose of reconstruction or amalgamation) has been passed;
(c) A decision by the customer that the customer intends to make arrangement with its creditors;
(d)The insolvency of the customer within the meaning of s. 62(3) of the Sale of Goods Act 1893.
Furthermore and independently of the above, where any of the foregoing provisions do not apply, the company hereby reserves the right of disposal as provided by s. 19(1) of the Sale of Goods Act 1893.