England and Wales Court of Appeal (Civil Division) Decisions

IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
BIRMINGHAM MERCANTILE COURT
His Honour Judge Simon Brown Q.C.
9BM40023

		Royal Courts of Justice Strand, London, WC2A 2LL
		19 April 2011

Lord Justice Moore-Bick :

1. The appellant, Mr. Bulbinder Singh, carries on business as a manufacturer of clothing under the name Isher Fashions UK ("Isher Fashions"). At the time with which the appeal is concerned the first respondent, Jet Star Retail Ltd ("Jet Star"), carried on business as a retailer of women's fashion garments through a chain of shops around the United Kingdom.
2. During the summer and autumn of 2008 Isher Fashions supplied a substantial quantity of garments to Jet Star under contracts which included a retention of title clause. By the middle of October 2008 Jet Star was in serious financial difficulties. On 27^th October three other suppliers presented a winding up petition against it and on 19^th November an administration order was made in respect of it. The second and third respondents, Mr. Healy and Mr. Bennett, were appointed as administrators. Between 20^th and 24^th November 2008 Jet Star continued to trade and stock held in its various shops was sold to the public, as before. On 25^th November 2008 Jet Star acting through the administrators sold the entirety of its business as a going concern to Internacionale Retail Ltd ("Internacionale") and delivered to it the stock remaining in the shops.
3. In March 2009 Isher Fashions brought proceedings against Jet Star and the administrators in the Birmingham Mercantile Court relying on the retention of title clause to claim damages for conversion of the garments delivered to Internacionale under the sale agreement and an order that the damages be treated as an expense of the administration. On 5^th June 2009 His Honour Judge Simon Brown Q.C. directed that there be a trial of certain preliminary issues, the third of which was framed in the following terms:

"whether the claimant has any claim as pleaded in the particulars of claim in respect of any goods:

(i) held in stock by the first defendant upon its entering into administration on 19^th November 2009 but sold before the sale of the business to Internacionale Retail Limited on 25^th November 2008; or

(ii) held in stock by the first defendant at the time of the administration and delivered to Internacionale Retail Limited pursuant to the 25^th November 2008 agreement."

4. The terms on which the goods were sold by Isher Fashions to Jet Star included the following:

"6. PROPERTY AND RISK

. . .

6.2 Isher Fashions shall retain property, title and ownership of the Products until it has received payment in full in cash or cleared funds of all sums due and/or owing for all Products supplied to the Customer by Isher Fashions under this Contract and any other agreement between Isher Fashions and the Customer.

7. DEFAULT

If the Customer

. . .

7.1.4 . . . has a bankruptcy petition presented against it, has appointed in respect of it or any of its assets a liquidator, . . . receiver, administrative receiver, administrator or similar officer . . .

then Isher Fashions shall have the right, without prejudice to any other remedies, to exercise any or all of the following rights:

. . .

7.1.9 Isher Fashions may require the customer not to re-sell or part with the possession of any Products owned by Isher Fashions until the Customer has paid in full all sums due to Isher Fashions under this Contract or any other agreement with the Customer;"

5. The judge held that although the terms on which the goods had been sold included a retention of title clause, Jet Star had implied authority to sell or otherwise dispose of them unless and until Isher Fashions exercised its right under clause 7.1.9 to withdraw it. Since no steps had been taken to withdraw its authority, Jet Star was entitled to dispose of the goods, both by selling them through its retail outlets during the period of the administration and by disposing of them to Internacionale in connection with the sale of its business. Accordingly, he held that each of the questions should be answered 'No' and entered judgment for the respondents.
6. Isher Fashions now appeals against the judge's order. It accepts that Jet Star had authority to sell and dispose of the goods in the ordinary course of business, notwithstanding the retention of title clause, but says that it ceased to have such authority once it became insolvent and entered into administration. Accordingly, any sale and disposal of the goods that took place on or after 20^th November 2008 amounted to wrongful interference with its goods.
7. The scope of Jet Star's authority to dispose of the goods lies at the heart of the appeal. On behalf of Isher Fashions Mr. Peter Arden Q.C. submitted that the retention of title clause was intended to provide security for the payment of the price and that the implied authority to dispose of the goods before they had been paid for was limited, as would be the case under an agreement for a floating charge, to selling goods in the ordinary course of business, that is, while the company remained solvent. In support of that submission he drew our attention to the decisions in Re Bond Worth [1980] Ch. 228 and Four Point Garage v Carter [1985] 3 All E.R. 12, each of which provides an example of circumstances in which a purchaser was given limited authority to sell or otherwise dispose of goods subject to a retention of title clause in the ordinary course of business.
8. Mr. Adam Goodison for Jet Star submitted that in the present case the terms of clause 7.1.9 made it clear not only that the parties had contemplated that the buyer might go into administration (or worse), but that even under those circumstances it should continue to have authority to dispose of the goods unless Isher Fashions took steps to withdraw it. In those circumstances they must have contemplated not only the disposal of the goods through shops during the currency of the administration but also their disposal in bulk to a purchaser of the business, since that is a well-recognised way of carrying out the administrators' duty to achieve a better result for the company's creditors than would be likely if it were to be wound up.
9. Mr. Arden's case rests on two main propositions: that in relation to the buyer's authority to dispose of the goods before it has paid for them, the effect of the retention of title clause is broadly the same as that of an agreement for a floating charge; and that in the case of a floating charge the company's authority to dispose of its assets is limited to disposals made in the ordinary course of business and ceases on insolvency.
10. The second of those propositions was not seriously in dispute. Nowadays a debenture which creates a floating charge normally expressly permits the borrower to dispose of assets "in the ordinary course of business", but from time to time disputes have arisen over the precise meaning of that expression. In Ashborder BV v Green Gas Power Ltd [2004] EWHC 1517 (Ch), [2005] 1 BCLC 623 Etherton J. reviewed a number of authorities in which the question has been considered and in doing so drew attention to the case of Driver v Broad [1893] 1 QB 744, in which Kay L.J. expressed the view that there is no distinction between a debenture which expressly gives the company liberty to dispose of the charged property "in the ordinary course of its business" and one that does not, the concept being, in his view, inherent in the term "floating security" or "floating charge." The case therefore supports the proposition that a debenture creating a floating charge limits the company's ability to dispose of its assets to disposals under transactions made in the ordinary course of its business. In paragraph 227 of his judgment Etherton J. set out certain conclusions that he thought could be drawn from the decided cases about what is meant by the ordinary course of a company's business in this context. The last of these conclusions, on which Mr. Arden placed particular reliance, was that transactions which are intended to bring to an end, or have the effect of bringing to an end, the company's business are not transactions in the ordinary course of its business. For my part I would accept that as a correct statement of the law.
11. The first of Mr. Arden's propositions is, however, more controversial, since the existence and scope of any authority that Jet Star may have had to dispose of the goods before they had been paid for is to be gleaned from the terms of the contract and its commercial object. It is for this reason that I have not derived a great deal of assistance from either of the authorities on which he relied, since each case depends on its own facts and the particular terms of the contract. In Re Bond Worth, for example, the court held that title passed to the buyer on delivery of the goods, but that the effect of the retention of title clause was to create a floating charge over the products in favour of the seller. No one has suggested that that was the effect of the contract in this case. In Four Point Garage v Carter one question for decision was whether a retention of title clause in a contract between two motor dealers for the sale of a car was sufficient to exclude any implied authority on the part of the buyer to resell in the ordinary course of business. The court held that it did not, but again, the question clearly turned on the nature of the business and the express terms of the contract.
12. In the present case the purpose of the contract, as both parties recognised, was to supply fashion goods for sale in the retail market. The very fact that Jet Star sold garments through more than a hundred outlets is sufficient to show that it was engaged in a trade dealing with large quantities of goods with a high turnover, in which it is necessary for stock to be capable of moving from manufacturer to stores at speed in order to satisfy customer demand. The terms of payment were generous - 5% of the price was to be paid within 60 days of invoice - which reinforces the conclusion that the parties intended that the goods could be sold before they had been paid for. Moreover, it is not unknown in the clothing trade for stock clearances to be made from time to time in order to create space for new lines. These are all aspects of the trade which tend to suggest that one matter the parties must have had in mind was that Jet Star might wish to dispose of substantial quantities of stock to wholesalers rather than disposing of them through its own retail outlets.
13. All this forms part of the context in which the contract as a whole, and clause 7.1.9 in particular, falls to be construed. The clause proceeds on the assumption that the buyer is entitled to sell and dispose of the goods even though property has not passed and that its right to do so continues after the occurrence of any of the events described in clause 7.1.4, unless terminated by a requirement on the part of Isher Fashions to refrain from doing so. The parties clearly had in mind, therefore, that the buyer might be permitted to continue to deal with the goods even after it had become insolvent or (as here) had gone into administration. In my view that is an important distinction between this contract and a debenture creating a simple floating charge and one which has significant implications for the scope of the buyer's authority to dispose of the goods. It is an important feature of a floating charge that it crystallises on the insolvency of the debtor and thereby provides the creditor with the protection he seeks. Under this contract, by contrast, the protection provided by the retention of title clause is contingent on the decision of Isher Fashions to withdraw the buyer's authority to deal with the goods. I do not think, therefore, that one can draw a direct analogy between the two.
14. Having regard to the commercial considerations mentioned earlier and to the language of clause 7, I am unable to accept that Jet Star's authority to sell and dispose of goods subject to the retention of title clause was limited to disposals in what, in the context of a floating charge, could be described as the ordinary course of business. While the buyer's business was flourishing it did not matter to Isher Fashions whether goods were disposed of through retail outlets, by means of wholesale contracts or in any other manner. Its chosen method of securing protection when the buyer encountered financial difficulties was to reserve the right to decide whether, and if so when, to intervene in order to preserve its interest in any goods for which payment had not been made. In those circumstances I do not think that it is possible to construe the contract as restricting the buyer's authority to dispose of the goods otherwise than as provided for by clause 7.1.9. The fact that the seller's rights under clause 7 are expressed to be without prejudice to any other remedies it may have does not carry the matter any farther. Isher Fashions did not seek to exercise any right or remedy that might have been available to it under the general law and it was not suggested that Jet Star's right to dispose of the goods was otherwise affected by the events that had occurred.
15. Despite the fact that Mr. Singh was by then the sole shareholder in Jet Star and, although not formally a director, effectively responsible for the management of the company, he took no steps in his capacity as Isher Fashions to withdraw its authority to dispose of the goods at any time before the sale of the business to Internacionale was completed, although he was well aware of its financial difficulties and of the appointment of the administrators. It follows that Jet Star did not wrongfully interfere with the goods, either by disposing of them during the currency of the administration or by disposing of them under the agreement with Internacionale. Jet Star no doubt remained liable to Isher Fashions in respect of the price of the goods, as it had been throughout, but the disposal, having been made with its authority, did not give Isher Fashions any other cause of action against it.
16. For these reasons, which are essentially the same as those of the learned judge, I would dismiss the appeal.

Lady Justice Smith:

17. I agree

Lord Justice Maurice Kay:

18. I also agree.