Mercantile Court

IN THE HIGH COURT OF JUSTICE
QUEENS BENCH DIVISION
BIRMINGHAM DISTRICT REGISTRY
MERCANTILE COURT

		21st April 2010

JUDGMENT ON OUTSTANDING PRELIMINARY ISSUE

Issue

1. In the interests of furthering the Overriding Objective, on 5^th June 2009 the Court ordered that 3 key determinative issues concerning a Retention of Title clause ["ROT"] in a contract between the Claimant and the First Defendant be tried as preliminary issues.
2. On 22^nd January 2010, judgment was given in favour of the Claimant on the first two issues. Accordingly, the ROT clause was found to be validly incorporated in Clause 6.2 of the Contract dated 9^th June 2008.
3. The remaining issue is:

"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 it entering into administration on 19^th November 2008 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."

Parties

4. The Claimant has been the 100% shareholder in the First Defendant Company, Jet Star Retail Ltd, since 30^th October 2008. However, he is not an official Director of the Company.
5. The Defendants are Jet Star Retail Ltd and its Joint Administrators since 20.40 hrs on Wednesday 19^th November 2008.
6. Isher Fashions UK was the supplier of budget fashion garments to a high street retailing chain called "Mark One" originally owned by Northworld Ltd until its administrators sold its assets to Jet Star on 27^th May 2008.

Agreed Facts

7. Counsel for the parties have very helpfully, and in an exemplary way of achieving the Overriding Objective, distilled the essential non controversial facts required for determination of this final preliminary issue without the need to call oral evidence (as originally envisaged). I set the relevant ones out below in their agreed tabular form with footnote references to trial bundles of documents.

8^th May 08 The Company was incorporated to acquire assets of the Mark One chain from the administrators of Northworld Ltd.^[1]

27^th May 08 Completion of purchase by the Company of the Mark One chain from Northworld Ltd (for £7.1m, to be paid by £1.5m on completion, and deferred consideration of £5.7m payable on 13^th September 2008). At the time of completion the Company was owned by Mark Brafman and Bali Singh (50% shareholders each).^[2]

9th June 08 Isher and Jet Star contract and conditions of sale of stock.^[3]

27^th Oct 08 Winding Up Petition presented against the Company by Jogo Associates Ltd (with a hearing date scheduled for 22^nd Dec 08).^[4]

30^th Oct 08 Bali Singh (the Claimant) became 100% shareholder of the Company (buying Mark Brafman's 50% share). With no director in place, Bali Singh appoints a Mr Bastock as sole director.^[5]

11^th Nov 08 Northworld Ltd made demand (by its Administrators) against the Company for payment of £3.027m.^[6]

19^th Nov 08 The Stock report of the Company recorded that it held 208,258 Isher items costing £811,822" valued at"£2,376,760 with a Creditor Balance of £580,841.36". Branches held £559,849 worth but the warehouse held £252,032.^[7]

20.40pm: Administrators were appointed over Jet Star Retail Limited. Neil Bennett and Michael Healy appointed Joint Administrators (by QFC holder Northworld Ltd).^[8]

The Joint Administrators found that the electronic stock and sales records management system had failed rendering the tracing and identifying of stock impossible. .

20^th – 24^th Nov 08 Stock with realisations aggregating £162,064 was sold by the Company per the Administrators.^[9]

25^th Nov 08 Sale by the Administrators of the Company's leasehold properties and stock to Internacionale^[10] in consideration £1m^[11] with the stock element being sold for £750,000.^[12] Excluded assets (subject to ROT claims) were delivered up to Internacionale.

28^th Nov 08 Joint Administrators received a letter from Freeth Cartwright on behalf of the Claimant alleging a ROT claim under 6.2 of the Contract of 9^th June 2008.^[13] This was the first time they were aware of the Contract or any ROT claim by Isher.

5^th Dec 08 Joint Administrators (by its solicitors Sprecher Grier Halberstam LLP)) respond to Freeth Cartwright 28^th Nov 08 letter.^[14]

2 Jun 09 Disclosure by joint administrators of sale agreement to Internacionale. Mr Singh maintains this was the first time he was aware that goods subject to ROT claims had not been sold. ^[15]

Contentions

8. I am most grateful to both Counsel for their helpful learned & succinct arguments about the law on ROT's, administrations and its applicability to the Contract and given facts in this case.
9. Both Counsel agreed that the answer to the question posed by the remaining Preliminary Issue lay in the interpretation of the governing Contract.
10. Mr Pepperall for the Claimant submitted that the court should focus on the agreed ROT clause 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."

11. He further submitted that this was an "all accounts" clause. Accordingly, by the ROT clause, title in garments supplied did not pass until the outstanding balance on the account had been cleared, and it palpably had not. Accordingly, the Administrators were guilty of conversion when they sold the stock between 20^th - 25^th November 2008.
12. However, he recognized that he had an inherent difficulty in this contention; the Company did have the right to sell and pass on title in the stock to its own retail customers. He therefore argued that in order to give it "business efficacy" it was "necessary" as per The Moorcock Test^[16] to imply a term into the written contract containing the Claimant's own Standard Terms & Condition that "Jetstar Retail Limited was entitled to resell goods in the ordinary course of business while the company was solvent".
13. He submitted that the reason why it was necessary to imply such a term was that the commercial purpose of the ROT was to protect the supplier's position in insolvency since unsecured creditors "receive a raw deal"^[17] and "the situation changes post-insolvency" as he put it. Therefore, he submitted that the provisions of the Insolvency Act and the law of conversion should be followed ignoring the provisions in the contract under Clause 7 relating to Default which merely gave the Claimant additional rights to those in insolvency and conversion law.
14. Mr Goodison for the Defendants submitted as follows. Firstly, that the Contract is patently a continuing existing contract for purpose of the sale of goods for resale, not just a ROT agreement; secondly, contained "entire agreement terms"; thirdly, Clause 7.1.4 dealt with the "post insolvency situation" rendering the implication of implied terms unnecessary and would be a wrongful rewriting of an agreement; and fourthly, the administration did not determine the contract which provides for that scenario and the contractual provisions prevailed here concerning the rights and obligations of the parties, not the default position in general insolvency law.

Judgment on submissions

15. In my judgment, Mr. Goodison is correct in his submissions.
16. First, the contract is patently for the purpose of the sale of goods to become stock for resale e.g. Clause 8 on Limitations on Liability refers to the Claimant as the Customer and also to "customers of the Customer". It is the supply of stock as part of the working capital of a business for resale, as distinct from items such as tools and equipment that are not for resale where a ROT is often in place and effective. It is not just concerned with ROT in isolation; it also has other highly relevant terms including Clause 7 which deal with the "post insolvency situation". The contract must be read in its entirety and governs the situation arising between the parties. Clause 7 prevails here concerning the insolvency of the Company and its administration concerning the stock under the agreement, not the Insolvency Act "regime" as Mr Pepperall terms it.
17. Secondly, Clause 2.1 is an "entire agreement "clause "to the exclusion of any other terms or conditions".
18. Thirdly, clause 7.1.4, 7.11 and 7.12 expressly deals with the situation of many instances of insolvency of the Claimant, including administration as here. There is no "need" to imply any terms into the written agreement, the Claimant's own standard terms and conditions of sale, to deal with any lacuna concerning the situation arising "post insolvency" or administration and it would be wrong to rewrite the contract retrospectively.
19. They state the following:

" 7.1.4 If the Customer is, or is deemed to be unable to pay its debts or is
insolvent, suspends making payments on any debts or announces an
intention to do so, commences negotiations with one or more of its
creditors with a view to rescheduling any of its indebtedness by reason of actual or anticipated financial difficulties, has a moratorium declared in
respect of any of its indebtedness, ceases or threatens to cease to carry
on business, applies for an interim order under Section 252 Insolvency Act
1986 or has a bankruptcy petition presented against it, has appointed in
respect of it or any of its assets a liquidator, trustee in bankruptcy, judicial
custodian, supervisor; compulsory manager, receiver, administrative
receiver, administrator or similar officer (in each case whether out of court
or otherwise).pledges or charges any Products which remain the property
of Isher Fashions, takes or suffers any similar action in any jurisdiction or
any step is taken (including without limitation, the making of an application or the giving of any notice) by it or by any other person in respect of any of these circumstance

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

7.1.11 Isher Fashions may cancel, terminate and/or suspend without liability to the Customer any contract with the Customer; and

7.1.12 all monies owed by the Customer to Isher fashions shall forthwith become due and payable". ".

20. Fourthly, there is no clause in the Contract that states that the agreement automatically terminates upon administration. An administration of itself does not terminate a contract. In Corporate Administrations and Rescue Procedures (2^nd ed), p.153, it states:

"Administration does not have any effect on the legal personality of the company, nor does it, of itself, have any effect on a third party's contractual obligations to the company; nor (without more) does it terminate contracts to which the company is a party. …. A contract, however, will very often provide for its termination, or for the obligations or rights of one or other of the parties to come to an end if it enters administration." A footnote states "It will, of course, be a question of construction as to whether notice is required before termination or whether it happens automatically."

21. There is no dispute that there were 3 occasions when such insolvency "trigger" events arose before the contested sale of the stock between 20^th – 25^th November 2008: (1) 27^th October upon the presentation of a Winding Up petition just 3 days before Mr Singh became 100% shareholder of the Company; (2) 11^th November 2008 when Northworld Ltd made a demand by its administrators upon the Company for £3.027 in respect of the outstanding purchase price of the Company now fully owned by Mr Singh; and (3) 20.40hrs on 19^th November 2008 when the appointment of Administrators.
22. The Claimant could therefore have exercised his contractual rights on any of those 3 occasions to terminate the agreement to supply stock to the company but did not do so before the stock had been sold. Indeed, as appears from the letter from Freeth Cartwright on behalf of the Claimant dated 28^th November 2008, he did not even then purport to terminate the agreement or demand delivery up under the ROT clause 6.2 but sought to claim their value from the administrators. The Claimants never identified stock, and the stock records do not identify the exact stock. So delivery up was never possible. Some stock was with the warehouseman and held by them pursuant to a lien. If he had chosen to do so, on any of these three occasions before the stock was sold, he could have identified his stock and demanded and obtained "immediate possession" of his stock under the ROT (Clause 6.2). The Claimant did not otherwise have any contractual right to "immediate possession" of the stock and the Defendants correspondingly had the contractual right to resell them or part with possession of them.
23. It is common ground that in order to have any claim for wrongful interference by conversion, the Claimant needs to prove as at 20 Nov 08 to 25 Nov 08, he had an "immediate right to possession" of the stock^[18]. Accordingly, the claim for conversion in its entirety must fail. Furthermore, the claim for conversion of stock^[19] held in a warehouse subject to the lien of the warehouseman, Clipper, is in any event doomed to fail quite simply on the grounds that by the lien the administrators have no right to "immediate possession" of the stock anyway.

Conclusion

24. In my judgment Question 7 (c) in the preliminary issue should be answered "no", both in respect of the stock sold between 19 Nov and 25 Nov 08, and in respect of the stock sold to Internacionale.

21^st April 2010

His Honour Judge Simon Brown QC

Specialist Mercantile Judge

s.9 Senior Court Act.

Note 1    File 2, tab 2, Exh NAB 1, p.214 (para 3.1).    [Back]

Note 2    File 2, tab 2, Exh NAB 1, p.214 (para 3.5).    [Back]

Note 3    File 1, tab 1, pp.7 to 12.    [Back]

Note 4    File 2, tab 2, Exh NAB 1, p.34 (para 5).    [Back]

Note 5    File 2, tab 2, Exh NAB 1, p.215. File 1, tab 22, para 22.    [Back]

Note 6    File 5, tab 4, Exh NAB 2, p.203-204.    [Back]

Note 7    File 3, tab 5, p.18.    [Back]

Note 8    File 2, tab 2, Exh NAB 1, p.36.    [Back]

Note 9    File 3, tab 5, p.20.    [Back]

Note 10    File 1, tab 7, WS Bennett (2 Jun 09), para 17.    [Back]

Note 11    File 2, Exh NAB 1, p.217 (para 5.1.2 and 5.1.3).    [Back]

Note 12    File 2, Exh NAB 1, p.66.    [Back]

Note 13    File 2, Exh NAB 1, p.95.    [Back]

Note 14    File 2, Exh NAB 1, p.106.    [Back]

Note 15    File 1, tab 7, para 17.    [Back]

Note 16   (19889) 14 P,D. 64, per Bowen L.J. on 68    [Back]

Note 17   Borden (UK) Ltd v. Scottish Timber [1981] 1 Ch. 25 at 42F.     [Back]

Note 18   Clerk & Lindsell on Torts (19th ed), para 17-02 & Torts (Interference with Goods) Act 1977    [Back]

Note 19   £252.032    [Back]