Court of Appeal
Published January 14, 2009
Moriarty and Another v Atkinson and Others
Before Lord Justice Dyson, Lord Justice Jacob and Lord Neuberger of Abbotsbury
Judgment December 16, 2008

If a company, in breach of its promise to a payer to keep money in a separate client account to be held on trust, paid it into a deficit current account to be used to settle the company’s debts, the payer could not trace the money paid into the current account since he acquired no proprietary right to trace the money in question which had disappeared before forming trust fund in the client account.

The Court of Appeal so stated dismissing the appeal of Malcolm Frederick Atkinson, Bettina Ann Atkinson, Paul Michael Clarke and Claire Suzanne Clarke, respondents in the Companies Court to an application by Jane Bronwen Moriarty and Myles Anthony Halley, as administrators of B.A. Peters plc, in administration, from Mr Nicholas Strauss, QC, sitting as a deputy Chancery Division judge ([2008] EWHC 2205 (Ch)).

The judge held that the respondents were ordinary unsecured creditors of the company in respect of moneys paid by them to the company to be held on trust by it in a client account pending dispersal of the funds in the purchase of boats from the company before it had gone into administration on August 14, 2007.

The company sold boats both on its own account and as brokers for its clients in the normal course of its business; it received £97,500 from the respondents to hold in a client account, but, save for a small amount which was paid in to the client account, paid it in a deficit current account mixed with other funds which had been used to pay off debts before the company went into liquidation. Mr Christopher Aylwin for the respondents; Ms Lexa Hilliard for the administrators.

LORD NEUBERGER said that it was true that as between the respondents and the company, the money in question should have formed part of the balance in the client account, and the fact that it did not do so was attributable to the company’s breach of trust.

It was also true that equity treated as done that which ought to have been done.

Accordingly, there was some attraction in the notion that, as between the company and the respondents, the client account should be treated as having received the money in question, at least to the extent that that would not prejudice any other proprietary claim.

However, that would seem to be taking counterfactual assumptions too far. The respondents appeared to have had a good claim against the company for breach of trust, for not having paid the money in question into the client account, but that did not mean that they had a proprietary interest in that account.

The court should not be too ready to extend the circumstances in which proprietary claims could be made, bearing in mind the consequences to unsecured creditors.

To those in the commercial world, it should sometimes seem almost a matter of happenstance as to whether or not a particular commercial creditor, with no formal security, would have a proprietary claim.

Every time such a claim was held to exist in the case of an insolvent debtor, the likely consequence was that one commercial creditor would get paid in full to the detriment of all the other commercial creditors, with no formal security and no proprietary claims.

The “trust fund" in the present case was the client account, and there had been no breach of trust in relation to any money in that account. Unfortunately for the respondents, the breach of trust occurred before the money in question could become part of the trust fund.

Indeed, the breach of trust had the consequence that the money had never become part of a trust fund, and it resulted in the money ceasing to exist.

Lord Justice Dyson and Lord Justice Jacob agreed.

Solicitors: Lyons Davidson, Bristol; Pinsent Mason.

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