[CHANCERY DIVISION]

CARRERAS ROTHMANS LTD. v. FREEMAN MATHEWS

TREASURE LTD. AND ANOTHER

[1983 C. No. 3983]

Company - Winding up - Voluntary liquidation - Moneys paid to company to meet its liabilities to third parties - Winding up of company before payment to third parties - Whether moneys held on trust - Whether trust void as contrary to public policy - Breach of implied obligation to pay third parties promptly - Whether liability to company to be set off against damages flowing from breach - Companies Act 1948 (11 & 12 Geo. 6, c. 38), s. 302 - Bankruptcy Act 1914 (4 & 5 Geo. 5, c. 59), s. 31

Company - Charge - Registration - Moneys paid to company to meet liabilities - Trust created - Whether void as unregistered charge - Companies Act 1948, s. 95

The plaintiff manufactured cigarettes and brands of tobacco which it advertised extensively in newspapers, periodicals and by means of posters. For many years, the defendant, a company carrying on the business of an advertising agency, had undertaken services for the plaintiff. In 1979 the defendant undertook all the plaintiff's placement work, namely, producing from the artwork all that was needed for the advertisements to be printed and buying space in publications and on bill boards. In doing that work the defendant negotiated favourable discounts for advertising space and incurred debts as a principal to third parties for the space bought and for certain technical services. The plaintiff paid the defendant an annual fee in monthly instalments for the placement work and each month the plaintiff would pay the defendant a sum equivalent to the amount of the invoices received by the defendant from third parties for liabilities incurred the previous month. The plaintiff paid the money in time for the defendant to pay the third parties when the debts became due for payment, which was usually at the end of the month. The defendant was in financial difficulties and, at the suggestion of the plaintiff, it agreed in July 1983 that a special account should be opened into which the plaintiff would pay a sum equivalent to the moneys due to third parties. Under that July agreement the plaintiff paid into the special account a sum of money to meet the invoices for June liabilities payable by the defendant at the end of July. The defendant drew the cheques necessary to pay the third parties on that account but on 3 August the defendant went into a creditors' voluntary liquidation and its liquidator arranged for the special account to be frozen before the cheques were cleared. The third party publishers reacted to non-payment by threatening that unless the plaintiff met the defendant's liabilities to them they would not publish any advertisement of the plaintiff's goods until new discounts had been negotiated. The plaintiff was taken by surprise by the winding up of the defendant. It

hurriedly arranged for another advertising agency to do its placement work and, so that its advertising campaign would not be jeopardised, it paid the third parties for debts incurred by the defendant in June and July and took assignments of those debts. While settling those debts, the plaintiff discovered that a number of the invoices relating to liabilities incurred in May had not been met although it had paid an equivalent sum to the defendant in June under its normal practice before the July agreement. It refused to meet those demands on the basis that the third parties had been at fault in not enforcing their debts against the defendant.

The plaintiff brought an action against the defendant and its liquidator for a declaration that the moneys in the special account were held on trust for the sole purpose of paying the third party creditors and for an order for those moneys to be repaid to the plaintiff. By their defence, the defendant and the liquidator claimed that the July agreement was unenforceable being contrary to public policy as an attempt to avoid section 302 of the Companies Act 1948¹ or void because it had created a charge on the defendant's book debts that had not been registered as required by section 95 of the Act and they counterclaimed for £780,000, being the July instalment of the defendant's annual fee and the debts it had incurred in July to third parties. The plaintiff by its reply sought under the provisions of section 31 of the Bankruptcy Act 1914², to set off against the counterclaim damages equivalent to the sums paid by the plaintiff to third parties for the defendant's breach of its contractual obligation to pay the third parties promptly.

On the claim, counterclaim and claim to set off: -

Held, (1) that under the terms of the July agreement the moneys paid by the plaintiff into the special account to meet the June debts owed by the defendant to third parties were never held by the defendant beneficially; that since the moneys had been placed in a special account for a specific purpose, equity required that the moneys were used only for that purpose; that, accordingly, the July agreement did create a trust and the plaintiff had a right to enforce the payment over of moneys in the special account to the third parties and the third parties had an interest in the orderly administration of those trust funds (post, pp. 220F-H, 221B-C, 222B-C, 224C-D).

Quistclose Investments Ltd. v. Rolls Razor Ltd. [1970] A.C. 567, H.L.(E.) applied.

(2) That, although an agreement entered into for bona fide commercial reasons would be avoided as a matter of public policy if its effect would be to cause assets owned by a company at the commencement of its liquidation to be dealt with otherwise than in accordance with section 302 of the Companies

1 Companies Act 1948, s. 302: "Subject to the provisions of this Act as to preferential payments, the property of a company shall, on its winding up, be applied in satisfaction of Its liabilities pari passu, and, subject to such application, shall, unless the articles otherwise provide, be distributed among the members according to their rights and interests in the company."

2 Bankruptcy Act 1914, s. 31: "Where there have been mutual credits, mutual debts or other mutual dealings, between a debtor against whom a receiving order shall be made under this Act and any other person proving or claiming to prove a debt under the receiving order, an account shall be taken of what is due from the one party to the other in respect of such mutual dealings, and the sum due from the one party shall be set off against any sum due from the other party, and the balance of the account, and no more, shall be claimed or paid on either side respectively..."

Act 1948, the moneys paid into the special account were not the moneys of the defendant and, since the book debt owed by the plaintiff to the defendant for debts incurred by the defendant to third parties in June had been discharged when the plaintiff paid the moneys into the special account under the terms of the July agreement before the date of the defendant's liquidation that book debt was not an asset of the defendant at the time of the liquidation; that, therefore, the July agreement could not be avoided in relation to the moneys paid into the special account (post, p. 226G).

British Eagle International Airlines Ltd. v. Compagnie Nationale Air France [1975] 1 W.L.R. 758, H.L.(E.) distinguished.

(3) That the book debt owed by the plaintiff to the defendant for debts incurred by the defendant to third parties in July that had not been discharged before the liquidation was an asset of the defendant available for distribution in the winding up and, since in respect of that debt the July agreement was ineffectual, the defendant was entitled to judgment on the counterclaim (post, pp. 228G - 229B).

(4) That the July agreement did not create a charge by the defendant on its book debts so that it was avoided for non-registration under section 95 of the Companies Act 1948; that even if the rights of the third parties in the moneys in the special account were charges and void for non-registration, the plaintiff's equitable right would not be avoided under the section and, accordingly, the plaintiff was entitled to judgment on its claim (post, pp. 226H - 227B, E-F, G).

(5) That from the nature of the mutual dealings between the parties, a term was to be implied that the defendant would pay the third parties promptly once moneys were paid over to it by the plaintiff; that, although the defendant was in breach of contract before its liquidation in not paying some of the third party creditors promptly for debts incurred in May, it was conceded that no damage could be shown as flowing from that breach; that as the plaintiff's cheque for the June debt, was not handed over until after banking hours on 26 July no breach of the implied term in respect of those debts had occurred by 3 August when the defendant went into liquidation, and as the plaintiff had not paid any moneys to the defendant to meet the third party claims for July, the defendant had not been in breach of its implied obligation for its debts incurred in June and July and, therefore, the plaintiff could not set off a claim for damages under the provisions of section 31 of the Bankruptcy Act 1914 against the defendant's claim for £780,000 (post, pp. 229C-E, G-H, 230E-F, 231E-F, G).

The following cases are referred to in the judgment:

British Eagle International Airlines Ltd. v. Compagnie Nationale Air France [1975] 1 W.L.R. 758; [1975] 2 All E.R. 390, H.L.(E.)

Daintrey, In re, Ex parte Mant [1900] 1 Q.B. 546, C.A.

Debtor (No. 66 of 1955), In re A, Ex parte The Debtor v. The Trustee of Waite (A Bankrupt) [1956] 1 W.L.R. 1226; [1956] 3 All E.R. 225, C.A.

Northern Developments (Holdings) Ltd., In re (unreported), 6 October 1978, Sir Robert Megarry V.-C.

Oriental Bank Corporation, In re, Ex parte Guillemin (1884) 28 Ch.D. 634

Quistclose Investments Ltd. v. Rolls Razor Ltd. (In Liquidation) A.C. 567; [1968] 3 W.L.R. 1097; [1968] 3 All E.R. 651, H.L.(E.)

Wiltshire Iron Co., In re, Ex parte Pearson (1868) L.R. 3 Ch.App. 443

The following additional cases were cited in argument:

Ayerst v. C. & K. (Construction) Ltd. [1976] A.C. 167; [1975] 3 W.L.R. 16; [1975] 2 All E.R. 537, H.L.(E.)

B. & S. Contracts and Design Ltd. v. Victor Green Publications Ltd. [1984] I.C.R. 419, C.A.

Edwards v. Glyn (1859) 2 E. & E. 29

F.L.E. Holdings Ltd., In re [1967] 1 W.L.R. 1409; [1967] 3 All E.R. 553

Foaminol Laboratories Ltd. v. British Artid Plastics Ltd. [1941] 2 All E.R. 393

Hanak v. Green [1958] 2 Q.B. 9; [1958] 2 W.L.R. 755; [1958] 2 All E.R. 141, C.A.

Kayford Ltd., In re [1975] 1 W.L.R. 279; [1975] 1 All E.R. 604

Kent & Sussex Sawmills Ltd., In re [1947] Ch. 177; [1946] 2 All E.R. 638

Lobb (Alec) (Garages) Ltd. v. Total Oil (Great Britain) Ltd. [1983] 1 W.L.R. 87; [1983] 1 All E.R. 944

Pao On v. Lau Yiu Long [1980] A.C. 614; [1979] 3 W.L.R. 435; [1979] 3 All E.R. 65, P.C.

Rogers, In re, Ex parte Holland and Hannen (1891) 8 Morr. 243, C.A.

Saunderson & Co. v. Clark (1913) 29 T.L.R. 579

Sharp v. Jackson [1899] A.C. 419, H.L.(E.)

Toovey v. Milne (1819) 2 B. & A. 682

Tout & Finch Ltd., In re [1954] 1 W.L.R. 178; [1954] 1 All E.R. 127

Universe Tankships Inc. of Monrovia v. International Transport Workers Federation [1983] 1 A.C. 366; [1982] 2 W.L.R. 803; [1982] 2 All E.R. 67, H.L.(E.)

X Company Ltd., In re [1907] 2 Ch. 92

ACTION

The following statement of facts is taken substantially from the judgment of Peter Gibson J. The plaintiff, Carreras Rothmans Ltd., the manufacturer of several well-known brands of cigarettes and tobacco, advertised extensively in the United Kingdom to promote its products. Because of restrictions agreed with the government the advertising was confined to newspapers, periodicals and posters but the amounts expended were enormous. The plaintiff allocated approximately £5m. to its United Kingdom advertising for 1983. In that year its United Kingdom advertising manager was Miss Pauline Moore, who reported to Mr. Ray Higgs, the United Kingdom marketing director, who in turn reported to the managing director. The plaintiff employed advertising agencies to carry out its advertising. The advertising work was in two parts, first the creative work of advising the plaintiff on the appearance of its advertisements and producing the artwork for the advertisements. Second there was the placement work of producing from the artwork all that was needed (such as negatives and proofs) for the printing of the advertisements in the newspapers and periodicals or for the production of the posters and then buying the space for the advertisements.

The first defendant, Freeman Mathews Treasure Ltd. (referred to as "the defendant"), was for many years until its liquidation one of the

advertising agencies employed by the plaintiff. In 1979 the plaintiff appointed it to handle all the plaintiff's placement work in the United Kingdom. For that work the defendant had a team of five headed by Mr. Shephard. Mr. Shephard had for some time prior to the defendant's liquidation, and in particular in the period leading up to that liquidation, openly voiced his desire to leave the defendant and take the plaintiff's placement work with him.

The pattern of the financial dealings between the plaintiff and the defendant in relation to placement work between 1979 and July 1983 was that the plaintiff paid an annual fee payable by monthly instalments for the services performed by the defendant on that work. The monthly fee in 1983 was £20,416.67. In addition the plaintiff paid the defendant a sum equal to all expenditure incurred by the defendant on the placement work which it carried out for the plaintiff, such payment being limited to debts incurred to third parties. Any work done by the defendant itself was paid for in the annual fee. The third parties were newspapers and periodicals in whose publications the plaintiff's advertisements appeared and production agencies who performed technical services to enable the defendant to supply newspapers and periodicals with the actual advertisement to be printed. The obligations incurred to such third parties were incurred by the defendant as principal and not as agent of the plaintiff, although the third parties would be well aware that they were working on advertisements for the plaintiff. To obtain payment from the plaintiff for the debts incurred by the defendant to third parties, the defendant each month supplied the plaintiff with the invoices it had received and, after the plaintiff had checked them and was satisfied, it paid a cheque to the defendant for the amount of the sums claimed in the invoices. The cheque would be paid by the 23rd or 24th of the month so that it reached the defendant a few days before debts owed by the defendant became due (usually by the end of the month).

In 1982 the defendant began to be subject to financial pressure and, in 1983, Mr. Duskwick took over as managing director. He decided that the defendant's overheads had to be cut down drastically and many employees were made redundant in June 1983. There were discussions with a number of other agencies about a merger and discussions with a financier. Mr. Duskwick, who was worried that the merger discussions would be prejudiced by Mr. Shephard's hope that if he left he would be able to take the plaintiff's account with him, arranged a meeting with the plaintiff. He and another director met Mr. Higgs and Miss Moore on 14 July 1983. The meeting was a cordial one. It was agreed, on the suggestion of Mr. Higgs, that the plaintiff's financial controller should visit the defendant so as to be able to report to the plaintiff on the defendant's financial situation and that there should be a scheme to protect the plaintiff's payments to the defendant to meet the invoices of third parties. The scheme to protect the third parties was incorporated in the plaintiff's "contract letter," which read:

"... As regards payments made to you for purely onwards transmission (in effect) to the media and production agencies by way of reimbursement for past services, we require the following

arrangements to be approved and implemented by you before we are prepared to make further payments.

"In essence, we require such payments to be paid to a special account to be opened by you at your bank for the purposes only of meeting the accounts of media and production agencies incurred on your behalf for Carreras Rothmans. The bare bones of the arrangement are as follows: 1. Your agreement to setting up a special account at your bank under the title of 'FMT/Carreras Rothmans Client Account.' 2. All moneys received by you from us for such account will be clearly marked 'FMT/Carreras Rothmans Client Account Only' and payable only into such account. 3. The moneys in the account will be used only for the purposes of meeting the accounts of the media and production fees of third parties directly attributable to Carreras Rothmans involvement with the agency. 4. The account will be used only for the purposes in (3) above and no other moneys will be paid in or out of such account. 5. In the event of any balance occurring in the account after the payment as in (3) then such sum will be repaid to us (obviously this should never occur in the usual course of things). 6. We are supplied with fortnightly statements in respect of the account through your good selves as supplied by the bank. 7. We receive written confirmation from the bank that they are aware of the conditions and purpose of this account prior to our cheque (shortly due to be paid) being sent to you and that such an account has been opened. 8. In consideration for your meeting the above arrangements, we pay a one-off fee of £150 plus VAT against receipt of the appropriate invoice.

"Upon receiving your written confirmation of the above, we foresee no delay in making future payments to you in respect of placements charges etc.

"I believe that it is also appropriate for us to seek your confirmation that all placements and forward media options obtained by you on our instructions are held for us on trust subject only to payment by us of your fee and our paying for the expenditure on the placements so incurred...."

A special account was opened and the contract letter was signed by the defendant and handed back to the plaintiff on 26 July. Under that agreement (the "July agreement") a cheque was paid into the special account for the amount of the invoices relating to debts incurred in June from third party creditors. The defendant paid the third parties promptly and cheques were sent off on or by 29 July. On the afternoon of 29 July the bank informed the defendant that it would not lend it money to support a merger which the defendant had been arranging with another agency. The defendant's board then took the advice of its solicitors on fraudulent trading. On 3 August the defendant went into a creditors' voluntary winding up and the moneys in the special account were frozen at the instigation of the liquidator, the second defendant, Mr. Lawrence Gerrard, before any cheques drawn on that account had been cleared.

The news of the liquidation surprised the plaintiff. It promptly arranged for another agency to carry on with the placement work. On 5 August Mr. Higgs and Miss Moore attended a meeting with representatives of nearly all the major newspapers. It was indicated that unless the plaintiff undertook responsibility for the debts incurred by the defendant, the newspapers would cancel the unfulfilled orders and would in future only take the plaintiff's advertisements on a renegotiated basis. The plaintiff estimated that the loss of the favourable discount negotiated by the defendant would increase its advertising costs by 24 per cent. In order not to prejudice its advertising campaign (the second stage of which had not yet begun), the plaintiff agreed to pay the defendant's debts incurred to third parties including those subsequent to June 1983. Those payments, totalling £1,308,124.22, were made against the third parties assigning the debts to the plaintiff.

In ascertaining the amounts owed to third parties, the plaintiff discovered that the defendant had failed to pay some of the third party debts for May notwithstanding that it had put the defendant in funds to meet those debts. The plaintiff refused to meet those debts of £101,306.29 on the ground that it had already paid the defendant and it was the creditors' fault in failing to pursue the defendant promptly for payment.

The plaintiff issued a writ on 26 August 1983 and by its statement of claim sought, inter alia, a declaration that the moneys now or at any time whatsoever since on or about 26 July 1983 standing to the credit of the account designated "Carreras Rothmans Client Account" maintained by the defendant with the branch of the Midland Bank at 69, Pall Mall, London, were at all times held by the defendant for the plaintiff upon trust for the sole purpose of applying the same in meeting the accounts of the media and production fees of third parties directly attributable to the plaintiff's involvement with the defendant and in default of such purpose being carried into effect upon resulting trust to repay to the plaintiff the full amount or any remaining balance in the account; and an order for the repayment of those moneys to the plaintiff. By their defence and counterclaim, the defendant and its liquidator denied that the moneys were held on trust and alleged that the July agreement was unenforceable. They counterclaimed for the sum of £780,000 being the fee for the defendant's services in July 1983 and moneys payable to the defendant for debts incurred to third parties in that month. In its reply and defence to counterclaim, the plaintiff alleged that after the date of the July agreement the plaintiff was not obliged to make payments to the defendant to cover the third party debts other than under the terms of the July agreement; and that it was an implied term of the contract between the plaintiff and the defendant that the defendant, to the extent that it was put in funds by the plaintiff for such purpose, duly and promptly pay the third party fees incurred by the defendant; that the defendant was in breach of that obligation and the plaintiff was entitled to set off the loss and damage it had suffered by reason of that breach against the defendant's counterclaim.

Peter Millett Q.C. and John Higham for the plaintiff on the claim. The terms of the July agreement created a trust of which the defendant

was the trustee. The trust was fully constituted when the plaintiff as settlor paid the moneys which were to be used only for the specific purpose of onwards transmission to the third party creditors into the special account. At no time did the defendant have a beneficial interest in the moneys in the special account. This was the clear intention of the parties and the bank was also informed of the purpose of the special account. There is clear authority that moneys paid by A to B for a specific purpose which has been made known to B are clothed with a trust: see Toovey v. Milne (1819) 2 B. & A. 682; Edwards v. Glyn (1859) 2 E. & E. 29; Sharp v. Jackson [1899] A.C. 419; In re Rogers, Ex parte Holland and Hannen (1891) 8 Morr. 243 and Quistclose Investments Ltd. v. Rolls Razor Ltd. (In Liquidation) [1970] A.C. 567. The primary purpose of the trust was to pay the third party creditors. Failing the primary purpose the moneys should result to the plaintiff. The plaintiff seeks the execution of the trust.

Robin Potts Q.C. and John Vallat for the defendant on the claim. The July agreement did not give rise to a trust but merely imposed a contractual obligation on the defendant to apply the moneys in the special account in favour of the third party creditors. The plaintiff's only remedy is specific performance of that contractual obligation, and as the defendant is in liquidation that remedy is not available. [Reference was made to In re Wiltshire Iron Co., Ex parte Pearson (1868) L.R. 3 Ch.App. 443; In re Oriental Bank Corporation, Ex parte Guillemin (1884) 28 Ch.D. 634 and Universe Tankships Inc. of Monrovia v. International Transport Workers Federation [1893] 1 A.C. 366.

There are several indications that the July agreement did not create a trust. 1. The language of the letter of 19 July was not apt to create a trust. 2. It was not the plaintiff but the defendant that was the provider of the moneys and thus the settlor. In reality the defendant had declared a trust of its own property, i.e. the debt owed to it by the plaintiff for repayment of debts incurred by the defendant on the plaintiff's behalf. If the true provider of the moneys was the defendant, then the moneys cannot revert to the plaintiff. It would be absurd if the moneys did revert to the plaintiff without reviving the debt. 3. The agreement conferred no rights on the third party creditors. In a true trust the beneficiaries could enforce it. It was never intended that the third party creditors should have enforceable rights. 4. Consequently if there is a trust it is an illusory trust and revocable by the defendant.

Whether or not the July agreement created a Quistclose [1970] A.C. 567 type of trust, it was an agreement to contract out of section 302 of the Companies Act 1948 and therefore contrary to public policy and void: see British Eagle International Airlines Ltd. v. Compagnie Nationale Air France [1975] 1 W.L.R. 758, the principle of which is that section 302 avoids as a matter of public policy any arrangement which is entered into by a company in contemplation of its insolvency and which has the effect that an asset of the company is not available at the commencement of its liquidation for the general body of its creditors, but is available only for particular creditors, not having been disposed of in a manner recognised as legitimate by law, even if the arrangement was entered into for consideration and for bona fide commercial reasons. The debt

owed by the plaintiff to the defendant both for the June and the July debts was such an asset of the defendant. If the July agreement created a Quistclose type of trust, it was a trust created by way of security. It constituted a charge by the defendant company on an asset, the book debt of moneys due or to become due, in favour of third parties. [Reference was made to In re Kent & Sussex Sawmills Ltd. [1947] Ch. 177 and Saunderson & Co. v. Clark (1913) 29 T.L.R. 579.] That charge was not registered within 21 days or at all pursuant to section 95 of the Companies Act 1948 and was therefore void. The policy of the section is that assets should not be taken out of the general assets of a company without advertisement to other creditors. The duty to register was that of the company. Failure to register avoids security so that no other enforceable rights can be spelt out; there is a return to the simple debtor/creditor position.

[Reference was made to In re F.L.E. Holdings Ltd. [1967] 1 W.L.R. 1409; Alec Lobb (Garages) Ltd. v. Total Oil (Great Britain) Ltd. [1983] 1 W.L.R. 87; Pao On v. Lau Yiu Long [1980] A.C. 614 and B. & S. Contracts Design Ltd. v. Victor Green Publications Ltd. [1984] I.C.R. 419; but defences based on absence of consideration, economic duress and fraudulent preference were eventually abandoned.]

Higham in reply on the claim. The argument that the defendant was the settlor is based on a fallacy that the subject matter of the trust is a book debt which the defendant owned. The defendant did not settle or deal with a book debt; it agreed to a variation of the terms of trade. The plaintiff was released from the obligation to pay the defendant direct in return for an obligation to pay into the special account, which it discharged. In any event this argument would be equally applicable in Quistclose [1970] A.C. 567. All it amounts to is that the defendant has provided consideration for the plaintiff's agreement to constitute the trust.

The line of argument that the arrangement merely sounds in contract was rejected in Quistclose [1970] A.C. 567, 581-582, for a common law contractual obligation does not preclude the co-existence of a trust. Indeed it is commonplace: see for instance contracts for the sale of land.

It was argued that the terms of the letter were not apt to create a trust. However, a reading of the whole letter indicates that the letter is indeed the trust deed. The letter together with the invoices and the cheques by which payment was made constitute the actual settlement: see Quistclose [1970] A.C. 567, 653. The following factors are particularly to be noted. First, the reference to "payments for onward transmission to the media" sets out a positive obligation on the part of the defendant. Secondly, the letter provides for the establishment of a special account. Thirdly, the moneys are to be used for the specified purpose of meeting the accounts of media and production fees directly attributable to the plaintiff. Fourthly, in the event of any balance, there is to be repayment to the plaintiff. Fifthly, confirmation from the bank is sought that the bank is aware of the conditions of and purpose of the letter. If the obligation rested simply in contract there would be no point in seeking confirmation from the bank. Read as a whole it is clear that the arrangement is designed to protect payments to the media.

In construing the effect of the letter valuable assistance is to be drawn from the judgment of Sir Robert Megarry V.-C. in In re Northern Development (Holdings) Ltd. (unreported), 6 October 1978.

It was said that no rights are conferred on the third party creditors. Primarily, it is agreed that the letter conferred no rights on third parties. The whole of the arrangements, set up by contract between the plaintiff and the defendant could have been varied or rescinded by agreement between them. But it does not follow that it could be revoked by the defendant without the plaintiff's consent. Nor does it follow that the primary trust completely constituted by paying moneys into the account cannot be enforced by the plaintiff. The absence of any enforceable right in the third party creditors, if correct, does not prevent the primary trust arising. The enforceability of the primary trust by the settlor is fully recognised by the authorities: see In re Rogers, 8 Morr. 243, 248, 249, per Lindley and Kay L.JJ.; Quistclose Investments Ltd. v. Rolls Razor Ltd. (In Liquidation) [1970] A.C. 567, 580-582 and In re Northern Developments (Holdings) Ltd. (unreported), 6 October 1978, Sir Robert Megarry V.-C. The argument that the trust is illusory is misconceived.

The plaintiff does not seek specific performance but execution of the trust. The true rule is that nothing keeps an asset out of the hands of the general body of creditors in a liquidation except a proprietory interest in a third party: see section 302 of the Companies Act 1948. Such an interest may be legal or equitable, absolute or by way of security. If equitable it will depend on the availability of equitable remedies but the availability of equitable remedies depends upon ordinary well settled principles and is unaffected by the insolvency o f the defendant. The only relevance of insolvency is that damages mean an inadequate remedy. In re Wiltshire Iron Co., L.R. 3 Ch.App. 443 and In re Oriental Bank Corporation, 28 Ch.D. 634, do not support the proposition for which they were cited viz. that specific performance will not be ordered against a company in liquidation except where it operates to transfer the legal estate in a property to a party that already has an equitable interest in it. Those cases concerned transactions entered into between the presentation of the petition and the winding up which were not in any event of a kind that equity would have enforced by way of specific performance. They were either incomplete at the date of the winding up order in which case there was no disposition or, alternatively, complete, in which case there was a disposition prima facie avoided by section 227 of the Companies Act 1948. If validated, then the transaction being complete, the plaintiff was entitled to an order for delivery up; no question of specific performance arose. [Reference was made to In re Kayford Ltd. [1975] 1 W.L.R. 279 and In re Tout & Finch Ltd. [1954] 1 W.L.R. 178.]

As to the section 302 argument, there is no general principle of public policy such as that for which the defendant contends. If there were the statutory provisions relating to fraudulent preferences and the avoidance of floating charges would be otiose. There could be no grounds of public policy to prevent the plaintiff and defendant recognising that if the defendant became insolvent its other creditors would gain an unexpected windfall at the expense of the third party creditors if the

plaintiff had put the defendant in funds in the ordinary way for onwards transmission to the third party creditors. The trust account was only machinery to enable the plaintiff to have the third party creditors paid whilst holding the defendant out as paying them. It does not amount to a private arrangement for set off: see British Eagle International Airlines Ltd. v. Compagnie Nationale Air [1975] 1 W.L.R. 758 and Ayerst v. C. & K. (Construction) Ltd. [1976] A.C. 167. The British Eagle principle strikes only at contracts and not at trusts duly constituted prior to the commencement of a liquidation.

As to the section 95 argument, the first question is whether there is a charge. The answer is no because there is no enforceable right to resort to the trust account vested in the third party creditors. The creditors were not party to the arrangement which arose by agreement between the defendant and the plaintiff. The reason why an appropriation of an asset to answer a debt due to a particular creditor gives him security is that that creditor can restrain its application in any other manner but unless he can do so he has no security. It is no help to the creditor that somebody else can do so. The cases cited by the defendant are of no help since they were concerned in determining whether assignments from a debtor to a creditor were absolute or by way of security. If that be wrong then the rights conferred upon the third party creditors are rights of administration only: In re Northern Developments (Holdings) Ltd. (unreported), 6 October 1978. Such rights do not confer on the creditor any interest in any property of the defendant. Further, there is no charge on any book debt owed to the defendant since until the moneys are paid into the trust account the trust is not completely constituted. Until the trust is completely constituted the creditors have no rights of enforcement even by way of administration. Finally there is no equity of redemption and certainly no equity of redemption in the defendant. The arrangements do not operate by way of security. Subject to the resulting trust in favour of the plaintiff the obligation to pay the third party creditors is absolute and the moneys can be used for no other purpose: see paragraphs 3 and 4 of the letter of 19 July 1983.

If there was a charge the defendant was not the chargor. If the moneys in the account exceed the sums due from the defendant to the third party creditors because of refunds or credit notes from them the surplus goes back to the plaintiff. In other words the supposed equity of redemption is in the plaintiff. If the defendant had paid the third party creditors out of other money the primary trust would fail and the resulting trust in favour of the plaintiff would then come into force.

No question of invalidity on account of section 95 arises since the 21 days for registration had not elapsed at the date of the resolution for winding up. If a charge was created it was valid at the date of liquidation; thereafter it was still the company's duty acting by the liquidator and indeed the duty of the liquidator himself to register the charge under section 95 of the Companies Act 1948. The liquidator, who is required to do the highest equity, is not entitled to take advantage of his own default to avoid the charge. For the purpose of section 95 which imposes an obligation on the company and its officers to register a charge, the liquidator is an officer of the company: see In re X Company

Ltd. [1907] 2 Ch. 92. The charge, if it be a charge, was not void at the commencement of the winding up and no creditors of the company have been prejudiced by virtue of non-registration. Alternatively if strictly the charge requires to be registered then in the exceptional circumstances of the present case the court would extend time for registration. Indeed in this case the liquidator was called upon to execute the trust within 21 days of the creation thereof.

If contrary to all the above arguments a charge was created which is void the plaintiff's right to enforce the trust is not avoided, nor is the power of the plaintiff to enforce the primary trust as against the defendant. Accordingly the only effect of section 95 would be to produce the very result contended for, namely a trust, enforceable by the plaintiff but not by the third party creditors to pay the debts due to the third party creditors.

Potts Q.C. on the counterclaim. The defendant counterclaims that if the plaintiff is entitled to repayment of the moneys in the account, the defendant is entitled to a corresponding payment for its services provided on behalf of the plaintiff. The defendant also counterclaims for payment of £780,000 for services which it provided during July of which £20,416.67 is the monthly fee for July which was paid to the defendant itself and was left unaffected by the July agreement. [The argument is more fully reported in the judgment at post, p. 228A-G. Reference was made to British Eagle International Airlines Ltd. v. Compagnie Nationale Air France [1975] 1 W.L.R. 758; In re A Debtor (No. 66 of 1955), Ex parte The Debtor v. Trustee of Waite (A Bankrupt) [1956] 1 W.L.R. 1226; Foaminol Laboratories Ltd. v. British Artid Plastics Ltd. [1941] 2 All E.R. 393 and Hanak v. Green [1958] 2 Q.B. 9.]

Higham for the plaintiff on the counterclaim. After the July agreement the plaintiff had no obligation to pay the defendant for the third party debts except under the terms of the agreement. It was an implied term of the agreement that the defendant would pay the third party debts duly and promptly which it failed to do, causing the plaintiff loss and damage inter alia by the threatened damage to its advertising campaign. The plaintiff reasonably mitigated that loss and damage by paying third party creditors in respect of the June and July debts and the plaintiff is entitled to treat that expenditure as part of the recoverable loss and damage and to set that off against the defendant's counterclaim.

In the circumstances against the £20,416.67 and any other sums found to be due to the defendant the plaintiff is entitled to set off the amount of sums paid to the third party creditors and the costs of management time in connection therewith pursuant to section 31 of the Bankruptcy Act 1914. Credit must be given for the sums received back under the primary trust and any dividend which the plaintiff would be entitled to receive by reason of the assignments taken. [The argument is more fully reported in the judgment, post, pp. 229C - 230C. Reference was made to In re Daintrey, Ex parte Mant [1900] 1 Q.B. 546.]

PETER GIBSON J. By this action and counterclaim the plaintiff, Carreras Rothmans Ltd., and the defendant, Freeman Mathews Treasure Ltd., now in creditors' voluntary liquidation, and its liquidator, Mr.

Lawrence Gerrard, seek the determination of certain questions as to the consequences in law of an arrangement entered into by the plaintiff and the defendant shortly before the defendant's liquidation whereby moneys payable by the plaintiff to the defendant were to be paid, and some moneys were paid, into a special bank account for the payment of certain of the defendant's creditors.

[His Lordship stated the facts and continued:] By its statement of claim the plaintiff claims that the sum of £597,128.72 in the special account is and was since 26 July 1983 held by the defendant for the plaintiff upon trust for the sole purpose of applying the same in meeting the debts owed to third parties and in default of that purpose being carried into effect upon a resulting trust to repay the same to the plaintiff. The plaintiff seeks a declaration to that effect and an order that the defendant and the liquidator forthwith apply those moneys in carrying out that purpose and in default thereof an order that they repay the same to the plaintiff. In their defence the defendant and the liquidator deny that the moneys in the special account were or are held in trust and they allege four grounds on which the July agreement was unenforceable and a fifth was added by amendment at the commencement of the trial: (1) no consideration for the agreement; (2) the July agreement was procured by economic duress; (3) the July agreement constituted a fraudulent preference; (4) the July agreement was contrary to public policy being entered into to avoid the provisions of section 302 of the Companies Act 1948 (providing for pari passu distribution to unsecured creditors of an insolvent company in voluntary liquidation); (5) the July agreement constituted an unregistered charge on book debts and was void under section 95 of that Act. The defendant and the liquidator also claim that the court should not order specific performance of the July agreement. They counterclaim that if the plaintiff is entitled to repayment of the moneys in the account, they are entitled to a corresponding payment for the defendant's services provided to the plaintiff. Further they counterclaim for payment of £780,000 for further services provided by the defendant (in effect those provided in July). Of that sum £20,416.67 is the monthly fee for July which was payable to the defendant itself and was left unaffected by the July agreement and the balance represents the amounts payable by the plaintiff in respect of the third party July debts. In its reply and defence to counterclaim the plaintiff raises two defences to the counterclaim: (1) after the date of the July agreement the plaintiff was not obliged to make payments to the defendant otherwise than pursuant to and in accordance with the July agreement; (2) it was an implied term of the contract between the plaintiff and the defendant, alternatively of the July agreement, that the defendant should pay the third parties duly and promptly upon being put in funds by the plaintiff for that purpose; there were breaches of that term in relation to the May and June debts and an anticipatory breach in relation to the July debts, from which breach loss and damage resulted; the plaintiff reasonably mitigated that loss and damage by paying third party creditors in respect of June and July debts and the plaintiff is entitled to treat that expenditure as part of the recoverable loss and damage and to set that off against the defendant's claim.

After the oral evidence and at the start of the sixth day of the trial Mr. Potts for the defendant and the liquidator abandoned the defences to the statement of claim which were based on absence of consideration, economic duress and fraudulent preference, and in my opinion he was right to do so. The remaining issues can therefore be classified under five heads: in respect of the statement of claim (1) trust; (2) section 302 of the Companies Act 1948; (3) section 95 of the Act of 1948 and in respect of the counterclaim (4) the plaintiff's obligations; (5) set off.

(1) Trust

Mr. Millett and Mr. Higham for the plaintiff contended that the language of the contract letter was apt to create a trust and that such trust was fully constituted as to the moneys in the special account when the defendant agreed to the terms of the contract letter and received the moneys from the plaintiff. They relied on the line of cases of which Quistclose Investments Ltd. v. Rolls Razor Ltd. [1970] A.C. 567 is the highest authority. Mr. Potts denied that any enforceable trust was created. He submitted that the language of the contract letter was apt to create obligations of a contractual nature only in relation to the moneys to be paid into the special account, that the Quistclose line of cases was distinguishable, that if there were a trust it was an illusory trust and that in any event the court should not order specific performance of the July agreement to perform any trust that was created.

The July agreement was plainly intended to vary the contractual position of the parties as to how, as the contract letter put it, payments made by the plaintiff to the defendant for purely onwards transmission, in effect, to the third party creditors, would be dealt with. If one looks objectively at the genesis of the variation, the plaintiff was concerned about the adverse effect on it if the defendant, which the plaintiff knew to have financial problems, ceased trading and the third party creditors of the defendant were not paid at a time when the defendant had been put in funds by the plaintiff. The objective was accurately described by Mr. Higgs in his informal letter of 19 July as to protect the interests of the plaintiff and the third parties. For this purpose a special account was to be set up with a special designation. The moneys payable by the plaintiff were to be paid not to the defendant beneficially but directly into that account so that the defendant was never free to deal as it pleased with the moneys so paid. The moneys were to be used only for the specific purpose of paying the third parties and as the cheque letter indicated, the amount paid matched the specific invoices presented by the defendant to the plaintiff. The account was intended to be little more than a conduit pipe, but the intention was plain that whilst in the conduit pipe the moneys should be protected. There was even a provision covering the possibility (though what actual situation it was intended to meet it is hard to conceive) that there might be a balance left after payment and in that event the balance was to be paid to the plaintiff and not kept by the defendant. It was thus clearly intended that the moneys once paid would never become the property of the defendant. That was the last thing the plaintiff wanted in view of its concern about the defendant's financial position. As a further precaution

the bank was to be put on notice of the conditions and purpose of the account. I infer that this was to prevent the bank attempting to exercise any rights of set off against the moneys in the account.

Only two matters were relied on as indicating that no trust was intended. One was the consideration fee; but the presence of consideration does not negative a trust. The other was the express reference in the penultimate paragraph in relation to placements and forward media options with which was contrasted the absence of the word "trust" in relation to the moneys in the account. But I regard that as of minimal significance when I consider all the other indications as to the capacity in which the defendant was to hold any moneys in the account. In my judgment even in the absence of authority it is manifest that the defendant was intended to act in relation to those moneys in a fiduciary capacity only.

There is of course ample authority that moneys paid by A to B for a specific purpose which has been made known to B are clothed with a trust. In the Quistclose case [1970] A.C. 567, 580 Lord Wilberforce referred to the recognition, in a series of cases over some 150 years, that arrangements for the payment of a person's creditors by a third person gives rise to

"a relationship of a fiduciary character or trust, in favour, as a primary trust, of the creditors, and secondarily, if the primary trust fails, of the third person ..."

Lord Wilberforce in describing the facts of the Quistclose case said a little earlier on p. 580 that the mutual intention of the provider of the moneys and of the recipient of the moneys and the essence of the bargain was that the moneys should not become part of the assets of the recipient but should be used exclusively for payment of a particular class of its creditors. That description seems to me to be apt in relation to the facts of the present case too.

Mr. Potts sought to distinguish the Quistclose case in this way. He submitted that for any trust one needed (i) a settlor conveying property to a trustee or declaring a trust of property in his own hands; (ii) trust property and (iii) a beneficiary. He said that in Quistclose the settlor was the provider of the moneys, who did so by way of loan. In the present case, he submitted, the settlor was not the plaintiff but the defendant to which the plaintiff owed a debt to reimburse the defendant for the June debts owed to the third parties and he pointed out that the plaintiff made no claim that there was a trust of the book debt. In the Quistclose case Lord Wilberforce, in rejecting an argument that the lender only had contractual rights in a transaction of loan, said, at p. 581:

"There is surely no difficulty in recognising the co-existence in one transaction of legal and equitable rights and remedies: when the money is advanced, the lender acquires an equitable right to see that it is applied for the primary designated purpose."

Mr. Potts submitted that there was no recognition in the Quistclose case that anyone else had an enforceable right and that in particular a person in the position of the plaintiff discharging a debt had no right to enforce any trust.

It is of course true that there are factual differences between the Quistclose case and the present case. The transaction there was one of loan with no contractual obligation on the part of the lender to make payment prior to the agreement for the loan. In the present case there is no loan but there is an antecedent debt owed by the plaintiff. I doubt if it is helpful to analyse the Quistclose type of case in terms of the constituent parts of a conventional settlement, though it may of course be crucial to ascertain in whose favour the secondary trust operates (as in the Quistclose case itself) and who has an enforceable right. In my judgment the principle in all these cases is that equity fastens on the conscience of the person who receives from another property transferred for a specific purpose only and not therefore for the recipient's own purposes, so that such person will not be permitted to treat the property as his own or to use it for other than the stated purpose. Most of the cases in this line are cases where there has been an agreement for consideration so that in one sense each party has contributed to providing the property. But if the common intention is that property is transferred for a specific purpose and not so as to become the property of the transferee, the transferee cannot keep the property if for any reason that purpose cannot be fulfilled. I am left in no doubt that the provider of the moneys in the present case was the plaintiff. True it is that its own witnesses said that if the defendant had not agreed to the terms of the contract letter, the plaintiff would not have broken its contract but would have paid its debt to the defendant, but the fact remains that the plaintiff made its payment on the terms of that letter and the defendant received the moneys only for the stipulated purpose. That purpose was expressed to relate only to the moneys in the account. In my judgment therefore the plaintiff can be equated with the lender in Quistclose as having an enforceable right to compel the carrying out of the primary trust.

Mr. Potts also submitted that the third party creditors had no enforceable rights and that where the beneficiaries under the primary trust have no enforceable rights, no trust is created. Mr. Millett and Mr. Higham also submitted that the third party creditors had no enforceable rights, though that submission was made primarily with an eye to an argument relevant to the section 95 point that the beneficial interest in the moneys paid into the special account always remained in the plaintiffs. In none of the many reported cases in the Quistclose line of cases, so far as I am aware, has any consideration been given to the question whether the person intended to benefit from the carrying out of the specific purpose which created the trust had enforceable rights. Thus the existence of enforceable rights in such persons has not been treated as crucial to the existence of a trust. Further in the one case in which so far as I am aware the question who, in addition to the provider of the property, had enforceable rights was determined by the court, it was held that the persons intended to benefit from the carrying out of the primary trust did have enforceable rights. That case is the decision of Sir Robert Megarry V.-C. in In re Northern Developments (Holdings) Ltd. (unreported), 6 October 1978. In that case the eponymous company ("Northern") was the parent company of a group of companies including

one ("Kelly") which was in financial straits. Seventeen banks agreed to put up a fund in excess of half a million pounds in an attempt to rescue Kelly. The banks already had other companies in the group as customers. They paid the moneys into an account in Northern's name for the express purpose of providing moneys for Kelly's unsecured creditors and for no other purpose, the amounts advanced being treated as advances to the banks' other customers in the group. The fund was used to sustain Kelly for a time, but then Kelly was put into receivership at a time when a little over half the fund remained unexpended. One of the questions for the court was who was entitled to that balance. Sir Robert Megarry V.-C. held that there was a Quistclose type of trust attaching to the fund, that trust was a purpose trust but enforceable by identifiable individuals, namely the banks as lenders, Kelly, for whose immediate benefit the fund was established, and Kelly's creditors. The reason given by Sir Robert Megarry V.-C. for holding that Kelly's creditors had enforceable rights were the words of Lord Wilberforce in the Quistclose case at p. 580 which I have already cited, describing the Quistclose type of trust as giving rise to a relationship of a fiduciary character or trust in favour of the creditors. However, Sir Robert Megarry V.-C. went on to describe the interests of the creditors in this way:

"The fund was established not with the object of vesting the beneficial interest in them, but in order to confer a benefit on Kelly (and so, consequentially, on the rest of the group and the bankers) by ensuring that Kelly's creditors would be paid in an orderly manner. There is perhaps some parallel in the position of a beneficiary entitled to a share of residue under a will. What he has is not a beneficial interest in any asset forming part of residue, but a right to compel the executor to administer the assets of the deceased properly. It seems to me that it is that sort of right which the creditors of Kelly had."

The interest of the banks was held to be under the secondary trust if the primary trust failed. In the light of that authority I cannot accept the joint submission that the third party creditors for the payment of whose debts the plaintiff had paid the moneys into the special account had no enforceable rights. In any event I do not comprehend how a trust, which on no footing could the plaintiff revoke unilaterally, and which was expressed as a trust to pay third parties and was still capable of performance, could nevertheless leave the beneficial interest in the plaintiff which had parted with the moneys. On Sir Robert Megarry V.-C.'s analysis the beneficial interest is in suspense until the payment is made.

I can dispose of Mr. Potts' remaining arguments under this head more briefly. In my judgment the doctrine of illusory trusts has no application to the facts of the present case. That doctrine applies where a debtor for his own convenience settles property in favour of his creditors, the court treating the trust as a revocable one. In the present case although the defendant agreed to the discharge of an asset, its book debt, by payment by its debtor, the plaintiff, in such a way that the moneys paid would be held on trust to pay its creditors, the defendant

did not enter into the arrangement for its convenience but for good commercial reasons on the insistence of the plaintiff and the trust was not for its creditors generally but for a particular class of creditor. It cannot be said in the circumstances that the July agreement was intended to be revocable by the defendant alone. Nor can I accept Mr. Potts' argument on specific performance. He submitted that where, as here, the beneficial interest in the moneys in the account has not vet become vested in the third party creditors, the court should not order payment. His argument was based on a suggested analogy with cases like In re Wiltshire Iron Co. (1868) L.R. 3 Ch.App. 440 and In re Oriental Bank Corporation (1884) 28 Ch.D. 634 in which the court refused to allow the completion of contracts after the commencement of a winding up where the property, the subject of the contracts, remained in the company's ownership at the commencement of the winding up. In the present case the plaintiff seeks an order not for specific performance but for the carrying out of the primary trust in respect of moneys which not only are not the property of the defendant but never have been. At the commencement of the liquidation its previous asset, the book debt, had been discharged. I see no reason why the court should not so order.

In my judgment therefore a trust was created by the July agreement, the trust was completely constituted by the payment of moneys into the special account and the plaintiff as the provider of the moneys has an equitable right to an order for the carrying out by the defendant of the trust.

(2) Section 302

Mr. Potts submitted that the July agreement was an agreement to contract out of section 302 of the Companies Act 1948 and as such was contrary to public policy. Prior to the July agreement, Mr. Potts said, the defendant had an asset in the form of the debt owed to it by the plaintiff in respect of the debts incurred to third parties by the defendant. But for the July agreement, that asset would have been available to meet the debts of its general body of creditors. As a result of the July agreement that debt could no longer be discharged by payment to it beneficially but was appropriated for the benefit of particular creditors. Those particular creditors remained creditors at the time of the commencement of the liquidation. The principle which he submitted was applicable was this: an arrangement which is entered into by a company in contemplation of its insolvency and which has the effect that an asset of the company is not available at the commencement of its liquidation not having been disposed of in a manner recognised as legitimate by law, but is available only for particular creditors, is avoided as a matter of public policy as an attempt to contract out of the provisions of section 302.

Two points should be noted on this formulation. First, it is not necessary that the asset in question affected by the arrangement should be an asset of the company at the date of the commencement of the winding up; instead a comparison must be made between what the actual contractual position was at that date and what would have been the position but for the arrangement. That seems to me to involve a

highly unsatisfactory hypothesis for what is suggested as a principle of public policy. How does one know what a company might have done with the asset but for the arrangement? Second, there is an exception for what is a legitimate disposition and Mr. Potts gave as an example the discharge of a debt, to which he added the qualification that such discharge must not be a fraudulent preference. Again this exception seems to me to be unsatisfactory. What is a legitimate disposition? Mr. Potts submitted that the arrangement would be struck down even if entered into for consideration and for bona fide commercial reasons. Take a case where a company issues a debenture charging its property by way of security, the company and the debenture holder thereby plainly contemplating that the company might become insolvent. So commonplace a transaction might be vulnerable if Mr. Potts were right. Further it would appear that the statutory provisions relating to fraudulent preference were quite unnecessary. Considerations such as these seem to me to cast the gravest doubts on the correctness of Mr. Potts' proposition. However he submits that that is the effect of the decision of the House of Lords in British Eagle International Airlines Ltd. v. Compagnie Nationale Air France [1975] 1 W.L.R. 758. To that I now turn.

The essential facts of that case were these. British Eagle and Air France were airline operators and members of IATA (the International Air Transport Association) along with many other airlines. Airlines perform services for each other constantly. IATA established a clearing house system under which there was a mandatory monthly settlement of debits and credits. But instead of each member settling with any other who was in debit or credit on their mutual dealings, the scheme provided that no member could claim payment from another member but could only claim from IATA the balance due under the scheme and likewise IATA alone could claim from the member the net amount due from that member. The scheme therefore provided for a form of set off internal to the members of the clearing house system. There were good commercial reasons for the clearing house arrangements. When British Eagle went into liquidation, the aggregate amount it owed to other members exceeded the aggregate amount that other members owed it. One member owing British Eagle at the commencement of the liquidation on their mutual dealings was Air France. British Eagle by its liquidator sought to recover from Air France the sum so owed, claiming that the clearing house arrangements were not binding on him in respect of those moneys. Templeman J. at first instance, the Court of Appeal and Lord Morris of Borth-y-Gest and Lord Simon of Glaisdale (who dissented from the majority in the House of Lords) did not, as I understand them, dissent as to the applicable principles. They accepted that it is not possible to contract out of section 302. Where they differed from the majority in the House of Lords was in their view as to what was the property of British Eagle at the commencement of the liquidation. Their view was that the property of British Eagle did not include any debt recoverable from, or chose in action against, Air France by reason of the bona fide commercial arrangements by which British Eagle and its liquidator were bound. But Lord Cross of Chelsea, with whom Lord

Diplock and Lord Edmund-Davies agreed, found that on the true interpretation of the provisions of the arrangement British Eagle did have an asset at the commencement of the liquidation, that asset being described by Lord Cross, at p. 778, as an innominate chose in action having some but not all the characteristics of debts. That Lord Cross was looking to the actual assets of British Eagle at the date of liquidation is, I think, clear from his statement, at p. 772:

"The question to be decided in this appeal is whether if a member of such a group becomes insolvent the clearing house system continues to apply to its credits and debits which have not been cleared at the date of the insolvency or whether they should be dealt with in the general liquidations on the same footing as its 'non-clearing house' assets and liabilities."

He gave the answer, at pp. 780-781:

"But what the respondents are saying here is that the parties to the 'clearing house' arrangements, by agreeing that simple contract debts are to be satisfied in a particular way have succeeded in 'contracting out' of the provisions contained in section 302 for the payment of unsecured debts 'pari passu.' In such a context it is to my mind irrelevant that the parties to the 'clearing house' arrangements had good business reasons for entering into them and did not direct their minds to the question how the arrangements might be affected by the insolvency of one or more of the parties. Such a 'contracting out' must, to my mind, be contrary to public policy. The question is, in essence, whether what was called in argument the 'mini-liquidation' flowing from the clearing house arrangements is to yield to or to prevail over the general liquidation. I cannot doubt that on principle the rules of the general liquidation should prevail."

Thus the principle that I would extract from that case is that where the effect of a contract is that an asset which is actually owned by a company at the commencement of its liquidation would be dealt with in a way other than in accordance with section 302 of the Companies Act 1948, then to that extent the contract as a matter of public policy is avoided, whether or not the contract was entered into for consideration and for bona fide commercial reasons and whether or not the contractual provision affecting that asset is expressed to take effect only on insolvency.

When that principle is sought to be applied to the facts of the present case, it is clear that the moneys in the special account were not assets of the defendant at the date of liquidation. The book debt which had been its asset was discharged no later than the date when the moneys were paid into the special account. Accordingly the principle has no application to those moneys and this defence fails.

(3) Section 95

Mr. Potts submitted that the agreement constituted a charge by the defendant on its book debts, being a charge on moneys due or to

become due to the defendant from the plaintiff, and that the charge was in favour of the third party creditors; such charge was not registered within 21 days or at all and so, Mr. Potts says, it was void under section 95 of the Companies Act 1948. To this submission Mr. Millett and Mr. Higham responded with a large number of arguments. One, that the third party creditors had no enforceable interests and hence nothing that could come within the description of a charge, I have already rejected in the light of In re Northern Developments (Holdings) Ltd. (unreported). But others of their submissions seem to me to be manifestly correct and I shall not extend a lengthy judgment by going through them all. To come within section 95 Mr. Potts must show that the creditors have a charge on the defendant's book debts, such that in the absence of registration the security conferred on the company's property or undertaking is avoided. "Charge" is not defined for the purpose of section 95 (save to extend its meaning to include a mortgage) and so must, in the absence of any indication to the contrary (and none is suggested), bear its ordinary meaning. The type of charge which it is said was created is an equitable charge. Such a charge is created by an appropriation of specific property to the discharge of some debt or other obligation without there being any change in ownership either at law or in equity, and it confers on the chargee rights to apply to the court for an order for sale or for the appointment of a receiver, but no right to foreclosure (so as to make the property his own) or take possession: see, for example, Megarry and Wade, The Law of Real Property, 4th ed. (1975), pp. 902, 925. I do not see how the rights of the third party creditors to enforce the primary trust relating as it does to the moneys in the special account can be said to amount to a charge on any book debt of the defendant. The book debt of the defendant owed to it by the plaintiff is discharged no later than on payment of the moneys into the account and only on such payment do the rights of the third parties arise. Their rights to enforce against the defendant as trustee the carrying out of the primary trust seem to me to be wholly different from the rights of a chargee. There is no equity of redemption in the defendant. In reality what was created by the July agreement was a method of settling the plaintiff's debt to the defendant and the defendant's corresponding debts to the third party creditors without any intention to create a charge in favour of the third party creditors who knew nothing of the July agreement until the third party creditors' representatives were told of it after the commencement of the liquidation. Further, even if the rights of the third parties were charges, and the security were avoided, that would not in my judgment prevent the plaintiff from exercising its equitable right to enforce the primary trust. In my judgment this defence also fails.

(4) The plaintiff s obligations

In the light of my conclusions that the primary trust can and should be carried out in relation to the moneys in the special account, that part of the counterclaim which relates to those moneys has no application. That leaves the claim to £780,000. It is common ground that subject to

the question of set off there is no defence to the claim that the fee for July in the sum of £20,416.67 is payable.

In respect of the balance the claim of the defendant and the liquidator is very simple. The defendant performed its contractual obligations by its services and incurred debts in July to third parties for which it is entitled to be paid by the plaintiff. Not so, says the plaintiff: by the July agreement the plaintiff's only obligation to the defendant was to pay its debt into the special account, that is to say to constitute the trust by paying the defendant as trustee and any outstanding debt on 26 July and any further debts incurred thereafter became owed to the defendant only as trustee; the defendant's counterclaim to receive the moneys beneficially must, the plaintiff says, fail. To that the defendant replies that that is an incorrect analysis of the position: the defendant was owed a debt by the plaintiff which it had not discharged at the commencement of the liquidation; that was an asset of the defendant and to the extent that the July agreement purported to provide for the appropriation of that asset to the third party creditors, it is avoided as contrary to public policy: see the British Eagle case [1975] 1 W.L.R. 758.

In short therefore the issue between the parties is very similar to the crucial issue in the British Eagle case. Again there is no dispute in principle. Mr. Higham accepted that if the debt of the plaintiff was an asset of the defendant at the date of the commencement of the liquidation, the July agreement could not cause that asset to be taken away from the defendant. Just as in British Eagle the issue turned on the identification of what having regard to the clearing house arrangement was the property of British Eagle, so in the present case the issue turns on the identification of what having regard to the July agreement was the property of the defendant.

Mr. Potts submitted that the position here was even clearer than in the British Eagle case where Lord Cross of Chelsea, at p. 778, described the relevant assets of British Eagle as not, strictly speaking, "debts" owing by Air France, because the contract under which the right to be paid arose did not permit British Eagle to sue Air France for payment but provided for payment exclusively through the medium of the clearing house. In contrast here there is no bar on the defendant suing the plaintiff. Mr. Potts submitted that notwithstanding the July agreement the debtor/creditor relationship subsisted between the plaintiff and the defendant; on its true construction it provided merely for the discharge of the debt owed to the defendant in a particular manner.

In my judgment Mr. Potts is correct in that submission. Immediately before the July agreement the defendant had a book debt owed to it by the plaintiff. Immediately after the July agreement the defendant, as Mr. Higham accepted, still had a valuable right against the plaintiff which it could enter in its books. Mr. Higham said that that right was not a debt but the contractual right to enforce the plaintiff's obligation to constitute the trust by paying the moneys owed into the special account. He accepted that if the July agreement had provided for payment to a trustee other than the defendant, the trustee would have had no right to enforce payment. Similarly only when the trust was

constituted did the third parties acquire any rights. No debt in any sense of the term was owing to the defendant as trustee. The position would of course be different if the defendant had constituted itself trustee of its book debt, but the plaintiff does not contend for that result. In my judgment, on a proper analysis of the July agreement, it did not discharge or replace the defendant's book debt which remained an asset of the defendant until that debt was discharged by payment by the plaintiff into the special account. That did not occur in respect of the July debts and accordingly the July agreement is ineffective in purporting to appropriate to the third parties any moneys which the plaintiff might pay the defendant to discharge its debt. Therefore the whole of the sum of £780,000 is payable by the plaintiff to the defendant.

(5) Set off

The plaintiff claims that it is entitled to set off certain sums against the defendant's and the liquidator's right to receive £780,000. Its argument proceeds thus: (1) the plaintiff and the defendant had mutual dealings pursuant to its agreement with the defendant in August 1982 for the calendar year 1983 and the variation thereof in the form of the July agreement; (2) it was an implied term of the 1982 agreement, alternatively of the July agreement, that to the extent to which the defendant was put in funds by the plaintiff to pay third parties it would pay the third parties duly and promptly; (3) in breach of that term it failed to make due and prompt payment of the outstanding May debts, the June debts and the July debts; (4) the plaintiff thereby suffered loss and damage; (5) in reasonable mitigation of the loss and damage the plaintiff incurred expenses, in that it paid the June and July debts, and it is therefore entitled to recover those expenses subject to giving credit for any recoveries made by it by reason of the assignments which it took from the third parties. For completeness I should add that there is also a novel claim for interest on those expenses and a claim for management and administrative expenses, but the latter claim was never proved.

Mr. Potts' riposte was that for a valid set off the plaintiff must show that moneys were due from the defendant to the plaintiff at the commencement of the liquidation and that the plaintiff could not show this because (i) there was no such implied term; (ii) if there was, the only breach that had occurred by the time of the commencement of the liquidation was the failure to pay the May debts and no loss was thereby caused; (iii) no damage for any breach has in any event been proven and consequently no mitigation is possible; (iv) it is not legitimate to treat the mitigation as part of the sum due at the commencement of the liquidation.

There is no doubt that there have been mutual dealings between the plaintiff and the defendant. Section 31 of the Bankruptcy Act 1914 states explicitly:

"an account shall be taken of what is due from the one party to the other in respect of such mutual dealings, and the sum due from the one party shall be set off against any sum due from the other party ..."

There is also no doubt that a liability existing at the relevant date but which cannot be quantified till after the relevant date is nevertheless a sum due at the relevant date for the purposes of the section: see In re Daintrey [1900] 1 Q.B. 546. There is also no doubt that a contingent obligation to pay is not a debt due even though the contingency subsequently occurs and the obligation to pay arises under the contract entered into before the due date: see In re A Debtor (No. 66 of 1955), Ex parte The Debtor v. Trustee of Waite (A Bankrupt) [1956] 1 W.L.R. 1226. Mr. Higham submitted that damages for a breach of contract occurring after the date of the commencement of the liquidation where there have been mutual dealings and the contractual obligation which was subsequently broken existed at that date were the proper subject of a set off. But Mr. Higham was unable to cite any authority which supported this proposition and in my judgment it is contrary to principle. Unless and until the breach of contract occurs, no damages could arise and hence nothing was due at the date relevant for set off. Accordingly I am only concerned with breaches of contract that have occurred at the commencement of the liquidation.

Was there an implied term in the August 1982 contract between the defendant and the plaintiff when Messrs. Higgs and Shephard agreed the fee for 1983 that the defendant would pay the third party creditors duly and promptly to the extent to which it was put in funds by the plaintiff? There are two matters to be shown: an obligation to pay the creditors and if so an obligation to pay duly and promptly. The meeting on 17 August 1982 was only to discuss the question of the fee and so there was no express agreement on payment of creditors. It was mutually understood that in all other respects the business relationship of the parties would continue as it had since 1979. Mr. Potts rightly points out that it is not enough for the implication of a term to say that it would be a reasonable term for the parties to have agreed. It must be a matter of necessity to give business efficacy to the contractual relations between the parties. He says that as the defendant already had its own obligation to the third parties such a term was not necessary. However I am satisfied on the evidence before me that such a term which the plaintiff could enforce against the defendant is to be implied. The plaintiff plainly regarded advertising as an important part of its business, hence the huge sums spent on its advertising campaign as the defendant as an experienced agency well knew. It was obvious to the third parties that the advertisements were those of the plaintiff and the plaintiff had regular meetings with the media. As Mr. Higgs said, because the media channels open to a cigarette and tobacco manufacturing company were very restricted, the plaintiff was highly dependent on the press and needed to preserve its goodwill with the press. Any delay in payment by the defendant or other action to undermine that goodwill was regarded by him as very damaging to the plaintiff. Mr. Duskwick was also aware of the consequences of failing to pay promptly. He said that a failure to pay a bill to a newspaper could cause a total blacking of the plaintiff's advertisements by that paper. He also confirmed that the third party creditors expected that the bills they presented to the defendant would be passed on to the plaintiff. The payment system operated by the

defendant and the plaintiff was designed to ensure and was operated in such a way that the defendant would be put in funds to enable it to pay the third party creditors about the end of the month following that in which the defendant incurred liabilities to the third parties. Mr. Higgs and Miss Moore both regarded the failure by the defendant to pay the May debts as a breach of the contract with the plaintiff and in my judgment they were right to do so. I would add that in any event there was an express obligation on the defendant in the July agreement for the defendant to make payment to the third party creditors, and if one then asks the question when was the defendant to perform that obligation, the obvious answer is that it should do so duly and promptly once the moneys had been received.

However, an obligation to pay duly and promptly once put in funds does not in my judgment mean that the obligation must necessarily be performed by the end of the month in which payment is made by the plaintiff. Indeed it is to be noted that the plaintiff itself pleads that its own obligation to pay the defendant was to pay by the last day of the month. If it exercised its right to delay payment until the last day of the month, the defendant had to have time to make payments, the total of which each month in the material period was many hundreds of thousands of pounds.

Were there any breaches that occurred on or before the commencement of the winding up? Mr. Potts concedes that there was such a breach in respect of the May debts, but denies that there was any such breach in respect of the June and July debts. The cheque for the June debts was not handed over until after banking hours on 26 July, that is to say effectively three or four days later than the plaintiff's normal practice. I am not satisfied that by 3 August a breach had already occurred. Indeed it is clear that even though the defendant appears to have sent off the cheque drawn on the special account on or before 29 July, there had not been time for the cheque to be cleared before 3 August. In my judgment therefore there was no breach in respect of the June debts. A fortiori there was no breach in respect of the July debts as the defendant had not been put in funds by the plaintiffs. It is also pleaded by the plaintiff that the liquidation itself caused a breach, but that seems to me to be fundamentally wrong. It is not the liquidation which causes a breach of unperformed contracts but actions taken thereafter, as in this case by the liquidator in causing the cheques to be stopped.

What damage was caused by the plaintiff by the breach in respect of the May debts? Mr. Higham concedes that no damage can be shown as resulting from that breach alone, and that concession was in my view rightly made in view of the evidence that no creditor acted on the failure to pay the May debts until in August or September that failure was brought to the attention of the plaintiff.

It follows that the claim to a set off fails. However, in case this case goes further and I am held to be wrong in the views expressed on this head, I should add that I am satisfied that the failure to pay the June debts by itself or coupled with any anticipatory breach of the obligation to pay the July debts did cause loss and damage to the plaintiff in that it would either have had to stop its advertising campaign with consequent damage, which I am prepared to infer, to its business or it would have had to pay

increased advertising charges. Further I am satisfied that the plaintiff acted reasonably in seeking to mitigate its loss by paying the June and July debts. As Mr. Webb put it, "We had no alternative."

In the result I shall make the following orders: (on the statement of claim) (1) a declaration that the moneys now and since 27 July 1983 standing to the credit of the special account are and were held by the defendant upon trust for the sole purpose of applying the sums in meeting the debts of the third parties to which the invoices attached to the cheque letter related; (2) an order that the defendant and the liquidator do forthwith apply the said moneys in carrying out that purpose; (on the counterclaim) (3) an order for payment by the plaintiff to the defendant of £780,000.

In conclusion I would like to pay tribute to counsel on both sides for their admirably presented arguments, and in particular to Mr. Higham who in the absence of his leader had the conduct of the plaintiff s reply and performed his duties with conspicuous ability.

Solicitors: Linklaters & Paines; Fielder Le Riche.

[Reported by SARAH WADHAM, Barrister-at-Law]