Effect of Bankruptcy and Liquidation on Contracts of the Debtor Flashcards
Re Scheibler (1874) LR 9 Ch App 722
Case: H & Co extended credit to S on security of deposit title deeds to house owned by S; six months later S went bankrupt; H & Co, now owed £11,239 by S, applied for order directing S’s trustee in bankruptcy to assign house to them. The negotiation had commenced verbally, when all the parties were in Prussia, but was concluded by a letter written by S. No conveyance or memorandum of the deposit was made, but the house remains registered in the name of S.
Decision: The contract must be governed by English law, and that H & Co had a good security on the house by the deposit of the deeds. The Contract was personally binding on S and could and could be enforced against the trustee in liquidation; and the court made an order to sell the house and pay the proceeds to H & Co.
Rule: Equitable interest lies in purchaser when contracts are made (title may not have passed) and therefore land does not form part of the bankrupt vendor’s estate.
Re Jartay Developments Ltd (1983) 22 BLR 134
Case: J had not properly set aside a retention fund for sub-contractors as contracted to do
Decision: Although the sub-contractors would have been entitled to specific performance before J’s liquidation, this could not be enforced
Rule: Cannot grant specific performance against a trustee - therefore for non-land property (cf Re Scheibler) the question to ask is whether property has passed to the purchaser
N.B. There are no equitable doctrines in SoG (Re Wait)
Swiss Bank Corporation v Lloyds Bank Ltd [1982] AC 584
Case: S agreed to lend a sum in Swiss francs to I to enable them to acquire shares and loan stock from F (bank); under the loan agreement I covenanted to observe all the conditions attached to the Bank of England consent (that on acquisition the F securities should be held in a separate account, that repayment of the loan was to be made from the sale of the F securities and that the trip of the F securities was to be held by an authorised depository). The following year I granted an equitable charge over the F securities to L, the scrip having already been transferred by T to F, also an authorised depository, without BoE permission. S brought an action claiming declarations that it was entitled to be considered an equitable chargee for the F securities or the proceeds thereof for the purpose of securing repayment of the loan in accordance with the loan agreement and the BoE conditions and that the charge in favour of L was void.
Decision: There was nothing in the documents to suggest that there was any agreement with S on the part of I to repay the loan out of the F securities and that accordingly, S’s claim to any charge over or proprietary interest in the F securities or the proceeds of their sale failed.
Quote: “The essence of any transaction by way of mortgage is that the debtor confers on his creditor a proprietary interest in property of the debtor, or undertakes in a binding manner to do so, by the realisation or appropriation of which the creditor can procure the discharge of the debtor’s liability to win, and that the proprietary interest is redeemable, or the obligation to create it is defeasible, in the event of the debtor discharging his liability. If there has been no legal transfer of a proprietary interest by merely a binding undertaking to confer such an interest, that obligation, if specifically enforceable, will confer a proprietary interest in the subject matter in equity. The obligation will be specifically enforceable if it is an obligation for the breach of which damages would be an inadequate remedy. A contract to mortgage property, real or personal, will, normally at least, be specifically enforceable, for a mere claim to damages or repayment is obviously less valuable than a security in the event of the debtor’s insolvency. If it is specially enforceable, the obligation to confer the proprietary interest will give rise to an equitable charge on the subject matter by way of mortgage.” per Buckley LJ
Re Eastgate [1905] 1 KB 564
Case: In February debtor bought goods on credit misrepresenting that he intended to pay for them; on 22 April debtor absconded; on 27 April seller rescinded and retook repossession of goods; in May debtor adjudicated bankrupt and trustee in bankruptcy claimed goods from seller on grounds trustee’s title related back to 22 April
Decision: If goods are sold on credit to a person who has no intention of paying for them, the vendor, on discovering the circumstances, can within a reasonable time disaffirm the contract by re-taking possession of the goods, and this is so although the buyer has committed an act of bankruptcy, to which the title of the trustee relates back before the contract has been so disaffirmed.
Rule: Rescission (only available for misrepresentation) is a proprietary right.
N.B. Said to be wrong by Lord Mustily in Re Goldcorp Exchange
Re Crown Holdings (London) Ltd [2015] EWHC 1876
Case: Currency exchange company insolvent since 2008 ceased trading when Barclays stopped withdrawals from account at 1.00pm on 29 September 2010 and deposits at 1.00pm on 1 October 2010; company entered administration on 4 October 2010 and winding up on 31 March 2011; as at October 2010 company had £2.8m in 12 accounts at Barclays but owed creditors £22m (98% of which was owed to 12,400 customers).
(i) Was the £1.1m paid into Barclays accounts between 29 Sept - 1 Oct in trust for customers who paid these sums for foreign exchange they never received?
- No proprietary claim based on rescission for fraudulent misrepresentation as rescission does not create a proprietary remedy (distinguishes from Re Eastgate mainly on the basis that the case is old; a mere equity is not a proprietary right)
- There is a constructive trust on the grounds of unconscionable receipt; money paid in Nestly Oy by mistake (shipping agent ceased trading)… however subsequent authorities show the reasoning was that money should not be available to general body of creditors due to a total failure of consideration (inevitable failure of consideration made the retention of funds unconscionable); not that mistake/total failure of consideration often overlap but it is the latter that creates a proprietary right; the 12,4000 customers; decided first-in/first-out but will likely have a hearing to decide pari passu
- No express trust; but if a trust did exist pari passu distribution for those whose money was paid in after 29 Sept, as customers could not have expected that their funds would be paid out in the order they paid them in
(ii) Was the £360,000 found in envelopes addressed to customers belonged to customers for the company?
- Question was whether legal title had passed when the envelopes where sealed and awaiting delivery? This depends on the intention of the parties; the current contract terms contained no express provision, however, in the contract: ‘your package’ will be delivered, specific cash to be allocated, contract terms expressly contemplated the customer’s ownership of the package… but court disagree: it makes no sense for customer’s only to be at risk of non-delivery just because money had been put in an envelope and there was no unconditional appropriation or consent/knowledge of the customers. Property passed on delivery
Re Sharpe [1980] 1 All ER 198
Case: In Jan 1975 debtor brought property for £17,000 with the help of £12,000 lent by his aunt under arrangement whereby aunt could live with debtor and his wife and be looked after by them so long as £12,000 was not repaid; in 1978 debtor went bankrupt and trustee contracted to sell house with vacant possession for £17,000; aunt then claimed either a beneficial interest in the property under a resulting trust or a licence to occupy until her £12,000 was repaid
Held: There was no RT as that would entitle the lender to get their money back twice (on repayment of the loan and share in the house); as the parties proceeded on a common assumption that the aunt was to occupy the property and in reliance on that she expended money (or otherwise acted to detriment), the court would imply an irrevocable licence or constructive trust giving effect toe the arrangement, the effect of this being that the aunt had an irrevocable licence to occupy the house until the loan was repaid - this was a proprietary interest binding on the trustee; the aunt’s conduct in failing to reply to the trustee in bankruptcy’s enquiries prior to the contract for the sale of the house was not such as to preclude her from enforcing her interest.
This is a CT.
Insolvency Act 1986, s.336(2)
“Deserted wife’s equity” was a licence to occupy family home devised to bind husband’s trustee in bankruptcy: Bendall v McWhirter; overruled in National Provincial Bank Ltd v Ainsworth; so statutory right of occupation introduction in Family Law Act 1996, Part IV; binding on trustee
Sale of Goods Act 1979, ss. 39, 41 and 44
Right of unpaid seller on goods still in seller’s possession or to stop them in transit even where property has passed to buyer (can hold property until price paid)
Re Edwards (1873) 8 Ch App 289
Case: Hall agreed to sell Edwards 330 tons of bleach to be delivered at 30 tons per month (for 11 months), payment 14 days after each delivery; Edwards failed to pay for November delivery and in December declared himself insolvent; Hall refused to make December delivery (therefore 10 out of 11 deliveries made; 10th not paid for); Edwards went bankrupt and his trustee sued Hall for not making December delivery
Decision: Although neither the non-payment of the tenth instalment nor the bankruptcy entitled the vendors to rescind the contract, yet after the declaration of insolvency they had a right to refuse to deliver any more goods, until the price of both the tenth and eleventh instalments had been tendered, and the letter refusing to deliver did not excuse the trustee from tendering
Rule: After declaration of insolvency a seller can refuse delivery until payments have been tendered (right of rescission on bankruptcy)
Cf ss. 233, 233A, 372 and 372A
Insolvency Act 1986, ss. 233, 233A, 372 and 372A
A supplier can refuse to provide gas, water, electricity or essential supplies.
Arrears rank, but current supply must be paid in the future by the trustee (trustee personally liable)
Re Leyland DAF Ltd v Talbot [2004] UKHL 9
Case: T make vehicles; go into liquidation owing money to suppliers (L) and suppliers refuse to supply; argument that contravenes Treaty of Rome
Decision: Rejected
