Case No: CHANF 99/0011 A3
 
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY DIVISION (LONGMORE J)
Royal Courts of Justice
Strand, London, WC2A 2LL

Thursday 18 April 2000

B e f o r e :

THE MASTER OF THE ROLLS
(LORD WOOLF)
LORD JUSTICE ROBERT WALKER
and 
MRS JUSTICE SMITH

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	TRIFFITT NURSERIES (A FIRM) & ORS		Appellant	
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	SALADS ETCETERA LTD & ORS	Respondent	

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   (Transcript of the Handed Down Judgment of
Smith Bernal Reporting Limited, 180 Fleet Street
London EC4A 2HD
Tel No: 0171 421 4040,  Fax No:  0171 831 8838
Official Shorthand Writers to the Court)  
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Mr Edward Bannister QC (instructed by  Actons for the appellant)
Mr Simon Mortimore QC (instructed by  Walker Morris for the respondents)
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Judgment
As Approved by the Court

Crown Copyright ©

Lord Justice Robert Walker:
	The main issue in this appeal is concerned with the beneficial ownership of money collected by administrative receivers appointed by a bank to take over the assets and undertaking of a mercantile agent.

	The facts were not in dispute (although there is a subsidiary issue as to the costs implications of two notices to admit facts) and they were put before the court in the form of two statements of agreed facts, amplified by witness statements on which there was no cross-examination.  The following summary is an abbreviated version of the fuller statement of facts in the judgment of Longmore J, which is reported at [1999] 1 AER (Comm) 110.  The parties’ co-operation in agreeing statements of facts is commendable, but (as sometimes happens in such cases) some points have emerged in this court on which there is nothing in the agreed statements, and therefore no finding by the judge.

	The claimants are all growers of vegetables, and in particular salad vegetables such as lettuce, tomatoes and cucumbers, in the north-east of England.  The first defendant Salads Etcetera Ltd (“Salads”) had premises at Newport, North Humberside.  It took delivery of produce from growers (including, but by no means limited to, the five claimants) and sold the produce on either by direct sales to supermarkets (which took Class I produce) or to wholesale markets (which took Class II produce, or Class I produce not sold by direct sales).  Unsold produce was treated as waste.  Salads dealt with the claimants as a mercantile agent, although there were some other suppliers from whom Salads bought produce which it sold on as a principal.  It charged the claimants a commission on all produce which it sold, even if the produce was rejected by the customer.  Salads also debited each grower with the wholesaler’s commission on market sales.  

	There were no written agreements between Salads and any of the claimants but there was standard documentation which evidenced the way business was done between them: the growers’ delivery notes; weekly stock sheets prepared by Salads and sent to individual growers; weekly growers’ returns prepared by Salads and sent out with the stock sheets, showing the prices achieved and deductions for Salads’ commission on direct sales (described as ‘haulage’) and for wholesalers’ commission; and (where relevant) invoices for packaging materials sent by Salads to growers.  These are described in more detail in the judge’s judgment.

	Salads might decide to pool produce from different sources for more efficient marketing.  This was known to the claimants and must therefore have been accepted by them.  When pooling had taken place the growers’ returns would show an average price obtained that week by all produce of that type and grade.  The delivery notes and invoices which Salads sent to its customers did not identify the grower which had consigned the produce; nor did the weekly stock sheets and growers’ returns identify the customer, although a supermarket customer might be identified by the packaging which a grower was required to use.  There was not in practice any direct dealing between grower and customer.  Salads made payments to growers by BACS transfer at a fixed period (at first three weeks and later four weeks) after the week of sale.  Most customers had credit terms requiring payment to Salads within that period, but two supermarkets had used their economic power to secure 35-day credit terms.

	Salads had been incorporated on 23 October 1989 and on the same day it entered into a debenture in favour of the Royal Bank of Scotland.  This contained a fixed charge on Salads’ freehold and leasehold property and other specified categories of assets including book debts, and a floating charge on all its other assets and rights.  The five claimants (two limited companies and three partnerships) began dealing with Salads on a regular basis at various dates between April 1990 and February 1994.  Salads did not prosper and on 11 October 1994 the bank exercised its power under the debenture to appoint the second and third defendants, Mr Michael Hore and Mr Keith Hinds, as administrative receivers.

	At the time of the appointment of the receivers there was no saleable growers’ produce on Salads’ premises, nor was any further produce consigned by growers after that time.  Nothing further, therefore, was sold or delivered to customers by Salads’ receivers after their appointment.  So far as the growers were concerned the receivers’ only task was to get in trade debts from past sales of produce.  The receivers got in debts of over £666,000, but Salads’ debt to the bank was about £1.878m when the receivers were appointed, and its total liabilities were very large.  It does not appear from the agreed facts how much of the £666,000 was in respect of sales of produce consigned by the five claimants, but it was clear that neither they nor other growers in a similar position would receive anything significant unless they could establish that the receivers held the money in trust for them, and not as part of Salads’ assets.  That was the claim which the claimants put forward before the judge, and which they again put forward on appeal to this court.

	It was not and is not the claimants’ case that while Salads was trading, it held the proceeds of sales to customers as a trustee and was obliged to keep them separate from its own funds.  It was at liberty to mix the proceeds with its own funds and use them for its own purposes, subject to a contractual obligation to account to the claimants  (and other growers with whom it was in an agency relationship).  The judge noted that that concession stemmed from cases such as Henry v Hammond [1913] 2 KB 515, Neste Oy v Lloyds Bank [1983] 2 LLR 658 and the Australian case of Walker v Corboy (1990) 19 NSW LR 382.  He also referred to what he rightly called the illuminating discussion in Bowstead & Reynolds on Agency, 16th ed para 6.043 (approved, in the previous edition, by Lord Goff in Napier v Hunter [1993] AC 713, 744).

	The case put forward by Mr Edward Bannister QC (appearing in this court, as below, for the claimants) was that a change of critical importance occurred when the receivers were appointed and Salads’ business ceased to be a going concern.  At that point, he submitted, the authority of Salads to act as agent on behalf of the claimants came to an end, and with it the debtor-creditor relationship which had previously existed between Salads and the claimants (and other growers dealing with Salads on similar terms).  Mr Bannister has placed particular reliance on the decision of this court in Re Farrow’s Bank [1922] 1 Ch 51 and has described that case as exemplifying a principle established at latest by the middle of the eighteenth century.

	The judge analysed Re Farrow’s Bank in detail.  Mr Voyce was a customer of Farrow’s Bank and on 16 December 1920 he paid into its Birmingham branch a cheque drawn on another bank.  The cheque was sent to clearing agents and was finally cleared (by the cessation of any relevant right of recourse) at 12.30pm on 21 December.  However Farrow’s Bank had suspended payment at the opening of business on 21 December, and news of this had been telegraphed to all its branches before 12.30pm.

	Before Astbury J there were two issues: whether Farrow’s Bank took the cheque on 16 December as a holder for value or as a collecting agent; and whether (if it took the cheque as a collecting agent) it had effectively changed its relationship with its customer from that of agent and principal to that of debtor and creditor.  Astbury J held that the bank took the cheque as a collecting agent, and there was no appeal on that point.  He also held that the bank’s authority to effect a change of the relationship came to an end when the bank had, to the knowledge of its Birmingham branch, suspended payment ([1922] Ch 41, 51):
"That being so it seems to me that after ceasing to act as a going concern and stating their intention no longer to act as a going concern they had no longer any authority from Voyce to take what was in fact his money received after the stoppage and convert it into money forming part of their assets, in respect of which they would be entitled to assume the position of debtors instead of agents."

This court upheld the decision that the bank’s suspension of payment had a crystallising effect which terminated its authority to complete the collection of the cheque and to treat Mr Voyce as its creditor for the amount of the cheque.  Lord Sterndale MR put the point in these terms ([1922] 1 Ch 41, 53),
"If [the bank] received [the amount of the cheque] before they suspended payment, they then held the money simply in the relation of debtors to their customer; if they did not receive it till after the suspension, then they had given up all their functions as a bank, and they had no right to receive the money and retain it, and the customer would be entitled to recover it."

	It has not been suggested that Re Farrow’s Bank does not bind this court (although there was some discussion before the judge as to whether, and why, the case is mentioned in textbooks less than it used to be).  For present purposes the question is whether it is a decision as to the effect on a bank’s authority as a collecting agent of the bank’s suspension of payment, or whether it is a decision embodying a principle of wider application beyond the confines of the law of banking.

	Mr Bannister has submitted that it does embody a principle of general application.  It shows (he has submitted) that a person whose business is to act as an agent in turning to account the property of his principal is not entitled, after he has ceased actively to carry on the business, to keep for himself the proceeds of his principal’s property (even though the relationship until then was a debtor-creditor relationship, and not a fiduciary relationship).  The cases on which he has relied in order to furnish Re Farrow’s Bank with a venerable pedigree are Scott v Surman (1743) Willes 400, ex parte Pauli (1838) 3 Dea 169 and Re Wood ex parte Boden (1873) 28 LT 174.  

	It is necessary to approach those cases with some caution.  That is particularly true of Scott v Surman, a case concerned with a cargo of tar shipped from Carolina to London, where it was sold by a factor who shortly afterwards became bankrupt.  The question was whether promissory notes taken by the bankrupt factor were available for his creditors.  The case was heard in the Court of Common Pleas and the opinion of the court was given by Willes LCJ.

	Willes LCJ stated that the whole court agreed that the equity of the case was with the plaintiffs (the factor’s principals).  The question was whether the plaintiffs could succeed at law so as to avoid the need for circuity of action.  He then stated his own minority view “that nothing vests in these assignees [in bankruptcy] even at law but such real and personal estate of the bankrupt in which he had the equitable as well as the legal interest”.  He then returned to the view of the whole court and considered three possible events: sale of the tar for cash before bankruptcy, possession of the tar unsold at bankruptcy, and sale of the tar for promissory notes which were unpaid at bankruptcy.  

	He said of the first of these events (at pp.403-4),
"We are all agreed that if the money for which the tar had been sold had been all paid to the bankrupt before his bankruptcy, and had not been laid out again by him in any specific thing to distinguish it from the rest of his estate, in that case the plaintiffs could not have recovered any thing in this action, but must have come in as creditors under the commission, as is laid down in the case of Whitecomb v Jacob (1710) 1 Salk. 161, and in many other cases.  But the reason of this is so very plain that I need not cite any other, because money has no earmark and therefore cannot be followed."

Had the tar been unsold, on the other hand, the plaintiffs could have recovered it from the assignee in bankruptcy; and the same principle applied in the intermediate case of the promissory notes (at p.404):
"But the present case is a middle case between these two which I have mentioned, but I think may be determined on the same reasons.  For why are goods considered still as the owners? Because they remain in specie, and so may be distinguished from the rest of the bankrupt’s estate.  But as money has no earmark, it cannot be distinguished.  Otherwise to be sure in reason the thing produced ought to follow the nature of the thing out of which it is produced, if it can be distinguished; and so long as it remains a debt, it is equally distinguishable; or if it be laid out in a particular thing, as the case in Salkeld is.  And the notes are within the same reason."

	Scott v Surman is an important case in the development of this area of the law, but there was still a good deal of development to take place.  There have been two notable changes, which pull in opposite directions in the contest between the unpaid principal and the creditors of the bankrupt agent.  On the one hand, the law as to following and tracing property has developed dramatically since the 18th century (see in particular the well-known passage in the judgment of Sir George Jessel MR in Re Hallett (1880) 13 Ch D 696, 713-8, explaining why Fry J at first instance had erred in following old authorities in preference to his own opinion).  On the other hand, the assumption (readily made in some of the older cases) that every factor is a trustee of the proceeds of sale of his principal’s goods has been shown by later cases to be mistaken.

	Both these points merit some further examination.  The notion that “money has no earmark” was critically examined by Lord Ellenborough in Taylor v Plumer (1815) 3 M&S 562, a case heard in the Court of King’s Bench.  Lord Ellenborough (at p.575) referred to Scott v Surman and Whitecomb v Jacob and then made some well-known observations to the effect that the right only ceases when the means of ascertainment fails, and that the difficulty is a difficulty of fact, not law.  In The Law of Tracing (1997) Dr L D Smith comments as follows (p.169):
"What, then, did Lord Ellenborough CJ mean to say?  The context of the discussion is that of claims by principals trying to establish priority upon the insolvency of their agents.  That was what happened in Whitecomb v Jacob and in Scott v Surman.  There were dicta in both cases to the effect that if the agent had sold the principal’s goods for money, then because ‘money has no ear-mark’, the principal was automatically reduced to claiming as a creditor in the insolvency.  This rather simplistic idea was to undergo refinement.  Shorthand for the conclusion that the plaintiff had no proprietary rights in money, it concealed at least two different ideas.  One was relevant to claims based on following; the other was relevant to claims based on tracing."

(For an explanation of the importance of distinguishing between following, tracing and claiming, see pp.6-14 of that work; also Millett LJ in Boscawen v Bajwa [1996] 1 WLR 328, 334.  Basically following is the process of identifying property; tracing involves one or more substitutions.)

	Ex parte Pauli and ex parte Boden are not seminal cases but they illustrate the over-ready acceptance, at that time, of the general proposition that money due to a factor from a purchaser must belong to the principal.  That appears most clearly from the short judgment of Sir John Cross in ex parte Pauli (at p.175):
"It is a strange mode of arguing, to contend, that directly the bills were sold by the bankrupts, the proceeds became their property; although it is admitted, that the moment before, the bills were the property of the petitioners."

Later cases such as Kirham v Peel (1880) 43 LT 171, (1881) 44 LT 195 King v Hutton [1899] 2 QB 555, [1900] 2 QB 504 and Henry v Hammond [1913] 2 KB 515 show that the argument was not so obviously absurd as Sir John Cross supposed.  And it is not irrelevant or facetious to point out that on the facts of this case the principal’s goods would, because of their highly perishable nature, become worthless if not they were not sold very quickly.  That was part of the commercial context.

	Kirkhall v Peel and Henry v Hammond are particularly instructive.  In Kirkham v Peel the plaintiff was a Manchester merchant who was accustomed to consign goods to an agent trading in Bombay.  The agent was not insolvent, but the plaintiff sued him for an account of profits said to have been made by the agent’s use of balances due to the plaintiff.  The claim failed.  At first instance Sir George Jessel MR had his own judgment in Re Hallett cited to him, and he said (43 LT at p.172),
"My observations in the case which has been cited had nothing whatever to do with the case of a commission merchant or agent.  They were confined to the case of a bailee, ordinarily called a factor, who sells single articles, and whose duty it is to remit the necessary proceeds to his principal.  The case I have before me is one of a totally different character.  The defendants are ordinary merchants and commission agents, with a house at Bombay, with nearly the same partners as at Manchester, and they receive goods from anybody who sends goods to them.  No person in their position ever dreamed of keeping separate accounts at their bankers, and no consignee of goods ever dreamed of such a thing being done.  Such an idea, I am sure, was never entertained by anyone."

In the Court of Appeal James LJ (44 LT at p.196) said,
"If he is a factor or a mortgagee, he has to account for the balance; but, subject to that, such proceeds of sale are as much his moneys as any other moneys that he has in his possession or under his control.  There was no bargain that he would not invest them in any way, or that he would not mix them up with his own moneys.  He was under no obligation to keep the moneys distinct."

Lush LJ (at p.198) referred to what he called “a very ingenious and grotesque distortion of an equitable doctrine, namely, that a trustee cannot make a profit out of trust moneys”.  

	In Henry v Hammond [1913] 2 KB 515, 521, the distinction was clearly stated by Channell J:
"It is clear that if the terms upon which the person receives the money are that he is bound to keep it separate, either in a bank or elsewhere, and to hand that money so kept as a separate fund to the person entitled to it, then he is a trustee of that money and must hand it over to the person who is his cestui que trust.  If on the other hand he is not bound to keep the money separate, but is entitled to mix it with his own money and deal with it as he pleases, and when called upon to hand over an equivalent sum of money, then, in my opinion, he is not a trustee of the money, but merely a debtor.  All the authorities seem to me to be consistent with that statement of the law.  I agree with the observation of Bramwell LJ in New Zealand and Australian Land Co v Watson (1881) 7 QB D 374, 382 when he said that he would be very sorry to see the intricacies and doctrines connected with trusts introduced into commercial transactions."

For all these reasons I cannot accept Mr Bannister’s submission that Re Farrow’s Bank should be regarded as an embodiment of a long-standing general principle, derived from Scott v Surman.  The importance of Scott v Surman is historical, and not as a guide to the present state of the law.

	Mr Bannister also relied on s.12(3) of the Factors Act 1889.  That Act repealed and replaced the Factors Acts 1823-1877, but it is a curiosity that the word “factor” occurs in the Act only in its long and short titles.  It defines a mercantile agent (s.1(1)) as
"a mercantile agent having in the customary course of his business as such agent authority either to sell goods, or to consign goods for the purpose of sale, or to buy goods, or to raise money on the security of goods"

A factor is a mercantile agent who has goods in his possession for the purpose of sale (Cotton LJ in Stevens v Biller (1883) 25 Ch D 31, 37).

	The Factors Act 1889 gives to a mercantile agent wide powers to pass title to goods of his principal which are in the agent’s possession, but s.12 contains savings for the rights of the true owner.  S.12(3) provides,
"Nothing in this Act shall prevent the owner of goods sold by an agent from recovering from the buyer the price agreed to be paid for the same, or any part of that price, subject to any right of set-off on the part of the buyer against the agent."

Therefore, Mr Bannister submitted, Salads never had an absolute (but only a defeasible) right to recover debts in respect of produce consigned by the claimants and sold by Salads on their behalf.  

	The terms of s.12(3) are negative and do not confer any positive right.  On the facts of this case, any of the claimants would have had the greatest possible difficulty in demanding direct payment from any of Salads’ customers, because it would not normally have any records showing that its produce had been sold to a particular customer at a particular price.  The course of dealing between Salads and the claimants made it a practical necessity that these trade debts should be collected by Salads.  However there is nothing in the statements of agreed facts, and no finding by the judge, that the claimants had bound themselves never to ask for payment direct from customers.  It cannot therefore be excluded as a theoretical argument, but it is very doubtful whether it was ever a practical possibility.

	Even on the assumption that Salads’ right to obtain payment from customers was in some sense defeasible, the claimants cannot succeed unless they can show that the right was indeed terminated by the appointment of receivers, in conjunction with the cessation of the business.  That presents a number of difficulties, as the judge noted.  On the material before this court there is no clear evidence of what steps the receivers took to close down the business.  They had power, as administrative receivers invariably do, to take possession of and manage the business.  The supplementary statement of agreed facts states (possibly in carefully chosen or carefully negotiated words),
"[Salads] ceased to trade on the appointment of the receivers, in the sense that it ceased to carry on business as a mercantile agent, ie no further produce was supplied by the [claimants] to [Salads] and none was sold or delivered to customers by [Salads]."

This court was told that on the same day as the receivers were appointed, the claimants’ solicitors wrote to them making a claim to the trade debts due from customers who had purchased the claimants’ produce.

	That appears to me to be an inadequate factual basis from which to infer that the agency relationship between the claimants and Salads must have come to an end, automatically and for all purposes, when the receivers were appointed and Salads ceased (in the sense described above) to carry on business as a mercantile agent.  The judge observed that apart from express notice of termination, agency is usually terminated only by the death, insanity or bankruptcy of an individual agent or the equivalent of death (that is, dissolution) on the part of a corporation.  For this the judge referred to Boustead & Reynolds, 16th ed, para 10-015.  However that particular paragraph is, with respect, not very illuminating, especially as the first footnote refers to some provisions of the Companies Act 1985 which have been repealed and replaced by ss.91 and 103 of the Insolvency Act 1986.  No authority is cited for the proposition (in the same footnote) that the appointment of a receiver may have a similar effect (to that of the commencement of winding up).

	There are by way of contrast some reported cases in which this point, if sound, could have been taken, but was not taken.  The most notable is the Australian case mentioned by the judge, Walker v Corboy (1990) 19 NSW LR 382, a decision of the Court of Appeal of New South Wales.  It is of particular interest since it was concerned with an agent which sold farm produce on behalf of a large number of producers.  The agent, a company called Lojon, was a farm produce agent for the purposes of the Farm Produce Act 1983 of New South Wales, which was broadly the equivalent of a mercantile agent under the Factors Act (in Great Britain some of the purposes of the Australian statue are achieved by the Horticultural Produce (Sales on Commission) Act 1926).  A bank appointed receivers of Lojon’s business, and the receivers agreed to pay into a separate account money which they received from sales of produce.  It does not appear whether the receivers sold any produce after their appointment, but as Lojon went into liquidation soon afterwards that seems unlikely.  In his judgment Meagher JA noted that there were two issues, and commented on their interrelation:
"1.	Whether, by reason of any relationships, between growers of farm produce (including the plaintiffs) and [Lojon], of principal and farm produce agent, the proceeds of the sale of farm produce sold by [Lojon] on behalf of such growers in its capacity as such agent were received by [Lojon] on trust for such growers?

2.	Whether moneys collected by the receivers representing proceeds of the sale of farm produce sold by [Lojon] on behalf of such growers in its capacity as such agent are received by [the receivers] or by [Lojon] on trust for such growers?  

It was not in dispute, at least on appeal, that an affirmative answer to the first question requires an affirmative answer to the second question, and that a negative answer to the first question requires a negative answer to the second question.  Cole J answered each question in the affirmative."

However the Court of Appeal of New South Wales answered both questions in the negative, attaching particular weight to the practicalities of the pattern of dealing between the growers and Lojon (see Priestley JA at pp. 386-7, Clarke JA at p.390 and Meagher JA at p.395).  Meagher JA’s statement of the issues suggests that the growers may have been contending, at first instance, that a negative answer to the first question might be followed by an affirmative answer to the second question.  If so, the basis for that contention is obscure.  Walker v Corboy contains a very full and instructive discussion of this whole area, but does not assist on the point about termination of authority.

	In this court the argument has followed the same general lines as before the judge, but with some change of emphasis and some new points which Mr Bannister (candidly acknowledging that they had not been taken below) put forward as footnotes to his main argument.  Mr Simon Mortimore QC (appearing in this court, as below, for Salads and the receivers) has submitted that the claimants’ case requires the implication of a term into each of their oral contracts with Salads, and that such an implication is not merely unnecessary but also unworkable.  Neither the appointment of receivers on its own, nor their appointment coupled with a cessation of business (which Mr Mortimore described as an uncertain concept) necessarily terminated the relationship of principal and agent so as to defeat the agent’s right to obtain payment from customers (and to treat every payment as its own money).  The proposition that the agent’s title is defeated by the added element of supervening insolvency would be contrary to public policy as embodied in the scheme of the insolvency legislation.  The debts belonged to Salads while it was trading, subject to the charge in favour of the bank.  Its cessation of trading and insolvency could not alter that.  

	I have commented on most of these points already but (because it was not always possible, in the course of the hearing, to see quite where counsel’s arguments were going) it may be helpful to recapitulate the main points.  Mr Bannister has accepted that while Salads was trading as a going concern it was not obliged to hold and account for receipts from customers as if it were a trustee.  It could use the money for the purposes of its own business, subject to a contractual duty to account to the claimants for what was due to them.  Mr Bannister has accepted that he must point to some divesting event which impressed the post-receivership receipts with a totally different character, so that they were not caught by the bank’s charge, and were beneficially owned (as to an appropriate and quantifiable share) by the claimants.

	In his skilful attempt to achieve this Mr Bannister relied mainly on Re Farrow’s Bank, and the general principle which he sought to derive from it.  I have already explained why Re Farrow’s Bank is in my view an authority of limited application in the law of banking.  Even if the agency relationship between Salads and the claimants did come to an end, by force of circumstances, as soon as the receivers were appointed, that could not by itself alter the right of Salads and its receivers to seek outstanding sums due from customers, or the bank’s charge on those book debts.  Mr Bannister’s use (in his skeleton argument and his oral submissions) of the expression ‘defeasible’ underlines the difficulty: even if the agency relationship has come to an end, why (whatever sympathy is felt for them as relatively small businesses suffering from the insolvency of a larger business) should the established titles of the marketing agent and its chargee be defeated in favour of the claimants?

	The only persuasive answer to that question is, to my mind, that the claim of the disappointed principal will prevail if (and only if) the circumstances are such that it would be wholly unconscionable for the receivers or the bank to oppose the claim.  The most relevant authority is the decision of Bingham J in Neste Oy v Lloyds Bank [1983] 2 LLR 658.  

	It is not necessary to go into the facts of that case in detail.  The principal was a Finnish shipowner and the insolvent agent, PSL, was a shipping agent which would regularly ask for and receive remittances from its principal for the purpose of paying harbour dues, pilotage, towage, and similar expenses.  PSL had received six payments during the period of about six weeks before its directors decided, on 22 February 1980, that it was insolvent and could no longer continue trading.  The sixth payment had been received on that same day, following the appointment of PSL as agent for a vessel called Enskeri.  Bingham J rejected the claim for an express trust (on Quistclose lines: see Barclays Bank v Quistclose Investments [1970] AC 567) affecting any of the six payments, but he concluded that PSL became a constructive trustee of the sixth and last payment made on 22 February.  His findings and conclusion on this point were as follows ([1983] 2 LLR 658, 666):
"Given the situation of PSL when the last payment was received, any reasonable and honest directors of that company (or the actual directors had they known of it) would, I feel sure, have arranged for the repayment of that sum to the plaintiffs without hesitation or delay.  It would have seemed little short of sharp practice for PSL to take any benefit from the payment, and it would have seemed contrary to any ordinary notion of fairness that the general body of creditors should profit from the accident of a payment made at a time when there was bound to be a total failure of consideration.  Of course it is true that insolvency always causes loss and perfect fairness is unattainable.  The bank, and other creditors, have their legitimate claims.  It nonetheless seems to me that at the time of its receipt PSL could not in good conscience retain this payment and that accordingly a constructive trust is to be inferred."

A similar result has been reached, since the decision of Longmore J, by Mr Nicholas Warren QC sitting as a deputy judge of the Chancery Division in Re Japan Leasing (Europe) (30 July 1999).  That was an application for directions by administrators and Mr Warren was prepared to put his decision on the alternative ground of the high standard of conduct to be expected from officers of the court (see ex parte James (1874) 9 Ch App 609).

	Mr Bannister rightly did not seek to push this alternative approach very far, since neither his pleaded case nor the judge’s findings of fact lay a foundation for either Salads or its receivers to be convicted of (in Bingham J’s words) “little short of sharp practice”.  Nor are administrative receivers appointed out of court officers of the court so as to bring into play the rule in ex parte James.  If the receivers had, after their appointment, accepted any further consignments of produce or sold further produce (whenever consigned) to customers, the position would no doubt be different (although probably on the basis of the receivers having adopted Salads’ contracts with the claimants, rather than because of a constructive trust).  As it is, I can see no answer to the basic point relied on by Mr Mortimore, that immediately before the receivership the customers’ debts were assets of Salads charged to the bank, and that the appointment of the receivers and the cessation of trading could not alter that.

	I can deal with the subsidiary issue much more briefly.  The trial judge’s discretion over the costs implications of notices to admit facts will rarely be interfered with by an appellate tribunal, because the judge is in the best position to form a view about the rights and wrongs of the matter and to decide whether to grant indulgence or to apply a costs sanction.  I am not persuaded that the judge exercised his discretion on a wrong principle, or in a manner that was clearly wrong.

	I would therefore dismiss this appeal, despite Mr Bannister’s skilful arguments in support of it, and despite the sympathy which I feel for the claimants whose small businesses may ill afford the losses which they have suffered.

Mrs Justice Smith:
	I agree.

The Master of the Rolls:
I also agree.

Order:  Appeal Dismissed with costs to be subjected to detailed assessment.
Leave to appeal to House of Lords refused.
(Order does not form part of the approved judgment)