Disputes often arise over whether particular assets fall within the estate of an insolvent company, and assets arising out of a principal and agent relationship can cause particular uncertainty. If a claimant can establish a proprietary interest in an asset, then he may be able to “jump the queue” of creditors alongside whom he would otherwise be left to take his pari passu share.
These issues came for consideration before the UK Supreme Court in the 2016 decision of Bailey v Angove’s in the form of two important questions: (i) in what circumstances an agent’s authority to collect payments (and the commission on those payments) from customers is irrevocable despite a valid notice of termination from the principal; and (ii) when (if at all) such payments form part of the insolvency estate or are held on a constructive trust in favour of the principal.
The case concerned an agency and distribution agreement for the sale of wine in the UK between Angove’s Pty Ltd (“Angove’s”) (the principal supplier) and D&D Wines International Ltd (“D&D”) (the selling agent). Under the agreement, D&D was responsible for collecting payment from customers, and was then entitled to deduct its commission from those monies before passing them on to Angove’s. D&D went into administration (and then liquidation) and Angove’s quickly served a contractual termination notice with immediate effect, so as to revoke D&D’s authority to collect outstanding payments from customers. D&D’s liquidators claimed that, on the true construction of the agreement, D&D’s authority was irrevocable, thereby channelling the totality of the payments made by customers into the insolvency estate, leaving Angove’s to prove as unsecured creditors for the amount of those payments less D&D’s commissions.
Irrevocability of Agency Agreements
In considering the circumstances in which the authority of an agent could be irrevocable, Lord Sumption restated the general rule that an agent’s authority is by its nature revocable even if agreed (whether expressly or by implication) to be irrevocable, although termination may give rise to a claim by the agent in damages. He also noted the exception where the agent has a ‘relevant’ interest of his own in the exercise of his authority. As reflected in s 4 of the English Powers of Attorney Act 1971, this exception will apply where (i) there is an agreement that the agent’s authority is irrevocable; and (ii) the authority was given in order to ‘secure’ an interest of the agent, whether proprietary or personal.
While noting some special cases (about which he said nothing more), Lord Sumption held that the traditional approach to the exception, namely that it only applies “where the authority exists solely in order to secure the agent’s financial interest, and is in reality no more than the commercial equivalent of an assignment” is too narrow; and that there is no principled reason why a true agent employed on his principal’s affairs should not also be regarded as having a personal interest in the exercise of his authority sufficient to make it irrevocable – eg., where the relationship is broader than the mere collection of money to satisfy the agent’s debt, so that the agent may be said to act both for himself and his principal. However, his Lordship held that the exception will not apply where the agent’s only interest is in being able to earn his commission.
The Court therefore clarified that while an “an agent’s interest in continuing to act in order to earn his commission was insufficient to make his authority irrevocable, his interest in recovering a debt in respect of already earned commission might well be, provided that it is sufficiently clear that the parties intended that the agent’s authority should secure it” [emphasis added].
In the light of these principles, the court construed the contract in which there was no express irrevocability and found that, contrary to the Court of Appeal’s analysis, no continuing right of D&D to collect the price from the customer could be implied. In particular, provisions that collection of the price by the agent was its ‘responsibility’, and that the customer could pay the principal directly, made it difficult to regard collection by the agent as a ‘right’, still more as a ‘security’. In the result, the collections made by D&D after its authority had been terminated went to Angove’s, with D&D taking its earned commissions on those sales.
In a further obiter but per curiam ruling, the Court held that if the agency had been irrevocable on the facts, a constructive trust in favour of the principal would have not arisen in any event. In doing so, the Court overruled the decisions in Neste Oy v Lloyd’s Bank Plc  2 Lloyds Rep 658 and In re Japan Leasing Europe Plc  BPIR 911; two troublesome decisions.
In Neste Oy Bingham J had decided that a payment received by a corporate agent after its directors had concluded that it was insolvent could not “with conscience” be retained, because there was, due to the insolvency, “bound to be a total failure of consideration” on the company’s part; the payment was therefore subject to a constructive trust in favour of its principal. In Japan Leasing Nicholas Warren QC (as he then was) decided that a payment received by a corporate agent after it had entered administration, partly for its own account and partly for the account of others, was subject to a constructive trust as to the other parts because it would be “unconscionable” for the company to retain them, knowing that it could not account for them to its principals.
Lord Sumption pointed out that in maintaining the existence of a restitutionary proprietary claim where money is paid with the intention of transferring the entire beneficial interest to the payee, at least one of two things must be shown: either that the intention was vitiated (for example because the money was paid as a result of a fundamental mistake); or that irrespective of the intentions of the payer, in the eyes of equity the money has come into the wrong hands (for example where it represents the fruits of fraud, or breach of fiduciary duty against a third party). As to Neste Oy, the prospect of a total failure of consideration could not have vitiated the intention of the payer, and the right to restitution of money paid on a consideration that has wholly failed is simply a process of contractual readjustment, giving rise to purely personal obligations. As to Japan Leasing, although the company was accountable for most of the payment, it was contractually entitled to receive the money and had given consideration for its share.
In reaching these conclusions, the court usefully reiterated (a) the usual rule that money received for his principal’s account by an agent who becomes insolvent before accounting for it will, unless the relations between the parties were such as to make the agent an express trustee of money in his hands, form part of the insolvent estate, and the principal must prove in the liquidation; (b) the general aversion of English law to the discretionary adjustment of property rights (remedial constructive trusts); and (c) the public importance of ensuring fairness to other creditors in conformity with the statutory insolvency scheme, even if it sometimes produces apparently arbitrary results.