Moriarty & Anor v Various Customers of BA Peters Plc

In an insolvent administration, a proprietary or trust claim against money in a client account requires an identifiable fund into which the claimant’s money has entered. Money paid in breach of an arrangement into an overdrawn current account, where it is used to reduce the company’s bank debt and effectively disappears, does not become part of the client-account fund merely because it ought to have been paid there. The equitable maxim that equity treats as done what ought to have been done does not retrospectively create a proprietary interest in the client account. A defaulting-trustee rule may apply where a relevant trust or aggregate fund exists, but cannot be extended to create a new preference for creditors whose money never entered that fund.

The administrators of an insolvent company sought directions concerning the beneficial ownership of money held in its client account. The Atkinsons and the Clarkes claimed proprietary or trust interests in that account, although substantial sums paid to the company had instead been placed in its overdrawn current account.

The deputy judge held that the Atkinsons had a beneficial entitlement to money actually paid into the client account, but that the remaining sums claimed by them and the sums claimed by the Clarkes were unsecured debts. They appealed. The central issue was whether money paid into the current account could support an impounding or proprietary claim against surplus money in the separate client account.

Lord Neuberger delivered the judgment of the court. Lord Justice Dyson and Lord Justice Jacob agreed. Both appeals were dismissed, and the order below was upheld.

1. Trust in money entering the client account. Where money is agreed to be paid into a separate account for the benefit of identified third parties, a trust arises when the money is paid into that account, even without express trust language. Mixing with other money does not itself defeat the trust, although equitable principles may affect the consequences. The court regarded the principle in Re Lewis’s of Leicester Ltd [1995] 1 BCLC 428 as correct.
2. No fund for the appellants’ claim. The money claimed by the appellants had been paid into the company’s overdrawn current account and used to reduce its liability to the bank. It therefore never formed part of the client-account fund against which the proprietary claim was asserted. The reasoning was supported by Re Bishopsgate Investment Management Ltd v Holman [1995] 1 Ch 211 and Re Goldcorp Exchange Ltd [1995] 1 AC 74.
3. Defaulting trustee principle. The principle in Re Whitaker v Dacre [1916] 1 Ch 344, that a defaulting trustee cannot take its beneficial share until the default is remedied, could apply in suitable commercial circumstances. It nevertheless presupposed an estate, trust fund or aggregate fund containing the relevant money. The principle did not assist where the money had never entered the fund.
4. Equitable maxim and insolvency. Equity’s treatment of acts as done where they ought to have been done could not retrospectively make the client account receive money paid elsewhere, or create an equitable interest in that account. The suggested claim would effectively create a new class of preferred creditor. Courts should therefore be cautious about extending proprietary or equitable claims in insolvency. The further argument that the client account constituted one homogeneous trust was not decided; the appeals were resolved on the absence of a fund.
5. The Atkinsons and the Clarkes were consequently unsecured creditors in respect of the sums paid into the current account. The existing beneficial entitlement of the Atkinsons to money actually received into the client account was not disturbed.

• Court of Appeal (Civil Division): In [2008] EWCA Civ 1604, both appeals were dismissed and the order below was upheld.
• Chancery Division: The deputy judge held that the Atkinsons had a beneficial entitlement to £7,822 paid into the client account, but that their remaining claim and the Clarkes’ claim were unsecured debts.