Published online by Cambridge University Press: 02 January 2018
Arguments are sometimes made attempting to justify proprietary awards to unjust enrichment claimants by reference to the ‘priority’ such awards supposedly give in the defendant's insolvency. Those justifications are variously that unjust enrichment claimants do not take insolvency risks, that the defendant's creditors would otherwise receive an underserved windfall, and that unjust enrichment claimants occupy a position analogous to secured creditors. This paper shows that such arguments are flawed. To award unjust enrichment claimants' proprietary rights is not to give them priority in their defendant's insolvency but to withdraw the right from the estate available for distribution to all the unsecured creditors, whatever their order of priority. Moreover, insolvency ‘priority’ is not the only consequence of such an award. Finally, when seen for what they are, viz arguments for the award of property rights, the justifications do not, for a number of reasons, stand up.
1. Although restitution is undoubtedly a response to a number of different events (see Birks, P Misnomer’ in Cornish, W et al (eds) Restitution: Past, Present, and Future (Oxford: Hart Publishing, 1998) p 1 Google Scholar), the focus of this paper is on unjust enrichment alone. For this reason, no examination of proprietary awards in the context of restitution for wrongs will be made.
2. Birks, P Restitution and resulting trusts’ in Goldstein, S (ed) Equity and Contemporary Legal Developments (Jerusalem: Hebrew University, 1992) p 335 Google Scholar; ‘Trusts raised to reverse unjust enrichments: the Westdeutsche Case’[1996] RLR 3; ; ; . The argument is questioned in
3. The common law has no mechanism for collective debt enforcement, only one in which the rule is first past the post.
4. The best account is that of Fletcher, If The Law of Insolvency (London: Sweet & Maxwell, 3rd edn, 2002).Google Scholar
5. See, generally, Sir Goode, Roy Principles of Corporate Insolvency Law (London: Sweet & Maxwell, 2005)Google Scholar; ;
6. Though the law will place a value on my right not to be defamed or assaulted, this is not relevant for the purposes of insolvency since these are not rights which can be liquidated.
7. There is an exception in the case of a corporate insolvency for those holding floating charges. It is discussed below at text to n 22.
8. There is also the question, which will not be discussed here, of which debts are provable: see, generally, Goode, above n 5, pp 202–207.
9. The bankrupt's estate is defined in s 283 of the Insolvency Act 1986.
10. Ibid, s 306.
11. Scott v Surman (1742) Willes 400; Re Elford, ex p Gennys (1829) Mont & M 258; Baddington v Castelli (1853) 1 E & B 879; Winch v Keeley (1787) 1 Term 619; Re Bell, ex p Debtor (1908) 99 LT 939; Insolvency Act 1986, s 283(3)(a).
12. Martindale v Smith (1841) 1 QB 389.
13. As, eg, in Clough Mill Ltd v Martin [1985] 1 WLR 111, a case involving a retention of title clause.
14. Armory v Delamirie (1722) 1 Str 505.
15. Re Wallis [1902] 1 KB 719.
16. Re Caine's Mortgage Trusts [1918] WN 370.
17. Though see the exception for floating charges discussed below, text to n 22.
18. Goode, Rm Commercial Law (London: Penguin, 3rd edn, 2004) p 837.Google Scholar
19. Insolvency Act 1986, ss 328–329.
20. In Borden (UK) Ltd v Scottish Timber Products Ltd [1981] Ch 25 at 42, Templeman LJ (as he then was) said that ‘Unsecured creditors rank after preferential creditors…’. However, given that there is no distinction between unsecured and preferential creditors, it can only be that his lordship meant to compare the plight of ordinary and preferential creditors.
21. For discussion, see Insolvency Law and Practice Cmnd 8558, 1982 (Chairman, Sir Kenneth Cork), chs 32 and 33 (the Cork Report); Finch, above n 5, pp 424–437, 446-7; Goode, above n 5, paras 7-21–7-29.
22. Insolvency Act 1986, s 176A.
23. The Cork Report, above n 21, para 1409.
24. See Goode, above n 5, para 7-27.
25. Insolvency Act 1986, Sch 6, para 5.
26. The Cork Report, above n 21, para 1428; Finch, V The measures of insolvency law’ (1997) 17 OJLS 227 CrossRefGoogle Scholar; Goode, above n 5, para 7-28. Of course, the same could be said of tort victims, who are never given priority. This only shows that such issues are inherently ones of distributive justice, incapable of resolution by courts.
27. As do those whose debts arise as a result of acquisitive wrongs.
28. [1965] 1 QB 525. The case is ambiguous, however, as it may have been an example of an award of proprietary restitution for the common law wrong of deceit.
29. The award of such a right is difficult to defend in terms of deductive logic: see Swadling, Wj Rescission, property, and the common law’ (2005) 121 LQR 123.Google Scholar
30. (1887) 36 Ch D 145 at 186–187 per Lindley LJ and 189–193 per Bowen LJ.
31. It is generally accepted that a right to rescind does not give rise to an immediate trust: Alati v Kruger (1955) 94 CLR 216; Daly v Sydney Stock Exchange Ltd (1985) 160 CLR 371; El Ajou v Dollar Land Holdings plc [1993] 3 All ER 717. For a contrary view, see R Chambers Resulting Trust, above n 2, pp 171–184. In his dissenting judgment in Allcard v Skinner, Cotton LJ held that there was an immediate trust: (1887) 36 Ch D 145 at 175.
32. [1996] 1 WLR 328.
33. Another example is the award made by the House of Lords in Banque Financière de la Cité v Parc (Battersea) Ltd [1999] 1 AC 221.
34. (1867) LR 2 HL 149.
35. (1880) 13 Ch D 696.
36. It is a difficult question whether cases of tracing involve unjust enrichment at all. The House of Lords in Foskett v McKeown[2001] 1 AC 102 denied that they did, though their reasoning relies on an illegitimate fiction of ‘persistence’: Birks, P ‘Property, unjust enrichment, and tracing’ (2001) 54 CLP 231 Google Scholar at 242–245.
37. Whether described as constructive (remedial or institutional), resulting or implied.
38. [1981] Ch 105.
39. [1983] 2 Lloyd's Rep 658.
40. Above n 36.
41. For an argument that such mistakes do not exist, see WJ Swadling, ‘Unjust delivery’ in Burrows and Rodger, above n 2, p 277.
42. The paradigm case is where the defendant picks the claimant's pocket. It is a point of contention whether ‘ignorance’ is an unjust factor at all. For an argument that it is not, see Swadling, Wj ‘Ignorance and unjust enrichment: the problem of title’ (2008) 28 OJLS CrossRefGoogle Scholar (forthcoming).
43. Re Eastgage [1905] 1 KB 465; Tilley v Bowman [1910] 1 KB 745.
44. Text to nn 15–17.
45. For the effect of bankruptcy on the part of a trustee, see W Mowbray et al Lewin on Trusts (London: Sweet & Maxwell, 18th edn, 2008) ch 22.
46. [1996] AC 669.
47. [2007] UKHL 34, [2008] 1 AC 561.
48. Above n 36.
49. (1841) 4 Beav 115.
50. [1988] Crim LR 465.
51. Above n 38.
52. See, eg, Westdeutsche, above n 46, at 690, where Lord Goff cites with apparent approval the comments of AS Burrows, ‘Swaps and the friction between law and equity’ [2005] RLR 15 at 27.
53. Above n 38.
54. Ibid, at 119.
55. Birks ‘Trusts raised to reverse unjust enrichments: the Westdeutsche Case’, above n 2, at 26.
56. Nor even is it possible to see how Birks' own argument based on a resulting trust arising as a response to the claimant's ‘non-beneficial’ transfer could be affected by any subsequent change of position.
57. Bird, J Choice of law’ in Rose, F (ed) Restitution and the Conflict of Laws (Oxford: Mansfield Press, 1995) pp 64–141.Google Scholar
58. Jones, Gh Goff & Jones: The Law of Restitution (London: Sweeet & Maxwell, 7th edn, 2007 Google Scholar) para 43-024.
59. RSC Ord 11, r 1(1)(t); Nabb Bros Ltd v Lloyds Bank International (Guernsey) Ltd [2005] EWHC 405 (Ch).
60. RSC Ord 29, r 2.
61. There are other arguments than those discussed below, but they are so weak as not to merit discussion. One is the theory of ‘property for personhood’, that certain things are essential to the welfare or personal identity of human beings: Radin, Mj ‘Property and personhood’ (1982) 34 Stanford LR 957 CrossRefGoogle Scholar. However, as Sherwin notes, this cannot explain the award of proprietary responses such as the constructive trust because they bite on assets which persons would not closely associate with their identity: E Sherwin ‘Constructive trusts in bankruptcy’[1989] U of Ill LR 297 at 335. So far as English law is concerned, an example is Car & Universal Finance Co Ltd v Caldwell, above n 28, where the defrauded vendor was perfectly willing to part with his title to his car, provided only that he was paid for it. Another weak argument is that a constructive trust should arise whenever the common law remedy is inadequate, and that it will be inadequate where any judgment will not be satisfied because of the defendant's insolvency: Zaidan Group Ltd v City of London (1987) 58 OR (2d) 667; para 160, comment f, p 645. The argument is rightly rejected by Paciocco on the ground that ‘it begs the very question that needs to be answered: when is it just and appropriate to confer on a plaintiff the priority over the general creditors of the defendant? The answer according to the inadequacy doctrine appears to be “when that priority is required”’: at 339.
62. See, eg, Sherwin, above n 61; Kull, A Restitution in bankruptcy: reclamation and constructive trust’ (1998) 72 Am Bank LJ 265 Google Scholar; . A Canadian view is presented by Paciocco, above, n 61.
63. ‘When property has been acquired in such circumstances that the holder of the legal title may not in good conscience retain the beneficial interest, equity converts him into a trustee’: Beatty v Guggenheim Exploration Co (1919) 225 NY 380 at 386 per Cardozo J. Though this was a case of restitution for wrongs, the same thinking applies to restitution of unjust enrichment. Thus, in the Restatement of Restitution, above n 61, it is said that ‘A constructive trust is imposed upon a person in order to prevent his unjust enrichment. To prevent such unjust enrichment an equitable duty to convey the property to another is imposed upon him’: para 160, comment c. Further, in para 163, it is provided that ‘where the owner of property transfers it as a result of a mistake of such a character that he is entitled to restitution, the transferee holds the property upon a constructive trust for him’.
64. Kull, above n 62, at 277.
65. This is also the approach of some English writers: see, eg, Goode, R, ‘Ownership and obligation in commercial transactions’ (1987) 103 LQR 433 Google Scholar at 444–445, arguing against proprietary awards in cases of restitution for wrongs.
66. North American writers talk in terms of ‘effective’ priority: see, eg, Paciocco, above n 61, at 318: ‘[The award of a constructive trust] has the effect of giving the plaintiff the status of a secured creditor with respect to the constructive trust property’.
67. Above n 58, para 2-002.
68. Birks, P Unjust Enrichment (Oxford: Oxford University Press, 2nd edn, 2005) p 181.CrossRefGoogle Scholar
69. Burrows, As The Law of Restitution (Oxford: Oxford University Press, 2nd edn, 2002) p 69.Google Scholar
70. This is also the view of the North American writers: Sherwin, above n 61, at 331; Paciocco, above n 61, at 340–347.
71. Burrows, above n 69, p 70.
72. Though not necessarily those claiming in restitution for wrongs: ibid, p 72.
73. Above n 38.
74. [1980] CLJ 275 at 276. Given that unsecured creditors as a whole do not take pari passu, it is not clear to which class of unsecured creditor Professor Jones refers.
75. Sherwin, above n 61, at 317.
76. This is also the argument of Kull, A Rationalising restitution’ (1995) 83 Cal LR 1191 CrossRefGoogle Scholar at 1217;
77. Above n 74, at 276.
78. Birks, above n 68, p 181. Notice that, if correct, this argument would also justify proprietary awards in cases of restitution for wrongs.
79. Although Paciocco, above n 61, at 318, talks of the claimant awarded a proprietary right being effectively given ‘the status of secured creditor with respect to the constructive trust property’, this is an observation, not a justificatory argument.
80. Burrows, above n 69, p 69
81. Ibid. See also Burrows, As Proprietary restitution: unmasking unjust enrichment’ (2001) 117 LQR 412 Google Scholar at 425ff.
82. Burrows, above n 69, p 72.
83. Ibid, p 70.
84. Ibid, p 71.
85. Ibid, p 69.
86. Ibid.
87. See, eg, R v Preddy [1996] AC 815. An exception is R v Hinks [2001] 2 AC 241, though there Lord Hobhouse of Woodborough dissented precisely because the majority ignored the fact that ‘theft is a crime which relates to civil property and, inevitably, property concepts from the civil law have to be used and questions answered by reference to that law’: [2001] 2 AC 241 at 263–264.
88. MacCormick, N Legal Reasoning and Legal Theory (Oxford: Oxford University Press, rev edn, 1994)CrossRefGoogle Scholar ch VI (Consequentialist arguments).
89. ‘To dip into the Laws Reports is to be confronted at every turn with such arguments’: ibid, p 129.
90. [1969] 2 AC 147.
91. Ibid, at 194 per Lord Pearce.
92. [1957] 1 QB 267.
93. Ibid, at 281.
94. (1890) 45 ChD 1.
95. In other words, a case of restitution for wrongs.
96. Above n 94, at 15. His lordship then said that he was satisfied that the premises were unsound in ‘confounding ownership with obligation’. A more recent example of such reasoning can be found in Re Polly Peck (No 2) [1998] 3 All ER 812 at 827, where Mummery LJ refused a claim to a constructive trust in the case of a wrongs-based claim on the ground that it would upset ‘the scheme imposed by statute for a fair distribution of the assets of an insolvent company’.
97. Above, text to nn 61–62.
98. Above n 88, p 120 (emphasis in original). MacCormick gives the example of Scruttons Ltd v Midland Silicones Ltd [1962] AC 446, where the question was whether a third party stevedore which had negligently dropped a chemical drum causing damage amounting to nearly £600 could take advantage of a clause in a contract of carriage made between the seller of the goods and the carrier by which liability was limited to US$500 (£179 1s). Although the doctrine of privity of contract dictated a negative answer, the House of Lords in Elder, Dempster & Co v Paterson, Zochonis & Co [1924] AC 522, on different facts, had held that a third party could claim such protection. Lord Reid, at 477, refused to extend the decision to the facts of Scruttons on the ground that it was impossible to discern the ratio decidendi of Elder Dempster, and that the result had been achieved purely by an appeal to the consequences of a decision the other way: ‘Lord Finlay said that a decision against the shipowner would be absurd and the other noble Lords probably thought the same. They must all have thought that they were merely applying an established principle to the facts of the particular case. But when I look for such a principle I cannot find it, and the extensive and able arguments of counsel in this case have failed to discover it. The House sustained the dissenting judgment of Scrutton LJ in the Court of Appeal. The majority there did not have to consider this question, but Scrutton LJ did and he also devoted less than a page to its consideration. His reasoning, though brief, is quite clear, but he gives no reason or authority for the proposition on which he bases his judgment and it is not derived from the argument as reported…It is true that an unreasonable proposition is seldom good law, and, perhaps for that reason, it would seem that that great lawyer did not pause to consider how great an exception he was making to the rule that a stranger to a contract cannot take advantage from it. For he was saying in terms that servants and “agents” can take advantage of contracts made by their master or “principal”. I would not dissent from a proposition that something of that kind ought to be the law if that was plainly the intention of the contract, and it may well be that this matter is worthy of consideration by those whose function it is to consider amending the law. But it seems to me much too late to do that judicially’.
99. [1993] RLR 3 at 10.
100. Birks, P The end of the remedial constructive trust?’ (1998) 12 Trust Law International 202 Google Scholar at 214–215. Similar comments appeared in his last book, Unjust Enrichment, above n 68, p 181: ‘the law of such a sensitive matter as insolvency, where many must necessarily suffer undeserved misfortune, should not be reviewed from case to case but left to Parliament, typically acting on the advice of a Royal Commission…It is preeminently a question of policy for reflection and legislation, not for the courts’.
101. Cf Templeman J (as he then was) in Business Computers Ltd v Anglo-African Leasing Ltd [1977] 1 WLR 578 at 580, who, in talking, inter alia, of the preference formerly given to Crown debts, said ‘The question whether in this day and age it is necessary or desirable to permit the Crown and holders of future floating charges the totality of the priorities which can be exercised under the existing law is not the subject of debate in this court, though I am inclined to think that it is at least debatable elsewhere’.
102. There are of course other uses of the word. Thus, we talk about the ‘priority’ of mortgagees in cases where the same right has been used as security for more than one debt: see, eg, Burn, Eh and Cartwright, J Cheshire & Burn's Modern Law of Real Property (Oxford: Oxford University Press, 17th edn, 2006) pp 784–808 Google Scholar. We also talk of priority amongst assignees where a chose in action has been assigned more than once: . Indeed, it may be that the different usages of the word account for much of the confusion in this area.
103. Goode, above n 5, para 7.20.
104. [2003] EWHC 1637, (Ch) [2005] Ch 281.
105. Ibid, at [126].
106. One article in fact does this. In the essay by V Finch and S Worthington ‘The pari passu principle and ranking of restitutionary rights’ in Rose, F Restitution and Insolvency (Oxford: Mansfield Press, 2000) pp 1–20 Google Scholar, the authors discuss the question where the respective personal claims of the unjust enrichment and the restitution for wrongs claimant should be located on the priority scale. For the former, they conclude that preferential status should be awarded, though for the latter they say that the claim should be deferred. Moreover, they correctly note that such a result can only be achieved by legislation.
107. A common criticism of statutory insolvency regimes is that they have developed piecemeal and do not have coherent rationales: the Cork Report, above n 21, passim; Finch, V The measures of insolvency law’ (1997) 17 OJLS 227 Google Scholar; V Finch, above n 5, passim.
108. The exception is for those creditors whose debts are secured by a floating charge: discussed above, text to n 22.
109. Above, text to nn 70–72.
110. Above n 33.
111. Ibid, at 237.
112. As, eg, in the US decision of Bush v Canfield (1818) 2 Conn 485. Discussion in Burrows, above n 69, pp 341–343.
113. Above n 61, at 329.
114. Above n 62, at 280. The objection to this approach is that once the wrong is removed, the whole basis of recovery disappears. As Viscount Simon LC said in United Australia Ltd v Barclay's Bank Ltd [1941] AC 1 at 18, such actions lie ‘only because the acquisition of the defendant is wrongful and there is thus an obligation to make restitution’. A better approach is that of Finch and Worthington, above n 106, pp 13–14, who, rightly thinking in terms of priority, not property, see the solution in terms, not of reducing the amount of the award, but of giving a person with a claim to the profits of wrongdoing the status of a deferred creditor.
115. Though this is hardly consistent with Kull's suggestion that different measures of recovery should be available against wrongdoers depending on their solvency.
116. Above n 61, at 323.
117. [1998] 3 NZLR 171.
118. [1997] 1 NZLR 711 at 722–723.
119. Above n 117, at 177.
120. Burrows, above n 69, p 71.
121. Text to nn 109–116.
122. See the excellent discussion in Sheridan, La Rights in Security (London: Collins, 1974) pp 4–7.Google Scholar
123. A common problem with mortgages of titles to ships.
124. The so-called phenomenon of ‘negative equity’.
125. Burrows, above n 69, p 70.
126. Thus, in Vernon v Bethell (1762) 2 Eden 110 at 113, Lord Henley LC famously said that the court was ‘very jealous of persons taking securities for a loan, and converting such securities into purchases’. The context in which this statement was made was that of an estate in Antigua which had risen enormously in value, the question being whether the transaction was a mortgage or sale.
127. Burrows, above n 69, p 70. As we saw earlier (text to n 82), they are somewhat cryptically described as ‘actual’ creditors.
128. In this respect, it should be noted that a number of US courts have held that the making of proprietary restitutionary awards through a constructive trust does have the effect of undermining the insolvency regime. So, eg, it has been said that ‘to permit a creditor…to lop off a piece of the estate under a constructive trust theory is to permit that creditor to circumvent completely the [Bankruptcy] Code's equitable system of distribution’: Omegas Group 16 F 3d 1443 (1994) at 1453. See also Re Dow Corning Corpn 192 Bank Rep 428 (1996).
129. Above n 38.
130. Above n 30.