NATURE OF JURISDICTION: Equity Division - Bryson J

PARTIES: ASSOCIATED ALLOYS PTY LTD v METROPOLITAN

ENGINEERING & FABRICATION PTY LTD (VOLUNTARY ADMINISTRATORS APPOINTED) (RECEIVERS & MANAGERS APPOINTED) & ANOR

CATCHWORDS: CONTRACT - Romalpa Clause - trust created constituted charge on book debts - s262 Corporations Law

ASSOCIATED ALLOYS PTY LIMITED v METROPOLITAN ENGINEERING & FABRICATIONS PTY LIMITED (VOLUNTARY ADMINISTRATORS APPOINTED) (RECEIVERS & MANAGERS APPOINTED)

This appeal concerned the effect of a Romalpa clause in a contract for the sale of goods. Since about 1981 the appellant had been selling steel to the first respondent. In about 1987 or 1988, the appellant began issuing invoices to the first respondent with Romalpa clauses printed on the reverse side.

In 1995 the three invoices in question were issued. Each invoice had printed on the front `Romalpa clause set for on the reverse side hereof applies.' However, for reasons unexplained, the clause was only printed on the reverse side of two of the invoices. The fifth subclause of the Romalpa clause purported to create a trust in favour of the appellant over so much of the proceeds of sale of products containing the supplied steel as related to the supplied steel.

The sum of $US197,911.29 remained outstanding from the three invoices.

The first respondent had used the steel supplied to manufacture goods which were sold to a Korean company. The first respondent went into liquidation and the second respondent was appointed liquidator.

The appellant sought: (i) a declaration that either of the respondents held the $US197,911.29 on trust for it; (ii) an order that either of the respondents account to it; (iii) additionally or alternatively, an order that it was entitled to $US197,911.29; or (iv) additionally or alternatively, a declaration that title in the goods had not passed to the first respondent and therefore either of the respondents was guilty of conversion.

The trial Judge dismissed the proceedings. His Honour held that in the case of the invoice without the Romalpa clause printed on it reverse side, title of the goods had passed to the first respondent and, furthermore, the steel supplied no longer existed as it had been used in manufacture of products and the appellant had no title in the derived products. His Honour held that subclause 5 had created a registrable charge over book debts, notice of which had not been lodged under s.263 of the Corporations Law and, therefore, the clause was void as against the liquidator and administrator under s.266(1).

The issues on appeal were: (i) whether the trust on the "proceeds" of a manufacturing or construction process constituted a charge on book debts within the meaning of s.262(1)(f) of the Corporations Law; and (ii) whether the omission of the Romalpa clause on one of the invoices meant that particular sale of steel was on terms excluding the clause where there had been a "course of dealing" and the clause was referred to on the front of the invoice.

1. The trial Judge was correct in holding that any charge on the proceeds was not a floating charge, rather, that it was a charge on book debts. Borden (UK) Limited v Scottish Timber [1981] Ch 25 at 44-45 applied.

2. The fifth sub-clause was designed to protect the appellant from the consequences of the first respondent's insolvency by charging part of its book debts through the creation of a trust. The trust embraced part of the proceeds of the manufacturing process when the price of those derived goods became payable either immediately or in the future and continued until the first respondent paid the appellant for the goods which the appellant sold to the first respondent and the first respondent used in the manufacturing process. It was one trust and involved as an essential feature a charge on the first respondent's book debts.

3. The charge created by subclause 5 was created by contract and not by the operation of law. It was therefore a charge within the meaning of s.262(1)(f) of the Corporations Law and was, therefore, void for lack of registration as against the liquidator under s.266(1). In re Bond Worth at 271 referred to. In re Wallis & Simmonds (Builders) Limited [1974] 1 WLR 391 at 404 and Tatung at 334-5 followed.

Aluminium Industrie Vaassen BV v Romalpa Aluminium Limited [1976] 1 WLR 676

Armour v Thyssen Edelstahlwerke AG [1991] 2 AC 339

Borden (UK) Limited v Scottish Timber Products Limited [1981] Ch 25

Chattis Nominees v Norman Ross Homeworks Pty Limited(Receiver Appointed) (In Liquidation) (1992) 28 NSWLR 338

Clough Mill Limited v Martin [1985] 1 WLR 111

Compaq Computers Limited v Abercorn Group Limited [1991] BCC 484

Herdigan v Federal Commissioner of Taxation [1988] FCA 419; (1988) 84 ALR 271

In re Bond Worth [1980] Ch 223

In re Hallet's Estate [1879] 13 ChD 696

In re Wallis & Simmonds (Builders) Limited [1974] 1 WLR 391

Tatung (UK) Limited v Galex Telesure Limited (1989) 5 BCC 325

ASSOCIATED ALLOYS PTY LIMITED v METROPOLITAN ENGINEERING & FABRICATIONS PTY LIMITED (VOLUNTARY ADMINISTRATORS APPOINTED) (RECEIVERS & MANAGERS APPOINTED)

This appeal concerns the meaning and effect of a retention of title or Romalpa clause in a contract for the sale of goods and, in particular, a provision that in the event that the buyer used the goods in some manufacturing process, the buyer should hold "such part of the proceeds" of such process in trust for the seller.

Since about 1981, the appellant, Associated Alloys Pty Limited (Alloys), had been selling steel to the first respondent, Metropolitan Engineering & Fabrications Pty Limited (Metropolitan). In about 1987 or 1988 Alloys began to issue invoices with a Romalpa clause on the reverse side. On 31 August, 26 September and 26 October 1995 Alloys issued three invoices, No 583 for $US61,361.29, No 592 for $US80,630 and No 598 for $US69,920 for steel supplied to Metropolitan in response to orders Metropolitan had placed. On the front of each invoice were payment terms "payment due approx mid/end November - 95" and at the bottom the printed words "Romalpa clause set forth on the reverse side hereof applies". On the back of invoices 592 and 598 was a standard printed clause (the Alloys standard clause). For some reason not explained, this clause was not to be found on the back of invoice 583. On 31 January 1996 Metropolitan paid Alloys $US14,000 for the goods referred to in the invoices. The balance of $US197,911.29 remains outstanding.

On 9 February 1996 the second respondent, Mr Kevin Shirlaw, and his partner Mr Paul Weston, were appointed administrators of Metropolitan. Metropolitan has since gone into liquidation. Mr Shirlaw is the liquidator.

The Alloys standard clause was divided into the following five paragraphs or subclauses:

"It is expressly agreed and declared that the title of the subject goods/product shall not pass to the purchaser until payment in full of the purchase price. The purchaser shall in the meantime take custody of the goods/product and retain them as the fiduciary agent and bailee of the vendor.

The purchaser may resell but only as a fiduciary agent of the vendor. Any right to bind the vendor to any liability to any third party by contract or otherwise is however expressly negatived. Any such resale is to be at arms length and on market terms and pending resale or utilisation in any manufacturing or construction process, is to be kept separate from its own, properly stored, protected and insured.

The purchaser will receive all proceeds whether tangible or intangible, direct or indirect of any dealing with such goods/product in trust for the vendor and will keep such proceeds in a separate account until the liability to the vendor shall have been discharged.

The vendor is to have power to appropriate payments to such goods and accounts as it thinks fit notwithstanding any appropriation by the purchaser to the contrary.

In the event that the purchaser uses the goods/product in some manufacturing or construction process of its own or some third party, then the purchaser shall hold such part of the proceeds of such manufacturing or construction process as relates to the goods/product in trust for the vendor. Such part shall be deemed to equal in dollar terms the amount owing by the purchaser to the vendor at the time of the receipt of such proceeds."

By summons Alloys claimed (i) a declaration that Mr Shirlaw or Metropolitan held $US197,911.29 upon trust for the benefit of Alloys, (ii) an order that Mr Shirlaw or Metropolitan account to Alloys or, (iii) additionally or alternatively, that in the events which had happened Alloys was entitled to this sum or, (iv) additionally or alternatively, a declaration that in the events which had happened title in the goods, the subject of the invoices, did not at any time pass to Metropolitan and that Mr Shirlaw or Metropolitan was guilty of conversion of the goods. Bryson J heard the proceedings and on 10 May 1996 dismissed them. It should be emphasised that US$197,911.29 was the balance of debt owing to Alloys on the three invoices. It was not represented by moneys in any identified account past or extant.

Bryson J found that for some time, since 1991 or earlier, in the course of business Alloys' invoices to Metropolitan had at the foot of the front page the printed statement which appeared on the invoices in question and drew attention to the application of the Romalpa clause on the reverse side His Honour found that Metropolitan must be taken to have known, from this course of business, that Alloys did business and sold steel on the basis that its standard Romalpa clause would appear on the back of its invoices and would be incorporated in its agreement for sale. As a result, Metropolitan was bound by the clause in cases where it appeared on the back of invoices and Metropolitan accepted delivery, as was invariably the case, without objection to the clause. However, in the rare case, such as invoice 583, where there was no clause on the reverse, Bryson J held that the clause was not incorporated and title passed in accordance with ss 22 and 23 of the Sale of Goods Act 1923.

When Metropolitan went into voluntary administration it had several large manufacturing contracts on hand. The largest was for the manufacture of pressure vessels, heat exchangers, columns and other industrial equipment for a Korean company referred to as Lucky Goldstar. Alloys supplied Metropolitan with steel used in the manufacture of these products in various forms including steel plate and formed dish ends for pressure vessels. The steel described in invoices 583, 592 and 598 was used in the fabrication of pressure vessels, heat exchangers and columns for Lucky Goldstar. Some of the goods ordered from Alloys for the Lucky Goldstar job were delivered, invoiced and paid for but the goods described in these invoices were not paid for or not fully paid for.

Most of the pressure vessels, heat exchangers and columns had been shipped to Lucky Goldstar although some components, possibly no more than one pressure vessel, remained in Metropolitan's hands. The administrators hoped to complete the Lucky Goldstar project. Bryson J described Metropolitan's manufacturing process and found that the steel supplied by Alloys and described in the invoices no longer existed and that Alloys had no property in the derived products. "The property in the derived products in Metropolitan Engineering's hands is in Metropolitan Engineering; the property in the derived products which have been delivered to Lucky Goldstar is in Lucky Goldstar."

Bryson J said that the fifth subclause in the Alloys standard clause gave rise to questions whether Alloys could intervene and receive payments coming due from Lucky Goldstar or whether the administrators might receive them, use them in the company's business and endeavour to complete its contracts. Metropolitan had used substantially all the steel in the invoices in a manufacturing process of its own. It had received large sums from Lucky Goldstar and would receive further sums as time passed, more goods were delivered and payments were received.

"However Metropolitan Engineering has done nothing to identify any part of the proceeds as relating to the steel in these invoices, and has done nothing to set aside and hold any part of the proceeds in trust for Associated Alloys. An agreement to hold proceeds when received on trust could be enforced by compelling Metropolitan Engineering to hold some part of proceeds already received, if they could be identified, in trust, and by compelling Metropolitan Engineering to hold in trust part of proceeds of the manufacturing process to be received in the future."

Bryson J regarded the last sentence in the fifth subclause of Alloys standard clause as an attempt to state how the part of the proceeds of the manufacturing process which related to the goods was to be ascertained. The sentence meant (inverting its order of expression) that the amount owing to the vendor at the time of receipt was to be taken to be part of the proceeds of the manufacturing process which related to the goods, and was to be held in trust for the vendor. His Honour said:

"It was contended that the trust failed for uncertainty in that the fifth subclause does not say what element it is which is to be used to relate the goods not paid for to the proceeds. In my opinion there is appropriate certainty; with the aid of the last sentence the relevant part of the proceeds is equal to the amount of the debt.

If the plaintiff has any remedies they arise under the fifth subclause. They cannot arise under the first three subclauses because, on my view of the facts, the goods sold and delivered have gone out of existence and the derived products when produced were the property of Metropolitan Engineering only. Further there is no basis on the evidence on which any particular one of the derived products, whether they have been delivered to Lucky Goldstar or are still in Metropolitan Engineering's hands, can be identified as having been produced from the goods in any one of the three invoices. Nor is there any basis for carrying out any process of apportionment; if such a process were appropriate, the evidence would not enable it to be done."

If the fifth subclause created a registrable charge, notice of it had not been lodged under s263 of the Corporations Law and the charge was void as against the liquidator and administrators under section 266 (1). His Honour was of opinion that the proceeds of a manufacturing or construction process to which the fifth subclause applied were "book debts, both before and after they are received and held in trust" (s262 (1) (f)), but that there was no floating charge (s262 (1) (a)) "because there [was] no authorisation to deal with proceeds in the course of business irrespective of the charge, and no provision relating to some crystallising event which would end that authorisation." He referred to the descriptions of a floating charge collected by Slade J in In re Bond Worth [1980] Ch 228 at 266-7. Bryson J went on:

"Although the fifth subclause does not literally say so, it obviously contemplates not only that the part of the proceeds to which it refers should be held in trust for the vendor but also that it should be paid over to the vendor. When all the provisions of this subclause are taken together they have the effect that the vendor is given an entitlement to be paid the amount which is owing to it at the time of receipt of proceeds of a manufacturing process in which the goods were used, has a right to be paid out of those proceeds, and has an equitable interest in the proceeds until paid. If these arrangements were not created by a term in a contract for the sale of goods they would be unhesitatingly identifiable as an equitable charge over debts due by Lucky Goldstar to Metropolitan Engineering, charging those debts with the amount due to Associated Alloys and to be discharged by paying that amount."

Bryson J was of the view that the fifth subclause gave Alloys an entitlement to a charge over the proceeds of the sale of the derived goods "because the trust is a trust over the part of the proceeds which equals the amount owing, and it was obviously the parties' intention that when that amount was paid, the trust would cease to exist." His Honour held that by virtue of s266 (1) of the Corporations Law subcl (5) was void as against the administrators.

Alloys appealed from Bryson J's decision. Alloys said that the appeal raised two issues:

(a) whether the trust on the "proceeds" of a manufacturing or construction process constituted "a charge on book debts" within the meaning of subs 262 (1) (f) of the Corporations Law;

(b) whether the omission of a retention of title statement on the reverse side of invoice 583 meant that those goods were sold on terms which did not include the Alloys standard clause in circumstances where:

(i) there had been an acknowledged "course of dealing" of which the retention of title was part, and

(ii) the retention of title was referred to on the front of the invoice.

By leave, the respondents filed a notice of contention in which they contended that the decision of the court below should be affirmed on the ground that the provision for a trust of the proceeds of sale of the goods, the subject of the invoices, constituted a security, with respect to any such proceeds, in the form of a floating charge upon any such proceedings within the meaning of s262 (1) (a) of the Corporations Law and was void against Mr Shirlaw as administrator and liquidator of Metropolitan pursuant to s266 of the Corporations Law and the proceeds were thus available for the benefit of creditors generally.

The Romalpa clause was developed to protect the unpaid seller of goods from the consequences of the buyer's insolvency by the simple expedient of providing that the seller would retain title in the goods until they were paid for; Armour v Thyssen Edelstahlwerke AG [1991] 2 AC 339 at 352-3. This basic idea was expanded to meet cases, commonly found, where the buyer intended, to the seller's knowledge, to sell the goods on, to consume the goods or to use the goods in the manufacture of other goods (derived goods). The more obvious problems or questions caused or raised by such clauses relate to the capacity in which the buyer on-sells or receives and holds the product of on-sale or of the sale of derived goods, whether that product is the price paid or the price payable for the goods on-sold or for derived goods sold to a third party. This is in a context where, in reality, the seller intends to obtain security for the payment by the buyer of the goods sold and sometimes security for "all moneys" owing by the buyer to the seller; see Professor Everett's article "Romalpa Clauses: The Fundamental Flaw" 68 ALJ 404 at 412. Inevitably, if the buyer is a company which has gone into liquidation before the seller has been paid for the goods the question becomes whether the clause in whole or in part is a registrable charge on property of the company and void, if not registered, against the liquidator or administrator and in the United Kingdom against the creditors.

The Alloys standard clause is the result of a process of evolving commercial drafting, conscious of a body of case law, particularly in the United Kingdom, and academic comment. The process has invoked principles of contract law, equity and statute.

Section 22 of the Sale of Goods Act 1923 provides that where there is a contract for the sale of specific or ascertained goods, the property in them is transferred to the buyer at such time as the parties to the contract intend it to be transferred and that for the purpose of ascertaining the intention of the parties regard shall be had to the terms of the contract, the conduct of the parties, and the circumstances of the case. In the Alloys standard clause, the parties agreed that the title of the goods, the subject of the invoice in question, should not pass to the buyer until payment in full of the purchase price. While the facts of this case do not require consideration of the consequences of Metropolitan's selling the goods on, it assists to note that the terms about Metropolitan's custody and power to re-sell the goods designated Metropolitan as the fiduciary agent and bailee of Alloys. Metropolitan received in trust for Alloys, and was obliged to keep, "all proceeds" in a separate account "until the liability to the vendor shall have been discharged" when, it must be inferred, the beneficial interest in the proceeds, or so much of them as remained, reverted to Metropolitan. It can hardly have been intended, though this would be consistent with Metropolitan's having no title in the goods and selling them as the fiduciary agent and bailee of Alloys, that Alloys was and remained entitled to the whole of the proceeds of the sale by its fiduciary agent of its goods; see Clough Mill Limited v Martin [1985] 1 WLR 111 at 120 per Robert Goff LJ. In Compaq Computer Limited v Abercorn Group Limited [1991] BCC 484 at 497 Mummery J said:

"In determining whether any given agreement creates a charge, equity looks to the substance and reality of the transaction. What on the face of it may appear to be an out-and-out disposition of a legal or equitable interest in property by way of assignment or conveyance or an out-and- out disposition of a beneficial interest in property by way of trust, may in fact be by way of security only, with a right of redemption and, therefore, in the nature of a charge: see, for example, Re Kent & Sussex Sawmills Limited [1947] Ch 177 at 181 and Re Welsh Irish Ferries Limited [1985] 1 BCC 99,430 at 99,433 to 99,434."

As the learned editors of Benjamin's Sale of Goods, 5th ed, at para 5-148 remark:

"....for reasons of cash flow alone, no buyer would willingly accept that the seller was absolutely entitled to claim the entire proceeds of resale. The parties may in consequence be held to have intended that the seller's interest in the proceeds is to be defeasible upon payment of the sums owing from the buyer company to the seller, and is, in consequence, an interest by way of security rather than an absolute interest. If such is the true construction of the provision, then it is submitted that a charge is created over the proceeds of sale. If created by the buyer company, it will require registration under section 395 of the Companies Act 1985. It is perhaps for this reason, and possibly because such a provision might appear more acceptable to the buyer, that `Romalpa' clauses sometimes contain a provision that the buyer is to hold as trustee on behalf of the seller, not the entire proceeds of resale of the goods, but only such part of those proceeds as represent or are equivalent to the price at which the goods resold were invoiced by the seller to the buyer. ........... It may, therefore be that such a provision would be upheld, provided that the parties thereby intended that the seller should have an absolute and indefeasible interest in the trust money and provided that the buyer company was not free to use that money as it pleased."

Commonsense and the words "until the liability to the vendor shall have been discharged" require that the trust be treated not as one under which Alloys was the sole beneficiary but as one under which Alloys had a charge in equity over the proceeds to secure payment of the unpaid purchase price; compare In re Bond Worth at 247; Tatung (UK) Limited v Galex Telesure Limited (1989) 5 BCC 325 at 335; Compaq Computer Limited v Abercorn Group at 495.

Quite apart from the express trust, the sale of the goods by Metropolitan as Alloy's fiduciary agent gave Alloys the right to trace the proceeds in accordance with the principles Jessel MR expounded in In re Hallett's Estate [1879] 13 ChD 696; see Benjamin para 5-147; Aluminium Industrie Vaassen BV v Romalpa Aluminium Limited [1976] 1 WLR 676 at 689-690. The Alloys standard clause required the proceeds to be kept in a separate account; compare In re Bond Worth at 261 where Slade J remarked that an alleged trustee's right to mix tangible assets or moneys with his own other assets or moneys and to deal with them as he pleased was incompatible with the existence of a presently subsisting fiduciary relationship in regard to such particular assets or moneys.

In In re Hallett's Estate at 709, Jessel MR stated the consequences of both the rightful and wrongful disposition by persons in a fiduciary position. If the proceeds of sale could be identified, the beneficial owner took them. If the proceeds could not be identified, because for example they had been used to purchase other property, the beneficial owner was entitled at his or her election either to take the property or to have a charge on the property for the amount of the trust money. If, however, the trustee had mixed the money with his or her own, the beneficial owner could no longer elect to take the property, since it was bought with a mixed fund, but was still entitled to a charge on the property purchased for the amount of the trust money laid out in the purchase.

Section 9 of the Corporations Law defines "charge" to mean a charge created in any way and to include a mortgage and an agreement to give or execute a charge or mortgage, whether on demand or otherwise. Section 266 provides that where a company is wound up or an administrator appointed "a registrable charge on property of the company is void as a security on that property as against the liquidator, the administrator of the company ....... unless" relevantly "a notice in respect of the charge was lodged under s263" within the prescribed period. Section 262 (1) sets out the charges required to be registered which include:

"(a) A floating charge on the whole or part of a property, business or undertaking of the company; and

However, subs (2) (a) excludes from these "a charge, or a lien over property, arising by operation of law."

According to the United Kingdom cases concerned with the legislative regime found in s95 of the 1948 and s395 of the 1985 Companies Act (UK) which speaks of "every charge created .... by a company", if the Romalpa clause meant that the buyer never acquired title to the goods, the buyer could not charge the goods to the seller. Accordingly, there was no question of there being any charge on the goods in favour of the seller which was void if unregistered; see Clough Mill Limited v Martin at 116. The result was to the contrary if the clause provided that the "equitable and beneficial ownership" in the goods should remain with the sellers until full payment had been received: In re Bond Worth Limited. In the present case, Metropolitan did not acquire title to the goods before payment and could not, accordingly, charge the goods in favour of Alloys; compare Chattis Nominees v Norman Ross Homeworks Pty Limited (Receiver Appointed) (In Liquidation) (1992) 28 NSWLR 338 at 345 per Cohen J. There could be no question of any charge over the goods, the title to which Alloys retained at least until they are sold or used in a manufacturing or construction process.

Bryson J correctly held that the goods, the subject of the three invoices, no longer existed. Metropolitan had used them in the manufacture of goods supplied or to be supplied to Lucky Goldstar. In the words of Templeman LJ in Borden (UK) Limited v Scottish Timber Products Limited [1981] Ch 25 at 44 Alloys' title to the goods became meaningless. In that context I turn to examine the fifth subclause expressed to apply in the event that Metropolitan used the goods in some manufacturing process of its own.

The fifth subclause obliged Metropolitan to hold part of the proceeds of the manufacturing process in trust for Alloys. Two questions arise, what part and what is meant by "the proceeds". The subclause itself attempted to answer the first question. It was such part as related to the goods and equalled in dollar terms the amount owed by Metropolitan to Alloys at the time of the receipt of such proceeds. Bryson J construed this to mean (inverting its order of expression) that the amount owing to Alloys at the time of receipt was to be taken to be the part, and hence the measure, of the proceeds of the manufacturing process which related to the goods, and was to be held in trust for Alloys. On the appeal, neither side challenged this interpretation, though Mr Ellicott QC, who appeared for Alloys, preferred to read it as meaning that all that Metropolitan owed to Alloys on any goods supplied to it by Alloys, at the time of receipt, was the measure of the part of the proceeds of the manufacturing process which related to the goods and so was held on trust by Metropolitan for Alloys.

In my opinion, the fifth subclause was directed to Metropolitan's use of identifiable steel supplied by Alloys to Metropolitan and unpaid for. The manufacturing process used the steel to make pressure vessels, heat exchangers, columns and other industrial equipment for Lucky Goldstar. When the proceeds of that manufacturing process, that is to say, the price agreed on the sale of the articles made, were received by Metropolitan, the part of those proceeds held in trust for Alloys equalled in dollar terms the amount then owing by Metropolitan to Alloys for the steel used in that manufacturing process. Of course a particular receipt of proceeds might include the proceeds of the sale of goods in the manufacture of which steel supplied by Alloys and covered by more than one invoice was used. But I do not think that the subclause required that the part of the proceeds to be held in trust should be calculated by taking account of the amount owing by Metropolitan to Alloys in respect of goods unpaid for but not used in the manufacturing process represented by these proceeds.

I leave aside the difficulty in any particular instance of determining the extent to which the proceeds related to a manufacturing process which related to goods in a particular invoice. Bryson J said that Metropolitan had done nothing to identify any part of the proceeds as relating to the steel in the three invoices and had done nothing to set aside and hold any part of the proceeds in trust for Alloys. It may be, as Mr Coles QC, who appeared for the respondents, submitted, that such considerations would defeat Alloys' right to any remedy claimed in its summons.

Bryson J was of opinion that the proceeds of the manufacturing process on which the fifth subclause imposed a trust in favour of Alloys were "book debts, both before and after they are received and held in trust". Central to Alloys' submissions on this appeal was the proposition that the trust attached not to book debts but to the fund created from moneys paid by Lucky Goldstar in discharge of its indebtedness for the manufactured goods Metropolitan sold to it. This contention gains some support from the last sentence in the fifth subclause which equated the part of the proceeds held in trust with an amount owing "at the time of the receipt of such proceeds".

In my opinion, the proceeds of the manufacturing process to which subcl (5) referred was the price agreed to be paid for the goods derived from that process. Unless otherwise agreed, a buyer must be ready and willing to pay the price in exchange for possession of the goods; s31 of the Sale of Goods Act. In the present case the parties agreed that Metropolitan could take possession of the goods before payment. A period of credit was allowed in each of the three invoices until "approx mid/end November - 95".

Section 262 (4) of the Corporations Law provides that the reference in para (1) (f) to a charge on a book debt is

"a reference to a charge on a debt due or to become due to the company at some future time on account of or in connection with a .......trade or business carried on by the company, whether entered in a book or not, and includes a reference to a charge on a future debt of the same nature although not incurred or owing at the time of the creation of the charge".

The exceptions are not material. There could be no doubt that upon delivery by Metropolitan of the derived goods, in accordance with the contract for sale to Lucky Goldstar, there came into existence a book debt within the meaning of s262 (4). Mr Ellicott did not suggest otherwise. The submission was that subcl (5) did not make Metropolitan trustee of such book debts but of the fund created when payment was received. However, in my opinion, if subcl (5) is to have any operation it must have operated to charge the book debts as defined immediately they came into existence. If it were otherwise, Metropolitan would be left to deal with the book debts as it pleased. To adapt the words of Roskill LJ in the Romalpa case at 690 it would be strange if the first step in Metropolitan's becoming entitled to the proceeds of sale of the derived goods afforded no relevant security while the next step, when money was received, was the subject of an elaborately drawn provision to give such security.

The first sentence in subcl (5), by use of the word "then", meaning "in that case", emphasised that part of the proceeds should be held in trust for Alloys as soon as they came into existence, that is, as soon as there was a price agreed and payable in accordance with the contract for sale. If the trust was certain enough to be enforceable, as Bryson J thought it was, it would be possible at that point of time to identify the part of the proceeds held in trust by reference to the amount owing by Metropolitan to Alloys for goods used in the manufacturing process which produced the derived goods sold. However, in a practical sense, any payment to Alloys depended upon payment to Metropolitan of the book debts. At that point the trust attached to the amount paid, that is to say to a fund, but again, clearly, I would have thought, by way of a charge since, for the reasons already given, the parties must have intended that the fund or the balance of it reverted to Metropolitan if the amount owing to Alloys on the goods were paid from some other source. In this sense, the charge on the book debts was subsumed by a charge on the fund.

In Borden (UK) Limited v Scottish Timber at 44-5 Templeman LJ, speaking of the chipboard in the manufacture of which the resin supplied by the plaintiff seller had been used, said:

"For good measure, it seems to me that if the plaintiffs have any interest or share in chipboard or proceeds of sale of chipboard, or property representing proceeds of sale of chipboard, they fall foul of s95 of the Companies Act 1948. Any such interest or share must have been agreed to be granted by the defendants when they bought and accepted delivery of resin on the terms of the retain of title condition. Any such interest or share must have been created by the defendants when they employed the resin in the manufacture of chipboard. Any such interest or share must have been agreed to be granted and must have been created as security and only as security for the payment of the debts incurred and to be incurred by the defendants to the plaintiffs in respect of the supply of resin. Those debts were charged on the interest or share granted and created by the defendants. If tracing is permissible, the charge attached to the chipboard, when chipboard was manufactured, then attached to the proceeds of sale when the chipboard was sold, and finally attached to any property representing those proceeds of sale of chipboard. If the defendants created a charge on chipboard, such a charge is void against the liquidators and creditors of the defendants under s95, which makes void against the company or its creditors an unregistered charge created or evidenced by an instrument which, if executed by an individual, would require registration as a bill of sale. If the interest floated from the chipboard to proceeds of sale and onwards, so floated the charge, and s95 makes void any unregistered floating charge on the undertaking or property of the company.

It was said that a floating charge of this nature has no so far been comprised in any authority on s95; the fact that this is the first authority does not seem to me to be any drawback."

What Templeman LJ said accords with the general concept of a floating charge as one "intended by the parties to cover a class of property but not to attach to specific items within the class until some future event occurs" with the consequence that until that event occurs the chargor is free to dispose of items within the class in the ordinary course of business so that the taker from the chargor acquires the property free of the charge; see Ford and Austin's Principles of Corporation Law, 7th ed, para 19.190. But the fifth subclause of the Alloys standard clause provided for the part of the proceeds charged to be held in trust for Alloys which inhibited Metropolitan from dealing with that part of the proceeds in any way contrary to the terms of the trust, that is to say, in any way other than for the benefit of Alloys. Moreover, as is pointed out in Jacobs' Law of Trusts in Australia, 6th ed, para 227 a person in whose favour property is charged has only a security interest in the property and has not the equitable ownership in the same way as a beneficiary under a trust. I agree with Bryson J that any charge on the proceeds was not a floating charge.

The fifth subclause was designed to protect Alloys from the consequences of Metropolitan's insolvency by charging part of its book debts. This was achieved by using the device of a trust. The trust embraced part of the proceeds of the manufacturing process when the price to be paid for those derived goods became payable either immediately or in the future and continued until Metropolitan paid Alloys for the goods Alloys sold to Metropolitan and Metropolitan used in the manufacturing process. It was one trust and involved as an essential feature a charge on Metropolitan's book debts.

For that reason, in my opinion, subcl (5) was void as against the liquidator and administrators because it created a registrable charge, no notice of which had been lodged by Metropolitan, on property of Metropolitan, namely its book debts. I do not think it is permissible to treat as separate the trust, subject to which moneys received were held, when the book debts were paid and argue that although those moneys were the subject of a trust, whether by charge or otherwise, they were not the subject of a registrable charge within the meaning of s266 (1) of the Corporations Law.

Mr Ellicott argued however, that the charge was not void because it arose by operation of law. The meaning of this expression in the same context, though not as part of the local statute, has been considered in the United Kingdom cases. In In re Bond Worth at 271 Slade J observed that there was authority for the proposition that a charge which arose merely by operation of law was not registrable under s95 of the Companies Act (UK) 1948. His Lordship mentioned In re Wallis & Simmonds (Builders) Limited [1974] 1 WLR 391 in which Templeman J held that an equitable charge on land arising from a deposit of title deeds, although created as a result of a presumption of law, was contractual in nature and was therefore registrable under s95. At 404 Templeman J said:

"But in my judgment this is a contractual lien - it is said to be a contractual lien - and that makes all the difference. It is also a contractual charge; true it is that the charge arises by presumption, but it does not arise by operation of law. What the court does is to say: `We shall not compel the parties to write down in so many words what the effect of the deposit of title deeds is; we shall simply assume that when they contract, and although they probably do not know the consequences, the person who takes the title deeds contracts not only to retain them but also to have an equitable charge on the land.' The presumption reads into the contract the charge which is implied. If that is right, the charge was created by the company and is therefore registrable under s95."

His Lordship was fortified in this conclusion by considering the mischief at which the section was aimed.

In Tatung, the plaintiff asserted rights in goods supplied to the defendant companies, or in the proceeds of sale or hire of such goods, by virtue of retention of title clauses in the contracts under which the goods were supplied. The preliminary issue was whether the rights claimed by the plaintiff to a trust, in respect of certain sums received by the defendants and representing payments of hire for goods bought from the plaintiff, were void as against debenture holders on the ground that such alleged rights constituted a charge registrable under s95 of the Companies Act 1948. The plaintiffs sought to avoid this consequence by a submission that their interest in the debts due under the hire contracts arose automatically by operation of law from the fact that the debts were the fruits of the plaintiffs' property disposed of by the defendants as fiduciaries and not as a consequence of any agreement between the parties. At 334 Phillips J concluded that the nature of the agreement was that the defendants would hold the proceeds of dealing with the goods in trust for the plaintiffs by way of charge (the words "plaintiffs" and "defendants" at 334G have been mistakenly transposed) and at 335 said:

"This submission fails by reason of my finding that the plaintiffs' rights in the present case were the creature of contract and not of law. The charge was directly created by the agreement, to which the defendants were party, that the plaintiffs should have the interests specified in the proceeds of dealing with their property."

For like reason, in the present case, Alloys' charge over the book debts or the fund consisting of moneys received on the payment of those debts is properly categorised as the creature of contract not of the operation of law.

In the result, Bryson J rightly dismissed the proceedings and the appeal fails. It is unnecessary to deal with the contention put in the forefront of the respondents' submissions that no fund of money with respect to which the trust Alloys claimed might operate had ever been identified and that no mechanism existed for Metropolitan to set up a separate account and quarantine any moneys therein so as to create a fund to which Alloys was entitled; see generally Herdigan v Federal Commissioner of Taxation [1988] FCA 419; (1988) 84 ALR 271 at 277. Nor is it necessary to deal with Alloys' claim that the Alloys standard clause was a term of the contract under which the goods described in invoice 583 were sold by it to Metropolitan, though I note that Mr Coles, quite fairly, recognised that it was difficult to agree with Bryson J's conclusion on this point.

ASSOCIATED ALLOYS PTY LIMITED v METROPOLITAN ENGINEERING & FABRICATIONS PTY LIMITED (VOLUNTARY ADMINISTRATORS APPOINTED) (RECEIVERS & MANAGERS APPOINTED)

ASSOCIATED ALLOYS PTY LIMITED v METROPOLITAN ENGINEERING & FABRICATIONS PTY LIMITED (VOLUNTARY ADMINISTRATORS APPOINTED) (RECEIVERS & MANAGERS APPOINTED)