Cases - Mac-Jordan Construction Ltd v Brookmount Erostin Ltd (in administrative receivership)

Record details

Name
Mac-Jordan Construction Ltd v Brookmount Erostin Ltd (in administrative receivership)
Date
(1992)
Citation
56 BLR 1 CA
Keywords
Insolvency
Summary

This case concerned a contractor's right to retention after the employer's insolvency. Brookmount Erostin Ltd. ('Brookmount') was the developer of a site known as Wyllotts Manor, Potters Bar. The development was funded by a bank loan that was secured by a floating charge. Mac-Jordan Construction Ltd. ('Mac-Jordan') was the main contractor subject to the JCT 1981 Standard Form of Contract with Contractor's Design. The contract provided for interim payments and a three per cent retention. The contract stated that Brookmount's interest in the retention was fiduciary as trustee for Mac-Jordan, but the standard clause requiring the employer to place the retention in a separate bank account was deleted. No fund was ever appropriated and set aside by Brookmount. Some way through the project, the bank appointed administrative receivers. At the date of Brookmount's insolvency the retention amounted to £109,247 and Brookmount held £157,000 in its bank account. Mac-Jordan brought an application claiming that Brookmount held the retention on trust for Mac-Jordan and that interest took priority over the bank's floating charge.

Held, by the Court of Appeal: Following, Rayack Construction Ltd. v Lampeter Meat Co Ltd. (1979) 12 BLR 30 where the contract imposed an obligation on the employer to set aside as a separate trust fund a sum equal to the retention and such a fund were established, the contractor could claim a proprietary interest in the fund that would take priority in the event of the employer's insolvency. However, in this case, the retention fund had not been set aside and there were no identifiable assets which could be said to be subject to a trust. In such a situation the bank's floating charge took priority over Mac-Jordan's contractual right to have the retention fund set aside. It was irrelevant that the bank may have been aware of Brookmount's contractual obligation to Mac-Jordan before its floating charge was created.

Brookmount's liability to the bank far exceeded Brookmount's assets and Mac-Jordan would therefore not be able to recover any of the retention.