The sellers supplied resin to the buyers on credit terms under a contract which provided that the property in goods supplied was to pass to the buyers when full payment had been made for those goods and all other goods supplied up to the date of payment. As the sellers well knew, the buyers used the resin as an ingredient in the manufacture of chipboard within two days of it being supplied, the resin thereafter becoming an inseparable component of the chipboard. The buyers became insolvent, and a compulsory winding-up order was made. The sellers, who were owed £318,321 and who would otherwise have been ordinary unsecured creditors, claimed against the receiver of the buyers that under the reservation of title clause any chipboard which had been manufactured using resin supplied by them was charged with the amount owing, and that they were entitled to trace their resin into any chipboard manufactured from it or the proceeds of sale of such chipboard. On the trial of a preliminary issue the judge held
1. That the reservation of title clause had the effect in law of charging any chipboard manufactured by the buyers to the extent that it consisted of resin supplied by the buyers with the amount owing to the sellers;
2. That all moneys and other property representing any such chipboard were similarly charged; and
3. That the charge resulting from the reservation of title condition was not one to which s.95 of the Companies Act 1948 had any application. The grounds on which the judge held that the sellers were entitled to a tracing remedy were that the buyers had received the resin as bailees and that the resulting fiduciary relationship entitled the sellers to trace. he buyers appealed.
Held The appeal would be allowed for the following reasons -
1. Once the buyers had used the resin in the manufacture of chipboard the resin ceased to exist as resin and there was nothing which the sellers could trace. The effect of the reservation of title clause in the contract was merely to reserve to the sellers the property in the resin so long as it remained unused; and on the resin's ceasing to exist when it was incorporated in the chipboard the seller's title to the resin also ceased to exist. Furthermore, there was no express agreement and no ground to imply an agreement in the contract that the buyers were to provide substituted security for the resin used in the chipboard.
2. In any event, there did not exist between the buyers and the sellers the necessary fiduciary relationship in regard to the chipboard to entitle the sellers to trace the resin supplied by them into the chipboard manufactured from it, or into the proceeds of sale of such chipboard, because the resin was supplied under a contract of sale and purchase by which the buyers received the resin for themselves as purchasers and were free to use it in the manufacture of chipboard. The buyers did not receive the resin in any fiduciary capacity or (per Bridge LJ) as bailees, since by delivering the resin knowing it would be used before it was paid for the sellers had no right to call for its return and it was never intended by the parties that it should be recovered in its original or its altered form.
3. (Per Buckley and Templeman LJJ) Even if the sellers had acquired an interest or share in the chipboard it would have been by way of an unregistered charge attached to the chipboard or the proceeds of sale thereof and as such void under s.95 of the 1948 Act as against the liquidator and other creditors for want of registration.
Per Bridge LJ Quaere Whether a tracing remedy can ever apply where there has been a mixture of heterogeneous goods in a manufacturing process wherein the original goods lose their character and what emerges is a wholly new product. Quaere Further, if the remedy were available in such cases, how the proportion of the value of the manufactured product which the tracer could claim as property attributable to his ingredient could be quantified.