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Q&A – Can I use client funds to pay business expenses?

Question: I have sold a painting on consignment, I have received payment from the buyer and I would like to delay paying the seller and use the funds to pay some bills until I can make some sales, then of course I shall pay the seller.  Can I do that?

Answer: The simple answer is “no”.

As the painting was sold on consignment, the payment received was not received by you as a principal but as an agent for the seller. As a result, you have fiduciary duties towards the seller, and you cannot simply pocket the proceeds to use them for your own overheads.  

Generally, as a matter of English law, an agent owes a number of fiduciary duties to his or her principal. These are implied duties in addition to any duties that may have been agreed expressly between the principal and the agent. Such implied fiduciary duties include the following, all of which would likely be breached if you used the sale proceeds to settle overheads, even if your intention is to pay the seller later on:

  • An agent is under a duty to account to the principal for the principal’s property and money. Having sold the painting on the principal’s behalf, the agent must immediately inform the principal and thereby discharge its duty to account to the principal. The agent should only hold on to the proceeds, if the principal expressly authorises him/her to do so. However, in no circumstances should the proceeds be used for the agent’s own commercial ends.
  • The agent is also under an obligation not to act in a way that is outside the scope of its authority as granted by the principal. Clearly, if the principal does not expressly permit the agent to use the proceeds for his or her own affairs, such action almost certainly falls outside the agent’s authority.
  • An agent is also under a duty to act in its principal’s best interests in relation to the transaction that is subject to the agency. By using the proceeds from the sale of the painting for his/her own overheads, the agent would not be acting in his principal’s interests, but clearly in his/her own interests.
  • An agent is under a duty to keep its principal fully informed. Simply using monies held for the principal for purposes other than those expressly authorised by the principal would be to fall foul of this duty.
  • An agent may not use its position to make a profit, unless the agent fully informs the principal and the principal expressly agrees. Using the proceeds of the sale of the painting to pay off debts without express consent from the principal would likely amount to accruing commercial benefit, for instance by reducing possible interest payments on overdue overheads. The agency relationship with the principal must not be abused in that way.

Using sale proceeds to settle overheads would no longer breach the fiduciary duties towards the seller, if and only if the agent were to obtain express permission from the seller to use the proceeds to pay overheads. Such permission from the seller, however, would place the seller in a highly undesirable commercial situation, whereby receipt of the purchase price would have been deferred simply to grant the agent a loan to deal with overheads. It is difficult to see why such an arrangement would make commercial sense for any seller, in particular if this were an unsecured loan and the principal receives no consideration for the loan. The agent would also run the risk of the seller changing its mind at any point. If no consideration exists, then the loan is not based on a legally binding agreement. It may be “undone” at any point and could easily lead to a dispute between the seller and its agent.