Fivestar Properties Ltd, Re [2015] EWHC 2782 (Ch)

[2015] EWHC 2782 (Ch)Case No 6369 of 2015
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Venue BIRMINGHAM DISTRICT REGISTRY, Birmingham Civil Justice Centre, Bull Street, Birmingham B4 6DSDate 08/10/2015
Before
HHJ DAVID COOKEIn the matter of Fivestar Properties LtdIn the matter of the Insolvency Act 1986In the matter of the Companies Act 2006
Between
West Bromwich Commercial LtdApplicant
Amit Gupta (instructed by Gateley Plc) for ApplicantNo other party appeared or was representedHearing Hearing date: 28 September 2015
JudgmentHHJ David Cooke:
[1]On 28 September 2015 I made an order on the application of West Bromwich Commercial Ltd ("the Bank") for the restoration of Fivestar Properties Ltd ("the Company") to the Register and its immediate winding up by the Court, also making consequential provision including in particular a decision that in consequence of the restoration a freehold commercial property at Croydon ("the Property") which is registered in the name of the Company and charged to the Bank, is, or perhaps it might be said is again, vested in the Company, notwithstanding the previous dissolution of the Company and disclaimer of the freehold by the Crown. The intention behind the application is that negotiations for a new lease of the Property may now be concluded and the freehold sold with the benefit of a new lease, the proceeds going, in the first instance at least, to the Bank under its charge. It appears there is no previous authority precisely on point, so Mr. Gupta invited me to state reasons for my decision which might be reported. These are those reasons.

The facts

[2]The Company was incorporated in 2003 with the stated object of development and sale of real property. In 2006 the Bank made a secured loan facility available to the Company, pursuant to a facility letter dated 21 July 2006 which it appears was drawn down on or about 16 August 2006. On that date the Company granted security to the Bank including a legal charge over the Property, which appears to have been its principal asset, and a general floating charge over its assets and undertaking. It appears that part at least of the Bank's advance was used to discharge earlier borrowing from Northern Rock plc, since although a fixed charge in favour of Northern Rock dated 9 June 2003 remains on the Charges Register at Companies House, Northern Rock has confirmed that its lending was discharged on 17 August 2006 and its charge was removed from the Land Register.[3]On 8 February 2011 following default the Bank made demand on the Company for repayment of just under £3.15m, which was not paid. On 9 June 2011 the Bank appointed Law of Property Act receivers ("the Receivers") pursuant to its legal charge over the Property, who pursued the collection of rent apparently outstanding due from the tenant in occupation of the Property. It became apparent that the tenant had paid about £175,000 due in respect of rent to North Salford Estates Ltd, a company connected with the Company which acted as managing agent for the Property, but that it had not been paid over to the Company. The Receivers recommended that the Company be placed in administration so that administrators with wider powers than their own might investigate this and other dealings between the Company and North Salford Estates Ltd.[4]The Bank therefore appointed administrators ("the Administrators") to the Company on 25 July 2012, which it was entitled to do under para 14 of Sch B1 Insolvency Act 1986 as the holder of a qualifying floating charge. This did not have the effect of ending the appointment of the Receivers, which the Administrators agreed should continue (they could have required the Receivers to vacate office pursuant to para 41(2) of Sch B1 had they so chosen).

Dissolution and disclaimer

[5]The Administrators concluded a settlement of claims against North Salford Estates Ltd under which just under £130,000 was paid to the Company and on 6 January 2014 filed a final report and gave notice to move the Company from administration to dissolution under para 84(1) of Sch B1. Para 84 provides as follows:
“Moving from administration to dissolution 84(1) If the administrator of a company thinks that the company has no property which might permit a distribution to its creditors, he shall send a notice to that effect to the registrar of companies... (4) On the registration of a notice in respect of a company under sub-paragraph (1) the appointment of an administrator of the company shall cease to have effect… (6) At the end of the period of three months beginning with the date of registration of a notice in respect of a company under sub-paragraph (1) the company is deemed to be dissolved.”
[6]The conclusion that "there are no further assets that remain to be realised" was stated in the Administrators' final report, though the same report refers to the Company's continued ownership of the Property. It is not clear whether the Administrators thought that the freehold had no value (that seems unlikely) or considered that it was to be left out of account because it was under the control of the Receivers for the benefit of the secured creditor. If the latter was the case, then it seems to me doubtful whether that can have been a correct view, though as the point was not argued before me I should not express a concluded opinion on it.[7]In Re GHE Realisations Ltd (formerly Gatehouse Estates Ltd) [2005] EWHC 2400 (Ch) Rimer J held that the para 84 procedure was not limited to cases where the company never had any assets that might have enabled a distribution to creditors (a view previously expressed by Blackburne J, obiter) so that it might be used where there had been such assets but they had now been realised and all potential distributions made- but unsurprisingly he did not consider the position where valuable assets still existed but were not, for some reason, in the control of the administrators themselves. At para 21 of his judgment he said this:
“[The] view … is expressed in Corporate Administrations and Rescue Procedures, 2004, Fletcher, Higham and Trower, page 418 … that the duty under para 84 will arise in two categories of case: (i) where it transpires that the company has no property available for distribution to creditors, and (ii) where the administrators have made distributions under para 65 and there is no further distribution to be made, whether through the medium of an administration or a liquidation.”
But he did not expressly approve this statement, and referred to it for the purpose of contrast with the opinions of other authors concurring with Blackburne J. It seems to me, provisionally at least, that the purpose of the para 84 procedure is to enable the company to be efficiently put to rest when the creditors have no interest in it entering any other procedure (cf para 24 of the judgment of Rimer J) which will not be the case where further payments to creditors may be made out of any assets, whether at the time under the control of the administrator or not and whether the proceeds of realisations will go to unsecured or secured creditors.[8]Be that as it may, it is not suggested that the para 84 notice was of no effect. It was duly registered and the company was recorded as being dissolved three months later, on 8 April 2014.[9]The Receivers continued to deal with the lease of the Property, which was due to expire on 24 March 2014 but extended pursuant to the tenant's request for a new lease under the Landlord and Tenant Act 1954. The Receivers have continued to negotiate terms for a new lease, which are said to be almost concluded. To protect its position the tenant issued a claim for a new lease under the 1954 Act on 30 April 2014.[10]By that date the Company had been dissolved and any assets remaining in its ownership vested in the Crown as bona vacantia pursuant to s 1012 Companies Act 2006, which provides: “1012 Property of dissolved company to be bona vacantia(1) When a company is dissolved, all property and rights whatsoever vested in … the company immediately before its dissolution … are deemed to be bona vacantia and— (a) accordingly belong to the Crown… , and (b) vest and may be dealt with in the same manner as other bona vacantia accruing to the Crown...(2) Subsection (1) has effect subject to the possible restoration of the company to the register under Chapter 3 (see section 1034).” (a) accordingly belong to the Crown… , and (b) vest and may be dealt with in the same manner as other bona vacantia accruing to the Crown...[11]The tenant therefore served notice of the claim under the 1954 Act on the Treasury Solicitor, who represents the Crown's interest in matters relating to bona vacantia. In response however the Treasury Solicitor served notice on 19 May 2015 disclaiming on behalf of the Crown the interest vested in it under s 1012. The provisions of the Companies Act relevant to such disclaimer in the present context are as follows: “1013 Crown disclaimer of property vesting as bona vacantia(1) Where property vests in the Crown under section 1012, the Crown's title to it under that section may be disclaimed by a notice signed by the Crown representative, that is to say the Treasury Solicitor... (3) A notice of disclaimer must be executed within three years after— (a) the date on which the fact that the property may have vested in the Crown under section 1012 first comes to the notice of the Crown representative... (4) If an application in writing is made to the Crown representative by a person interested in the property requiring him to decide whether he will or will not disclaim, any notice of disclaimer must be executed within twelve months after the making of the application or such further period as may be allowed by the court. (5) A notice of disclaimer under this section is of no effect if it is shown to have been executed after the end of the period specified by subsection (3) or (4). (6) A notice of disclaimer under this section must be delivered to the registrar [of Companies] and retained and registered by him. 1014 Effect of Crown disclaimer (1) Where notice of disclaimer is executed under section 1013 as respects any property, that property is deemed not to have vested in the Crown under section 1012.(2) The following sections contain provisions as to the effect of the Crown disclaimer— sections 1015 to 1019 apply in relation to property in England and Wales… 1015 General effect of disclaimer (1) The Crown's disclaimer operates so as to terminate, as from the date of the disclaimer, the rights, interests and liabilities of the company in or in respect of the property disclaimed. (2) It does not, except so far as is necessary for the purpose of releasing the company from any liability, affect the rights or liabilities of any other person. 1017 Power of court to make vesting order (1) The court may on application by a person who— (a) claims an interest in the disclaimed property… make an order under this section in respect of the property. (2) An order under this section is an order for the vesting of the disclaimed property in… (a) a person entitled to it … (4) An order under this section may be made on such terms as the court thinks fit. (5) On a vesting order being made under this section, the property comprised in it vests in the person named in that behalf in the order without conveyance, assignment or transfer.” (a) the date on which the fact that the property may have vested in the Crown under section 1012 first comes to the notice of the Crown representative... sections 1015 to 1019 apply in relation to property in England and Wales…

Effect of Crown disclaimer on the freehold

[12]The position is therefore that the Company has ceased to exist by virtue of its dissolution, and by virtue of the disclaimer its freehold interest in the Property is deemed not to have vested in the Crown (s1014(1)) but has nevertheless been terminated (s1015(1)). Mr. Gupta submits, correctly, that the effect is that the land escheats to the Crown. Escheat is an ancient term, denoting the principle that if the interest of an inferior tenant determines or is extinguished, the land reverts to the tenant's immediate feudal lord. All land is ultimately held of the Crown, and a freehold interest (otherwise called a "tenancy in fee simple") is a tenancy for these purposes, so that if the freehold interest is extinguished the land reverts to the immediate lord, in practice nowadays being the Crown. The disclaimer does not have the effect of extinguishing the Crown's ultimate right to the land but only "the Crown's title to it under [s1012]", see s1013(1) above. Stanley Burnton QC so held in Scmlla Properties Ltd v Gesso Properties (BVI) Ltd [1995] BCC 793 having conducted an extensive review of relevant learned writing and authority going back hundreds of years. That case concerned disclaimer of a freehold by a liquidator rather than the Crown, but the material statutory provision as to the effect of the disclaimer on the interest of the company (in s 178(4)(a) Insolvency Act 1986) is in identical terms to s 1015(1) Companies Act 2006.[13]I note that in that decision the then Deputy Judge: i) further held that the escheat operated automatically without need for any election by the Crown (p804G), ii) noted the power of the Crown to disclaim bona vacantia vesting in it on disclaimer (then contained in s 654 Companies Act 1985) and the curious result in the case of freeholds that such a disclaimer the land ultimately came back to the Crown in any event as an escheat (p805G). The disclaimer may nevertheless serve a purpose for the Crown in that it may not come under liability as owner of the land unless it takes some step to assert ownership; see Megarry & Wade Law of Real Property, Eighth Ed, para 2.024, iii) held that, notwithstanding the apparent illogicality, the termination of the freehold interest did not operate to determine subordinate interests created out of it, in particular those of a mortgagee and leasehold tenants (p808(B)), and iv) held that a conveyance of the freehold by the mortgagee after the disclaimer was effective to vest an unimpeachable freehold title in the purchaser, whether or not the mortgagee's power of sale had arisen before the disclaimer (p810H).[14]Notwithstanding the dissolution of the Company and the termination of its freehold, the registered freehold title has not been closed. The practical reasons for this are noted in Ruoff & Roper on the Law and Practice of Registered Conveyancing, at para 40.012 (December 2013) as being that the record on the Register is a useful form of preservation of information as to charges and encumbrances binding on the former freehold which would be effectively revived and binding on any new freehold which the Crown might create in respect of the land, and also inferior interests which are not extinguished by the termination of the freehold. For that reason, r173 of the Land Registration Rules 2003 provides that a note may be made in the property register of the termination of a registered freehold interest. That has been done in the present case.

Power to restore and effect of restoration

[15]What then would be the effect on the freehold of restoration of the Company to the register, and is that modified by the fact that the freehold has been disclaimed? The relevant provisions of the Companies Act 2006 are as follows:
“1029 Application to court for restoration to the register (1) An application may be made to the court to restore to the register a company— (a) that has been dissolved under Chapter 9 of Part 4 of the Insolvency Act 1986 … (dissolution of company after winding up), (b) that is deemed to have been dissolved under paragraph 84(6) of Schedule B1 to that Act … (dissolution of company following administration), or (c) that has been struck off the register— (i) under section 1000 or 1001 (power of registrar to strike off defunct company), or (ii) under section 1003 (voluntary striking off), whether or not the company has in consequence been dissolved. (2) An application under this section may be made by— … (c) any person having an interest in land in which the company had a superior or derivative interest, (e) any person who but for the company's dissolution would have been in a contractual relationship with it, (i) any person who was a creditor of the company at the time of its striking off or dissolution… or by any other person appearing to the court to have an interest in the matter. 1031 Decision on application for restoration by the court (1) On an application under section 1029 the court may order the restoration of the company to the register— (a) if the company was struck off the register under section 1000 or 1001 (power of registrar to strike off defunct companies) and the company was, at the time of the striking off, carrying on business or in operation; (b) if the company was struck off the register under section 1003 (voluntary striking off) and any of the requirements of sections 1004 to 1009 was not complied with; (c) if in any other case the court considers it just to do so… 1032 Effect of court order for restoration to the register (1) The general effect of an order by the court for restoration to the register is that the company is deemed to have continued in existence as if it had not been dissolved or struck off the register… (3) The court may give such directions and make such provision as seems just for placing the company and all other persons in the same position (as nearly as may be) as if the company had not been dissolved or struck off the register. (4) The court may also give directions as to… (c) where any property or right previously vested in or held on trust for the company has vested as bona vacantia, the payment of the costs … of the Crown representative— (i) in dealing with the property during the period of dissolution.. 1034 Effect of restoration to the register where property has vested as bona vacantia (1) The person in whom any property … is vested by section 1012 (property of dissolved company to be bona vacantia) may dispose of, or of an interest in, that property … despite the fact that the company may be restored to the register under this Chapter. (2) If the company is restored to the register— (a) the restoration does not affect the disposition (but without prejudice to its effect in relation to any other property or right previously vested in or held on trust for the company), and (b) the Crown … shall pay to the company an amount equal to— (i) the amount of any consideration received for the property … or, if no consideration was received an amount equal to the value of the property… disposed of, as at the date of the disposition.” (a) that has been dissolved under Chapter 9 of Part 4 of the Insolvency Act 1986 … (dissolution of company after winding up), (b) that is deemed to have been dissolved under paragraph 84(6) of Schedule B1 to that Act … (dissolution of company following administration), or (c) that has been struck off the register— (i) under section 1000 or 1001 (power of registrar to strike off defunct company), or (ii) under section 1003 (voluntary striking off), whether or not the company has in consequence been dissolved. (c) any person having an interest in land in which the company had a superior or derivative interest, (e) any person who but for the company's dissolution would have been in a contractual relationship with it, (i) any person who was a creditor of the company at the time of its striking off or dissolution… (a) if the company was struck off the register under section 1000 or 1001 (power of registrar to strike off defunct companies) and the company was, at the time of the striking off, carrying on business or in operation; (b) if the company was struck off the register under section 1003 (voluntary striking off) and any of the requirements of sections 1004 to 1009 was not complied with; (c) if in any other case the court considers it just to do so… (c) where any property or right previously vested in or held on trust for the company has vested as bona vacantia, the payment of the costs … of the Crown representative— (i) in dealing with the property during the period of dissolution.. (a) the restoration does not affect the disposition (but without prejudice to its effect in relation to any other property or right previously vested in or held on trust for the company), and (b) the Crown … shall pay to the company an amount equal to— (i) the amount of any consideration received for the property … or, if no consideration was received an amount equal to the value of the property… disposed of, as at the date of the disposition.”
[16]The power to order restoration in the present case is given by s 1029(1)(b). The Bank has standing to make the application under (at least) all the provisions of s 1029(2) cited. It is just to do so (satisfying s 1031(1)(c)) if the effect is that the Property may be realised, or more readily realised, for the benefit of the Bank as secured creditor.[17]As to the effect of restoration on property held by the company, it will be recalled that s1012(1) which deems such property to be bona vacantia "has effect subject to the possible restoration of the company to the register" (s 1012(2)). The general effect of restoration is that the company is retrospectively deemed to have continued in existence as if it had not been dissolved (s 1032(1)), on which hypothesis the property in question never would have become bona vacantia. Subject to the possible effect of s1034 if the Crown has in the meantime made a disposition of the property, the company is deemed always to have been the owner, as if it had never been dissolved.[18]In Allied Dunbar Assurance plc v Fowle & others [1994] BCC 422 Garland J considered a similar question in relation to a lease held (as assignee) by a company that had been dissolved following striking off. The lease became vested in the Crown as bona vacantia (then pursuant to s654 Companies Act 1985) but was disclaimed by the Crown. Sureties for the company's obligations under the lease claimed that their liability determined when the lease was disclaimed and was not revived by the restoration because the Crown disclaimer constituted a "disposition", as a result of which the company's obligations under the lease were discharged and it became entitled to compensation from the Crown under s655 Companies Act 1985, the predecessor to s1034. After reviewing authorities and arguments presented to him by counsel for the sureties and the original tenant, he held:
“The answer to the central issue: 'Is a Crown disclaimer a disposition for the purposes of s 655 [Companies Act 1985]?' must, in my judgment, be No. I accept the arguments advanced by Allied [the lessor] and Pneumatic [the original tenant] which I have summarised earlier. In my view, both the natural meaning of the words used and the policy of Ch VI of Pt XXI of the 1985 Act point to an 'as you were' situation once the company is restored to the register, subject to the court's power to 'tidy up' under ss 653(3) and 655.”
[19]The argument accepted as to construction of the statute was that a disclaimer, whether by the Crown or a liquidator, operated by way of avoidance or extinguishment of the interest disclaimed and not by way of transfer or conveyance of that interest to any other person; see p431C to 432H. The principal point as to policy was that a landlord of property is left in limbo if a lease is disclaimed but may be revived if the company is at some stage restored to the Register. As to that, Garland J accepted that there was an anomaly, but noted that the landlord could compel the Crown to elect within 3 months whether to disclaim by serving notice under what was then s656(3) Companies Act 1985. The equivalent provision in the Companies Act 2006 is s 1013(4), which provides for a period of 12 months rather than 3 months, but Parliament must be taken to have extended this period in the knowledge of Garland J's decision and thus that it was extending the period of uncertainty for landlords and other interested parties.[20]The reference to "tidying up" is to the power of the court to give directions to place persons "as nearly as may be" in the same position as if there had been no dissolution, and to direct compensation for any property incapable of restoration to the company because of an intervening disposition.[21]It seems to me that there is no reason to regard a Crown disclaimer of a freehold as operating differently from that of a leasehold. It operates by way of extinguishment of the freehold estate such that "the Crown becomes the owner of the land in question freed from the previous freehold interest" (Scmlla at p805C) rather than by way of transfer of that freehold to the Crown. Thus the operation of the disclaimer as it relates to the interest disclaimed is the same whether that interest is a freehold or a leasehold estate, even if the nature of the superior interest freed from that estate is different (the Crown's seignory as distinct from the freehold reversion or superior leasehold expectant on a disclaimed lease). That difference, it seems to me, has no bearing on the matter; it does not mean for instance that the rights removed from the company are transferred to or accrete to the Crown, simply that they no longer exist to bind the Crown.[22]As for policy considerations, not only would it be highly undesirable to interpret the statute as having a different effect dependant on the nature of the interest disclaimed, but there is if anything less reason to seek to protect the Crown (rather than a landlord) from uncertainty caused by Crown disclaimer, given that(a) the disclaimer is the Crown's own act and(b) if the Crown had in mind any dealing with the land that might be at risk on an unexpected restoration it has the more straightforward option of disposing of the bona vacantia interest rather than disclaiming it.

Conclusion

[23]I conclude therefore that Crown disclaimer of the freehold is not a "disposition" and the effect of restoration is that the freehold estate is retrospectively re-created and re-vested in the Company in all respects as if it had never been dissolved and as if the freehold had never been disclaimed. It follows that it is just to make the restoration order in this case and the power to do so should be exercised.[24]I should record that, although no other party appeared on the application, notice of it was given to the Treasury Solicitor (representing the Crown's interest in bona vacantia), the solicitors acting for the Crown Estates (representing the interest of the Crown in escheated lands), the Registrar of Companies, the Administrators and the solicitors for the tenant of the Property, each of whom (except the Registrar, who did not respond) indicated in writing that they had no objection to the order sought.[25]It does seem surprising that this application has had to be made. I have not been asked to make any decision as to alternatives, though on the face of it there are several possibilities that might be considered in future. I mention below those that occur to me, though in the circumstances I should not be taken as expressing a decided view on any of them: i) The most obvious would be that if assets remain to be realised after administration and are expected to produce value for creditors the company should not be put into dissolution (even if it is technically proper to do so, which I doubt for the reasons given above). The administrators could petition for compulsory winding up or, subject to the hurdles in para 83 of Sch B1, serve notice to put it into creditors' voluntary winding up. If the only remaining assets are under the control of receivers who will remain in office, the administrators could apply to the court to end the administration without moving to any other procedure, leaving the company in due course to be struck off as defunct if no other demise is initiated by its directors, members or creditors. ii) Since the disclaimer of the freehold does not determine subordinate interests created out of it (see Scmlla, above) a mortgagee's powers would appear to be exercisable notwithstanding the dissolution and disclaimer and, for instance, sufficient to vest a secure freehold title in a purchaser from it. The position in a case like the present may be more complex if, for instance, the negotiation or grant of a new lease required the mortgagee or receivers appointed by a mortgagee to act as agent of the company when they could not do so after its dissolution. iii) An application might be made for an order vesting the freehold in a purchaser from a mortgagee under Companies Act 2006 s 1017, perhaps by way of confirmation. There may be a difficulty if such an order is sought in favour of the mortgagee himself (even if willing to become owner) as he may not be "a person entitled to it" for the purposes of s1017(2), though it seems to me the contrary is arguable since subsection (1) permits an application by a person who "claims an interest in" the property, which presumably might be an interest less than full ownership. iv) In Quadracolour Ltd v Crown Estate Commissioners [2013] EWHC 4842 (Ch) Jeremy Cousins QC sitting as a Deputy High Court Judge made an order vesting a freehold title, extinguished by Crown disclaimer as in this case, in the holder of an option to acquire it, exercising the power in s 181 Law of Property Act 1925 to create and vest an estate corresponding to that which had been determined "in the person who would have been entitled to the estate which determined had it remained a subsisting estate". He held that the option holder would have been so entitled because but for the dissolution of the company it would have followed the steps required to exercise its option. A mortgagee would not of course be entitled to the estate mortgaged (except on forfeiture) but a purchaser from him would be.[26]I conclude by expressing my thanks to Mr. Gupta for his research and submissions.