Company – Administration – Receivers – Company owning freehold of land subject to mortgage – Appellant sole director occupying property as trespasser – Company defaulting on loans – Lender appointing respondent administrators – Court ordering transfer to respondents – Appellant appealing – Whether administrators able to obtain order under section 234 of Insolvency Act 1986 for delivery of possession of residential property occupied by appellant as trespasser – Appeal allowed
The freehold title to land known as Furzefield, Holwood Park Avenue, Orpington, was owned by a special purpose vehicle set up by the appellant, of which he was the sole director. The land comprised a large six-bedroom house set in about 1 acre in a gated estate. The company obtained a loan of £2.85m secured by a legal charge over the land but defaulted on the loans. Thereafter, interest became due to the lender on all amounts outstanding at a rate of 3% per month, compounded monthly. The appellant occupied the land as a trespasser.
The lender subsequently appointed LPA receivers over the property pursuant to the mortgage which incorporated all the powers conferred on receivers by the Law of Property Act 1925 and issued proceedings in the county court for possession of the property.
Faced with the prospect of delays in the resolution of those proceedings, the lender appointed the respondents as joint administrators of the company pursuant to the terms of its floating charge and they issued separate proceedings under section 234(2) of the Insolvency Act 1986. The judge made an order for possession ruling that the property appeared to be “property to which the company appears to be entitled” for the purposes of section 234(2). The appellant appealed. The judge made an order under section 234 requiring the appellant to deliver possession of the property to the respondents. The appellant appealed.
Held: The appeal was allowed.
(1) Section 234 was a summary procedure to assist an insolvency office-holder to carry out his functions in the relevant insolvency process. The office-holder could obtain an order in his own name for transfer etc of company property to himself, but the section did not give the office-holder any better rights to any property than the company had: Leyland DAF Ltd [1994] 2 BCLC 106, Smith v Bridgend County Borough Council [2001] UKHL 58 and Ezair v Conn [2020] EWCA Civ 687; [2020] PLSCS 103 considered.
In accordance with section 436 of the 1986 Act, “property” for the purposes of section 234 was wide enough to include land and any interest in land. However, it was doubtful that section 234 was intended to apply where the only basis for saying that a person “has in his possession or control property to which the company is entitled” was that he was occupying land as a trespasser who would in fact be required to cease to occupy the land.
(2) In general terms, a mortgage of land was a form of fixed security created by contract which conferred an interest in land in favour of the mortgagee which was defeasible upon the payment of a given sum of money. Since 2003, a mortgage of registered land had to take the form of a charge by deed expressed to be by way of legal mortgage.
The mortgagee was entitled to go into possession immediately upon execution of the mortgage. However, a mortgagee would not ordinarily go into possession, but would agree that the mortgagor could remain in possession for so long as the payments secured by the mortgage were being made. A second right given to a mortgagee by a legal mortgage was the right to appoint a receiver pursuant to section 101 of the 1925 Act once money became due under the mortgage and was unpaid: see Fisher & Lightwood, paragraphs 29.2 – 29.4 and Megarry & Wade, paragraph 24025.
Conventionally, as in the instant case, the receiver would be given wide powers of management including those set out in the 1925 Act and specifically the power to take possession of, and to sell, the mortgaged property for the benefit of the mortgagee. Such a receiver would invariably be appointed to exercise those powers as agent of the mortgagor. But the receiver was no ordinary agent. They were not obliged to exercise their powers for the benefit of the mortgagor, but were appointed to exercise their powers for the primary benefit of the mortgagee in order to repay the secured debt: Downsview Nominees v First City Corp [1993] AC 295, Medforth v Blake [1999] 2 EGLR 75 and Silven v Royal Bank of Scotland [2003] 3 EGLR 49 considered.
(3) In relation to a liquidation, the “property … to which the company is or appears to be entitled” in section 144 did not include property to which a receiver had been appointed under the fixed charge in a mortgage. It also followed that when section 234 was applied in a liquidation, the “property” did not include any mortgaged property to which a receiver had been appointed.
The basic position, and the meaning of section 234 in that respect, was no different in an administration. An administrator was defined by paragraph 1(1) of schedule B1 to the 1986 Act as a person “appointed under this schedule to manage the company’s affairs, business and property”. So, when paragraph 67 of schedule B1 provided, in similar terms to section 144, that, “the administrator shall on his appointment take custody or control of all the property to which he thinks the company is entitled” that did not extend to property which was subject to a mortgage under which receivers had been appointed prior to the administration. For the same reason, the “property” to which section 234(2) applied in an administration could not extend to property subject to the fixed charge in a mortgage to which receivers had been appointed. In any event, purely as a matter of land law, the company was not entitled to possession of the land, and hence section 234(2) could not be used to give such a right to the administrators.
(4) Although the company remained in possession of the land after the grant of the mortgage, it had no entitlement to the land other than its equity of redemption which was subject to the mortgage. After the appointment of the receivers and the commencement of the county court proceedings by the lender as mortgagee, the land subject to the mortgage was not “property to which the company [is] entitled” within section 234(2), and the equity of redemption gave the company no entitlement to take proceedings for possession.
Clive Wolman (instructed by William Sturges LLP) appeared for the appellant; Eleanor Temple KC and Jonathan Fletcher-Wright (instructed by Ashtons Legal LLP) appeared for the respondents.
Eileen O’Grady, barrister
