Legal charge – Debenture – Declaratory relief – Claimant company entering joint venture to development land – Funding being secured by debenture – Claimant entering into administration – Administrators seeking to sell land to repay bank as secured creditor – Defendant participant in joint venture registering unilateral notices against titles to land – Claimant seeking to vacate notices as wrongly registered – Claimant applying for summary judgment – Whether debenture void – Whether bank subrogating rights in security to defendant – Application granted
The claimant was a limited company and the registered proprietor of seven parcels of land in Romford, some of which were freehold while others were leasehold. The claimant was a special purpose vehicle formed to develop the site as part of a joint venture with another company (S). The defendant was a director of both companies and was the majority shareholder in S. The joint venture was not a success and the parties to it entered into a deed of dissolution, although the development continued. Funding for the development of the site was provided by L and secured by a debenture over the claimant’s assets and undertakings, a legal charge over one of the properties at the site and an intercompany omnibus guarantee and set off agreement. Following refinancing, the bank entered into a facility agreement for a term loan with the claimant and a working capital facility to S. In return, various securities over the land were granted to the bank. To facilitate those arrangements, L released some of its securities. S acquired the shares in the claimant’s parent company to satisfy a condition that the claimant should be part of the same group as S.
The claimant went into administration in August 2009 and its administrators took steps to sell the site with a view to releasing the sale proceeds to the bank as a secured creditor. A purchaser was found and heads of term were agreed, but further progress of the sale was brought to a halt when the defendant caused unilateral notices to be registered against the titles to five of the seven parcels of land. The administrators contended that those notices had been wrongly registered and should be vacated. The claimant, acting by its administrators, issued proceedings seeking: (i) a declaration that neither the defendant, nor any party on whose behalf he acted, had any interest in the properties that comprised the site or its sale proceeds; (ii) a declaration that any security rights held by the bank over those properties had priority to any rights enjoyed by the defendant; and (iii) an order that the unilateral notices be vacated.
The administrators applied for summary judgment. In order to avoid delaying a sale of the site pending resolution of the defendant’s claims, it was agreed that, in return for the cancellation of the notices, the administrators would retain the sale proceeds of the five affected properties. The notices were cancelled, but the site remained unsold.
Held: The application was granted.
(1) If an instrument was to be rendered void, the alteration had to be deliberate. It was not enough if it was made accidentally or mistakenly. The alteration had to be material, ie, an alteration to the legal effect of the instrument. The would-be avoider had to be able to demonstrate that the alteration was one which, assuming the parties acted in accordance with the other terms of the contract, was one which was potentially prejudicial to his legal rights or obligations under the instrument. Further, the alteration had to have been made without the consent of the other party to the instrument and it was at least questionable whether the rule applied to an alteration made by a stranger: Raiffeisen Zentralbank Osterreich AG v Crossseas Shipping Ltd [2000] 1 WLR 1135 applied.
(2) In the present case, the defendant had no basis for complaint regarding the circumstances in which the bank had come to hold security over titles to the property which was relevant to the validity of the unilateral notices which he had caused to be registered and with which the proceedings were primarily concerned. On the facts, there was plainly an issue over how the handwritten insertion to the bank’s debenture had come to be made which the court was in no position to resolve on an application for summary judgment. However, the insertion was not material in that it did not affect the claimant’s legal rights under the debenture and had not done so in a manner that was potentially prejudicial to it. Furthermore, the provisions of the bank’s debenture had entitled its solicitors, as its agent, to do whatever was needed to enable a legal charge to be executed over the title in question once it came into existence.
(3) There was overwhelming documentary evidence that the defendant’s claim to have been granted rights of subrogation in respect of L’s rights was without foundation. The terms of the refinancing had been inconsistent with any continuing subrogation agreement in respect of L’s security rights under any of its securities over the assets, which were to provide the bank with its security for the facilities it provided to the claimant. L’s debenture and charge had been released in accordance with the terms of the refinancing and in the full knowledge of the defendant. In any event, it was not clear that defendant had made any payment that would have entitled him to exercise any right of subrogation.
Derrick Dale QC and Christopher Knowles (instructed by Eversheds LLP) appeared for the claimant; Richard Millett QC and Tom Ford (instructed by Cartier & Co) appeared for the defendant.
Eileen O’Grady, barrister
