Insolvency – Contract for sale of land – Administrators of applicant companies agreeing to sell property and equipment to respondent – Large deposit paid – Deposit forfeited for non-completion – Whether administrators to be permitted to distribute to secured creditors – Whether permission to be refused pending claim by respondent for return of deposit – Whether deposit an unlawful penalty – Whether respondent having proprietary claim to its return – Judgment in favour of applicants
The applicants, two companies in administration, owned a leasehold interest in a frozen potato processing plant. Their joint administrators sought to sell the plant together with the equipment and machinery that it contained. Out of two potential purchasers, they preferred an offer of £1.9m from the respondent, who was not, however, immediately in funds to complete. In order not to lose the purchase, it agreed to pay a non-returnable deposit £800,000 plus VAT on exchange of contracts and the balance within 30 days. A sale contract was concluded on those terms. The respondent was allowed to occupy the property as licensee and commence production there in the meantime.
The respondent failed to complete on time. A dispute over its occupation of the premises was resolved on the terms of a consent order, under which it paid a further non-refundable deposit of £500,000, a new completion date was set and the overall purchase price was increased to include agreed interest and damages for late completion. The respondent again failed to complete on time or to comply with a notice to complete served by the applicants. The applicants consequently rescinded the agreement and forfeited the deposit.
The applicants applied for a direction, under para 63 of Schedule B1 of the Insolvency Act 1986, that their joint administrators could distribute to their secured creditors forthwith. The respondent opposed that application and sought permission to bring a claim for the recovery of its deposit. It contended that the deposit was an unreasonably large proportion of the sale price and constituted an unlawful penalty, such that it had a proprietary claim to the return of the deposit and the applicants could not set off their claim for damages against it.
The applicants disputed those contentions and further sought to rely on clause 9.13(d) of the sale agreement, which provided that any sums due from the administrators by reason of that agreement should rank only as an unsecured claim against the applicants. The respondent argued that clause 9.13(d) did not apply since it held an equitable lien for the return of the deposit or, alternatively, the deposit sum should be paid out to it in priority to any other creditor, pursuant to the rule in Ex parte James (1874) 9 LJ Ch App 609.
Held: The issues were determined in favour of the applicants.
(1) A deposit was an earnest for performance of the contract and did not have to bear reference to the anticipated loss to the vendor flowing from breach. It simply had to be reasonable in all the circumstances to provide an assurance to the vendor that the purchaser would complete: Midill (97PL) Ltd v Park Lane Estates Ltd [2008] EWCA Civ 1227; [2009] 1 EGLR 65; [2009] 07 EG 92 and Howe v Smith (1884) 27 Ch D 89 applied. That principle was not confined to contracts for the sale of land but extended also to the sale of other property. In light of the conflicting evidence on the issue, the court could not reach a definitive conclusion at the summary stage as to whether the deposit paid by the respondent was reasonable and the respondent had an arguable case on that issue.
(2) However, even if the deposit was unreasonable, it was not in the nature of an unlawful penalty and the respondent’s remedy was not proprietary in nature. The penalty rule applied only to provisions that required payment of a sum of money or the transfer of property or money’s worth in the event of breach. It did not extend to provisions for forfeiture of moneys already paid over prior to breach: Else (1982) Ltd v Parkland Holdings Ltd [1994] 1 BCLC 130 applied; Workers Trust & Merchant Bank Ltd v Dojap Investments Ltd [1993] AC 573; [1993] 1 EGLR 203 not followed.
Where the innocent party was seeking to retain money transferred to it as part performance of the other’s obligations under the contract, the correct approach was to apply the forfeiture rule by looking at the position after the breach and asking whether it would be unconscionable to allow the forfeiture to take effect, taking into account the circumstances prevailing at the date of the breach and the extent to which the vendor had suffered loss as a result of it. That involved an exercise of the court’s discretion to grant equitable relief; the statutory jurisdiction conferred by section 49(2) of the 1925 Act did not give rise to any additional considerations. Even if, at a future trial, it were found to be appropriate to grant relief from forfeiture, the respondent’s claim in that regard was not a proprietary claim. The applicants were entitled to set off against it their claim for damages for breach of the sale agreement.
(3) The applicants were entitled to rely on clause 9.13(d) of the agreement. They were not prevented from doing so by the existence of any purchaser’s lien for the return of the deposit. The purchaser’s lien was an equitable invention introduced to do justice as between vendor and purchaser where a sale went off by reason of some default on the part of the vendor. The respondent should not be allowed the benefit of such a lien in circumstances where the breach was its own and the applicants bore no responsibility for it: Whitbread & Co Ltd v Watt [1901] 1 Ch 911; [1902] 1 Ch 835 distinguished. Nor was the principle in Ex parte James engaged. The question raised by that principle was whether an office holder could be said to be taking unfair advantage of a third party. No unfair advantage was taken where the respondent had expressly agreed to clause 9.13(d), thereby accepting that its claims should be treated as unsecured claims. That clause did not involve the parties impermissibly contracting out of the order of priority under Schedule B1 to the 1986 Act.
Mark Cawson QC (instructed by Squire Sanders & Dempsey (UK) LLP) appeared for the applicants; John McGhee QC (instructed by Eversheds LLP) appeared for the respondent.
Sally Dobson, barrister
