Hughmans Solicitors v Central Stream Services Ltd (in liquidation) and another

Charging order – Priority – Land Registration Act 2002 – Tomlin order made in compromise of claim – Order conferring on first respondent right to net proceeds of sale of property after discharge of specified debts of owner including fees of appellant solicitor – Appellant obtaining charging order registered against title to property to secure judgment debt in respect of fees – Whether Tomlin order creating beneficial interest in land – Whether appellant’s rights under charging order having priority over rights conferred by Tomlin order – Appeal dismissedThe appellant firm of solicitors acted for the owner of a property in proceedings that the first respondent company had brought against him. The second respondent, acting as the liquidator of the first respondent, compromised those proceedings on the terms of a Tomlin order. By that order and the schedule thereto, the first respondent agreed to accept the net proceeds of sale of the property, following payment of certain specified debts of the owner, in settlement of its claim, “provided always that [the first respondent] shall receive not less than £100,000”. The specified debts included an existing mortgage over the property and the reasonable fees and disbursements of the appellant in connection with the action.The appellant obtained judgment against the property owner for more than £19,000 in professional fees incurred in relation to the compromised action. The debt was secured by a charging order over the property and that order was in turn protected by the registration of a unilateral notice against the title. The appellant later agreed to remove the notice, without prejudice to its rights, in order to facilitate a sale of the property.The sale produced net proceeds of only £49,104 after the mortgage was discharged. The appellant applied to the court for an order for payment out of those proceeds of the £19,000 secured by its charging order. That claim was dismissed in the court below on the ground that the respondents had a prior secured right to the net proceeds, in the form of a proprietary interest under a trust, pursuant to the terms of the schedule to the Tomlin order: see [2012] EWHC 1222 (Ch); [2012] 2 EGLR 30; [2012] 32 EG 47. The appellant appealed.Held: The appeal was dismissed.(1) Clear words were needed in order to create a proprietary interest. In a commercial context, the court would not readily find that a trust or equitable interests had been created, both because the creation of such interests ran counter to the rateable distribution of assets on an insolvency and because the courts were generally disinclined to see the intricacies and doctrines connected with trusts introduced into everyday commercial transactions: Tradegro (UK) Ltd v Wigmore Street Investments Ltd (in administration) [2011] EWCA Civ 268; [2011] BCLC 616 and Neste Oy v Lloyds Bank plc [1983] 2 Lloyd’s Rep 658 applied. None the less, the agreement set out in the Tomlin order and its schedule created a proprietary interest. The relevant interest was not created by way of an equitable charge, since there was no debt due from the property owner to the first respondent for which a charge could stand as security. Rather than imposing an obligation on the property owner to pay a particular sum of money to the first respondent, the agreement created an obligation to sell the property and apply its proceeds in a particular manner. Instead, the proprietary interest arose under the general principle that if, for valuable consideration, the owner of property agreed to hold the property on terms that appropriated it for the benefit of another party, and the agreement was one that the courts would enforce by an order for specific performance, then the effect of the agreement was to create an equitable interest in the property in favour of the latter party: Palmer v Carey [1926] AC 703 applied.The effect of the agreement in the instant case was to give to the first respondent the whole of the property owner’s net equity in the property, subject only to the application of part of the proceeds of sale in the payment of identified debts. From the date of the agreement, not only was the property owner not free to deal with the property as he wished but he was also under a positive, unqualified obligation to sell the property and to apply the proceeds for the benefit of the first respondent, subject to the discharge of the mortgage and the payment of other debts as provided by the agreement. The property was wholly appropriated to that settlement. The courts would enforce the agreement by specific performance. That agreement therefore created an equitable interest in the property in favour of the first respondent.(2) The appellant’s charging order was not made for “valuable consideration” within the meaning of section 29(1) of the Land Registration Act 2002 so as to take priority over the first respondent’s rights pursuant to that section. The case was therefore governed by the basic rule of priorities under section 28, namely that equitable interests ranked in priority according to the time of their creation. Accordingly, the first respondent’s interest ranked in priority to the appellant’s charging order. No different result flowed from the fact that the appellant’s agreement to remove its unilateral notice had been given without prejudice to its rights. Although the title transferred to the purchaser would have been subject to the charging order had the notice not been removed, the first respondent, as the holder of a prior equitable interest, had the right to require the appellant to remove the unilateral notice. Consequently, the appellant never had a right to maintain its unilateral notice in the face of a proposed sale of the property and no such right was reserved in its favour.Mark Warwick (instructed by Hughmans Solicitors) appeared for the appellant; Gary Cowen (instructed by Moon Beever) appeared for the respondents.Sally Dobson, barrister