Insolvency – Beneficial interest in land – Trust – Applicant administrators seeking declaration that land held by respondents on resulting and/or constructive trust for benefit of companies – Whether court having power to find resulting or constructive trust in cases where express declaration of trust made – Application granted
The applicants were joint administrators of two companies (Holdings and Homes) whose principal activity was the development of land south of Clipstone Road, Mansfield (the development site).
The first respondent was a director of both companies and the sole shareholder in Holdings, of which Homes was a wholly owned subsidiary. The second respondent (his wife) was a director of Homes periodically but had little to do with its day-to-day management.
In May 2023, land on the south side of Clipstone Road East was bought from the local authority and transferred to the respondents jointly. Form TR1, executed as a deed, stated that the respondents were to hold the property on trust for themselves as tenants in common in unequal shares.
The ultimate intention was that, together with the development site, the land would be made subject to an agreement under section 278 of the Highways Act 1980 for off-site highway works to be carried out, including the construction of road water drainage systems and sewers.
The land occupied a very small area between the development site and the highway. Its value lay in its use for access to the development site which would not be possible without it.
The companies went into administration and the applicants sought a declaration, under paragraph 63 of schedule B1 to and/or section 234 of the Insolvency Act 1986, that the land was held by the respondents on resulting and/or constructive trust for the benefit of the companies; and an order that the land be transferred accordingly.
Held: The application was granted.
(1) The central purpose of section 234 was to provide a summary, discretionary remedy, enabling an office holder to carry out his functions, without necessarily involving a determination of title; if title was in dispute, the usual appropriate course would be to commence proceedings in the name of the company itself. However, the court would resolve issues raised in respect of title in opposition to an application under section 234, where, for example, the issue was a pure point of law. Ultimately, the decision whether to determine the issue was likely to depend on whether a summary process, without statements of case, disclosure and witness statements, was fair.
In principle, paragraph 63 of schedule B1 conferred powers sufficiently broad to allow a court to resolve disputes with third parties. The decision whether to determine, on an application under paragraph 63, an issue such as that raised in the present case, would depend, certainly in part, on whether it was fair to use a summary process. In many such cases, the usual and appropriate course would be to commence proceedings in the name of the company itself.
The applicants’ claim was, in principle, capable of being brought under either section 234 or paragraph 63 of schedule B1, or both. An issue arose concerning the power of the court to find a resulting or constructive trust in cases (such as the present) in which there has been an express declaration of trust.
In the absence of a vitiating factor, such as fraud or mistake, as a ground for setting aside the express trust or as a ground for rectification of it, the court had to give legal effect to the express trust declared in the transfer. In the absence of such claims the court could not go behind that trust: Pankhania v Chandegra [2012] EWCA Civ 1438; [2012] PLSCS 241 considered.
(2) A vital ingredient in creating a resulting trust was establishing that payment of the purchase money for the property was made in the character of a purchaser. In the present case, the land was not held on resulting trust for the companies. Essentially, on the evidence, although the purchase price was paid by Homes from its own bank account, it was not paid by Homes “in the character of a purchaser”; the parties plainly intended that the respondents would acquire and own the land, rather than the companies: Princess Tessy of Luxembourg v Prince Louis of Luxembourg [2018] EWFC 23; [2019] 1 FLR 1203 considered.
The respondents’ untested written evidence was that they intended to acquire the land as its owners, to be sold to Holdings at some future time, in uncertain circumstances, depending upon further development funding and the agreement of a purchase price. The TR1 form signed by the respondents evidenced their subjective intention at that time to become the beneficial owners of the land despite the price being paid by Homes, of which they were the only directors.
Ultimately, other than the mere, adventitious fact of the payment having come from its bank account, there was no evidence to suggest an intention that Homes would purchase and own the land beneficially. All the available evidence showed that the entire arrangement was otherwise.
(3) However, the land was acquired by the respondents in manifest breach of their duties under sections 172 and 175 of the Companies Act 2006. Whether or not it comprised a ransom strip, the land was a valuable, integral part of the development project, required by the companies and intended to be used by them to construct the contemplated means of access to the site.
The draft section 278 agreement, exhibited by the applicants, named the companies as parties, but not the respondents. Accordingly, the commercial opportunity to buy the land arose in the context of the development, and for its purposes.
The respondents were bound to protect the companies’ interests, and to act with undivided loyalty, in good faith and in their best interests. Manifestly, the acquisition in their own names of the land, needed by the companies for the purposes of their business, placed the respondents’ interests and those of the companies in sharp conflict.
Furthermore, despite ample opportunity to do so, the respondents had failed positively to advance any good reason for having acquired the land themselves, consistent with the best interests of the companies.
(4) In the circumstances, the appropriate remedy was the imposition of a constructive trust. Two directors acting in breach of duty might not avoid the proprietary consequences of that breach by declaring a trust for themselves of property that they wrongfully acquired, any more than that a single director could do so as transferee of the whole legal and beneficial title.
Matthew Weaver KC (instructed by Addleshaw Goddard LLP) appeared for the applicants; Chloe Shuffrey (instructed by HCR Legal LLP) appeared for the respondents.
Eileen O’Grady, barrister
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