Insolvency – Sale of property – Equitable lien – Company formed to develop residential units – Purchasers purchasing partially developed units before company placed in administration – Claimant administrators seeking order authorising sale of property free from security – Whether claimants to dispose of property as whole to third-party or consortium of purchasers with build-out plan – Claim allowed
A company was formed for the purpose of developing land on the East side of Fox Street, Liverpool. That was its main asset. The anticipated development encompassed 400 residential units in five blocks by converting an existing building and constructing four new blocks. A lender who had advanced monies to enable the company to refinance and complete the development appointed administrators; a substantial part of the property had only been partly developed, although units had already been sold. The purchasers were the company’s main creditors.
By the time the company was placed in administration, some of the purchasers had formed an unincorporated association to advance their interests. That included some purchasers who had acquired leasehold interests in residential units in the completed blocks, and others who had contracted to purchase units in block D which was still a shell. The claimant administrators instructed independent valuers to assist in valuing and marketing the development.
The purchasers of the unbuilt flats, having paid deposits on exchange of contracts, were entitled to purchasers’ liens in respect of the airspace notionally allocated to their flats, generally protected by the registration of unilateral notices in priority to the lender’s unregistered fixed charge.
The purchasers devised a build-out plan to purchase the freehold for £150,000, leaving it them to complete the building work at an estimated cost of up to £10 million. However, the valuer recommended a sale to an experienced property company for £1.6 million.
The claimants applied to the court for, amongst other things, an order authorising them to sell the property free from security under paragraph 71 of schedule B1 to the Insolvency Act 1986. The principal issue was whether the claimants should dispose of the property as a whole to a third-party or to a consortium of purchasers.
Held: The claim was allowed.
(1) The purchasers had the benefit of an equitable lien for part payment of the purchase price of units at the property. They were entitled to be treated as secured creditors on the basis that a purchaser of real property who paid the purchase price or any part of it prior to completion, including a deposit, was generally entitled to such security. However, a purchaser’s lien was limited to the interest he had contracted to buy and did not encompass the vendor’s estate as a whole. Thus, in the case of a contract for the purchase of a suite in a building that was never constructed, the subject matter of the contract was in effect the legal estate in the relevant airspace which would have been occupied by the suite when constructed: Eason v Wong [2017] EWHC 207; [2017] PLSCS 89 followed.
In the present case, since block D was no more than a shell, most if not all of the relevant purchasers were entitled only to an interest in the relevant airspace. However, the purchasers’ equitable liens had been protected by the registration of separate notices under the company’s registered title and thus ranked in priority ahead of a lender’s unregistered security. Whilst the debenture was registered by the registrar of companies, it could not have crystallised until after the acquisition and registration of the purchasers’ equitable liens.
(2) Realising the company’s property in order to make a distribution to the company’s secured or preferential creditors, and thus achieve the statutory objective in paragraph of 3(1)(c) of schedule B1, plainly encompassed the disposal of the company’s interests in any property subject to prior rights or incumbrances. That included rights of security. The claimants could thus dispose of the company’s property subject to such rights or incumbrances. However, the court had a statutory power to authorise an administrator to dispose of property free from rights in the nature of a security under paragraph 71 of schedule B1.
The court would make an order authorising the claimants to dispose of the property as a whole. Their strategy was based on the independent advice of a professional valuer and they were fully entitled to act on the basis that their advice and recommendations provided the most reasonable and practical way forward for achieving a distribution to the secured creditors within a realistic time scale on satisfactory terms. Deploying his professional expertise, the valuer considered the available options and concluded that, with a view to achieving a reasonable return, the property as a whole should be marketed for disposal to a selective number of large regional developers and investors who had expressed interest in similar complex situations in the past.
(3) The alternative build-out plan was an unsatisfactory and unrealistic proposal and the claimants were fully entitled to reject it. There was no good reason why the property should be sold at substantially less than market value so as to diminish the distribution to the secured creditors, a class which encompassed the purchasers themselves. The purchasers only had an equitable interest, notional or otherwise, in the units they had contracted to buy. That ranked in priority before the lender’s security in the particular units. However, they had no rights of security in respect of the other parts of the property. The build-out plan was thus to the disadvantage of the lender which had a secured interest in the property as a whole. It was difficult to see how it could be implemented without unnecessarily harming the interests of the creditors as a whole.
The build-out plan was based on cost estimates for the completion of the construction works that were not satisfactorily supported by evidence. In any event, if and to the extent that purchasers elected to opt in to the project, itself a matter for speculation, there was no evidence that the purchasers had realistic prospects of raising the funds required to purchase the property and complete the development. In the absence of evidence that a build-out proposal could properly be funded by a third party, such a proposal did not merit realistic consideration where the secured creditors had not agreed to release their rights: Williams v Broadoak Private Finance Ltd [2018] EWHC 1107 considered.
Andrew Latimer (instructed by Hill Dickinson LLP) appeared for the claimants; Sebastian Clegg (instructed by WE Solicitors, of Manchester) appeared for the defendants.
Eileen O’Grady, barrister
Click here to read a transcript of Re Fox Street Village Ltd (in administration)
