Landlord and tenant — Dissolution of original tenant — Right of original tenant to be indemnified limited to rent actually accrued — Whether dissolution should be avoided
By two
underleases dated December 31 1960 F, a limited liability company, was granted
terms of parts of 535, 537 and 539 Oxford Street, London W1, expiring in 2002;
the first plaintiff holds the reversion. On January 28 1964 F assigned both
underleases to Post Inns Ltd, the first intervener in the proceedings, and it
in turn assigned the underleases to Forte’s Properties Ltd, the second
intervener, on January 28 1967. On February 4 1979 Forte’s Properties Ltd
assigned both underleases to B. After its assignment F ceased to trade and
became dormant. Following a special resolution of F it went into members’
voluntary liquidation on October 27 1988. No specific notice of the liquidation
was given to the landlord and on February 8 1992 F was dissolved pursuant to
section 201 of the Insolvency Act 1986. In January 1992 B was wound up
following a petition in the High Court. The liquidator failed to pay the rent
due on the March quarter day and disclaimed the underleases on June 10 1992. On
December 17 1992 the plaintiff applied to avoid the dissolution of F and on
February 2 1993 the interveners applied to be joined. On March 11 1993 Mr
Registrar Buckley, by order, refused to join the two interveners as defendants
and ordered the dissolution of F to be avoided under section 651 of the
Companies Act 1985. From those orders the interveners appealed.
and the application to avoid the dissolution dismissed. There was jurisdiction
to consider the interveners’ applications to be joined; their presence was
necessary to ensure that all matters in dispute may be effectually and
completely determined because: (1) they were the only source of funds and the
avowed purpose of the plaintiff was to extract money from the interveners; and
(2) if they did not argue against avoiding the dissolution of F, no one would.
Because the rent arrears did not arise until after the dissolution of F and
because the liability of the interveners was by way of an implied covenant of
indemnity (under section 24 of the Land Registration Act 1925 or section 77 of
the Law of Property Act 1925) there would have been no loss at the time of the
dissolution of F, for which the plaintiff could have proved. The right of
indemnification of F against the interveners as assignees would have been
limited to arrears of rent actually accrued — it would be unjust to the
interveners if the dissolution were avoided.
The following
cases are referred to in this report.
Clarkson
(H) (Overseas) Ltd, Re (1987) 3 BCC 606
Gurtner v Circuit [1968] 2 QB 587; [1968] 2 WLR 668; [1968] 1 All ER
328; [1968] 1 Lloyd’s Rep 177, CA
House
Property & Investment Co Ltd, In Re [1954] Ch
576; [1953] 3 WLR 1037; [1953] 2 All ER 1525
New
Oriental Bank Corporation, Re [1895] 1 Ch 753
Portrafram
Ltd, Re (1986) 2 BCC 99
Servers
of the Blind League, In Re [1960] 1 WLR 564; [1960]
2 All ER 298
Spottiswoode
Dixon & Hunting Ltd, Re [1912] 1 Ch 410
Workvale
Ltd, Re [1991] BCLC 528
This was an
appeal against two orders of Mr Registrar Buckley made on March 11 1993, whereby
he refused an application by the interveners, Post Inns Ltd and Forte’s
(Manufacturing) Ltd to be joined as defendants and ordered the dissolution of
Forte’s Properties Ltd to be avoided under section 651 of the Companies Act
1985 on an application by the plaintiffs, Stanhope Pension Trust Ltd and
Custodian Holdings Ltd, against the first and second defendants, the Registrar
of Companies and Colin Bird.
Terence
Etherton QC and James Ayliffe (instructed by Paisner & Co) appeared for the
interveners; Christopher Pymont (instructed by Jaques & Lewis) represented
the respondent plaintiffs; the first and second respondents did not appear and
were not represented.
Giving
judgment, JUDGE WEEKS said: It is now a notorious feature of English law
that the liability of a tenant to pay rent and to observe covenants persists
during the continuance of the lease, notwithstanding any assignment. When the
current tenant fails to pay the passing rent the landlord will often look to
the original tenant, who will try in turn to recover from the first assignee
and so on down the chain. That is the situation in the present case with two
quirks. One is that the current tenant is in liquidation and the liquidator has
disclaimed the lease. The result is that the lease continues to exist until the
landlord chooses to forfeit or a vesting order is made, but the last tenant is
under no continuing liability to pay the rent. The other, and more important,
unusual feature is that the original tenant has gone into liquidation. The liquidation
has been completed and the company has been dissolved. The landlord, therefore,
needs to have the dissolution avoided in order to make a claim against the
original tenant.
The matter
comes before me on appeal from Mr Registrar Buckley, who made two orders on
March 11 1993. By the first he refused an application by two intermediate
assignees to be joined as defendants. By the second he ordered the dissolution
of the original tenant to be avoided under section 651 of the Companies Act
1985. From those two decisions the interveners appeal.
The original
tenant is Forte’s (Manufacturing) Ltd, a company incorporated under a different
name in 1896. On December 31 1960 under its former name it took two underleases
of parts of 535, 537 and 539 Oxford Street, London W1, from Montague Burton
Ltd. The terms of those underleases will expire in the year 2002. The
underleases are registered at HM Land Registry and the companies currently
entitled to the reversion are the respondents to this appeal,
On January 28
1964 Forte’s (Manufacturing) Ltd assigned both underleases to another company
in the Forte group, the first intervener, Post Inns Ltd, which also had a
previous name at the time. On January 28 1967 Post Inns Ltd assigned both
underleases to the second intervener, which is now called Forte’s Properties
Ltd. On February 4 1979 Forte’s Properties Ltd assigned both underleases to
Bank of Credit & Commerce International SA (‘BCCI’). All assignments were
made with the consent of the current lessor. After its assignment Forte’s (Manufacturing)
Ltd ceased to trade and became dormant. The parent company decided to wind it
up. A special resolution of Forte’s (Manufacturing) Ltd was passed on October
27 1988 and on that date the company went into members’ voluntary liquidation.
A declaration of solvency was made, Mr Colin Bird was appointed liquidator, and
the liquidation was duly advertised. However, it is common ground that no
specific notice was given to the landlords and at the time the liquidation did
not come to their attention. On November 8 1991 Mr Bird filed his final report
and three months later, on February 8 1992, Forte’s (Manufacturing) Ltd was
dissolved pursuant to section 201 of the Insolvency Act 1986.
In the
meantime in January 1992 an order was made for the winding up of BCCI on a
petition presented to the High Court in July 1991. Until January 1992 the rent
under both underleases had been paid and there were no arrears owing, either at
the date the order was made for the liquidation of BCCI or at the date that
Forte’s (Manufacturing) Ltd was dissolved. The liquidator of BCCI did not pay
the instalment of rent which fell due on the March quarter day, and on June 10
1992 he disclaimed both underleases, so terminating any further liability of
BCCI.
On December 17
1992 the landlords launched an application to avoid the dissolution of Forte’s
(Manufacturing) Ltd and, on February 2 1993, the interveners applied to be
joined on that application. Both applications came before Mr Registrar Buckley
on March 11 1993 with the result that I have mentioned.
The first
issue I have to decide is whether the interveners should be joined to the
application to avoid the dissolution. Their application is made under Ord 15
r6(2) which provides:
Subject to
the provisions of this rule, at any stage of the proceedings in any cause or
matter the Court may on such terms as it thinks just and either of its own
motion or on application —
. . .
(b) order any of the following persons to be
added as a party, namely —
(i) any person who ought to have been joined as
a party or whose presence before the Court is necessary to ensure that all
matters in dispute in the cause or matter may be effectually and completely
determined and adjudicated upon, or
(ii) any person between whom and any party to the
cause or matter there may exist a question or issue arising out of or relating
to or connected with any relief or remedy claimed in the cause or matter which
in the opinion of the Court it would be just and convenient to determine as
between him and that party as well as between the parties to the cause or
matter.
Guidance in
applying that subrule was given by the Court of Appeal in Gurtner v Circuit
[1968] 2 QB 587. Lord Denning MR said at p595B:
The relevant
rule is the new RSC Ord 15 r 6(2)(b), which says that the court may
order any person to be added as a party
‘whose
presence before the court is necessary to ensure that all matters in dispute in
the cause or matter may be effectually and completely determined and
adjudicated upon.’
That rule is
in substantially the same terms as the old RSC Ord 16 r 11, and nothing turns
on the difference in wording. There were many cases decided on it. But I need
not analyse them today. That was done by Devlin J in Amon v Raphael
Tuck & Sons Ltd. He thought that the rule should be given a narrower
construction, and his views were followed by John Stephenson J in Fire Auto
& Marine Insurance Ltd v Greene. I am afraid that I do not agree
with them. I prefer to give a wide interpretation to the rule, as Lord Esher MR
did in Byrne v Brown. It seems to me that when two parties are in
dispute in an action at law, and the determination of that dispute will
directly affect a third person in his legal rights or in his pocket, in that he
will be bound to foot the bill, then the court in its discretion may allow him
to be added as a party on such terms as it thinks fit. By so doing, the court
achieves the object of the rule. It enables all matters in dispute to ‘be
effectually and completely determined and adjudicated upon’ between all those
directly concerned in the outcome.
At p596 Lord
Denning said:
It is thus
apparent that the Motor Insurers’ Bureau are vitally concerned in the outcome
of the action. They are directly affected, not only in their legal rights, but
also in their pocket. They ought to be allowed to come in as defendants. It
would be most unjust if they were bound to stand idly by watching the plaintiff
get judgment against the defendant without saying a word when they are the
people who have to foot the bill. I think that Fire Auto & Marine
Insurance Ltd v Greene was wrongly decided and should be overruled.
At p602
Diplock LJ said:
Clearly the
rules of natural justice require that a person who is to be bound by a judgment
in an action brought against another party and directly liable to the plaintiff
upon the judgment should be entitled to be heard in the proceedings in which
the judgment is sought to be obtained. A matter in dispute is not, in my view,
effectually and completely ‘adjudicated upon’ unless the rules of natural
justice are observed and all those who will be liable to satisfy the judgment
are given an opportunity to be heard. In the case of an ordinary insurer, this
does not arise in practice, since the standard terms of a third-party liability
policy give to the insurer a contractual right to conduct the defence of the
running-down action in the name of the assured. But as I read his judgment in
the Fire Auto & Marine case, John Stephenson J would have allowed an
ordinary insurer to be added as a party to a running-down action if the policy
of insurance did not contain such a term. And this, I think, would be right.
I do not
think the rules of natural justice depend upon a technicality as to the
procedure by which the liability of a person who is bound to satisfy the
judgment obtained by the plaintiff in the running-down action is enforceable.
So long as it is legally enforceable against that person either directly by the
plaintiff or indirectly by the Minister for the plaintiff’s benefit under such
a contract as exists in the present case, the court has jurisdiction to add
that person as a party and ought normally to exercise its discretion by
granting his application to be added. I think, therefore, that the bureau is
entitled to be added as a party to the present action and to this extent, at
any rate, this appeal should be allowed.
The rule was
specifically applied to an application under section 651 of the Companies Act
by Harman J in Re Workvale Ltd [1991] BCLC 528. Harman J did not refer
to his earlier decision in Re Portrafram Ltd (1986) 2 BCC 99 at p160 in
which he appears to have held that Ord 15, r 6 did not apply to an application
under what is now section 653 of the Companies Act. I think it right,
therefore, to treat the decision in Re Portrafram Ltd as a decision
under section 653 only. In so far as it is applicable to section 651, I prefer
to follow Re Workvale. I observe that in Re H Clarkson (Overseas) Ltd
(1987) 3 BCC 606, Hoffmann J (as he then was) was referred to Re Portrafram
Ltd, but was prepared to assume for the purposes of his case that there was
jurisdiction under Ord 15, r 6, to join a party to a section 653 application.
I therefore
hold that I have jurisdiction. I now have to decide whether the presence of the
interveners is necessary to ensure that all matters in dispute in the case may
be effectually and completely determined. I have no doubt that it is for two
reasons: first, because the interveners are now the only source of the funds to
pay the applicant’s proof and the avoidance of Forte’s (Manufacturing) Ltd’s
dissolution will directly affect them in their pocket. The avowed purpose of
the respondents in trying to resurrect Forte’s (Manufacturing) Ltd is to
extract money from the interveners. Mr Prevett’s [the plaintiff’s solicitor] affidavit
in support said in para 7:
It is the
Plaintiff’s contention that, if the dissolution of this Company is declared
void, the Company can pursue its own rights of action against the company to
which it assigned the underleases under the indemnity provided by section
24(1)(b) of the Land Registration Act 1925. This will enable funds to be
available in the liquidation from which a distribution can be made to the
Plaintiffs.
Second, if the
interveners do not argue against the avoidance no one will, because the
defendants to the original application, that is the
application. It would be unjust for the interveners to have to stand idly by,
watching the landlords have the dissolution avoided and proving against Forte’s
(Manufacturing) Ltd when they are the people who have to foot the bill at the
end of the day. Their interest appears to me similar to the insurer’s interest
in Re Workvale Ltd and I do not think that decision should be read as
limited to cases where the point is one of limitation.
I therefore
allow the first appeal and order the interveners to be joined as defendants.
It was common
ground that there is no further evidence to be filed and that I should proceed
to determine the second issue, namely whether the dissolution ought to be
avoided. The jurisdiction arises under section 651(1) of the Companies Act,
‘Power of court to declare dissolution of company void’, which reads:
Where a
company has been dissolved, the court may . . . on an application made for the
purpose by the liquidator of the company or by any other person appearing to
the court to be interested, make an order, on such terms as the court thinks
fit, declaring the dissolution to have been void.
I have no doubt
that the applicants for the order, that is the respondents to the present
appeal, are persons who ‘appear to the court to be interested’.
There is no
help in the Act itself and very little authority in law as to how the
discretion should be exercised. From what decisions there have been on section
651 and its predecessors, that is section 223 of the 1908 Act and section 352
of the 1948 Act, I can, I think, extract two principles. One is that generally
the jurisdiction ought to be exercised to allow creditors to prove who, through
no fault of their own, have had no earlier opportunity to prove, and so to
prevent liabilities from being, whether intentionally or inadvertently, escaped
by the process of liquidation. This was the situation which would have occured
if Neville J had not made the order which he did in Re Spottiswoode Dixon
& Hunting Ltd [1912] 1 Ch 410.
The second
principle is that exceptionally the jurisdiction ought not to be exercised to
put the applicant for an order in a better position than he would have been in
if the liquidation had been properly conducted and so to deprive third parties
of benefits which have accrued to them during the course of the liquidation or
thereafter. This principle I derive from In Re Servers of the Blind League
[1960] 1 WLR 564 where Pennycuick J declined to make an order avoiding a
dissolution of a company which was a beneficiary under the will of a testatrix
who died after the dissolution was complete.
At first sight
this case falls within the first general principle, but I have been persuaded
by Mr Terence Etherton QC, for the interveners, that in fact it falls within
the second exceptional principle. If the landlords had proved in due time in
liquidation of Forte’s (Manufacturing) Ltd they could then have proved only for
the loss of the original tenant’s covenant, because the rent continued to be
paid until December 1991. This loss could not have been passed on to the first
assignee because the covenant implied by section 24 of the Land Registration
Act, and for that matter the covenant implied by section 77 of the Law of
Property Act 1925, is an indemnity covenant only and no breach of that covenant
occurred until the rent was not paid in March 1992. On the other hand, if the
dissolution is avoided and the liquidation is now reopened the landlords will
prove on one of three bases. Mr Christopher Pymont, for the landlords, accepts
that there is no fourth basis on which they could prove.
One of those
three bases is for the loss of the tenant’s covenant, valued now taking into
account BCCI’s financial position. This may well be the proper basis of proof
having regard to In Re House Property & Investment Co Ltd [1954] Ch
576, and the provisions of the Insolvency Regulations, in particular
regulations 12.3, 13.12, 4.86 and 4.92, but I make no decision on that aspect.
The important point is that again this is not a loss which could be laid at the
door of the interveners. There would be no point in restoring the company
simply to allow a claim to be made which there were no assets to meet.
The second
basis is for the rent due at the date of proof and a commuted sum for future
rents. The third basis is for rent, again accrued due at the date of proof,
with a reservation of a claim for future rents. Either of these bases may be
consistent with the practice at least until the Insolvency Act 1986: see Re
New Oriental Bank Corporation [1895] 1 Ch 753. However, the important point
is that a claim for rent is one which does fall within the scope of the
indemnity covenant and which, if admitted, the first intervener would have to
meet. That liability did not arise until March 1992 and would not have arisen
in the ordinary course of winding up Forte’s (Manufacturing) Ltd.
In the
circumstances of the present case it seems to me that there will be no point in
avoiding the dissolution unless the interveners are to be subjected to a
liability which would not normally have arisen if the liquidation had pursued
its usual course. In my judgment, it would be unjust to the interveners if the
dissolution were avoided and that injustice outweighs the injustice to the
respondents if the dissolution were not avoided. Accordingly, in my discretion,
I will allow the second appeal and dismiss the application to avoid the
dissolution.
