Equitable protection of right to redeem – Company lending to farmers on security of milk quotas – Borrowers required to transfer quotas to a sister company – Sister company holding dairy land under lease from appellants – Liquidators seeking to compel sister company to deal with quotas at their direction – Liquidators seeking transfer of quotas to “safe haven” – Judge making interim orders in favour of liquidators – Orders upheld on appeal
The applicants were the joint liquidators of Dairywise Ltd (the company), which went into creditors’ voluntary liquidation in June 1999. The company provided loans to farmers on the security of milk quotas, the founder (R) being, at all material times, aware that EU law required the quota to be attached to a holding of appropriate land called a “euroholding”. Since the company did not have a euroholding, a sister company, Dairywise Farms Ltd (Farms Ltd), which did have such a holding (the land), was used as a vehicle for holding the quotas offered as security. Farms Ltd held the land under a lease (the Farms lease) granted by the trustees of a pension fund (the pension trustees) established for the benefit of R and his family. Clause 13(c) of the Farms lease prohibited Farms Ltd from transferring or otherwise dealing with any milk quota without the prior consent of the pension trustees.
To the intent that the mortgaged quota would, in the event of default, become attached to the land*, the company required each borrower to enter into an agreement with the company (the company agreement) and another with Farms Ltd (the Farms agreement). The company agreement set out the terms of the loan, which included a requirement that security be furnished by the simultaneous execution of the Farms agreement, the terms of which would also form part of the company agreement. By the company agreement, the company undertook to “assign back” the quotas in the circumstances specified in the Farms agreement, which took the form of a short-term lease by the borrower to Farms Ltd (described as the “tenant farmer”) of the land having the benefit of the borrower’s quota. Clause 4 of the lease required the borrower (described as “the landlord”) to transfer the quotas to Farms Ltd as security for the company agreement. The clause further declared that, upon registration by the intervention board, the transferred quotas would be amalgamated with quotas already registered in the name of Farms Ltd.
At the date of liquidation, the company’s only significant assets were outstanding loans of over £2m. In November 1999 the liquidators, seeking the power to deal with the redemption or realisation of the securities, obtained High Court declarations and orders enabling them to: (i) give Farms Ltd directions as to the disposal of the quotas; (ii) dispose of the quotas without obtaining the consent of the pension trustees; and (iii) restrain the pension trustees from dealing with the land in a manner calculated to prevent such disposals (see [1999] EGCS 137). The remedies so obtained were granted on the basis that the quotas were held by Farms Ltd on trust for the company. At a second hearing in February 2000, the same judge further ordered that the quota be transferred to a “safe haven” in the person of a dairy farmer to be nominated by the liquidators.
The pension trustees appealed, disputing the basis of the earlier declarations and contending that the safe haven order was in any event disproportionate.
Held: The orders were upheld with minor variations.
1. Upon a true construction of the agreements, and upon a proper application of the equitable principles that protected the mortgagor’s right to redeem and gave relief against forfeiture (see Shiloh Spinners Ltd v Harding [1973] AC 691), the borrowers had rights to which Farms Ltd was bound to give effect at the company’s direction.
2. The question whether the contract gave to the company an implied power of sale of the mortgaged quotas (section 101 of the Law of Property Act 1925 being inapplicable) was not before the court. However, if such a power did exist, it had to be a power for the company to direct a sale by Farms Ltd upon terms requiring the proceeds to be applied to the credit of the borrower’s account with the company.
3. The safe haven order was properly made, even though it was inconsistent with the restriction in clause 13(c) of the Farms lease. It was important to bear in mind that the order was an interim measure taken for the purpose of protecting the borrowers and the parties until trial. The judge had rightly identified a good arguable case that the pension trustees knew that the whole lending system depended upon their acquiescence and co-operation. If such knowledge were to be established, it would, in all the circumstances, be unconscionable for the trustees to rely upon clause 13(c): see per Oliver J in Taylor Fashion Ltd v Liverpool Victoria Trustees Co Ltd (1979), reported as a note to Amalgamated Investment & Property Co Ltd v Texas Commerce International Bank Ltd [1982] QB 84 at p155.
* Editor’s note: Conveyancing device described by Rattee J in Harries v Barclays Bank plc [1997] 2 EGLR 15.
Michael Briggs QC and Stephen Davies (instructed by Bond Pearce, of Bristol) appeared for the appellant pension trustees; Paul Morgan QC and Stephen Jourdan (instructed by Burges Salmon, of Bristol) appeared for the respondent liquidators.
Alan Cooklin, barrister
