The New Northumbria Hotel Ltd (Company No. 3699960) v Maymask (148) LLP

The New Northumbria Hotel provides accommodation and operates two restaurants and two bars in Jesmond Newcastle-upon-Tyne (“the Hotel Business”). As at July 2009 the leasehold premises were vested in Northumbria Hotel Ltd (“the Tenant”), but the freeholder (W G Mitchell (Scotland) Ltd (“Mitchells”)) was in administration. The Hotel Business was however operated at the premises by New Northumbria Hotel Ltd (“the Operator”) under an informal trading and management agreement with the Tenant. The Operator guaranteed the Tenant’s obligation to pay rent to Mitchells. But during the administration of Mitchells no rent was paid either by the Tenant or the Operator so that arrears of just over £1 million built up (though the Tenant disputed this on the grounds that there was a “standstill” agreement with Mitchells’ administrators).

In February 2010 the Tenant and the Operator entered into a formal management and trading agreement for a fixed term of six months capable of extension (but not of earlier termination) under which the Operator had to pay the Tenant £65,000 for the right to trade. The recital to that agreement said that the Tenant had the benefit of the leasehold of the premises and “the Contents together with the Fixtures and Fittings contained therein”, all of which were defined together as “the Property”. The Tenant appointed the Operator to operate the Hotel Business. The Operator bought “the stock” (which in the context of clause 6 of the agreement meant the stock in trade). By clause 10 the Tenant promised that it would not by it acts or omissions prevent or impede the Operator in the operation of the business pursuant to the agreement and would permit the manager to collect and retain all income and profits of the business. By clause 11.2 the Operator was not allowed to dispose of any of the “fixed assets” or to dispose of any of the other assets of the business excluding the stock. By clause 11.3 the Operator had at its own expense to keep “the Property” and all assets of the business in reasonable repair and condition. By clause 11.7 the Operator had to reimburse the Tenant for any premiums expended by the Tenant in insuring “the Property, the Contents and the Fixtures and Fittings contained therein”. It is not clear whether this agreement embodied the existing arrangement or constituted some radical change.

On 10 March 2010 the freehold reversion expectant on the Tenant’s lease was sold by the administrators of Mitchells to a company called Maymask (147) Ltd. It immediately on-sold to Maymask (148) LLP. Maymask (147) Ltd took an assignment from Mitchells of the disputed claim to arrears of rent. It also on-sold that to Maymask (148) LLP. In September 2007 the Tenant had granted a Debenture to a brewer: and in March 2010 Maymask (148) LLP also directly or indirectly acquired the debt which the debenture secured. The Maymask entities are all controlled by members of the Malhotra family.

On 17 March 2010 Maymask (148) LLP commenced forfeiture proceedings against the Tenant in the Newcastle-upon-Tyne County Court for non-payment of rent of £1.07 million. Paragraph 12 of its Particulars of Claim said that to the best of Maymask (148) LLP’s knowledge the persons who were in possession of the premises where the Tenant and/or the Operator. The Tenant defended and applied for relief from forfeiture. The proceedings came on for hearing on 20 April 2010. The Court ordered a speedy trial on the 6 July on condition that the Tenant paid into court the sum of £400,000 by 18 May 2010. So the Tenant and the Operator had the clear right to remain in possession of the premises and to conduct the Hotel Business until 18 May 2010.

On 29 April 2010 Maymask (148) LLP made demand of the Tenant under the Debenture. Before the Tenant had had the opportunity to consider the demand and before Maymask (148) LLP had provided the Tenant with the relevant incorporated terms of the Debenture, Maymask (148) LLP began the process of appointing Martin Daley and William Paxton of Robson Laidler LLP as joint administrators of the Tenant. Their appointment would only take effect once the requisite forms had been filed at court: see para.19 of Schedule B1 to the Insolvency Act 1986. The effect of appointment would be to engage the moratorium on legal proceedings under paragraph 43(6) of Schedule B1. So the Tenant would have had a clear right to remain in possession of the premises beyond 18 May 2010 and until such time as the administrators gave consent to the continuation of the proceedings or the court gave permission.

Extraordinarily, even before they were properly appointed as administrators of the Tenant Mr Daley and Mr Paxton agreed with Maymask (148) LLP that the Tenant through them would consent to the making of an immediate order for possession. Their solicitor confirmed in a letter written on the afternoon of 29 April 2010 what the agreement was.

“My clients as joint administrators….. shall consent order forfeiting the lease……….

Your client shall pay £75,000 effectively as a reverse premium…….. I confirm that we have today received the £75,000 directly from your client…

It is agreed that, notwithstanding the forfeiture, your client will pay an amount to my clients to be determined for the company’s interest in the fixtures and fittings at the Premises. Your client will allow my client… access to the Premises for the purpose of carrying out a valuation of the fixtures and fittings. Your client shall then pay the amount determined to be a fair and reasonable valuation for those fixtures and fittings.

Your client has agreed that it will not file a claim in the administration for all and any rent or other liabilities due under the Lease. It is acknowledged by my clients that your client is not waving their right to the arrears which shall be particularly relevant in any application for relief from forfeiture……”

That same afternoon the consent order was presented to the Newcastle-upon-Tyne County Court and was sealed. It may be assumed that that was done in normal court hours. Although the Tenant’s solicitor was in contact with Maymask (148) LLP’s solicitor at 4.40pm (apparently after normal court hours) with a request for information about the demand under the Debenture, he was not told about the appointment of administrators (which in fact deprived him of his right to take instructions from the Tenant) or the consent order that had been made by the Court.

That night, at 1.30am on 30 April 2010, agents of Maymask (148) LLP took possession of the premises. The Operator’s staff called the police: but the police ordered the staff to leave and left the agents in possession. Maymask (148) LLP appropriated the Hotel Business and immediately began trading (itself or through an associated company Maymask (160) Ltd). It took possession of the cash which was in the tills and the safe (which it knew might well belong to the Operator, and to which as a re-entering landlord it had no legal right even if it belonged to the Tenant). It took possession of the stock of drinks and consumables (which it knew it might well belong to the Operator and to which as a re-entering landlord it had no legal right even if they belonged to the Tenant). It appropriated the Operator’s notepaper and used it to write to customers telling them to redirect to Maymask (160) LLP (sic) payments due to the Operator. A re-entering landlord would not have such a power even in relation to the Tenant.

The Operator has commenced proceedings against Maymask (148) LLP. The nature of the claim is that the Operator is the owner of certain chattels described in a schedule (which the Operator values at £235,000, excluding £40,000 in respect of drink stock) which Maymask (148) LLP has wrongfully converted to its own use. The relief sought is an order of the delivery up and damages calculated on a restitutionary basis (i.e. by reference to the gain which Maymask 148 LLP has derived, rather than the loss which the Operator suffered, from their wrongful use). In those proceedings the Operator has applied for an interim injunction restraining Maymask (148) LLP) from using the stock, cutlery and crockery (and at the hearing an order for delivery up was also sought).

Mr Rainey QC says that such an injunction should issue almost as of course because a failure to grant injunctive relief would in effect be to sanction clear wrongdoing on the part of Maymask (148) LLP in concert with others and to send a message that a commercial entity can commit any interference with property rights it wishes however blatant provided it can afford to pay damages. I have profound misgivings about the conduct of Maymask (148) LLP and of the administrators and their advisers: so that is a very powerful plea. But I must focus on the claim for conversion of the chattels. Maymask (148) LLP may well have induced a breach the Tenant’s contract with the Operator. There may well be a conspiracy to injure the Operator’s business by unlawful means. The administrators may well have acted more precipitately than might be expected of truly independently minded office-holders in abandoning the Tenant’s negotiating position in the forfeiture proceedings even before they had been appointed, and may well have been in breach of the 1986 Act in failing to notify the Tenant of their appointment before handing over its assets to one of its creditors. But that is not the subject matter of the Operator’s action: and the Operator cannot use its claim to ownership of the chattels as a peg for interim relief appropriate to such apparent general wrongdoing and appropriation of its trade.

If I focus on the actual Particulars of Claim and the fact that this is an interim hearing then the correct questions seem to be: (a) Is it clear who has the better right to possession of the chattels? Or is there a serious issue to be tried about that matter? (b) If there is a serious question to be tried, what is the correct approach to relief on the established American Cyanamid principles?

This application is now about the chattels. It has from the outset been accepted by the Operator that the forfeiture of the lease by peaceable re-entry (even collusively) had the effect of vesting in Maymask (148) LLP as landlord all of the fixtures and fittings at the premises (whether landlord’s fixtures or tenant’s fixtures). The issues relating to the stock of drink and to the cash were disposed of at a hearing before Morgan J. By “chattels” is meant the freestanding furniture and the soft furnishings, the crockery and cutlery and trolleys and napery used in the restaurants, the glasses and washing machines used in the bars, the linen used in the bedrooms and the machines used for cleaning them, and all the stocks of consumables from drinking straws to cleaning materials used in the Hotel Business.

The Operator’s primary case is that it owns the chattels which it uses in running the Hotel Business. Its secondary case is that if Maymask (148) LLP is right in its contention that the Tenant owned the chattels, then the Operator had the right to hire them under the management agreement, and the management agreement has not been terminated. It may have been repudiated by the Tenant consenting to forfeiture of the lease and thereby impeding the Operator in the conduct of the business on the premises: but the Operator has not accepted that repudiation and wants the contract performed (rather than damages in lieu of future performance).

Maymask (148) LLP’s case is that the Tenant owned the chattels and that the administrators sold the chattels Maymask (148) LLP.

The Operators case is not right beyond argument. The accountant who has a long-standing connection with both gives clear evidence that the Tenant does not conduct any trading business whereas the Operator does. But that does not answer the question whether the Operator trades with assets which belong to it or with assets which it hires from the Tenant. The accountant produces invoices. Some invoices would plainly demonstrate that the goods purchased belong to the Operator and are not repairs or replacements for goods belonging to the Tenant. It cannot seriously be suggested that the Tenant was hiring drinking straws or toilet rolls or ketchup to the Operator who was an obligation to repair or replace them. But some invoices are unclear. It might be the case that the Operator was hiring a stock of glasses and was purchasing replacements for breakages. That would accord with the management and trading agreement in place as at the end of April 2010 (which says that the Tenant owns the contents and imposes an obligation on the Operator to return them), and there is no evidence that this represented a radical departure from the terms of the informal agreements which preceded it.

Moreover the accounts of the Tenant and of the Operator do not present a picture which clearly supports a conclusion that the chattels belong to the Operator.

The accounts of the Tenant say that its principal activity is “that of equipment leasing to a hotel operator”; that its turnover represents amounts receivable for “rent of assets”; that it has made available its “fixed assets” for hire to the Operator on terms that the Operator is to repair and replace all items as necessary for “the assets” to maintain their condition at the level at which they were first provided; and that for “fixtures fittings and equipment” there is no depreciation charge. The balance sheet carries “tangible fixed assets” at a value of £490,000. This is ambiguous and inconsistent language.

The accounts of the Operator say that its principal activity is that of “a bar, restaurant and hotel operator”. The current assets shown on its balance sheet include only “stocks”, and a cross-reference to the profit and loss account shows that this is a reference to “stock of finished goods”. There is no balance sheet entry for “equipment” or “tangible assets” worth £235,000, although there is a very heavy charge against profits for “repairs and maintenance”. There is also a significant charge for stationery. It is therefore clear that whilst the Operator may have hired some items (which certainly included fixtures and fittings and may have included more) it also used items of its own (which certainly included stationery and consumables and may have included more).

On the other hand the evidence adduced by Maymask (148) LLP does not clearly establish that it owns or has a present right to possession of the chattels. First, the “ tangible assets” valued at £490,000 on the Tenant’s balance sheet might be explained by the very substantial sums spent on fixtures and fittings (such as cooling equipment and lifts); and it is not clear that any items properly to be regarded as “chattels” are included. The administrators cannot demonstrate what the Tenant owned and what they claim to control. Second, what the administrators sold to Maymask (148) LLP at a valuation was quite plainly the “fixtures and fittings” (an oft repeated expression). This was a right they secured “notwithstanding the forfeiture” (a clear reference to the effect of forfeiture upon fixtures, and of no relevance to chattels). Mr Daley says that he intended this reference to include all chattels. I do not think I should too readily assume that the administrators were so negligent as immediately to hand over to Maymask (148) LLP property the extent of which they did not know (and in relation to which they had made no enquiry of the directors of the Tenant) for sale on an unspecified date at a price yet to be determined, and in relation to which they did not qualify the title offered or bargain for the ascertainment of third party claims (although they knew the Operator was probably in occupation and trading).

I therefore consider that there is a serious question to be tried, save in relation to the stationery and the consumables. The position there is clear cut in favour of the Operator. I would make an order for the delivery up of the stationery forthwith. This will enable the Operator to conduct such of its business as remains and prevent the Maymask entities and the Malhotras misusing it. I would order an immediate inquiry into what of the consumables belonging the Operator were appropriated by Maymask (148) LLP. For the purpose of this enquiry I would ignore the existence of Maymask (160) Ltd which (if it is indeed the current trading entity) was only able to use the consumables because Maymask (148) LLP permitted it to do so. If Counsel cannot agree sensible directions as to the prosecution of the enquiry I will decide them. This relief is not sought in the application notice but is in my judgment a more sensible alternative to an order for delivery up (since the original stock is likely to have been substantially consumed). The items to be the subject of the inquiry are those items on the Schedule to the Particulars of Claim which might properly be regarded as “consumables” in the restaurant, bar and hotel trade.

Would damages be an adequate remedy for the Operator if it establishes ownership of or a right to use the remainder of the chattels? Save in one respect the answer must be “yes” because the Operator has included a financial claim in this action in respect of the chattels. If the Operator owns the chattels then the Operator can claim the value of the chattels appropriated and go out into the market to replace them: there is nothing unique about them. If the Operator hires the chattels under a subsisting management agreement, then it would not wish to seek compensation for the loss of their use (because, for reasons other than the appropriation of the chattels, it is unable to conduct its trade, the Tenant having surrendered possession of the premises): but there is a ready measure for restitutionary damages payable by Maymask (148) LLP based upon what the Operator itself paid for the use of the chattels.

The one exception is the tills. These are not simply machines. They are repositaries of the Operator’s trading data. Substituting an identical machine is not good enough because the identical machine would not be loaded with the historic data. I shall order the delivery up to the Operator’s solicitors of the tills at noon on 31 May 2010 unless Maymask (148) LLP has afforded the Operator access at reasonable times (ignoring the requirements of current trading) for the extraction of its data. In other words Maymask (148) LLP (or Maymask (160) Ltd) cannot say that access will be afforded at 5.00am because otherwise the tills are busy.

If damages are adequate, could they be paid? My attention was not drawn to any evidence of the means of Maymask (148) LLP, but nor was its ability to meet any damages awarded the subject of direct challenge. I was effectively invited to assume that Maymask (148) LLP was able to fund damages because it owned the freehold of the hotel and had a cross-claim against the Operator under a guarantee in a sum exceeding £300,000. I would not regard Maymask (160) Ltd as able to pay anything: but it was only added as a Defendant at the hearings before me and all of the argument (and all of the evidence) proceeded on the footing that the real dispute was between the Operator and Maymask (148) Ltd. I accordingly conclude that damages could be paid.

On these findings and holdings an injunction must be refused in relation to the balance of the chattels.

I would add that if the analysis had proceeded further I would have held that (if Maymask (148) LLP is to be regarded as trading through its agent Maymask (160) Ltd) it would have been difficult to calculate the compensation payable under the Operator’s cross undertaking in damages (because a delivery up injunction would not simply interfere with the bare use of the relevant chattels but would affect the trading at the restaurants, bars and hotel bedrooms): and I would have held the Operator unable to pay under the cross-undertaking (because it is the subject of a current winding-up petition at the suit of Maymask (148) LLP in respect of arrears of rent due from the Tenant and guaranteed by the Operator).

I would record that I was addressed with arguments (and taken to evidence) relating to retention of title claims against chattels shown on the Schedule and in supporting invoices. I have ignored these. The Operator does not have to show an absolute title good against third parties in order to sustain this claim. It simply has to show a better right to possession than Maymask (148) LLP: and bailment under a contract of sale containing an RoT clause will suffice for that.

I dispose of the application in that way.

This case has not been decided on any final view of the merits but is an interim decision founded upon the balance of convenience. Costs will therefore be reserved until the trial.