Saw (SW) 2010 Ltd & Anor v Wilson & Ors (Joint Administrators of Property Edge Lettings Ltd)

His Honour Judge Hodge QC: This is my extemporary judgment in the matter of Property Edge Lettings Limited, case numbers 2129 of 2012 and 3180 of 2013. On the 10^th July 2015 two companies, SAW (SW) 2010 Limited and Neil Wilson Accountancy Limited, issued an application notice against Simon Wilson, Anne O’Keefe and Fraser Gray in their capacity as the purported joint administrators of Property Edge Lettings Limited (to which I shall refer as “PEL”) and Nationwide Building Society.

The application notice sought:

The primary reason why the Nationwide did not hold an enforceable and/or qualifying floating charge was said to be that a prior floating charge over all of PEL’s property had automatically crystallised in favour of another lender, Capital Home Loans Limited (to which I shall refer as “CHL”), at the time at which the Nationwide’s predecessor in title, Derbyshire Building Society, was purportedly granted a floating charge, which was 9^th May 2008.

The factual and legal basis of the application is said to be set out in the attached particulars of claim (which were verified by a statement of truth) and in witness statements of Mr Neil Wilson, Mr Shaun Kelly and Mrs Yolena Kelly. Although I have the witness statements of Messrs Wilson and Kelly, I pointed out at the beginning of this hearing that I did not have Mrs Kelly’s witness statement. I was told that it did not add substantially to the witness statement of her husband.

That is the substantive claim in these proceedings, which were settled by Mr Clive Wolman (of counsel) who appears before me today for the substantive applicants. Today’s hearing is the adjourned hearing of an application issued by the respondents on the 27^th August 2015 seeking a declaration that the application is totally without merit and also orders that the application be struck out under CPR 3.4 (2) (a) and that the respondents’ costs of the application be summarily assessed and paid jointly and severally by the applicants on an indemnity basis. That cross-application is supported by the witness statement of one of the purported joint administrators, Miss Anne Clare O’Keefe which is dated 7^th August 2015.

As I have mentioned, on this application Mr Wolman appears for the substantive applicants and Mr Wilson Horne (also of counsel) appears for the substantive respondents, who are applying to have the substantive claim struck out.

I have received detailed written skeleton arguments from both counsel. Both counsel have also addressed me orally, in each case for about an hour and a half, with Mr Horne advancing his application to strike out, Mr Wolman responding to it, and Mr Horne very briefly replying.

I have considered in detail the evidence and the written and oral submissions that have been presented to me. Inevitably there will be certain submissions that I do not consider to be relevant to my determination in this matter. The mere fact that I do not refer to a particular submission does not mean that I have overlooked it or that it has not been considered by me in the course of my deliberations. This judgment is confined to those matters which I consider to be material to the ultimate disposal of this cross-application.

I must also bear firmly in mind the nature of the cross-application which is before me. I remind myself that this is not - as it could have been - an application for summary judgment under CPR 24.2, on the basis that the substantive applicants have no real prospect of succeeding on the substantive application at any trial. Rather, this is an application to strike out the substantive application under CPR 3.4 (2) (a) on the basis that it discloses no reasonable grounds for bringing the claim.

The starting point is, of course, the particulars of claim. The first applicant is said to be the parent company of PEL and to be a substantial creditor of that company. The second applicant is an accountancy firm which is said to have provided business finance and accountancy advice to the first applicant company and also to PEL and is said to be a creditor of the latter company.

The background to the application is set out at paragraphs 10 to 12 of the particulars of claim. At the time of the purported appointment of the joint administrators in respect of PEL it is said that the Nationwide claimed to have a qualifying floating charge over PEL’s property as an assignee or on the basis that it had otherwise acquired the benefit of that charge from the Derbyshire Building Society. On 27^th January 2012 Nationwide purported to put PEL into administration by making an out-of-court appointment of three partners in the then insolvency practice of Zolfo Cooper LLP. They are the first three respondents to the application.

The applicants’ case is that the Nationwide had no enforceable or qualifying floating charge and that the purported administration of PEL was, and has at all times remained, a nullity. At paragraphs 13 through to 16 reference is made to the prior loan from CHL and the floating charge. Essentially, on the 18^th December 2007 CHL, which was a specialist mortgage lender, had granted PEL a Vitalec loan secured by way of six separate fixed charges on Bartholomew House, which was a residential property in central Exeter, and personally guaranteed by PEL’s then director, Mr Shaun Kelly. It is said that the terms of CHL’s six deeds of charge were intended to give CHL additional security, beyond that provided over Bartholomew House, over other assets which PEL owned or might acquire. In particular, it is said that, under each of the six charging deeds, CHL was granted a floating charge over the whole of PEL’s undertaking and all of its property assets not subject to the fixed charge.

Each deed of charge charged not only each of the six flats at Bartholomew House by way of legal mortgage but, as the borrower was a company, by clause 2.3 also charged:

“By way of a floating charge the undertaking and all other property assets and rights of the borrower not effectively charged above, both present and future.”

I reject Mr Wilson Horne’s submission that, on its true construction, that floating charge did not extend to real property assets to be acquired in the future by PEL. I see no basis for restricting the wide wording of clause 2.3. Mr Horne submitted that had it been intended to apply to future freehold or leasehold properties, then the sub-clause would have contained some additional provision regulating the grant of further securities over those properties and their registration. I do not see any proper basis for confining the wording of clause 2.3 of each of the separate legal charges so that it does not apply to future-acquired freehold or leasehold properties.

Paragraph 15 of the particulars of claim asserts that the particulars of the charges were duly registered under PEL’s name at Companies House and a certificate was issued in relation to each property on 7^th January 2008. The particulars of mortgage or charge, in Companies Form Number 395, expressly states that the legal charge not only charged the relevant flat by way of fixed charge but also:

“… by way of floating charge the undertaking and all other property assets and rights of the company not effectively charged by the provisions referred to above, both present and future.”

I am satisfied, contrary to the submissions of Mr Horne, that the floating charge was duly registered against the name of PEL under the provisions (then applicable) of Section 395 of the Companies Act 1985. Again I reject Mr Horne’s submissions to the contrary.

One of the provisions incorporated within each of the six separate legal charges of flats at Bartholomew House was the Capital Home Loans Mortgage Conditions 2004. These provide (where the borrower was a company) by clause 9.11 that:

“If, without the prior written consent of the lender, the borrower encumbers howsoever the property subject to the floating charge or if any person levies or attempts to levy any distress, sequestration or other process against the said property the said floating charge shall, automatically without notice, operate and have effect as a fixed charge instantly such event occurs.”

That particular mortgage condition is pleaded at paragraph 16 of the particulars of claim.

Paragraphs 17 to 20 of the particulars of claim relate to the Derbyshire loan and debenture. By paragraph 17 it is said that PEL sought to raise further finance for the redevelopment of a hotel known as “The Strand” and the construction of twenty three apartments next to The Strand on a site at Bude in the County of Cornwall. PEL was introduced by a broker to Salt Commercial, which was the recently-formed and rapidly expanding commercial lending arm of the Derbyshire Building Society.

On the 9^th May 2008 it is pleaded (at paragraph 18) that PEL and the Derbyshire entered into an agreement by which PEL was granted a £3.9 million lending facility. It is further pleaded that PEL drew down £1.9 million of that sum on the same day and used it to complete its acquisition of what is described as “the Bude site”. The loan was personally guaranteed by Mr Kelly.

The Bude site was actually held under three separate title numbers. One related to what is described as a ransom strip lying to the south west of The Strand Hotel, another related to land on the east side of The Strand, and the third was The Strand Hotel itself. PEL was registered as the proprietor of the ransom strip, and also of the Hotel itself, on 9^th June 2008. The price stated to have been paid on 9^th May 2008, when the purchasers apparently completed on both parcels of land, was the sum of £1,884,930. For some reason, which is not immediately apparent, the third parcel of land - that on the east side of The Strand - was not registered until the 17^th September 2009, and no separate price is stated to have been paid for that parcel of land.

The registered charges in favour of the Derbyshire were all registered at the same time as PEL was registered as proprietor of the respective properties. All charges were dated the 9^th May 2008. What is described as the automatic crystallisation of the CHL floating charge is addressed at paragraphs 21 through to 23 of the particulars of claim. It is pleaded that, at a date prior to 9^th May 2008, PEL drew the attention of the Derbyshire to the existence of the prior charges it had granted to CHL which, in any event, appeared on the public Companies House register. Notwithstanding that, before the execution of the charging deed and the Salt debenture, the Derbyshire failed to ask PEL to obtain, and PEL failed to seek, the written consent of the prior charge holder, CHL, as required by clause 9.11 of CHL’s mortgage conditions.

At paragraph 22 of the particulars of claim it is pleaded that, as a consequence, at the instant at which the charging deed was executed on the morning 9^th May 2008, the automatic crystallisation provisions of clause 9.11 of the CHL mortgage conditions were engaged. All the assets of PEL became instantaneously subject to a fixed charge in favour of CHL. Further the implied licence granted by CHL to PEL’s directors to continue operating its business, subject to the floating charges, was revoked as a matter of law and in the absence of any express contractual term to the contrary,

It is pleaded at paragraph 23 that, in the premises, when, a few hours later on the same day, the Salt debenture was executed, the floating charge that PEL agreed and purported to grant to the Derbyshire under that debenture never came into existence. That is because, as a result of the crystallisation beforehand of CHL’s floating charge, there were no assets, and no undertaking, over which such a charge could float. If necessary, the applicants said that they would rely on the Australian case of Fire Nymph Products Limited v The Heating Centre Pty Limited (1992) 7ACSR 365, which is cited with approval at Lightman and Moss: The Law of Receivers and Administrators of Companies, 5^th Edition, at paragraphs 3-064 to 3-066.

The Fire Nymph Products case is a decision of the Court of Appeal of New South Wales delivered by Chief Justice Gleeson. The case is referred to at paragraph 3-066 of Lightman and Moss:

“The permissible conceptual limits of automatic crystallisation were tested in the Australian case of Fire Nymph Products. The clause in question sought to produce the effect that a floating charge automatically crystallised and became fixed ‘at the moment immediately prior to’ any dealing with the charged property other than in the ordinary course of the company’s business. The clear intent was to produce the consequence that the extraordinary dealing which resulted in crystallisation would not itself escape the consequences of that crystallisation

It was held that the clause could not operate so as to bring about a retrospective crystallisation but that it was possible for automatic crystallisation to occur contemporaneously with the crystallising event; such that the assets passed to the disponee, subject to a fixed charge. How the third party disponee was affected by this state of affairs would depend upon the nature of the title which he acquired and whether he was aware of the crystallisation of the charge.”

The headnote to the authority reads as follows (so far as material):

“A floating charge was given by a retailer of heating units in favour of its supplier. The charge provided to the effect that the chargor was not at liberty to create any other charge in priority to the floating charge and that, if the chargor dealt with the charged property other than in the ordinary course of its business, the floating charge would ipso facto become fixed to the charged property ‘at the moment immediately prior to such dealing’.”

It was held, first, that the ordinary course of business was directed to the companies’ ongoing business so that a transfer by the chargor of the whole of its stock back to its supplier, in circumstances where the supplier was ceasing production and all orders by the chargor from the supplier had been cancelled, could not possibly be a transaction in the ordinary course of the chargor’s business.

Secondly, it was held that there was no reason in policy or in principle why the court should not give effect to a provision in a floating charge which provided for automatic crystallisation.

Thirdly, whilst it was not possible for a floating charge to become fixed retrospectively i.e. prior to the impugned transaction, there was no reason why the charge could not become fixed contemporaneously with the impugned transaction. In the present case, while the charge was ineffective to crystallise prior to the transfer by the chargor to the supplier, the charge did crystallise at the time of the transfer so as to cause the transfer to be subject to the charge.

It should be borne in mind that, on the facts of that case, there was no question of the heating units in question having been acquired by The Heating Centre Proprietary Limited subject to any pre-existing charge in favour of a third party. What was held was that, when The Heating Centre Proprietary Limited transferred the heating units back to its supplier, it did so subject to a charge in favour of a secured creditor, AGC Advances Limited, even though that secured creditor had only enjoyed a floating charge which, in accordance with its terms, crystallised at the moment immediately prior to such transfer.

I was taken to the judgment of Chief Justice Gleeson at pages 371 through to 373. In the course of that judgment, Chief Justice Gleeson could not accept that there was any conceptual impossibility involved in making a charge become fixed and attached to a specific property contemporaneously with the event that brought that about.

The substantive applicants rely heavily upon the order of creation of, first, the fixed charge in favour of the Derbyshire over the Bude site and the subsequent execution of the debenture in favour of the Derbyshire over PEL’s assets. The sequence of events is described in some detail in Mr Shaun Kelly’s witness statement. At paragraph 5 he refers to the events of the 9^th May 2008 when PEL entered into the financing agreements with the Derbyshire for the acquisition of The Strand Hotel and adjacent land in Bude, Cornwall. He says that it was these transactions that led to PEL’s subsequent financial difficulties. At the time he had been engaged in refurbishing Bartholomew House, a PEL-owned property, whose acquisition had been financed by the CHL loan advanced in December 2007.

Mr Kelly states that in the morning of that day, his wife Yolena and he went to the offices of his solicitors, Stones in Exeter, to sign the charging deed for the loan and also the documents for the purchase of the land in Bude. However, he needed to leave urgently to get back to Bartholomew House and so he did not have time to sort out the personal guarantee that he was being required to provide. He arranged to return later in the afternoon. However, whilst he was back on site his solicitor telephoned him to say that, when he returned to the office, he should bring Yolena with him as there was one further document the solicitor had overlooked which both of them needed to sign. For that reason, they returned together in the afternoon and they both signed the additional document, which was the Derbyshire debenture. Mr Kelly also signed the personal guarantee.

It is necessary to refer also to the terms of the facility letter which was referred to in the submissions before me. The facility letter is dated 9^th April 2008 and was signed on that day both on behalf of the Derbyshire Building Society and also on behalf of PEL by Mr Kelly, although he incorrectly stated the year as 9^th April 2009. The property is described as The Strand Hotel, Bude, Cornwall. Although there were three separate registered titles, the separate registered title numbers were not given against the description of the property. Given that PEL charged all three properties to Derbyshire Building Society, and the land lying to the south west of The Strand Hotel was described as a ransom strip, and the consideration for it was aggregated for Land Registry purposes with The Strand Hotel, Bude, it seems to me that the offer letter is clearly referring to the property as a whole, and not just to the land registered within title number CL199342 as being The Strand Hotel. Clearly the facility letter related to the ransom strip as well.

The conditions precedent to the grant of the loan facility included the delivery to Derbyshire, to the satisfaction of its solicitors, of:

It was a further condition precedent that no event of default had occurred. By clause 4, drawdown was to take place only on the Derbyshire being satisfied that the conditions precedent had been complied with.

Clause 13 set out various representations and warranties from PEL to Derbyshire. These included:

“13.1

The execution of this agreement and the security documents are or will be apparently authorised constituting legally binding obligations on your part.”

“13.2

Neither the execution of this agreement nor the security documents will result in your being in breach of any law, statute, regulation, mortgage or debenture”; and

“13.7

You are not in default in respect of any other existing financial facility nor will the entering into this agreement or the making of the advance constitute an event of default under such facility.”

Mr Wolman submits that, on its true construction, none of those representations and warranties amounted to a representational warranty that the execution of any of the security documents would not operate to crystallise any pre-existing floating charge, such as that in favour of CHL. I cannot accept that submission. Looking at the representations and warranties in their context, bearing in mind that clause 13.7 is specifically addressed to events of default under any existing financial facility as something different from what is addressed by 13.2, and bearing in mind also that 13.1 provides that the execution of the security documents will constitute legally binding obligations on PEL’s part, it seems to me clear that there was a representation, and a warranty, by PEL to Derbyshire, that no pre-existing security document would in any way prevent the creation of either the specific legal charge over The Strand Hotel, Bude or the first-ranking mortgage debenture over PEL.

In any event, the matter is put beyond doubt by the terms of one of the warranties in the Derbyshire debenture. Clause 19.1 (headed ‘Ownership’) is a warranty by PEL that it has:

“Good and marketable title to the charged assets (which are defined as meaning “all the property rights and assets of the company subject to, or expressed to be subject to, the security interest created by this debenture”) and has full power and authority to grant to the lender the security interest in the charged assets pursuant to this debenture and to execute deliver and perform its obligations hereunder without the consent or approval of any other person other than any consent or approval which has been obtained.”

By that warranty I am satisfied that PEL was warranting that it could grant the debenture without the need for the consent or approval of anyone else, including CHL.

It seems to me quite clear that PEL was acquiring The Strand Hotel, Bude with the assistance of the mortgage advance from Derbyshire which was to be secured by the fixed legal charge over that property and also by the debenture over PEL’s assets. Although not cited by either counsel, at the end of Mr Wilson Horne’s address I referred counsel to the House of Lords decision in the case of Abbey National Building Society v Cann [1991] 1 AC 56. That is authority for the proposition that, where a purchaser relies on a bank or building society loan for the completion of his purchase, the transactions of acquiring the legal estate and granting the charge are one indivisible transaction, at least where there has been a prior agreement to grant the charge on the legal estate when obtained. The purchaser never acquires anything but an equity of redemption, and there is no scintilla temporis during which the legal estate vests in him free of the charge, and an estoppel affecting him could be fed by the acquisition of the legal estate so as to become binding on, and take priority over, the interest of the chargee. That, of course, was in the context of whether a person could have acquired an overriding interest arising from actual occupation for some thirty five minutes on the day of completion.

The reasoning of the House of Lords seems to be to apply equally here. PEL acquired The Strand Hotel, Bude, subject to the terms of the fixed legal charge and the debenture. In my judgment, that transaction did not involve the borrower, PEL, in “encumbering howsoever” a property subject to the floating charge in favour of CHL. PEL never acquired The Strand Hotel, Bude and its adjoining land otherwise than subject to the terms of Derbyshire’s legal charge and debenture.

Mr Wolman drew my attention to the fact that the ransom strip was already the subject of an existing contract to purchase in favour of PEL, as evidenced by the unilateral notice entered against the Charges Register of the title to the ransom strip on 11^th April 2008 and said to be in respect of an agreement for sale and purchase dated 20^th March 2008 between a Mr Anderson and others and PEL. That equitable interest it seems to me merged in PEL’s purchase of the freehold. In many cases a purchase will be completed with the assistance of a mortgage advance where there has been a pre-existing contract for sale to the purchaser of the property in question; but, in my judgment, the existence of such a prior contract does not mean that the principle in Abbey National Building Society v Cann has no application. The benefit of that contract had not been charged in favour of anyone before the purchase was completed, and it seems to me that it is irrelevant to a true analysis of the position.

I therefore reject the principal submission advanced on behalf of the substantive applicants that the creation of the fixed charge operated to crystallise the previous floating charge in favour of CHL and converted it into a fixed charge such that the debenture in favour of Derbyshire was not a floating charge at the time of its creation. I am therefore satisfied that the Derbyshire debenture fell within the meaning of a “floating charge” for the purposes of the Insolvency Act 1986, section 251 (which defines “floating charge” as meaning a charge which, “as created”, was a floating charge).

It seems to me that nothing thereafter had the effect of depriving the Derbyshire debenture of its status of a floating charge “as created”. Paragraphs 24 to 26 assert that the charging agreement constituted by the Derbyshire debenture was vitiated by a common mistake and is to be treated as void. The common mistake made by the two parties is said to be to have assumed that they could effectively encumber the assets and undertaking of PEL with fixed and floating charges in favour of the Derbyshire without first obtaining the written consent of CHL as prior charge holder. The intention and effect of CHL’s automatic crystallisation clause was to prevent them from doing so.

For the reasons I have given, I do not accept that that was the effect of CHL’s automatic crystallisation clause and therefore there was no common mistake. Even if I were wrong on that, then it seems to me that it is not open to the substantive applicants to rely upon the doctrine of vitiation by common mistake. At paragraph 46 of his written skeleton, Mr Wolman identified five criteria which must be satisfied in order to vitiate a contract on such grounds. The second of these is that there must be no warranty by either party that the state of affairs, as to which there is a common assumption about its existence, exists.

For the reasons I have already given, I am satisfied that there was such a warranty by PEL: such warranty was contained in the offer letter accepted by PEL; and, if that is wrong, then there was such a warranty in clause 19.1 of the Derbyshire debenture. Therefore no reliance can be placed on the doctrine of common mistake.

At paragraphs 27 and 28 of the particulars of claim the substantive applicants seek to rely on a second crystallisation event, in the form of the appointment by Nationwide of a Law of Property Act receiver over The Strand redevelopment site on the 21^st December 2009. I am by no means satisfied that such an appointment constituted the levying, or attempting to levy, any distress, sequestration or other process against property subject to CHL’s floating charge; but, even if I am wrong in that, it seems to me that that cannot affect the fact that, “as created”, the Derbyshire debenture was a floating charge.

At paragraphs 30 and 31 it is said that the appointment of a receiver by the Nationwide on the 21^st December 2009 triggered clause 3.4 of the Salt debenture, cited at paragraph 20 of the particulars of claim. The plea is that clause 3.4 stated that the floating charge should, without notice, be automatically converted into a fixed charge with immediate effect if the company or any other person took any steps for the appointment of a receiver in relation to the company. That is addressing the position of the appointment of a receiver in relation to PEL, not the appointment of a Law of Property Act Receiver over specifically charged property in the form of The Strand Hotel, Bude.

The third crystallisation event is said to be the purported, and ineffective, appointment of joint administrators on the 24^th January, which proved abortive because the consent of CHL was not given as required by paragraph 15 of Schedule B1 to the Insolvency Act 1986 (as amended) and the actual purported appointment with CHL’s consent on the 27^th January 2012, which is the appointment which is sought to be challenged by the substantive application.

For the reasons I have already given, I am satisfied that the Derbyshire debenture constituted a floating charge within the meaning of Section 251 of the Insolvency Act. I am also satisfied that the Nationwide was not precluded from making the appointment by the terms of paragraph 16, which provides that an Administrator may not be appointed out-of-court under paragraph 14 while the floating charge on which the appointment relies is not enforceable.

The Derbyshire charge was enforceable. Paragraph 16 is contemplating the situation in which all-monies secured by a floating charge have been paid off so that the floating charge has ceased to be enforceable. Even if there was already a crystallised fixed charge in favour of CHL, that would not render the floating charge unenforceable; it would simply mean that it would take effect subject to the rights of the prior fixed charge holder, CHL.

In any event, CHL expressly consented to the appointment of the joint administrators: see the Rule 2.15 Notice (in Form 25B) filed at court on the 26^th January 2012 and endorsed with CHL’s consent on the 27^th January 2012. Mr Wolman sought to make certain points on the true meaning and effect of that consent but in my judgment there was nothing in them.

Clause 3 refers in terms to Capital Home Loans Limited having the benefit of six legal charges, each dated 18^th December 2007 and registered at Companies House on the 29^th December 2007 and made between the company, Shaun Kelly and CHL, which purport to include floating charges over all of the assets and undertaking of the company. That seems to me to be an accurate description of the six property charges which contain the floating charge over PEL’s assets and which, in terms, incorporate the CHL mortgage conditions 2004. CHL gave its consent as the holder of the six floating charges dated 18^th December 2007 over flats one to six Bartholomew House. In my judgment, given that consent, it was not open to CHL thereafter to take any steps to challenge the validity of the joint administrators’ appointment by Nationwide.

Moreover, it seems to me that, in light of the representations and warranties contained in the offer letter and clause 19.1 of the debenture (to which I have already referred), it is not open to PEL to contend that the Derbyshire debenture was ineffective as a valid floating charge over PEL’s assets. Given that it is not so open to PEL, it does not seem to me that it is open to PEL’s shareholders, or any of its creditors, to take the point either.

For all of those reasons, therefore, I am satisfied that there is nothing in the substantive application and accompanying particulars or points of claim that discloses any reasonable grounds for bringing or defending the claim. I am satisfied that the claim for a declaration that Nationwide did not hold an enforceable or qualifying floating charge over PEL’s property for the purpose of paragraph 14 of Schedule B1 on the 27^th January 2012, and so had no power to appoint the joint administrators as such, stands no chance of success, and that the particulars or points of claim does not set out any reasonable grounds for that declaration. It follows that the other heads of relief are also bound to fail.

So, for those reasons, I accede to the cross-application by the former joint administrators and the Nationwide to strike out the substantive application by the applicants. I am not sure that it is appropriate to declare that the application is totally without merit; but I am satisfied that it discloses no reasonable grounds for bringing the application. So I will strike out the substantive application under CPR 3.4 (2) (a). That concludes this extemporary judgment.