Williams & Anor v Broadoak Private Finance Ltd & Ors

This is the hearing of an application, issued on 12 March 2018, by the joint administrators of a company, Birchen House Limited, who are Mr Steven John Williams and Miss Lila Thomas. The application notice seeks an order under paragraph 71 of Schedule B1 to the Insolvency Act 1986 (as amended) seeking the court’s permission to dispose of the freehold land known as Pier Hotel and situated at Hamilton Street, Birkenhead as if it were not subject to various security interests together with an order as to the application of the sale proceeds up to a limit of some £4.48 million-odd. It is considered by the joint administrators to be highly unlikely that the property will sell for a sum in excess of this figure but, to the extent that it does, the joint administrators will apply to the court for further directions. The evidence in support of the application is contained in the witness statements of (1) Mr Stephen John Williams, one of the joint administrators, dated 9 March 2018, together with exhibit SJW1 and (2) Mr Alistair Graeme Lomax, a solicitor and partner in the solicitors’ practice, TLT LLP, who act for the joint administrators, dated 29 March 2018, together with exhibit AGL1.

The applicants are represented before me today by Mr Ian Tucker (of counsel) who has produced a detailed written skeleton argument, dated 2 April 2018, which I have had the opportunity of pre-reading.

There are three respondents, or classes of respondent, to the application. The first is Broadoak Private Finance Limited, which provided security to the company for the purpose of securing the advance of money to the company which was applied in the partial development of Pier Hotel.

The second respondent is Eloquent Developments Limited which has the benefit of an option, apparently now expired, to acquire two of the apartments in the redeveloped property.

The third class of respondents are the purchasers who are described in a schedule to the application. They are contracting purchasers who had contracted to acquire, off-plan, proposed apartments in the proposed development of Pier Hotel and who have paid advance deposits which had been applied towards the development project. Those deposits are secured by contracting purchasers’ liens over the property. Those purchasers fall into three categories which have been identified as categories A, B, and C. Mr Arnold, a solicitor with Cullimore Dutton in Chester, is here, largely in the capacity of an observer, on behalf of some 20 of the category B purchasers. He has taken the opportunity of addressing me, very briefly, in relation to the application.

In summary, the various respondents hold various, and different, secured interests in the property which will be adversely affected by the sale sought to be achieved by the joint administrators.

The company was a special, and single, purpose vehicle, incorporated in November 2015, to purchase the property and to develop it into commercial units on the ground floor and 62 residential apartments above. Initial funding was provided by an entity, Hope Capital Limited, and the development was overseen by Goodman Wells Limited, a company connected with Birchen House Limited by virtue of common directors and shareholders. It was initially anticipated that the works would be completed by September 2016. To further fund the development, the residential apartments were, as I have mentioned, sold off-plan, with the first such sale taking place in February 2016. Each sale agreement was in materially the same form, with a sample agreement to be found at divider 7 of exhibit SJW1 to Mr Williams’s witness statement. In each case, a deposit was paid of (usually) 25% of the purchase price, which was free to be used to fund the development. A great many of the apartments were sold off in this way. In addition, also in February 2016, apartments 1 and 2 were the subject of option agreements granted by the company to the second respondent, Eloquent Developments Limited, which does not appear before me today.

It would appear that the company itself did not benefit from the option agreements, which effectively provided security to various third parties in the event that Goodman Wells did not make a certain payment when it fell due. Those options have now lapsed and expired and are in the process of being removed; but an order is sought in relation to overriding any interest conferred by those options on the second respondent.

By September 2016, it had become apparent to the company that the development was under-funded, and the company therefore sought to re-finance the original loan with the first respondent, Broadoak Private Finance Limited. That re-finance was effected by way of a loan agreement, dated 23 September 2016, which provided for a secured loan divided into two facilities, one of which drawn down in its entirety on 22 September 2016 and the other of which was drawn down, in large part, on 21 October. There was a later, and third, facility also granted to the company by the first respondent. As security for the loan, the company granted to the first respondent an all-monies debenture and a legal mortgage over the property, both of which were registered at Companies House and, a little later, at the Land Registry over the registered title to the property. The third facility advanced by the first respondent took effect as an extension of the second loan facility and was drawn down in November 2016.

Apartments continued to be sold off-plan. Work continued until about May 2017, when the builder, Ridgemere, suspended works for non-payment of an invoice. On 9 June 2017, the joint administrators were appointed by the first respondent, pursuant to its powers as the holder of a qualifying floating charge. As at the date of appointment of the joint administrators, the property was the company’s primary asset and, apart from a bank account with a credit of some £6,000, the property was the company’s only identified asset. The joint administrators’ proposals, which have been deemed approved by creditors, confirm that the purpose of the administration is to achieve a better result for the creditors as a whole than would be likely if the company had been wound up or, if that is not possible, to make a distribution to one or more secured or preferential creditors of the company; in other words, the second or third in the hierarchy of statutory purposes in paragraph 3 of Schedule B1.

The present application is, as I say, made under paragraph 71 of Schedule B1 to the 1986 Act (as amended). By paragraph 71 (1), the court may, by order, enable the administrator of a company to dispose of property which is subject to a security, other than a floating charge, as if it were not subject to the security. By sub-paragraph (2), such an order may be made only on the application of the administrator, and where the court thinks that disposal of the property would be likely to promote the purpose of the administration in respect of the company. Sub-paragraph (3) provides that an order under this paragraph is subject to the condition that there be applied towards discharging sums secured by the security (a) the net proceeds of disposal of the property and (b) any additional money required to be added to the net proceeds so as to produce the amount determined by the court as the net amount which would be realised on a sale of the property at market value. By sub-paragraph (4), if an order under paragraph 71 relates to more than one security, any application of money under sub-paragraph (3) is to be in the order of the priorities of the securities.

Mr Tucker rightly identifies that two issues arise on the present application. The first is whether the disposal of the property, free of secured interests, is likely to promote the purpose of administration, which in this case is either the second or the third in the hierarchy of statutory purposes; and if so, and secondly, what is the order of priority of the securities affected. Mr Tucker points out, that for the purposes of this application, the joint administrators have sought to identify an amount that the first respondent is entitled to, and to seek an order directing that claims with priority to the first respondent are paid, and that the first respondent is then paid up to that limit. In the unlikely event that any surplus funds remain available, the joint administrators will bring an application for further directions.

Mr Tucker addresses the nature of each contracting purchaser’s interest in the property at paragraphs 20-25 of his written skeleton. He acknowledges that each of the contracting purchasers is entitled to a purchasers’ lien over the property. He also addresses the nature of a purchasers’ lien. He has referred me to observations of Arnold J in the case of Eason v Wong [2017] EWHC 209 (Ch) at paragraph 15. There Arnold J explained that an equitable lien is an equitable right over real or personal property to secure the discharge of a debt. It is a form of equitable charge over the subject property. Both an equitable lien and an equitable charge are enforceable by the same remedies, namely by the appointment by the court of a receiver and a judicial order for sale or, where the security is over a fund, by an order for payment from the fund. An equitable lien, like an equitable charge, confers on the holder a proprietary right, so that he is a secured creditor in a bankruptcy or winding up.

Mr Tucker then addresses the various interests secured against the property, as set out in the office copy entries of the relevant registered title. There are said to be two restrictions and 103 entries on the charges register. The first restriction is in respect of an overage agreement in favour of a company known as Mapeley Steps Limited. No relief in respect of that restriction or agreement is sought as the overage provisions are said not to be engaged. There are also various historic restrictive covenants appearing as entries 1 and 2 on the charges register in respect of which no relief is sought. There are then unilateral notices registered by the second respondent, Eloquent Developments Limited, in respect of its options. Mr Tucker invites the court to hold that the company is entitled to sell free of the option agreements without the second respondent becoming entitled to any payment. This is on the basis that the options expired by effluxion of time on 31 December 2017. Whilst the joint administrators are said to be taking steps to have the relevant entries on the register cancelled, to the extent that a sale is agreed prior to these entries being removed it is desirable that the sale is not delayed.

I am satisfied that the options in favour of the second respondent have expired. The second respondent has not objected to, or opposed, the relief sought. Therefore, the secured interests that the administrators are seeking to effect are limited to the various contracting purchasers, and to the first respondent, Broadoak Private Finance Limited, and various sub-chargees, whose interest is derived from the first respondent.

The various contracting purchasers have been divided into three categories. First, there are three purchasers of apartments 44, 29 and 53 who each registered unilateral notices over their respective parts of the property before the charge in favour of the first respondent was registered. They are the category A purchasers. There are then some 46 purchasers who registered unilateral notices, but only after the charge in favour of the first respondent was registered, and also after all three advances pursuant to that charge were made. They are the category B purchasers. Finally, there are five purchasers who entered into sale agreements, but who have not yet registered any interest in the property. They are the category C purchasers. In opening, Mr Tucker confirmed to me that none of the category C purchasers has, since the issue of this application, registered any unilateral or other notice in relation to the property, and therefore there remain five category C purchasers.

Strenuous efforts have been made by the joint administrators to give notice of this application to, not only the two named respondents, but also to all the contracting purchasers. At the time of Mr Lomax’s witness statement, all but two of the contracting purchasers, including all of those who are based overseas, had confirmed that they had received a copy of the papers in support of the present application. The two exceptions were identified at paragraph 14 of Mr Lomax’s witness statement and were a Mr and Mrs Grainger, in respect of apartment 35, and Mr Hazelwood and Miss Zimmerman, in respect of apartment 41. Mr Tucker has told me, in opening, that Mr Grainger has since confirmed receipt of the application papers by email, and therefore Mr Hazelwood and Miss Zimmerman are the only contracting purchasers who have not been demonstrated to have notice of this application. I am satisfied that all reasonable attempts have been made to give notice of this application to all the contracting purchasers, and that all but Mr Hazelwood and Miss Zimmerman, in respect of apartment 41, have received actual notice of the application. I am satisfied that all efforts have been made to notify Mr Hazelwood and Miss Zimmerman at their last known address or addresses. I am satisfied that everything has been done to notify them of that.

All those efforts have produced only two stated objections to the grant of the relief sought on the present application. The first, in point of time, was from Mr Andrew Jarvis, the contracting purchaser of apartment 43. He has written a letter to the joint administrators, dated 25 March 2018, which appears at page 12 of exhibit AGL1. He opposes the sale of Birchen House with a clean title. He says that the administrators’ brief is to deliver the best outcome for all investors, yet the proposed move to sell the property with a clean title only serves the interests of the companies involved, and not the majority of the investors. As an investor, he says he surely has the right to a share of the sale proceeds; the ranking of the investors is unfair, and there is said to be no mention of this in any contract. Throughout the administration process, he says, it has been clear that the only real aim is for the first respondent to recover as much of their loan as possible and to find laws supporting that aim. There is said to have been no real consideration of completing the build, which would, in fact, be the best outcome for all the investors and for the first respondent. It is said the completion of the build is a very viable option, and that there has been no concrete reason or evidence presented to investors as to why this cannot happen. Only the beliefs of the administrators have been presented, and there has been no real engagement with other parties for alternative outcomes. Mr Jarvis points out that he is a teacher and public servant and, like many other purchasers, is not a wealthy investor. He says that this was his chance to gain a foothold in the property market as someone who had never owned a house. He urges the court to consider a fair option for all concerned, and not just to protect the interests of the companies which have mismanaged this build or misguided investors. He says that there are other options, which have not been seriously considered, which could fulfil that aim, to the benefit all concerned.

Mr Tucker has addressed this issue at paragraphs 32-37 of his skeleton argument. It is also addressed in a letter, dated 26 February 2018, from Wignall Brownlow, the chartered surveyors who have been marketing the property on behalf of the joint administrators, which is to be found at divider 24 of exhibit SJW1 to Mr Williams’s witness statement. In his skeleton argument, Mr Tucker points out that it is not possible for the administrators to build out the property themselves because substantial further funding would be required, and there are no further funds within the administration to do so. As such, the administrators would require either a third-party funder or a purchaser.

The options open to the joint administrators, in relation to the property, are therefore threefold. One, to build out the property with the benefit of third party funding; two, to sell the property as it is; or, three, to sell the property free of the secured interests, which is the object sought to be achieved by the present application. Mr Tucker points out that the property has been marketed by Wignall Brownlow on an offers-invited basis, that is to say without any sort of guide price or restriction as to the basis, nature, or terms of any offer. Extensive interest has been generated and, as at the date of Wignall Brownlow’s letter of 26 February, they considered that, based on the market activity to date, and feedback from interested parties, the property would, by mid-March, have had the appropriate level of market exposure, and Wignall Brownlow would have had sufficient depth of demand to maximise realisation.

Mr Tucker has told me, by way of update on the bidding process, that on 12 March offers were invited by 29 March. Two offers have now been made and are being considered. Mr Tucker confirmed that no offers have been made on any basis other than the sale of an unencumbered freehold; in other words, no interest has been expressed in purchasing the property as it is.

Mr Tucker has highlighted page 2 of the Wignall Brownlow letter: that makes it clear that whilst the property has been marketed for sale as an unencumbered freehold, the surveyors have also invited proposals for acquisition subject to the apartment sale interests. Where interested parties were said to be considering that option, the surveyors have provided them with a schedule detailing pre-appointment purchase prices and deposits paid, in accordance with company records. Notwithstanding that, Wignall Brownlow expressed their belief that it was unlikely that a sale with security interests intact would result in a higher realisation than the sale of the unencumbered freehold. That was on the understanding that if a party were to acquire the property with the security interests intact, they would have to complete the development to comply with the terms of the sale contracts, and then complete the sales at the contracted prices, net of previously received deposits. That would reduce developer’s profit by some £850,000, which would impact on the residual value and the sale price. Wignall Brownlow also expressed the belief that the sale proceeds, on realisation, are unlikely to exceed the aggregate value of the priority i.e., Category A purchaser, claims and the first respondent’s secured debt.

It is on that basis that the joint administrators do not consider that they would be able to secure adequate funding from a third party, at least without all or, a majority, of the existing secured creditors agreeing to release some, or all, of their rights in favour of the incoming funder, or other unacceptable risks as to delay, cost and uncertainty arising. That is because the purchasers’ rights, if not released, would reduce the incoming funder’s profit by some £850,000. Moreover, absent any agreement from the secured creditors, it was questionable how any such funder would be entitled to a profit element for providing funding. As Mr Tucker observes, if the build-out had been viable without such a write-off, or unacceptable risks, it is highly unlikely that there would have been a need to appoint administrators in the first place.

Mr Tucker submits, and I accept, that in the absence of any offer of third party funding - of which there is none, and no reason to think there will be any - and in the absence of any offer, and any necessary subsequent agreement from the secured creditors to release rights in the event of such an offer, the option of a sale of the development, as it is, cannot realistically be considered further, nor can any proposal for further funding.

It seems to me that Mr Jarvis is wrong to say, as he does in his letter of 25 March, that alternative options and outcomes have not been explored. I am satisfied, on the evidence, that the only realistic option is that sought on the present application: of a sale of the development free of the existing secured interests.

I am also satisfied, for those reasons, that a sale of the property, free of the relevant security interests, will promote one or other of the two purposes of administration in respect of the company.

I turn then to the second issue: that of the order of priority of the securities affected. Under the Land Registration Act 2002, section 28 sets out the basic rule of priority. The priority of an interest affecting a registered estate or charge is not affected by a disposition of the affected estate or charge; and it makes no difference, for the purposes of this section, whether the interest or disposition is registered. That is subject to two exceptions, one of which (in section 30 of the Act) is of no relevance. The other exception, that in section 29 of the Act, is however highly relevant. Section 29(1) states that if a registerable disposition of a registered estate is made for valuable consideration, completion of the disposition by registration has the effect of postponing to the interest under the disposition any interest affecting the estate immediately before the disposition whose priority is not protected at the time of registration. Subsection 29 (2) sets out how an interest’s priority may be protected. An equitable charge may be protected by being made the subject of a notice on the register.

A succinct summary of the state of the law is provided at paragraph 25.203 of Volume 2 of Emmet and Farrand on Title. There, it is said that as between registered and unregistered charges, priority is governed by the general registered land priority rules laid down by the 2002 Act. A registered chargee takes subject to any prior mortgages and charges which are protected by notice on the register or are overriding, but free from all others. Prior mortgages and charges can be overriding interests only if they are local land charges or if the prior chargee is in actual occupation of the mortgaged property. None of the contracting purchasers was in actual occupation of the property at any material time.

Mr Tucker has considered whether the contracting purchasers may be entitled to protection in respect of their purchaser’s liens under the doctrine of constructive trust, in accordance with the case of Chattey v Farndale Holdings Inc (1998) 75 P & CR298. The effect of that decision is that it cannot be a fraud on the part of a registered disponee to rely on the provisions of the Land Registration Act as conferring an unencumbered title on the disponee. As Sir Christopher Slade observed in Lloyd v Dugdale [2001]EWCA Civ 1754: ‘There is no general principle which renders it unconscionable for a purchaser of land to rely on a want of registration of a claim against registered land, even though he took with express notice of it. A decision to the contrary would defeat the purpose of the legislature in introducing the system of registration embodied in the 1925 Act.’ The test to be applied was deciding whether or not the conscience of the new estate owner was affected. The crucially important question was whether he had undertaken a new obligation, not otherwise existing, to give effect to the relevant incumbrance or prior interest. If, and only if, he had undertaken such a new obligation would a constructive trust be imposed.

As Mr Tucker submits, there is nothing that suggests that to be the case here. That provides the answer to the point raised by the other objectors to the present application, Mr and Mrs Kerai, who have submitted an email to the applicants’ solicitors dated 3 April 2018. They are the purchasers of Apartment 56. They have pointed out, and asked the court to take into account the fact, that they exchanged contracts on 19 September 2016. They believed that it was part of the contract that, from that point of exchange, their interest was to be protected by an agreed unilateral notice against the freehold title. For some reason, that was not formally registered by their solicitors until 2 August 2017. They do not have their solicitors’ file to ascertain when they applied to register the notice at the land registry.

Mr and Mrs Kerai note, from Mr Williams’s witness statement, that because the agreed notice relating to their agreement was not registered until after the first respondent’s charge was registered, the administrators submit that Mr and Mrs Kerai’s interest and unilateral notice do not take priority, effectively meaning that they are unlikely to recover their deposit and costs of approximately £20,000. Mr and Mrs Kerai are of the view that, by virtue of the fact that the sale agreement relating to their purchase was agreed and dated 19 September, before the charge in favour of the first respondent was dated or registered, they should be entitled to an equitable lien from the date of their sale agreement, which should take priority over any subsequent agreed or registered charges. That is said to be because the lien begins from the date of the agreement to purchase, and not the date of registration of any agreed notice. They also point out that the freeholder would have been aware of their sale agreement at the date the charge with the first respondent was agreed; and the lenders, in the ordinary course of their due diligence, ought to have been, or were, aware through disclosure that agreements for sale had been agreed before they entered into their legal charge. This should have been a factor in their decision to lend; and they should have appreciated that those agreements included equitable liens and agreements for notices to be registered, which they would have expected to be registered ahead of their own charge being registered, and thereby take priority.

Mr Arnold has drawn the court’s attention to the express terms of clause 13.4 of the standard form sale agreement at divider 7, page 164 of exhibit SJW1 to Mr Williams’s witness statement. Clause 13.4 provided that the seller consented to the entry of an agreed notice against the registered title of the building in relation to the property at HM Land Registry in order to protect the purchase contract. Mr Arnold has pointed out that rather than unilateral notices, the seller had consented to the entry of agreed notices by each of the contracting purchasers. That is undoubtedly correct in terms of the contractual sale documentation; but I accept Mr Tucker’s submission that the basic rule in section 28 is overridden by the express terms of section 29(1) in light of the fact that no notices protecting their respective purchase agreements were entered against the title to the property at the Land Registry in favour of any of the category B purchasers before the registration of the first respondent’s charge, and the completion of the third, and final, of its advances. Therefore, although the contracting purchasers were originally entitled to priority in respect of their liens over the subsequent charge in favour of the first respondent, that priority was lost when their conveyancing solicitors failed to secure the entry of agreed or unilateral notices prior to the entry of the registration of the first respondent’s charge on the registered title.

I therefore reject the contentions of Mr and Mrs Kerai; their liens would originally have taken priority, but such priority was lost by the prior registration of the first respondent’s charge. It is only the category A purchasers who have priority over the first respondent’s interest. I therefore accept Mr Tucker’s submission that those purchasers, the category A purchasers, who registered their interests prior to the first respondent’s charge, have priority to the first respondent; but that the remainder, the category B and C purchasers, rank behind. Since all three advances were made before any of the category B unilateral notices were registered, those three advances all have the same priority.

I therefore find that whilst the proceeds of any sale, pursuant to paragraph 71, should be distributed, first in order of priority, to the category A purchasers, the same does not apply to the category B purchasers. The amount to be paid to the category A purchasers should be the amount of their respective deposits, together with interest on that deposit at 5%, and any costs arising under, or connected with, the category A purchasers’ respective sale agreements. As Mr Tucker points out, that is the appropriate quantum in accordance with the decision in Eason v Wong (previously cited).

Next in order of priority is the first respondent, up to the amount of £4,409,593, representing the total sums advanced, simple interest at 1.65% per month, being the standard rate under the loan agreement, to 8 June 2017, and simple interest thereafter, at a rate of 3% per month, being the default rate, which was triggered by the appointment of the joint administrators. Mr Tucker acknowledges that whilst it has been contended that the first respondent should be entitled to compound interest and interest at the default rate from a date earlier than 9 June 2017, the joint administrators have not yet formed a view on that, or on the quantum of contractual fees, costs and expenses, and do not seek to argue that point today.

Finally, there is the question of costs. I accept Mr Tucker’s submission that the net proceeds of sale to be distributed to secured creditors under paragraph 71 (2) of Schedule B1 should be the proceeds of sale after the deduction of all proper costs, charges and expenses reasonably incurred in the preservation and realisation of the property as an asset in the administration. I am satisfied that the joint administrators are entitled to an order to that effect, and on that basis.

For those reasons, I accede to the joint administrators’ application, notwithstanding the opposition of Mr Jarvis and of Mr and Mrs Kerai, and notwithstanding the point made by Mr Arnold in relation to clause 13.4 of the standard form sale contract. Mr Tucker will no doubt submit an appropriate form of order to give effect to that judgement.