England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
BANKRUPTCY COURT
(Mr Michael Briggs QC
(sitting as a deputy High Court judge))

		Royal Courts of Justice Strand London WC2 Wednesday 27th March, 2002

1. LORD JUSTICE ALDOUS: I invite Lord Justice Jonathan Parker to give the first judgment.
2. LORD JUSTICE JONATHAN PARKER: On 7 February 2002 the administrative receivers of Viasystems Tyneside Ltd ("the Company"), which is in liquidation, issued an originating application for directions. Paragraph 2 of the originating application raised the question whether an Underlease dated 28 March 2001 and granted by the Company to Grantax Developments Ltd ("Grantax"), and any rights deriving from the Underlease, were subject to or otherwise affected by the rights of the holders from time to time of a Debenture dated 29 March 2000 and granted by the Company to Chase Manhattan International Ltd, now called JP Morgan (Europe) Ltd ("Chase").
3. The respondents to the originating application were, firstly, three companies claiming to be entitled to the benefit of the Debenture by subrogation, namely Viasystems Technograph Ltd, Forward Acquisition Ltd and Viasystems Mommers BV ("the Subrogation Claimants"); secondly, two companies claiming rights under the Underlease, namely Grantax (as underlessee) and the Bank of Scotland ("the Bank") (which financed the acquisition of the Underlease by Grantax and which is entitled as against Grantax to a charge over the Underlease); and thirdly the liquidators of the Company.
4. By an order made by Park J on 14 February 2002, the hearing of the issue raised by paragraph 2 of the originating application ("the Priority Issue") was expedited. The reason for expedition was the need for the Priority Issue to decided prior to the end of the current fiscal year on 5 April 2002.
5. The expedited hearing of the Priority Issue took place before Mr Michael Briggs QC, sitting as a Deputy High Court Judge in the Companies Court, on 8 and 9 March 2002. He delivered judgment on 11 March 2002. He decided the Priority Issue in favour of Grantax and the Bank, holding that the Underlease took priority over the Debenture. He gave permission to appeal, subject to the condition that any Appellant's Notice be accompanied by an application for expedition. The Subrogation Claimants and the liquidators have appealed, and have duly applied for expedition. The hearing of the appeal has accordingly been expedited, and comes before us on the last day of the Hilary sittings. In other circumstances, we might well have taken time to consider our judgment; but given the urgency of the matter, and since we are agreed as to the outcome of the appeal and as to the reasons for our conclusion, we have decided to deliver our judgments extempore.
6. I turn, then, to the material transactions. I summarise them as follows.
7. By an Option Agreement dated 27 March 1998 and made between The Urban Regeneration Agency ("the Agency") of the one part and the Company of the other part, the Agency granted to the Company, for a non-returnable consideration of £171,300 plus VAT, an option (defined in the Option Agreement as the "Call Option") to take a lease of an area of development land situated in the Tyneside Enterprise Zone and known as Balliol East Business Park ("the Property"). The option was exercisable within a period of three years from the date of the Option Agreement. Clause 10.1 of the Option Agreement provided that the option was "inalienable without the prior consent of the Agency". The Option Agreement further provided that the lease to be granted on the exercise of the option ("the Headlease") was to be in a specified form, and that the consideration for the grant of the Headlease was to be calculated by reference to a specified formula. The option consideration was to be credited against the price payable for the Headlease, if the option was exercised.
8. By a Facility Agreement dated 29 March 2000 a group of banks, led by Chase, agreed to make available to the Company and other companies in the same group a revolving credit facility of up to some £15.7 million. The agreement was conditional on Chase taking a Debenture in agreed form. A Debenture in the agreed form was duly executed the same day. By the Debenture, the Company and its associated companies (described as the "Obligor Companies") covenanted to pay their own and each other's indebtedness to the debentureholders and gave fixed and floating charges as security for their obligations. In particular, by Clause 3.1.2 of the Debenture each of the Obligor Companies charged:

"... by way of first charge ... all present and future freehold and leasehold property wheresoever situate ... now or from time to time hereafter owned by such Obligor Company or which in such Obligor Company may have an interest, together with all liens, charges, options, agreements, rights and interests in or over such property or the proceeds of sale of such property and all buildings and fixtures thereon and all rights, easements and privileges appurtenant to, or benefitting, the same."

9. The Debenture was registered at the Companies Registry on 14 April 2000.
10. On 15 March 2001 a number of relevant dealings took place.
11. First, a company called One North-east ("ONE"), which (it seems) was the statutory successor to the Agency, and the Company entered into a Deed of Variation varying the terms of the Option Agreement. The purchase price for the Headlease was crystallised as some £1.8 million less the consideration for the grant of the option (£171,300), and the Company also undertook to pay to ONE a share of any profit made on any subsequent disposal of the Property or any interest in it.
12. Secondly, the Company served notice on ONE exercising the option.
13. Thirdly, the Company and Grantax entered into an agreement for the grant to Grantax of an Underlease of the Property for the term of the Headlease less three days. The consideration for the grant of the Underlease was some £3.2 million. Under the terms of the agreement, Grantax undertook (a) to perform the Company's obligations under a development agreement relating to the property which the Company was obliged to enter into with ONE, and (b) to pay to the Company on the grant of the Underlease a further some of approximately £5.8 million, representing a profit share in the development of the Property (being defined as "Sellers' Priority Profit Share"). Clause 3.3 of the agreement required the Company to deliver to Grantax a certified copy of the notice exercising the option, and clause 4.1 required it to hand over to Grantax on completion (i.e. on the grant of the Underlease) certified copies of the Headlease, of the Deed of Variation, and of the requisite licences for alteration and subletting, duly executed by the Company or ONE (as appropriate). By clause 7.1 the Property was expressed to be sold "subject and (where appropriate) with the benefit of the Existing Matters", which included the Headlease.
14. On 27 March 2001 the Bank agreed to provide Grantax with the entirety of the finance required for the purchase of the Underlease. On the same day, Messrs Dickinson Dees, the Company's solicitors, wrote to Messrs Eversheds, the Bank's solicitors, as follows:

"Further to the telephone conversation between Ryan Bannen at this firm and Gerry Mulholland at your firm, we undertake to hold the sum of £8,851,939.58 to your order. Completion with Grantax Developments Ltd cannot take place until after completion has taken place with One North East. Completion with One North East will take place when the appropriate moneys have been forwarded to One North East. Therefore, prior to completion you will need to release the moneys to our order and completion will take place immediately after the money has been received by One North East."

15. Completion of the grant of the Headlease and the Underlease took place on 28 March 2001, the Headlease being executed before the Underlease. By the Headlease, ONE demised the Property to the Company for 125 years from 27 March 2001. The term of the Underlease was three days less than that, thereby leaving the Company with a nominal reversion. The Underlease did not comprise the entirety of the land demised by the Headlease: a roadway which was demised by the Headlease was not included in the Underlease. Nor do the terms of the Underlease match exactly the terms of the Headlease, in that the Underlease grants to the underlessee rights of access over adjoining land in the freehold ownership of the Company.
16. On completion, the Company paid ONE a total of some £5.3 million excluding VAT (representing the balance of the purchase price for the Headlease after bringing into account the option consideration, plus the profit share payable pursuant to the Deed of Variation). Grantax paid the Company a total of some £9 million excluding VAT (representing the consideration for the grant of the Underlease plus the "Sellers' Priority Profit Share").
17. It is common ground that, as foreshadowed in Dickinson Dees' letter, the moneys paid by Grantax to the Company were used by the Company to complete its purchase of the Headlease from ONE. It is, however, not common ground that the Company was dependent upon the moneys paid by Grantax to complete its purchase of the Headlease, in the sense that it would have been unable to raise the requisite finance from elsewhere had it chosen to do so. As to that, the judge held (at page 7 of the transcript of his judgment, lines 7-10) that:

"... the purchase of the headlease by [the Company] was probably dependent upon its receipt from Grantax of its payment for the underlease."

18. The evidence is silent as to how the balance of the moneys paid by Grantax to the Company, after payment thereout of the sums due to ONE, was applied.
19. The consent of Chase was not sought to the grant of the Underlease; Chase did not learn of the grant of the Underlease until some time later.
20. Following completion the parties turned to the question of the registration of the Headlease and the Underlease as HM Land Registry, and it was in that context that the Priority Issue arose.
21. On 20 September 2001 Chase appointed administrative receivers over the Company's property, pursuant to the Debenture. The Company's indebtedness to Chase has since been reduced to a nominal level, and (as noted earlier) the Subrogation Claimants claim to be entitled to the benefit of the Debenture by subrogation. The validity of that claim is, I understand, to be the subject of a future court hearing: at all events, it is not in issue on this appeal.
22. Before the judge, the Subrogation Claimants, supported by the liquidators, contended that the Debenture took effect in priority to the Underlease, on the basis that it created an equitable charge over after-acquired leasehold property, effective as from the point in time at which such leasehold property was acquired, and that that equitable interest was prior in time to the grant of Grantax's (equitable) interest in the Underlease prior to registration.
23. Grantax and the Bank contended that the Underlease was not subject to the Debenture. In support of this contention, they relied on a number of technical arguments relating to land registration, on all of which they failed before the judge. It is perhaps fortunate, in the circumstances, that none of those arguments is sought to be resurrected on this appeal. The one ground on which Grantax and the Bank succeeded before the judge was that, in substance, the only interest which the Company acquired in the Property was the nominal three-day reversion expectant on the termination of the Underlease, and that it never acquired or became the owner of an unencumbered 125-year term granted by the Headlease. It is that conclusion of the judge which alone forms the subject of this appeal. No Respondent's Notice has been served.
24. In concluding that in substance the Company never acquired an unencumbered 125-year term, the judge applied the principle established in Abbey National Building Society v Cann [1991] 1 AC 56 ("Cann"). As the judge put it (at page 21 of the transcript of his judgment, at lines 5-8):

"The result is that in the eyes of equity [the Company] never acquired anything more than a nominal reversion which could fall prey to Chase's charge an Grantax takes free of it."

25. Before examining the judge's reasons for reaching that result, it is convenient first to refer to Cann, and to the earlier authorities considered by the House of Lords in Cann.
26. The facts in Cann were, in summary, as follows.
27. The first defendant in the action, Mr Cann, purchased a house with the aid of a mortgage from a building society. He had applied for the mortgage advance on the footing that the house was for his own occupation, whereas in truth it was to be occupied by his mother and her husband-to-be (whom she subsequently married). Subsequently, Mr Cann defaulted on the mortgage repayments and the building society brought to proceedings for possession against Mr Cann, his mother and her husband. Mr Cann took no part in the proceedings, but his mother resisted the claim for possession on the basis that (a) she had an equitable interest in the house arising by reason of proprietary estoppel, and (b) that since, by chance, she was in actual occupation of the house at the time when completion took place, she had an overriding interest under section 70(1)(g) of the Land Registration Act 1925, with the result that her equitable interest took priority of the interest of the building society as chargee. This defence was founded on the proposition that since the charge to the building society was executed after the transfer of the title to the house to Mr Cann, there was a moment in time between the execution of the two deeds during which the legal title to the house vested in Mr Cann free from any charge. The consequence of that, so the argument ran, was that the estoppel was "fed" when the transfer of the (at that point unencumbered) title to Mr Cann was executed, so that by the time the charge came to be executed the mother had an equitable interest in the house which, by virtue of the fact that she was in actual occupation of the house, constituted an overriding interest which took priority to the building society's charge.
28. The argument (which I will refer to as the "moment in time" argument) failed in the Court of Appeal on the ground that the mother had impliedly authorised Mr Cann to raise the mortgage advance and hence had authorised him to charge the house to the building society as security for it.
29. The House of Lords rejected the "moment in time" argument for different reasons. It held that where a purchaser relied on a bank or building society loan for the completion of his purchase, the transactions of acquiring the legal estate and granting the charge were one indivisible transaction, at least where (as in Cann) there had been a prior agreement to charge the legal estate when obtained; that in substance Mr Cann had never acquired anything more than a equity of redemption in the house, subject to the charge; and that there was no moment in time at which it could be said that the legal estate was vested in Mr Cann free from the charge so that the estoppel relied on by the mother was "fed" so as to become binding on the chargee and take priority over its interest.
30. Cann also raised a number of other issues as to the operation of the scheme for land registration under the 1925 Act, which are immaterial for present purposes. Lord Oliver turned to the "moment in time" argument at page 89G of the report of Cann.
31. He first referred to the Court of Appeal decision in Church of England Building Society v Piskor [1954] Ch 553. That was a case involving unregistered land. A contracting purchaser of a leasehold property was let into possession prior to completion and granted a number of weekly tenancies. Since the purchase had not been completed, the tenants' interests could take effect only in equity. The tenants moved in. The contract was subsequently completed. On completion, the purchaser charged the property to the building society whose moneys had enabled him to complete the purchase. The charge contained the usual prohibition on the creation of tenancies by the chargor/purchaser. The purchaser subsequently defaulted on the mortgage repayments and the building society took proceedings for possession against the tenants. The tenants claimed that they had acquired tenancies by estoppel which was "fed" by the acquisition of the legal estate, thereby converting their tenancies into legal tenancies binding on the building society. The building society argued that the purchase and the charge formed in reality a single transaction. The Court of Appeal rejected this argument, holding that the various conveyancing steps must be treated as separate steps in the eye of the law.
32. Lord Oliver then referred to In re Connolly Brothers (No 2) [1912] 2 Ch 25 and Security Trust Co v Royal Bank of Canada [1976] AC 503.
33. In Connolly a company granted a debenture over all its assets, present and future. Subsequently, it wished to acquire an additional property, and it approached a third party who agreed to finance the purchase but in terms that the loan be secured by a charge over the property. The company accordingly contracted to purchase the property. The price was £1,100, of which £150 was payable by way of deposit on exchange of contracts. The company duly paid the deposit. On completion (at which the lender was present), the lender's cheque for £1,000 was paid into the company's bank account and the company paid the balance of the purchase price (amounting to £950) to the vendor in cash. The same solicitor acted for the vendor, purchaser and lender. The solicitor retained the title deeds, on behalf of the lender. A few days later, the company executed a memorandum of deposit (i.e. an equitable charge) in the lender's favour. Warrington J held that the equitable charge in favour of the lender took priority over the debenture. In the course of his judgment (in a passage quoted in the report of the decision of the Court of Appeal at page 29) he said:

"... in my judgment, the company on the facts of this case never acquired as against [the lender] any interest in this property at all, except subject to the obligation of giving her a charge for the amount of the purchase-money which she ... advanced."

34. Warrington J's decision was upheld by the Court of Appeal. In the course of the argument for the appellant debenture-holders, Buckley LJ identified the question at issue as being "whether the company acquired the property unfettered by any charge to [the lender]."
35. In the course of his judgment, Sir Herbert Cozens-Hardy MR said:

"... we should be shutting our eyes to the real transaction if we were to hold that the unincumbered fee simple in the property was ever in the company so that it became subject to the charge of the debenture-holders."

36. In Connolly, the Court of Appeal distinguished Piskor, but on a ground which Lord Oliver in Cann regarded as questionable.
37. In Security Trust, a company called Fisher contracted to purchase land on terms that a certain proportion of the purchase price should be paid by a fixed date and the balance should be left outstanding secured by a mortgage to the vendor. A conveyance and a mortgage were duly executed and held in escrow pending payment of the agreed proportion of the price. Fisher failed to pay the stipulated sum on the fixed date. Fisher then granted a debenture, creating a fixed charge on its existing property and a floating charge on future property. A receiver was subsequently appointed under the debenture. The contract was eventually completed. In the subsequent litigation, the question arose whether the charge over the property created by the debenture took priority over the vendor's mortgage. The Judicial Committee of the Privy Council, allowing the vendor's appeal, held that Fisher's interest in the land was merely an equity of redemption subject to the vendor's mortgage, and that the mortgage accordingly took priority over the charge created by the debenture. At page 518E Lord Cross said:

"As [their Lordships] see it the mortgage was entitled to priority. The respondent's charge was a charge on Fisher's interest under the contract and could give the respondent no greater interest than Fisher had. Fisher could not obtain a conveyance of the lands free from the obligation to grant back the mortgage to the appellant. He had no right to obtain an unincumbered fee simple and the charge on his interest which he created in favour of the respondent only gave the respondent rights which were subject to the prior rights of the appellant."

38. Lord Oliver in Cann also referred to the decision of Harman J in Coventry Economic Permanent Building Society v Jones [1951] 1 All ER 901. In that case the contracting purchaser of a property agreed, prior to completion, to let the ground floor of the property to two tenants. She subsequently borrowed a sum of money from the plaintiffs to enable her to complete the purchase. On completion, she granted the plaintiffs a mortgage which contained a prohibition on the creation of tenancies. On a claim for possession by the plaintiffs, the tenants argued that a tenancy by estoppel had been created prior to completion and that (to use the words of Lord Jauncey when referring to the case in Cann at page 97A-B):

"... there must be predicated a scintilla temporis [i.e. a moment in time] between the conveyance to [the purchaser] and the mortgage by her into which the tenancy by estoppel could be inserted so as to precede the mortgage."

39. Harman J rejected that argument, saying (at page 903):

"The question is whether I must assume the scintilla temporis and assume that because of the obligations of the landlord she must be held to have defrauded her mortgagee by creating a tenancy which is good against the society although it was not willing to lend the money except on the footing that she had no such right. I do not see why I need postulate this. The whole transaction was one transaction. The vendor would not sell without receiving his purchase money, and the mortgagee would not provide the purchase money without receiving the term of years. The money, in fact, went straight - as is the universal practice - from the mortgagee to the vendor, and not until it was in the vendor's hands would a legal state be created wither in favour of the landlord or of the mortgagee. It seems to me that the whole thing is one transaction in substance, and I am not constrained to introduce an artificiality so as to affect the rights of the building society. Consequently, I reject the argument that the doctrine of estoppel must have created in the tenants an estate in priority to that of the building society. The grantor of the so-called tenancy would never have acquired the estate which she did acquire but for that mortgage money, and it would not be right, therefore, to introduce a fiction in the manner suggested."

40. Lord Oliver in Cann (at page 92C) expressed agreement with Mustill LJ's observation in Lloyds Bank Plc v Rosset [1989] Ch 350, 393, that the decisions in Piskor, Connolly and Security Trust cannot stand together. Lord Oliver found himself faced with a stark choice between them. He continued (at page 92F):

"The reality is that, in the vast majority of cases, the acquisition of the legal estate and the charge are not precisely simultaneous but indissolubly bound together. The acquisition of the legal estate is entirely dependent upon the provision of funds which will have been provided before the conveyance can take effect and which are provided only against an agreement that the estate will be charges to secure them. Indeed, in many, if not most, cases of building society mortgages, there will have been, as there was in this case, a formal offer and acceptance of an advance which will ripen into a specifically enforceable agreement immediately the funds are advanced which will normally be a day or more before completion. In many, if not most, cases, the charge itself will have been executed before the execution, let alone the exchange, of the conveyance or transfer of the property. This is given particular point in the cases of registered land where the vesting of the estate is made to depend upon registration, for it may well be that the transfer and the charge will be lodged for registration on different days so that the charge, when registered, may actually take effect from a date prior in time to the date from which the registration of the transfer takes effect: see section 27(3) of the Act of 1925 and the Land Registration Rules 1925, rule 83(2). Indeed, under rule 81 of the Rules of 1925, the registrar is entitled to register the charge even before registration of the transfer to the chargor if he is satisfied that both are entitled to be registered. The reality is that the purchaser of land who relies upon a building society or bank loan for completion of his purchase in fact never acquires anything but an equity of redemption, for the land is, from the very inception, charged with the amount of the loan without which it could never have been transferred at all and it was never intended that it should be otherwise. The `scintilla temporis' is no more than a legal artifice and, for my part, I would adopt the reasoning of the Court of Appeal in In re Connolly Brothers Ltd (No 2) [1912] Ch 25 and of Harman J in Coventry Permanent Economic Building Society v Jones [1951] 1 All ER 901 and hold that Piskor's case was wrongly decided. It follows, in my judgment, that Mrs Cann can derive no assistance from this line of argument."

41. Lord Oliver then turned to the question whether the mother was in "actual occupation" of the house at the moment of completion, for the purposes of section 70(1)(g) of the Land Registration Act 1925, and concluded that she was not.
42. Lord Jauncey in Cann (at page 101E) said that he shared Mustill LJ's difficulty in reconciling Connolly and Jones with Piskor. Lord Jauncey continued (at page 101F):

"It is of course correct as a matter of strict legal analysis that a purchaser of property cannot grant a mortgage over it until the legal estate has vested in him. The question however is whether having borrowed money in order to complete the purchase against an undertaking to grant security for the loan over the property the purchaser is, for a moment in time, in a position to deal with the legal estate as though the mortgagee had no interest therein. In re Connolly, Coventry Permanent Economic Building Society v Jones [1951] 1 All ER 901 and the Security Trust Co case say that he is not in such a position recognising, in my view, the realities of the situation. Piskor's case says that he is, thereby ignoring any interest which the mortgagee may have prior to completion of the purchase. Nevertheless in each of the four cases the purchase was dependent upon the loan and I find it impossible to see any material distinction between the circumstances obtaining in the three former cases and those obtaining in Piskor's case. In my view a purchaser who can only complete the transaction by borrowing money for the security of which he is contractually bound to grant a mortgage to the lender eo instante with the execution of the conveyance in his favour cannot in reality ever be said to have acquired even for a scintilla temporis the unencumbered fee simple or leasehold interest in land whereby he could grant interests having priority over the mortgage or the estoppel in favour of prior grantees could be fed with similar results. Since no one can grant what he does not have it follows that such a purchaser could never grant an interest which was not subject to the limitations on his own interest. In so far as Piskor decided that such a purchaser could be vested for a moment in time in the unencumbered freehold or leasehold estate with the consequences to which I have just referred, I consider that it was wrongly decided. Conversely I consider that the decision of Harman J in Coventry Permanent Economic Building Society case was correct."

43. Lords Griffiths and Ackner agreed with the speeches Lords Oliver and Jauncey; Lord Bridge agreed with Lords Oliver and Jauncey on this point.
44. I can now return to the judge's judgment on the Priority Issue.
45. At page 13 of the transcript of his judgment the judge posed the relevant question, namely: "Upon what interest of [the Company] did the debenture bite?"
46. The judge went on to note that it was common ground (a) that the Debenture had the effect of creating an immediate equitable charge on any leasehold property subsequently acquired by the Company, and (b) that the answer to the question which he had posed turned on whether the analysis in Cann applied to the facts of the instant case. The judge then quoted from the speech of Lord Oliver in Cann, and from the judgment of Harman J in Jones (passages which I quoted earlier in this judgment). The judge went on to observe (at page 13 of the transcript at line 3) that there are a number of factual differences between Cann and the instant case, but he concluded that nothing turned on those differences. In particular, he concluded that the special status of an overriding interest was not a material consideration for present purposes, given that in Cann the House of Lords approved Connolly - a case which was decided in 1912, prior to the passing of the Land Registration Act 1925 - and that there was no material difference for present purposes between a charge and an underlease. He continued:

"The real difference, or alleged difference, between Cann and the present case is, according to Mr Westwood [he was for the Subrogation Claimants] and Mr Arden [he was for the liquidators], that the element of necessity which made the link between Mr Cann's purchase and his mortgage indissoluble is missing in this case. They point to the first part of my citation from Lord Oliver's speech in Cann as showing that necessity is a precondition to the operation of the principle. Only if the headlease could not have been acquired by [the Company] without the use of the money paid by Grantax for the underlease could the principle apply, so they say."

47. Commenting that that submission raised a mixed question of fact and law, the judge said that he was not persuaded as a matter of law that the principle was quite so rigidly confined. He gave four reasons, as follows:

"(1) The court is here concerned, subject to Mr Hodge's alternative challenges, with the application to a priority question of equitable rules worked out mainly before 1875 by the Court of Chancery, a court of conscience which looked at the substance rather than the form. This is so regardless of whether the competition is between a legal and an equitable interest, or between purely equitable interests. The bona fide purchaser is Equity's darling, even though he needs a legal estate.

(2) The underlying question is therefore whether, in substance, in reality or in the eves of equity, the person in Mr Cann's position can be said at any moment in time to have acquired an interest unincumbered by the transaction by which he financed his acquisition. It seems to me that there could be various different reasons that could lead to a negative answer to that question. One reason proffered by Lord Oliver in Cann at page 92G was that the purchaser may, by the time he acquired the property, already be subject to a specifically enforceable contract to charge it to his lender. This does not necessarily, or even ordinarily, depend upon his being unable to raise alternative finance. He has contracted to use the finance actually advanced, and that is sufficient.

(3) In my judgment, the nearest one may come to a general test which will answer the question, `When does the Cann principle apply?' is by asking whether the purchaser is, at the time of his purchase, bound in contract, in conscience or by necessity to confer an immediate interest on the chargee. It needs to be borne in mind that the process by which a purported charge of after-acquired property works is itself the creation of equity. In Tailby Lord Watson described the relevant principle as a rule of equity at page 533. The effect of the rule is, of course, to create only an equitable charge.

(4) It seems to me that it is entirely consistent with that equitable rule that it should not apply so as to create a charge over anything which the chargor was not at the moment of acquisition entitled to keep for himself. Plainly it would not apply to property which he obtained merely as a trustee. Equally, it ought not to apply to an interest which, at the moment of acquisition, he was already bound in law, in equity or in conscience to confer on somebody else."

48. Turning next to the facts, the judge noted that he had already found on the facts that on the balance of probabilities the Company's purchase of the Headlease was dependent on its receipt of the purchase price for the Underlease. He continued (at page 20 of the transcript at line 12):

"It was fairly pointed out by Mr Westwood and Mr Arden that this factual question had arisen so late in the day that I should draw no adverse inferences from the fact that neither the liquidators nor the subrogation [claimants] had advanced any positive evidential case on the point. I agree and I have not done so. In any event, by 28th March when [the Company] had acquired the headlease it had already contracted to grant the underlease on 15th March. Since it is clear that [the Company] did in fact use Grantax's money to complete its acquisition of the headlease, it seems to me inescapable that, adopting Lord Oliver's reasoning in Cann at page 92, Grantax had `a specifically enforceable' right to the underlease by then. [The Company] was therefore bound, both in contract and in conscience, to grant the underlease when it acquired the headlease, regardless of whether it was also bound as a matter of necessity.

It follows that, in my judgment, the principle laid down in Cann is applicable to this case. The result is that in the eyes of equity [the Company] never acquired anything more than a nominal reversion which could fall prey to Chase's charge and Grantax takes free of it."

49. The judge went on to observe that that conclusion was sufficient to dispose of paragraph 2 of the originating application (i.e. the Priority Issue), but for completeness he went on to consider the remaining arguments raised by Mr David Hodge QC (for Grantax and the Bank). As mentioned earlier, in the result the judge rejected those arguments, and since there is no Respondent's Notice I need not consider them further.
50. After determining the various issues raised before him, the judge concluded his judgment as follows (at page 34 of the transcript, at line 17):

"The result is therefore that, although Grantax and Bank of Scotland have only succeeded on the applicability of the principle in Abbey National v Cann, both the underlease and therefore the Bank of Scotland charge have priority over the Chase charge, so that Grantax and Bank of Scotland have obtained the result for which they came to court. I reach that conclusion with some relief, since I agree with Mr Hodge's observation that, were the result to have been otherwise, the subrogation [claimants] would have received a windfall at Mr Hodge's clients' expense."

51. I turn next to the arguments which have been addressed to us on behalf of the appellants by Mr Guy Newey QC (who leads Mr Westwood on this appeal, for the Subrogation Claimants) and Mr Peter Arden (for the liquidators) and by Mr David Hodge QC (leading Miss Katherine Holland) for the respondents Grantax and the Bank.
52. Mr Newey submits that the principle in Cann is not applicable in the instant case.
53. Firstly, he submits the Cann principle can only come into play where there is, on the facts, a single indivisible transaction, the various elements of which are "indissolubly bound together". The grant of a Headlease and an Underlease cannot, he submits, form nor do they represent a single indivisible transaction; they represent separate transactions. He points out that Connolly, Security Trust and Cann itself all concerned mortgages which had been entered into for the sole purpose of enabling the purchaser to complete the purchase, and without which the purchases could not have been completed; and that in such circumstances it could readily be seen that the mortgage is an indispensable and indissoluble part of the transaction of purchase. By contrast, he submits, the Underlease was not entered into in order to facilitate the grant of the Headlease. Nor can the payment of the price for the Underlease be properly regarded as a payment made for the purpose of facilitating the purchase of the Headlease.
54. He further submits that, in contrast to cases in which a property is acquired with the aid of a mortgage, in the case of a Headlease followed by an Underlease there is no necessary correlation between the amount paid for the Underlease and the funding required to complete the purchase of the Headlease. He further points out, referring to the option price of £171,300, that in the instant case part of the price for the Headlease was paid by the Company when it entered into the Option Agreement, so that it cannot be said that Grantax funded the whole cost of the purchase of the Headlease.
55. Secondly, and in the alternative, Mr Newey submits that even if the Headlease and the Underlease are in principle capable of forming a single indivisible transaction, they do not do so in the instant case since the evidence does not establish that the Company's acquisition of the Headlease depending on its receipt of the purchase price for the Underlease. He submits that the evidence before the judge did not warrant an inference to that effect, and that it shows no more than that the moneys received from Grantax were in fact used to fund the purchase of the Headlease. He submits that there is no evidence that Chase and its fellow debentureholders would not have been willing to fund the purchase of the Headlease, and good reason to suppose that they would have been willing to do so.
56. Thirdly, Mr Newey submits (again in the alternative, should his primary submission be rejected) that since the Company was entitled to the benefit of the option when it granted the Debenture, the option was subject to the fixed charge created by the Debenture. It must follow, so he submits, that the Headlease, as the product of the option, must equally be so subject. The Cann principle cannot operate, he submits, so as to deprive the debentureholders of their security rights over the Option Agreement, being rights which they took at a time when there was as yet no agreement for the grant of the Underlease. By the time it came to exercise the option the Company was, he submits, already committed to the debentureholders, with the consequence that the Company was never in a position to grant an underlease unfettered by the Debenture.
57. Mr Newey submits that the House of Lords in Cann did not have to consider the question of priority which arises in the instant case, that the Cann principle is an exception to the established rules as to priorities as between equitable interests, and that there is no basis for extending that exception so as to cover the transactions in the instant case.
58. In support of this submission Mr Newey relies, in his written skeleton argument, on the case of Armstrong & Holmes Ltd v Holmes and Anor [1993] 1 WLR 1482, a decision of Mr Paul Baker QC. In that case, it was held that for the purposes of the Land Charges Act 1972 an option to purchase land was a conditional contract and that the exercise of the option did not give rise to a separate estate contract registrable under the Act. At page 1488G of the report Mr Baker QC said this:

"The purpose of the Land Charges Act 1972 is to give notice of contracts creating [equitable] interests in land. The original option created an equitable interest in land; ... I do not see that interest being altered or superseded by some other and different interest on the exercise of the option, although no doubt the respective rights and obligations of the grantor and option-holder change. If we look at the matter more practically, the exercise of the option does not add to the burden on the land. Indeed, it may diminish it, as the option-holder may exercise the option well within the option period but subsequently fail to complete, so that rescission follows. In other words, a later potential purchaser from the grantor is sufficiently warned by the registration of the option and does not require the further registration of the contract of sale envisaged by the option."

59. Mr Peter Arden, for the liquidators, supports and adopts the arguments of the Subrogation Claimants. He submits that Connolly, Security Trust and Piskor were all cases in which the acquisition of the property was "entirely dependent on the provision of funds" (see per Oliver in Cann at page 92F). He submits that in extending the principle of Cann to the instant case the judge was in error. Echoing Mr Newey, Mr Arden submits that the evidence in the instant case does not raise an inference that the Company's acquisition of the Headlease was "entirely dependent" on receipt of moneys from Grantax; and that the purchase of a Headlease and the grant of an Underlease cannot be regarded as forming a single transaction in the same way as a purchase and a mortgage granted to enable the purchase to be completed. The more so, submits Mr Arden, where the Headlease was granted pursuant to an option granted some three years earlier. Mr Arden also adopts Mr Newey's argument that the Debenture created a fixed charge over the benefit of the option, which took priority over Grantax's equitable interest as underlessee. (In this connection, I should record that the question whether Grantax's interest in the Underlease pending registration was an equitable or a legal interest was also raised before the judge, and that the judge concluded, rejecting Mr Hodge's submission to the contrary, that its interest was equitable only.)
60. Mr Arden, in the course of his oral submissions, reminded us that there is no precise match between the terms of the Headlease and those of the Underlease. He also points out that the Development Agreement entered into by the Company with ONE remains binding on the Company, albeit that Grantax has agreed with the Company to perform the Company's obligations thereunder.
61. Mr Hodge submits firstly that the judge's conclusion that the likelihood was that the Company was dependent on receipt of the moneys paid by Grantax in respect of the Underlease to complete its purchase of the Headlease from ONE was fully justified on the evidence. In this connection he relies in particular on Dickinson Dees' letter dated 27 March 2001 (which I quoted earlier).
62. In any event, Mr Hodge submits that the judge's decision that the Cann principle is applicable to the instant case is correct for the reasons he gave. He submits that the reality of the matter is that the grant of the Headlease to the Company was indissolubly bound together with the grant of the Underlease to Grantax, and that in reality the Company acquired nothing more than the nominal three-day reversion expectant on the termination of the Underlease.
63. In support of his submissions Mr Hodge relies on the Australian case of Composite Buyers Ltd v State Bank of New South Wales (1990) 3 ACSR 196 (a decision of Hodgson J in the Equity Division of the Supreme Court of New South Wales). In that case a company granted to the claimant a charge over its assets. The charge was duly registered. Subsequently, the company purchased a property with the aid of a bank mortgage. The advance was treated by the bank as a personal loan to the Company's directors, but part of the advance was in fact used to purchase the property. The bank mortgage was not registered. The court, following Connolly and Security Trust, held that the bank's unregistered mortgage took priority over the claimant's earlier charge, on the footing that the substance of the matter was that the company never had any right to obtain, and never did obtain, anything more than the property subject to the bank's mortgage. At page 200, line 17, Hodgson J said this:

"The question of priority of equitable charges is, in my view, to be considered as far as possible as a matter of substance rather than a matter of technicality. Although [the company's] rights after purchase of the property were more than an equity of redemption, it does seem to me that the substance of the matter is that [the company] never had any right to obtain, and never did obtain anything more than the property subject to the charge to the bank. The money provided by the bank was used to purchase the property, and at no stage did [the company] have a right to the property which was not qualified by obligations in respect of this advance."

64. Mr Hodge submits that the Cann principle is not limited to property acquisition charges. He submits that the underlying consideration in every case is (to use the words of Professor Goode in his work Legal Problems of Credit did and Security, 2nd edn. (1998) at pages 99-100):

"... the inequity that would result in allowing the prior chargee a windfall increase in his security brought about not with the debtor's money or new funds injected by the prior chargee but with financing provided by a later incumbrancer."

65. Further, Mr Hodge submits that in any event the benefit of the option was not subject to the Debenture, given the prohibition on alienation contained in clause 10.1 of the Option Agreement (which I quoted earlier), and given the terms of the Debenture itself which (by the joint operation of clauses 3.1.2 and 3.2.1 effectively excluded the benefit of the option from the first fixed equitable charge created by clause 3.1.2). Clause 3.2.1 of the Debenture is in the following terms:

"The fixed security from time to time constituted by or pursuant to this Deed ... shall not extend to such Obligor Company's interests in any Excluded Assets unless and until the relevant third party consent has been obtained ..."

66. The expression "Excluded Assets" is defined in clause 1.1 of the Debenture as meaning, in relation to an Obligor Company:

"... such Obligor Company's interest in the whole or any part of the Properties and the fixtures or any other interest or right in any Property of such Obligor Company where the creation of any security interest therein is prohibited either absolutely or without the consent of a third party including a lessor."

67. The word "Properties" is defined as meaning:

"... properties referred to in clauses 3.1.1 and 3.1.2."

68. As to clause 10.1 of the Option Agreement, Mr Hodge submits that the word "inalienable" means what it says, and that as against the Company it prevents the creation of any third party right or interest in the benefit of the Option Agreement. On that footing, he submits, it must follow that clause 3.2.1 has the effect of excluding it from the scope of the fixed charge. Even if clause 3.2.1, on its true construction, does not have that effect, Mr Hodge submits that the existence of an equitable charge presupposes that equity would grant relief in aid of it, and that in the instant case such relief would not be available since the grant of any effective relief (e.g. an order for sale) would involve a breach of the contractual obligations of the grantor of the option. As a further alternative, Mr Hodge submits that the Cann principle is applicable to the events of the 15 March 2001, when the option was exercised, and that in reality the obligation to grant the Underlease was an indivisible part of the exercise of the option.
69. In response to these last submissions, which were largely developed by Mr Hodge in the course of his oral argument today, Mr Newey submits firstly that on its true construction clause 10.1 of the Debenture does not prevent the creation of an equitable charge over the option, and that even if it does, the prohibition takes effect only as between for the parties to the Option Agreement. In support of this submission he relies on a passage from the speech of Lord Browne-Wilkinson in Linden Gardens Ltd v Lenesta Sludge Disposals Ltd [1994] 1 AC 85 at 108.
70. The question which arises in the instant case is whether the Cann principle applies, and if so with what consequences.
71. In the instant case the court is faced with a sequence of dealings relating to the Property. At the start of the sequence, the Property is vested in the Agency for a freehold estate free of relevant encumbrances. At the end of the sequence, the freehold title is subject to a registrable Headlease in favour of the Company for a term of 125 years, which is in turn subject to a registrable Underlease in favour of Grantax expiring three days before the expiry of the Headlease. In determining whether the Debenture takes priority over the Underlease, the question (as it seems to me) is whether in reality the Company ever acquired anything more than the three-day reversion on the Underlease.
72. In my judgment, in the light of the decision of the House of Lords in Cann it must now be taken as settled law that, in the context of an issue as to priorities as between equitable interests, the court will have regard to the substance, rather than the form, of the transaction or transactions which give rise to the competing interests; and in particular that conveyancing technicalities must give way to considerations of commercial and practical reality. I agree with the judge that this approach is not limited to cases involving the purchase of a property coupled with the grant of a mortgage or charge to secure repayment of the funds which were required to enable completion of the purchase to take place. In my judgment it falls to be adopted generally, in every case where an issue arises as to priority as between equitable interests. The case of a purchase of property coupled with the grant of a security is likely to be the paradigm case where the Cann principle applies, but, like the judge, I can see no reason in logic or principle why its application should be limited to such cases. That said, the result of applying the Cann principle will inevitably depend on the facts of each particular case.
73. In my judgment the substance and reality of the sequence of dealings in the instant case is that the Company acquired no more, in terms of property interest, than the nominal three-day reversion on the Underlease. It seems to me that it would be wholly unreal, in the context of the Priority Issue, to regard the Company as being the owner of an unencumbered 125-year term on the execution of the Headlease, in circumstances where in commercial terms the exercise of the option and the obligation to grant the Underlease to Grantax were directly connected, where completion of the grant of the Headlease and the grant of the Underlease took place together, and where the purchase price for the Headlease was satisfied out of the moneys paid by Grantax for the Underlease. To adopt the words of Sir Herbert Cozens-Hardy MR in Connolly (which I quoted earlier), we should in my judgment be shutting our eyes to the real transaction if we were to hold that an unencumbered 125-year term was at any point in time vested in the Company so that it became subject to the Debenture.
74. In my judgment, the appellants' proposition that on the execution of the Headlease the Company acquired an unencumbered 125-year term involves a process of dissection of the sequence of events on 28 March 2001 which would represent a triumph of form over substance and would as such be wholly contrary to the Cann principle. Moreover, the result of so doing would, as the judge correctly observed at the conclusion of his judgment, produce a situation in which, in effect, the security of the debentureholders was increased by the amount of the Bank's advance - a result which no one (least of all the Bank) could sensibly have contemplated.
75. Mr Newey and Mr Arden submit that is was not open to the judge in the instant case to infer that the Company was dependent on the moneys received from Grantax to fund its acquisition of the Headlease, in the sense that the Company did not itself have the resources to complete and could not have raised the necessary resources elsewhere. But the ability of the Company to raise the necessary funds from other sources is not, in my judgment, of any materiality. As the transaction was structured, completion was plainly dependent on the receipt of the moneys from Grantax: the letter from Dickinson Dees, dated the day before completion, makes that absolutely clear. Whether or not, had it wished to do so, the Company might have been able to structure the transaction differently by (for example) obtaining other funding for the grant of the Headlease, does not seem to me to affect the position. In the event, the Company chose to fund its acquisition of the Headlease out of the Grantax moneys: that was the reality of the matter. And it is common ground that the Grantax moneys were in fact used for that purpose.
76. I also reject the submission that a Headlease and an Underlease are by their nature incapable of forming a single transaction for the purposes of, and in the context of, the application of the Cann principle. In my judgment, the instant case is an example of a case where they do just that. In the instant case the substance of the transaction into which the Company entered on 28 March 2001 was the simultaneous acquisition of a Headlease and grant of an Underlease. It is only the fact that for conveyancing purpose it was necessary to execute the Headlease before the Underlease which seems to me to provide any basis for the "moment in time" argument. But, for the reasons which I have given, that is a mere conveyancing technicality which cannot affect the substance of the matter.
77. I turn next to the submission that the benefit of the Option Agreement was subject to the Debenture, and that the debentureholders' rights in this respect cannot be overridden by the Company subsequently entering into an obligation to grant an Underlease.
78. In the first place, in my judgment clause 10.1 of the Option Agreement, on its true construction, prevents any third party rights or interests being created in the benefit of the Option Agreement, save with the consent of the Agency and its statutory successors. I accept Mr Hodge's submissions that the word "inalienable" means what it says, and that it is all-embracing. Further, I accept Mr Hodge's submission that clause 3.2.1 of the Debenture has the effect of excluding the Option Agreement from the ambit of the fixed security created by clause 3.1.2, since the Option Agreement falls within the definition of the expression "Excluded Assets" in clause 1.1. On that footing it is unnecessary to consider whether, had the benefit of the Option Agreement not been excluded from the Debenture, a purported charge over it would nevertheless have been unenforceable.
79. In the result, therefore, the reality of the transactions in the instant case, in my judgment, is that the Company never acquired the Headlease free from an obligation to grant the Underlease and accordingly that, as the judge decided, the Underlease takes priority over the Debenture.
80. I would accordingly dismiss this appeal.
81. LORD JUSTICE ALDOUS: I agree.
ORDER: Appeal dismissed; Viasystems Technograph Ltd and Forward Acquisition Ltd, Mr Martin and Mr Brown to pay Grantax's and the Bank's costs of the appeal; permission to appeal to the House of Lords refused. (Order not part of approved judgment)