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HC 268/04

THE HIGH COURT

RECORD NO. 2004 23 Cos.

IN THE MATTER OF SALTHILL PROPERTIES LIMITED (IN RECEIVERSHIP)

AND IN THE MATTER OF THE COMPANIES ACTS, 1963-2001

Judgment of Miss Justice Laffoy delivered on 30^th day of July, 2004.

The Application

This is an application by Ray Jackson (the Receiver), the receiver of Salthill Properties Ltd. (the Company), pursuant to s. 316 of the Companies Act, 1963 for directions. The notice party is Porterridge Trading Ltd. (the Lessee), being the Lessee named in three leases created on 22^nd December, 1999 by the Company. The specific issues on which directions are sought are as follows:

(1) Whether the leases, which in the notice of motion are referred to as "purported" leases, are valid?

(2) Whether the leases contravene the negative pledge clause contained in certain mortgages between the Company and First Active Plc (the Bank)?

(3) Whether the leases were determined by reason of forfeiture notices served by the Company on the Lessees dated 20^th December, 2001?

(4) Whether the leases were surrendered by the Lessee in January, 2002?

(5) Whether the Lessee currently has any valid or enforceable leasehold or other interest in the lands thereby demised?

The Receiver also seeks an order staying plenary proceedings in this court by the Lessee, as plaintiff, against the Company (in receivership), as defendant (Record No. 2003/12328P). In the plenary proceedings the Lessee claims a declaration that the Company (in receivership) has trespassed on, and unlawfully interfered with, its possession of the premises demised by the leases and further claims injunctive relief and damages.

At the hearing of the application the Receiver did not pursue the issue as to the validity of the leases referred to at (1) above.

Title of the Bank/Standing of the Receiver

The Company was incorporated on 14^th January, 1998. It is one of a group of companies, which have been referred to as the Cunningham Group, of which Brian Cunningham and Marian Cunningham are directors, which the Receiver asserts are owned and controlled by Mr. and Mrs. Cunningham.

The Company was the developer of a complex known as The Bailey Point at Salthill in Galway. It financed the development by means of borrowings from the Bank, which were secured on the development site by the following instruments:

(1) a mortgage debenture dated 21^st October, 1999 made between the Company of the one part and the Bank of the other part, which was registered in the Registry of Deeds on 3^rd February, 2000;

(2) a mortgage debenture dated 29^th October, 1999 made between the same parties, which was registered in the Registry of Deeds on 4^th April, 2000;

(3) a mortgage debenture dated 22^nd November, 1999 (incorrectly referred to in the notice of motion as dated 12^th November, 1999) made between the same parties, which was registered in the Registry of Deeds on 1^st March, 2000;

(4) a mortgage debenture dated 20^th December, 2001 made between the same parties, which was registered in the Registry of Deeds on 18^th January, 2002; and

(5) an assignment of receivables dated 9^th October, 2002 made between various companies in the Cunningham Group, including the Company, of the one part and the Bank of the other part.

The mortgage debenture dated 21^st October, 1999 was the first, and patently the primary, security obtained by the Bank from the Company over the development site at Salthill. It was not referred to in the notice of motion and it was not exhibited in the first grounding affidavit of the Receiver. However, it was exhibited in an affidavit sworn by the Receiver on 14^th July, 2004 and filed in court on the second day of the hearing of the application. Insofar as they are relevant for present purposes, the provisions of that mortgage debenture are as follows:

(a) It contained comprehensive charging provisions. First, fifteen parcels of land at Salthill then in the ownership of the Company were specifically mortgaged or charged in favour of the Bank – unregistered freehold in fee, unregistered leasehold by way of sub-demise and registered land by way of registered charge in the prescribed form. Secondly, there were various fixed charges on other assets, which are not relevant for present purposes. Thirdly, there was a first floating charge on all the undertaking, property, rights and assets of the Company whatsoever and wheresoever both present and future.

(b) The so-called negative pledge clause, clause 6, provided that the Company should not, except with the written consent of the Bank, inter alia, create, extend or permit to subsist any encumbrance (defined as including any mortgage, charge, pledge, lien and such like) over the secured assets for any sum ranking in priority to or pari passu with or after the security thereby created, or "part with, sell, transfer, lend, lease or otherwise dispose of" the whole or any part of the secured assets.

(c) A wide range of enforcement provisions was included, including power to appoint a receiver and manager over the secured assets whose powers were defined and included power to take possession of the secured assets, to carry on business, and to deal with the secured assets. It was provided that a receiver so appointed should at all times and for all purposes be the agent of the Company.

The other three mortgage debentures were in the same form as the mortgage debenture dated 21^st October, 1999 and contained provisions similar to the provisions set out above. They specifically mortgaged to the Bank parcels of land at Salthill to which the Company had acquired legal title after 21^st October, 1999. The mortgage debenture dated 29^th October, 1999 mortgaged a parcel of land the subject of a conveyance dated 28^th October, 1999 to the Company to the Bank in fee. The mortgage dated 22^nd November, 1999 mortgaged a property which the Company had acquired by conveyance dated 8^th November, 1999 to the Bank in fee. The mortgage debenture dated 20^th December, 2001 mortgaged to the Bank a property which the Company had acquired by a conveyance and assignment dated 27^th July, 2001, which was described as premises situate at the rear of the Bamba Hotel, Salthill.

The assignment of receivables dated 9^th October, 2002 charged by way of first fixed charge in favour of the Bank the Company's present and future right, title and interest in, inter alia, amounts payable pursuant to or in connection with "any lease" entered into in relation to the Salthill site. In my view, as regards the issues which fall for determination on this application, the security thereby created in favour of the Bank did not materially bear on the relationship of the Bank and the Lessee. The charging clause was a "catch-all" provision, not a provision specifically directed to the leases.

By deed dated 9^th April, 2003 the Bank appointed the Receiver to be Receiver and manager of and over all the undertaking property and assets of the Company referred to in the security documents listed in the schedule thereto, including the four mortgage debentures and the assignment of receivables referred to above.

The Leases

Three leases were created by the Company on 22^nd December, 1999, each of which was made between the Company of the first part, Adaremount Management Company Ltd. of the second part and the Lessee of the third part. Each created a term of 25 years from the date thereof. The leases related to three commercial units, which were in the course of development, and were described as Unit 1 (a restaurant), Unit 2 (a cinema) and Unit 3 (a public house with nightclub), at The Bailey Point. The leases were registered in the Registry of Deeds on 14^th June, 2000.

In his grounding affidavit the Receiver averred that the leases appear to have been created in order to avail of the double rent relief provisions of the Consolidated Taxes Acts. To achieve that objective they required to be at arm's length with an unconnected third party.

The Lessee was incorporated on 2^nd December, 1999. When the leases were created the two issued shares in the Lessee were held by Ita Hynes and Ronan Quinn. Each signed a declaration of trust on that day, 22^nd December, 1999, declaring that the relevant share was held in trust for Mr. Cunningham. On the same day Mr. Cunningham gave Ms. Hynes and Mr. Quinn an indemnity in respect of any liability either might incur while acting as a director of the Lessee and, in the case of Mr. Quinn, as secretary of the Lessee. It is common case that Mr. Cunningham was, and currently is, the beneficial owner of the shares in the Lessee. There is a dispute as to whether Mr. Cunningham controls the Lessee, it being asserted that the Lessee has an independent board of directors.

There is also a dispute as to the reason for the creation of the leases at the time they were made. Ms. Hynes in an affidavit sworn by her has averred that they were granted for the mutual benefit of the Company and the Lessee and that relief against taxation was only one, albeit an important, factor. Ms. Hynes has also averred that it was agreed that no rent would be payable by the Lessee under the leases until the surrounding buildings, car parks, access roads and such like were completed and the demised units were fit for use. On the evidence it appears that on the grant of the leases side letters issued in relation to Unit 1 and Unit 3 providing for a rent, insurance rent and service charge free period, but the two letters are not consistent as to the duration of that period. No side letter in relation to Unit 2 has been adduced in evidence. In the circumstances, I am not satisfied on the evidence that Ms. Hynes' averment is wholly accurate.

The Evidence

At the end of 1999 when the Bank was taking security from the Company on the Salthill site and on the other assets of the Company, BCM Hanby Wallace, Solicitors, acted for both the Company and the Bank, although different solicitors in the firm acted for each client. When the leases were created on 22^nd December, 1999, it would appear that that firm acted for both the Company and the Lessee. Subsequently, it is not clear precisely when but at any rate from around November or December, 2001, Michael Lynn & Co., Solicitors, were retained to act for the Company in connection with the Salthill site and the Company's dealings with the Bank. BCM Hanby Wallace continued to act for the Bank in connection with the granting of, and taking of security for, further loan facilities for the Company in late 2001 and early 2002. Later, in July or August, 2002 Arthur Cox, Solicitors, replaced BCM Hanby Wallace as solicitors for the Bank in connection with loan facilities to the Company and other companies in the Cunningham Group and Michael Lynn & Co. continued to act for the Company. When the Receiver was appointed, as he was entitled to do, he took possession of such books and records of the Company as he was able to locate, including the Company's files held by Michael Lynn & Co.

The Receiver has endeavoured to reconstruct the history of the leases from the records of the Company in his possession and, in particular, from –

(1) correspondence from BCM Hanby Wallace to the Company, to the Company's tax advisers, PricewaterhouseCoopers, and internal memoranda of that firm and

(2) the files of Michael Lynn & Co. in relation to negotiations for the disposal of the units the subject of the three leases to potential purchasers.

The Receiver has exhibited many of the documents from the records and files of the Company in his grounding affidavit. I have come to the conclusion that those documents, on their own, are of no probative value in relation to the intentions of the parties to the leases or status of the leases at any particular time. Apart from that, the documents reveal many inconsistencies.

Apart from three affidavits sworn by him, the other evidence put before the court by the Receiver was as follows:

(a) An affidavit sworn by Barry O'Brien, Commercial Development Manager of the Bank, in which it was averred that the Bank was not aware until in or around August, 2000 of the creation of the leases and that it consented retrospectively to the creation of the leases on condition that it obtained security from the Lessee over the leases.

(b) An affidavit sworn by Ciara Gunning, a solicitor in BCM Hanby Wallace, who acted for the Bank in connection with the taking of security over the properties and assets of the Company and other companies in the Cunningham Group on foot of a facility letter of 6^th December, 2001 and who averred as to her dealings with the Company's then solicitors, Michael Lynn & Co. Ms. Gunning averred, in particular, that she was informed at a meeting held in mid-January, 2002 to complete all matters under the facility letter by the Company's then solicitors, Michael Lynn & Co., that forfeiture notices had been signed by Mr. Cunningham on behalf of the Company and served on the Lessee and that the leases had thereby been forfeited. She exhibited a copy of one of the forfeiture notices which had been furnished to her. That document, which was dated 20^th December, 2001, was headed in the name of the Company and signed on behalf of the Company by Mr. Cunningham. It was addressed to the Lessee. It referred to the lease of Unit 2. The text of the notice was as follows:

"We hereby give you notice that the above lease is hereby forfeited by us, the Landlord with immediate effect as a result of for breach of your covenant to pay the rent"

The averments contained in Miss Gunning's affidavit are hearsay as to what happened between the Company, qua lessor, and the Lessee. Insofar as they are proffered as proof that the leases were forfeited, they are inconsistent with other evidence before the court. In the affidavit sworn by her, Ms. Hynes exhibited a letter of 6^th March, 2002 from BCM Hanby Wallace, acting for the Bank, to Michael Lynn & Co., as solicitors for the Company, stating that "the letter of forfeiture" furnished was not in the required form and setting out certain further requirements.

(c) Affidavits sworn by Ultan Shannon and Orla O'Connor, solicitors in Arthur Cox, who acted for the Bank in connection with getting security from the Company and other companies in the Cunningham Group on foot of a facility letter issued by the Bank to the Company on 16^th August, 2002. What emerges from Mr. Shannon's affidavit is that he was told by Michael Lynn, who was then acting for the Company, that the Lessee was not a Company within the Cunningham Group. It is common case that such representation was, and continues to be, correct: Mr. Cunningham in his personal capacity is the beneficial owner of the shares in the Lessee. Mr. Shannon also averred that he was told by Mr. Lynn that the Lessee was only set up for taking over leases from the Company. While this is hearsay, it is not inconsistent with admissible evidence before the court and, in particular, the evidence contained in the affidavit of Ms. Hynes. Mr. Shannon also averred that he was not told of the existence of any such leases by Mr. Lynn. In her affidavit Miss O'Connor exhibited a letter sent by facsimile transmission to Michael Lynn on 10^th September, 2002 requesting confirmation from the directors of the Lessee that it did not trade, that it had not incurred any liability and that it held no assets. She averred that, despite a reminder dated 12^th September, 2002, she did not receive any written response from Michael Lynn & Co.

Two affidavits sworn by Ms. Hynes have been filed on behalf of the Lessee. They were filed without prejudice to the contention of the Lessee that the Receiver lacks standing to bring this application, and that it is improperly brought. The thrust of Ms. Hynes' affidavit is that the leases have not been effectively forfeited, that they have not been surrendered and that they still subsist.

On the filing of the receiver's third affidavit sworn on 14^th July, 2004 and filed in court, Counsel for the Lessee was given leave to cross-examine the Receiver on it. Moreover, the Lessee was given leave to file a replying affidavit. Because Ms. Hynes was abroad, it was not feasible to obtain an affidavit from her. However, for present purposes, I propose to act on Ms. Hynes' instructions to the solicitors on record for the Lessee on this application that she had no knowledge of the mortgage debenture of 21^st October, 1999 until after the commencement of the hearing of this application.

The Lessee's Response

In broad outline, the submissions made on behalf of the Lessee on the issues raised on this application were as follows:

(1) that the issues between the Company (in receivership) and the Lessee as to the leases should be dealt with in the plenary proceedings;

(2) that an application under s. 316 is inappropriate for the resolution of contested facts and that the determination of this application on affidavit would be prejudicial to the Lessee;

(3) that, in any event, on careful consideration of the facts adduced, the Receiver is not entitled to any of the relief claimed, namely, a determination that –

(a) the negative pledge clause in the mortgage debentures was contravened; or

(b) that the leases were determined by forfeiture; or

(c) that the leases were surrendered; and

(4) that the Receiver has failed in an essential proof, namely, demonstrating that the reversions on the leases are still vested in the Company (in receivership).

It was submitted on behalf of the Lessee that the application should be dismissed or, alternatively, the issue should be submitted for plenary hearing.

I propose dealing with each of the foregoing submissions, but not necessarily, in the order set out above.

Plenary Proceedings/Application under section 316

Insofar as it is relevant for present purposes, s. 316(1) of the Companies Act, 1963, as inserted by the Companies Act, 1990, provides as follows:

"Where a Receiver of the property of a company is appointed under the powers contained in any instrument, any of the following persons may apply to the court for directions in relation to any matter in connection with the performance or otherwise by the Receiver of his functions, that is to say –

(a)(i) the Receiver . . .

and on any such application, the court may give such directions, or make such order declaring the rights of persons before the court or otherwise, as the court thinks just."

Order 75, rule 5 of the Rules of the Superior Courts, 1986 provides that an application under s. 316(1) shall be brought by originating notice of motion. Rule 21 of the same Order provides that every such application shall be grounded upon the affidavit of the party making the application and shall be heard and determined on affidavit unless otherwise as the court authorises.

It was submitted on behalf of the Lessee that, although drafted in wide terms, s. 316(1) was not intended to furnish a Receiver with a means of circumventing the usual processes of the court for resolving matters in controversy. I do not accept that proposition as a correct statement of the law. Subject to the limitations inherent in s. 316, it is quite clear that the objective of the legislature in enacting s. 316(1) was that a Receiver should not have to embark on a plenary action, or abide the taking of a plenary action against a company in receivership, to resolve matters covered by the provision. The limitations inherent in the provision are that the directions sought must relate to the performance or otherwise by the Receiver of his functions and, of course, it is presumed that proceedings under it are intended to be conducted in accordance with the principles of constitutional justice. I think it is of significance that the provision expressly empowers the court to determine issues as to the rights of persons before it, subject to the overriding imperative that what the court does must be just. While one is wary of making any broad generalisation as to the operation of a provision such as s. 316(1) in practice, I find it difficult to envisage a situation in which it would be just to make an order declaring rights on the basis of affidavit evidence where the affidavits have thrown up a dispute as to a material fact or material facts.

In support of the Lessee's contention that the issues between the parties should be resolved in the plenary proceedings, the decision of this court (Costello J.) delivered on 21^st January, 1994 in O'Malley v. Irish Nationwide Building Society was cited as being illustrative of the wide principle that the courts will not readily permit actions to be maintained separately which centre on the same issues and parties. While it is probable that, when the issues are joined in the plenary proceedings, there will be a certain similitude between those issues and the issues which arise on this application, in my view, that is not a basis for the court refusing to exercise its jurisdiction under s. 316(1).

Prima facie, the Receiver was entitled to bring this application. Whether it would be just for the court to declare rights as between the Company (in receivership) and the Lessee on this application on the basis of the current state of the evidence remains to be considered having regard to the admissible evidence considered in the context of the issues which arise.

Absence of an essential proof

The submission that on this application under s. 316 it is an essential proof that the Receiver demonstrates that the reversions on the leases remain invested in the Company (in receivership) is misconceived. The Receiver's standing derives from the instruments under which he was appointed, namely, the mortgage debentures and the assignment of receivables referred to earlier. While it is true that he acts as agent of the Company, his powers, including his power to take possession of the secured assets, derive from the mortgage debentures. Having regard to the nature of the interests in the various parcels of property specifically mortgaged or charged by the mortgage debentures which were acquired by or created in favour of the Bank (whether a mortgage in fee or by sub-demise or a charge on registered land), the Company could not have disposed of the reversions free from the mortgage debentures without procuring either a separate deed of release from the Bank, or the joinder of the Bank in the relevant transaction, or a requisition for discharge in the prescribed form in the case of registered land.

On the first day of the hearing of the application counsel for the Lessee raised a question as to identifying Units 1, 2 and 3 as demised by the leases as the property the subject of the mortgage debentures on which the Receiver is relying. There was obviously a difficulty at that juncture in such identification because the primary security, the mortgage debenture of 21^st October, 1999, was not referred to in the notice of motion or exhibited in the grounding affidavit. The Receiver was given liberty to file a supplemental affidavit and, as I have already stated, he did so on the following day. In the supplemental affidavit he also exhibited a letter from Hugh Wallace, of the firm of Douglas Wallace, Architects, who have been retained by the Receiver. Mr. Wallace confirmed that the vast majority (circa 98%) of the floor area of the commercial units in The Bailey Point (consisting of cinema, pub and restaurant) had been constructed on property which was mortgaged to the Bank under the mortgage debenture dated 21^st October, 1999. Mr. Wallace estimated that, perhaps, only 2% of the overall floor area of the units in question was constructed on the property constituting a field at the rear of the former Bamba Hotel, which was the subject of the mortgage debenture dated 20^thDecember, 2001.

What emerges from the evidence is that, when the leases were created, the units thereby demised were already the subject of the mortgage debentures which had been created by the Company in favour of the Bank in October and November, 1999. The small portion of the units which was the subject of the mortgage debenture dated 20^th December, 2001 could not have been comprised in the leases because it is clear from that mortgage debenture that the Company only acquired title to the land at the rear of the former Bamba Hotel on 27^th July, 2001.

Issues

Given that the Receiver did not pursue the issue of the validity of the leases, it seems to me that, on the assumption that, as between the Company and the Lessee, the leases were validly created, the issues which fall for determination are the following:

(1) Whether, as between the Company and the Lessee, the leases have terminated by –

(a) forfeiture, or

(b) surrender.

(2) What impact the existence of the mortgage debentures had on the leases.

Forfeiture/Surrender

I am not satisfied that it has been established by admissible evidence that the leases have been effectively forfeited by the Company for non-payment of rent or breach of covenant or condition. Such evidence as there is, strongly suggests that they have not been.

Similarly, I am not satisfied that the evidence established that the leases have been surrendered by the Lessee to the Company. Surrender could have occurred by deed of surrender or by act or operation of law. It is not suggested that a deed of surrender was ever executed. There is no admissible evidence that the Lessee delivered possession of the demised units to the Company which accepted possession. On the contrary, Ms. Hynes has averred that that did not happen.

Impact of the existence of the mortgage debentures on the leases

In seeking the directions of the court the Receiver focused on the effect of the so called negative pledge clauses in the mortgage debentures and the fact that the Company did not obtain the prior consent of the Bank to the creation of the leases. It was contended on his behalf that the fact that the Company did not fulfil the condition that it would give the Bank security over the leasehold interests, which condition the Bank attached to the grant of retrospective consent, resulted in there being no consent to the creation of the leases.

Both counsel for the Receiver and counsel for the Lessee referred to Gough on "Company Charges" (2^nd Edition, 1996) in making submissions in relation to the effect of a clause such as clause 6 in the mortgage debentures, which, as in the case of the Bank's security documents, is sometimes dubbed a "negative pledge" clause and is alternatively referred to as a "restrictive" clause or a "prohibition" clause. There is a very clear exposition of the legal principles applicable in England to such clauses in the following passage from Gough at p. 225:

"The purpose of the draftsman in inserting a restrictive clause was to preserve priority for a prior floating charge against subsequent adverse interests, whether in the nature of a subsequent specific charge or some other form of dealing. The restrictive clause was only of limited effectiveness. A subsequent adverse interest taken in breach of the restrictive clause took subject to the floating charge only if the holder of the latter interest had actual notice of the restrictive clause. The subsequent adverse party took subsequent to the prior floating charge only if he had actual notice of the terms or 'contents' of the floating charge prohibiting or restricting the chargor under its express or implied licence from creating the relevant interest of the kind taken by the subsequent party. This result arose from three separate, but linked, propositions developed in the cases:

(1) A subsequent specific interest takes subject to a prior floating charge containing a relevant restrictive clause in the floating charge contract against the creation of that interest by the chargor only if the subsequent party has actual notice of the restrictive clause at the time he takes his interest.

(2) A party taking a subsequent specific interest with actual notice of the existence of a prior floating charge, but without actual notice of the contents or terms of a relevant restrictive clause, contained within that floating charge, does not have constructive notice of the restrictive clause.

(3) Since the introduction of public charges registration into the companies legislation in England in 1900, a subsequent party is fixed with constructive notice of the existence of a registered floating charge arising out of the fact of its registration, but not the contents of the floating charge containing the relevant restrictive clause.

The combined effect of these propositions is that a subsequent party takes subject to a registered floating charge containing a relevant restrictive clause only if he has actual notice of the restrictive clause contained in the contents of the floating charge. Actual notice of the existence of the prior floating charge or, since 1900, constructive notice of its existence by reason of registration is insufficient to cause the subsequent party to take his specific interest subject to the prior floating charge. The rule requiring actual notice of the restrictive clause to bind a subsequent party applies in the same manner whether the subsequent specific interest is legal or equitable. The rule also operates to same effect in relation to a restrictive clause against a subsequent specific charge as in relation to a restrictive clause against other subsequent dealings, such as a sale or other absolute dispositions under sale and lease-back transactions or factoring arrangements. Despite the priority disadvantage of the requirement for actual notice of the restrictive clause, the burden of proof operates in favour of the prior floating chargee. A subsequent adverse third party asserting priority under a specific interest must positively discharge the burden of proof of his entitlement and in particular that he took without actual notice of the restriction."

That the principles set out in the foregoing passage reflect the current state of Irish law was not in controversy. Both counsel for the Receiver and counsel for the Lessee cited the decision of the Supreme Court in Welch v. Bowmaker (Ir.) Ltd. [1980] I.R. 251 as a definitive statement of the law on the issue of the effect of a restrictive clause in a floating charge on a subsequent charge. In fact, there are copious references to that decision in Gough and, indeed, in other English textbooks dealing with company charges. The contest in Welch v. Bowmaker was between a debenture which a company, of which Mr. Welch, the plaintiff, was liquidator, had given to Bowmaker and a subsequent equitable mortgage by deposit of title deeds it had given to Bank of Ireland. One issue which arose in the case was the nature of the security held by Bowmaker. As a matter of construction of the debenture, it was held that Bowmaker only had a floating charge. Counsel for Bowmaker argued that the Bank should be fixed with constructive notice of a clause in the debenture which precluded the creation of a mortgage in priority to the debenture. In his judgment, with which Parke J. agreed, Henchy J. stated at p. 256:

"Since such a prohibition is more or less common form in modern debentures, there would be much to be said for applying the doctrine of constructive notice to such a situation were it not that it is settled law that there is no duty on the Bank in a situation such as this to seek out the precise terms of the debenture: In re Standard Rotary Machine Company; Wilson v. Kelland and G & T Earle Ltd. v. Hensworth R.D.C. Actual or express notice of the prohibition must be shown before the subsequent mortgagee can be said to be deprived of priority."

Henchy J. went on to say that, if it was proposed to extend the doctrine of constructive notice to the situation in issue, the necessary change in the law would need to be made prospectively and that it would more properly be made by statute.

In the instant case, if it were the position that the Bank was constrained to rely on the floating charges contained in the mortgage debentures to make title and the Receiver's standing and powers were dependent on the crystallisation of the floating charge on his appointment, the legal principles applicable to the determination of priority between the Bank's debentures and a subsequent charge or other disposition would be that the owner of the subsequent charge or disposition would only be postponed to the Bank if such owner had actual notice of the contents of clause 6. Registration of particulars of the mortgage debentures in the Companies Office pursuant to s. 99 of the Companies Act, 1963, even, it would seem, registration noting the contents of clause 6, would not constitute notice on the part of the subsequent party of such clause. Those principles would apply whether the subsequent party had a legal or equitable interest and whether the interest in question was by way of charge or some other form of disposition such as a conveyance or a lease. The onus would be on the subsequent party to prove that he did not have actual notice.

In such eventuality, which is the assumption underlying this application, the issue whether the Leases contravened clause 6 and the determination of the priority of the mortgage debentures as against the subsequent leases created by the Company, in the light of the history of the transactions, raises the following questions:

(1) Were the leases granted without the written consent of the Bank?

(2) If they were, was the breach of clause 6 negatived by a subsequent retrospective consent granted by the Bank?

(3) If it was not, has the Lessee discharged the onus of establishing that it did not have actual notice of clause 6?

I will consider each of the foregoing questions in turn.

Written consent of Bank?

It is not in dispute that the leases were granted without the written consent of the Bank. When the Bank first became aware that the Lessee had been involved in the planning process in relation to The Bailey Point at the end of August, 2000, in a letter of 29^th August, 2000 written by Mr. O'Brien, it sought an explanation from Mr. Quinn, the director and trustee shareholder of the Lessee, in his capacity as financial controller of the Cunningham Group. Mr. Quinn's response was that the Lessee had applied for planning permission as it held the leasehold interest in the cinema and other commercial units. Subsequently, by letter dated 7^th September, 2000, which is exhibited in the affidavit of Ms. Hynes, the Company's then solicitor, Michael D. Walsh of BCM Hanby Wallace, wrote to the Bank's then solicitor, Paul McGennis of BCM Hanby Wallace, expressing the Company's regrets for not having sought the Bank's consent to the creation of the leases in advance and seeking consent retrospective to 22^nd December, 1999 in respect of each unit.

On the basis of evidence adduced by the Lessee, I am satisfied that the creation of the leases contravened clause 6 in that they were granted without the written consent of the Bank.

Retrospective Consent

By letter dated 12^th September, 2000 to the Bank's then solicitor, Mr. McGennis, the Bank confirmed instructions to proceed to take up a guarantee by the Lessee of the Company's indebtedness supported by legal mortgages over each of the three leases held by the Lessee. The Bank's consent to the creation of the three leases with retrospective effect to 22^nd December, 1999 was confirmed. It was submitted on behalf of the Lessee that, despite the averment in Mr. O'Brien's affidavit that the retrospective consent was on condition that the Bank obtain security from the Lessee, the retrospective consent contained in the letter of 12^th September, 2000 was unconditional. It was also submitted that, in order to decide that the retrospective consent was conditional, the court would have to make a finding of law that the condition was valid and legally enforceable, for example, by finding that its fulfilment was intra vires the Lessee.

As the last item in a stream of correspondence, which started with the letter of 29^th August, 2000 from Mr. O'Brien to Mr. Quinn, I have no doubt that the effect of the letter of 12^th September, 2000 was to evidence the Bank's willingness to give retrospective consent on condition that it got security from the Lessee over the leases. In other words, the actual correspondence which passed between the relevant parties at the time bears out the averment of Mr. O'Brien in his affidavit. It is not in dispute that the condition was not fulfilled. Therefore, there was no retrospective consent.

It is not for the court to evaluate if, or how, the Company and the Lessee might have procured compliance with the condition imposed by the Bank. In a contest for priority between the Bank's floating charge and the subsequent leases, the burden of proof as to the existence of such consent was on the Lessee asserting priority. Moreover, it was for the Company, or the Lessee through the Company, to pursue the procurement of retrospective consent, and not for the Bank to pursue the granting of it.

Actual Notice

The rationale of the "actual notice" rule according to Gough is that it is based "on the principle of good conscience". This is explained in the following passage at p. 228:

"Although creating no more than a negative contractual right, a restrictive clause can affect the quality of, and therefore bind, a subsequent proprietary interest through actual notice of the restriction. In equity it would be unconscionable to permit a subsequent third party to take his interest free of the restrictive right in spite of his actual knowledge that to do so would constitute a breach of the floating charge contract by the chargor."

The issue here is whether the Lessee has discharged the onus of proving that it did not have actual notice of clause 6 at the time the leases were created.

It was submitted that the Company and the Lessee are two separate legal entities. That is undoubtedly the case. It was also submitted that the evidence did not establish that Mr. Cunningham controlled the Company and that the control of the Lessee, through its board of directors, was independent of Mr. Cunningham. In my view, those arguments are specious in the context of the reality of the transactions between the Company and the Lessee at the end of December, 1999 judged by documents which are properly before the court. Mr. Cunningham, as a director of the Company, witnessed the execution of the mortgage debentures, each of which contained clause 6. In the absence of evidence to the contrary, it must be assumed that he was aware of the contents of those instruments. On the day the leases were executed he obtained from the two shareholders of the Lessee, Ms. Hynes and Mr. Quinn, declarations that proved that between them they held the entire share capital of the Lessee in trust for Mr. Cunningham. In return for each trustee shareholder becoming a director of the Company, on the same day Mr. Cunningham gave each full indemnity in respect of all costs, expenses and such like, including consequential fees, expenditure and VAT, in respect of or arising out of that office.

In my view, the core issue is whether the beneficial owner of the entire share capital of the Lessee, who became the beneficial owner of the leasehold interests through the medium of the Lessee, had actual notice of clause 6. I am satisfied that the evidence on the material facts, which I have just outlined and is not in controversy, clearly shows that he did. This conclusion does not impute any propensity to have anything other than proper regard for company law and regulation to the directors of the Lessee. It merely reflects the reality of the situation which prevailed.

Accordingly, I am satisfied that the Lessee has not discharged the onus of establishing that it did not have actual notice of clause 6.

Directions

On the questions raised on the notice of motion the following directions are given:

(1) The leases did contravene clause 6 contained in each of the prior mortgage debentures.

(2) It has not been established that the leases were determined by reason of forfeiture.

(3) It has not been established that the leases were surrendered by the Lessee to the Company.

(4) No determination has been made as to the validity or enforceability of the leasehold interests in Units 1, 2 and 3 as between the Company and the Lessee.

The conclusions I have reached on the analysis of the impact of clause 6 on the subsequent leases and the direction set out at (1) above are predicated on the Bank being constrained to rely on the floating charge and on the Receiver's standing and powers being dependent on the crystallisation of the floating charge. As the summary of the contents of the relevant documents set out earlier clearly indicates, the Bank is not so constrained. The Bank holds mortgages in fee or by sub-demise, or charges over the Company's interests in so much of Units 1, 2 and 3 as is comprised in the leases. The Bank's interests were created by deeds which predate, and were registered in the Registry of Deeds before, the leases.

The application for an order staying the plenary proceedings pending the determination of this application is now redundant.