Scottish Court of Session Decisions

Petitioners: Webster; Davidson Chalmers

Defender: Dalgleish; Brodies LLP

8 December 2009

[1] The Natural House Company Limited ("NH") was incorporated under a different name in 1993. Its principal commercial activity was land development. The first petitioner ("Mr Salvesen") was the principal shareholder and managing director of NH. He and his wife ("Mrs Salvesen") are the second petitioners.

[2] NH purchased Woodworthy Farm, Waterrow, Taunton ("the farm") for development in 2005. Mr and Mrs Salvesen funded the purchase as follows: Mr Salvesen advanced £303,140 and Mr and Mrs Salvesen together advanced a further £200,000. On 1 December 2005 NH granted legal charges over the farm as security for those advances. The charges were registered in the Land Register on 20 December 2005.

[3] As a result of an oversight, which I describe below, no one registered the charges in the companies register within 21 days of their creation as Section 410 of the Companies Act 1985 ("the 1985 Act") requires. As a consequence, the charges are void against a liquidator, administrator or any creditor of NH. This is an application under Section 420 of the 1985 Act to extend the time within which the charges may be registered in the companies register.

Background

[4] In 2003 NH had granted a bond and floating charge over its assets in favour of The Royal Bank of Scotland plc ("RBS"). On about 31 March 2006 Merrill Lynch International Bank Limited ("Merrill Lynch") advanced £300,000 to NH which granted a legal charge over the farm. To regulate the ranking of the various securities, NH, Mr and Mrs Salvesen, RBS and Merrill Lynch entered into a ranking agreement on 31 March 2006. In that agreement Merrill Lynch ranked first, Mr and Mrs Salvesen second and RBS third. When negotiating the agreement no one noticed that the charges in favour of Mr and Mrs Salvesen had not been registered with the registrar of companies.

[5] As a result of the financial crisis and credit crunch in 2008 NH suffered from cash flow difficulties and the directors of NH, including Mr Salvesen, decided on 25 September 2008 to place the company in administration. On 13 October 2008 David Menzies and Keith Anderson of Baker Tilley Restructuring and Recovery LLP were appointed administrators of NH. The administrators' estimated statement of affairs as at 13 October 2008 showed a deficiency to creditors of £1,520,907 and a total deficiency of £2,815,944.

The failure to register

[6] Section 420 of the 1985 Act provides:

"The court, on being satisfied that the omission to register a charge within the time required by this Act or that the omission or mis-statement of any particular in respect of any such charge or in a memorandum of satisfaction was accidental, or due to inadvertence or to some other sufficient cause, or is not of a nature to prejudice the position of creditors or shareholders of the company, or that it is on other grounds just and equitable to grant relief, may, on the application of the company or any person interested, and on such terms and conditions as seem to the court just and expedient, order that the time for registration shall be extended or (as the case may be) that the omission or mis-statement shall be rectified."

[7] Mr Webster on behalf of the petitioners submitted that the failure to register was accidental or due to inadvertence. Mr Dalgleish on behalf of the administrators did not dispute that assertion. The petitioners' agents lodged affidavits by Mr and Mrs Salvesen, Mr Eric Cowsill, who was a solicitor who acted for NH, and Mr Anthony Goddard, who was a qualified solicitor and acted as a director of NH. The affidavits reveal that Mrs Salvesen had no involvement in NH and had agreed, at Mr Salvesen's request, to provide jointly with him the loan of £200,000 to NH. She was not involved in the negotiation of the loans or of the ranking agreement but signed the documents which he asked her to sign. Mr Salvesen made the decision to purchase the farm and asked his co-director, Anthony Goddard, to manage the legal requirements.

[8] Mr Salvesen stated in his affidavit that he had left it to Mr Goddard and the company's solicitor, Mr Cowsill, to register the charges in his favour and in favour of himself and his wife. Mr Goddard explained that he arranged for Mr Cowsill to carry out the conveyancing of the farm to the company but had not instructed him to act for Mr and Mrs Salvesen. The professionals had to complete the transaction urgently. Mr Cowsill prepared charges in favour of Mr and Mrs Salvesen and his assistant registered the transfer and the charges in the Land Register. On 28 November 2005 Mr Cowsill e-mailed his assistant, pointing out that the charges would require to be registered in Companies House. He copied that e-mail to Mr Salvesen, Mr Goddard, and Mr Oliphant, NH's company secretary, on 29 November 2005. He assumed that either the company officials would register the charge or they would specifically instruct him to do so. On 8 December 2005 Mr Goddard e-mailed Mr Salvesen in response to a memorandum which he had sent. In that e-mail he discussed various sites which NH were developing. In relation to the Woodworthy farm transaction Mr Goddard explained that the mortgages to protect Mr and Mrs Salvesen's interests had been signed and lodged for registration. In so stating, he must have meant to refer to their registration in the Land Register.

Discussion

[9] Mr Webster submitted that it was just and equitable that the charges in favour of the petitioners should be registered late. The petitioners were not to blame for the failure to register and late registration would merely give effect to the contract with RBS in the ranking agreement that the petitioners' charges should rank before their bond and floating charge. If the court did not allow late registration, RBS would obtain a windfall at the petitioners' expense. The court had in the past used its power to allow late registration to give effect to agreements between creditors: In re I. C. Johnson & Co Ltd [1902] 2 Ch. 101. He recognised that there was a possibility that the ordinary creditors of NH would lose out if the charges were registered late as the prescribed part for unsecured creditors under section 176A of the Insolvency Act 1986 might be reduced. The petitioners therefore undertook to pay the administrators such sum as equalled the amount by which the prescribed part would be reduced by the late registration of their charges.

[10] The administrators presented an estimated statement of affairs as at 26 October 2009 which showed that, if the petitioners' charges were void, £232,978 would be available to the floating charge holder, of which £49,596 would be attributed to the prescribed part. If the petitioners' charges were valid, £96,216 would go to the petitioners, the amount available to the floating charge holder would fall to £136,762, and of that £30,352 would be the prescribed part. But those figures were only of limited value because the administrators had not deducted the estimated costs of the administration and I was informed that those costs to date amounted to about £97,000. The amount available to the floating charge holder and the prescribed part for the unsecured creditors would be significantly smaller than the estimated statement disclosed but there would be a differential between what unsecured creditors would recover if the charges were void and what they would recover if the charges were retrospectively registered.

[11] I am not persuaded that I should exercise my discretion to allow the late registration of the charges. I recognise (a) that the effect of the failure to register the petitioners' charges has given RBS a windfall of about £70,000 after the administrators' expenses and (b) that it is not clear whether the petitioners have any remedy against the professionals who acted in the transaction. Nonetheless I am satisfied that there are not such exceptional circumstances as to justify late registration when NH, by going into administration, has commenced formal insolvency proceedings.

[12] The onset of formal insolvency, as a general rule, fixes the position of creditors, who are ranked on the insolvent estate in accordance with their strict legal rights. From then on, the insolvency practitioner holds the company's assets for the benefit of the creditors in accordance with the rights which the general law gives them as to ranking. For the court thereafter to interfere with that ranking would be a serious step. I do not exclude the possibility in exceptional circumstances of the court allowing the late registration of a charge after formal insolvency had commenced, for example where a creditor had been the victim of fraud and especially if the perpetrator stood to gain in the insolvency through the invalidity of the charge. But in the absence of exceptional circumstances, I do not consider that it is just and equitable to interfere with the statutory ranking of creditors on insolvency.

[13] Persons with contractual claims against an insolvent debtor are unable to enforce their contractual rights. They have to submit claims and suffer disappointment when they receive at most a dividend from the insolvent estate. In most circumstances, real rights govern and it is persons with real rights in security who can take the secured assets out of, or obtain a prior ranking in, the insolvency. In this case the bond and floating charge in favour of RBS attached NH's property on the appointment of the administrators. RBS therefore have a real right in security which they obtained when the petitioners' charges were void against them. While I am sympathetic to the petitioners' plight, it seems to me that insolvency inevitably involves unfairness to unsecured creditors. I can see that justice and equity might point to the preservation of a contractual right under the ranking agreement against RBS and the company if NH were solvent and a going concern. But that consideration has much less force in the context of an insolvency other than in exceptional circumstances. Insolvency destroys contractual expectations. In most circumstances it will not be just and equitable for the court to exercise its powers to fulfil some expectations while leaving others disappointed.

[14] The administrators receive their powers from statute and distribute the company's estate in accordance with the legal rights of its creditors. The prescribed part is the proportion of the sums due to the floating charge holder: see section 176A of the Insolvency Act 1986 and the Insolvency Act (Prescribed Part) Order 2003 (SI 2003/2097). What the petitioners seek is that the court impose a condition on extending the time for the registration of the charge which orders the administrators to distribute to the unsecured creditors of NH a sum which is in part the prescribed part and in part a sum which the petitioners will provide to prevent any such creditors from loss arising as a result of the validation of their charges. While I do not say that circumstances can never arise in which the court would interfere in this way to order an insolvency practitioner to depart from an allocation of an insolvent company's funds in accordance with creditors' rights under statute and the common law, it would require exceptional circumstances for it to do so.

[15] There are no such exceptional circumstances in this case. First, it is principally the duty of the company to register the charge: 1985 Act, section 415. Frequently the creditor registers the charge as section 415(1) allows any interested person to do so. Mr Salvesen was managing director of the company as well as its creditor. In either capacity he could have instructed the registration of the charges. Secondly, as Mr Dalgleish submitted, the application was initiated more than three years after the charge should have been registered and came to a hearing one year after NH went into administration. While the petitioners are not to blame for the passage of time before the company went into administration, the mere passage of time, without blame, is a relevant factor. Thirdly, if the court did not restrict the circumstances in which applications could be made under section 420 of the 1985 Act after formal insolvency had commenced, such applications might cause significant delay and uncertainty when an insolvency practitioner sought to realise the assets of the insolvent company. It is generally in the interest of an insolvent's creditors that there should be legal certainty and speed in the realisation of the insolvent's property. In this case delay in the disposal of the farm could prejudice creditors if a planning permission were allowed to expire.

[16] I consider that the view which I have taken in this case is consistent with the case law to which counsel referred.

[17] First, section 420 (like the equivalent English provision which is section 404) provides five separate grounds on which the court can extend the time for registration of a charge. They are (1) where the omission was accidental, (2) where it was due to inadvertence, (3) where it was due to some other sufficient cause, (4) where the omission was not of a nature to prejudice the position of creditors or shareholders, or (5) where on other grounds it is just and equitable to grant relief: In re Ashpurton Estates Ltd [1983] 1 Ch 110, Lord Brightman at p.119F-G. The section therefore gives the court a wide discretion and the underlying guide to the exercise of that discretion is whether it would be just and equitable to grant relief: In re Braemar Investments Ltd [1989] 1 Ch 54, Hoffmann J at p.61B.

[18] Secondly, the section empowers the court in the exercise of that discretion to specify the terms and conditions upon which the rectification shall take effect. Thus it is competent for the court in an appropriate case to impose conditions and the petitioners' request that the court should put in place measures to protect unsecured creditors is not beyond the court's powers.

[19] Thirdly, it follows from the wide discretion which the section confers that each case must depend upon its own circumstances and prior decisions in different circumstances cannot determine the outcome of a particular case: Prior, Petitioner 1989 SLT 840, Lord Clyde at p. 842E & I.

[20] Fourthly, nonetheless, it has for many years been an established and almost invariable practice of the English courts when making an order under section 404 or its statutory predecessors to include a proviso that the order is to be without prejudice to the rights of parties acquired prior to the time when the charge shall be actually registered. This practice started with the order of Buckley J in In re Joplin Brewery Co Ltd [1902] 1 Ch 79. The reason for the proviso was that the creditors did not have notice of the application which was not advertised. The proviso does not protect the unsecured creditors of a company which is a going concern but safeguards only those who have acquired rights in relation to the property to be charged. On formal insolvency, such as a winding up, the proviso would protect unsecured creditors, as the liquidator controls the company's assets for the benefit of all creditors according to their proper ranking. See In re Ashpurton Estates Ltd, Lord Brightman at pp.122H-123G. Accordingly, where the court includes such a proviso in its order, there is no benefit to the applicant in an order extending the period for registration after a winding up has commenced. See also In re S Abrahams & Sons [1902] 1 Ch 695.

[21] It is correct, as Mr Webster submitted, that in In re I. C. Johnson & Co Ltd [1902] 2 Ch 101, the court interfered with vested rights by extending the time for registration of debentures. In that case the Court of Appeal removed the In re Joplin Brewery proviso from the order, which Kekewich J had granted, to allow the debentures to rank pari passu with other debentures in a series of debentures in accordance with the terms on which the whole series had been issued. But in that case there was no question of the company's facing imminent insolvency and the court was merely giving effect to the debenture holders' contractual rights. No issue arose in relation to the other creditors and the order which the Court of Appeal pronounced provided that it was without prejudice to the rights of any party (other than the holders of other debentures in the series) against the holders of the debentures to be recorded late. In effect the order allowed the restoration of pari passu ranking among the debenture holders but preserved the rights of all other parties. Contrary to Mr Webster's submission, I do not see the proviso as an unprincipled restriction of an otherwise very wide statutory discretion. For the reasons to which I refer in paragraphs [12] to [14] above, I consider the proviso, particularly in the context of a formal insolvency, to be both principled and practical.

[22] Fifthly, the imminence of a winding up is a relevant factor which in many cases points against the making of an order to extend the period for registration. This is because in the normal case, where the failure to register has resulted from inadvertence rather than fraud, the court seeks before making the order to ensure that the company is solvent and that creditors are not prejudiced as they would be if the court allowed a charge to be registered after the commencement of liquidation. See In re Resinoid & Mica Products Ltd [1983] 1 Ch 132, In re Ashpurton Estates Ltd. But the imminence of a winding up does not of itself require the court to refuse to make the order: Barclays Bank plc v Stuart Landon Ltd [2002] BCC 917, Chadwick LJ at paras 13 and 14. Thus in In re Braemar Investments Ltd Hoffmann J upheld an order extending the time for registration of a charge which enabled a bank to register its charge shortly before the liquidation commenced.

[23] Sixthly, the inclusion of the proviso and the refusal to grant such an order after a company has gone into liquidation is a matter of discretion and not of law. Section 420, by making the absence of prejudice to creditors one of the five grounds on which the court make an order, clearly allows there to be such prejudice if one of the other grounds applies. Thus in exceptional circumstances the court may extend the time for registration after the commencement of a winding up and thereby harm the interests of other creditors of the company. In In re Ashpurton Estates Ltd, Lord Brightman (at pp.124A-B and 131G) suggested that such exceptional circumstances might arise where fraud was involved.

[24] In Prior, Petitioner Lord Clyde observed (at p.842J-L) that the presentation of a winding up petition was not an absolute bar to the grant of an order under section 420 but that it was a significant consideration. He was not persuaded that there were exceptional circumstances, such as fraud, to support the application.

[25] Seventhly, the passage of time since the date on which the charge should have been registered is a relevant factor which points against the grant of an order extending the time to register even if the applicant was unaware that the charge had not been registered and acted with all due speed once he found out: Prior, Petitioner, Lord Clyde at p.842I.

Conclusion
[26] I therefore accede to the motion of counsel for the respondents and refuse the prayer of the petition.