Lehman Commercial Conduit and Another v Gatedale Ltd (in Creditors Voluntary Liquidation)
| Jurisdiction | England & Wales |
| Judge | Mr. Justice Vos |
| Judgment Date | 14 February 2012 |
| Neutral Citation | [2012] EWHC 3083 (Ch) |
| Docket Number | No. 3388 of 2010 |
| Court | Chancery Division |
| Date | 14 February 2012 |
[2012] EWHC 3083 (Ch)
Mr. Justice Vos
No. 3388 of 2010
IN THE HIGH COURT OF JUSTICE
CHANCERY BENCH DIVISION
Royal Courts of Justice
MR. A. ZACAROLI QC (instructed by Dickinson Dees) appeared on behalf of the Claimants.
MR. C. BOARDMAN (instructed by Rochman & Landau) appeared on behalf of the Defendant.
This is an unopposed but seemingly hot contested application by Lehman Commercial Mortgage Conduit Limited (in administration) (“LCMC”) and by Northern Rock (Asset Management) Plc (“NR”) under s.112 of the Insolvency Act 1986 (the “ IA”).
The application was originally issued as long ago as 14 th April 2010 for a declaration of validity in respect of a third party charge dated 19 th June 2006 (the “charge”) made between NR and the respondent, Gatedale Limited (“Gatedale”) to secure a loan of some £13.3 million made by NR to Brookdane Limited (“Brookdane”). The application was later amended to seek an order that the applicants were entitled to be subrogated to the rights of two chargees, namely Woolwich PLC (“Woolwich”) and Lloyds TSB PLC (“Lloyds TSB”) whose loans had been discharged by the monies advanced by NR. The claim to subrogation is in respect of the principal sums that were due to Woolwich and Lloyds TSB (some £9.5 million in total plus interest payable under those charges).
The transaction of which the grant of the charge was a part was, as is now common ground, a transaction in breach of the financial assistance provisions in what was s.151 of the Companies Act 1985. As such, it could only be valid if the so called whitewash provisions in s.155 and following of the Companies Act 1985 were complied with. It is now common ground that they were not. Thus, it is accepted on all sides that the charge was void as a result of the effect of the Companies Act 1985. The provisions of s.151 and following of the Companies Act 1985 are now found in ss.677–683 of the Companies Act 2006.
The application is not opposed but neither is it consented to by the liquidator of Gatedale (the “liquidator”) acting as agent of Gatedale. The liquidator has been represented before me by Mr. Christopher Boardman of counsel. I have had some trouble understanding the position of the liquidator and will in due course deal with that question. His approach has put me in mind of the well known poem by Alexander Pope in 1734 entitled: “The Epistle to Dr. Arbuthnot” where he wrote:
“Damn with faint praise, assent with civil leer. And without sneering, teach the rest to sneer; willing to wound, and yet afraid to strike, just hint a fault and hesitate dislike.”
The liquidator has sought to infer two matters without actually alleging them to be the case. First, that Northern Rock was complicit in Gatedale's failure to comply with the whitewash provisions to which I have already referred and, secondly, that subrogation is not an available remedy where the charge taken is illegal under s.151 of the Companies Act 1985.
Chronological background
In 1998, Gatedale purchased a town leisure centre scheme in Newcastle-under-Lyme registered at Her Majesty's Land Registry under title number SF398564 (the “property”) with the benefit of a loan of £7 million from Dunbar Bank Plc. In 2001, Gatedale refinanced the purchase of the property. As part of that refinancing, on 2 nd August 2001 Gatedale granted a mortgage to Woolwich over the property, and on 22 nd November 2001 Gatedale granted a mortgage to Lloyd's TSB over the property. In 2006, Gatedale again wished to refinance its borrowings on the property. On 25 th April 2006, NR made an offer of a loan to Brookdane in the sum of £13.3 million in order to refinance the property and to provide additional equity on the basis of a first legal charge over the property. On 14 th June 2006 (i) Mark Philips, of DLA, NR's solicitors, informed NR that Brookdane would now purchase the shares in Gatedale saying that: ‘Subject to the whitewash procedure being properly carried out, I am satisfied that the arrangement works and that [NR's] position would be protected’, and (ii) Saunders Bearman (solicitors for Gatedale/Brookdane) sent whitewash documentation, including a draft audited report to DLA.
On 15 th June 2006 DLA (acting for NR) emailed Saunders Bearman (acting for Gatedale/Brookdane) saying that they were happy with the whitewash documentation. On 16 th June 2006 NR issued a revised loan offer to Brookdane for £13.3 million to acquire shares in Gatedale and to provide additional equity on condition that it was granted a first legal mortgage over the property and redemption of all prior mortgages prior to drawn down. On 19 th June 2006 Brookdane acquired 100% of the shares in Gatedale, Gatedale executed the third party charge over the property in favour of NR, and NR advanced the loan of £13.3 million to Brookdane. On 20 th June 2006, the Woolwich mortgage (in respect of which £9,113,034.32 was owed) and the Lloyds TSB mortgage (in respect of which £440,000 was owed) were discharged by Brookdane using monies advanced by NR. The liquidator's skeleton argument accepts that and I quote: “£9,543,080.87 of the loan monies can be traced directly to the discharge of the Woolwich and [Lloyds TSB] mortgages”. On 3 rd July 2006 the charge was registered in favour of NR at Her Majesty's Land Registry.
On 22 nd June 2007 NR sold a portfolio of loans including this loan to LCMC and assigned all its claims under the charge to LCMC. On 18 th August 2008 Gatedale went into a creditors' voluntary liquidation. At some point thereafter Brookdane went into liquidation and was subsequently dissolved. On 1 st January 2010 NR underwent a restructuring so as to be renamed NR (Asset Management) Plc. On 22 nd March 2010 the liquidator wrote to Dickinson Dees, solicitors for the applicants, saying that he would not oppose the intimated application which was then to validate the charge. On 14 th April 2010 Mr. Martin Clark of NR made a statement in support of the prospective originating application dealing only with the issue that was then the subject of it, namely whether the charge should be validated notwithstanding that Saunders Bearman, who seemed to have acted as solicitors for both Gatedale and of Brookdane, had administered the Gatedale's directors' statutory declaration as part of the whitewash documentation.
On 22 nd April 2010 LCMC and NR filed their originating application seeking an order validating the charge notwithstanding, as I have said, Gatedale's directors' statutory declaration having been administered by a partner in Gatedale's solicitors, Saunders Bearman. On 9 th July 2010 Mr. Registrar Nichols ordered all parties to disclose all documents relating to the grant of the charge. On 22 nd September 2010 Mr. Stephen Franklin, the liquidator of Gatedale, made a statement dealing with numerous difficulties and inconsistencies in the whitewash documentation. On 20 th May 2011 Ms. Rachel Turner of Dickinson Dees, solicitors for the applicants, made a statement referring to the fact that Mr. Graham of Westbury, Gatedale's auditors, had not signed the auditor's report in respect of the whitewash bearing his name and seeking to advance instead the subrogation claim. On 27 th May 2011 Deputy Registrar Briggs gave the applicants permission to amend their originating application to seek an order that they were entitled to be subrogated to the Woolwich and Lloyds TSB charges for the principal sums plus interest payable under them. On 17 th June 2011 the applicants abandoned the first claim in their originating application as to the validity of the charge.
On 12 th September 2011 Mr. Grant Rechnic of Rochman Landau, the liquidator's solicitors, made a statement recording that, first, the applicants said they had disclosed all relevant documentation; secondly, that Saunders Bearman had said that they had lost their files; thirdly, that Westbury had said that they had no further relevant documentation; fourthly, that the directors of Gatedale had said they could not assist; fifthly, that the liquidator was “stymied from carrying out any further investigations” and, sixthly, that the applicants were seeking to be put in a better position than they would be if the 2006 charge had been valid, since if that were the case the Prescribed Part for unsecured creditors under s.176A of the IA would have been provided for since the charge was executed after 15 th September 2003.
On 27 th October 2011 Deputy Registrar Frith adjourned the final hearing of the application to the judge with an estimate of one day. On 17 th January 2012 Mr. Antony Zacaroli QC, counsel for the applicants, filed a detailed skeleton argument dealing at paragraphs 20–29 with defences that might be available to the claim to subrogation, including illegality and the equitable doctrine of clean hands. On 7 th February 2012, and in response to Mr. Zacaroli's skeleton argument, Mr. Boardman filed his skeleton argument. It said this. First, under the heading: “The liquidator's position”:
“16. The liquidator's position has been the same throughout and clearly stated in his witness statement … and that of Mr. Rechnic … He neither supports nor opposes the relief sought. As an officer of the court he is under a duty to providing whatever assistance he can to the court on applications of this kind. He also owes a duty to consider the interests of creditors both secured and unsecured. To assist the court to determine whether the applicant(s) are secured creditors the liquidator has sought to ensure that as full and fair account...
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