On Demand Information Plc (in administrative receivership) v Michael Gerson (Finance) Plc
| Jurisdiction | England & Wales |
| Judge | LORD JUSTICE ROBERT WALKER,Sir Murray Stuart Smith,Lord Justice Pill |
| Judgment Date | 31 July 2000 |
| Judgment citation (vLex) | [2000] EWCA Civ J0731-22 |
| Docket Number | Case No: A3/1999/0645 |
| Court | Court of Appeal (Civil Division) |
| Date | 31 July 2000 |
[2000] EWCA Civ J0731-22
lord Justice Pill
Lord Justice Robert Walker and
Sir Murray Stuart Smith
Case No: A3/1999/0645
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF
JUSTICE CHANCERY DIVISION
(MR GEORGE LAURENCE QC)
Royal Courts of Justice
Strand,
London, WC2A 2LL
Dr Fidelis Oditah (instructed by Walker Morris, Leeds for the appellants)
Sir Roy Goode QC and Mr H Tomlinson (instructed by Royds Treadwell for the respondents)
Introductory
This appeal is concerned with the court's jurisdiction to grant relief from forfeiture of a lease of tangible moveable property, and the circumstances in which that jurisdiction can or should be exercised. It is an appeal from an order made on 5 March 1999 by Mr George Laurence QC sitting as a deputy judge of the Chancery Division of the High Court. His judgment is reported at [1999] 2 AER 811. The deputy judge dismissed an action by the claimants On Demand Information PLC ("ODI") and On Demand Information International PLC ("ODII") against the defendants Michael Gerson (Finance) PLC ("MGF") and Michael Gerson (Investments) Ltd ("MGI"). ODII is a wholly-owned subsidiary of ODI. Both companies are now in administrative receivership and for most purposes they can be referred to together as "On Demand". Similarly MGF and MGI can for most purposes be referred to together as "Michael Gerson".
The finance leases
The case is concerned with four finance leases of equipment (used for purposes such as making and editing videos) granted by Michael Gerson to On Demand. The deputy judge quoted a passage from a statement published by the Institute of Chartered Accountants, SSAP 21, which provides a convenient explanation of how a finance lease differs from an operating lease:
"BACKGROUND
Leases and hire purchase contracts are means by which companies obtain the right to use or purchase assets. In the UK there is normally no provision in a lease contract for legal title to the leased asset to pass to the lessee.
A hire purchase contract has similar features to a lease except that under a hire purchase contract the hirer may acquire legal title by exercising an option to purchase the asset upon fulfilment of certain conditions (normally the payment of an agreed number of instalments).
Current tax legislation provides that in the normal situation capital allowances can be claimed by the lessor under a lease contract but by the hirer under a hire purchase contract.
…..
FORMS OF LEASE
Leases can appropriately be classified into finance leases and operating leases. The distinction between a finance lease and an operating lease will usually be evident from the terms of the contract between the lessor and the lessee.
An operating lease involves the lessee paying a rental for the hire of an asset for a period of time which is normally substantially less than its useful economic life. The lessor retains most of the risks and rewards of ownership of an asset in the case of an operating lease.
A finance lease usually involves payment by a lessee to a lessor of the full cost of the asset together with a return on the finance provided by the lessor. The lessee has substantially all the risks and rewards associated with the ownership of the asset, other than the legal title. In practice all leases transfer some of the risks and rewards of ownership to the lessee, and the distinction between a finance lease and an operating lease is essentially one of degree."
The deputy judge also referred to a passage in Chitty on Contracts (27 th ed para 32–056) which has reappeared in substantially the same form in the latest edition (28 th ed para.33–078).
The four finance leases were in the same terms, except for the details of the equipment and the financial terms. The form of lease is set out in an appendix to the deputy judge's judgment ([1999] 2 AER at pp.827–32). The terms can therefore be summarised fairly briefly. Each lease was for an initial period (the primary period) of 36 months. During the primary period the lessee paid a substantial rent which by the end of the primary period (as Mr Michael Gerson accepted in his affidavit evidence) recouped Michael Gerson for the cost of the equipment (which was specified in a schedule to the agreement) with interest, costs and profit. This rent was payable monthly but with an initial payment of three months' rent so that during the primary period rent was in effect being paid three months in advance. Thereafter the lessee could continue the lease for one or more periods of twelve months (a secondary period) for a single modest payment made on the first day of the secondary period. The lease could be determined by not less than 60 days notice to expire on the last day of the primary period or any secondary period.
Schedule 2 to the agreement contained a variety of conditions, of which the most important for present purposes were in paragraph 9 (headed 'default') and paragraph 12 (headed 'sales agency appointment'). Paragraph 9(A) provided that on a repudiatory breach by the lessee, Michael Gerson might accept the breach as a repudiation of the agreement and, at its option, all or any other lease agreements between the same parties. By paragraph 9(B)(iv) the appointment of a receiver of the lessee's undertaking or assets constituted a repudiatory breach. Paragraph 9(C) provided that on acceptance of a repudiatory breach the lessee should pay an amount (the termination sum) including any arrears of rent, any rent to become due during any unexpired part of the primary period, and compounded interest on arrears, but with a possible credit (the terms of which are obscure, and can be ignored for present purposes).
Paragraph 12(A) was in the following terms (with one obvious error corrected):
"SALES AGENCY APPOINTMENT
(A) Subject to the Lessee having duly performed its obligations under this Agreement and any other Lease Agreement upon termination of the leasing of the Equipment at the end of the Primary Period or at any time thereafter by notice from the Lessee in accordance with the provisions of this Agreement, the Lessee is appointed the Sales Agent of the Owner to negotiate a sale of the Equipment to a third party (not being a parent, subsidiary or associated company of the Lessee) at the best price available, such price to be communicated to and approved by the Owner prior to the sale."
Subparagraphs (B) and (C) dealt with the terms of sale, and provided that the agency appointment should continue for six months after the termination or expiry of the lease. Subparagraphs (D) and (E) were in the following terms:
"(D) In the event of any breach by the Lessee of the terms of this appointment or of this Agreement (including without limitation the occurrence of any of the events specified in paragraph 9 above) or any other Lease Agreement then the authority of the Lessee to act as agent in relation to any Equipment shall cease forthwith.
(E) In the event that the Lessee is successful in negotiating a sale of the Equipment the Owner agrees to allow the Lessee by way of rebate of rental a sum equal to 95 per cent of the sale proceeds in respect of the Equipment after deducting any Value Added Tax thereon and any reasonable expenses incurred by the Lessee in negotiating the sale."
The general effect of the conditions (especially paragraphs 2, 4 and 6) was to allocate all risks and responsibilities in respect of the equipment (including its selection, use, maintenance and insurance) to the lessee. The four leases were entered into on dates between September 1994 and May 1995, so that the four primary periods were to expire between September 1997 and May 1998. The equipment comprised in the leases was all installed at On Demand's premises at 2 Burley Road, Leeds.
On Demand goes into receivership
On 12 February 1998 On Demand went into administrative receivership under debentures in favour of Lloyds Bank entered into on 16 October 1995. On 19 February 1998 Michael Gerson gave notice to On Demand terminating all four lease agreements on the ground that receivers had been appointed. The position under the four leases at that date was summarised by the deputy judge as follows:
(1) The first and second leases (dated 5 September 1994 and 20 October 1994 respectively) had continued beyond the primary period and were in the first secondary period. Michael Gerson had received primary rentals totalling about £295,000 (plus VAT) and secondary rentals totalling about £2,500 (plus VAT) in respect of equipment which had cost about £242,000 (plus VAT).
(2) The third lease (dated 31 March 1995) was very close to the end of its primary period and all the primary rentals had been paid (about £377,000 plus VAT in respect of equipment which had cost about £310,000 plus VAT). It was not clear whether the secondary rent had been paid in advance.
(3) The fourth lease dated 17 May 1995 had about three months of its primary period still to run. On Demand had paid primary rentals totalling about £120,000 (plus VAT) in respect of equipment which had cost about £100,000 (plus VAT) but about £3000 (plus VAT) for future primary rental became due under paragraph 9(C) of the conditions.
On Demand's business was organised in two divisions, called Creative Convergence (which used the leased equipment) and New Media Publishing. The receivers sold New Media Publishing very quickly, the sale being made on 20 February 1998. The other division, Creative Convergence, had 78...
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