On Demand Information Plc (in administrative receivership) v Michael Gerson (Finance) Plc
| Jurisdiction | UK Non-devolved |
| Judge | LORD NICHOLLS OF BIRKENHEAD,LORD BROWNE-WILKINSON,LORD HOBHOUSE OF WOODBOROUGH,LORD MILLETT,LORD SCOTT OF FOSCOTE |
| Judgment Date | 18 April 2002 |
| Neutral Citation | [2002] UKHL 13 |
| Date | 18 April 2002 |
| Court | House of Lords |
(In Administrative Receivership) and Others
And Others
[2002] UKHL 13
Lord Nicholls of Birkenhead
Lord Browne-Wilkinson
Lord Hobhouse of Wood-borough
Lord Millett
Lord Scott of Foscote
HOUSE OF LORDS
My Lords,
I have had the advantage of reading in draft the speeches of my noble and learned friends, Lord Hobhouse of Woodborough, Lord Millett and Lord Scott of Foscote. For the reasons they give, and with which I agree, I would allow this appeal.
My Lords,
I have read the speeches of my noble and learned friends, Lord Millett and Lord Scott of Foscote. For the reasons which they give I would allow the appeal and make the order which he proposes.
My Lords,
This dispute has arisen from the special facts of this case, the making of an order for the sale of goods pendente lite which were the subject of financing agreements which had been contractually terminated by the goods owner.
There is no problem about the financing agreements themselves. The appellants needed to obtain computer systems in order to operate their business. They did not wish (and maybe were not able) to finance the transaction themselves. They accordingly entered into finance agreements with the respondents. They were elaborate agreements structured so as to keep the cost to the appellants as low as possible. They took the form of hire agreements. The title to the goods remained throughout with the respondents and was not at any time nor in any circumstances to pass to the appellants or any company associated with them. The appellants had the possession of the goods but no power to sell or otherwise deal with them either during the currency of the agreements nor afterwards. This structure reflected the fact that one of the important features of the agreements was the inclusion of provisions to enable the respondents to obtain the maximum tax advantages. The appellants had a contractual right to require the respondents to sell the goods at the end of the 'primary' contract period but the appellants could only act as the negotiating agent of the respondents in relation to the sale and the sale must be at a price approved by the respondents prior to the sale. Further this right could only be exercised if the appellants had fully performed all their contractual obligations to the respondents. The benefit to the appellants was that the appellants were then entitled to receive a sum equivalent to 95% of the proceeds of sale by way of a rebate on hire previously paid. There were also default provisions of a familiar kind which gave the respondents the right to bring the agreements to an end at any stage if the appellants failed to perform their obligations. These were the forfeiture rights which the respondents exercised and from which the appellants claimed relief in the action. The purpose of claiming relief was so that the appellants could take advantage of the provisions for the sale of the goods and enjoy the benefit of the rebate.
There is now no dispute that the agreements were of a character susceptible to relief against forfeiture; they were financing agreements and possession of the goods was given to the debtor. ( Shiloh Spinners Ltd v Harding [1973] AC 691)Similarly it is not in dispute that the appellants needed to obtain an order for such relief if they were to be enabled to exercise their contractual right to require the sale of the goods and obtain the 95% rebate. The complication which has given rise to these appeals is that, when the appellants' business collapsed, the receivers wanted to mitigate their loss by selling the business as a going concern which meant, in commercial terms, that they must find a way of procuring the sale of both the appellants' goodwill and the respondents' computer systems together to the same purchaser. They started their action claiming (inter alia) relief against forfeiture. But they would not be able to obtain an order sufficiently quickly to enable the combined sale they needed to go ahead within a time scale acceptable to a purchaser of the business. They therefore struck upon the idea of applying to the court for an order for the sale of the goods under RSC O.29 r.4. Fortunately for them the response of the respondents was very helpful. On 2 March 1998, Mr Gerson wrote:
"I confirm our conversation of this morning when I put forward the suggestion that Without Prejudice to the terms of and conditions of our four leases and the rights existing under those leases, that in order to enable the best realisable price to be negotiated in the interest of saving jobs at the Company and to preserve any goodwill, you should negotiate a sale to any interested party with which we will cooperate as owner … subject to agreement on price with our valuer and the proceeds of sale be paid into an escrow account …"
In an affidavit dated 5 March, he said that, without accepting that the appellants had any right to relief against forfeiture but accepting that they had an arguable case:
"I understand that the Receivers wish to sell the plaintiffs' business as a matter of extreme urgency and that they believe that the Equipment is a vital part of that sale. In these circumstances the [respondents] are prepared to consent to an order for sale of the Equipment and will agree that good title shall pass to the purchaser. In order to hold the position pending a full hearing of the motion, the proceeds of sale should be paid into an escrow account as contemplated by the Notice of Motion. …"
He reserved the respondents' rights in relation to the sales and their contention that they were entitled to the full value of the goods at the date of sale. He concluded:
"In summary, therefore, the [respondents] are prepared to consent to an order which does not prejudice their rights to raise arguments as to the true value of the equipment in due course. The sum which is, in fact, achieved on the sale of the Property should be paid into an account in the joint names of the parties' solicitors pending the determination of the substantive motion."
At the hearing of the motion, counsel for the respondents, having made similar reservations, did not oppose the making of the order for sale.
Whether of not the order for the sale of the computer systems should have been made under this rule had the respondents opposed it is something about which we need express no opinion; the purpose of the appellants' application was collaterally to assist the receivers to realise the best possible value from the sale of the goodwill and sell the business as a going concern. However what is clear is that the order made was of the character of an order made pendente lite without prejudice to the rights of the parties in the pending litigation. In an ideal world there would be no need for such orders; the parties' rights would be decided then and there. But that is not the real world. The ascertainment of the parties' rights takes some time and there will be a lapse of time before a determination can be arrived at. The mechanism used by the courts to accommodate this fact is to convert the relevant property into money and to treat that money as if it was the property. The task of the court remains the same as before - to ascertain what were the rights of parties in respect of the property and then to give effect to those rights by making appropriate orders as to the application of the money.
In the present case, once the question of whether the appellants would have been granted relief against forfeiture (and its terms) and the value to be attributed to the goods at the time of sale had been decided, the questions debated upon this appeal have ceased to exist. An order for a sale pendente lite does not deprive parties of their rights. It simply, for purely practical reasons, provides a mechanism for allowing the parties' rights as they existed immediately before the making of the order to be ascertained without in the meantime damaging the value of whatever those rights were. Thus perishable goods may be ordered by a Master of the Queen's Bench to be sold and the proceeds paid into court or a ship or cargo under arrest may be ordered to be sold by the Admiralty Judge or Registrar without affecting what were the rights of the parties and other potential claimants over the property sold. The sale is free of encumbrances. There is no longer any lien or mortgage over the property yet a lien holder's or a mortgagee's rights continue to be recognised by the court and are given effect to by making orders in relation to the money now under the control of the court.
There are two main reasons why the decision of the majority of the Court of Appeal was wrong. First, it was implicit in the order made by Harman J that the order was without prejudice to the rights of the parties in the action. The Court of Appeal construed the order as destroying the rights of one of the parties in the action. Secondly, the majority failed to carry out the task of ascertaining what relief the appellants were entitled to immediately before the order for sale was made. They treated the necessity of taking time to have a trial and determine what the rights of the parties were as depriving the appellants of their rights. It is true that there has been no relief against forfeiture until a court has made an order granting that relief and that the contractual or proprietary rights do not consequentially revive until the relief has been granted. But that is not relevant here. The court had to put itself back in the position Harman J would have been in if he had been able to decide the whole dispute on the day the matter was before him. The majority gave the interim order a...
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