Dissolution, disclaimer and legal interests in land

18th January 2016

What is the status of an interest in land following dissolution of a corporate proprietor and subsequent disclaimer of any interest by the Crown? Louise Power explains the court’s approach to this complex and unclear area of law in the recent case of Re Fivestar Properties.

Background law

When a company is dissolved, any property still owned by it passes to the Crown pursuant to section 1012(1) of the Companies Act 2006 (the Act). Such property is known as bona vacantia. However, the Crown has various options as to how it treats bona vacantia property and where the property may carry with it liabilities, the Crown, acting by the Treasury Solicitor, may disclaim any interest. If the disclaimed property is freehold land, although the property will form part of the Crown Estate, the legal position is that the Crown has no liability unless and until it takes some step to assert ownership

Background facts

In Re Fivestar Properties [1] a bank provided a loan facility to Fivestar Properties Ltd (the Company). The loan was secured by a legal charge over a commercial property (the Property), which the Company leased to a large commercial tenant (the Tenant).

When the Company failed to repay the loan, the bank appointed LPA receivers. The receivers attempted to recover rent from the Tenant, but the Tenant had in fact paid the rent to another company. Administrators were subsequently appointed in order to resolve the claim for rent from that other company.

Once the rental issue had been concluded, the administrators dissolved the Company, giving the requisite notice under the Insolvency Act 1986 [2]. The administrators’ final report stated that there were no further assets to be realised, and appeared to ignore the fact that the freehold to the Property was still vested in the Company.

Following dissolution, assets remaining in the Company’s ownership, which included the Property, vested in the Crown. The Tenant sought to renew the lease and served notice on the Crown accordingly. However the Crown responded by disclaiming any interest it had in the Property pursuant to section 1013 of the Act.

The Tenant and the bank were therefore left in a difficult position. The Company no longer existed to grant a new lease and the Crown had disclaimed any interest that had vested to it. The bank wanted to enforce its charge and sell the Property with the benefit of a new lease. It therefore applied to restore the Company to the register of companies, with an immediate order for winding up the Company.

Key issues

There were three key issues which the High Court considered in this case:

1. What interest in the Property still existed after the Crown’s disclaimer? If there was an interest, in whom did it vest?
2. What was the effect of the restoration of the Company to the register?
3. Should the Company be restored and then immediately wound up?

In relation to the first issue, the court found that the Crown’s disclaimer did not extinguish the Crown’s right to the Property, but only the Crown’s title to it under section 1012 of the Act. Instead, the Property escheated back to a different part of the Crown Estate. Escheat is an ancient term for the principle that if the interest of an inferior tenant is extinguished, the land reverts to the tenant’s immediate feudal lord. All land is ultimately owned by the Crown, so when a particular freehold interest is extinguished, nevertheless the land reverts to the Crown, as the immediate lord.

In relation to the second issue, the court held that the freehold estate was retrospectively re-created and re-vested in the Company, as if it had never been dissolved and as if the freehold had never been disclaimed. The court stressed that there was no transfer of rights upon dissolution of the Company, and that that the elimination of the freehold interest only caused the land to escheat to the Crown. Therefore, on the restoration of the Company the freehold interest was also restored and legally bound the Crown once more.

In deciding this second issue, Judge Cooke referred to the case of Allied Dunbar Assurance plc v Fowle & others [3], which considered a similar question in relation to leasehold interests. In that case the judge found that the lease should remain with the company following its restoration. Judge Cooke decided that there was no logical reason to regard a Crown disclaimer of a freehold interest any differently to that of a leasehold interest, and that to do so would be contrary to public policy.

Finally, the court held that it was just to make the restoration order if that meant that the Property would be realised or more readily realised for the benefit of the bank as a secured creditor. The court was also satisfied that the Company ought immediately to be wound up to allow the Property to be dealt with accordingly.

Practical lessons

Paragraph 25 of the judgment sets out some practical lessons to be learned from this case, which are:

1. If a company still holds assets that remain to be realised, it should not be dissolved.
2. Administrators should petition for compulsory winding up or put the company into creditors’ voluntary winding up and secured creditors should liaise with the administrators to try to prevent a similar scenario to this case.
3. Since a disclaimer by the Crown of a freehold does not extinguish the subordinate interests created out of it, a mortgagee should be sufficiently secured to sell the property without the need for restoration. However, this may not be possible in every case and a safer course of action would be to apply to restore the company.
4. It may be possible to make an application for an order vesting the freehold in a purchaser from a mortgagee under section 1017 of the Act.
5. The Court can also use section 181 of the Law of Property Act 1925 to create and vest a corresponding estate in the Company on a restoration.

Advice to Creditors

Scenarios such as occurred in the Fivestar case ought to be avoided if possible. Therefore, from a practical point of view, it is always best for the secured creditor to liaise closely with administrators to ensure that the company is not dissolved until all its secured assets have been discovered and realised.

If a creditor does find itself in a similar situation, the alternative methods to restoration should always be considered and advice should be taken as to the most appropriate approach in any individual case. However, as recognised by the Court, not all of these options will always be available and most of the potential solutions identified in this case would require a court order in any event. In practice, restoration of a company may often be preferable as a means of achieving certainty and finality.

If you have any queries arising from this case or from any other banking litigation or title issue, please do not hesitate to contact Louise Power or any member of Walker Morris’ Banking Litigation team.

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[1] [2015] EWHC 2782 (Ch)
[2] Schedule B1, paragraph 84(1)
[3] [1994] BCC 422