ICC Judge Greenwood’s judgment in Kendall & Anor v Ball & Anor (Re Sherwood Oak Homes Ltd – Sherwood Oak Holdings Ltd) [2024] EWHC 746 (Ch) arises out of an application by the administrators of Sherwood Oak Homes Ltd and Sherwood Oak Holdings Ltd under para 63 Sch B1 Insolvency Act 1986 and/or s 234 Insolvency Act for a declaration that land forming part of a development site in Mansfield Woodhouse was held on resulting and/or constructive trust for the benefit of Homes or Holdings and an order for its transfer. The land had been bought from Mansfield District Council for £156,500 in May 2023 and transferred to the respondents jointly. The respondents were Mr and Mrs Ball. Mr Ball had been a director of both companies and was the sole shareholder in Holdings, of which Homes was a wholly owned subsidiary. Mrs Ball had never been a director of Holdings but had been a director of Homes between 1 April 2021 and 20 May 2021, and between 25 May 2023 and 9 August 2023, periods during which her husband had been unwell. The respondents claimed that she had had little to do with the company’s day-to-day management or operation. The original intention appears to have been to transfer the land to Holdings, but that did not occur.
The administrators’ case was that the land was either held on resulting trust for Homes, which provided and paid the purchase price, or on constructive trust for both companies (or one of them) because it had been acquired by the respondents in breach of their duties as directors, principally under ss 172 and 175 Companies Act 2006 (to promote the success of the company and to avoid conflicts of interest).
Mr Ball’s evidence was that the companies’ development funding had run out, which was why the land had been bought with his own money (by which he meant money he had previously lent to Holdings over a number of years, so was owed to him by Holdings), albeit subject to an intention to sell it to Holdings for the purposes of the development project at a price to be agreed when new or additional financing had been obtained for the companies. He had agreed with his wife that the property would be transferred beneficially to both of them.
After a close analysis of the facts and the law, ICC Judge Greenwood concluded that the resulting trust claim failed. He accepted that the purchase price had been paid by Homes and not by Mr Ball:
“Mr Ball’s belief that money previously lent by him to Holdings continued to be ‘his’ money, was plainly wrong: the money had been lent by him, had become Holdings’ property (and I assume very likely mixed with other monies) and had been replaced by a debt owed to him by Holdings, reflected in its accounts,” although the judge also said he was “not able to find that it was not a genuinely believed misconception.”
The money had not, however, been paid by Homes “in the character of a purchaser” (see Lewin on Trusts, 20th edn, at 10-021: “[W]hen real or personal property is purchased in the name of a stranger, a resulting trust is presumed in favour of the person who paid the purchase money (Rochefoucauld v Boustead [1897] 1 Ch 196) if he did so in the character of purchaser;”; see also Princess Tessy of Luxembourg v Prince Louis of Luxembourg). Furthermore, on the basis of the documentary and other evidence the judge held that the parties had plainly intended that the respondents would acquire and own the land, rather than Homes or Holdings.
He went on to conclude, however, that the land was held on constructive trust for the companies, having been acquired by the respondents in breach of their duties under ss 172 and 175 Companies Act 2006. He did so for a number of reasons including: (a) that the land had been, and remained, a valuable, integral part of the development project, required by the companies and intended to be used by them for the purpose of access to the development site; and (b) that the respondents had been obliged to protect the companies’ interests and to act with undivided loyalty, in good faith and in their best interests. He said:
“Manifestly, the acquisition in their own names of the Land, needed by the companies for the purposes of their business, placed the Respondents – as is now abundantly plain from the fact of this litigation – in a position where their interests and those of the companies were in sharp conflict. They exploited and diverted to themselves an opportunity to acquire property which the companies themselves needed. On their own evidence, they placed themselves in a position in which it would at some point be necessary (albeit there was no alleged obligation) to negotiate for a re-sale of the property to Holdings, at a ‘purchase price [to be] agreed.’ In no sense did any of that promote the companies’ interests.”
The judge concluded by saying that he would declare that the land was held on constructive trust for the companies and make consequential orders for its transfer.
The foregoing matters are case specific. Of more general interest is what the judge had to say about the scope of s 234 and para 63 Sch B1 Insolvency Act 1986. His consideration of those provisions arose as a result of submissions by counsel for the respondents that the claims before the court could not be brought under or within either provision: the law to be considered was “notoriously complex,” and the kind of application, process and procedure adopted was not appropriate to determination of the issues the court was being asked to decide.
The judge began with s 234, which empowers the court to require any person who has in his possession or control any property, books, papers or records to which the company appears to be entitled, forthwith (or within such period as the court directs) to pay, deliver, convey, surrender or transfer the property, books, papers or records to the office-holder. Whilst acknowledging that r 7.78 Insolvency Rules 2016 did not apply to administrators, he noted that it provided that the powers conferred on the court by s 234, were “exercisable by the liquidator or, where a provisional liquidator has been appointed, by the provisional liquidator,” and that any person on whom a requirement under s 234(2) “is imposed by the liquidator or provisional liquidator must, without avoidable delay, comply with it.” So not only the court, but also a liquidator or provisional liquidator without a court order, was able to require delivery up. Section 234(3) and (4) protect an office-holder (in certain circumstances and to some extent) who seizes or disposes of property which transpires not to belong to the company, if he had “reasonable grounds for believing” that he was entitled to act. “The language of those provisions,” the judge said, “and the entitlement of a liquidator to exercise s. 234 powers without court order, suggest that it is not the primary purpose of s. 234 to empower an office holder to raise, and the court to decide, issues of disputed ownership.”
That reading, he said, was supported by authority. He noted Lord Hoffmann’s observation in Re Coslett (Contractors) Ltd that s 234 was a summary jurisdiction:
“If, for example, the liquidator appeared on affidavit evidence to be prima facie entitled to property, books or records which he needed to proceed with the liquidation, the court could in its discretion order the person in possession to hand over the property and argue about ownership later;” but it was “a summary discretionary remedy, obtainable by a liquidator or other office-holder for the purpose of enabling him to carry out his functions and which does not necessarily involve any determination of title.” Furthermore:
“Ordinarily…an action brought by an administrator to assert a claim on behalf of the company should be in the name of the company. The title to the claim will be vested in the company.”
Similarly, in Ezair v Conn Patten LJ said that s 234 “may not provide an appropriate procedure for determining complex issues about title involving, in particular, claims by third parties.”
Judge Greenwood concluded that
“[T]he central purpose of s. 234 is to provide a summary, discretionary remedy, enabling an office holder to carry out his functions, but without necessarily involving a determination of title; if title is in dispute, the usual appropriate course would be to commence proceedings in the name of the company itself. However, having said that, the court is not precluded from finally resolving issues raised in respect of title in opposition to an application under s. 234, and in certain cases (for example, as in Ezair, where the issue was a ‘pure point of law’) will do so. Ultimately, the decision whether or not to determine the issue is likely to depend on whether or not a summary process, without statements of case, disclosure and witness statements, is fair.”
As to para 63 of Sch B1, he noted it was expressed in broad terms and had been used in a wide variety of situations:
“I accept that in principle it confers powers sufficiently broad to allow a court to resolve disputes with third parties, such as, for example, in Re Rodus Developments Ltd (In Administration), in which ICCJ Barber decided, on an application for directions, that an equitable charge claimed by a creditor was avoided for non-registration by virtue of section 859H of the CA 2006, and granted declaratory relief to that end. I note that at [38], the judge observed that whilst in many cases it could be argued that a respondent should be given a final opportunity to put in evidence and attend a hearing before final relief is granted, it was not appropriate in that case because the creditor had been given ample pre-application notice of the intended process; the charge was plainly void and the creditor, despite having been given a number of opportunities to do so, had failed to articulate any alternative conclusion; furthermore, it was essential to grant urgent relief to ensure that the administration was not further prejudiced.”
[…]
“Again therefore, the decision whether or not to determine, on an application under paragraph 63, an issue such as that raised in the present case, will depend, certainly in part, on whether or not it is fair to use a summary process, without statements of case, disclosure and witness statements. Throughout, I have in mind that in many such cases, the usual and appropriate course would be to commence proceedings in the name of the company itself.”
In this case it would appear that the respondents had only raised their procedural objections late in the day. The judge decided that they knew the particulars and nature of the case which they faced sufficiently well to provide their response; they gave no indication otherwise. He therefore treated the whole of the administrators’ case as open to them in principle “but subject to the constraints inherent in the process which they have chosen – including that there was no cross-examination and no disclosure.” He rejected the respondents’ argument that as a matter of fairness, pleadings were a necessity.
The applicants’ choice of the bases on which to proceed was thus vindicated.
The respondents tried to seek relief under s 1157 Companies Act 2006 on the basis that they had relied on the professional advice of solicitors and had intended to re-sell the land to Holdings as soon as re-financing was available; they had not intended to profit from the arrangement. The judge refused relief for three reasons:
(a) The point could have been raised by the respondents in their witness statements.
(b) Mr Ball’s evidence was that a purchase price for the future sale to Holdings would have had to be agreed; his evidence was not that he had no intention of making a profit; moreover, it did not assert that the respondents were ever obliged to sell the land to Holdings or negotiate for its sale.
(c) Whether or not they acted honestly and/or on advice and/or with an intention to make a profit on re-sale, the respondents had acted in breach of their duties as directors: the arrangement entailed what the judge described as “an acute conflict of interest, and was not beneficial to the companies’ creditors as a class.” There was no basis on which the court could conclude that it was reasonable of the respondents to have protected their own interests, even as a temporary measure, at the expense of those of other creditors, nor was there any basis on which the court ought now, in the exercise of its discretion, to relieve them of liability to the detriment of the creditors of the companies in administration.