The Court of Appeal (CoA) heard a dispute over possession of a property owned by a company which was under administration despite the property being mortgaged.
Background:
The appellant and his family occupy a property known as Furzefield. The freehold title to the property is held by Rose Cottage Farm Ltd. which was a special purpose vehicle (SPV) set up by the appellant to acquire the property in 2022, of which he was the sole director. The original purchase price had been in the region of £2.5m.
TFG Capital No.2 Ltd. lent a total of £2.85 million to Rose Cottage Farm Ltd in 2022 by way of a mortgage over the property and a floating charge over any other assets and undertaking of the Company. At the time the property was valued for the purposes of TFG2's security it was valued at between £3.5m and £4m. It was noted in the valuation report that it had recently been let on an assured shorthold tenancy for £9,250 pcm.
The loan documents however contained a covenant that the property should not be occupied by any person related to Rose Cottage Farm Ltd. However, the appellant, various family members and other dependents took up residence at the property in early 2023.
Rose Cottage Farm Ltd. defaulted on the loans in April and August of 2023, and TFG appointed Law of Property Act 1925 (LPA) receivers over the property. More or less two weeks later, TFG issued proceedings in court under CPR 55 seeking an order for possession of the property. The appellant tried to resist by filing for bankruptcy and having administrators named under the Insolvency Act 1986.
In March 2024, the administrators issued an application against the appellant under the Act to seek possession of the property. By an order of May 2024, the appellant and the other extant occupier were required to free the property and this appeal related to a stay in proceedings.
Decision:
One of the grounds of appeal was that the Company was only entitled to the equity of redemption so the property should not be regarded as ‘property to which the Company appears to be entitled’ under Section 234(2) Insolvency Act 1986. Lord Justice Snowden agreed that the scope of this section is not clear and there is no such direct authority.
Another aspect raised by this case is the relationship between possession claims under CPR 55 and proceedings by officeholders under the Insolvency Act 1986.
The Court rejected the defendant’s argument that, since the appellant did not have a valid legal basis to occupy the property, the appeal had no substance. In Lord Justice Snowden’s opinion, even if the appellant does not have any legal right to occupy the property, that does not mean that “the law must be indifferent to the legality of the means by which he is compelled to leave”. Moreover, the appeal has a realistic prospect of success, and it would be unjust to prevent him from pursuing it.
The Court also noted that granting a stay would not amount to ‘authorising a trespass’ as the stay does not prevent “any appropriate remedies being sought by the administrators against the appellant in relation to his continued occupation of the property”.
Another aspect is that the property is a mortgage in favour of TFG and that an LPA was appointed to sell it. The administrators could only dispose of the property if the Court made an order under paragraph 71 of Schedule B1 of the Insolvency Act 1986. “However, the Court can only make such an order if such sale would be likely to promote the purpose of the administration of the Company, and then only on terms that the net proceeds of sale be applied towards discharge of the secured debt”. Moreover, the Company’s interest in the property, based on equity of redemption, is worthless due to the recent valuation of the property and the amount of debt to TFG. On that basis, there is no ground for a court to authorise the sale of the property under paragraph 71.
Implications:
This decision is only one instance in what seems set to be a lengthy saga. It raises different points of law, some of which have barely been analysed. More importantly, this judgement reiterated that, despite not having the legal right to occupy a property, the person can only be forced to leave in accordance with the law.
An appeal cannot be dismissed solely on the basis that, for the defendant, the appeal is only ‘purely a point of form and not substance’. Moreover, a stay does not amount to a trespass, as the administrators could stay and seek appropriate remedies for the continued occupation.
Finally, in the case of a property being acquired by a company and mortgaged, courts will only make an order under paragraph 71 of Schedule B1 of the Insolvency Act 1986 to sell the property if it is not mortgaged or if there is a sufficient surplus.