Escheating bona vacantia—Re Fivestar Properties Ltd

Can freehold property—formerly owned by a dissolved company and subsequently disclaimed by the Crown—re-vest in the company on its restoration? Amit Gupta, barrister at St Philips Chambers, examines the decision in Re Fivestar Properties Ltd.

Original news

Re Fivestar Properties Ltd [2015] EWHC 2782 (Ch), [2015] All ER (D) 76 (Oct)

The Chancery Division, in granting a bank's application to restore a company to the register of companies, ruled that, where the Crown disclaimed property vested in it following the dissolution of a company, that disclaimer, under section 1012 of the Companies Act 2006 (CA 2006), was not a 'disposition' of property, and the effect of restoration of the company to the register was that its freehold estate was retrospectively re-created and re-vested in the company in all respects as if it had never been dissolved and as if the freehold had never been disclaimed.

What was the background to the application, briefly?

The bank had provided a loan facility to Fivestar Properties Ltd (the Company) which was secured by way of a legal charge over the freehold in commercial premises (the Property) owned by the Company which had been leased to a large commercial tenant.

The company defaulted on repayment. The bank appointed receivers, who pursued rent from the tenant (which had been paid to another company). Administrators were subsequently appointed (while the receivers were in office) who resolved a claim for unpaid rent. The administrators’ exit strategy from administration was dissolution, and they gave notice under paragraph 84(1) of Schedule B1 to the Insolvency Act 1986. The administrators’ final report stated that there were no further assets to be realised, albeit the freehold was still vested in the Company (as the same report later acknowledged). The Company was dissolved.

On dissolution, the assets remaining in the company's ownership vested in the Crown as bona vacantia under CA 2006, s 1012, which included the Property. The tenant sought to renew the lease and served notice on the Crown. The Crown then disclaimed any interest in the Property pursuant to CA 2006, s 1013.

The tenant was left in limbo since the Company did not exist in order to grant a lease and the Crown had disclaimed any interest it had in the Property such that under the terms of the disclaimer the Property never vested in the Crown.

The bank applied to restore the Company to the register of companies together with declarations as to the effect of restoration, followed immediately by an order winding up the Company.

What were the legal issues the judge had to decide in this application?

The bank had standing to make the application for restoration on several grounds and the question of restoration was straightforward given the broad statutory test. The real issues for determination were:

• what interest in the Property, if any, still existed after disclaimer? If there was an interest, who did it vest in?

• what was the effect of restoration of the Company in those circumstances?

• should the Company be restored and then wound up?

What were the main legal arguments put forward?

There is decided authority which provides that disclaimer by the Crown of a lease determines that specific interest in the lease (but not subordinate interests). There was, however, no settled law on restoration where a freehold has been disclaimed.

The bank contended that when the freehold of a property was disclaimed by the Crown, it escheated to a different part of the Crown (with a boomerang effect) because the Property cannot be ownerless. There was still a record maintained of the freehold at the Land Registry (as was to be expected under rule 173 of the Land Registration Rules 2003, SI 2003/1417) however an interest beyond a paper record still existed.

The bank further contended that on restoration a company was treated as if it had not been dissolved which was justification itself to unravel the disclaimer and boomerang effect pursuant to CA 2006, s 1012(2).

In addition, the bank contended that the court should treat (on restoration) disclaimer of a freehold interest no less favourably than disclaimer of a leasehold interest, even though the effect of disclaimer on each is different.

The bank, therefore, sought an order for restoration to the register together with orders in relation to the Property pursuant to CA 2006, s 1012(2), alternatively CA 2006, s 1017 and in the further alternative pursuant to section 181 of the Law of Property Act 1925 (LPA 1925) for certainty that the Property was and remained vested in the Company.

What did the judge decide, and why?

The court held that the disclaimer did not, per se, extinguish the Crown’s right to the Property—the right to the Property remained vested in the Crown, however it escheated to a different department (without any liability for the Property).

The corollary of restoration was that the Company was deemed to have continued in existence as if it had not been dissolved and the Property should be treated in the same way (unless the Crown had disposed of its interest, in which a claim for the price would have to be made). For the purposes of restoration, the court would not treat disclaimed freehold interest differently to disclaimed leasehold interests as there was no logical reason to do so, but also it would be contrary to public policy for there to be a difference. In addition, there was no reason to treat the Crown any more favourably when it came to disclaimer of a freehold which escheated back to it (such that the Property could only remain vested in the Crown) because:

• it was the Crown’s decision to disclaim in the first instance, and

• the Crown always had the option to dispose of the bona vacantia interest in the Property (for value) rather than disclaim it

Finally, the disclaimer was not capable of being called a disposition by the Crown and more importantly neither was the automatic escheat thereafter, therefore the court was able to make orders in respect of the Property.

It was just to restore the Company to the register. It was also right to grant declaratory relief that on restoration the freehold interest in the Property was recreated and re-vested in the Company as if the Company had not been dissolved and as if there had never been a disclaimer. Thereafter, the court was satisfied that it ought to wind up the Company for the Property to be dealt with.

To what extent is the judgment helpful in clarifying the law in this area?

Freehold and leasehold interests are substantially different in nature and effect, particularly in the context of Crown disclaimer. Where the court restores a company to the register it will endeavor (insofar as statute permits) to restore the position of the Company as if the dissolution had not taken place. This is the case where the Property has been disclaimed by the Crown, even if it has later automatically escheated back to the Crown.

The judgment also clarifies that, even where Property escheats to the Crown, this will not be treated as a disposition, such that orders or declaratory relief can be granted.

What practical lessons can those advising take away from this case?

This judgment has filled an ancient lacuna that existed on restoration of companies where a freehold has been disclaimed. This may only be a rare occurrence, but one which the court has the power to deal with.

The real practical lessons though can be found in para 25 of the judgment. The court expressed surprise that the administrators had permitted the Company to be dissolved where it still held the freehold interest in land. The court also explored alternative methods by which property that was owned by a dissolved company might otherwise be realised, for example:

• as a disclaimer by the Crown does not terminate subordinate interests, a mortgagee ought to be sufficiently secured to sell the freehold of the Property without restoration (although the court accepted this might not be possible in every case)

• an application can be made for a vesting order under CA 2006, s 1017, although this comes with uncertainties

• the court can also use LPA 1925, s 181 to create and vest a corresponding estate in the Company on restoration

The practical lessons to be taken away are these:

• these scenarios ought to be avoided if possible by office-holders

• if this cannot be avoided, alternative methods (without restoration) ought to be considered, although not all of these will always be available

• most solutions will require court orders

• in reality, whichever option is available or selected, certainty is best achieved by obtaining a court order

Amit practices in general commercial litigation with a strong focus on insolvency. Amit has a wealth of experience in insolvency work; he is instructed on cases pre and post an insolvency procedure, including setting aside or resisting transactions at an undervalue or preference payments. He is also instructed in high value wrongful trading claims and general insolvency applications, including cases about the validity of administration appointments. He acts for individuals, companies, partnerships and insolvency practitioners. Amit acted for the bank in this case.

Interviewed by Stephen Leslie.

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

Further Reading

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Restoration to the register by court order

How an administration comes to an end

Dissolution and bona vacantia—dealing with the Treasury Solicitor

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First published on LexisPSL Restructuring and Insolvency