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In that paragraph Lord Drummond Young stated: If all that Parliament is doing in a consolidation statute is to reproduce the existing law, with no scope for significant change, it cannot be said that there is any genuine endorsement of any cases interpreting the statutes concerned. Ratio |
There is no power to do so. Ratio |
I agree with that statement; the re-presentation of the same statutory phrase in two sub-paragraphs in section 98(5) of a consolidation statute cannot amount to a parliamentary endorsement of prior case law. Ratio |
Even if such a presumption applied, I am not persuaded that it would be sufficient to support the liquidators case. Ratio |
It would be necessary to put in the balance against it both the harsh and anomalous results which I have mentioned and the mismatch between the interpretation in Shorts Trustee and Cays Trustee on the one hand and the established principled approach of Scots common law on the other, both of which are matters which the ... |
The general approach of the law is that when a person seeks to annul a transaction, for example on the basis that a contract was induced by fraudulent or innocent misrepresentation, the court will only grant decree of reduction if it is able to place the defender substantially in the position it would have been in if t... |
In Spence v Crawford 1939 SC (HL) 52 the House of Lords made it clear that the court has power to order monetary adjustments to restore the defender to its pre-contract position. PRE |
Lord Wright stated at p 77: restoration is essential to the idea of restitution. PRE |
To take the simplest case, if a plaintiff who has been defrauded seeks to have the contract annulled and his money or property restored to him, it would be inequitable if he did not also restore what he had got under the contract from the defendant. PRE |
Though the defendant has been fraudulent, he must not be robbed nor must the plaintiff be unjustly enriched, as he would be if he both got back what he had parted with and kept what he had received in return. PRE |
The purpose of the relief is not punishment, but compensation. PRE |
It appears from the limited authorities that are available that the law before the 1985 statutory reforms provided as the only remedy the annulment of the gratuitous alienation if such annulment was possible. Ratio |
Where the alienation was wholly gratuitous, the question of restitution of the defender did not arise. Ratio |
But where the insolvent had sold at an undervalue the law did not provide for a general restitutio in integrum: Tennant v Miller (above). Ratio |
Similarly, in relation to fraudulent preferences, Bells Commentaries (above), (p 217), in addressing the 1696 Act (c 5) (viz para 25 above), stated: It may be questioned whether the success of the reduction is to be accompanied by a restitutio in integrum, so that the defender shall hold the same advantages when depriv... |
The answer seems to be, that a restitutio in integrum is no part of the reduction on the Act 1696, nor necessarily implied as a condition of it; but that as the creditors are entitled to reduce only in so far as the deed is prejudicial to them, their success will be limited to the effect of restoring them to the full b... |
Bell went on to state, as an example, that if a creditor had renounced a security which he had held over any part of the insolvents estate in exchange for the impugned security, he would be entitled to the full benefit of the old security when the new security was annulled, because it was only to the extent of the diff... |
Further, in Thomas v Thomson (1866) 5 M 198, which concerned an application by a trustee in bankruptcy to annul a security in the form of an ex facie absolute disposition on the ground that it was a fraudulent preference, the court ordered a partial reduction only, which preserved the security in so far as it secured a... |
The prior law was thus not wholly inflexible and allowed a partial restitutio in integrum in the context of the annulment of the document which effected the preference. Ratio |
Reduction was also not the only remedy under the prior law. Ratio |
Where the transaction could not be nullified, for example where property which an insolvent company had purchased from one of its directors at an overvalue had been sold to a third party in good faith and for value, the court allowed the liquidator to recover from the director a sum of money representing the difference... |
In that context the remedy reflected the disadvantage which the companys creditors had suffered as a result of the impugned transaction and gave them no windfall. Ratio |
The law before the 1985 statutory reforms appears to have been a partial exception to the general principle that the annulment of a transaction necessarily involved restoring the defender to its pre-transaction position. Ratio |
But there is only very limited case law on the point, which the Scottish Law Commission did not discuss. Ratio |
The 1985 statutory reforms, by imposing on a purchaser, who is not an associate of the insolvent, the burden of proving adequate consideration was paid, have increased the risk that a bona fide purchaser may suffer injustice if there is no flexibility in the remedies which the court can give. Ratio |
Such an outcome would also deter rescue transactions involving the purchase of assets from distressed businesses and hamper the rescue culture which statutory insolvency law has sought to promote. Ratio |
These considerations point towards a more flexible interpretation of the remedies provided in section 242(4). Ratio |
But, as I have said, there is nothing in the Scottish Law Commissions report which explains the policy behind its recommendation which has found its way into section 242 of the 1986 Act. Ratio |
The court must therefore fall back on the statutory words, which are broad enough to allow the court in an appropriate case, and if justice requires it, to devise a remedy to protect the bona fide purchaser of property from a reversal of its purchase which would otherwise give the creditors of the insolvent a substanti... |
The general approach to the annulment of transactions requires no more from a fraudster than that he or she compensate the victim, as Lord Wright stated in Spence v Crawford (para 58 above). Ratio |
Section 242(4) does not mandate restitutio in integrum in every case. Ratio |
But neither does it exclude such restitution as part of the appropriate remedy. Ratio |
It is not open to doubt that an insolvency operates adversely on the insolvents unsecured creditors who have paid for goods or services which they have not received or have provided goods or services and not been paid. Ratio |
Gratuitous alienations or unfair preferences by an insolvent can cause further harm to unsecured creditors. Ratio |
The pre-1985 law, by not requiring full restitutio in integrum, had the benefit of discouraging transferees from entering into transactions by which an insolvent person transfers his or her assets gratuitously or at an undervalue. Ratio |
Since the 1985 statutory reforms, there may be circumstances in which the court considers it appropriate to annul a transaction which was a gratuitous alienation without also ordering the repayment of the inadequate consideration, thus leaving the transferee to rank an unsecured claim for unjustified enrichment in the ... |
For example, business associates of an insolvent might knowingly seek to obtain property at an undervalue to the prejudice of the insolvents creditors. Ratio |
The words of section 242(4) of the 1986 Act leave open that option to the court. Ratio |
But there would in my view need to be clear statutory words to require the court in all circumstances to penalise the purchaser of property who had no knowledge or incomplete knowledge of the circumstances of the insolvent and who was not colluding to remove assets from the reach of the insolvents creditors. Ratio |
There are no such words in the subsection. Ratio |
There will be cases in which, as the commentators have suggested, it would be wholly disproportionate and unfair to annul the property transfer without giving the bona fide purchaser credit for the consideration which it has paid. Ratio |
In my view, section 242(4) gives the court sufficient power to devise an appropriate remedy. Ratio |
This does not involve a general equitable jurisdiction to take account of the personal and financial circumstances of the defender such as was envisaged by section 35 of the Bankruptcy (Scotland) Act 1985 (now section 100 of the 2016 Act). Ratio |
Nor does this approach call into question Lord Kingarths conclusion that section 243 (and by analogy section 242) does not allow a liquidator to seek what was in substance damages from a defender. Ratio |
The question for the court is simply whether in devising a remedy for the gratuitous alienation by restoring property or value to the insolvents estate in a particular case it should order that credit be given in some way for the consideration which a bona fide purchaser has paid. Ratio |
In so far as Shorts Trustee v Chung and Cays Trustee v Cay held that the court did not have this power, I respectfully conclude that they were wrongly decided and should not be followed. Ratio |
The question of whether the subsection is consistent with article 1 of the First Protocol to the European Convention on Human Rights (A1P1) does not arise in this context. Ratio |
This is because there is no need to read down the words of section 242(4) to avoid a disproportionate result as there is nothing to prevent the court in a particular case from taking account of the consideration paid by the transferee in devising the remedy. Ratio |
Because of that determination, I also see no reason to question the conclusion which was reached in cases in the Outer House that Parliament acted within its wide margin of appreciation in providing for remedies against gratuitous alienations and unfair preferences in the 1985 statutory reforms without creating a gener... |
There may also be cases where the purchase of the alienated property is wholly funded by borrowings and the bona fide third party lenders security is protected by the proviso to section 242(4), enabling it to recover its lending by calling up its security or by allowing the liquidator to realise the secured asset in th... |
In such case there would be no call for the court to qualify in any way its annulment of the transfer as the interested parties themselves can achieve substantive restitutio in integrum. Ratio |
Counsel for the liquidators inform the court that the liquidators have recognised the validity of the Banks security by virtue of the proviso to section 242(4). ARG |
As a result, if the Bank still had a claim for the sums it had lent to Carnbroe, Grampians creditors would receive no windfall through the reduction of the disposition of the Property. ARG |
But in written submissions since the hearing, backed by supporting documents, counsel for Carnbroe inform the court that Carnbroe repaid its borrowings for the purchase of the Property in July 2016. ARG |
Counsel also explain that Carnbroe has recently re-financed and consolidated its borrowings by taking out a facility from Together Commercial Finance Ltd (TCFL). ARG |
Counsel state that the Banks securities over the Property have been discharged and that there are now no securities covering the Property. ARG |
But these are not, as yet, agreed facts, in part because Carnbroes lawyers have not authorised the Bank to confirm the position to the liquidators lawyers and in part because the re-financing by TCFL has occurred very recently. ARG |
It ought to be straightforward for Carnbroe to provide documents to vouch these assertions to the liquidators and for the liquidators advisers to search in the Land Register and at Companies House to avoid further dispute about these facts. ARG |
In the light of this judgment and the absence of agreed facts, it is necessary to afford the First Division an opportunity to consider whether it is appropriate in the circumstances of this case to qualify the remedy of reduction which it has given to take account of all or part of the consideration which Carnbroe gave... |
Conclusion RPC |
I would allow the appeal but only to the extent that I would remit the case to the First Division to consider what is the appropriate remedy under section 242(4) in the light of the courts power to give appropriate redress. RPC |
I would allow the appeal but only to the extent that I would remit the case to the First Division to consider what is the appropriate remedy under section 242(4) in the light of the courts power to give appropriate redress. RPC |
This appeal concerns what is sometimes called a fully qualified covenant in a lease of real property. FAC |
Leases commonly contain a series of covenants by the tenant not to do things, typically relating to assignment, sub-letting and the use of the demised premises. FAC |
By what is called a qualified covenant, the tenant promises not to do something without the landlords consent. FAC |
By a fully qualified covenant, the tenant promises not to do something without the landlords consent, not to be unreasonably withheld. FAC |
In the present case, the tenant promised not to apply for any planning permission without the consent of the landlord, not to be unreasonably withheld. FAC |
The tenant wished to apply for planning permission for a change of use of part of the demised premises, from business to residential use, but the landlord refused consent on the ground that this would substantially increase the risk that the tenant could compulsorily acquire the freehold reversion under the Leasehold R... |
The tenant claimed that the landlord was unreasonably withholding consent. FAC |
Both the judge and the Court of Appeal agreed. FAC |
This was in their view because, although the premises were in mixed use at the time of its grant, the lease permitted the tenant to use the whole of the premises for residential purposes. FAC |
Since this inevitably exposed the landlord to the risk of a compulsory purchase of the freehold (enfranchisement), to refuse permission to the tenant to seek planning permission for a change of use of part of the premises to residential use was to seek to obtain an uncovenanted advantage falling outside the purpose of ... |
The landlord appeals to this court, upon the basis that protection against an increased risk of enfranchisement is a well-recognised and legitimate reason for refusing consent under a fully qualified covenant, within the general purposes of restrictive covenants in leases, namely the protection of the value of the reve... |
The Facts FAC |
The leasehold property in question is a terraced building at 51 Brewer Street London W1, being part of the appellants Soho estate which includes numbers 39- 61 (odd numbers) Brewer Street. FAC |
No 51 is constructed over six floors including a basement. FAC |
The basement and ground floor are, in area, much greater than any of the upper floors. FAC |
By a lease dated 4 April 1986 (the Lease) the whole of No 51 was let by Standard Wharf (No 2) to Burgess & Galer Ltd for a 100 year term from 25 December 1985, for a premium of 200,000 and a peppercorn rent. FAC |
The respondent has been the tenant under the Lease since 1998. FAC |
The appellant is now the successor in title to the reversion under the Lease, as freeholder of No 51. FAC |
The whole of No 51 has since October 1998 been sublet, initially to Cusdens (Victoria) Ltd and, following an assignment, since 2008 to Romanys Ltd, under two successive sub- leases, the second of which will expire in September 2023. FAC |
The Lease contains the following relevant tenants covenants. FAC |
Clause 3(11) contained a general user covenant in the following terms: Not to use the Demised Premises otherwise than for one or more of the following purposes (a) retail shop (b) offices (c) residential purposes (d) storage (e) studio PROVIDED however that nothing herein contained shall imply or be deemed to be a warr... |
By clause 3(15) the Lease contained further specific user covenants prohibiting, for example, noxious noisy or offensive trades, illegal or immoral acts, use as a sex shop, use for an auction, for holding of public meetings or entertainments or use as a betting shop, public house, restaurant, off-license or wine bar. F... |
By clause 3(19) the tenant covenanted as follows: To perform and observe all the provisions and requirements of all statutes and regulations relating to Town and Country Planning and not to apply for any planning permission without the prior written consent of the Landlord such consent not to be unreasonably withheld T... |
The Lease permitted assignment of the whole (but not part) of the premises and a sub-letting of the whole or part of the premises otherwise than during the last seven years of the term, in relation to which there was a fully qualified covenant. FAC |
At the time of the grant of the Lease in 1986, the ground floor and basement of No 51 were in retail use. FAC |
The first and second floors were used for storage and as a staff area in connection with the retail use on the lower floors. FAC |
The top two floors were in occasional residential use. FAC |
At all material times the permitted use of No 51 in planning terms has been as follows: for the ground floor and basement it is retail; for the first and second floors it is office/ancillary; for the top two floors it is residential. FAC |
Between 2013 and 2015 Romanys carried out, and the respondent paid for, building works on the four upper floors of No 51 by which each floor was converted into a self-contained flat. FAC |
Although this was carried out with knowledge of the landlord, it reserved its rights to refuse an application for permission to apply for a change of use under clause 3(19) of the Lease, in respect of the first and second floors. FAC |
Following the completion of those works, the top two floors of No 51 have been let to residential tenants but, pending the obtaining of planning permission for consent to a change of use, the first and second floors remain vacant. FAC |
At the time of the grant of the Lease in 1986, the freeholder faced no immediate risk of enfranchisement because the 1967 Act imposed a residence qualification on a tenant which could not be satisfied by a limited company. FAC |
That qualification was however removed by the Commonhold and Leasehold Reform Act 2002. FAC |
Nonetheless the proportion of No 51 in residential use did not, for as long as it was confined to the top two floors, amount to a sufficient proportion of the whole building to give rise to a real risk of enfranchisement, because the building could not, in that state of occupation, be described as a house reasonably so... |
It is common ground that it was for that reason that, having served a notice of claim to acquire the freehold under the 1967 Act in October 2012, the respondent abandoned it in January 2013. FAC |
But the judge (Judge Collender QC) found, and it is not now in dispute, that if (as he thought likely) the respondent were to obtain planning permission for a change of the use of the first and second floor to residential, this would, in his words, substantially enhance the respondents prospects of obtaining enfranchis... |
On 17 April 2015 the respondent applied under clause 3(19) of the Lease for permission from the appellants predecessor in title (Tuesday One) to apply for planning permission to change the use of the first and second floors of No 51 to residential, on the basis that residential use of those two floors was permitted by ... |
In its reply refusing consent dated 30 April 2015, Tuesday One identified the increased risk of a successful claim to enfranchise under the 1967 Act as its reason for refusal. FAC |
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