Case No. 9508-OF-2007

This is an application by Hughmans Solicitors against Central Stream Services Limited (in liquidation) (“the Company”) and Stephen Hunt (its liquidator) for an order for payment out of the proceeds of sale of a property known as 3 Tisdal Place, London SE17 1QQ (“the Property”) of the sum of £19,000 odd, to which Hughmans claim to be entitled as a judgment debt supported by a final charging order against the Property. The judgment debt arose from a claim for professional fees for work done by Hughmans as solicitors to a Mr Davidson, the registered proprietor of the Property at the time when the charging order was obtained.

The respondents claim a prior secured right to the whole of the net proceeds of sale of the Property by virtue of the contractual terms of the schedule to a Tomlin Order dated 13 June 2008 (“the Schedule”) made by way of compromise of proceedings by the Company, by its liquidator, against Mr Davidson. Hughmans acted for Mr Davidson in those proceedings and signed the Schedule on his behalf. The issues, concisely argued by counsel at the hearing of this application in the ordinary applications list (being Mr Warwick for the applicant and Mr Lewis for the respondents) may be summarised as follows:

Did the Schedule give rise to a proprietary interest of the Company in the Property?

If so, did the obtaining of the charging order, and its protection at HM Land Registry by a unilateral notice, have the effect of conferring priority in favour of the applicant over the Company’s interest?

Mr Davidson was the second defendant to the Company’s claim. The single recital to the Schedule recorded that the company and Mr Davidson had agreed to settle the Company’s claim by the Company accepting the net sale proceeds of the Property, following payment of certain debts of Mr Davidson, “provided always that the Claimant (the Company) shall receive not less than £100,000.” The operative terms of the Schedule may be summarised as follows. Paragraph 1 contained a provision for judgment against Mr Davidson for £10.2m if he should be shown to have mis-stated his assets pursuant to an earlier disclosure order made by Lindsay J in December 2007. Paragraph 2 provided that the Property should be sold for such price as might be agreed by the parties or in default of agreement as determined by the Court. Paragraphs 3 and 4 provided for Mr Davidson to have conduct of the sale, for his solicitors Hughmans to have conduct of the conveyancing work, subject to a reporting obligation to the Company, and for the parties to agree (or for the court to nominate) estate agents for the purposes of marketing.

Paragraph 6 provided as follows:

to discharge the mortgage secured thereon in favour of National Westminster Bank;

in payment of £100,000 to the Claimant;

in payment of Hughmans’s reasonable conveyancing costs and disbursements in connection with the sale;

in payment of the estate agent’s fees;

in payment of the following debts of the Defendant:

any shortfall showing on the completion statement in relation to the sale of 52 Park View Road;

the reasonable fees and disbursements of Hughmans in connection with this action;

debt owing to National Westminster Bank in connection with personal loan account, the subject of a Judgment in the Northampton County Court under claim number 8QR50189;

debt owing to National Westminster Bank in connection with credit card reference 5522 1395 0007 7395;

debt owing to MBNA in connection with credit card account reference 4129850349499133;

debt owing to Egg in connection with credit card account reference 4627654919450309.

In payment of any remaining balance to the Claimant.”

Paragraph 7 provided for the Company to remove a restriction registered against the Property upon receipt of payment pursuant to Paragraph 6. I infer that this was a restriction designed to give notice of a freezing order earlier obtained against the Mr Davidson from Lindsay J on 18 December 2007. Paragraph 8 provided for the Company to be entitled to the outstanding balance of the judgment debt of £10.2m (less amounts received pursuant to Paragraph 6), should Mr Davidson enter into a IVA or become bankrupt. Paragraph 9 contained a standard form full and final settlement provision.

The Tomlin Order itself provided in the usual way for a stay of the proceedings against Mr Davidson, save for the putting into effect of the terms of the Schedule, and for the discharge of the freezing order upon receipt by the Company of the funds referred to in Paragraph 6 of the Schedule.

It appears to have been assumed by the Company, Mr Davidson and Hughmans at the time of the making of the Tomlin Order that the net proceeds of sale of the Property would be sufficient to discharge the mortgage debt owing to National Westminster Bank, the initial £100,000 payment to the Company and at least some of Mr Davidson’s debts, including Hughmans’ fees and disbursements in connection with the action, referred to in Paragraph 6.5(b) of the Schedule. Unfortunately, the subsequent fall in the property market undermined this assumption.

Hughmans ceased to act for Mr Davidson in November 2009. In March 2010 they commenced proceedings for unpaid fees against him, leading to the obtaining of a judgment for £15,635.83 plus interest in default of defence, amounting in total to £19,004.18 inclusive of interest, on 12 April 2010. On 29 April Hughmans obtained an interim charging order in relation to the Property and, after duly notifying the Company by its liquidator (and obtaining an acknowledgment of receipt) Hughmans obtained a final charging order on 27 August 2010, which they made the subject of a unilateral notice at HM Land Registry.

In October 2011 the liquidator’s solicitors served a form requesting the removal of the unilateral notice in relation to the Property, so as to permit it to be sold. Hughmans having declined, an arrangement was reached pursuant to which the notice would be removed, and the Property sold, but a sufficient sum out of the net proceeds (after paying National Westminster Bank) retained on client account by the liquidator’s solicitors to protect Hughmans’ claim to priority.

The Property was eventually sold so as to produce net proceeds of sale (after paying National Westminster Bank) of only £49,104.07. Thus, the priorities set forth in Paragraph 6 of the Schedule would lead to the whole of that sum being payable to the Company pursuant to Paragraph 6.2.

Mr Lewis for the respondents put his case under three headings: Equitable Charge, Declaration of Trust and Estoppel. Relying on Palmer v Carey [1926] AC 703, he submitted that the Property and its proceeds of sale constituted a fund from which, pursuant to a contract for valuable consideration, the Company was to be paid £100,000, in priority to all other claims upon it, save only the first mortgage of National Westminster Bank plc. The Company’s rights in relation to the £100,000 therefore had all the traditional characteristics of an equitable charge.

Mr Warwick for Hughmans based his response on the following dictum of Lord Neuberger MR in Tradegrow (UK) Ltd v Wigmore Street Investments Ltd [2011] EWCA Civ 268 at paragraph 36:

Mr Warwick submitted that the Schedule came nowhere near containing sufficiently clear words to display an intention that Paragraph 6.2 should operate by way of equitable charge over the Property. He pointed out that Paragraph 6.2 (in relation to the £100,000) was only one of some eleven stages in the agreed priority of payments out of the proceeds of sale of the Property, and that none of the other stages, save perhaps for the last, could possibly satisfy the Palmer v Carey (or for that matter Flightline) requirements, not least because none of the intended recipients of those payments were parties to the agreement contained in the Schedule, so as to be able to obtain specific performance of its terms. Finally, Mr Warwick submitted that any proprietary interest (whether by charge or trust) which might attach to the proceeds of sale did not in any event extend to the Property itself, pending sale.

I have not found this question easy to resolve, there being real force in counsel’s opposing submissions. In the end I have concluded that the Schedule did create a proprietary beneficial interest in the Property in favour of the Company, by way of trust, rather than equitable charge. My reasons follow.

The starting point is that I consider it to be too blinkered an approach to focus purely on Paragraph 6.2, containing the priority treatment of the £100,000. The Schedule must be reviewed as a whole, for the purpose of deciding whether it displays a sufficient intention to confer a proprietary interest on the Company. For that purpose I have found the recital to the Schedule to be of particular assistance. The object and intent of the compromise recorded in the Schedule was for Mr Davidson to give to the Company, in lieu of its monetary claim in the pending proceedings, the whole of his own beneficial interest in the Property, subject only to the payment of certain of his debts, out of any net proceeds of sale in excess of £100,000. Mr Davidson’s beneficial interest was already circumscribed by the priority of National Westminster’s legal charge. On the face of it, Mr Davidson was settling the company’s claim by agreeing to give the Company the whole of his net equity in the Property, subject only to retaining a sufficient sum for himself (if the net proceeds exceeded £100,000) with which to pay certain debts.

In my judgment that sufficiently disclosed an intention on the part of the parties to the Schedule that, thenceforth, the Company should be the beneficial owner of the Property subject to the National Westminster Bank charge, save only for that part of any net proceeds of sale in excess of £100,000 necessary to discharge the debts of Mr Davidson identified in Paragraph 6. The result is not an appropriation of the Property, or even of its proceeds of sale, by way of security for some debt of Mr Davidson to the Company. The Company received a share of the proceeds in lieu of Mr Davidson’s alleged liability. Paragraph 6.2 of the Schedule is simply part of the mechanism designed to ensure that Mr Davidson’s reservation of rights to use the proceeds of sale for payment of certain debts should not impact upon the Company realising at least £100,000 (if otherwise available after satisfying National Westminster Bank’s legal charge) from the proceeds of sale.

There is in my judgment nothing in the point that the detailed description in the Schedule of the Company’s and Mr Davidson’s rights in relation to the Property is expressed by reference to its proceeds of sale. It is common for a declaration of trust of real property to be expressed by reference to proceeds of sale, rather than by reference to the property itself, without thereby depriving the intended beneficiaries of proprietary interests in the property.

Accordingly, I consider that the Schedule confers a beneficial interest upon the Company in relation to the Property, not by way of equitable charge, but by way of trust. For reasons which will become apparent, the question whether absent that conclusion a similar result might have been arrived at as against Hughmans by way of estoppel does not arise. If I had concluded that the Schedule was not intended to confer a proprietary beneficial interest in the Property on the Company, I would have found it very difficult to envisage how the opposite result might have been arrived at as against Hughmans by way of estoppel, and Mr Lewis did not spend much time or effort in seeking to persuade me otherwise.

The basic rule as to priority between competing equitable interests in relation to registered land is laid down in unambiguous terms by Section 28 of the Land Registration Act 2002 (“the Act”). Priority is determined by the order in which those equitable interests are created. Section 28 provides as follows:

It makes no difference for the purposes of this section whether the interest or disposition is registered.”

For the purposes of subsection (1), the priority of an interest is protected –

In any case, if the interest –

Is a registered charge or the subject of a notice in the register,”

The common feature of Sections 29 and 30, (which are identified as the only exceptions to the basic rule in Section 28(1), is that priority for a later interest over an earlier interest is conferred by registration (including by way of notice) if, but only if, the later interest is a disposition made for valuable consideration. If it is, then the earlier interest loses its priority if not protected on the register. If it is not, then the priority of the two competing equitable interests continues to be governed by the order of their creation.

For present purposes, I shall (as invited to do by Mr Warwick, without demur from Mr Lewis) assume that the obtaining of a final charging order is a registrable disposition of a registered estate, and that the registration of a unilateral notice in relation to it constitutes “completion of the disposition by registration” within the meaning of Section 29(1). Nonetheless, it is for Hughmans to show that their charging order is a disposition “made for valuable consideration”: see Halifax plc v Curry Popeck [2008] EWHC 1692 (Ch) at paragraph 46 per Norris J.

Section 3(4) of the Charging Orders Act 1979 provides that:

Most equitable charges are of course made for valuable consideration, and their enforcement in equity may depend upon that. Nonetheless, some equitable charges may be conferred voluntarily rather than for valuable consideration: see Megarry & Wade’s Law of Real Property (8^th Edition) at paragraph 24-042. It would therefore be wrong in my judgment to read section 3(4) as containing within it an unspoken presumption or deeming provision to the effect that a charge imposed by a charging order should, for the purposes of the Land Registration Act 2002 or otherwise, be treated as having been created for valuable consideration.

The question whether a charging order should be so treated arose directly in United Bank of Kuwait plc v Sahib [1997] Ch 107. The case concerned a competition between two banks for priority in respect of their competing alleged equitable interests in freehold registered land. The defendant bank claimed an equitable charge by the proprieor’s deposit of the land certificate in its favour. The claimant bank relied upon a subsequently obtained charging order. Chadwick J held that the charging order was obtained by the claimant bank as a volunteer, rather than for valuable consideration, for the purposes of the rule in Dearle v Hall. Nonetheless since, following the coming into force of the Law Property (Miscellaneous Provisions) Act 1989, there could be no equitable charge created by deposit of title deeds, the claimant bank succeeded. The Court of Appeal upheld Chadwick J’s decision on the issue as to the effect of the 1989 Act. It heard no argument, and therefore expressed no view, on the question whether the recipient of a charging order is a volunteer. Chadwick J’s conclusion to that effect was based upon his analysis of the effect of Scott v Lord Hastings (1858) 4 K & J 633, which decided that a judgment creditor under a charging order (under section 14 of the Judgments Act 1838) obtained thereby no priority over an earlier equitable assignment of the debtor’s interest in the relevant property. He concluded that the modernisation of the language in section 3(4) of the Charging Orders Act 1979 gave rise to no difference in substance, and continued, at page 119G:

In seeking to uphold Hughmans’ claim to priority by virtue of its charging order, Mr Warwick was constrained to submit that I should not follow Chadwick J’s analysis, namely that the recipient of a charging order under the Act of 1979 is a volunteer, and gives no valuable consideration. But he could provide no persuasive reason why I should not do so. On the contrary, I consider that Chadwick J’s analysis is compelling and correct. It seems to me most unlikely that the draftsman of the 1979 Act was unaware of Scott v Lord Hastings, still less that it was part of the purpose of the 1979 Act to confer upon the recipient of a charging order any priority over the holder of a prior beneficial interest in the relevant property, even if unprotected by registration.

The result therefore is that the Company obtained by the Schedule a beneficial interest in the Property which entitled it to the whole of the net proceeds of sale thereof after satisfying National Westminster Bank’s legal charge, since those net proceeds fell short of £100,000. The subsequent obtaining by Hughmans of a final charging order was ineffective to confer priority for its consequential equitable charge over the Company’s beneficial interest in the Property. I should add that I was wholly unpersuaded by Mr Warwick’s attempt to conjure an estoppel from the Company’s decision not to oppose the making final of Hughmans’ charging order (after due notice). The Company and its solicitors were entitled to take the view that, even if Hughmans had its charging order made final, this would confer no priority for Hughmans’ claim over the Company’s beneficial interest.