Liquidators successfully challenge grant of 999 year leases

Background

A press release issued by the government in June last year noted that 3 directors of a company called Oak Forest Partnership Limited who were involved in an '£8.9 million hotel room investment scheme' had been disqualified from running companies for a total of 25 years. 

The press release summarises the background to their disqualification and notes that an investigation by the Insolvency Service uncovered 'that the directors caused Oak Forest Partnership to enter into three questionable agreements that benefited the company and left investors being owed millions of pounds'.  The summary also notes that liquidators of Oak Forest Partnership 'are continuing to establish whether funds, or recovery of funds, is a viable option'.

The case

Fast forward to July 2023 and the liquidators of Oak Forest Partnership Limited (Oak Forest) and another company called Oak Property Partners Limited (Oak Property) (which owned a different property in similar circumstances) have indeed brought a claim seeking to undo the various 'questionable agreements'.  Two freehold properties were involved, one known as Hever and the other Needham, and these were owned by the above two companies respectively. The 'questionable agreements' included 999 year common parts leases in relation to each site and then transactions flowing from those leases to various connected companies. These transactions had the effect of extracting significant value from the relevant freehold and the company which owned it, at the expense of creditors.

Companies Act 2006 (CA 2006)

Under section 171 CA 2006 a director must:

• act in accordance with the company's constitution, and
• only exercise powers for the purposes for which they are conferred

In this case one of the arguments put forward by the liquidators of Oak Forest and Oak Property was that the 999 year common parts leases should be declared void because those who executed the leases were not exercising the powers of directors for the purposes for which those powers were conferred and did not act in a way that they considered, in good faith, would best promote the success of companies for the benefit of its members as required by s.172 CA 2006.

Hever

In relation to the grant of the 999 year common parts lease at Hever, based on the evidence presented at trial, the judge found that the decision by the directors of Oak Forest to grant the 999 year lease to Company A which was found to be linked to, and controlled by a shadow director of, Oak Forest was not made in good faith to promote the success of Oak Forest. It was noted that there 'there was no genuine or acceptable commercial purpose' in relation to the grant of the lease.  It therefore not done in accordance with the purpose of the power conferred on the directors to deal with the property and was void. The judge found that on the facts the sole purpose of granting the common parts lease was to was avoid a legitimate charge being registered against the unencumbered Hever freehold title.  However as title to the lease had passed due to the statutory intervention of the Land Registration Act 2002, Company A to whom the lease was granted (which as noted above was linked to Oak Forest and controlled by the same person) held its title on trust for Oak Forest.

In relation to the Hever common parts lease there was then also a series of further dealings, including a charge over the lease and a disposal of the lease pursuant to that charge (with the lender selling as a mortgagee in possession). However, these transactions all involved companies connected to Oak Forest and which were found on the facts to be under the control of the same person who had knowledge of the situation. As a result of this control, all these entities were found on the facts not to be purchasers for value acting in good faith and without notice of the resulting trust in favour of Oak Forest.  They therefore also all held or had held their interest on bare trust for Oak Forest.

When it comes to value the judge noted that the 'requirement of a purchase for value does not mean the consideration has to be shown to be adequate but it does require more than nominal consideration.' In this case it was found that on the facts a payment of £20,000 in relation the common parts lease was not adequate consideration.

Needham

A similar fact pattern applied at Needham, the freehold of which was owned by Oak Property. A 999 year common parts lease was granted to Company B which was found to be linked to, and controlled by the same person as Oak Property.  The grant of the lease was held to be a depletion of Oak Property's assets for the benefit of Company B. The judge found that the grant of the common parts lease was not an exercise by the directors of the power to demise in accordance with the purpose of the power, namely, to promote Oak Property's success. On the contrary, it was a decision that was not in the interests of Oak Property (its members or creditors) and was described as a fraud on the power. As such it was a void transaction.

Again as title to the lease was registered and legal title had passed in accordance with the Land Registration Act 2002, the judge found Company B held its leasehold title on trust for Oak Property.  There was again a subsequent transaction in relation to the lease but this was also to a related company.   On the facts of the case, it was noted in relation to both Company B and the related company that the defence that they were purchasers for value acting in good faith and without notice was 'unsustainable'.

Remedies

In addressing the remedies the available the judge proposed a court order vesting the common parts leases in Oak Forest and Oak Property to allow them to them to then be merged back into the freehold.

The judge also looked at rectification and held that as the original transactions were void the original registrations of both common parts leases were mistakes. As such the registrar would not have entered them or the subsequent transactions had the true facts been known. There was therefore jurisdiction to alter the register, subject to the restrictions on doing so which are set out in the Land Registration Act 2002 and which were found not to apply in this case.

Oak Forest Partnership Ltd (In Liquidation) and others v Mercantile Investment Holdings Sa and other companies [2023] EWHC 1903 (Ch)