Swift v Dairywise Farms Ltd

Milk quota transferred as security for a loan remains subject to the contractual and equitable rights created by the security arrangement. On repayment, the secured party may require re-transfer of equivalent quota. On default, a power of sale may be implied only if the agreement supports that construction; any sale must account for the proceeds to the borrower’s account, and the secured party cannot sell for its own benefit. Equity may relieve against forfeiture where the arrangement’s primary purpose is security. Interim protection may include transferring quota to a neutral safe haven where there is a good arguable case and any prejudice can be compensated.

The joint liquidators of Dairywise Limited sought directions concerning milk quota transferred by borrowers to Dairywise Farms Limited under lending arrangements. The quota was registered in Farms’ name through short agricultural leases and was leased back to the borrowers. The liquidators claimed that Farms held the quota on trust and sought directions concerning re-transfer, sale and the proceeds.

Mr Justice Jacob held that quota could be trust property, that Farms held it on trust for Dairywise, and made a subsequent order requiring its transfer to a liquidator-nominated safe haven: [2000] 1 WLR 1177. The pension trustees appealed. The central issues were the parties’ rights on repayment or default, the availability of relief against forfeiture, and the validity of the safe haven order.

1. Contractual term and re-transfer. The Loan Term was to be treated provisionally as co-terminous with the contractual term of the primary loan, subject to earlier repayment or a demand for immediate repayment following default. During that term Farms could not deal with transferred quota for its own benefit. On repayment, Farms was obliged to re-transfer an equivalent amount of quota, and that obligation was enforceable by both the borrower and Dairywise.
2. Default and sale. The arrangements created security. Equity would therefore provide relief against forfeiture where necessary to give effect to the underlying security purpose, following Shiloh Spinners Ltd v Harding [1973] AC 691. A power of sale was not expressly provided and did not arise under section 101(1) of the Law of Property Act 1925. It might nevertheless be implied at common law, as recognised in Deverges v Sandeman Clark & Co [1902] 1 Ch 579. The point was left open because borrowers were not represented. If implied, the power permitted Dairywise to direct Farms to sell, with the proceeds accounted for against the borrower’s debt. Farms could not sell for its own benefit.
3. Safe haven order. The judge was entitled to make an interim order transferring the quota to a nominated safe haven. There was a good arguable case that the pension trustees knew the lending scheme depended on their acquiescence and cooperation. Applying the unconscionability approach described in Taylors Fashions Ltd v Liverpool Victoria Trustees Co Ltd [1982] QB 133, they could be estopped, for interim purposes, from relying on the tenancy restriction. Dairywise also had an arguable interest sufficient to seek restoration of the tenancy after forfeiture, relying on Bland v Ingram’s Estates (21 December 2000, unreported).
4. The appeal was dismissed, subject to varying the order to reflect that quota was re-transferable on repayment, that sale on default was permissible if a power of sale existed, and that the proceeds belonged to Dairywise for the borrower’s account.

• Court of Appeal: appeal dismissed, with the order varied to reflect the court’s answers on re-transfer, sale and sale proceeds.
• High Court, Chancery Division: Mr Justice Jacob held that milk quota could be trust property, that Farms held it on trust for Dairywise, and made the safe haven order: [2000] 1 WLR 1177.