On Demand Information Plc & Ors v Michael Gerson (Finance) & Ors

The House of Lords held that an interim court order for sale pendente lite under RSC Order 29 r.4 (now CPR Part 25) which converts disputed chattels into money does not of itself extinguish the substantive rights that existed immediately before the sale. Where relief against forfeiture would have been available immediately before the sale, the court should, so far as practicable, give effect to those rights by appropriate orders in relation to the proceeds of sale.

The court explained that relief against forfeiture cannot be granted in specie after the goods have been sold, but the proceeds stand in the place of the goods; accordingly the right which would have been vindicated by relief (here the lessee's entitlement to retain 95% of proceeds under clause 12 of the finance leases) can be reflected by an order for distribution of the money. The intermediary sale was held to be pendente lite and not intended to prejudice substantive rights; the proper task is to ascertain the parties' rights as at the date of the sale and give effect to them against the fund in court.

The appellants (lessees) had taken finance leases of video and editing equipment from the respondents (lessors). The leases gave the lessor title and restricted the lessee from selling; clause 12 permitted the lessee, on proper termination and performance, to sell as agent and retain 95% of proceeds. Following the lessees' insolvency and appointment of administrative receivers, the lessors exercised termination rights. The receivers sought urgent sale of the business together with the equipment to preserve the business as a going concern.

The receivers obtained an interim ex parte order for sale under RSC Order 29 r.4 from Harman J on 5 March 1998; the net proceeds were paid into escrow. The lessees had earlier issued proceedings claiming relief from forfeiture so that they could bring the leases to an end and rely on clause 12 to obtain a 95% rebate of sale proceeds. At trial before a deputy judge (treated as the trial of the action) the lessees' claim was dismissed on the ground that, because the equipment had been sold, the court could not grant relief in specie and therefore had no jurisdiction to grant relief. The Court of Appeal ([2001] 1 WLR 155) dismissed the lessees' appeal, concluding that the sale precluded relief in specie and that the court could not grant the type of equitable relief sought once the goods were gone.

The House of Lords framed the issues as (i) whether the court had jurisdiction and power to grant relief or an equivalent remedy after a court-ordered sale pendente lite, and (ii) how the parties' rights should be given effect where the subject-matter had been converted into money. The Lords accepted it was common ground that, immediately before the sale, the court would have granted relief from forfeiture on appropriate terms. They held that an interim sale under Order 29 r.4 (now CPR Part 25) is intended to preserve the value of the property and the parties' rights, not to destroy them. Although relief in specie could no longer be granted after the sale, the court should give effect to the substantive rights by appropriate orders as to the proceeds. The case was therefore allowed and remitted for the Chancery Division to make orders to reflect the rights that would have existed had relief been granted prior to sale (including treating the proceeds as if they derived from a clause 12 sale).

Relief sought: relief from forfeiture of finance leases; declaration and orders as to entitlement to sale proceeds; ancillary relief to permit the receivers to sell the business.

Court's reasoning (concise): an order for sale pendente lite converts the property into money which stands in lieu of the property; the interim sale was not intended to prejudice substantive rights and the court must ascertain and give effect to the parties' rights as they existed immediately before the sale by orders in relation to the fund. Relief in specie may be impossible after sale, but equitable relief can be reflected by distribution of proceeds.

Appeal allowed. The House of Lords held that an interim sale under RSC Order 29 r.4 which converts disputed chattels into money does not extinguish the substantive rights existing immediately before the sale; although relief from forfeiture in specie could not be granted after the goods were sold, the court should give effect to the rights that would have existed by appropriate orders in relation to the proceeds of sale. The matter was remitted to the Chancery Division to make orders to give effect to those rights.

Order for sale made by Harman J (ex parte) 5 March 1998; inter partes trial before deputy judge of the Chancery Division (end of November 1998) — claim dismissed; Court of Appeal dismissed the lessees' appeal ([2001] 1 WLR 155); House of Lords allowed the appeal ([2002] UKHL 13).