On Demand Information Plc and others v Michael Gerson (Finance) Plc and others

An interim judicial sale of disputed property converts the property into money without prejudicing the parties’ substantive rights. The proceeds stand in place of the property so that, once those rights have been determined, the court can make an appropriate monetary order.

The sale may make the remedy originally claimed unavailable. It does not extinguish the substantive rights to which that remedy would have responded. Where relief from forfeiture would have been granted immediately before a court-ordered sale, the court should determine the parties’ resulting entitlements and give effect to them through the sale proceeds.

The appellants leased video-making and editing equipment from the respondents under finance leases. Following the appellants’ entry into administrative receivership, the respondents terminated the leases. The appellants claimed relief from forfeiture so that they could exercise a contractual right to sell the equipment and retain 95% of the proceeds as a rebate of rentals.

Before that claim could be tried, Harman J ordered an urgent interim sale under Order 29, rule 4 of the Rules of the Supreme Court. The proceeds attributable to the equipment were placed in escrow. A deputy judge subsequently dismissed the action because the equipment had been sold and relief from forfeiture could no longer restore the former position.

The Court of Appeal, by a majority, dismissed the appeal: [2001] 1 WLR 155. Sir Murray Stuart-Smith dissented. The sole issue before the House was whether the sale pursuant to the court’s order defeated the appellants’ claim and the substantive rights which relief from forfeiture would have protected.

Appeal allowed unanimously.

1. Per Lord Millett, an order under Order 29, rule 4 was an interim and ancillary order. Its purpose was to prevent property which was the subject of proceedings from becoming worthless or losing significant value before the parties’ rights could be determined. The sale converted the property into money but was not intended to prejudice those rights.

2. Per Lord Millett, the proceeds were a substitute for the equipment. A sale necessarily changed the remedies available at trial because the court could no longer grant proprietary or specific relief concerning property which no longer existed in specie. The court could instead make orders concerning payment of, or entitlement to, the substituted fund.

3. The sale brought the leases to an end independently of the earlier forfeiture. Relief from forfeiture could therefore no longer be granted as such. That did not require dismissal of the claim. Relief from forfeiture had been the means by which the appellants sought to secure commercially valuable rights, including their entitlement to 95% of the proceeds of a sale complying with clause 12.

4. Because relief would have been granted immediately before the judicial sale, and became unavailable only because of an order intended to preserve the parties’ rights, the court had to make an order concerning the proceeds which best reflected those rights. Outstanding and future rentals, the financial conditions which would have accompanied relief, and the agreed best sale price were relevant to the division of the fund.

5. Lord Hobhouse agreed. An interim sale pendente lite does not destroy the parties’ rights. The majority of the Court of Appeal had wrongly given the interim order substantive effect and had failed to ascertain the relief to which the appellants were entitled immediately before the sale.

6. Lord Scott adopted Lord Millett’s reasoning. The proceeds stood in place of the equipment and should be treated, subject to the financial conditions which relief would have imposed, as the proceeds of a sale under clause 12. Lord Nicholls agreed with Lords Hobhouse, Millett and Scott. Lord Browne-Wilkinson agreed with Lords Millett and Scott.

Failing agreement, the case was remitted to the Chancery Division for the orders necessary to give effect to the House’s judgment.

1. House of Lords: The appeal was allowed unanimously: [2002] UKHL 13. Failing agreement, the case was remitted to the Chancery Division to make the necessary orders concerning the sale proceeds.
2. Court of Appeal: Pill and Robert Walker LJJ, Sir Murray Stuart-Smith dissenting, dismissed the lessee’s appeal: [2001] 1 WLR 155. The court unanimously accepted that the equitable jurisdiction had existed before the sale, but the majority held that relief could not be granted after the equipment had been sold.
3. Chancery Division: Mr George Laurence QC, sitting as a deputy judge, dismissed the action. He held that relief from forfeiture would have been available when sought, but that the court lacked power to grant it after the equipment had been sold and restoration of the former position had become impossible.