Edwards & Anor v Flightline Ltd.

The Court of Appeal allowed the appeal against Neuberger J's order which had granted Flightline leave under section 130(2) of the Insolvency Act 1986 to continue proceedings. The court held that the March 2002 consent order and the Company’s undertaking to retain up to £3,325,000 in a joint solicitors' account did not create an equitable charge or proprietary security in favour of Flightline.

The court applied the principle in Palmer v Carey and related authority that, to create an equitable charge over a specific fund, there must be not merely a restriction on disposal but also an obligation that the debt be paid out of that fund. The March Order was construed as providing continued interim, in personam protection of a freezing nature rather than imposing a right to payment out of the fund. Consequently, no security was created and Flightline was not made a secured creditor by virtue of the joint account arrangements.

Background and parties: Swissair Schweizerische Luftverkehr-Aktiengesellschaft (the Company) was part of the Swissair group. Flightline Limited provided services to the Company and after the group’s collapse commenced proceedings claiming c.£4.2M. Provisional liquidators (the appellants) were later appointed to the Company.

Procedural posture: Flightline obtained a freezing order and later, by consent, the parties agreed the February 2002 and March 2002 orders which led to payment by IATA into a joint solicitors' account described as an "escrow" account. The March Order recorded the Company’s undertaking not to withdraw or deal with monies in that account up to £3,325,000 pending further order. Flightline then sought leave under section 130(2) of the Insolvency Act 1986 to continue its substantive claim; Neuberger J granted leave. The appellants appealed.

Nature of the application: The substantive issue on appeal was whether the March Order and the Company’s undertaking created a proprietary charge (security) in favour of Flightline over the monies in the joint account such that Flightline would be a secured creditor up to £3,325,000; the appellants also sought to raise a secondary argument that any charge would be void for non-registration under ss.395–396 Companies Act 1985 (the court did not reach that secondary issue).

Issues framed:

• Whether the March Order imposed an obligation that any judgment obtained by Flightline be satisfied out of the joint account (thus creating an equitable charge), or whether it merely afforded interim, in personam freezing protection;
• Whether the surrounding orders and background (notably the February Order and the description of the account as "escrow") supported the existence of a proprietary security.

Court’s reasoning and decision: The court held that the March Order did not contain, and did not permit the implication of, an obligation that the Company must satisfy Flightline’s judgment out of the joint account. The court relied on the principle in Palmer v Carey (adopted in subsequent authority) that an equitable charge requires an obligation to pay from the specific fund, not merely a restriction on disposition. The fact that the monies were under court control and that the account was labelled "escrow" did not, on the facts and terms of the March Order (viewed against the February Order background), demonstrate an intention to create a security. The appeal was allowed on the primary issue; the court did not need to decide the non-registration point. The order below was set aside and the appeal allowed; permission to appeal to the House of Lords was refused.

Appeal allowed. The Court of Appeal held that the March 2002 consent order and the Company’s undertaking to retain up to £3,325,000 in a joint solicitors’ account did not create an equitable charge or proprietary security in favour of Flightline. The March Order provided interim, in personam protection akin to a freezing order and did not impose an obligation to pay any judgment debt out of the fund; accordingly Flightline was not converted into a secured creditor by the payment into the joint account.

Appeal from Neuberger J, Chancery Division, Companies Court (order reported at [2002] 1 WLR 2535) granting Flightline leave under section 130(2) of the Insolvency Act 1986 to continue proceedings. Permission to appeal to this Court was granted; permission to appeal to the House of Lords was refused.