Hughes v Groveholt Ltd

Where a contract makes additional purchase consideration dependent on a final accounting and deduction of development costs, the grant of planning permission does not itself create a vested or accrued debt. The seller is entitled only to the net sum, if any, produced once the contractual accounting is complete.

A liquidator’s disclaimer does not, under section 178(4)(b) of the Insolvency Act 1986, extinguish a charge as against a third-party owner of the charged land. The charge nevertheless secures only the contractual balance as properly construed. It does not secure statutory compensation for loss caused by the disclaimer.

Mr Hughes sold land for development to Chelverton Properties Ltd. The agreement provided for further payments when specified planning consents were obtained. It also required the final preparatory and site-assembly costs to be deducted from those payments. Chelverton granted Mr Hughes a charge over the land as security.

Chelverton later sold the land, subject to the charge, to Groveholt Ltd and then entered liquidation. Its liquidator disclaimed the agreement under the Insolvency Act 1986. Although planning permissions had generated apparent additional consideration of £3 million, the preparatory costs had not been finally ascertained.

A Deputy High Court Judge dismissed Mr Hughes’s application for summary judgment and declared that the sums were not secured by the charge. Mr Hughes appealed. The central issue was whether he had an accrued and enforceable debt, and whether disclaimer affected the charge.

1. Appeal dismissed unanimously. Lord Justice Jonathan Parker, with whom Lords Justice Dyson and Auld agreed, held that clause 11 governed the amount secured by the charge. It entitled Mr Hughes only to the net sum, if any, remaining after the contractual deduction of preparatory costs from the additional consideration in clause 5.

2. The right of deduction was not conditional on Chelverton’s full performance of its obligations concerning the works or the Railtrack land. No such condition was expressed or could properly be implied. Such a construction would produce the irrational result that Chelverton’s breach could entitle Mr Hughes to additional purchase consideration free from all preparatory costs.

3. The planning permissions did not mean that the clause 5 payments had been earned or had become vested debts. The increase in the land’s value depended upon the costs needed to make the permitted development viable. The contractual accounting could occur only when those costs were finally known. Until then, each party had only a contingent entitlement to a future unascertained sum. Applying [1915] 3 KB 499, no debt was owing or accruing.

4. The disclaimer made no difference to Groveholt’s position as third-party owner. Under section 178(4)(b) of the Insolvency Act 1986, the disclaimed agreement was to be treated, as between Groveholt and Mr Hughes, as continuing. The charge therefore remained on foot, contrary to the judge’s reasoning. It was nevertheless unenforceable because no sum was presently due and, on the evidence accepted for the summary-judgment application, no sum would become due.

5. The court also disagreed with the judge’s view that the charge secured statutory compensation under section 178(6). The defined contractual balance could not be construed to include such a claim, and [1973] AC 331 did not support that construction. That correction did not affect dismissal of the appeal.

• Court of Appeal (Civil Division) — dismissed Mr Hughes’s appeal: [2005] EWCA Civ 897 .
• High Court, Chancery Division — Deputy High Court Judge dismissed Mr Hughes’s application for summary judgment and granted declaratory relief in Groveholt’s favour.