Stablewood Properties Ltd v Amrit Virdi & Anor

A present-tense declaration that shares are held on trust may create an immediate trust even though it is subject to accounts being cleared. Where the transaction shows that the wording secures payment of monies due, it may create a security interest rather than a condition precedent. The security holder may exercise voting rights in his own interests and protect the security, including by causing the company to obtain possession of property needed to generate rent and avoid mortgage default. Beneficiaries hold only the equity of redemption and cannot require action that prejudices the security. The secured account may extend to all monies due between the parties.

Stablewood Properties Limited sought possession of residential property from Mr and Mrs Virdi and their son. The dispute concerned whether Mr Nagi held Stablewood’s shares beneficially for the Virdis under an April letter, whether he remained the company’s lawful director, and whether he could bring possession proceedings.

Mrs Recorder Walden-Smith held that the letter created no trust until the parties’ account was settled, that Mr Nagi remained the legal and beneficial owner of the shares and director, upheld the possession claim, and dismissed the counterclaim. The appeal concerned the proper construction and effect of the letter, the security and voting rights it created, and the consequences for the possession order and the account between the parties.

The appeal was allowed to a limited extent. Arden LJ gave the leading judgment, with Carnwath LJ and Stanley Burnton LJ agreeing.

1. Construction of the April letter. The letter created an immediate trust of the shares, subject to a security interest in Mr Nagi’s favour. The present tense, the placement of the account wording, the immediate tax indemnity, and the commercial substance of the transaction supported that construction. The account condition was therefore not a condition precedent to creation of the trust.
2. Scope of the security. The reference to the old account covered all monies owed by either side, not merely the sum said to arise from the building works. The beneficiaries held the equity of redemption in the shares and could be in no better position than mortgagors in relation to their mortgagee.
3. Voting and protection of the security. As security holder, Mr Nagi could exercise the voting rights attached to the shares in his own interests: Musselwhite C.H. v Musselwhite & Sons Ltd [1962] Ch 964. He could also take steps to protect the security. Because the property needed to generate rent and avoid default on the NBS mortgage, he was entitled to cause Stablewood to seek possession so that repairs and reletting could take place. The possession order therefore stood, without a stay pending the account. The Virdis could stop the possession process by providing satisfactory substitute security.
4. Directorship and beneficiary instructions. The purported removal of Mr Nagi as director was ineffective. He was not required to prefer the beneficiaries’ wishes to his own interests as security holder. The court did not need to decide whether all beneficiaries had consented to any possible ratification. On the facts, the company’s interests in receiving rent and avoiding mortgage default coincided with the beneficiaries’ interests, so there was no relevant conflict between Mr Nagi’s duties as director, trustee and security holder.
5. Account and counterclaim. The Recorder had made no error on the claim advanced at trial, and the counterclaim otherwise remained dismissed. Mrs Virdi was to be permitted, if sought, to amend the Part 20 claim to seek a declaration reflecting the judgment and an account. In any event, an account was directed on the basis of the Recorder’s factual and credibility findings, with directions to be sought at a case management conference.

• Court of Appeal (Civil Division): On 28 July 2010, allowed the appeal to a limited extent, construed the April letter as creating an immediate trust subject to security, left the possession order standing, and directed an account.
• Central London County Court: Mrs Recorder Walden-Smith held that Mr Nagi remained sole legal and beneficial owner of the shares and lawful director, upheld Stablewood’s possession claim, and dismissed the counterclaim.