Fenland District Council v Sheppard & Ors

When property is disclaimed in bankruptcy, a vesting order under Insolvency Act 1986 s 320 is discretionary. The court should preserve third-party interests so far as possible. A local authority whose charge ranks ahead of a mortgage does not lose that priority merely because the freehold is vested in it. Equity presumes against merger where merger would prejudice the charge-holder. The court should not extinguish a mortgagee’s interest to address speculative future expenditure or development. An authority concerning a vesting order on materially different facts does not require the same terms in every case.

The appellant local authority carried out urgent works to a derelict property owned by a bankrupt and obtained a prior-ranking local land charge for the cost. The trustee in bankruptcy later disclaimed the property under s 315 of the Insolvency Act 1986. The respondents held a registered mortgage that ranked behind the authority’s charge.

The County Court dismissed the authority’s application for a vesting order which would extinguish the mortgage. On appeal, the central issues were whether the authority’s charge would merge with the freehold and whether the respondents’ interest should be discharged under s 320.

1. Appeal and discretion. Permission to appeal was granted. The lower court had failed to consider the effect of preserving the mortgage on the authority’s prior-ranking charge. The exercise of discretion therefore had to be reconsidered afresh under s 375(2) of the Insolvency Act 1986.
2. Hackney distinguished. Hackney LBC v Crown Estate Commissioners [1996] BPIR 428 concerned whether the local authority had an interest within s 320(3)(a), an issue not disputed in the present case. Its vesting order was also made in circumstances where the mortgagee did not oppose the relief and the property value was materially below the competing charges. The observation that a different order might have been made if the mortgagee had opposed was obiter and did not establish any general rule requiring the mortgage to be set aside.
3. Merger. Equity determines merger by reference first to the parties’ intention and, absent evidence of intention, to the benefit accruing to the person in whom the interests unite. Applying BOH Ltd and ors v Eastern Power Networks plc [2011] EWCA Civ 19, and the principles in Ingle v Vaughan Jenkins [1900] 2 Ch 368, Grice v Shaw 10 Hare 76 and Capital and Counties Bank Ltd v Rhodes [1903] 1 Ch 631, the authority would be presumed to intend to preserve its charge because merger would be contrary to its interests. The vesting order could expressly preserve the charge and its priority.
4. The authority’s concern about future redevelopment expenditure was speculative. It was therefore unjustified to extinguish the respondents’ mortgage on that basis. Consistently with Hindcastle Ltd v Barbara Attenborough Associates Ltd [1997] AC 70, third-party interests should be preserved so far as possible.
5. The appeal was dismissed on the relief sought. The court indicated that, if the authority wished to seek a vesting order preserving its charge, it would hear counsel on whether such an order should be made.

• High Court (Chancery Division): The appeal from the order of Deputy District Judge Aitkin dated 12 April 2011 was dismissed on the terms sought, subject to the possibility of a further application for a vesting order preserving the appellant’s charge.