The Funding Corporation Block Discounting Ltd v Lexi Holdings Plc & Anor

A party may enforce obligations represented as genuine and enforceable where the counterparty knowingly participated in creating documents intended to induce reliance, and the claimant relied on those representations to its detriment. The claimant’s carelessness does not necessarily defeat reliance.

However, an estoppel binds only the parties involved in the representation. A company cannot create an equitable mortgage over property owned by another company without authority or a representation by the property owner.

Rights acquired by an innocent third party may prevent avoidance of a transaction under the Companies Act 1985. An avoidance order cannot defeat such rights merely because the third party’s interest was acquired later or was unregistered.

The claimant and Barclays each asserted proprietary rights to proceeds held by administrators following the sale of properties formerly associated with Lexi Holdings Plc. Lexi had purported to assign to the claimant rights under bridging loans and related security. The transactions formed part of a fraud perpetrated by Lexi’s controlling director and connected companies.

The claimant relied on estoppel and claimed equitable charges over the properties. Barclays relied on security granted by Lexi and rights arising under the Companies Act 1985 to set aside transfers to connected companies. The principal issues were whether the purported loan agreements created enforceable rights against the connected companies, whether equitable charges arose, the effect of Barclays’ deed of release, and the priority between the parties.

1. The claimant was entitled to the proceeds of sale relating to the properties other than those connected with the Tinsett loan. Barclays was entitled to the proceeds relating to the Tinsett properties.

2. Although the purported loan agreements were void as between Lexi and the connected companies because they were created for the purpose of defrauding the claimant, Lexi and the relevant connected company were estopped, as against the claimant, from denying the represented obligations. Lexi had represented that the agreements were genuine and enforceable and that the stated loans had been or would be advanced. The connected companies knowingly joined in those representations. The claimant relied on them, despite inadequate procedures and considerable carelessness.

3. The estoppel did not create an equitable charge over property owned by Serton where the relevant loan agreement was made by Tinsett. There was no evidence that Tinsett had authority to bind Serton, or that Serton had made any representation to the claimant. General participation in the fraud was insufficient.

4. In relation to the other properties, the claimant acquired by estoppel the benefit of the legal charge over the Dawnay Arms and equitable mortgages over the remaining properties. The argument that Lexi had waived the obligation to grant security failed because waiver could not arise between parties who never genuinely intended the purported loan to exist.

5. Barclays’ original security over the original borrowers’ charges was extinguished when those charges were discharged on registration of transfers to the connected companies. Barclays nevertheless retained security over Lexi’s statutory right to set the transfers aside.

6. The deed of release released the benefit of loans made after its date and related security, but did not release pre-existing security or the separate statutory right to set aside the transfers. The statutory right concerning the Dawnay Arms was likewise distinct, even though the transfer and purported loan were closely linked.

7. Under sections 28 and 29 of the Land Registration Act 2002, the right to avoid arose on the making of the voidable disposition and was not displaced by the later creation or registration of the claimant’s equitable interest. More fundamentally, section 322 of the Companies Act 1985 protected qualifying third-party rights from being defeated by avoidance. The avoidance orders therefore could not operate to defeat the claimant’s rights, which could be preserved in the proceeds.

The judgment was a first-instance determination of competing proprietary claims. The claimant had previously obtained permission to proceed against Lexi in administration from Briggs J, whose decision is reported at [2008] EWHC 985 (Ch). The present court determined the substantive claims between the claimant and Barclays.