Hughmans Solicitors v Central Stream Services Ltd & Anor

An agreement compromising litigation may create an equitable interest in identified property where, for valuable consideration, the owner is obliged to sell it and apply the proceeds for the claimant’s benefit. Clear words are required in a commercial context, but no particular form of words is necessary. The arrangement need not be an equitable charge or a trust where the property has been appropriated to the agreed settlement and specific performance would be available.

Priority between competing equitable interests ordinarily follows the time of creation under Land Registration Act 2002, sections 28 to 30. A later equitable charge cannot preserve priority by registering a unilateral notice where the earlier interest holder is entitled to require its removal before sale.

Central Stream Services Ltd and its liquidator brought Chancery Division proceedings against a former director, John Christopher Davidson, claiming more than £10.2 million. The proceedings were compromised by a Tomlin Order. The agreement required Davidson to sell a specified property and directed the application of its net proceeds, giving the company the first £100,000 and the residue after specified costs and debts.

Hughmans, Davidson’s solicitors, later obtained and registered a charging order over the property for unpaid fees. The property was sold, and the proceeds were insufficient to satisfy the company’s entitlement and Hughmans’ claim. Briggs J held that the compromise created a beneficial interest in the property, ranking ahead of the charging order. The appeal concerned whether that proprietary interest existed and whether Hughmans nevertheless had priority.

1. Appeal dismissed. The compromise agreement created an equitable interest in the property in favour of Central Stream. It gave the company the whole of Davidson’s net equity, subject to the mortgage and the specified application of part of the proceeds to identified debts.
2. An agreement for valuable consideration to apply a fund in a particular way does not, without more, amount to an equitable assignment or charge. A further requirement is an obligation in favour of the creditor to pay the debt out of the fund. That principle did not make this agreement an equitable charge because Davidson owed no post-compromise debt to the company. The agreement imposed an obligation to sell the property and apply its proceeds in settlement of the company’s claim.
3. The broader equitable principle illustrated by Palmer v Carey was decisive. Where the owner of property agrees for valuable consideration to appropriate it for another’s benefit, and the agreement is specifically enforceable, an equitable interest arises. Davidson was positively obliged to sell the property and apply the proceeds for the company’s benefit. The property was wholly appropriated to the settlement.
4. The waterfall provisions did not produce an impermissibly uncertain beneficial interest. Property may be held for several persons in different proportions and with different priorities. It was unnecessary to decide whether the individual creditors named in the agreement could enforce its terms. The Court expressed no view on the possible impact of the Contracts (Rights of Third Parties) Act 1999.
5. On priority, the parties accepted that Hughmans’ charging order was not made for valuable consideration within section 29(1) of the Land Registration Act 2002. Section 28 therefore applied, preserving the equitable rule that interests rank according to time of creation. The company’s earlier interest had priority. Hughmans’ agreement to remove its unilateral notice did not reserve a priority right because, as a subsequent equitable interest holder, it had no right to maintain the notice against the company’s proposed sale.

• Court of Appeal (Civil Division) [2012] EWCA Civ 1720: dismissed the appeal from Briggs J’s decision.
• High Court of Justice, Chancery Division, Companies Court: Briggs J held that the compromise agreement created a beneficial interest in the property and that it had priority over Hughmans’ later charging order. The judgment citation was not stated in the judgment.