Leon v Her Majesty's Attorney General & Ors

An applicant for a vesting order under section 1017 of the Companies Act 2006 must show that the interest claimed in disclaimed property is sufficient to entitle the applicant to that property. A contractual right to redeem a mortgage does not itself confer the mortgagor’s equity of redemption, which belongs to the owner of the mortgaged property.

Where the applicant instead relies on an undischarged liability, a vesting order may be made only if it would compensate the applicant in respect of the disclaimer. There must be a reasonable relationship between the liability and the benefit conferred. Loss caused by the company’s dissolution, rather than by the disclaimer, does not satisfy that requirement.

Following the dissolution of Frinton Limited, its long lease vested in the Crown as bona vacantia and was subsequently disclaimed. The appellant, Frinton’s shareholder and a co-debtor under a mortgage secured on the lease, sought a vesting order in his own favour.

The Chief Chancery Master made the order under section 1017 of the Companies Act 2006, holding that the appellant had an interest in the lease and was also subject to an undischarged liability. On Westminster’s appeal, Arnold J set the order aside and instead vested the lease in the mortgagee, subject to an obligation to account to the person next entitled.

The second appeal concerned whether the appellant was entitled to the lease by reason of an interest in it and, alternatively, whether vesting it in him would justly compensate him for an undischarged liability affected by the disclaimer.

1. Appeal dismissed. Section 1017(1)(a) and section 1017(2)(a) of the Companies Act 2006 are connected. In the usual case, the court asks whether the applicant’s claimed interest in the disclaimed property is sufficient to entitle that applicant to the property. Entitlement need not be absolute, and competing interests may require the court to choose between claimants. The precise limits of the required interest, including whether it must always be proprietary in the strict sense, did not need to be decided.

2. The appellant’s description as a co-mortgagor conferred no interest in the lease. The mortgage merely charged any interest which he might independently possess. Nor did his position as co-debtor confer the equity of redemption. That equity was Frinton’s interest as owner of the mortgaged property. A co-debtor or surety who pays the debt may become subrogated to the mortgagee’s rights, but has no interest in the mortgaged property before redemption.

3. The appellant’s ownership of Frinton’s shares did not give him an interest in the lease. Frinton beneficially owned the lease and was a separate legal person. Treating its shareholder as owning the lease would require an unjustified piercing of the corporate veil.

4. Under section 1017(2)(b) and (3), an order based on an undischarged liability may be made only where it would be just for the purpose of compensating the person in respect of the disclaimer. Compensation requires a reasonable relationship between the relevant liability and the benefit conferred by vesting. A general assessment of who deserves a windfall does not answer the statutory question.

5. The appellant remained liable to comply with the lease covenants, but vesting the valuable lease in him would not compensate for a loss caused by the disclaimer. His loss of control over Frinton and its assets resulted from Frinton’s dissolution and his failure to seek restoration in time. It did not result from the disclaimer. His liabilities were adequately protected by vesting the lease in the willing mortgagee, whose benefit remained confined to its security interest.

6. The Chief Master’s application of section 1017(3) was an evaluative judgment. An appellate court could intervene only if satisfied that it was wrong, rather than merely because it would have reached a different view. The Chief Master had failed to address the statutory compensatory purpose and the relationship between the liability and the benefit. Arnold J was therefore entitled to set his decision aside.

1. Court of Appeal (Civil Division): The appeal was dismissed by [2019] EWCA Civ 2047. The order vesting the lease in Kensington Mortgage Company Limited remained in force.

2. High Court, Chancery Division: Arnold J allowed Westminster’s appeal, set aside the order in favour of the appellant and vested the lease in Kensington, subject to its duty to account as mortgagee to the person next entitled. No citation is stated.

3. Chief Chancery Master: Master Marsh rejected the trust and statutory entitlement claims but made a vesting order in the appellant’s favour under section 1017 of the Companies Act 2006. No citation is stated.