Leon v Kensington Mortgage Co Ltd (Court of Appeal appeal of same matter)

The Court of Appeal considered the operation of the Companies Act 2006 provisions governing property of a dissolved company (sections 1012 to 1023), in particular the power to make vesting orders under section 1017 and the special rules for leasehold interests in section 1018. The appellant, a co-mortgagor, sought a vesting order of a lease disclaimed by the Crown following the dissolution of the registered proprietor company. The court held that the appellant did not have a proprietary interest in the disclaimed lease by virtue of his shareholding or his status as co-mortgagor, and that the equity of redemption or position as a surety does not itself confer the kind of proprietary interest sufficient to make him "entitled to" the lease under section 1017(2)(a). The court further held that, under section 1017(2)(b) and (3), a vesting order may only be made to compensate a person under a liability in respect of the disclaimed property where it would be just to do so, and the Chief Chancery Master had not established the necessary reasonable relationship between the appellant's liability and the benefit to be obtained. Accordingly the appeal was dismissed and a vesting order in favour of the mortgagee was appropriate under the statutory scheme.

Background and parties. The lease of a ground-floor flat was granted to a company (Frinton Limited) which was owned or controlled by the appellant, Michael Leon. The lease was subsequently charged as security under a mortgage; the appellant was a co-mortgagor. Frinton was dissolved for failure to file statutory documents and its leasehold interest vested in the Crown as bona vacantia. The Crown disclaimed the lease. The mortgagee's rights subsequently transferred to Kensington Mortgage Company Limited.

Procedural posture and relief sought. Mr Leon applied for a vesting order under section 1017 of the Companies Act 2006. He advanced alternative grounds below (including claims under the Trustee Act 1925 s.44 and the Law of Property Act 1925 s.181) but the Chief Master found that Frinton had not held the lease on trust for Mr Leon. The Chief Master nevertheless made a vesting order in Mr Leon's favour. On Westminster's appeal Arnold J set aside that vesting order and made a vesting order in favour of the mortgagee (Kensington) on terms that it account as mortgagee to the person next entitled; Mr Leon appealed to the Court of Appeal.

Issues framed by the court.

• Whether an applicant who "claims an interest in the disclaimed property" under section 1017(1)(a) must demonstrate that the interest claimed is such as to make him "a person entitled to it" for the purposes of section 1017(2)(a).
• Whether the appellant's status as co-mortgagor or his alleged entitlement to the equity of redemption gave him a sufficient proprietary interest to be "entitled to" the lease.
• Whether, alternatively, the appellant could obtain a vesting order under section 1017(2)(b) and (3) by showing he was under a liability in respect of the disclaimed property and that it would be just to vest the property in him to compensate him for the disclaimer.
• The effect of section 1018 on vesting orders of leasehold interests.

Court's reasoning and subsidiary findings. The court held that subsection (1) of section 1017 confers locus to apply but that the court must go on to consider whether the applicant is a person "entitled to" the property under subsection (2)(a); entitlement does not mean absolute ownership but requires an interest of the kind that in the court's judgment justifies vesting the property in the applicant. The court rejected reliance on corporate ownership to found a personal proprietary interest, applying the principle in Prest v Petrodel Resources Ltd; the Chief Master's factual finding that Frinton did not hold the lease on trust for Mr Leon was not appealed. The court explained that a co-mortgagor or surety's right to redeem or to pay the debt and be subrogated to the mortgagee's rights does not equate to the mortgagor's equity of redemption as a proprietary interest in the lease prior to redemption. Considering section 1017(2)(b) and (3), the court emphasised that a vesting order to compensate a person under a liability requires a reasonable relationship between the liability and the benefit to be obtained by vesting. The Chief Master had failed to analyse sufficiently how vesting the valuable lease in the appellant would justly compensate him for the effects of the disclaimer; several of his stated reasons lacked a direct connection to compensation and there was a substantial mismatch between the appellant's liability and the value of the lease. The court therefore concluded that a vesting order for the mortgagee (Kensington) was appropriate.

Wider context. The court noted the special statutory regime for property of dissolved companies, the Crown disclaimer mechanism, and the limited and careful circumstances in which vesting orders will be made to give effect to competing interests arising from dissolution and disclaimer.

The appeal is dismissed. The Court of Appeal held that the appellant did not have the requisite proprietary interest in the disclaimed lease to be "entitled to it" under section 1017(2)(a); nor did the Chief Master show that a vesting order in the appellant's favour would be just to compensate him under section 1017(2)(b) and (3). The vesting order in favour of the mortgagee (Kensington) was appropriate under the statutory scheme and section 1018.

Appeal to the Court of Appeal from decisions at first instance and by the Chief Chancery Master. Master Marsh (the Chief Chancery Master) made a vesting order in favour of the appellant; on Westminster's appeal Arnold J (Chancery Division, CH-2017-001318) set aside that order and made a vesting order in favour of the mortgagee on terms to account; the appellant appealed to the Court of Appeal ([2019] EWCA Civ 2047).