Oak Forest Partnership Limited (in liquidation) & Ors v Mercantile Investment Holdings SA & Ors

A company director’s power to dispose of company property must be exercised for a proper purpose and in good faith to promote the company’s success. A disposition made for an improper, self-interested purpose, and outside the purpose for which the power was conferred, is void for want of authority rather than merely voidable.

Registration under the Land Registration Act 2002 may vest legal title in the disponee, but the disponee then holds it on trust for the original owner. Subsequent registered proprietors are bound unless they acquired for value, in good faith and without notice of the trust. The register may be rectified where the original void disposition was registered by mistake, including against derivative entries.

The liquidators and former liquidators of two companies challenged 999-year leases of hotel common parts granted to connected companies. The leases concerned Hever Hotel and Needham House Hotel. The claimants alleged that the leases were granted without authority, for improper purposes, and in breach of directors’ duties under the Companies Act 2006. They also challenged a later variation reducing rent to a peppercorn and sought relief under the Insolvency Act 1986.

The defendants were successors in title to the original lessees. They argued that any breach made the transactions voidable only, and that they had acquired registered title for value, in good faith and without notice. The central issues were whether the original dispositions were void, whether the defendants took subject to resulting trusts, and whether the Land Registry entries could be rectified.

1. Hever Common Parts Lease. The power to grant a lease existed, but it was exercised for the purpose of preventing the company’s lenders obtaining security and of benefiting a connected company controlled by Mr Ron Popely. The decision was not made in good faith to promote the company’s success and failed to consider the company’s interests, the effect of a 999-year demise, the ability to pay rent, or the consequences for creditors. It was an improper exercise of power under sections 171 and 172 of the Companies Act 2006. The lease was void.
2. Registration nevertheless vested legal title under sections 29, 52(1) and 58(1) of the Land Registration Act 2002. The original lessee held the title on trust for the claimant company. The first defendant was also subject to that trust, and the second and third defendants failed to establish that they had acquired for value, in good faith and without notice.
3. The deed reducing the rent to a peppercorn was likewise an improper exercise of power. It removed valuable rent rights for no consideration and benefited the connected company. The transaction was void. The alternative claim under section 423 of the Insolvency Act 1986 would have succeeded if necessary.
4. Needham Lease. The same reasoning applied. The 999-year lease at a peppercorn rent depleted the company’s assets for the benefit of a connected company controlled by Mr Popely. The lease was void, and the original lessee held the registered title on trust. The fourth defendant was not a purchaser for value in good faith without notice.
5. Ratification and rectification. No effective ratification was proved. The court had jurisdiction under section 65 and Schedule 4 to the Land Registration Act 2002 to rectify the register. The original registrations were mistakes because the dispositions were void, and the derivative entries were consequences of those mistakes. Rectification was required absent exceptional circumstances. The parties were to agree an order giving effect to vesting and merger of the leasehold interests with the freeholds.