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

This was a first‑instance chancery trial about whether two 999‑year leases (the Hever Common Parts Lease and the Needham Lease) and a subsequent deed of variation were void for want of authority because they were granted for an improper purpose and in breach of directors’ duties (notably s.171/s.172 Companies Act 2006). The court found that the companies behind the projects were controlled by Mr Ronald Popely (a de facto/shadow controller) and that he directed dispositions at the expense of the company creditors and members.

Applying established authority on "fraud on the power" and the distinction between acts done without authority (void) and acts done with authority but in breach of duty (voidable), the judge concluded the dispositions were outside the powers conferred on the companies’ directors and therefore void. Because title had passed on registration, the registered proprietors held the leases on trust for the original freehold companies. The court held that the register could and should be corrected (or the leases vested back) because the registrations were mistakes for the purposes of Schedule 4 LRA 2002 and the proprietors could not rely on the paragraph 3(2) exception.

This judgment determines two related company/property claims. The claimants were the liquidators of Oak Forest Partnership Limited (C1) and Oak Property Partners Limited (C2). The defendants were the registered proprietors/successors of long common‑parts leases and related transfers: Mercantile Investment Holdings SA/White Linen Hotels & Resorts (hever chain), Hever Hotel Management Limited and Hever Spa & Wellbeing Limited (Hever successors), and Blakemore Hotels Property Holdings Limited (Needham successor).

Background and the nature of the claims

• C1 purchased Hever (2011) and C2 purchased Needham (2013). The projects involved selling 999‑year room leases to investors and operating hotels by third‑party managers.
• Both C1 and C2 fell into insolvency. The claimants alleged that the grant of the 999‑year leases of the common parts (Hever and Needham) and the Hever deed of variation (reducing rent to a peppercorn) were granted without authority, for an improper purpose and/or at an undervalue and should be set aside (including under s.423 Insolvency Act 1986), and that the subsequent purchasers/chargees cannot rely upon ostensible authority or registrable title.
• Relief sought included declarations of voidness, setting aside under s.423 IA (alternatively), and consequential rectification/alteration of the Land Registry entries (Schedule 4 LRA 2002) or vesting/merger back to the freehold owners.

Issues framed by the court

• Whether the dispositions (Hever Common Parts Lease, Hever deed of variation, Needham Lease) were an exercise of directors’ powers for a proper purpose (s.171/s.172 CA 2006) or a "fraud on the power" such that they are void for want of authority.
• If those dispositions were void or voidable, whether title nevertheless passed on registration and, if so, whether the registered proprietors (and any chargees) held on trust for the companies because they were not bona fide purchasers for value without notice.
• Alternatively whether the transactions could be set aside under s.423 IA as transactions at undervalue with the requisite avoidance purpose.
• If the claimants succeed, what consequential relief should follow: declarations, rectification of the register under Schedule 4 LRA 2002 or vesting/merger orders to give practical effect to the decision.

Court’s factual and legal reasoning (concise)

• The court made detailed factual findings. It accepted that Mr Ronald Popely was the effective controller of the projects and of the various companies, including those that became registered proprietors. His directions were attributed to the companies (shadow/de facto director). Key witnesses for the defendants were found unreliable on material aspects; Popely did not give live evidence and his disqualification undertakings and admissions were relevant and damaging.
• On the law, the judge applied established principles distinguishing acts done without authority (void) from acts done with authority but in breach of duty (voidable), and treated the grant of the 999‑year common parts leases as an exercise "outside the power" (a fraud on the power). The Hever Common Parts Lease was granted to defeat the contractual lenders’ security and the rent was reduced shortly afterwards to a peppercorn; the Needham Lease was granted on similar lines. Those dispositions were therefore void for want of authority (and alternatively would have been subject to avoidance under s.423 IA if relevant).
• Because registration under the Land Registration Act 2002 had given the registered transferees apparent legal title, the court held that title had to be treated as held on trust for the original companies where the transferees were not purchasers for value acting in good faith without notice. The court found the defendants (and their predecessors) were not bona fide purchasers for value without notice: they were linked into the same group and had the knowledge of Popely.
• On remedies, the court concluded that the proper practical relief was to give effect to the beneficial interest of the claimants (vesting/merger back into the freehold) and noted rectification under Schedule 4 LRA 2002 was available because the register entries resulted from a mistake; the paragraph 3(2) exception did not prevent alteration in the circumstances and paragraph 3(3) required the Court to order rectification absent exceptional circumstances.

Procedural/other points: the judgment discusses valuation and expert evidence, extensive documentary analysis, witness credibility (non‑attendance and disqualification undertakings), and the practical approach to the Court’s order (the court indicated it would hear counsel on the terms of vesting/rectification orders).

The claim succeeded. The court found on the facts that the Hever Common Parts Lease and the Needham Lease (and the related Hever variation) were granted for an improper purpose and outside the authority of the companies’ directors (a "fraud on the power"); accordingly those dispositions were void in equity and, although title had been registered, the registered parties held the estates on trust for the companies. The registered entries were mistakes for the purposes of Schedule 4 LRA 2002 and the court directed that the register should be corrected or the leases vested back so as to give effect to the claimants’ beneficial title. The judgment gave detailed reasons on attribution of knowledge to a shadow controller (Mr R. Popely), notice, and the inapplicability of the Schedule 4 paragraph 3(2) protection to the defendants on these facts.