House of Lords
|Session 2001- 02
Publications on the Internet|
|Judgments - On Demand Information plc (In Administrative Receivership) and Others v Michael Gerson (Finance) plc and Others
HOUSE OF LORDS
Lord Nicholls of Birkenhead Lord Browne-Wilkinson Lord Hobhouse of Wood-borough Lord Millett Lord Scott of Foscote
OPINIONS OF THE LORDS OF APPEAL FOR JUDGMENT
IN THE CAUSE
ON DEMAND INFORMATION PLC (IN ADMINISTRATIVE RECEIVERSHIP) AND OTHERS
MICHAEL GERSON (FINANCE) PLC AND OTHERS
ON 18 APRIL 2002
 UKHL 13
LORD NICHOLLS OF BIRKENHEAD
1. I have had the advantage of reading in draft the speeches of my noble and learned friends, Lord Hobhouse of Woodborough, Lord Millett and Lord Scott of Foscote. For the reasons they give, and with which I agree, I would allow this appeal.
2. I have read the speeches of my noble and learned friends, Lord Millett and Lord Scott of Foscote. For the reasons which they give I would allow the appeal and make the order which he proposes.
LORD HOBHOUSE OF WOODBOROUGH
3. This dispute has arisen from the special facts of this case, the making of an order for the sale of goods pendente lite which were the subject of financing agreements which had been contractually terminated by the goods owner.
4. There is no problem about the financing agreements themselves. The appellants needed to obtain computer systems in order to operate their business. They did not wish (and maybe were not able) to finance the transaction themselves. They accordingly entered into finance agreements with the respondents. They were elaborate agreements structured so as to keep the cost to the appellants as low as possible. They took the form of hire agreements. The title to the goods remained throughout with the respondents and was not at any time nor in any circumstances to pass to the appellants or any company associated with them. The appellants had the possession of the goods but no power to sell or otherwise deal with them either during the currency of the agreements nor afterwards. This structure reflected the fact that one of the important features of the agreements was the inclusion of provisions to enable the respondents to obtain the maximum tax advantages. The appellants had a contractual right to require the respondents to sell the goods at the end of the 'primary' contract period but the appellants could only act as the negotiating agent of the respondents in relation to the sale and the sale must be at a price approved by the respondents prior to the sale. Further this right could only be exercised if the appellants had fully performed all their contractual obligations to the respondents. The benefit to the appellants was that the appellants were then entitled to receive a sum equivalent to 95% of the proceeds of sale by way of a rebate on hire previously paid. There were also default provisions of a familiar kind which gave the respondents the right to bring the agreements to an end at any stage if the appellants failed to perform their obligations. These were the forfeiture rights which the respondents exercised and from which the appellants claimed relief in the action. The purpose of claiming relief was so that the appellants could take advantage of the provisions for the sale of the goods and enjoy the benefit of the rebate.
5. There is now no dispute that the agreements were of a character susceptible to relief against forfeiture; they were financing agreements and possession of the goods was given to the debtor. (Shiloh Spinners Ltd v Harding  AC 691) Similarly it is not in dispute that the appellants needed to obtain an order for such relief if they were to be enabled to exercise their contractual right to require the sale of the goods and obtain the 95% rebate. The complication which has given rise to these appeals is that, when the appellants' business collapsed, the receivers wanted to mitigate their loss by selling the business as a going concern which meant, in commercial terms, that they must find a way of procuring the sale of both the appellants' goodwill and the respondents' computer systems together to the same purchaser. They started their action claiming (inter alia) relief against forfeiture. But they would not be able to obtain an order sufficiently quickly to enable the combined sale they needed to go ahead within a time scale acceptable to a purchaser of the business. They therefore struck upon the idea of applying to the court for an order for the sale of the goods under RSC O.29 r.4. Fortunately for them the response of the respondents was very helpful. On 2 March 1998, Mr Gerson wrote:
In an affidavit dated 5 March, he said that, without accepting that the appellants had any right to relief against forfeiture but accepting that they had an arguable case:
He reserved the respondents' rights in relation to the sales and their contention that they were entitled to the full value of the goods at the date of sale. He concluded:
At the hearing of the motion, counsel for the respondents, having made similar reservations, did not oppose the making of the order for sale.
6. Whether of not the order for the sale of the computer systems should have been made under this rule had the respondents opposed it is something about which we need express no opinion; the purpose of the appellants' application was collaterally to assist the receivers to realise the best possible value from the sale of the goodwill and sell the business as a going concern. However what is clear is that the order made was of the character of an order made pendente lite without prejudice to the rights of the parties in the pending litigation. In an ideal world there would be no need for such orders; the parties' rights would be decided then and there. But that is not the real world. The ascertainment of the parties' rights takes some time and there will be a lapse of time before a determination can be arrived at. The mechanism used by the courts to accommodate this fact is to convert the relevant property into money and to treat that money as if it was the property. The task of the court remains the same as before - to ascertain what were the rights of parties in respect of the property and then to give effect to those rights by making appropriate orders as to the application of the money.
7. In the present case, once the question of whether the appellants would have been granted relief against forfeiture (and its terms) and the value to be attributed to the goods at the time of sale had been decided, the questions debated upon this appeal have ceased to exist. An order for a sale pendente lite does not deprive parties of their rights. It simply, for purely practical reasons, provides a mechanism for allowing the parties' rights as they existed immediately before the making of the order to be ascertained without in the meantime damaging the value of whatever those rights were. Thus perishable goods may be ordered by a Master of the Queen's Bench to be sold and the proceeds paid into court or a ship or cargo under arrest may be ordered to be sold by the Admiralty Judge or Registrar without affecting what were the rights of the parties and other potential claimants over the property sold. The sale is free of encumbrances. There is no longer any lien or mortgage over the property yet a lien holder's or a mortgagee's rights continue to be recognised by the court and are given effect to by making orders in relation to the money now under the control of the court.
8. There are two main reasons why the decision of the majority of the Court of Appeal was wrong. First, it was implicit in the order made by Harman J that the order was without prejudice to the rights of the parties in the action. The Court of Appeal construed the order as destroying the rights of one of the parties in the action. Secondly, the majority failed to carry out the task of ascertaining what relief the appellants were entitled to immediately before the order for sale was made. They treated the necessity of taking time to have a trial and determine what the rights of the parties were as depriving the appellants of their rights. It is true that there has been no relief against forfeiture until a court has made an order granting that relief and that the contractual or proprietary rights do not consequentially revive until the relief has been granted. But that is not relevant here. The court had to put itself back in the position Harman J would have been in if he had been able to decide the whole dispute on the day the matter was before him. The majority gave the interim order a substantive effect which it did not have. They failed to recognise its character as an order pendente lite.
9. For these reasons as well as those to be given by my noble and learned friends Lord Millett and Lord Scott of Foscote, whose opinions I have read in draft, I too would allow the appeal and make the order proposed by Lord Millett.
10. Between 5 September 1994 and 17 May 1995 the respondents or one of them ("the lessor") granted to the appellants or one of them ("the lessee") four finance leases of equipment for the making and editing of videos. In all respects material to the question to be decided in the present appeal the four leases were in similar terms.
11. Each lease was for an initial period (described as "the primary period") of 36 months. During this period the lessee was liable to pay a substantial rental (described as "the primary rental") which was designed to recoup the lessor by the end of the primary period for the cost of the equipment with interest together with other costs and profit. The primary rental was payable monthly with an initial payment of three months' rent at the outset, so that in effect the rent was paid three months in advance.
12. On the expiry of the primary period, the lessee was entitled to continue the lease indefinitely for successive periods of 12 months ("the secondary period") for a nominal annual rental payable on the first day of each secondary period.
13. Each lease provided (by clause 4A) that the equipment was to be located at the lessee's premises; (by clause 5A) that it was to remain at all times the sole and exclusive property of the lessor; and (by clause 5B) that the lessee was not to sub-lease, sell, charge, pledge, mortgage or otherwise dispose of or part with possession of any of the equipment.
14. Each lease provided that it could be determined by the lessee by giving a 60 day notice to expire on the last day of the primary period or any secondary period. It also provided (by clause 9(B)(iv)) that the appointment of a receiver over all or any part of the lessee's undertaking or assets should constitute a repudiatory breach of each of the leases and entitle the lessor to terminate all or any of them and claim payment of a termination sum from the lessee. The termination sum was equal to the sum of (a) all accrued but unpaid rentals with interest at 2% per month; (b) the balance of primary rental at the date of repudiation discounted for accelerated receipt; and (c) all costs incurred in repossessing the equipment or collecting payments, less the open market value of the equipment at the date of repudiation.
15. Each lease also provided (by clause 12) that, subject to the lessee having performed all its obligations under all the leases, then upon termination of the lease at the end of the primary period or at any time thereafter by notice in accordance with the terms of the lease, the lessee could sell the equipment to an unconnected third party at the best price available. The price was to be approved by the lessor prior to the sale and the sale was to be made by the lessee as the lessor's agent. The lessee was entitled to retain out of the proceeds of sale by way of a rebate of rentals a sum equal to 95% of the sale proceeds.
16. On 12 February 1998 the lessee went into administrative receivership. One week later the lessor terminated all four leases. Two of the leases were then in their secondary period and nothing was outstanding by way of rental under either of them. The primary period under the third lease was due to expire on 30 March 1998 and all the primary rentals had been paid in full. It was too late to serve a 60 days' notice to bring the lease to an end before the commencement of the secondary period, but the termination sum did not include secondary rental which had not accrued due at the date of termination. The primary period under the fourth lease was due to expire in May 1998. Only the last instalment of primary rental (£3,887.433) together with interest (£5.11) making a total of £3,892.54 was outstanding. The last payment of primary rental fell due during the first week of the receivership.
17. Following their appointment the administrative receivers took steps to realise the lessee's assets as best they could. The business was organised in two divisions; the creative convergence division, which used the leased equipment, and the new media publishing division. The new media publishing division was sold on 20 February. The creative convergence division had 78 employees, was reliant on them and their contacts, and had little value except as a going concern. There was a heavy and continuing liability for salaries and wages. Unless the business could be sold quickly, it would almost certainly have to be closed down.
18. Despite extensive marketing only one serious offer was received for the business. This was from the division's management and was for a sale of the business together with the leased equipment. The lessor also wished to achieve a sale of the equipment and had been attempting to sell it to the lessee or the management, but without success. The receivers had offered the lessor £30,000 in full and final settlement if it consented to a sale of the equipment as part of a sale of the lessee's business as a going concern. This sum was far in excess of 5% of the value of the equipment, but the lessor had refused.
19. On 4 March 1998 the lessee issued a writ claiming relief from forfeiture and other relief. Relief from forfeiture was needed in order to enable the administrative receivers to sell the equipment pursuant to clause 12 of the leases. As a term of obtaining relief they would, of course, be required to pay the arrears of primary rental and interest; and in order to sell the equipment pursuant to clause 12 they would have to terminate the leases by giving the appropriate notices of termination and paying any secondary rental due in the meantime; but subject thereto they would be entitled to recover a rebate equal to 95% of the sale proceeds.
20. Unhappily the parties were unable to agree on the proposed sale. There were two points of disagreement. First, the lessor did not accept that the lessee was entitled to relief from forfeiture, though it conceded that this was arguable. Secondly, it did not accept that the price at which the receivers were proposing to sell the equipment was, as clause 12 required, the best price available. The receivers were advised that the equipment was worth £273,000 if sold for use in situ, £178,000 if sold as individual items for removal from the premises at the purchaser's expense, and only £112,000 if sold separately. The lessor was advised that it was worth £251,295 if sold in situ and £134,030 if sold separately. Thus it was in the interests of both parties that the equipment be sold as part of the business; but they were unable to agree whether the lessee was entitled to a rebate of rentals following a sale at the best price available, which depended on whether the lessee was entitled to relief from forfeiture, or on the amount which the equipment should fetch.
21. In the ordinary way, the receivers would have waited to obtain relief from forfeiture before selling the equipment. But the sale would not wait. Unless the business was sold quickly it would not be sold at all. Accordingly on 4 March they issued two notices of motion for interim relief. One was a notice inter partes which sought relief from forfeiture of each of the four leases. The other was ex parte and sought an interim order for sale of the equipment pursuant to RSC Order 29, rule 4. This provides:
"Sale of Perishable property, etc.
22. The ex parte application came before Harman J on 5 March. The lessor had been notified of the hearing and was present by Counsel. The receivers asked for an order that the lessee be at liberty to sell the equipment, give a good title to the purchaser and retain the proceeds of sale in an escrow account pending the hearing of the inter partes motion.
23. The lessor filed an affidavit in which it stated that it did not accept that the lessee had any right to relief from forfeiture but conceded that this was arguable. It said that it understood that the receivers wished to sell the business as a matter of extreme urgency and that they believed that the equipment was a vital part of the sale. In those circumstances, the lessor was prepared to consent to an order for sale of the equipment and would agree that the purchaser should obtain a good title, and asked that "in order to hold the position pending a full hearing of the motion" the proceeds of sale should be paid into an escrow account. The lessor expressly reserved its rights in relation to the sale, and asked that it be made clear on the face of the order that it was made without prejudice to the lessor's contention that it was entitled to the full value of the equipment at the date of sale. It also wished to reserve the right to argue that the price at which the receivers proposed to sell the equipment did not represent its full value.
24. Harman J made an order for the sale of the equipment. It was a term of the order that the net proceeds of sale should be held in an escrow account pending the hearing of the inter partes motion for relief from forfeiture, and it contained a proviso that the lessor should be at liberty to contend that the break up value of the equipment was more than £130,500.
25. The business together with the equipment was sold on the following day, and the receivers paid the sum of £132,839. 96 into an escrow account as representing the proportion of the gross proceeds of sale which had been allocated to the equipment as between the lessee and the purchaser.
26. Although the order did not contain a proviso to the effect that the sale was without prejudice to the lessee's application for relief from forfeiture, no one contemplated that it would be automatically defeated by the sale which the judge had ordered. In the course of the hearing Harman J expressed the view that "relief from forfeiture is obviously available", and the terms of his order, which in this respect reflected those of the lessor's affidavit, clearly contemplated that the parties' respective rights to the proceeds of sale would depend on the outcome of the inter partes motion. There could be no other reason for requiring the proceeds to be paid into an escrow account.
27. The inter partes motion was heard by Mr George Laurence QC sitting as a deputy judge of the Chancery Division at the end of November 1998 and was by consent treated as the trial of the action. For the purposes of the hearing the lessee agreed that certain factual issues should be assumed in favour of the lessor. For present purposes the material concessions were:
(ii) that the best price available was £251, 617;(iii) that the lessor would not have approved a sale of the equipment at less than its written down value of £251,617, (since this would have had adverse consequences on the lessor's tax position); (iv) that the lessor would have approved a sale of the equipment at £251,617;
It was common ground that, if the equipment had been sold pursuant to clause 12 of the leases for £251,617, the lessee would have been entitled to a retain a sum equal to 95% of the net proceeds of sale.
28. The deputy judge dismissed the action, with the result that the money in the escrow account was payable to the lessor. He held that the criteria for the jurisdiction to grant relief would have been satisfied at the date of the application, since (i) the primary object of the bargain was to secure a stated result, namely the payment of the rentals in full and on time; (ii) at that date that result could effectively be attained when the matter came before the court; and (iii) the forfeiture provision was a security for the production of that result. But he held that the court no longer had power to grant relief from forfeiture since the equipment was no longer in the lessee's possession so that it was impossible to restore the status quo. As the deputy judge put it, relief from forfeiture would not make sense: first, a lease of equipment cannot meaningfully be restored if the equipment is gone; and secondly, possession of the equipment cannot be restored to the lessee if there is no longer any equipment to possess. Restoration of the status quo, he said, includes restoration of a state of affairs whereby the lessee must either (i) pay the secondary rentals and abide by the other terms of the leases if it wished to continue to possess and use the equipment; or (ii) comply strictly with the 60 day notice requirement and the terms of clause 12 if it wished to sell the equipment and become entitled to the 95% rebate. Neither of those possibilities would exist if the court purported to grant relief from forfeiture after the equipment had been sold, and it followed that there was no jurisdiction to grant it.
29. The Court of Appeal (Pill and Robert Walker LJJ, Sir Murray Stuart-Smith dissenting) dismissed the lessee's appeal:  1 WLR 155. The court unanimously upheld the deputy judge's ruling that the criteria for the exercise of the equitable jurisdiction were present at the date of the application. They rejected the lessor's objection that the leases were purely contractual in nature, and that the jurisdiction to grant relief from forfeiture was restricted to cases where the forfeiture of proprietary rights strictly so-called was in question. As Robert Walker LJ put it, contractual rights which entitle the hirer to indefinite possession of chattels so long as the hire payments are duly made, and which qualify and limit the owner's general property in the chattels, cannot aptly be described as purely contractual rights. For my own part, I regard this conclusion as in accordance with principle; any other would restrict the exercise of a beneficent jurisdiction without any rational justification.
30. The majority of the Court of Appeal also upheld the deputy judge's ruling on the effect of the sale, substantially for the reasons he had given. Robert Walker LJ was prepared to accept that the money in the escrow account might be regarded as a clean substitution for the equipment, but he could not see how the court could grant relief from forfeiture in relation to a sum of money once the equipment had gone. Pill LJ did not doubt the court's power to make the interim order for sale, but considered that its exercise did not affect the question whether the parties were thereafter to be treated as if their relationship was the same as had existed at the date of the interim order and as if the order had not been made. Sir Murray Stuart-Smith, who dissented on this part of the case, considered the true question to be whether the sale of the equipment pursuant to the order of the court defeated the lessee's claim to relief from forfeiture because it could not be restored to the position before the leases were terminated. He held that it was implicit in the order that the parties' substantive rights were not to be affected by the sale which it authorised.
31. The lessor has not cross-appealed against the first ground of the Court of Appeal's judgment, nor has it ever appealed from the order of Harman J. Accordingly, it must be taken to be settled that the court would have had jurisdiction to grant relief from forfeiture in respect of all four leases on suitable terms at the date of the application for such relief and at all times until the actual sale of the equipment pursuant to Harman J's order, which must be taken to have been properly made. No reason has been advanced before your Lordships why, if the jurisdiction existed, it should not have been exercised, and I would assume that, had the equipment not been sold, the lessee would have obtained relief from forfeiture and sold the equipment pursuant to clause 12 of the leases in due course.