Hughmans Solicitors v Central Stream Services Ltd & anr [2012] EWCA Civ 1720

Analysis

Hughmans Solicitors (Hughmans) appealed from the decision of Briggs J that a debt owed to Hughmans, secured by a charging order, did not enjoy priority over the rights of Central Stream Services Ltd (in liquidation) (the company) and its liquidator arising from a Tomlin Order.

Hughmans had applied for an order for payment of £19,000 from the proceeds of sale of 3 Tisdal Place, London (the property). Hughmans claimed to be entitled to the payment on the basis of a judgment debt secured by a final charging order against the property. The company and its liquidator claimed a prior secured right to the whole of the sale proceeds arising from the contractual terms of the schedule to a Tomlin Order dated 13 June 2008 (the schedule) made in compromise of proceedings between the company and a Mr Davidson. The schedule provided that the property would be sold by Mr Davison. After discharge of the mortgage, the company was entitled to the first £100,000 of sale proceeds and the whole of what was left after the payment of certain specified costs and debts.

On 12 April 2010, Hughmans obtained judgment in default against Mr Davison in respect of their unpaid professional fees. An interim charging order was obtained over the property on 29 April 2010, which was made final on 29 August 2010. The charging order was registered against the title to the property.

Falls in property values meant that when the property was sold in the early part of 2011, only £49,104 was available after discharge of the mortgage. Hughmans claimed their charging order ranked ahead of the right of the company to be paid under the schedule, either because the schedule did not create a proprietary interest in the property in favour of the company or because the charging order enjoyed priority over the company’s interest by virtue of registration.

At first instance, the issues were:

1. (1) Did the schedule give rise to a proprietary interest on the part of the company in the property?
2. (2) If so, did Hughmans’ charging order, and its protection at the Land Registry by a unilateral notice, confer priority in favour of Hughmans over the company’s interest?

Briggs J concluded that the schedule gave rise to a proprietary interest and that it took priority over the charging order because the charging order had not been created for valuable consideration for the purpose of s29 of the Land Registration Act 2002 and hence did not enjoy priority over an earlier, but unregistered, equitable interest. Hughmans did not challenge Briggs J’s conclusion on the second issue on their appeal.

Hughmans argued that the schedule did not purport to create a proprietary interest in the property, but only to impose a personal obligation on Mr Davidson to sell the property and apply the proceeds of sale in a particular way. The company filed a respondent’s notice supporting the judge’s decision on the alternative ground that the schedule had created an equitable charge in favour of the company.

Held (dismissing the appeal):

1. (1) The need for an intention to create a proprietary interest to be clearly shown is of general application. The creation of equitable interests will not readily be found in a commercial context because such interests run counter to the rateable distribution of assets on insolvency and because the courts are disinclined to introduce the intricacies and doctrines connected with trusts into everyday commercial transactions (para [21]).
2. (2) The schedule did not create an equitable charge because there was no debt due from Mr Davison to the company for which a charge could stand as security. The obligation was not a debt, but an obligation to sell the property and apply the proceeds of sale in a particular manner (para [25]).
3. (3) If, for valuable consideration, the owner of property agrees to hold the property on terms that appropriate it for the benefit of another party and the agreement is one that the courts will enforce by an order for specific performance, then an equitable interest will be created. The schedule gave the company the whole of Mr Davidson’s net equity in the property, subject only to the application of part of the proceeds in the payment of certain debts. It was an agreement the court would enforce by an order for specific performance (para [26]).
4. (4) There is nothing strange in beneficial interests created by agreement. There is no conceptual difficulty in property being held for the benefit of a number of different persons in different proportions and different orders of priority (para [28]).

JUDGMENT LORD JUSTICE WARD: [1] This is the judgment of the court. [2] The issues on this appeal are whether a contract compromising legal proceedings created a proprietary interest in property owned by the defendant in the proceedings and, if so, whether it took priority over a later charging order over the property. Notice of …

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