Dispute over "ransom strip" of land

Overview

In this case, the Court considered a dispute over what the Administrators described as a “ransom strip” of land which formed part of a larger development site. The land — essentially a bus stop — occupied a key point intended to give the development access to the highway. The Court agreed with the Administrators that the land was held on constructive trust for the companies, since it was acquired by the directors in breach of their duties to the companies under ss 172 and 175 Companies Act 2006. The land was an integral part of the development project which was required by the companies, and the directors had acted contrary to the companies’ interests in acquiring the land. The Court also commented on the circumstances in which it may be appropriate to determine issues of title on a summary application under paragraph 63 of Schedule B1 to the Insolvency Act 1986 and/or s 234 of the Act.

Background

Arron Kendall and Milan Vuceljic of Moorfields, the Administrators of Sherwood Oak Homes and Sherwood Oak Holdings, brought an application seeking a declaration that land forming part of a development site owned by the companies’ principal and his wife was actually held on trust for the benefit of Homes or Holdings.

The companies’ principal trading activity was the development of a site in Mansfield (the “Development Site") which was acquired by the companies in 2018. The land (the “Land”) at issue — which the Administrators described as a “ransom strip” — occupied a very small area of the Development Site. It was essentially a bus stop, but it happened to occupy a point between the Development Site and the highway that was intended to be used as a means of access to the Development Site. The Land was purchased by Timothy Ball, the companies’ director, and his wife Carol for £156,500 on 31 May 2023, some four months before the Administrators were appointed. Mr Ball was a director of both companies and the sole shareholder of Holdings. Mrs Ball was at no time a director of Holdings, but was at various times a director of Homes, although she claimed to have had little to do with the company's day-to-day management or operation.

The issue was whether the Balls purchased the Land for themselves or on trust for the benefit of the companies. Mr Ball took the position that the land was purchased using his money (i.e., money he had lent to Holdings over the years) because the companies’ funding had run out, and that the intention was to eventually sell the land to Holdings when financing was obtained.

The Administrators brought an application under paragraph 63 of Schedule B1 to the Insolvency Act 1986 and/or s 234 of the Act for a declaration that: (1) the Land was held on resulting trust for Homes, since Homes had paid for the Land; or (2) the Land was held on constructive trust for both companies, because the Balls had acquired the Land in breach of their duties, including the duty to promote the success of the company and avoid conflicts of interest.

The Court’s Decision

The Threshold Issue

The Court began its decision by considering the threshold question of whether the Administrators were entitled to bring their application under s 234 and para 63 Sch B1 of the Act. The Balls had argued that neither of these provisions was appropriate for the determination of the issues on the application, since the law on directors’ duties (including the circumstances in which a breach may occur, the various possible defences and the appropriate relief) is "notoriously complex".

The Court agreed with the Balls that the central purpose of s 234 is to provide a summary, discretionary remedy, enabling an office holder to carry out his functions, but without necessarily involving a determination of title. If title is in dispute, the usual appropriate course is to commence proceedings in the name of the company itself. However, the Court is not precluded from finally resolving issues of title in opposition to an application under s 234, and in certain cases (for example, where the issue was a ‘pure point of law’) will do so. Ultimately, the decision whether or not to determine the issue is likely to depend on whether or not a summary process, without statements of case, disclosure and witness statements, is fair.

With respect to para 63, the Court found that the provision was drafted sufficiently broadly to allow it to resolve disputes with third parties, and that it has been used to do so in the past. Therefore, as with s 234, the decision whether to determine an issue such as the issue in this case on an application under paragraph 63 will depend in part on whether it is fair to use a summary process, without statements of case, disclosure and witness statements. In many such cases, the usual and appropriate course will be to commence proceedings in the name of the company itself.

The Trust Claims

Turning to the substantive issues, the Court rejected the claim that the Land was held on resulting trust for Homes. The evidence established that the purchase price was paid by Homes from its own bank account, and the Court found that Mr Ball’s assertion that the money he lent to Holdings continued to be “his” was plainly incorrect. However, even though Homes technically paid for the Land, it did not do so "in the character of a purchaser" — the parties plainly intended that the Balls (and not Homes or Holdings) would acquire and own the Land. The Balls’ untested evidence, which the Court accepted, was that they intended to acquire and own the Land for a time before selling it to Holdings depending upon further development funding and the agreement of a purchase price. This was corroborated by the contemporaneous evidence, including minutes of a board meeting and email correspondence, which was consistent with an intention that the Balls would own the Land.

The Court did, however, conclude that the Land was held on constructive trust for the companies, since it was acquired by the Balls in breach of their duties to the companies under ss 172 and 175 Companies Act 2006. Among other things, the Court found that the Land was “a valuable, integral part of the development project, required by the companies and intended to be used by them” to access the Development Site, and that the Balls had acted contrary to the companies’ interests in acquiring the Land. The Court stated:

“The Respondents were bound to protect the companies' interests, and to act with undivided loyalty, in good faith and in their best interests. Manifestly, the acquisition in their own names of the Land, needed by the companies for the purposes of their business, placed the Respondents - as is now abundantly plain from the fact of this litigation - in a position where their interests and those of the companies were in sharp conflict. They exploited and diverted to themselves an opportunity to acquire property which the companies themselves needed. On their own evidence, they placed themselves in a position in which it would at some point be necessary … to negotiate for a re-sale of the property to Holdings, at a "purchase price [to be] agreed". In no sense did any of that promote the companies' interests.”

Conclusion

As a result, the Court declared that the Land was held on constructive trust for the companies, and ordered it to be transferred to them.

Judge: ICC Judge Greenwood

Counsel: Matthew Weaver KC of Radcliffe Chambers (instructed by Addleshaw Goddard) for the Administrators

Chloe Shuffrey of Radcliffe Chambers (instructed by HCR Legal) for the Balls