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Gerard van Tonder, barrister at New Square Chambers, examines a Court of Appeal decision that a leasehold interest in a property which had been assigned to the appellant's company and which, after the company was dissolved, was disclaimed by the Crown should not be ordered to vest in the appellant. The court found that although the appellant was a co-mortgagor of the leasehold interest, he was not entitled to it under section 1017(2)(a) of the Companies Act 2006 (CA 2006).
Leon v Her Majesty's Attorney-General and others  EWCA Civ 2047
This case highlights the very serious consequences for shareholders of companies with valuable assets that are dissolved but who do not make a restoration application within the six-year period allowed for under CA 2006, s 1024.
Their initial decision to conduct a business through a company rather than as a partnership may in time result in the assets of the company being lost to them unless they are able to bring themselves within the narrow provisions of CA 2006, s 1017 for making vesting orders in their favour.
The second respondent local authority had granted a long lease to a flat. The leasehold interest was eventually assigned to the appellant's company. That company was dissolved as a result of its failure to comply with its statutory filing obligations under CA 2006 and no application was made to restore it to the register within the period of six years allowed under CA 2006, s 1024. The lease was deemed to be bona vacantia and belong to the Crown pursuant to CA 2006, s 1012.
However, the Crown disclaimed any title in the lease and, pursuant to CA 2006, s 1015, the disclaimer terminated the company’s rights, interests and liabilities in the lease.
At the time of the dissolution, a mortgage company held a mortgage over the leasehold interest. The mortgage was later transferred to the third respondent, another mortgage company. The mortgage deed described the appellant's company as the mortgagor and the appellant as the co-mortgagor.
Following the Crown disclaimer, the appellant brought a claim for a vesting order on three grounds:
Chief Master Marsh dismissed the first two grounds, but made a vesting order in the appellant's favour on the third ground. The Chief Master decided that by virtue of his position as a co-mortgagor, the appellant had an interest in the lease and that a vesting order should be made under CA 2006, s 1017(1)(a). Alternatively, the Chief Master decided that the appellant was entitled to a vesting order because, within the meaning of CA 2006, s 1017(1)(b), he was 'under a liability in respect of' the lease as co-mortgagor and his liability was not discharged by the disclaimer.
The second respondent appealed against the decision. It contended that the Chief Master misconstrued the relevant provisions, and also that although he was exercising a discretion, the exercise of his discretion was flawed because he failed to explain how CA 2006, s 1017(3) was satisfied.
Mr Justice Arnold (as he then was) allowed the appeal.
He held that in order for a court to be able to make a vesting order under CA 2006, s 1017(1)(a), it was first necessary to establish, pursuant to CA 2006, s 1017(2)(a), that a person was entitled to the property. The correct question was not whether the person had an ‘interest in the property’, but whether he was ‘entitled to it’. It was necessary for the person to have a proprietary interest in the property for CA 2006, s 1017(2)(a) to be satisfied. The Chief Master had relied on the appellant’s equity of redemption in the property as his proprietary interest. The judge held that the equity of redemption belonged to his company as mortgagor and to the Crown after the dissolution and until the disclaimer. Although the appellant had the right to redeem the mortgage by paying off the debt, it did not mean that he owned the equity of redemption. He did not have a legal estate in the property which was capable of being charged to the mortgagee, nor was he entitled to the mortgaged property under LPA 1925, s 105.
The judge also held that the Chief Master had failed to explain why it would be just to make a vesting order to compensate the appellant who remained subject to the liability under the mortgage as was required under CA 2006, s 1017(3). The appellant could not be compensated for his interest in the lease as he did not have any such interest. Nor could he be compensated for his liability under the mortgage.
The application of the third respondent, as mortgagee, for a vesting order pursuant to CA 2006, s 1017 to preserve its security was not opposed by the other parties.
The appellant appealed to the Court of Appeal on two grounds:
the judge was wrong to hold that he was not ‘a person entitled to’ the disclaimed property for the purposes of CA 2006, s 1017(2)(a)
the judge was wrong to interfere with the Chief Master’s decision that it was just to make an order compensating him pursuant to CA 2006, s 1017(3)
The Court of Appeal dismissed both grounds of appeal. Lord Justice David Richards gave the only judgment.
As to the first ground, the appellant's reliance on his position as a co-mortgagor and an entitlement to the equity of redemption was held to be incorrect. David Richards LJ referred to the terms of the mortgage which made it clear that there was no basis for finding that the appellant was a co-owner of the lease or that he had any interest in the lease. The appellant's further reliance on his right to redeem the mortgage was dismissed by David Richards LJ as confusing the right to redeem with the equity of redemption. The appellant was not the owner of the lease and the equity of redemption belonged to the owner and not to a surety, which was the appellant’s position.
David Richards LJ further held that there was nothing in the decision of Re Vedmay Ltd  1 BCLC 676 which could assist the appellant. He held open the possibility that Re Vedmay Ltd was incorrectly decided when Mr Gavin Lightman QC (as he then was) held that statutory tenants under the Rent Acts (ie the Rent Acts 1968 and 1977) had an 'interest in the disclaimed property' under sections 181–182 of the Insolvency Act 1982 because they had a statutory ‘status of irremovability’.
On the second ground, David Richards LJ held that Mr Justice Arnold was correct to hold that the appellant’s application for a vesting order did not satisfy the requirements of CA 2006, s 1017(3). He concluded that the vesting order in favour of the third respondent provided the appellant with protection as regards his liabilities as co-mortgagor as it would be able to realise its security in the event of any default and the value of the lease was such that it would be fully recouped out of the proceeds of sale.
Court: Court of Appeal
Judges: Lord Justice Lewison, Lord Justice Simon, Lord Justice David Richards
Date: 22 November 2019
Interviewed by Robert Matthews.
The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.
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Zahra started working as a paralegal at LexisNexis in the Lexis®PSL Banking & Finance and Restructuring & Insolvency teams in April 2019 and moved to the Corporate team in June 2020, where she currently works as a Market Tracker Analyst. Zahra graduated with 2.1 honours in BA French and Spanish and completed the GDL at BPP University. She has undertaken voluntary work for law firms in London, Argentina and Colombia.
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