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	England and Wales Court of Appeal (Civil Division) Decisions
You are here: BAILII >> Databases >> England and Wales Court of Appeal (Civil Division) Decisions >> Barclays Bank Plc v Stuart Landon Ltd & Anor [2001] EWCA Civ 140 (26 January 2001) URL: http://www.bailii.org/ew/cases/EWCA/Civ/2001/140.html Cite as: [2002] BCC 917, [2001] EWCA Civ 140, [2001] 2 BCLC 316

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IN THE SUPREME COURT OF JUDICATURE
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE CHANCERY DIVISION
(BIRMINGHAM DISTRICT REGISTRY)
(SIR RICHARD SCOTT VC)

		Royal Courts of Justice Strand London WC2A 2LL Friday 26 January 2001

1. LORD JUSTICE PETER GIBSON: I will ask Lord Justice Chadwick to give the first judgment.
2. LORD JUSTICE CHADWICK: This is an appeal against an order made on 27 April 2000 by the district judge, sitting in Birmingham, on an application under section 404 of the Companies Act 1985 for the registration out of time of a charge created on 11 November 1998 in favour of the applicant, Barclays Bank Plc,. By that order, the district judge set aside an earlier order which he had made on 21 February 2000. The earlier order had granted leave to register out of time - subject to the usual proviso derived from the decision in In re R L Charles & Co [1935] WN 15. That proviso was to the effect that the order should be without prejudice and the rights of the parties acquired prior to the time when particulars of such charge shall be actually registered; and that the company should have liberty to apply to discharge the order within 42 days after commencement of winding up in the event of a resolution for voluntary winding up becoming effective on or before the 20 March 2001.
3. The circumstances in which the appeal comes before this Court (rather than before a judge of the High Court) are set out in a judgment given by Sir Richard Scott, then Vice-Chancellor, sitting as a judge in the Chancery Division in Birmingham on 19 June 2000. It is unnecessary to refer to them further.
4. The background to the application may be stated shortly. The charge was granted by Stuart Landon Limited, a company incorporated under the Companies Acts. The company had acquired from the appellant, Mr Griffiths, a garage business known as Seacroft Garage, 1 Clifton Grove, Skegness. The purchase price for the business was £265,000. £154,000, or thereabouts, of that price was left outstanding to be repaid over a period of 30 months. At the time of the acquisition, 11 November 1998, the company executed a legal mortgage of the property acquired in favour of the applicant, Barclays Bank Plc; and also a legal charge - together with a floating charge over the remainder of the company's assets - in favour of Mr Griffiths to secure the balance of the purchase price. It was expressly provided that the charge in favour of Mr Griffiths was to rank in priority after the legal mortgage in favour of Barclays Bank.
5. Section 395 of the Companies Act 1985 provides that a charge created by a company, to which that section applies, is void as against a liquidator and any creditor unless the prescribed particulars of the charge together with the instrument by which the charge is created or evidenced are delivered to or received by the registrar of companies for registration within 21 days of its creation. The Barclays Bank charge is a charge to which section 395 applies (see section 396(1)(d) of the Act). The charge was not registered within the period of 21 days from its creation in November 1998 - or at all, until after the application was made for permission to register it late.
6. Permission to register a charge outside the 21 day period may be granted under the provisions of section 404 of the Companies Act 1985. The section is in these terms:

"(1) The following applies if the court is satisfied that the omission to register a charge within the time required by this Chapter or that the omission or mis-statement of any particular with respect to any such charge or in a memorandum of satisfaction was accidental, or due to inadvertence or to some other sufficient cause, or is not of a nature to prejudice the position of creditors or shareholders of the company, or that on other grounds it is just and equitable to grant relief.

(2) The court may, on the application of the company or a person interested, and on such terms and conditions as seem to the court just and expedient, order that the time for registration shall be extended or, as the case may be, that the omission or mis-statement shall be rectified."

7. The application for an extension of time under that provision was made by a claim form issued on 2 February 2000, supported by a witness statement of a partner in the firm of solicitors which had acted on behalf of the applicant bank. The witness statement sets out the history that I have described; and explains that the failure to register the charge was due to inadvertence or accident in the solicitors' office.
8. It was that application which came before the district judge on 21 February 2000. As is usual in such a case, the application was made without notice to other parties and was dealt with on the basis of the witness statement to which I have referred. It is plain that the district judge must have been satisfied from the material before him that the failure to register was accidental or due to inadvertence, so that the first of the conditions set out in section 404(1) was satisfied. But he was also aware that, in the event of a liquidation of the company, there was a risk that the position of creditors or shareholders might be prejudiced as a result of a registration which avoided the consequences of section 395. Accordingly he adopted the practice - which originates in the decision of Clauson J in In Re Charles, and which has been adopted consistently thereafter - of making the order subject to a proviso designed to protect the position of creditors and shareholders in the event of a liquidation. The reason for that proviso was explained by Hoffmann J in In re Braemar Investments [1998] BCLC 556 between page 559E and 560F.
9. The district judge was concerned, also, to protect the position of Mr Griffiths, who was the holder of the other charge created on 11 November 1998. He gave Mr Griffiths permission to apply to the court for a variation or rescission of his order on or before 20 March 2000. It was an application by Mr Griffiths under that permission to apply which brought the matter back before the district judge at the hearing in April 2000.
10. On the hearing of Mr Griffiths' application, the district judge decided to set aside the order of 21 February 2000 and to direct that the registration of the charge which had been effected pursuant to that order should be cancelled. His reasons are set out in a written judgment, of which we have a copy.
11. He considered, first, whether registration of the bank's charge would unfairly prejudice Mr Griffiths - who had registered his own charge. He was referred to the decision in In re IC Johnson & Co Ltd [1902] 2 Ch 101 in which this court explained the principles which applied as between the holders of competing charges. In the present case, the position was that, when Mr Griffiths took his charge, he had been content that it should rank in priority behind the Barclays Bank charge. So that registration of the Barclays Bank charge could not be said to prejudice him; in the sense of depriving him of any advantage for which he had bargained. Registration of the Barclays charge out of time would deprive Mr Griffiths of an advantage that he would have obtained as a result of his own diligence (or that of his solicitors) and of the inadvertence or mistake of the bank's solicitors. It would deprive him of an advantage for which he had not bargained. The preservation of a 'windfall' advantage would not, of itself, be a proper reason for refusing to exercise the dispensing power under section 404. But, as the district judge said:

"It seems to me that the agreed priority as between Barclays and the Applicant is one of many factors I may consider in the exercise of my discretion. It does not seem to me that there is any authority for the proposition that I am bound to make the order so that the contractually agreed priority can be preserved."

12. In that passage the district judge is accepting that, although he is not obliged to make an order to preserve the contractually agreed priority, the fact that any order will have that effect is a reason why it should not be refused at the behest of the other secured creditor.
13. The district judge thought that the winding up of Stuart Landon was imminent and almost certain. He directed himself, in the light of observations of this court in In re Ashpurton Estates Ltd [1983] 1 Ch 110, and in the subsequent appeal in Exeter Trust v Screenways [1991] BCLC 888, that the imminence of winding up was a relevant factor in deciding whether or not to exercise a discretion on an application extending the time for registration. The reason why the imminence of winding up is a relevant factor is because it is the settled practice of the court not to make an order under section 404 extending time for registration on an application made after the commencement of the winding up.
14. Once winding up has commenced, the interests of the unsecured creditors in the property of the company will have vested under the insolvency code; and an order under section 404, which has the effect of making enforceable a charge which would otherwise be unenforceable by reason of section 395, will infringe those vested rights. But, prior to winding up, unsecured creditors have no vested rights in the property of the company. Therefore the possibility that the secured creditor will gain an advantage over them in a future winding up is not, of itself, a matter requires that no order is made (see the observations of Vaughan Williams LJ in In re Ehrmann Brothers Limited [1906] 2 Ch 697, in particular at page 704 and the explanation in the judgment of Romer LJ at pages 707-708).
15. But, in circumstances where it can be seen that winding up is imminent, the court can foresee that there may be creditors who are unsecured in the liquidation who could show that they had given credit to the company on the basis that the company's property was not encumbered by existing charges. That possibility is based upon the hypothesis - not, perhaps, altogether real in practice - that those who trade with companies take the trouble to search the register of charges before deciding to extend credit. But if there were such a creditor he would be entitled to say that he had been prejudiced by the making of an order under section 404 on an application of which he had no notice and at which he was not there to be heard.
16. Further, it may be that a liquidator, when examining the books and records of the company and the circumstances in which the charge was granted, will uncover material which suggests that the decision not to register the charge was deliberate; and so was not the result of accident or inadvertence. In other words, on an application on which others than the applicant are there to be heard, it may become apparent that there is some proper reason for declining to grant an extension of time. In order to protect that position, the court, as a matter of normal practice, will require the inclusion, in its order for extending time, of a proviso as contained in paragraph 2 of the order of the 21 February 2000. It is imminent possibility of liquidation which gives rise to the need for that proviso; and the inclusion of that proviso reflects the court's recognition that the imminent possibility of liquidation is a relevant factor.
17. The district judge, however, appears to have thought that on an application by a liquidator, under the liberty preserved by the proviso, it was inevitable that the order granting an extension of time would be set aside. He said:

"In this case, I have found that the winding up of SLL is almost certain. Although Mr Charman [who then appeared for the Bank) has invited me to conclude that there are few if any unsecured creditors I find that the evidence suggests the contrary. There are no doubt trade creditors and there is some evidence to suggest that the employees of the company had gone unpaid at least in part. Mr Kerr it is said has expressed the view that SLL should be wound up and lurking in the background is a suggestion, but no more than that, that there may have been preferential dealing with the assets of SLL. This it seems to me makes the prospect of winding up more likely since it would be a liquidator's duty to investigate any transactions adversely affecting the value of the company.

On balance I am satisfied that the winding up of the Company is sufficiently proximate to render it inappropriate for me to exercise my discretion in favour of Barclays. The eventual appointment of a liquidator seems to me highly likely to result in an application to set aside any extension Order and therefore, it would of little benefit to Barclays for the Order of 21 February 2000 to stand."

18. In my view the reasoning disclosed by that final paragraph cannot be supported. The benefit to the bank of the order of 21 February 2000, and the registration effected under that order, is that its charge is proof against challenge under section 395 of the Companies Act 1985 unless grounds are shown which satisfy the court that the extension order ought not to have been made for one of the reasons indicated in section 404 of that Act. But if no extension order was made, and no registration could be effected, the bank would have no chance of relying upon the charge which it has failed to register. The order of 21 February 2000 gave it that chance, subject to a proper provision for the protection of those who might be prejudicially affected.
19. It could only be if the circumstances were such that an application to set aside the order for extension (made following liquidation) would be bound to succeed, that it could be said that the extension order conferred no benefit on Barclays. However likely it is that an application to set aside will be made, the relevant question is whether there are grounds for thinking that the application would be bound to succeed. If there are no grounds for thinking that the application would be bound to succeed, then the proper course is to make the order with the proviso. Thereby, the bank is protected, subject to grounds being shown on a subsequent application which indicate that persons have been prejudiced. Their interests, also, are protected.
20. The district judge was pressed to follow the decision of this court in In re Ashpurton Estates Ltd. But there are a number of factors which distinguish the decision in Ashpurton Estates from the facts in the present case: (1) the registrar who had considered the matter on the first occasion was not satisfied on the evidence before him that the failure to register was the result of accident or inadvertence; (2) there was good reason for the exercise of discretion against the unregistered chargee in the circumstances that it appeared that, following discovery of his mistake in failing to register, he had sought the alternative course of obtaining a further security; (3) the decision of the Court of Appeal was on an appeal from a judge who had himself heard the appeal from the registrar at a time when the hearing before the judge was in the nature of a true re-hearing rather than an appellate hearing; by time the matter came before the judge, the company had gone into liquidation and so - on the facts as they were before the judge - it would have required exceptional circumstances to justify an extension of time; (4) there were no exceptional circumstances which could have led the Court of Appeal to take the view that it should interfere with the discretion of the judge against whose order the appeal lay; in the present case this Court has to review the decision of the district judge, made at a time when the company was not in winding up and in circumstances in which it is still not in winding up.
21. It follows that I am satisfied that the district judge misdirected himself as to the basis upon which his discretion should be exercised. Accordingly, it is open to this Court to exercise its own discretion in the matter.
22. It seems to me, therefore, that it is right for this Court to recognise that the exercise of discretion on 27 April 2000 was based on a misunderstanding of the principles applicable, and to substitute its own discretion for that of the district judge by making the usual order. That could be done by restoring the position to what it had been under the district judge's order of 21 February 2000. There is one variation sought by Mr Zacaroli on behalf of the bank; namely that the order of 21 February should be varied so as to make it clear that the proviso in paragraph (2) is not to interfere with the rights of priority as between the bank's charge and Mr Griffiths' charge under the contractual terms. If that is not already clear, it is desirable that it should be. I would allow the appeal, and set aside the order of 27 April 2000; save to that extent of varying the order of 21 February in the manner suggested.
23. LORD JUSTICE PETER GIBSON: The respondent, Mr Griffiths, has decided not to appear today, but we have had the benefit of a skeleton argument submitted by counsel on his behalf. It is argued that the district judge correctly directed himself as to the law and arrived at a decision that was within the scope of his discretion. It is submitted that the decision was not plainly wrong and that this court should not interfere with it.
24. It is certainly true that in his judgment the district judge refers to the relevant authorities and mentioned relevant factors. But as the Vice-Chancellor pointed out when giving permission to appeal, where an appeal is challenging the exercise of a discretion, it is possible in an appropriate case to argue that the person who took the decision, although mentioning and, presumably, taking into account all the relevant factors, has produced a result which could not have given proper weight to those factors.
25. The original order of the district judge properly recognised that Mr Griffiths' charge should remain subordinated to the Barclays' charge as had been agreed contractually. Further, paragraph 2 of the original order of the district judge gave proper protection to all interested parties. In those circumstances, I find it hard to see what factor could be put in the scales to count against allowing the extension of time for Barclays, given that its failure to register the charge in time was through inadvertence.
26. For the reasons given by my Lord, Lord Justice Chadwick, I, too, regard the reasoning of the district judge for his conclusion as unsustainable. I therefore accept the admirable submissions made by Mr Zacaroli that this appeal should be allowed and I concur in the order proposed by my Lord.
Order: Appeal allowed with costs of the appeal and the second lot of costs before the district judge, subject to detailed assessment.