Summary

Judge entitled to find that a series of transactions by a company, in which a headlease and underlease were executed, were so indivisably bound together that the company never acquired anything more than a nominal reversion which could fall prey to a debenture.

Facts

Appeal by the first, second and third respondents ('the subrogation claimants') and the sixth and seventh respondents ('the liquidators') from the decision of Michael Briggs QC (sitting as a Deputy High Court Judge) dated 11 March 2002, finding that an underlease in favour of the fourth and fifth respondents had priority over a debenture. The administrative receivers of Viasystems (Tyneside) Ltd ('the company') issued an application for directions as to whether the Underlease dated 28 March 2001, granted by the company to the fourth respondent ('Grantax'), which was secured by finance from the fifth respondent ('the bank'), was the subject of a debenture dated 29 March 2000 granted by the company in favour of Chase Manhattan International Ltd (now JP Morgan Europe Ltd) ('Chase'). By a facility agreement, a group of banks lead by Chase agreed to make funds available to the company by way of a revolving credit agreement. A condition of that facility was that Chase received a group debenture by which the company gave fixed and floating charges as security, and by way of a first fixed charge, charged all present and future freehold and leasehold property. By an agreement dated 27 March 1998, One Northeast granted the company an option to purchase a lease ('the Headlease'). On 28 March 2001 the Headlease and Underlease were executed. By the Headlease, One Northeast demised the property to the company for 125 years. By the Underlease the company demised the property to Grantax for 125 years less three days. The company went into administrative receivership on 20 September 2001 at Chase's instigation. The company's indebtedness to Chase was reduced to a nominal level, however the subrogation claimants claimed to have been subrogated to Chase's security. The judge found on the balance of probabilities that the company used the money received from Grantax to pay for the Headlease, while Grantax financed its payment to the company with a loan from the bank. He found that the debenture did not have priority over the Underlease and thus did not have priority over a charge granted by Grantax to the bank. The judge based that conclusion on the grounds that the company never acquired anything more than a nominal reversion which could fall prey to Chase's charge, and that the company never became the owner of the Headlease unencumbered. On this appeal, the subrogation claimants and the liquidators argued, inter alia, that the judge erred by applying Abbey National Building Society v Cann (1991) 1 AC 56. They argued that Cann (supra) only applied where there was a single indivisible transaction and in the present case, the Headlease and Underlease were not so. Alternatively, they argued that the judge was wrong to find that the Headlease was paid for by the company by the money received from Grantax for the Underlease. The respondents argued that the judge was entitled to find that the money received from Grantax funded the Headlease, and that the application by the judge of Cann (supra) was correct as the transactions were simultaneous and indivisibly bound together.

Held

(1) It was settled that in the context of priorities of equitable interests, the court was to have regard to the substance rather than the form of the relevant transactions (see Cann). The approach was not limited to the purchase of property, but was adopted generally where the question of equitable interests and their priorities arose. (2) The sequence of transactions in the present case resulted in the company receiving no more, in regards to proprietary interests, than three days reversion on the Underlease. (3) It could not be said that the company received the Headlease unencumbered where the completion of the Headlease and the Underlease took place together, and the Headlease was satisfied by the money received from the Underlease. The contention by the subrogation claimants and the liquidators that the company received the Headlease for 125 years unencumbered required a process of dissection and triumph of form over substance. (4) The judge was fully entitled to conclude that the completion of the Headlease was dependant upon the money received from Grantax. The ability of the company to acquire finance from elsewhere was irrelevant. The company choose to fund the Headlease transaction from the Underlease transaction. (5) The reality of the series of transactions was that the company never received the Headlease free from incumbencies of the Underlease. Accordingly, the Underlease took priority over the debenture.

Appeal dismissed.