- The recent case of Re Fivestar Properties Ltd highlighted an instance where the company’s administrators filed a dissolution notice despite the company continuing to own a freehold asset with substantial value. This is just one example of how a secured creditor may find itself having to realise a valuable asset following a formal insolvency process and subsequent dissolution.
- If a lender identifies an asset of value, the first question it will ask is how best to realise that asset. The second will be how much that method will cost. The next steps will depend on whether the asset has been disclaimed by the Crown and whether the disclaimed asset is freehold or leasehold.
- Without an insolvency practitioner in place, the active over the passive approach is to be preferred in relation to dissolved companies. Given that each realisation process in dissolution is lawyer-led, this can be a good opportunity to gain a client’s respect and be seen to offer cost-effective problem-solving without ‘over-lawyering’ the issue.
At some point, every lender will have to deal with an insolvency or dissolution of one of its borrowers. While most bankers in recoveries teams will be relatively familiar with the liquidation process and have trusted insolvency practitioners they can call upon, the situation in which a corporate borrower’s assets have to be realised while the borrower is dissolved is relatively unfamiliar territory. Added to this is that upon dissolution there is no person acting as a guide, nor sending prompts/updates to creditors, and it becomes easy to forget about a dissolved company, or let it fall to the bottom of a pile, particularly if the lending is low and the asset(s) difficult to realise.
If the company’s affairs are conducted properly, one would not expect that a secured lender would have any need to deal with a company which has been dissolved / struck off. The liabilities should have been repaid, security released and the company’s realisable assets transferred. However, experience suggests that companies’ affairs are not always conducted properly and that, whether through design or ignorance, it is not that uncommon for a secured lender to find itself needing advice on how to realise an asset to repay a debt due from a dissolved company.
This article offers a brief overview of the challenges facing secured lenders upon dissolution and possible solutions. For obvious reasons (value etc), the article will focus on realisation of real property, but one should keep in mind that much of what is said is applicable to chattels. If the lender is unsecured, its only recourse is to apply to restore the company to the register in conjunction with follow-up actions to bring about a realisation of the company’s assets and repayment of its debt. The options open to secured creditors are wider.
ROUTES TO DISSOLUTION
Broadly speaking, the main routes to dissolution are (i) following a formal insolvency process (administration/liquidation); (ii) director-led voluntary strike off; or (iii) involuntary strike off by the Registrar of Companies, most commonly resulting from a failure to file documents.
In relation to (i), one would hope that the insolvency practitioner would have dealt with all realisable assets of the company prior to making the appropriate filing for dissolution. However, the recent case of Re Fivestar Properties Ltd  EWHC 2782 (Ch) (8 October 2015) highlights an instance where the company’s administrators filed a dissolution notice despite the company continuing to own a freehold asset with substantial value. The reason why the administrators chose to file such a notice (which was not considered in the case) is less important for the purpose of this article than to note that a secured creditor can find itself having to realise a valuable asset following a formal insolvency process and subsequent dissolution.
In relation to (ii), it is easy to see several permutations by which the company is dissolved while still holding assets and retaining liabilities. The simplest is that the directors simply do not know that the company owns the asset in question. It is easy to forget about the small parcel of land obtained (and retained) by the company many years before, or to believe that all the company’s property was transferred to another member of its group as part of the restructure which left the now dissolved company dormant years before. Small parcels of land are easily forgotten about, but can be vital to the operation of a site and therefore valuable. In relation to outstanding liabilities, although the company should not have been dissolved with outstanding current liabilities, it could be dissolved while still contingently liable, for example pursuant to a guarantee. With no insolvency process preceding the dissolution that contingent liability has not been dealt with at law and could later be crystallised. At this point it is worth highlighting that while the specific legal mortgages may have been released, any ‘forgotten’ land should still be captured by mortgages contained in unreleased debentures. The rest of this article keeps such equitable mortgages in mind, since the power of sale is still exercisable and will be recognised by the Land Registry (Swift 1st Ltd v Colin & Ors  EWHC 2410 (Ch) (27 July 2011)).
By far the most common circumstance for lenders is (iii), where their borrower allows itself to be struck off. Not all lenders will have systems for automatic notification in instances where the Company Registrar files a strike off notice in relation to their borrowers. Combine this with inevitable oversights where such systems are in place, and a company with disinterested directors (who perhaps operate the trade through parallel entities), and one can easily imagine a situation where the company is dissolved while still owning assets and owing debt.
At this stage it is worth pointing out that each of the routes to dissolution provide for a period in which objections can be received. Needless to say, if a lender with outstanding debt, aware that the company in question holds property over which the lender has security and upon which the lender is relying, receives a dissolution notice it should immediately give notice to Companies House that it objects to the strike off, providing reasons.
ASSETS ON DISSOLUTION
Pursuant to s 1012(1) of the Companies Act 2006 (CA 2006), when a company is dissolved its assets are deemed bona vacantia. Title passes to the Crown and the assets are dealt with by the Treasury Solicitor. Practitioners should read the Government’s guidance paper on bona vacantia property for a good overview (BVC1). Significantly, the rules in relation to a mortgagee seeking to sell bona vacantia property under a power of sale changed from 1 July 2015, cutting down the Treasury Solicitor’s involvement in such a sale to rare cases where there is a possibility of a surplus returning to the Crown. Although this simplifies things in relation to a sale (cutting out correspondence with the Treasury Solicitor), a client would be well advised to use the checklist of information which the Treasury Solicitor previously required (reputable valuation, certificate of debt etc), which are good practical steps, as a matter of good practice.
If a lender identifies an asset of value, the first question it will ask is how best to realise that asset. The second will be how much that method will cost. The first option most will consider is an application to court under s 1029 of the CA 2006. However, while an uncontested application can be relatively inexpensive, the lender is then reliant upon either an appointment of a liquidator to realise assets and make a distribution, or upon the actions of directors who may have already permitted the company to be dissolved. If the intention is merely to realise property owned by the company (rather than use the company to pursue claims which may fall within a floating charge), it may be more cost effective to exercise a power of sale, or apply for an order vesting the property in the lender.
WHAT HAPPENS NEXT?
Pursuant to ss 1013 to 1022 of the CA 2006, the Crown has the right to disclaim any property of the dissolved company. Whether the Crown goes on to exercise that right will depend on a number of factors (again see BVC1). Below we consider the alternatives for disclaimed and nondisclaimed property.
For a mortgagee of freehold/leasehold property, this is the simplest case and the mortgagee may proceed to sell that real property under its power of sale or to appoint receivers in the usual way.
The position in relation to receivers is more complicated than the position of a mortgagee. This is due: (i) to the receiver’s special position between lender and borrower; (ii) the termination of the receiver’s agency upon liquidation/dissolution; and (iii) the lack of any guidance from the Treasury Solicitor on the position of receivers on dissolution. However, the general consensus appears to be that the receiver may still fulfil his role despite the company’s dissolution.
An observant purchaser may pick up on the company’s dissolution (in most cases the company will remain on title at the Land Registry unless a vesting order has been sought and granted), but a bit of research should make the purchaser comfortable as to the mortgagee’s/receiver’s ability to pass good title despite the company’s dissolution. To satisfy a cautious purchaser, confirmatory applications could be made under s 181 of the Law of Property Act 1925 (LPA 1925) (Quadracolour Ltd v Crown Estate Commissioners  EWHC 4842 (Ch)) or s 1017 of the CA 2006, as suggested in the Fivestar Properties case. However, in the case of a sale by mortgagee (rather than receiver), such applications may be unnecessary given the protections afforded purchasers pursuant to s 104 of the LPA 1925.
If there are no issues with the land itself (e.g. no environmental issues) and the lender is comfortable contracting to sell the land in return for the apparent costs savings, the exercise of a power of sale is likely to be the quickest and cheapest method by which a lender may realise value. Although, admittedly, a lender may well wish to have the benefit of the distance afforded by the appointment of a receiver in trade off against the higher costs incurred by that appointment.
In this section we deal with freehold and leasehold interests separately.
In relation to freehold interests, the disclaimed land escheats and the Crown obtains a right to possession. For a full discussion of escheat and how security interests are dealt with, the leading case of Scmlla Properties Ltd v Gesso Properties (BVI) Ltd  BCC 794 should be read. In summary, substantive interests such as mortgages and the mortgagee’s rights survive the escheat. Thus even where the freehold has escheated, the mortgagee may sell the property while incurring
the relatively low cost of a mortgagee sale process, rather than applying for restoration of the company to the register or for a vesting order.
In relation to leasehold interests, lenders and practitioners may be familiar with the disclaimer process in liquidation in relation to leasehold properties. The process on dissolution is similar, with the relevant statutory framework (ss 1016 and 1017 of the CA 2006) mirroring those applicable on liquidation. The effect of a disclaimer of leasehold property on the interested parties is more complex than the effect of a disclaimer of freehold. The contractual rights and responsibilities of landlord’s and sub-tenants under the respective leases are the main cause of that complexity. However, under s 1016 of the CA 2006 a mortgagee should receive notice of disclaimer from the Crown’s representative and, pursuant to s 1017 of the CA 2006, has the right to apply for an order vesting the leasehold property in its name. While it is understandable that a lender may not wish to put itself in the position of landlord/tenant under a lease it was not a party to, obtaining a vesting order and taking on those obligations may be preferable to allowing the secured value to vanish. The above highlights the importance of (i) lenders’ due diligence when accepting leasehold security; (ii) the lender’s due diligence upon permitting any leasehold interests to be granted out of its secured assets; and (iii) making sure that a lender has a plan for an asset before contacting the Treasury Solicitor, and thus potentially triggering a count-down to disclaimer (see BVC1).
A secured lender who is aware that its borrower has been dissolved should act quickly to establish the level of debt (even if this is contingent) and whether or not any assets are held by the company. Although this may entail a review of the historic file, a lender may well find that it has better information as to a company’s property portfolio than an average director. Initial due diligence property reports and/or subsequent security reviews spring to mind as obvious sources of information. In any case, if the debt (even if contingent) is relatively high it would be well worth the cost of a PN1 (search of registered proprietors) at the Land Registry or confirmation that this was done pre-dissolution. While most cases will reveal little, more than you would think will contain something worth realising or tidying up from the perspective of a wider group of companies.
Without an insolvency practitioner in place, the active over the passive approach is to be preferred in relation to dissolved companies (applicable to both lenders and their solicitors). Given that each realisation process in dissolution is lawyer-led, this is good an opportunity to gain client’s respect and be seen to offer cost-effective problem solving without ‘over-lawyering’ the issue.