Subrogation available to a claimant following dissolution of a company

Leon v Kensington Mortgage Company & Westminster City Council [2023] EWHC 121 (Ch)

Summary

The High Court has held that a claimant, who remained jointly liable for a debt with a company that had been dissolved, was entitled to be subrogated to a charge held by a secured creditor over property previously owned by the dissolved company. The claimant was also entitled to an assignment of a lease held by that creditor upon repayment of the loan, because that lease was held as security for the debt.

Facts

The claimant (Mr Leon) sought declaratory relief in respect of leasehold property in Kensington. The long lease of the property (the Lease) was previously registered to a company (Frinton). Mr Leon and Frinton had been jointly liable to repay a loan (the Debt) provided by the mortgagee (Kensington), which was secured against the Lease by a registered charge (the Charge). Subsequently, Frinton was struck off the register and dissolved without having disposed of the Lease.

In earlier proceedings (Leon v Attorney General [2019] EWCA Civ 2047; [2020] 3 All ER 140), following dissolution of Frinton and disclaimer of the Lease by the Crown, the Court granted a vesting order to Kensington. The earlier proceedings had been subject to two appeals following Mr Leon’s success in obtaining a vesting order for himself at first instance. Therefore, at the outset of the current proceedings, Kensington held both the Lease and the Charge. Kensington intended to market and sell the Lease before paying the proceeds of sale into Court.

In the current proceedings, Mr Leon argued that, if he repaid the Debt, he would be entitled both (i) to be subrogated to the Charge and (ii) to an assignment of the Lease. This was on the ground that the Lease was held pursuant to a vesting order, and without the Lease being vested in Kensington the Charge would have been ineffective. Kensington and the freeholder (Westminster) both contested Mr Leon’s claim.

Decision

Deputy Master Dray held that Mr Leon could avail himself of the remedy of subrogation. Further, Mr Leon was entitled to an assignment of the Lease upon repayment of the Debt.

This decision is notable for three reasons. First, it is an example of the application of section 5 of Mercantile Law Amendment Act 1856. Whilst that statute could be said merely to codify the equitable principle of subrogation, the Court derived assistance from the wide drafting of that Act when interpreting whether subrogation should be limited or available more widely.

Second, there was previously no authority on the issue of whether subrogation is available in cases where a co-debtor is a company that no longer exists. It might be considered surprising that subrogation is still possible in these circumstances. However, in the same way that insolvency (short of dissolution) does not abrogate the right of subrogation, neither does dissolution. The property (in this case the Lease) still continued in existence, so in principle Mr Leon could recover from that property any share of the Debt which he paid but could not recover directly from Frinton.

Third, the Deputy Master held that Mr Leon as a co-debtor was entitled not only to ‘stand in the shoes’ of Kensington as regards the Charge, but also to an assignment of the Lease held by Kensington. The Court accepted Mr Leon’s submission that a lease may be regarded as ‘security’ in particular circumstances. This is despite the fact that leases do not fall easily within the categories of security interests established in previous cases and, as estates in land, are typically not considered in themselves as ‘security’ interests.

Niraj Modha acted for Mr Leon, the successful claimant, and was instructed by Ian Mitchell of Anthony Gold Solicitors.