Key points for Security, Dissolution and Disclaimers

Company dissolution and Bona Vacantia

When a company is dissolved it ceases legally to exist and proceedings cannot be brought against it unless and until it is restored. However, save in narrow circumstances, companies that have been dissolved for six years or more cannot be restored to the register.

The Companies Act 2006 provides that when a company is dissolved or struck off, its interests, including any interest in a leasehold property, falls to the Crown as they become bona vacantia, or ownerless property.

The Crown’s title can then be disclaimed by a notice signed by the relevant Crown representative. The disclaimer ends any rights, interests or liabilities that the tenant might have in the lease. Importantly, disclaimer by the Crown does not affect the rights or liabilities of third parties.

If the borrower is subsequently restored, within six years of it being dissolved then Section 1028 of the Companies Act 2006 provides that the tenant is deemed to have continued in existence as if it had not been dissolved or struck off the register where there has been a restoration (and the Crown has already issued a notice of disclaimer), then the deeming provision in the legislation meant that a disclaimer by the Crown was not a “disposition”, as the property was deemed never to have vested in the Crown in the first place and so the Crown are deemed not to have disclaimed the lease.

What were the facts?

A company, Frinton Limited (“Frinton”) had granted security (a mortgage) to a lender in connection with a loan advanced (“the Debt”) by the lender to Frinton and its shareholder, Mr Leon.

Mr Leon was also a party to the security document and assumed repayment obligations under it and the loan agreement but had no ownership rights over the mortgaged property. The mortgaged property was a long leasehold interest in a West London flat.

A few years after granting the security, Frinton was struck off the register of companies for failure to file accounts and dissolved. Six years elapsed, meaning Frinton could no longer be restored to the register. The charged leasehold interest vested in the Crown as bona vacantia upon Frinton’s dissolution. On becoming aware of this, the Crown disclaimed the lease. The effect of this was that Frinton had no interest in the lease, although the creditor’s security interest remained.

Mr Leon applied for a vesting order, but his application ultimately failed on the grounds that he did not have sufficient rights in relation to the leasehold property itself to justify a vesting order (which would have given to Mr Leon ownership of the lease and a right to the surplus if the lender enforced its security).

Instead, the court vested the lease in the lender. The lender was however not entitled, despite the full legal and beneficial title to the lease vesting in it, to retain any surplus if it sold the lease and recovered its debt. Notwithstanding this the court did not decide who would be entitled to the surplus in those circumstances.

Mr Leon sought an agreement with the lender that if he settled the Debt in full that the lender would assign the lease and benefit of the charge to him. The lender refused to agree to this stating that whilst settlement of the Debt would entitle Mr Leon to an assignment of the lender’s charge, settlement of the Debt would not entitle him to assignment of the lease itself.