Property & Real Estate Barristers
Tom Carpenter-Leitch successfully resists application by Joint Administrators of failed Carlauren hotel and care-home chain to have their fees and expenses paid from investors’ assets.
19th October 2020
In Re: CHF2 Limited [2020] EWHC 2685 (Ch) Tom Carpenter-Leitch appeared in the Insolvency & Companies Court for 223 defrauded investors resisting an application by joint administrators (and in one case joint liquidators) of the Carlauren Group. The application sought directions, by way of an extension to the Berkeley Applegate jurisdiction, permitting the payment of the office holders’ fees and expenses so that they, at least potentially, might be paid from the properties of the investors rather than the properties of the insolvent estates. ICC Judge Prentis refused to grant the directions sought, or any directions.
Unitised property ownership schemes have become popular as apparently high-yielding but low risk (backed by “bricks and mortar”) investment opportunities. Sometimes these are illegal as being unregistered Collective Investment Schemes under Financial Services and Markets Act 2000; sometimes they are fraudulent “Ponzi” schemes (where unrealistically high returns are promised to participants by using the capital of incoming participants to pay “profits” or repay capital to existing participants); sometimes they are both. Where funds are paid up-front but not adequately ring-fenced there is a high risk of failure. When such schemes fail the existing mechanisms available under the Insolvency Act 1986 do not easily allow for their orderly dissolution.
Founded by Sean Murray, the Carlauren Group operated on the basis of acquiring hotels (“Properties”) with a view to converting them into, and then operating them as, luxury care homes. Investors were granted 125 year leases of individual rooms or suites in return for a single premium of around £80,000. Investors were promised a fixed monthly return of 10% from the time of investment, even before the building had been converted and whether or not operating or profitable, together with a guaranteed buy back at 110% of the price after 5 years, rising to 125% after 10 years. Individual Properties were owned by special purpose companies (“Propcos”) but the funds invested, which totalled around £79 million, were held within the Group generally and largely used for purposes other than those of the relevant Propco.
Perhaps inevitably, the funds available to convert, refurbish and operate the properties ran dry with many of the properties still in a parlous state. The Group companies became insolvent and Officeholders (mainly administrators but in one case liquidators) were appointed. The Officeholders commenced litigation against Sean Murray but, following his bankruptcy, it appeared to them that there was no possibility of recovering funds from him, and certainly no imminent possibility.
The Officeholders also took control of, secured and insured the Properties. They received valuation advice to the effect that the Properties might be worth some £24.75 million if sold “unencumbered” by the Investor leases, but that they were essentially unsaleable with the Investor leases in place and as freehold reversions. 781 leases had been granted to Investors, of which 687 had been properly registered at HM Land Registry. The Officeholders attempted to persuade Investors to surrender their leases, but to no avail.
In those circumstances, and having already incurred fees in the region of £2.6 million and also £1.3 million in legal costs, and without any obvious way to be paid or reimbursed, the Officeholders applied to the court for directions under Paragraph 63 of Sch B1 Insolvency Act 1986 (and s.168(3) in the sole liquidation). The directions sought would have enabled the Officeholders to pay their fees and expenses, both those directly related to holding and selling the Properties and also all those of the insolvencies more generally (including the litigation against Sean Murray) from the sale proceeds of the Properties. They envisaged some ability to deal with the Investors’ interests non-consensually such that the available sale proceeds were to incorporate the Investors’ interests under their leases.
The principle elucidated in Re Berkeley Applegate (Investment Consultants) Ltd [1989] Ch 32 relied upon by the Officeholders, at least as it concerns insolvency estates, was described in Re Sports Betting Media Ltd [2007] EWHC 2085 (Ch) at para 10 as being that:
“the court has an inherent jurisdiction to require persons beneficially interested in property to subject their beneficial entitlements to a right of payment to persons who have come otherwise than by officious intermeddling into the position of fiduciaries in relation to the relevant fund and have incurred time and cost in realising the fund and identifying the entitlements of the beneficiaries and paying out to those beneficiaries their entitlements.”
The Officeholders claimed that this might be extended to enable their fees and expenses to be paid from the sales proceeds of the Investors’ leasehold interests. The mechanism by which the freehold reversions were to be converted into unencumbered freeholds was not specified. The Officeholders recognised that the Investors leases, at least where registered, had vested legal (as opposed to merely equitable) interests in land on the Investors, but by extending the Berkeley Applegate principle sought nonetheless to require the Investors interests to bear a share of the insolvency costs.
Perhaps recognising the futility of this argument, the Officeholders’ position changed at the hearing of the application. The application then became one simply to declare the Officeholders’ rights over the freehold reversions and without adjusting Investors’ rights an dto apportion Group insolvency costs to the Propcos.
ICC Judge Prentis concluded that the principal directions sought on the application served no purpose as, absent a continuing attempt to infringe upon the Investors’ lease rights, they would do more than restate the pre-existing, obvious and undisputed position (that being that the Officeholders could sell the freehold reversions subject to the Investor leases and then seek to charge their fees and expenses to the insolvent estates in the usual way and subject to the usual controls). To the extent that there was to be apportionment of Group costs to Propcos, that apportionment could not be properly considered without an analysis of the cost and potential benefits involved and without considering the position of creditors (as opposed to Investors) who were not represented.
In itself, and analysed from a property practitioner’s perspective, this does not appear to be a particularly surprising result (perhaps more surprising is that the application was made at all), but it should be seen in the wider context of other attempts by administrators to find a solution to the problem of dealing with failed unitised property ownership schemes. Tom Carpenter-Leitch also successfully appeared for investors in very similar circumstances in Re: Caer Rhun Hall Hotel Ltd [2019] EWHC 3617 (Ch) (unreported). There administrators sought an order enabling them to sell the freehold of an hotel, then subject to some 57 long leases, free of those leases. That application was made under Paragraph 71 of Sch B1 Insolvency Act 1986, which applies to selling assets “subject to a security”. In the face of investor resistance those joint administrators abandoned their application, having previously been order by ICC Judge Jones to pay the costs of its initial hearing on the indemnity basis.
This decision closes another door to officeholders of failed unitised property ownership schemes who seek to impinge upon the vested rights of leasehold investors. Unfortunately, it does nothing to elucidate how the consequences of such failed schemes might be resolved and at present the only viable solution appears to be collective action by Propco investors to purchase the relevant reversion themselves.
Tom Carpenter-Leitch was instructed in both Re: CHF2 Limited [2020] EWHC 2685 (Ch) and Re: Caer Rhun Hall Hotel Ltd [2019] EWHC 3617 (Ch) by Shortlands Law Firm Ltd.