Encumbering a Company’s Equitable Land Interest as “Conversion” for LA 1980 s21(1)(b), and a Purchaser-Only, Knowledge-Sensitive Reading of CA 2006 s44(5)

1. Introduction

South Bank Hotel Management Company Ltd (“South Bank”) appealed from a decision of Richards J in litigation arising out of the development and operation of a hotel site near Waterloo Bridge in London. The development was owned within the “Galliard” group: Galliard Hotels Ltd (“Hotels”) held the freehold; Lodgeshine Ltd (“Lodgeshine”) and Galliard Homes Ltd (“Homes”) were group companies; and Mr Stephen Conway was the executive chairman and (at relevant times) the sole director of several key entities, including South Bank.

The dispute centred on an “Annex” building initially envisaged as separate from the hotel but later used as part of it. In 2004 Hotels entered into a freehold sale contract (“FSC”) to transfer the site to South Bank for £1 (an intra-group arrangement intended to facilitate a room-investor model under which investors would ultimately own shares in South Bank). In 2008, however, Hotels granted Lodgeshine a 999-year lease of the Annex at a peppercorn (“the Lease”), and Lodgeshine granted South Bank a 15-year underlease (“the Underlease”) at a substantial market rent after an initial period. South Bank later contended that this “Annex Lease Scheme” stripped value from it and benefited Lodgeshine (and indirectly Mr Conway).

The appeal raised three main issue clusters:

  1. Limitation and fiduciary liability: whether South Bank had an arguable claim against Mr Conway that was not time-barred because Limitation Act 1980 (“LA 1980”) s21(1)(b) applied.
  2. Room leases and continuing breach: whether Hotels was liable in damages to South Bank for breach of clause 9 of the “Room Leases” (leases granted to room investors) and whether any claim was statute-barred.
  3. Execution of deeds and land registration: whether the Lease and Underlease were validly executed, and the scope of Companies Act 2006 (“CA 2006”) s44(5) deeming “due execution,” especially where the “purchaser” does not wish to rely on it and where the parties knew execution formalities had not been complied with.

2. Summary of the Judgment

The Court of Appeal (Civil Division) allowed the appeal and made several important determinations, while remitting fact- and remedy-sensitive issues to the trial judge:

  • LA 1980 s21(1)(b): South Bank had an arguable claim against Mr Conway; s21(1)(b) applied and therefore the claim was not statute-barred. The case was remitted for determination on the merits and for consideration of relief under CA 2006 s1157.
  • Room Leases clause 9: clause 9 imposed a continuing contractual obligation on Hotels; there was a continuing breach, giving rise to recurring causes of action. Damages were to be assessed on remission.
  • CA 2006 s44(5): s44(5) did not validate the Lease/Underlease. The Court held (i) the deeming in s44(5) operates only “in favour of a purchaser” and cannot be invoked against a purchaser who does not wish to rely on it; and (ii) “good faith” was not satisfied where the purchaser had actual knowledge that the document was not executed as it purported. Estoppel did not prevent South Bank from denying due execution. Remaining questions (equitable effect and register rectification) were remitted.

3. Analysis

3.1. Precedents Cited

A. Limitation, directors as trustees, and “conversion” under LA 1980 s21(1)(b)

  • Burnden Holdings (UK) Ltd v Fielding [2018] UKSC 14, [2018] AC 857 (“Burnden (SC)”) and Burnden Holdings (UK) Ltd v Fielding [2016] EWCA Civ 557, [2017] 1 WLR 39 (“Burnden (CA)”) anchored the Court’s approach:
    • Directors are treated as “trustees” for s21 by analogy, as fiduciary stewards of company property, and are treated as being “in possession” of it from the outset (Burnden (SC)).
    • “Recover” in s21(1)(b) can extend to equitable compensation where trust property was previously received and converted to the trustee’s use (Burnden (CA), not challenged in Burnden (SC)).
    • Crucially, Burnden supplied a purposive lens (via In re Timmis, Nixon v Smith [1902] 1 Ch 176 and JJ Harrison (Properties) Ltd v Harrison [2002] 1 BCLC 162): s21(1)(b) is not to protect trustees where they would “come off with something [they] ought not to have.”
  • Paragon Finance plc v D B Thakerar & Co [1999] 1 All ER 400 (“Paragon Finance”) and Williams v Central Bank of Nigeria [2014] UKSC 10, [2014] AC 1189 (“Williams”) provided the taxonomy distinguishing:
    • “Class 1” fiduciaries who assume fiduciary responsibilities in relation to trust property; and
    • “Class 2” persons who never assumed trustee status but are subject to equitable remedies because of participation in wrongful misapplication.
    The Court held South Bank’s claim against Mr Conway was not “Class 2” because it concerned pre-existing company property (South Bank’s equitable entitlement/interest in the site), rather than a profit becoming trust property only because of breach.
  • Gwembe Valley Development Co Ltd v Koshy (No 3) [2003] EWCA Civ 1048, [2004] 1 BCLC 131 (“Gwembe Valley”) and First Subsea Ltd v Balltec Ltd [2017] EWCA Civ 186, [2018] Ch 25 (“First Subsea”) were used by respondents to argue s21(1)(b) inapplicability. The Court distinguished them:
    • Gwembe Valley concerned liability for secret profits, not misappropriation/conversion of pre-existing company property.
    • First Subsea clarified that s21(1)(b) is inapplicable where there is no misappropriation/receipt of pre-existing company property—again, not the present case.

B. Equitable interest under a specifically enforceable land sale contract

  • The Court’s conclusion that the FSC conferred a beneficial interest on South Bank drew on classic authority: Lysaght v Edwards (1876) 2 Ch D 499 and Rayner v Preston (1881) 18 Ch D 1, while stressing (via later authority) that the vendor is trustee in a qualified sense.
  • The “split beneficial ownership” description was reinforced by Jerome v Kelly [2004] UKHL 25, [2004] 1 WLR 1409.
  • Englewood Properties Ltd v Patel [2005] EWHC 188 (Ch) (“Englewood”) supported the proposition that the vendor must not prejudice the purchaser’s interest pending completion (including not leaving the property in a “legal state different” from what was contracted for).
  • Southern Pacific Mortgages Ltd v Scott [2014] UKSC 52, [2015] AC 385 (“Southern Pacific Mortgages”) was used to clarify limits: a purchaser under an uncompleted contract cannot necessarily carve out proprietary rights for third parties; but that does not negate that, as between vendor and purchaser, equity recognises a beneficial “split” and imposes protective duties.

C. Directors’ duties within groups

  • Charterbridge Corporation Ltd v Lloyds Bank Ltd [1970] Ch 62 supplied the “intelligent and honest man” test and underscored that directors may not sacrifice the interests of one group company for group-wide benefit.
  • The Court referenced shareholder-focused formulations of corporate interest: Gaiman v National Association for Mental Health [1971] Ch 317, Brady v Brady [1988] BCLC 20, and BTI 2014 LLC v Sequana SA [2022] UKSC 25, [2024] AC 211, noting the relevance of present and future members—important here because investors were contemplated to become shareholders.

D. Continuing breach of contract

  • The Court applied the distinction in Bell v Peter Browne & Co [1990] 2 QB 495 between single breaches and continuing obligations.
  • The classic description of continuing breach of a repairing covenant in Spoor v Green (1874) LR 9 Ex 99 supported the Court’s rejection of any requirement that the situation be “more acute” over time.
  • Jalla v Shell International Trading and Shipping Co Ltd [2023] UKSC 16, [2024] AC 595 (“Jalla”), Delaware Mansions Ltd v Westminster City Council [2001] UKHL 55, [2002] 1 AC 321, and Coventry v Apsley (1691) 2 Salk 420 were discussed but held not determinative, because they concern continuing nuisance/torts rather than continuing contractual obligations.

E. Duomatic ratification

  • The Court restated the core of shareholder assent via In re Duomatic Ltd [1969] 2 Ch 365 and EIC Services Ltd v Phipps [2003] EWHC 1507 (Ch).
  • It endorsed the requirement for outward, objectively verifiable assent, relying on Re Tulsesense Ltd [2010] EWHC 244 (Ch), [2010] 2 BCLC 525 (“Tulsesense”) and Schofield v Schofield [2011] EWCA Civ 154, [2011] 2 BCLC 319 (“Schofield”).
  • Re Bailey, Hay & Co Ltd [1971] 1 WLR 1357 was reconciled as a case where assent was objectively inferable from prolonged outward acceptance.
  • Ciban Management Corp v Citco (BVI) Ltd [2020] UKPC 21, [2021] AC 122 (“Ciban”) was distinguished as an ostensible authority case; it did not erode the need for consent in ordinary Duomatic ratification disputes.

F. Execution of deeds, “purchaser” protection, and good faith

  • On statutory purpose, the Court traced the purchaser-protection lineage from Longman v Viscount Chelsea (1989) 58 P&CR 189 (on LPA 1925 s74(1)).
  • For “good faith,” analogies were drawn from: Central Estates (Belgravia) Ltd v Woolgar [1972] 1 QB 48, Smith v Morrison [1974] 1 WLR 659, and Midland Bank Trust Co v Green [1981] AC 513.
  • The Court’s approach to knowledge and self-reliance invoked the logic of the internal management rule limits in Morris v Kanssen [1946] AC 459.
  • Tenant/landlord estoppel authorities—including Cuthbertson v Irving (1859) 4 H&N 742, First National Bank plc v Thompson [1996] Ch 231, Monroe v Kerry (1710) 1 Bro PC 67, and Taylor v Needham (1810) 2 Taunt 278—were held not to bar a challenge founded on defective execution rather than want of title.
  • Walsh v Lonsdale (1882) 212 Ch D 9 was raised on possible equitable effect of invalid legal leases but left for remission.

3.2. Legal Reasoning

A. LA 1980 s21(1)(b): “conversion” can occur even where the company later holds the freehold

The trial judge had reasoned that because South Bank ultimately acquired the freehold in 2014, there could be no “conversion” of the company’s interest in the freehold for s21(1)(b) purposes; the complaint was merely that the freehold was less valuable because it was encumbered.

The Court of Appeal rejected that as too narrow. It held that:

  • South Bank’s rights under the FSC were not merely a personal right to sue; on orthodox equity analysis (Lysaght v Edwards; Jerome v Kelly; Englewood) South Bank acquired a beneficial interest in the site, sufficient to be treated as “property” capable of being prejudiced by the vendor’s acts.
  • The grant of a 999-year lease over the Annex left the site “in a legal state different from that which [South Bank] had contracted to buy” (Englewood logic) and amounted to “conversion” of the company’s pre-existing equitable entitlement/interest.
  • “Recover” in s21(1)(b) includes equitable compensation for the loss occasioned by that conversion; it is not limited to a literal re-transfer of property.

The Court’s approach is explicitly purposive and consistent with Burnden (SC): the statutory exception exists to stop a fiduciary pleading limitation where they have, in substance, diverted value in breach of trust.

B. Paragon Finance / Williams taxonomy: this was not a “Class 2” constructive trust case

Respondents argued Mr Conway’s involvement was essentially as a director of Hotels/Lodgeshine (not South Bank), and therefore any trust-based liability fell into the “Class 2” category (where s21(1)(b) does not apply). The Court rejected that characterisation because the pleaded wrong was not merely the generation of an unauthorised profit; it was the carving out and diversion of value from pre-existing South Bank property (its equitable entitlement/interest) by an inter-company leasing structure in which Mr Conway was said to have acted while conflicted.

C. “To [the trustee’s] use”: minority shareholding plus control may suffice

The Court declined to treat “conversion to [a trustee’s] use” as requiring majority shareholding in the beneficiary company (Lodgeshine). It emphasised that purpose would be undermined by a rigid majority threshold. On the facts pleaded and found, Mr Conway’s (indirect) 47.68% interest, family shareholding context, and his operational control (sole director of Lodgeshine; effective control of group decisions) made it arguable that any conversion was “to his use.”

D. Room Leases clause 9: continuing obligation and continuing breach

Clause 9 (“The Landlord hereby grants to the Company the right to utilise the Common Parts…”) was held to be both:

  • a contractual undertaking by Hotels to allow South Bank to use the “Common Parts” (including the Annex) without charge; and
  • a continuing obligation over the term, such that each day Hotels failed to provide the promised right constituted a fresh breach (Bell v Peter Browne & Co; Spoor v Green).

The Court rejected the trial judge’s view that breach was “once and for all” upon grant of the Lease/Underlease, and also rejected any requirement that the situation must become “more acute” over time. The alleged loss (South Bank having to pay rent for use of a facility it should have been able to utilise for free under clause 9) was, at least prima facie, recoverable, with quantification remitted.

E. CA 2006 s44(5): (i) purchaser-only invocation; (ii) “good faith” excludes actual knowledge of defective execution

Two interpretive moves are central:

  1. “In favour of a purchaser” is not neutral: the deeming of due execution is a purchaser’s protection. It cannot be invoked by the counterparty to bind a purchaser who does not wish to rely on it. Applied here, Lodgeshine could not invoke s44(5) to validate the Underlease against South Bank.
  2. “Good faith” is defeated by actual knowledge: s44(5) exists to protect parties who rely on an apparently valid corporate execution. Where the purchaser knows the appearance is false—here, Mr Conway knew he did not sign and his knowledge was attributed to the companies—“good faith” is absent. Accordingly, s44(5) could not validate either instrument.

F. Estoppel cannot be used to sidestep statutory execution requirements

The Court held that tenant/landlord estoppel principles addressing denial of title do not answer a challenge based on the absence of due execution (a threshold requirement for a deed creating a legal estate). Accepting the respondents’ “bootstraps” argument would materially undermine Parliament’s chosen execution regime for deeds.

3.3. Impact

  • Broader s21(1)(b) reach in corporate land/value-diversion cases: “conversion” is not confined to outright dispossession. Encumbering and diminishing a company’s equitable land entitlement/interest (leaving the company with a “husk”) can qualify, keeping fiduciary claims alive notwithstanding the passage of time.
  • Practical consequences for group structures and conflicted directors: the decision underscores that intra-group arrangements designed to re-allocate value (especially where a company is intended to have future external shareholders) may engage strict fiduciary scrutiny and limitation exceptions.
  • Continuing breach analysis strengthens long-running access/use claims: where a contract promises ongoing rights of use (here, use of “Common Parts”), breach may accrue day-by-day, enabling recovery for more recent loss even if the original causative act occurred long ago.
  • Execution risk and s44(5) limits: the Court narrows any temptation to treat s44(5) as a general “cure.” It is purchaser-protective, not counterparty-enabling, and is unavailable where the purchaser has actual knowledge of defective execution. This elevates compliance discipline for deeds in corporate conveyancing (especially in single-director/“assistant signs” cultures).
  • Remedial and registration implications: by remitting questions of equitable effect (Walsh v Lonsdale) and rectification under LRA 2002, the Court signalled that invalid legal execution does not end the matter; equitable and registration outcomes will be fact-sensitive.

4. Complex Concepts Simplified

LA 1980 s21(1)(b) (“no limitation period” trust exception)
If a trustee (including, by analogy, a company director) has trust property, or previously received it and converted it to their own use, claims to recover it (including via equitable compensation) are not subject to the usual time limits. The policy is to stop fiduciaries keeping value they should not retain just because time has passed.
Equitable interest under a land sale contract
Once there is a specifically enforceable contract to sell land, equity treats the buyer as having a beneficial stake and the seller as holding the legal title in a qualified trustee-like way pending completion. The seller must not do things that would prejudice what the buyer contracted to obtain.
“Conversion” (in this context)
Not limited to physically taking property away. It can include stripping value from an existing equitable interest—e.g., granting a long lease that substantially deprives the buyer of what it was contractually and equitably entitled to receive.
Continuing obligation / continuing breach
Some contractual promises must be performed continuously (daily/throughout the term). If so, each day of non-performance can be a fresh breach with a fresh limitation clock for that day’s loss.
CA 2006 s44 execution and s44(5) deeming
A company typically executes a deed by two authorised signatories or by one director in the presence of an attesting witness. Section 44(5) can deem execution valid, but (as held here) only as a protective mechanism “in favour of a purchaser,” and it does not apply where the purchaser knows execution was not in fact compliant.
Duomatic principle
If all shareholders who could vote at a general meeting unanimously assent to something the company could approve, that assent can be as effective as a formal resolution—provided it is objectively established (not merely an internal, uncommunicated state of mind).

5. Conclusion

South Bank Hotel Management Company Ltd v Galliard Hotels Ltd & Ors establishes (or powerfully clarifies) three connected propositions of practical significance:

  1. LA 1980 s21(1)(b) is capable of applying where a director’s conflicted conduct encumbers and devalues a company’s pre-existing equitable land entitlement/interest, even if the company later becomes the registered freeholder; “conversion” and “recovery” are interpreted purposively to prevent fiduciaries retaining diverted value.
  2. A contractual “right to utilise” shared facilities can be a continuing obligation whose breach accrues day-by-day, permitting damages for continuing non-performance within the relevant limitation window.
  3. CA 2006 s44(5) is a purchaser-protective deeming provision that cannot be weaponised against a purchaser who does not rely on it and is unavailable where the purchaser has actual knowledge of defective execution; estoppel does not neutralise statutory deed-execution requirements.

The decision will likely influence future disputes at the intersection of (i) group-company value shifting, (ii) director conflict and limitation defences, (iii) long-duration contractual access rights, and (iv) corporate conveyancing formalities—particularly in cases where apparent execution masks informal or non-compliant signing practices.