Funds deposited into court remain property of depositor: Court of Appeal

Out-Law Legal Update | 02 Nov 2018 | 10:43 am | 2 min. read

LEGAL UPDATE: The Court of Appeal ruled that funds paid into court in the process of litigation remained the property of the person who deposited them. In this case this meant that the depositing company had the right to use the money as security against its legal costs. The judgment clarifies the law on the subject and sets a clear precedent.   

Hotels company Peak Hotels and Resorts was involved in litigation and paid £10.8 million into court; £7.7m for cross-undertakings and £3.1m as security for the other side's legal costs. Candey acted for Peak in the proceedings. Peak went into liquidation and the liquidators settled the litigation and received the deposited money.

Peak's lawyers Candey asked for their fixed fee of £3.8m to be paid out of the deposited money, claiming that it was a secured creditor but the liquidators refused. The liquidators said that no charge was created over the money because Peak did not control the money at the time of the charge, because the money was lodged with the court.

Candy had required that Peak grant security for its fee and the two had entered into  a deed of charge and security which contained a fixed charge over all present and future assets and undertakings of Peak, including all monies in court in all jurisdictions worldwide. It also contained a floating charge over all assets not capable of being charged by a fixed charge.

The Court of Appeal said that Peak did retain a proprietary interest in the money deposited, meaning that it was able to charge its interest to another party. This decision clarifies existing case law on whether funds paid into court remain the property of the depositor and whether the depositor can grant security over such funds.

The Court found that of all the cases it looked at only two supported the liquidators' assertion that Peak had given up its proprietary interest in the money by paying it into court, but multiple cases supported Candey's claim that Peak had retained a proprietary interest in the money.

The most compelling case for Candey was the 1951 decision of Pearlberg v May in which the Court of Appeal decided that money paid into court by a purchaser is money in which the purchaser retains an equitable interest. The Court of Appeal acknowledged that the Pearlberg case has since been followed by the lower courts and said that the facts of this case were not significantly different.

The Court said it was not bound by the case which best supported the liquidators' view, the 1996 case of Re Mordant. The judge said that the view expressed in that judgment - that once money was received into the solicitors' accounts, the money ceased to be part of that person's estate - was an unreasoned view, and was not binding on the Court of Appeal. The judge did not consider it to outweigh the binding decision of Pearlberg.

The Court dismissed the liquidators appeal stating that previous cases, including Pearlberg, provide clear authority that money paid into court to provide security in the process of litigation remained the property of the depositor though such property remained subject to the security interest granted to the other litigating party and the payment of the funds back out of court is subject to the making of a court order.

The decision makes it clear that a party who pays funds into court retains sufficient ownership and interest of the funds, despite them being out of their immediate control, to the extent that they can be an asset that security can be granted over.

Samantha Poulton is a restructuring expert at Pinsent Masons, the law firm behind Out-Law.com