Canada: Finance Litigation: The Latest Cases And Issues In November 2017

Last Updated: November 29 2017
Article by Turon Miah

Most Read Contributor in Canada, October 2018

Interests of bankrupt's creditors remain paramount

In Pickard and another (Joint Trustees in Bankruptcy of Constable) v Constable, the question before the court was how exceptional the circumstances had to be to postpone an order for possession and sale of a property in which the bankrupt had a 50% share.

The bankrupt shared the property with her husband, the defendant, who suffered from a severe autoimmune disease which had a debilitating effect on his health. The Trustees in Bankruptcy (TIBs) sought an order for possession and sale of the property.

At first instance, the district judge had accepted the defendant's own evidence that the local authority would not rehouse him but might offer him bed and breakfast accommodation which would not be suitable for him and that he had insufficient funds to afford anything that might be suitable in the private rental sector. Only very limited medical evidence was tendered. The district judge had considered the defendant's circumstances so truly exceptional that he would not survive a move and that those circumstances outweighed the interests of his wife's creditors. He made an order that possession and sale be postponed until after the defendant's death or earlier vacation of the property.

The TIBs successfully appealed.

The relevant provision is s335A Insolvency Act 1986 (s335A). It provides that where an application for possession and sale is made after the end of the period of one year following the vesting of the estate in the TIB the court shall assume, unless the circumstances of the case are exceptional, that the interests of the bankrupt's creditors outweigh all other considerations – such as the needs of any children or the needs and financial resources of any spouse or partner. Each case will be heavily fact dependant.

The High Court considered the principles to be derived from the relevant case law being:

  • Exceptional circumstances need to be present to displace the presumption that the creditors' interests outweigh all other considerations but even if they are present, this does not debar the court from making an order for sale;
  • The exceptional circumstances will relate to the personal circumstances of one of the joint owners, such as medical or mental health conditions, not those of the bankrupt;
  • What are exceptional circumstances is not to be categorised or defined but the court must make a value judgment after looking at all the circumstances;
  • Exceptional means outside the 'usual melancholy consequences of debt and improvidence' or 'compelling reasons not found in the ordinary run of cases';
  • The fact that a spouse or partner and/or children will be evicted with the realisation of their beneficial interest being insufficient to buy a comparable or any other property is not uncommon and cannot be described as exceptional; and
  • The fact that any realisation from a sale would be swallowed up in paying the expenses of the bankruptcy and would not go to the creditors is not an exceptional circumstance justifying displacement of the presumption that the interests of the creditors outweigh all other considerations.

The court found that there had been no formal expert evidence adduced as to the defendant's health or as to the lack of suitable accommodation available from the local authority or in the private sector. There was wholly inadequate evidence to justify the district judge's conclusions that the defendant would be unable to survive if the property was sold. The court was able to rely on the local authority to perform its statutory duties to adequately re-house the defendant.

The district judge had failed to give any real consideration to the possession order being suspended for a period of time to enable the defendant to obtain cogent evidence from the local authority and private landlords to support any further application to suspend. There was no evidence to pass the threshold necessary to justify a postponement for an indefinite period. The court ordered that possession and sale be postponed for 12 months with the defendant having permission to apply to further postpone.

Things to consider

The decision reaffirms the position that even where there may be exceptional circumstances, the interests of creditors remain paramount and that it will rarely be appropriate to postpone an order for possession indefinitely.

Is a guarantee an on demand bond or secondary liability?

The court has recently considered whether the wording of a guarantee entered into by an individual rendered it an on demand bond.

In Ultrabulk A/S v Jagatramka, the claimant was owed some US$4.2 million by a company (Gujarat). Gujarat entered into an agreement to pay the outstanding sums to the claimant in instalments by 30 December 2013. The defendant (Gujarat's chairman and managing director) entered into a personal guarantee (the Personal Guarantee) at the same time. The Personal Guarantee provided that the defendant 'unconditionally and irrevocably guaranteed' that if for any reason Gujarat did not discharge its liability, defined and stated to be US$4.2 million (the Gujarat Liability), by 31 December 2013, he would 'on [Ultrabulk's] first written demand... pay a sum equivalent..' to the Gujarat Liability plus interest. It also provided that he 'irrevocably confirms that [he] will not contest and/or defend any application and/or proceedings to enforce' the guarantee.

Gujarat had paid only US$1.95 million by the due date. The claimant demanded the full sum of the Gujarat Liability plus interest under the Personal Guarantee from the defendant who failed to make any payment. The claimant sought to enforce the Personal Guarantee.

The defendant defended the proceedings on a number of points but did not attend at trial. One of the issues before the court was whether, on the true construction of the Personal Guarantee the defendant was obliged to pay a sum equivalent to the Gujarat Liability (US$4.2 million) or the lesser balance (US$2.3 million) owed by Gujarat, plus interest. The answer depended upon whether the Personal Guarantee provided for a primary liability arising upon demand or whether it was a true guarantee which provided for a secondary liability in the sense that the guarantor's liability mirrored the liability of the principal debtor (Gujarat) – and so the lesser sum.

The High Court held that although there was authority for the proposition that there is a presumption against construing an instrument as an on demand bond where it is not given by a bank or other financial institution, that presumption can be rebutted by the wording of the instrument signed.

In this case, the defendant agreed to pay 'a sum equivalent' to the Gujarat Liability which was defined as US$4.2 million. It was not an agreement to pay Gujarat's actual liability at the material time. The wording 'unconditionally and irrevocably' guarantee and 'irrevocably confirms' not to contest any enforcement proceedings, was indicative of a primary liability and inconsistent with his liability being coextensive with that of Gujarat.

The court awarded judgment in the sum of US$4.2 million plus interest to the date of judgment.

Things to consider

Although there may be a presumption against on demand bonds being given by individuals, the true construction of the Personal Guarantee in this case permitted no other interpretation and as the demand was validly made under it, the defendant was bound to pay the sum guaranteed, not the outstanding liability at the material time.

New proportionality test doesn't apply to recoverable success fees and ATE insurance premiums

The Court of Appeal in BNM v MGN Ltd, has resolved the issue as to which test of proportionality applies to recoverable additional liabilities being:

  • a conditional fee agreement (CFA) success fee; and
  • an after the event (ATE) insurance premium entered into prior to 1 April 2013 when assessing costs on a standard basis.

BNM had settled the claim for £20,000 plus costs to be assessed. Those costs were in excess of £241,000, including an ATE premium of £58,000 (plus tax) and success fees in respect of the solicitors costs of 60% and barristers' costs of 75%. On detailed assessment, the senior cost judge applied the new test of proportionality to the additional liabilities, halving the success fees and ATE insurance premium on the basis they were disproportionate. He awarded costs in the sum of just under £84,000. BNM appealed.

The Court of Appeal confirmed that it is the former proportionality test under what was Civil Procedure Rule (CPR) 44.4(2), not the new proportionality test under the current CPR 44.3(2) and (5) (in force since 1 April 2013), that was to be applied to the additional liabilities. This is relevant because the old test provided that costs were recoverable if on an item by item basis they were reasonable and necessarily incurred even if the total amount appeared disproportionate. However, the new proportionality test is much stricter and disallows costs considered disproportionate in amount even if reasonable or necessarily incurred. Proportionality now trumps necessity.

The re-assessment of the additional liabilities on the old proportionality test has been remitted back to the senior costs judge.

Things to consider

This is an important decision as success fees and premiums that may look disproportionate to the size of the claim will still be recoverable if individually they are reasonable in amount and were necessarily incurred. Fortunately, the number of cases which lenders and finance companies continue to face which are funded by CFAs and ATE insurance where the additional liabilities are still recoverable will have substantially dwindled by now, some four and a half years on from the rule changes.

The Court of Appeal also declined to give any further guidance on the application of the current proportionality test. We will have to wait for further decisions of the court on that point.

In case you missed it:

Insolvency Litigation: recent cases and issues in October 2017

In our update this month we take a look at a case in which a non-party costs order was made against a major shareholder in the insolvent claimant company. The court found that the shareholder was the real party to the litigation; it funded the litigation, it was exercising control over the litigation and it would have been the main beneficiary had the litigation succeeded. We cover this, and other issues affecting the insolvency and fraud industry.

Legal privilege - human right or fraudster's shield?

In two recent judgments, the High Court and Court of Appeal have restricted the ability of trustees in bankruptcy to use privileged documents of the bankrupt.

Is legal privilege a fundamental human right, and should it override the interests of a bankrupt's creditors?

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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