UK: Finance Litigation Briefing - April 2016

Gowling WLG's finance litigation experts bring you the latest on the cases and issues affecting the lending industry.

Offer to secure debt not unreasonably refused

The fact that a debtor's offer to secure or compound a debt constitutes as much as that debtor can afford does not render its rejection unreasonable.

This was the finding in Cooke v Dunbar Assets plc, in which Dunbar sought to enforce a personal guarantee against Cooke. The guarantee related to loans by Dunbar to Cooke's property development company which were called in.

Receivers were appointed over the company's land. £5 million of debt remained outstand to Dunbar which subsequently issued bankruptcy proceedings against Cooke. Cooke offered to secure his debt of £750,000 with an offer of £175,000, being his half share in the equity of his matrimonial home. This was refused and a bankruptcy order was made. Cooke appealed.

Cooke argued that Dunbar and the district judge had acted unreasonably in refusing his offer to secure or compound his debt under s271 of the Insolvency Act 1986 (s271) and that Dunbar was no better off in his bankruptcy than it would have been in accepting his offer, especially considering the security it held over his company's land. S271 provides that in determining whether the debtor is able to pay all his debts, the court shall take into account his contingent and prospective liabilities. Cooke considered his offer was one that no hypothetical creditor would have refused.

The High Court dismissed the appeal. It held that the prospect of a sale of the company's land in a sum guaranteed to extinguish the debt to Dunbar was not so certain as to make Cooke's offer to compound one that no reasonable creditor could refuse. No convincing evidence of an imminent sale had been adduced. Dunbar could be rightly sceptical as to the prospects of a sale which would in fact eliminate the debt.

As to the offer to secure or compound the debt under s271, it was for less than a quarter of his liability to Dunbar, was not a cash sum offer and did not relate to a liquid asset. It related to his interest in his matrimonial home where he lived with his wife who was in her 80s and who may have been unwilling to co-operate in achieving an early sale. It was likely that the trustee in bankruptcy would achieve a much quicker sale than if Dunbar applied for an order for sale as a secured creditor. It was not therefore unreasonable for Dunbar to refuse the offer.

Things to consider

The value of any security owned by the principal debtor is irrelevant in cases against guarantors except where evidence indicates timely anticipated receipt of proceeds from realisation of such security that might discharge all liabilities, including that of the guarantor, in which case an adjournment might be justified. In this case, there was only a slim speculative possibility of a sale which did not justify an adjournment of the petition let alone its dismissal.

Vendor's solicitor beware

Although no contractual or tortious duties are owed by a vendor's solicitor to a purchaser, a breach of trust arises where purchase monies are paid away in a fraudulent transaction.

In Purrunsing v A'Court & Co (a firm) and House Owners Conveyancers Ltd, a fraudster (D) engaged the first defendant to act for him in the sale of a property to the claimant. The second defendant acted for the claimant.

D did not own the property and provided false documentation including a false passport. The purchase price passed through both defendants' accounts and into D's Dubai bank account. The fraud was then discovered. Genuine completion had not therefore taken place. The fraud could have been discovered if the first defendant had attempted to contact its client at the address given for the owner on the Land Registry documentation. The purchase monies were not recovered.

Judgment was entered against the first defendant for breach of trust. The second defendant admitted breach of trust but denied breach of contract or negligence. Both defendants sought relief under s61 of the Trustee Act 1925 (s61) on the basis they had acted honestly and reasonably and ought fairly to be excused for the breach of trust and relieved wholly or partly from personal liability for the same.

The High Court held that the first defendant had failed to take appropriate steps to confirm that D was the registered proprietor of the property. It had failed to comply with the requirements of customer due diligence as identified in the Law Society's Conveyancing Handbook and Property and Registration Fraud Practice Note or to comply with the duties imposed by the Money Laundering Regulations.

The second defendant had not clarified ambiguous answers received in relation to ownership which indicated that the first defendant had no documents linking D to the property, had no personal knowledge of D, and had not verified the information available to it. As a consequence, it had not advised the claimant of the risk of proceeding. It was almost inconceivable that the claimant would have proceeded had he been advised properly. The second defendant was therefore in breach of contract and negligent.

As to relief under s61, the court held that the same standard of reasonableness applied to a vendor's solicitor as to a purchaser's solicitor even though the vendor's solicitor owed no duty of care to the purchaser. A vendor's solicitor is as much a trustee of purchase money while it is in his or her possession pending completion as a purchaser's solicitor. The funds were held on trust for the purchaser as beneficiary and there had been a breach of trust when it was wrongly paid out.

Neither defendant had acted reasonably and neither was entitled to any relief under s61. The High Court held both defendants equally liable for the loss.

Things to consider

The decision highlights the duties that flow from the status of trustee and confirms that a lesser standard of reasonableness will not be applied to a vendor's solicitor than a purchaser's solicitor.

Fresh bites of the cherry where subsequent causes of action arise

As a general rule, parties to litigation should advance all causes of action or arguments arising from a particular set of facts through one set of proceedings. In effect, a second or third "bite of the cherry" should not be permitted where the new claim or new remedy could and should have been pleaded in the first action.

This issue arose in Monks v National Westminster Bank plc and another. Monks had already brought one claim against the bank for errors in its record keeping which erroneously suggested there were debts on his mortgage account. That false information had been passed on to three credit reference agencies. Monks had successfully sought non-monetary remedies, being a grant of declaration and an order that the records be rectified.

The court had warned Monks (a litigant in person) who had indicated from the outset that he intended to bring financial claims once he had established liability, that he should bring all his complaints in the one set of proceedings. Despite this, Monks commenced a second claim raising new causes of action including defamation by reason of the publications to the credit reference agencies, malicious falsehood, breaches of the Data Protection Act 1998 and negligent mis-statement.

The bank sought to strike out the claim under Civil Procedure Rule 3.4(2) as disclosing no reasonable ground for bringing the claim and/or an abuse of process as the complaints should all have been brought in the first claim.

The High Court dismissed the bank's application although certain complaints were struck out. The bank had continued to publish the adverse reports to the agencies on a continuing basis from December 2009 until July 2015 and each time it did so, a separate cause of action arose. Monks could not be criticised for failing to bring into the first proceedings any claims where the cause of action had not by then arisen.

As to those causes of action that had accrued, had he sought to amend the first claim to bring them in, the trial would have been delayed and the cost of the pre-trial preparation and trial itself would have increased. Monks decision to first obtain a ruling as to his indebtedness and as to the accuracy of the monthly reports before dealing with the other aspects of his claim did not constitute, in the circumstances, an abuse of process.

Things to consider

There is public interest in achieving finality in litigation and in preventing unnecessary duplication of costs. However, the court will apply a broad merits based approach, depending upon the circumstances of the case. It does not therefore always follow that just because a claim could have been made in earlier proceedings it will be struck out for failure to do so.

No evidence of collusion to indicate a transaction at an undervalue

In Sands (as trustee for Singh) v Singh and others, the trustee sought to set aside several transactions secured upon Singh's property on the basis that they were shams or represented preferences within the meaning of s340 of the Insolvency Act 1986 (IA 1986).

In particular, one transaction was a trust deed and consent order in matrimonial proceedings under which Singh was to hold his beneficial interest in the matrimonial home (which he owned) on trust for the benefit of his two children, pay the mortgage secured on the property, pay a lump sum to his wife in settlement of any ancillary relief claims under the Matrimonial Causes Act 1973 (the MCA) and pay maintenance for his children. The order and deed were finalised a few months before Singh was made bankrupt.

The trustee alleged that the consent order and trust deed should be set aside as constituting a transaction at an undervalue for the purposes of s339 IA 1986. He alleged collusion between Singh and his wife and that even if there had been no collusion, the transaction was one at an undervalue because the consideration Singh received was wholly inadequate.

The High Court held that giving up a claim for ancillary relief under the MCA constituted consideration under s339 IA 1986. The value of the claim for ancillary relief is generally taken to be equivalent to the value of the money and property required to be paid and transferred under the order. This applied whether the order was one by consent or following contested proceedings.

However, such an order could be set aside if there were vitiating factors such as collusion between spouses. Having reviewed the evidence available from the matrimonial proceedings, the court found there was no evidence of collusion and no persuasive circumstantial evidence.

Given the amount of debt secured on the property, the court found that what the wife and children were to receive pursuant to the trust deed and order was, on the face of it, far from overly generous to them and was therefore not a transaction at an undervalue which could be set aside.

Things to consider

Vitiating factors include fraud, mistake or misrepresentation as well as collusion. Although there may be circumstances where such an order could be challenged without there having been such collusion, such as where one party to a marriage has dishonestly concealed debts while at the same time overstated assets, the court is likely to be slow to set aside an order under the MCA in the absence of collusion.

Even given the court held one of the other transactions was a sham resulting in the equity in the property being greater than had appeared to be the case, the order under the was still one that a court could have made in all the circumstances and so the transaction was not one at an undervalue.

Exercise of discretion under Part 36

Where a claimant makes an offer to settle its claim under Part 36 of the Civil Procedure Rules (CPR) and obtains a more advantageous judgment following trial than its Part 36 offer, it is entitled to its costs on an indemnity basis, as well as various other enhancements, from 21 days after it made the offer.

The Court of Appeal, in Webb (by her litigation friend Stacey Perkins) v Liverpool Women's NHS Foundation Trust had to determine whether that entitlement included the costs of part of the claim which the claimant had failed to establish.

The claimant had made two allegations of negligence, only one of which succeeded. Despite this, the judgment was still more advantageous than the claimant's Part 36 offer. At first instance the trial judge exercised his discretion under Part 44 of the CPR and made an issue based costs award, depriving the claimant of her costs of the unsuccessful allegation, and then applied Part 36 indemnity costs and enhanced provisions to the costs of the successful allegation. The claimant appealed.

The Court of Appeal held that the two allegations had been part of the same event, namely the claimant's birth. The claimant had not been unreasonable in pursuing the unsuccessful allegation. Many claimants do not succeed on all parts of their claim and are not penalised in costs. Part 36 entitles a successful claimant that "beats" its offer to costs on the indemnity basis unless it would be unjust to award such costs. Part 36 is a self-contained code and the court should not first exercise its discretion under the costs rules generally (under Part 44 CPR) before applying Part 36.

The discretion in Part 36 enables the court to consider the basis of assessment of costs and what costs should be included. Part 36 did not preclude an issue based costs award or a proportionate costs order but such orders should only be made where the court considers it would be unjust in all the circumstances of the case to award all or part of the costs.

If it would not be unjust, they should be awarded, regardless of the fact that they might not be awarded under the general costs provisions in Part 44. The unsuccessful defendant could have avoided those costs and the costs of trial by accepting what proved to be a reasonable offer of settlement. It was not unjust to award the claimant all of her costs.

Things to consider

Part 36 is a self-contained code. The court does not have an unfettered discretion to depart from the ordinary costs consequences set out in Part 36 (i.e. indemnity costs on this occasion) but can do so where injustice would otherwise be suffered. If that were not the case, the whole purpose of Part 36 in promoting compromise and avoiding unnecessary expenditure of costs and court time would be undermined.

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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