UK: Finance Litigation Briefing November 2016: Report And Review On The Latest Cases And Issues

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

Enforcement and priority of an unpaid vendor's lien

We last reported on the case of Bank of Cyprus PLC v Menelaou, in December 2015 from which the details of the case can be seen. Briefly, the bank agreed to release its charges on one property owned by Menelaou's parents so it could be sold and monies freed up to purchase another property (Great Oak Court) and upon which the bank would have a charge. The purchase of Great Oak Court was in Menelaou's sole name but she held it on trust for the benefit of herself and two younger siblings. She had had no knowledge of the charge until she came to sell the property. Menelaou had never signed the charge, rendering it unenforceable, and sought to have it removed from the title. That would leave the bank with no security for the parents' debts as they were discharged bankrupts.

The bank argued that Menelaou had been unjustly enriched and sought an equitable charge by way of subrogation to an unpaid vendor's lien over Great Oak Court. The Supreme Court, agreeing with the Court of Appeal, had held that the bank was entitled to be subrogated to an unpaid vendor's lien on the property for £875,000 plus interest.

The bank applied for an order for sale to be made which was remitted to the High Court to determine. Menelaou opposed that application.

The High Court granted the order for sale. It held that the bank's interest had priority over the interests of the beneficiaries of the trust created when the claimant purchased the property. Menelaou and the trust beneficiaries had an interest in the equity of redemption only. The lien is an equitable charge over the property which does not of itself give rise to the right to possession of the property. Permission for an order for sale must be obtained. The court should apply the regime set out in s90 of the Law of Property Act 1925 because a lien falls within the definition of mortgage for the purpose of that section even though the unpaid vendor's lien does not have the nature of a mortgage in the traditional sense.

The remedies available to the holder of an unpaid vendor's lien were at the court's discretion and so would only be awarded if the court considered it just to do so, it being an equitable remedy. The court viewed the bank as a secured lender rather than an unpaid vendor as it was only subrogated to the unpaid vendor's rights. As no interest or capital had been repaid the bank was suffering a loss by being kept out of its money while the claimant's family were enjoying the benefit of living in the property without making any payment. In the circumstances, it was just that an order for sale be granted.

Things to consider

The fact that the claimant and her family had not made appropriate offers to repay, and appeared to the court to be unable to do so, formed part of the court's considerations when determining whether it would be unjust to make an order. The fact that the bank also had an indemnity in relation to losses it might sustain from the solicitors - who had acted (negligently) on their behalf in the transaction - did not, in the court's opinion, prevent the bank from exercising its rights in full against the claimant first.

Doubly-secured creditor and the doctrine of marshalling

The doctrine of marshalling provides that a creditor who has the means of satisfying his debt from charges over several properties shall not, by the exercise of his right, prejudice another creditor whose security comprises only one of the properties. The second creditor has a right in equity to require that the first creditor be treated as having satisfied himself as far as possible out of the security to which the latter has no claim.

This principle fell to be considered in McLean and Petts (as joint administrators of Dent Co (a partnership) (in administration) v Berry and Chadwick (as trustees in bankruptcy of T Dent, T Dent, C Dent) and Morrison. A bank and Morrison had made various loans to Dent Co. The bank's lending was secured by charges over two farms owned by the partners but which was not partnership property and over partnership property by an agricultural charge which acted as a fixed and floating charge over farming stock and agricultural assets. Morrison made a number of loans, only one of which was secured on a mortgage over the two farms. Following administration of Dent Co, the farms were sold and the bank was repaid in full. Morrison was partly repaid. As the bank had not had to enforce the agricultural charge, the administrator sold the partnership's agricultural assets, farming stock and other assets realising £276,000. The administrators sought, amongst other things, a direction from the court as to whether that sum should go to the general pot of unsecured creditors (of which Morrison was one) or be used to satisfy Morrison's remaining secured lending first.

The High Court held the agricultural charge was subject to the equitable doctrine of marshalling and Morrison was entitled to be paid first. The bank had had two securities to enforce against. Had the bank elected to be repaid by enforcing the agricultural charge, the proceeds of sale of the farms would have been available to satisfy Morrison's secured indebtedness. The bank was to be treated as if it had claimed under the agricultural charge and Morrison could claim what she was owed from the proceeds of the assets which had been subject to that charge. She was, in effect, subrogated to the rights of the bank.

Things to consider

This principle does not interfere with the right of a creditor with several securities to choose which remedy/security he wishes to pursue. Its aim is to provide some protection to the creditor with one security only in that it is not then relegated to the position of unsecured creditor when another creditor's unused security remains available.

Indefinite suspension of bankrupt's discharge

Where a bankrupt fails to co-operate with his trustee in bankruptcy or the official receiver, the court can suspend the otherwise automatic discharge from bankruptcy. We have previously covered the Wilson v Williams (Trustee in bankruptcy for John Wilson) case on this point. In the recent case of Harris v Official Receiver, the court made an indefinite suspension order where the bankrupt continued to fail to co-operate.

Harris was made bankrupt in August 2013. He unsuccessfully appealed the bankruptcy order and refused to co-operate with the Official Receiver (OR) or trustee in bankruptcy appointed. The OR obtained an order under s279(3)(a) of the Insolvency Act 1986 (IA) suspending his discharge from bankruptcy until October 2014 on the basis Harris would provide certain information sought. A further suspension was obtained, in Harris's absence, until January 2015 as he continued not to co-operate. In January 2015 an order was made under s279(3)(b) IA for indefinite suspension until such time as the OR was satisfied Harris had complied fully with his duty to co-operate.

Harris appealed against that order on the basis the original suspension for a fixed period had not been conditional on him providing information and he had not given any undertaking to provide information, it had not been appealed or varied and it would be wrong to make an indefinite suspension.

The High Court held that it was wrong to suggest an indefinite suspension could not be applied for following a fixed period of suspension. S279 IA did not provide for only one period of suspension and there was no good reason to imply such a limitation which would only act as a deterrent in making an order for a limited time. The OR had had to show good grounds for the successive suspensions of time under s279(3)(a) and (b) IA. Harris had continued to fail to co-operate and the court had been entitled to grant the further indefinite suspension.

Things to consider

The court can only make such an order if it is satisfied that the bankrupt has failed or is failing to comply with his obligations - in particular to co-operate and in relation to disclosure - under the IA. Mere suspicion that a bankrupt is not providing full disclosure will not necessarily justify a suspension. Out and out refusal to co-operate will.

Petitioning creditor must be a current creditor

A would be creditor must ensure that a debt is currently owed before it engages the winding up procedure. The Companies Court will not permit the insolvency procedure to be used where the petition is a creditor's petition and the company genuinely disputes the petition debt on substantial grounds or there is a serious and genuine cross-claim in an amount exceeding the petition debt.

In Cosmur Construction (London) Ltd v St Lewis Design Ltd, Cosmur applied for an injunction to restrain the presentation of a winding up petition against it, where it alleged there was a genuine and substantial dispute as to whether St Lewis Design Ltd (SLD) had served a valid application for payment under a construction contract and so whether it was currently a creditor of the claimant or not.

The High Court held that on the evidence, there was a real question over whether SLD had served a valid application for payment either by way of a specific interim payment application or by way of its final account. That being so, there was a genuine and substantial dispute whether it was a current creditor of Cosmur. The court found this to be the case despite the fact that Cosmur had been attempting to agree with SLD what it described as a draft final account. Cosmur was not thereby to be regarded as accepting that the amounts stated in the draft account were already due to SLD and that SLD was thereby already a creditor with the standing to petition for winding up. The doubt as to SLD's standing was sufficient for the court to restrain the presentation of the petition. Cosmur had also produced evidence of a substantial cross-claim which the court could not say was not genuine.

Things to consider

It is well established that the threshold for a bona fide and substantial dispute is not a high one and can be satisfied even if the defence is "shadowy". It is not the function of the Companies Court to try disputed claims or to allow the threat of winding up to be used to put improper pressure on a company to pay a disputed debt. Where the procedure is improperly used a costs order against the petitioning creditor can be expected.

Impecuniosity no grounds for granting relief from sanction

The High Court has confirmed that failure by a claimant to comply with an unless order to provide security for costs because it lacked the funds to do so, is not a good reason to provide relief from sanction where its claim was struck out due to the failure to provide that security.

In Pittville Ltd (as assignee of the rights of Mastercigars Direct Ltd) v Hunters & Frankau Ltd and another, the defendants obtained an order for security for its costs against Mastercigars pursuant to the Civil Procedure Rules (CPR) r25.13. Security was to be provided in the form of cash, a bank guarantee or possibly after the event (ATE) insurance. No security was provided. An unless order was made in August 2011 but not complied with and the claim was struck out and judgment entered against Mastercigars.

In November 2014, the claimant, as assignee of Mastercigars' rights of action (from Mastercigars' liquidators), sought to revive the claim and applied for an order that the judgment against Mastercigars be set aside, it be substituted as claimant and the unless order be varied to provide a further three months to provide security. The deputy master hearing the application acceded to the applications on the basis there had been good reason for not complying with the unless order, being Mastercigars' lack of funds, but that ATE insurance was now more likely to be obtained. He granted relief from the sanction imposed pursuant to CPR 3.9. The defendant appealed.

The High Court held that lack of funds was not a good reason for failure to comply with the unless order. An order requiring the provision of security for costs was made because there was reason to believe that a claimant would be unable to meet a defendant's costs if ordered to do so (CPR 25.13(2)(c)). It was inherent in CPR 25.13 that some claimants would find it difficult to provide security and so their claims would be dismissed. However, a claimant's lack of financial resources could not be both the reason for making the order in the first place and a good reason under CPR 3.9 for not complying with it.

Litigation had to be conducted efficiently and at proportionate cost and rules, practice directions and orders had to be complied with. There had been a three year delay in this case and costs would be incurred in picking the case back up again. There was also no evidence to suggest that the claimant could now comply with the order and provide security by way of cash or bank guarantee in any event. The confidence expressed by the claimant that ATE insurance could be obtained was not sufficient. There had been no material change of circumstances justifying a variation of the unless order. The order granting relief was set aside and judgment in favour of the defendant was restored.

Things to consider

Where the court makes an unless order, it will have considered the injustice of imposing the sanction if the party cannot comply when reaching its decision. If the terms of the order are unjust, the party should appeal it, not return to court in the distant future when it thinks it might be able to comply. That would undermine the interests of finality in litigation, the purpose of the original unless order and the concept of an appeal.

In case you missed it

Our commercial litigation experts look at the Court of Appeal decision in Excalibur Ventures LLC v Texas Keystone Inc & Others on the liability of commercial litigation funders and suggest some lessons that funders and funded parties can learn from it.

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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