Home
Publications
Receivership Update – February 2016

Receivership Update – February 2016

Print newsletter

The duty of receivers appointed over a property where the mortgagor is bankrupt

Facts of the case In Purewal v Countrywide Residential Lettings Ltd and another [1], the […]

Facts of the case

In Purewal v Countrywide Residential Lettings Ltd and another [1], the mortgagor, Mr Purewal, purchased a property on a buy to let basis and later took a charge out over the property with The Royal Bank of Scotland plc (the Bank). He went into arrears on the mortgage and the Bank appointed fixed charge, or LPA, receivers (the Receivers) to manage the property. The Receivers told Mr Purewal that they would insure the property and that he should cancel his buildings insurance policy, which he subsequently did.

Mr Purewal was made bankrupt in September 2009. Later in the month on a visit to the property he discovered that there was a leak causing severe water damage and informed the Receivers of this on the same day. He contacted the Receivers again in February 2010 and it was revealed that in the interim they had not taken any action to remedy the situation. The court could find no evidence that the Receivers had actually insured the property, but it was agreed that even if they had insured it would have been too late to make a claim by then. The Receivers appointment was terminated in April 2010, but the bankruptcy order remained in place until April 2011.

Mr Purewal carried out repairs to the water damage at the property at his own cost and in August 2011 his trustee in bankruptcy transferred the property back to him for a nominal amount. Mr Purewal claimed that the Receivers had breached their duty of care by not promptly submitting the insurance claim and should pay him back his costs of repairing the property.

Court’s decision

The Court of Appeal dismissed Mr Purewal’s claim and held that once he was made bankrupt the duty of care was owed his trustee in bankruptcy and not to him. This is because the on appointment of a trustee in bankruptcy the interest in the equity of redemption vests in the trustee. There were no mitigating factors here that would cause them to consider if the duty of care should be widened.

The court went on to say that even had Mr Purewal been able to establish a duty of care he would still have lost his claim because the Receivers would no doubt have directed that any insurance monies were paid to the mortgagee rather than being used on repairs.

WM Comment

This is a good opportunity to remind receivers of their duty of care generally in their dealings with a property. Specifically, receivers and lending institutions alike should bear in mind that if a mortgagor becomes bankrupt the duty of care is owed to the trustee in bankruptcy rather than the mortgagor. A mortgagor who becomes bankrupt and has LPA receivers appointed over his properties should think carefully before taking any action in relation to those properties that could fall under the remit of his trustee.

_____________________

[1] [2015] EWCA Civ 1122

Does an equitable owner of a legal charge have a power of sale?

Section 101 of the Law of Property Act 1925 (LPA 1925) implies a statutory power […]

Section 101 of the Law of Property Act 1925 (LPA 1925) implies a statutory power of sale into all mortgages and charges over land that are made by deed. Section 106 of the LPA adds that a power of sale may be exercised “by any person for the time being entitled to receive and give a discharge for the mortgage money”. In addition, under section 23(2)(a) of the Land Registration Act 2002 (LRA 2002), an owner’s powers in relation to a registered charge comprise a power to make a “disposition of any kind permitted by the general law…”. Under section 24 of the LRA 2002, a person is entitled to exercise these “owner’s powers” if they are the registered proprietor of the charge or they are a person “entitled to be registered as the proprietor” of the charge.

In Skelwith (Leisure) Ltd and another v Armstrong and others [1], a partnership agreed to sell a property (a golf club) to the claimant company. The agreement provided that part of the purchase price would be deferred with the deferred element secured by a charge in favour of the partnership. The transfer completed and the claimant was registered as the proprietor. The first defendant was registered as the proprietor of the charge (as security agent for the partnership). The security agent and the partnership assigned their interests to another company, called Polar. A transfer of the charge to Polar was executed but was not registered at the Land Registry. The claimant defaulted on the repayment and Polar sought to sell the club. It relied on its power to so under section 101 of the LPA 1925 and its remedies under the charge.

The claimant applied for an injunction to stop the sale going ahead. It argued that as Polar was not the registered proprietor of the charge it did not have the statutory power to sell.

The High Court disagreed. It held that the words “owner’s powers in relation to a registered estate or charge” in sections 23 and 24 extended to a power of sale of charged land by an equitable assignee, which is what Polar was, of the charge. An equitable assignee had the right to sue for the assigned debt and to receive and give a valid discharge for monies received and, as such, was able to exercise the power of sale under section 101.

This did not mean, however, that the equitable assignee’s powers were automatically the same as those of a registered proprietor. Somebody lacking legal ownership can only exercise the powers conferred on a registered owner if the statute or instrument conferring it expressly permit it. That meant, in the instant case, that the assignee, as equitable owner of the charge, would only have a power of sale if that power was granted by section 106 of the LPA 1925 and/or by the powers conferred by the charge instrument.

As such, the case is a reminder of the need to register the transfer of a charge promptly at the Land Registry as the rights of the holder of an equitable interest in a legal charge are not necessarily as extensive as those of a legal owner of the charge.

_______________________

[1] [2015] EWHC 2830 (Ch)

Changes to the pre-pack rules and a reminder of why they were introduced

Pre-packaged sales in administration (or “pre-packs”) are back in the spotlight. [1] On 1 November […]

Pre-packaged sales in administration (or “pre-packs”) are back in the spotlight. [1] On 1 November 2015, a new SIP 16 – the standard that regulates pre-packs – came into effect. The revised standard is partly a response to a perceived lack of public confidence in the transparency surrounding pre-packs and suggestion that creditors were not adequately protected under the then existing regime.

Shortly before the new SIP 16 took effect, the High Court gave judgment in Capital For Enterprise Fund A LP and another v Bibby Financial Services Limited [2]. This case concerned a pre-pack sale of the business and assets of a software company (the Company). The purchaser was a newly incorporated company, owned as to 30 per cent by one of the Company’s directors (the Director) and as to 70 per cent by a major creditor and supplier of essential services to the Company’s business. The Director negotiated the pre-pack sale but did not inform his fellow directors nor did he take into account the interests of the other creditors. It was arguable that greater value would have been realised by the stand-alone sale of the Company’s proprietary software.

The High Court ruled that the Director had breached his duties to the Company and its creditors. He had a duty to act in the best interests of all the creditors, not just the largest creditor. He also had a duty to inform the board of the proposed pre-pack sale. Although the sale helped to save the Company’s business, it was not in the best interests of the Company or its creditors.

The case is indicative of the criticism from some quarters that has been levelled at pre-packs. It is also a reminder of the requirement for a director of a company facing financial difficulties to distinguish between the interests of the business of the company and the interests of the company and its creditors. It is very easy for directors (and those advising them) – and understandable, when working under pressure to secure a deal – to believe that the two are the same thing, but this will not necessarily be the case.

The reform to the pre-pack process introduced by the revised SIP 16 is targeted at the mischief identified in the High Court case, although the focus is on ensuring that an enhanced level of information is made available to creditors after the pre-pack has been effected. It does this by requiring the administrator’s statement to creditors to include a narrative to explain all the steps that were taken and all the alternatives that were considered when deciding whether to effect a pre-pack, to show that it was appropriate.

The new SIP 16 mandates more extensive marketing of a business prior to a pre-pack sale than might have historically been the case or, alternatively, obliges the administrators to explain why this was not conducted. The new standard also includes the option for a purchaser who is connected with the company, to approach a pre-pack pool (which will provide an independent assessment of the appropriateness of the sale) and connected parties can submit viability statements, to explain what the purchasing entity will do differently so the business will remain viable. So far, it appears that there has been limited take-up for the pre-pack pool option.

The introduction of the new standard will mean changes to the pre-pack process. The duty of the directors of the insolvent company remains unchanged, however – and this is to act in the best interests of the company and its creditors.

______________________

[1] A “pre-pack” is the process by which a company is put into administration and its business and/or assets are immediately sold under a sale arranged before the appointment of the administrator.
[2] [2015] EWHC 2593 (Ch)

Who is entitled to the money in a solicitor’s client account?

An issue that regularly comes before the courts in insolvency situations is whether a lender, […]

An issue that regularly comes before the courts in insolvency situations is whether a lender, who has advanced money to a now insolvent borrower, has retained a “security interest” in the money advanced so that it is held on trust for the lender (called a “Quistclose trust”). A consequence of a ruling that a Quistclose trusts exists is that the money advanced is not available for distribution in the insolvency proceedings as part of the borrower’s estate. Rather than ranking as an unsecured creditor, the lender has a proprietary claim and would have a cause of action against a third party – solicitors, for example, holding the money in their client account – who parted with the money.

Two recent cases have clarified the requirements for the establishment of a Quistclose trust. In each case the issue concerned monies transferred to a solicitors’ client account.

In Gore v Mischon de Reya [1], the claimants were investors who had transferred money to the defendant solicitors which they intended was to secure a bank guarantee which could then be used to procure a loan facility to refinance a property development and to acquire a property development. The solicitors released the money to their client, a Mr Shepherd, who kept the money for himself. The investors claimed the solicitors had acted in breach of trust. The High Court rejected this argument. It attached importance to the absence of any express terms creating a trust. The only communications concerning the transfer of the money were express statements that the monies were to be held to Mr Shepherd’s order, statements which the court considered to be manifestly inconsistent with the establishment of a Quistclose trust.

In Bellis v Challinor [2], the claimants transferred money to the defendant solicitors which they intended to be used to develop an airport. The solicitors acted for the investment vehicle which had acquired the land and the money was used to reduce the borrowings of that company. The scheme failed and the company went into administration. There had been no dealings between the claimants and the defendants but the claimants relied on previous schemes in which both parties had been involved and where the solicitors had acted as escrow agent under express escrow terms and which, the claimants maintained, supported the conclusion that the monies advanced were held by the solicitors subject to a Quistclose trust. The Court of Appeal found that there was no Quistclose trust. In most cases the existence or otherwise of a Quistclose trust would be determined according to the words used; in this case, no words had been used so reference must be made to the surrounding circumstances. Payment to a solicitor’s client account constituted evidence of an intention that the monies be held for the solicitors’ client rather than to the order of the transferor and there was nothing in the factual matrix to supplant this presumption.

The lesson from these two cases is that a Quistclose trust will only be found to exist where there is clear evidence of an objective intention on the part of the transferor to establish a trust. This is best shown by the existence of clear wording establishing the trust, stating that the funds are advanced for the sole or exclusive purpose stipulated by the transferring party. Where monies are transferred to a solicitors’ client account, in most cases the monies advanced will be held on trust for the client and the transferor will need to express very clearly the contrary intention, perhaps by completing a declaration of trust.

____________________

[1] [2015] EWHC 164 (Ch)
[2] [2015] EWCA Civ 59

Contacts

Simon Clark
Partner
Learn More

Owen Ormond
Director
Learn More