Receivership Update – March 2014
Print newsletter06/03/2014

Excluding liability for misrepresentation on sale of residential property
A misrepresentation is a statement which induces entry into a contract and which turns out […]
A misrepresentation is a statement which induces entry into a contract and which turns out to be false. English law recognises three different types of misrepresentation: fraudulent, negligent and innocent. It is possible to exclude or restrict liability for misrepresentation (though not fraudulent misrepresentation) although such a clause will be subject to the Unfair Contract Terms Act 1977 (UCTA). Section 11 of UCTA subjects any such clause to a test of “reasonableness”. It is for the party seeking to rely on the clause to show that it is reasonable.
A body of case law has built up around what is reasonable. Schedule 2 to UCTA provides a list of relevant considerations, including the respective bargaining positions of the parties, whether any inducement was given to the purchaser to agree to the term and whether the purchaser knew or ought reasonably to have known of the existence and extent of the term.
In the context of sales of residential property, a very relevant factor in determining the reasonableness of a clause excluding liability for misrepresentation will be whether the clause appears in standard terms or whether it was separately negotiated.
In the Court of Appeal decision of Cleaver v Schyde Investments Ltd [1], a seller of a property for residential development failed to disclose that a notice of a planning application had been made. This would have materially affected the purchaser’s prospects of obtaining a different planning consent. At court the seller relied upon a standard condition which excluded the remedy of rescission – available for misrepresentation and which puts the parties back into the position they were before the contract was made. The court said that while the clause was not inherently unfair, the seller could not rely upon it in circumstances where the seller had known of the planning consent but did not disclose it.
This decision contrasts with another Court of Appeal decision, Lloyd v Browning [2], also concerned with a planning consent. In this case, the purchaser came away from the transaction with the erroneous impression that the property had the benefit of planning consent. The seller sought to rely upon a provision in the contract which stated that the purchaser’s decision to buy was not induced by any statement made by the seller except those contained in the written response to the enquiries of the purchaser’s solicitor.
On this occasion the court ruled that the seller could rely on the exclusion clause. It had been expressly negotiated by parties of equal bargaining position and, rather than being standard wording, had been typed in separately.
These two cases alone are not enough to offer a definitive statement of the law. But they do suggest that if you want to be able to rely on an exclusion clause for misrepresentation, you should draw it to the purchaser’s attention expressly and, if possible, rely on a bespoke clause, rather than one contained in standard or special conditions.
[1] [2011] EWCA Civ 929
[2] [2013] EWCA Civ 1637

How can creditors participate in the prescribed part?
An administrator, liquidator or receiver must make a “prescribed part” of the company’s net property […]
An administrator, liquidator or receiver must make a “prescribed part” of the company’s net property available for the satisfaction of unsecured debts. The amount of the prescribed part will depend upon the amount of the company’s assets that are realised but is subject to a maximum of £600,000. The prescribed part must not be distributed to the proprietor of a floating charge unless the claims of unsecured creditors have been satisfied and there is a surplus.
The courts have established that a creditor, having made a secured recovery, cannot share in the prescribed part in respect of its unsecured shortfall [1] and that a secured creditor can share in the prescribed part if it releases its security and proves as an unsecured creditor [2].
The recent High Court decision of Re JT Frith Ltd [3] has shown how senior secured creditors may be able to participate in the prescribed part while at the same time retaining their security.
In this case, an intercreditor deed provided – as is common – that the junior creditors were entitled to prove for their debts in the insolvency of the borrower but must turn over any distributions they received to the senior creditor until the senior creditor had been repaid in full. The borrower went into administration and subsequently liquidation. Its assets had been distributed in part repayment of the senior creditor’s debt, leaving only the prescribed part available for distribution. The liquidator refused to allow the junior creditors to participate in the prescribed part on the basis that they were secured creditors. The junior creditors applied to the court on the basis that they had released their security and were therefore able to participate in the prescribed part as unsecured creditors.
The judge held that the junior creditors could surrender their security simply by omitting to mention the security in their proofs of debt and they could therefore participate in the prescribed part. The requirement to turn over the prescribed part to the senior creditors did not prevent them from participating in the prescribed part. The judge considered that this did not offend the policy objectives behind the prescribed part.
The case confirms that the surrender by a secured creditor of its security, enabling it to participate in the prescribed part, may be effected by the omission of any mention of the security in the proof of debt.
Of more interest though to senior creditors is that by including a contractual provision obliging the subordinated creditors to prove as an unsecured creditor and to turn over unsecured distributions they receive, they may at the same time retain their own security and the ability to participate in the prescribed part.
[1] Thornily v Revenue and Customs Commissioners [2008] EWHC 124 (Ch)
[2] Kelly v Inflexion Fund 2 Ltd [2010] EWHC 2850 (Ch)
[3] [2012] EWHC 196 (Ch)

Marshalling – an opportunity for junior creditors
The law Marshalling is a equitable remedy for achieving fairness between two or more secured […]
The law
Marshalling is a equitable remedy for achieving fairness between two or more secured creditors of the same debtor. Where the first creditor enforces its security against assets over which both hold security but not against assets over which it alone holds security, the second creditor may be entitled to use the assets over which the former has security. Alternatively, the doctrine may require the former creditor to satisfy itself out of the asset over which the latter has no security.
The first case
In the first case [1], the Serious Organised Crime Agency (SOCA) brought proceedings to seize properties owned by Mr and Mrs Szepietowski on the basis that they were the proceeds of crime (the SOCA Proceedings). Some of the properties, including the family home, were registered in the name of Mrs Szepietowski and the Royal Bank of Scotland had a charge against them (and other properties) for a debt of £3.225m (the RBS Charge). The SOCA Proceedings settled on terms that included a deeming provision that the Szepietowskis’ home was not a “recoverable property” and pursuant to which Mrs Szepietowski granted a charge to SOCA over other properties (the SOCA Charge). The SOCA Charge contained various provisions, including a statement that Mrs Szepietowski did not personally owe any money to SOCA, and it was registered as a second charge over properties (excluding the marital home) that were already subject to the RBS Charge. The intention behind the settlement arrangement was that there would be sufficient proceeds of sale of the other properties to satisfy both the RBS Charge and the SOCA charge. However, proceeds were ultimately less than expected, leaving SOCA with only a nominal sum once the RBS Charge had been satisfied.
SOCA therefore brought an action to invoke the remedy of marshalling in respect of the Szepietowskis’ home. Mrs Szepietowski argued, in defence to that claim, that SOCA could not rely on marshalling because there was no underlying debt owed by her to SOCA.
The case reached the Supreme Court, which found that the doctrine did not apply in this case for two reasons. First, that marshalling cannot apply in circumstances where there is no underlying debt owed; and secondly that the doctrine of marshalling was precluded owing to the particular language of the settlement documentation and the nature of the SOCA charge.
Importantly though, the Supreme Court recognised that the remedy has a role to play in the modern commercial world and set out a clear test for marshalling: the correct approach to ask is whether, in the perception of an objective reasonable bystander at the date of the grant of the second mortgage, taking into account:
- the terms of the second mortgage;
- any contract or other arrangement which gave rise to it;
- what passed between the parties prior to its execution;
- all the admissible surrounding facts, it is reasonable to conclude that the second mortgagee was nonetheless not intended to be able to marshal.
The second case
In this case [2], Zirfin had borrowed money from Barclays Bank, secured by a charge over a property (Number 31). Barclays also made loans to companies affiliated to Zirfin (the Affiliates) which were secured by charges over the Affiliates’ own properties. In addition, Barclays took a guarantee from Zirfin in respect of the Affiliates’ obligations; that guarantee was also secured on Number 31.
Zirfin was also indebted to Highbury Pension Fund Management Company (Highbury), in whose favour it had granted second and third charges over Number 31.
When Zirfin and the Affiliates defaulted, Barclays enforced its security over Number 31, and took from the proceeds not only the amount of Zirfin’s direct indebtedness, but also its obligations as guarantor of the Affiliates. If Barclays had looked to the Affiliates’ own assets as security, there would have been enough surplus from the sale of Number 31 to satisfy Zirfin’s obligations to Highbury. On the face of it Highbury was left as an unsecured creditor of Zirfin. Highbury could not stand in Barclays’ shoes in relation to other security given by Zirfin to Barclays, as there was none.
The issue was whether a second ranking creditor of a guarantor was entitled to marshal securities granted to the first ranking creditor by the primary debtor – in this case, the Affiliates.
The High Court ruled that Highbury was entitled to share in the security constituted by the Affiliates’ charges, although only to the extent of any surplus remaining after amounts secured by those charges had been fully paid to Barclays. This was the case even though the Affiliates were not a common debtor of both Barclays and Highbury. However, the Zirfin guarantee to Barclays contained a (fairly standard) clause that Zirfin could not be subrogated to the rights of the Bank under the Affiliates’ loans until all sums due by the Affiliates to Barclays had been repaid in full. This meant the benefit of the remedy was qualified as Highbury could only participate in the proceeds of realisation of the Affiliates’ properties after Barclays had been repaid in full.
On Highbury’s appeal, the Court of Appeal took issue with the High Court’s interpretation of the clause in the guarantee, finding that it did not expressly apply or restrict Highbury’s right to require Barclays to marshal its securities. Accordingly, Highbury could begin the process of exercising its right to marshal immediately without waiting for Barclays to enforce its remaining security over the Affiliates’ properties.
Points to consider
The doctrine of marshalling has led a sheltered life for decades with the key authorities predating Waterloo. With two cases from higher courts in a matter of months, both endorsing the doctrine, we are likely to see more attempts by second mortgagees to use the remedy. Both cases are important in their own right. Szepietowski sets out the approach the courts will take when considering whether to apply the doctrine. And Highbury dispenses with the idea that the doctrine could only apply to marshal security given to two creditors by the same debtor. Now, it is clear, where there would otherwise be no return for subordinated secured creditors (by virtue of a senior secured creditor being entitled to, and exhausting, realisations) there may be an opportunity for subordinated secured creditors to be paid out of asset realisations made in another group company.
[1] Szepietowski v National Crime Agency (formerly the Serious Organised Crime Agency) [2013] UKSC 65
[2] Highbury Pension Fund Management Company v Zirfin Investments Management Ltd [2013] EWCA Civ 1283

Rent as an expense of the administration
The Court of Appeal has delivered its judgment in the eagerly anticipated Game [1] administration […]
The Court of Appeal has delivered its judgment in the eagerly anticipated Game [1] administration on the treatment of rent payable under a lease held by a corporate tenant that enters administration. When is the rent no more than a provable debt; and when does it rank as an expense of the administration?
The position prior to the Court of Appeal decision on 24 February, was following Goldacre [2] and Luminar [3], that rent payable in advance and which fell due before the appointment of an administrator was not considered an expense of the administration, but where the rent fell due during a period when the administrator was occupying the property for the purposes of the administration, then the whole sum ranked as an administration expense.
In the Game administration, the Game group had gone into administration the day after the March quarter day. Rent was payable in advance under various leases. The administrators did not pay rent for the remainder of the quarter notwithstanding their occupation of the premises. Applying Goldacre and Luminar, the High Court ordered that the arrears of rent falling due before the date of the administration were not an administration expense and ranked as unsecured claims while the rent falling due during the course of the administration was payable as an administration expense.
It will not come as a great surprise that the Court of Appeal has overturned the High Court decision and with it Goldacre and Luminar. The Court of Appeal has said in clear terms that where an administrator – or liquidator – uses leasehold premises for the purpose of the administration – or winding up – then the rent will be treated as an expense of the administration for the period during which the premises are so used and it is immaterial for these purposes whether the rent is payable in advance or in arrears.
It is therefore irrelevant whether the date upon which the quarter’s rent falls due falls before or after the commencement of the administration.
The decision is a sensible one and should also mean the end of some of the tactics surrounding appointments – the quarter date had assumed unwarranted importance in the timing of administrations. However, the decision will have an impact on existing administrations. Some administrators will have been reserving for rent on a period of occupation basis, even if they were appointed after the quarter date, in anticipation of the Court of Appeal overturning Goldacre and Luminar. Others, however, may not have done so and they will need to address the implications of the Court of Appeal decision as a matter of urgency.
Finally, the decision was concerned with an administration. However, the leading judgment makes the point that that “the office holder must make payments at the rate of the rent for the duration of any period during which he retains possession of the demised property for the benefit of the winding up or administration (as the case may be)” (our italics). So, in the Court of Appeal’s view the principle applies equally to winding ups as to administrations. However, it is arguable that as the court was not dealing with a winding up, the comment is of persuasive rather than binding authority only.
[1] [2014] EWCA Civ 180
[2] Goldacre (Offices) Ltd v Nortel Networks UK Ltd (In Administration) [2009] EWHC 3389 (Ch) [2010] Ch 455
[3] Leisure (Norwich) II Ltd v Luminar Lava Ignite Ltd (In Administration) [2012] EWHC 951 (Ch) [2012] 4 All ER 894

The age old question of exactly what is the effect of a loss of a receiver’s agency
We all know that if an individual borrower is made bankrupt, dies or if a […]
We all know that if an individual borrower is made bankrupt, dies or if a corporate borrower goes into liquidation or becomes dissolved, any receiver appointed (before or after the event) loses the agency relationship he or she would have previously had. Whilst this termination does not prevent the receiver continuing from being appointed (if not already) or continuing in office, it can effect the way in which s/he deals with property they are appointed over.
One of the best examples to use is if a lease is to be granted over the property and agency has been lost.
Under the terms of most legal charges, a receiver will be given the power to enter into leases. The agency relationship usually afforded to the receiver enables the receiver to enter such lease in the borrower’s name excluding any personal liability.
However, where the agency status is lost, a receiver loses the ability to enter into such lease in the name of the borrower (the rationale being that the receiver can do what the borrower can do and once the borrower dies, or enters and insolvency process, s/he can no longer deal with their property in that way).
It is often believed the provisions of section 4 of the Power of Attorney Act 1971 permit a receiver to continue to act in the borrowers’ name. It may not.
As noted above, the power of attorney provides that authority survives liquidation if the power is given ‘by way of security’. Something can only be given ‘by way of security’ if the person it is given to is owed something by the person giving it.
So, in the usual cases receivers deal with, a borrower grants a power of attorney in the relevant legal charge ‘as security’ to the lender by virtue of the fact the borrower owes the lender a debt. The power of attorney granted to any receiver in that same document cannot be given by security as the borrower does not owe the receiver anything. Therefore, upon termination of the agency agreement, only the bank can enter into a document listing the power of attorney the borrower granted. Practically, this simply requires the bank to sign the necessary paperwork as power of attorney in the borrower’s name. So, the follow-on question must then be what happens if the receiver does sign a document in the borrower’s name either purporting to be his agent or purporting to use the power of attorney?
Section 2 of the Law of Property (Miscellaneous Provisions) Act 1989 provides that a contact for the sale or other disposition of an interest in land can only be made in writing. A written contract cannot be unilaterally entered into. As we have seen, a receiver entering into a document as detailed above has no authority to do so on behalf of the borrower and therefore the document could be declared void. However, although currently no case law on the point, given the court’s aim in equity is put the parties into the position they ought to have been, it is more likely that a court would find that a clause seeking to exclude a receiver’s personal liability is ineffective and find the document was made by the receiver in his/her own right.