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Receivership Update – October 2014

Receivership Update – October 2014

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22/10/14

Mis-selling of interest rate swaps

The drop in interest rates which accompanied the economic downturn in 2008 left many borrowers […]

The drop in interest rates which accompanied the economic downturn in 2008 left many borrowers who had taken interest rate hedging products confronted with much higher than expected payments to lenders. This has in turn prompted a plethora of cases brought against banks in which the borrowers have claimed to have been negligently mis-sold interest rate products.

So far, the claims have generally been unsuccessfully. In one of the first cases, Rubinstein v HSBC Bank Plc [1], the court drew the key distinction in mis-selling cases between information and advice, a distinction later followed in Green and Rowley v The Royal Bank of Scotland plc [2], where it was held that the branch manager had recommended that the claimants look at an interest rate protection product but had not suggested or advised on specific ones.

Another important decision in the mis-selling cases was Titan Steel Wheels v The Royal Bank of Scotland plc [3]. In that case, the High Court focused on the terms of business agreed between the parties, the wording of which made clear that RBS were providing “an execution only service with no advisory services”. The contractual disclaimer of any duty of care precluded the existence of any such duty.

Titan had also sought to rely upon section 150 (now section 138D) of the Financial Services and Markets Act 2000 (FSMA). This provides that a “private person” who suffers loss as a result of a contravention of a COBS rule by an authorised person has an actionable claim (subject to certain defences). The court concluded that Titan was not a “private person” for the purposes of section 150 as the swaps in question formed part of a regular chain of transactions of a substantial value and scale, which were a necessary part of Titan’s trading and which were therefore integral to its business.

The “private person” issue arose in the recent High Court decision of Bailey v Barclays Bank [4]. The claimants sought to argue that the finding in Titan that a company could be a “private person” only if it did not suffer the loss in the course of carrying out “business of any kind” was wrong. The court rejected that argument, refusing to give a wide interpretation to the exclusion of companies acting in the course of their business from the definition of private persons.

In Bailey, the claimants also invoked section 127 of the FSMA. This provides that an agreement entered into by an authorised person in consequence of something done by an unauthorised person is unenforceable as against the other party. This type of allegation is quite common in swaps mis-selling cases where the claimant customer has usually had dealings with at least two different individuals at the bank – a specialist, who is authorised to sell investment products, and the relationship manager, who isn’t. However, the court gave this argument short shrift, explaining that even when giving investment advice and information on products the relationship manager is doing so in his or her capacity as an employee of the bank – which, of course, is authorised – and not as an independent third party.

This case, the latest in the succession of mis-selling cases, shows how hard it is for corporate claimants to succeed in a swaps mis-selling case.

[1] [2011] EWHC 2304
[2] [2012] EWHC 3661 (QB)
[3] [2010] EWHC 211
[4] [2014] EWHC 2882

Power of the courts to override an express costs clause in a mortgage

When a court assesses the amount of costs payable by one party in litigation proceedings […]

When a court assesses the amount of costs payable by one party in litigation proceedings to another, the costs may be assessed under the Civil Procedure Rules on either the standard basis or the indemnity basis. On an assessment under either basis, the court will not allow costs that have been unreasonably incurred or which are unreasonable in amount. Where costs are assessed on the standard basis, any argument as to whether the costs have been reasonably and proportionately incurred or are reasonable and proportionate in amount, must be determined in favour of the paying party. By contrast, where costs are assessed under the indemnity basis, any such doubt will be resolved in favour of the receiving party.

In The Co-operative Bank plc v Phillips [1] the claimant bank was the second mortgagee in respect of two properties owned by the borrower. Each mortgage provided that all costs, charges and expenses incurred by the bank and all other monies paid by the bank in connection with the charge over the charged property were recoverable from the defendant as a debt and were to be charged on the property.

When the borrower defaulted, the bank instituted possession proceedings in respect of each property. At the time the proceedings were instituted, the borrower had entered into an individual voluntary arrangement (IVA) with his creditors. The evidence from the IVA statement was that that there was negative equity.

The borrower applied to strike out the proceedings as an abuse of process. The proceedings were transferred to the High Court where they were discontinued. The borrower argued that the order for costs which followed should be made and assessed on the indemnity basis. He also argued that the bank was not entitled to add any costs of the proceedings to the security.

The borrower was unsuccessful on the first point. The High Court considered that the bank’s purpose in issuing the proceedings had been to put pressure on the borrower for the purpose of obtaining repayment of the secured debt. This was a legitimate purpose and not an abuse of process.

However, the borrower succeeded on the second point. The Court held that the mortgage did not enable the bank to recover its costs from the borrower. On its proper construction, the clause entitled the bank to recover costs which were reasonable in amount and reasonably incurred. In so holding, the Court applied Gomba Holdings (UK) Ltd v Minories Finance Ltd [2], where it had been established that a clause in a mortgage which provided that the mortgagor would pay on an indemnity basis all costs, charges and expenses however incurred by the bank or receiver did not entitle the bank to costs which were unreasonably in amount or which had been unreasonably incurred. In this case, the Court considered that even though the proceedings were not an abuse of process, they had been unreasonable incurred – the bank had not obtained any benefit from the proceedings which, from the bank’s point of view, had been a waste of time and expense.

The case shows the adverse costs consequences that may follow from a mortgagee commencing proceedings where there is limited or no prospect of recovery.

[1] [2014] EWHC 2862
[2] [1993] Ch 171

Rights of a subrogated creditor

Background In Day v Tiuta International Ltd [1], the claimant had borrowed funds from a […]

Background
In Day v Tiuta International Ltd [1], the claimant had borrowed funds from a lender, S, to refinance a property. That lending was secured by a charge in S’s favour. He then entered a facility agreement with the defendant to refinance his existing borrowings and to redevelop the property. This lending was supported by a charge in the defendant’s favour. He used the first tranche of funds from the defendant to repay the loan to S. The defendant was then placed in administration, leaving the claimant without access to the funds necessary to complete the development.

The claimant failed to repay the loan to the defendant who appointed receivers. A number of issues arose at the summary judgment hearing. One concerned the doctrine of subrogation.

Subrogation is a remedy allowing a party to step into the shoes of another party assuming the benefit of any rights that second party may have in relation to a liability. Two scenarios in which it is commonly encountered are:

a person discharges the debt of another person may be subrogated to any security on which the original debt was held
a lender who expected to receive security may be subrogated to another secured lender’s security if it does not get the security it expected.

In this case, there was an allegation that the defendant’s charge could be rescinded for fraud (i.e. its security was “voidable”). The defendant argued that, even if this were the case, it would be subrogated to the S charge as it had paid funds in discharge of S’s loan and security.

Issues
The High Court having given summary judgment for the defendant, the Court of Appeal was asked to determine the following issues:

If a lender is claiming subrogation on the basis that it did not get the security it expected, must the security actually be void before the lender can claim it did not get the security it expected or is it sufficient that the security is voidable, as was the case here?
If a lender has already appointed receivers under its defective security, can it continue to rely on that defective security or must it re-appoint the receivers, relying on the subrogated charge?

Judgment
The Court dismissed the appeal. It held:

a security interest that is voidable is ineffective as a security interest. A secured creditor who has a voidable security interest and has not obtained all that it bargained for can claim subrogation
there is no need to re-appoint the receivers as the right to subrogation existed at the time the receivers were appointed.

All that was needed in this case for the defendant to be able to rely on the doctrine of subrogation was for it to show that, pursuant to the terms of its contractual arrangements with the claimant, it had either demanded payment of its indebtedness or there had been a breach by the claimant of any of its contractual obligations to it, or there had been an event of default as defined in its contractual arrangements. That the defendant had not relied on S’s charge when appointing the receivers was immaterial.

Points to consider
By refusing to narrow the scope of the doctrine of subrogation, the Court of Appeal has ensured that its potential as a remedy for lenders remains considerable. The decision is a commercially sensible one as requiring the defendant lender to reappoint the receivers would not have served any useful purpose.

[1] [2014] EWCA Civ 1246

What are the consequences of overstating the amount due in a demand letter?

The Irish Supreme Court has ruled [1] that a letter of demand that overstates the […]

The Irish Supreme Court has ruled [1] that a letter of demand that overstates the amount due from the borrower, is nonetheless a valid letter of demand. Borrowers in Ireland who subject statements of accrued interest to a detailed analysis in the hope of finding that this has been overstated are therefore likely to be wasting their time.

This decision is in line with the leading English authority on the subject, County Leasing Limited v East [2], a case from 2007, which established that a demand made for payment of a debt will be valid even if the amount demanded is more than the sum due, provided that the lender has not refused an offer to pay the amount due. English authorities like this are not binding in Ireland but do have persuasive authority, so the judgment of the Irish Supreme Court is not a surprising one.

In English law, the position may be different where the demand is served pursuant to statute. In the case of bankruptcy, a 1908 case [3] established that a statutory demand must not overstate the amount due from the debtor, even by a very small amount. For liquidation, the current legal position appears to be that an excessive demand not invalidate the winding-up petition; Re A Company (No 003729 of 1982) [4] suggested that it would not be fatal to a petition if the petitioner, without serious argument, alleged a debt of a specified sum but inadvertently specified the wrong sum in the statutory demand.

It follows from the above that creditors serving a demand pursuant to a contract, such as a loan agreement, will not be adversely prejudiced if they overstate the amount due – although they should, of course, strive to get the amount right.

In relation to statutory demands grounding a bankruptcy petition, an overstated amount of even a negligible sum will invalidate the petition.

In relation to statutory demands grounding a winding-up petition, the position appears to that an overstated amount will not invalidate the petition where there is an undisputed debt due from the debtor for more than the statutory minimum and there is no set-off against that undisputed debt which could bring it below the statutory minimum.

[1] Flynn v National Asset Loan Management Ltd [2014] 7 JIC 2505
[2] [2007] EWHC 2907 (QB)
[3] Debtor (No 478) of 1908 [1908] 2 KB 684
[4] [1984] 1 WLR 1090

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