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

No duty of care owed for negligent bank reference to undisclosed principal

The Supreme Court has held that a bank which negligently provided a favourable credit reference for one of its customers did not owe a duty of care to an undisclosed principal who acted on that reference.

In Playboy Club London Ltd & Ors v Banca Nazionale Del Lavoro Spa (the Bank), the Bank provided a customer reference through a requesting bank to the effect that its customer, HB, was financially sound and trustworthy and good for up to £1.6 million per week. The requesting bank named its own customer (Burlington) as requesting the reference. Burlington was in fact acting as an agent for an undisclosed principal, the claimant casino. The claimant sought the reference through Burlington so as to avoid disclosing the purpose of the reference, being to set up a credit facility for gambling purposes. On the strength of the reference, the claimant exchanged HB's cheques for gaming chips. HB never had any money in the account with the Bank and the cheques he presented to the claimant were counterfeit. The claimant lost around £800,000 which it sought to recover from the Bank, HB having disappeared.

It was common ground that the reference was negligent. The Court of Appeal overturned the first instance decision and held that the Bank did not owe the claimant a duty of care in relation to the reference as the reference was addressed to its agent, not the claimant. The claimant appealed.

The Supreme Court dismissed the appeal. For purely economic loss for negligent misstatement to be recoverable, a special relationship must exist between the party making the representation (the representor) and the recipient (the representee) (Hedley Byrne & Co v Heller & Partners Ltd [1964]). The representor must have voluntarily assumed responsibility for the representation to an identifiable (although not necessarily identified) person, or group of persons, rather than to the world at large. The representor must have known (and intended) that the statement was going to be communicated to that identifiable person or group and would be relied upon by them.

The Supreme Court held that whether a relationship is sufficiently proximate to give rise to a duty of care is a question of fact. The court rejected the argument that the right of an undisclosed principal to intervene (and step into the shoes of its agent) in contract could also, of itself, give rise to the necessary proximate relationship for tortious purposes. The position in contract and tort should not be conflagrated.

Here, the Bank was unaware Burlington was acting as an agent. It knew nothing of the claimant's involvement (it being an undisclosed principal) and was unaware that the reference would be communicated to and relied on by the claimant. In all the circumstances, the Bank had not voluntarily assumed any responsibility to it.

Things to consider

The only duty the Bank owed was to Burlington (the agent) and as it had suffered no loss, it had no claim against the Bank. Had the Bank provided the reference expressly or impliedly for the benefit of an unnamed, as opposed to an entirely undisclosed, principal or client of Burlington, the outcome would have been different.

PPI commission repayable in full

In a worrying decision for lenders, the court has again disregarded the Financial Conduct Authority's (FCA) guidance for assessing damages in Plevin-type cases and awarded the borrowers the entire amount paid for the payment protection insurance (PPI) premium plus interest.

In Doran v Paragon Personal Finance Ltd, the claimant borrowers, through a broker, entered into a fixed-sum credit agreement with the defendant in June 2004. The agreement was for £40,500, £10,500 of which was the PPI policy premium. The defendant received £7,985 commission, or 76% of the PPI premium, from the insurer. This was not disclosed to the claimants. The claimants redeemed the loan in 2013, having paid £14,926 by way of repayment of the PPI premium and interest.

In July 2017 the claimants issued proceedings contending that the amount of commission paid was excessive and that, as it had not been disclosed to them, this led to an unfair relationship with the defendant.

The Manchester County Court had to determine:

  • Whether the relationship between the lender and borrower was unfair under s140A of the Consumer Credit Act 1974? The court found that it was and that Plevin v Paragon Personal Finance Ltd provided strong guidance as to when an unfair relationship arose, although each case was fact specific. Once the issue had been raised, it is for the defendant to prove the relationship was not unfair. Consumers in the claimants' position would be concerned with the large percentage of the premium cost being paid in commission. Had this been disclosed to them, they would most likely have considered whether it was worth taking out the policy or not. The defendant had produced no evidence that could justify the large level of commission payment;
  • Whether the claim was time barred having been issued some 13 years after the agreement was entered into? The court held it was not. The court dismissed the defendant's argument that the alleged unfairness only related to events that took place when the credit agreement was entered into in 2004 and so the 6 year limitation period had expired. When viewing the fairness of a relationship, the full course of the relationship had to be considered. The limitation period only started to run when the relationship ended which was within 6 years of the claim being issued; and
  • What was the appropriate level of damages? The court held it was likely that the claimants would not have entered into the credit agreement had the level of the PPI premium been disclosed to them. That being the case, they were entitled to repayment of the full amount of the premium plus interest. The FCA considers a 'tipping point' in respect of an unfair relationship as 50% of the premium, i.e. if the undisclosed commission paid amounted to more than 50% of the value of the premium, the relationship was unfair. The FCA calculates the redress payable based on the percentage of the premium over that 50% figure. The court rejected the FCA's approach as it was far from satisfied that the figure of 50% reflected a proper figure for commission. It considered that using the FCA's calculation for redress, i.e. 26% of the premium in this case, would undercompensate the claimants. The claimants were awarded £17,345 being the full premium plus interest.

Things to consider

The amount awarded to the claimants is substantially more than they would have received from the Financial Ombudsman under the FCA guidelines. There have been a number of other cases where the courts have awarded in excess of the FCA guidelines and given that is the case, consumers may prefer to take their chances in court which means lenders could face more claims and for larger sums.

An application for permission to appeal is not the same as a pending appeal

Rule 10.24(2) of the Insolvency Rules 2016 (IR) provides that the court can stay or dismiss a bankruptcy petition on the ground that 'an appeal is pending' from the judgment or order upon which it is based, or that execution of the judgment has been stayed.  The High Court has recently considered whether this rule also applies where there is an outstanding application for permission to appeal a judgment debt - and has held that it does not.

In Barker v Baxendale-Walker, Barker (the Petitioner) obtained a judgment against Baxendale-Walker (the Debtor) in the Court of Appeal for over £16 million. The Court of Appeal refused leave to appeal its decision and the Debtor applied to the Supreme Court for permission to appeal. The Petitioner served a statutory demand on the Debtor based on that judgment. The Debtor issued (but did not serve) a cross-claim and opposed the petition on the basis that he had a genuine and substantial cross-claim that equalled the judgment debt and that the judgment debt was subject to an outstanding application for permission to appeal. He argued it would be unfair to be made bankrupt on a debt which may be overturned on appeal and Rule 10.24(2) IR provided a safety net to prevent such unfairness.

The High Court made the bankruptcy order. It held that Rule 10.24(2) IR provided the court with discretion to stay a petition if an appeal was pending i.e. if the underlying judgment or order was awaiting appeal. An application for permission to appeal was not the same as an appeal and the court had no jurisdiction to stay or dismiss the petition under Rule 10.24(2) IR.

However, the court could take an outstanding application for permission to appeal into account when exercising its general discretion as to whether to make a bankruptcy order under Rule 10.24(1) IR.

In this case, the court, in reaching its decision to make the bankruptcy order, took into account the fact that, as well as there being no appeal pending, the Debtor had failed to apply for a stay of execution, admitted he could not pay the debt, had failed to co-operate with the interim receivers, had a history of taking legal action to stall or hinder progress, the cross-claim was an abuse of process, there was a risk of dissipation of assets and no creditors opposed the petition.

Things to consider

Once a petitioning creditor has established that the statutory conditions are fulfilled, he is prima facie entitled to a bankruptcy order. The court retains a discretion not to make a bankruptcy order even where the petition debt has been clearly established and any grounds of opposition have been dismissed. However, the discretion to adjourn should only be exercised if there is credible evidence that there is a reasonable prospect of the petition debt being paid in full within a reasonable period. There was no such evidence here.

Note, however, the decision below.

Court sets aside bankruptcy order as it served no useful purpose

The High Court recently exercised its discretion and set aside a bankruptcy order where the debtor had no assets to satisfy her liability. The court considered the order served no useful purpose, nor was of any benefit, to the creditor.

In Lock v Aylesbury Vale District Council, the Council served a bankruptcy petition on Lock in relation to council tax arrears of approximately £8,000. Lock opposed the application on the basis that a bankruptcy order would serve no purpose and be of no benefit to the Council. She was living in social housing, was unemployed, did not receive any benefits, was dependent on financial support from her family and had no assets to satisfy the liability. On the basis that the liability order had not been set aside, rescinded or challenged and the statutory demand had not been set aside, the County Court held the Council was prima facie entitled to a bankruptcy order and made that order. Lock appealed.

The High Court allowed the appeal, exercising its discretion under s 266(3) of the Insolvency Act 1986 (s 266(3) IA) which provides a general power to dismiss a bankruptcy petition for any reason if it appears appropriate to do so. It held that where a bankruptcy petition was founded on unpaid council tax, there was a burden on the public authority petitioning for the bankruptcy to at least show a prima facie case that a bankruptcy order would achieve some useful purpose. The Council's internal bankruptcy check list indicated that it was aware of Lock's financial position prior to serving the statutory demand. There was mention in its checklist about a possible inheritance being received by Lock but the Council had produced no evidence to substantiate it had been received or was likely to be received or that there was any benefit to be had from an investigation of Lock's assets and affairs. The court considered that the failure to consider whether there was any real purpose in making Lock bankrupt made the order unjust and set it aside.

Things to consider

This case confirms that the court has a wide and flexible discretion under s 266(3) IA. However, given the heavy burden on a debtor to demonstrate that he/she does not, and will not, have assets available for distribution in bankruptcy and that no useful investigation of his/her assets or affairs could be undertaken, we do not contemplate that decisions such as this one will be commonplace.

In case you missed it:

Insolvency Litigation: recent cases and issues in July 2018

In this update we take a look at some of the recent cases that will be of interest to those involved in insolvency litigation. These include:

  • another decision which deals with an application for security for costs where the claimant was in liquidation;
  • a Court of Appeal decision providing guidance on the effect of an unanticipated claim emerging after the approval of a company voluntary arrangement; and
  • confirmation that a director will not be in breach of fiduciary duty if he or she has acted in the best interests of the company.

Our insolvency litigation experts have reviewed the decisions and tell you what you need to know.