Finance litigation briefing November 2014: report and review on the latest cases and issues

15 minute read
26 November 2014


Our finance litigation experts bring you the latest on the cases and issues affecting the lending industry.

Constructive knowledge bars claim

The knowledge referred to under s14(A) of the Limitation Act 1980 (s14(A)) is knowledge of the material facts about the damage and time starts to run from that knowledge.

So confirmed the Court of Appeal in Jacobs V Sesame Ltd, a case relating to investment advice given by financial advisors to an inexperienced investor.

In 2005, the defendant financial advisers advised Jacobs to invest £65,000 in a bond invested entirely in commercial property. Although there was initial growth, there was then a catastrophic fall in value. Jacobs took advice from the bond provider direct in July 2009 and transferred the fund to a more balanced, less volatile, portfolio. She eventually surrendered the bond in February 2012 and suffered a loss.

She commenced proceedings in November 2012. She alleged the defendant advisors were negligent and the product was unsuitable for her as she had been assured by the defendant that she would receive the return of her original investment as a minimum and that the investment was low risk. Neither proved to be the case.

The issue of whether the claim was time-barred was determined as a preliminary issue. The defendant argued Jacobs had sufficient knowledge to bring a claim by July 2009 as she had, by that time, received four annual statements, the latter two of which showed the catastrophic fall in value of the bond. Further, the documentation she received on entering into the bond indicated in plain English that performance could go up or down.

Jacobs argued she had suffered no loss until the bond was surrendered in February 2012 and had insufficient knowledge that she had been given inappropriate advice to bring a claim before then. The bond was to be invested for a minimum of five years and she alleged that in 2009 she believed she would still have the full amount invested returned to her at the end of the five-year term.

The Court of Appeal held that the knowledge referred to in s14(A) meant knowledge of material facts about the damage. On her own evidence, Jacobs was aware by July 2009 that the investment was not performing and that she hoped it would "pick up" and that the investment had not been the correct one for her.

In the court's view, it was beyond sensible argument that Jacobs had acquired constructive knowledge of the material facts about the damage by July 2009. She might then reasonably have been expected to learn that she had suffered damage because the return of the amount invested was not guaranteed and so the bond was, from her perspective, defective in that regard.

The relevant facts were easily ascertainable. She could reasonably have been expected when speaking to the bond provider in July 2009, to seek confirmation that, despite the catastrophic performance of the bond at that time, her investment would still be returned in full at the end of the initial five-year period.

She could also have looked at the documentation which she had been sent (and retained) from which she could not have failed to comprehend that whatever assurances she may have been given by the defendant, there was no guarantee as to the performance of the bond and return of her investment sum.

Given the claimant's constructive knowledge of the material facts, the claim was time-barred and the action was struck out.

Things to consider

The court did take account of the financial naivety of Jacobs in reaching this conclusion but concluded that a reasonable, inexperienced investor, given the information available in 2009, could reasonably be expected to have asked the pertinent question being whether they would get their money back and would have understood from the responses that there was no guarantee. That was sufficient to start the clock running.

"Pay if paid" clause would be wildly at odds with commercial common sense

This was the finding of the High Court in Avonwick Holdings Ltd v Webinvest Ltd and Shlosberg, in which Avonwick and Webinvest entered into a $100 million loan agreement which was supported by a guarantee by Webinvest's beneficial owner, Shlosberg .

Webinvest used the money, and other money, to make a loan to Globoid Finance Establishment (Globoid). Webinvest was due to repay the loan to Avonick a few days after the loan from Webinvest to Globoid was repaid in May 2012. Globoid did not repay Webinvest and Webinvest failed to repay Avonwick.

When Avonwick commenced proceedings, the defendants alleged, for the first time, that there had been a "pay if paid" collateral oral agreement between the parties and as Webinvest had not been paid by Globoid, it was not liable to repay the loan to Avonwick. This was inconsistent with the terms of the loan agreement and guarantee which on their face set out straightforward and unconditional obligations for repayment at the maturity date of the loan.

The issue of whether there was such a collateral agreement fell to be determined on the credibility of the witnesses. The court held that the contemporaneous documentation provided overwhelming corroboration for Avonwick's witnesses' evidence. So too did the practical dealings between the parties in the way the loan and guarantee were negotiated, drawn up and implemented by all the parties. Moreover, such a "pay if paid" agreement would have been wildly at odds with commercial common sense in the context of the transaction.

The court found Avonwick's witnesses to be credible and truthful. In contrast, it found the defendants' witnesses to be dishonest and that they gave deceitful and evasive evidence in an attempt to avoid judgment being given.

The court held that had there been such an agreement, it would have represented an extraordinary risk to Shlosberg to proceed without it being recorded or referred to in any way in the guarantee and loan agreement. The fact that it was not so recorded was due to the reason that no such collateral agreement had been made.

Things to consider

Such an agreement would be unusual in the context of a commercial loan and the defendants faced an up-hill struggle to persuade the court on the balance of probabilities that there was such an agreement. Lenders, if faced with such an allegation by a desperate guarantor, will be assisted in rebutting it if their contemporaneous documentation is properly stored and searchable and (obviously) makes no reference to such a possibility.

Statutory demand valid if underlying debt not fully secured

Where evidence indicates that a charging order does not fully secure a judgment debt, the creditor can issue a statutory demand for the unsecured part.

This was the position in Ludsin Overseas Ltd v Maggs, in which the claimant obtained a judgment against the defendant and served a statutory demand on the defendant for the unsatisfied part of the judgment, being some £350,000.

The claimant also had the benefit of a charging order over the defendant's property but, due to prior charges, the claimant's debt would only be fully secured by the charge if the property was worth over £2.9 million. In February 2014, the defendant's property was valued at an open market figure of £3.35 million and on that basis, a deputy registrar set aside the statutory demand finding that the claimant's debt was fully secured.

The deputy registrar had refused to consider some late evidence adduced by the claimant that the 'floor price' was £2.5 million. The floor price was the price below which another of the defendant's creditors which had obtained an order for sale could not sell the property without reverting to the court. The claimant argued that that evidence showed that the claimant's debt was not secured.

The claimant appealed on the basis that the open market value had not been the appropriate basis of valuation for assessing whether the debt was adequately secured. A valuation on a forced sale basis was the correct basis. Further, the claimant submitted that after some six months of marketing at an asking price of between £2.5 million and £1.7 million no offer had been received at a price which provided any security for its debt. On that basis, the statutory demand should not have been set aside.

On appeal, the court permitted the fresh evidence holding that, in the interests of justice, it should consider the most up-to-date and reliable facts available. The court considered the fact that no one had been prepared to offer £2 million for the property despite six months of marketing by a well-known and reputable agent was highly persuasive, if not conclusive, evidence that the property was not currently worth £2.9 million.

That evidence was more persuasive than the earlier open market value and so permission would be granted to adduce the further evidence. On that evidence, the statutory demand should not have been set aside and the appeal - which was dealt with by way of re-hearing rather than review - was allowed.

Things to consider

Seeking an order that the property be valued on a forced sale basis would have addressed the issue of the amount of security from the start and would have been the most usual and appropriate order.

No relief from sanction

Failure to comply with a disclosure order or to attend trial without notice or reason are serious failures leading to the strike out of the defence and counterclaim.

In possession proceedings in Blemain Finance Ltd v Mukhtar and Osman, Blemain obtained an order for specific disclosure of the defendants' solicitors file. The defendants were to use their best endeavours to obtain the file or allow Blemain's solicitors to inspect and take copies of it.

The defendants confirmed the file was ready for inspection but did not respond to Blemain's request for confirmation of a convenient date to do so. The defendants did not attend the trial although Mukhtar appeared just prior to judgment being given. The defence and counterclaim were struck out and an order for vacant possession was given.

The judge refused the defendants' application for relief from sanction pursuant to Civil Procedure Rule (CPR) 3.9 and the Mitchell decision, holding that she was satisfied the defendants were in possession of the file and their failure to provide a time for inspection was a serious breach of the disclosure order. They had also given no advanced notice or reason of non-attendance at trial.

On appeal, and following the clarification of the application of CPR 3.9 given in Denton v TH White Ltd, the court considered the three stage approach to granting relief. It held:

  1. The judge had been entitled to conclude that the defendants' breaches were individually and cumulatively serious and that they compounded each other.
  2. The finding that there had been no good reason for either default was within the ambit of the judge's discretion.
  3. The judge had given a careful and detailed judgment and had had regard to the factors in CPR 3.9(1)(a) and (b) and the need to comply with rules, practice directions and orders as well as all the circumstances

The court held that the original order had not been shown to be wrong and the appeal failed.

Things to consider

This decision shows that in the appropriate case where the breaches of orders, rules or practice directions are sufficiently serious, the non-breaching party should not be shy of opposing an application for relief. We have not yet returned to the pre-Mitchell 'compliance appears optional' days and there are some judges willing to exercise their discretion to make robust orders.

Good reason for not attending trial

In contrast to the above case, where a party has good reason for not attending a final trial and judgment is entered against it as a result, the court may exercise its discretion to set the judgment aside under CPR 39.3.

In James & Anr v Chircop, the court entered judgment against the defendants (James and another) due to failure to attend the trial. The day before the trial, the defendants (who were litigants in person) received a letter from the claimant's solicitors informing them that an application had been made to adjourn the trial so the claimant's capacity could be determined and a litigation friend appointed if needs be.

Having received the letter, the defendants did not attend the trial. The claimant did not proceed with the adjournment application but successfully applied to strike out the defence due to the non-attendance pursuant to CPR 39.3.

The defendants applied to set aside the order on the basis they had been ready and willing to go to trial but had assumed, on the basis of the solicitor's letter, that the trial would be adjourned for the reasons they had stated. At first instance the judge held there was no semblance of good reason within CPR 39 for not attending; the failure to attend was a careless blunder and the fact that they were litigants in person was neither here nor there.

The defendants appealed arguing they had come to a reasonable view based on the claimant's solicitor's letter that their attendance was not required because the trial would not proceed on that day.

The High Court agreed. The judge had erred. The defendants' actions were not a careless blunder. They had reasonably understood from the letter that there would be an application to adjourn the trial due to the claimant's lack of capacity.

The fact that the defendants were litigants in person was not irrelevant and the claimant's solicitor's letter should have made it clear what they were required to do. It did not say they should still attend or that the application to adjourn may be withdrawn. The defendants had not attended as they thought there were no prospects of the trial going ahead. This was good reason for not attending and the situation had been brought about by the solicitor's letter.

Things to consider

Given the defendants were litigants in person, this is the right decision. They were entitled to take the solicitor's letter at face value that an application to adjourn was going to be made. As they were not opposing it, as lay persons they had every reason to believe the adjournment would be made.

This decision can be contrasted with the decision above where there was no reason, let alone a good one, for not attending the trial, and earlier cases which hinge upon failure to provide adequate medical reasons for non-attendance.

In case you missed it

The Supreme Court's decision in Plevin v Paragon Personal Finance Ltd has been handed down, overturning Harrison v Black Horse Ltd so that failing to disclose commission can lead to an unfair relationship. The Supreme Court also more narrowly defined "on behalf of" for the purposes of the unfair relationship test under s 140(A) of the Consumer Credit Act 1974.

For further detail, see our alert "The Supreme Court rules on unfair relationships - where does that leave us?".


NOT LEGAL ADVICE. Information made available on this website in any form is for information purposes only. It is not, and should not be taken as, legal advice. You should not rely on, or take or fail to take any action based upon this information. Never disregard professional legal advice or delay in seeking legal advice because of something you have read on this website. Gowling WLG professionals will be pleased to discuss resolutions to specific legal concerns you may have.