Finance litigation briefing April 2015: report and review on the latest cases and issues

13 minute read
27 April 2015

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

Valuer not liable for lender's loss

The High Court has upheld that a claim for loss in a professional negligence claim must stand or fall on the "but for" test.

In Tiuta International Ltd (In liquidation) v De Villiers Chartered Surveyors, the defendant had undertaken two separate valuations for the claimant on a part-built residential development. In February 2011, it had valued the development at £3.25 million and the claimant, relying on that valuation, had granted a loan facility to the borrower of £2.2 million (the existing indebtedness).

The second valuation of £3.4 million took place in November 2011. The claimant granted a loan facility to the borrower of £2.8 million. This facility was used to discharge the existing indebtedness of then about £2.6 million. The borrower failed to repay the loan. Law of Property Act (LPA) receivers were appointed and the property was sold.

In professional negligence proceedings against the defendant, the claimant alleged the November 2011 valuation was negligent. There was no allegation that the February 2011 valuation was negligent. The claimant's position was that the £2.8 million facility was a new loan on different terms and had been used to discharge the existing indebtedness. It alleged that the whole of the £2.8 million advanced had been advanced in reliance on the November 2011 valuation and claimed damages on that basis.

The question for the court was whether, in circumstances where the first valuer cannot be sued as the first loan has been fully redeemed by the second loan, the whole of the monies advanced in reliance on the second valuation were losses caused by the negligent second valuation? Here the valuer was the same on both occasions.

The High Court held that the "but for" test of causation in relation to the November 2011 valuation remained the appropriate test. The relevant comparison for the purposes of determining the cause of loss was with the position of a non-negligent valuation. If the defendant's November 2011 valuation had not been negligent no further loan would have been advanced but the claimant would still have been exposed to the loss attributable to the existing indebtedness. It was not therefore attributable to the November 2011 valuation.

As the claim was currently pleaded, the defendant was only liable for any relatively small loss suffered as a result of its over-valuation. The court granted summary judgment on that point.

Things to consider

The claimant could seek to amend its particulars of loss to include the value of a claim for loss caused by a negligent February 2011 valuation (should expert evidence support that position) on the basis that had the November 2011 valuation not been negligent, the claimant would have had the benefit of that claim which it had lost when the existing indebtedness was repaid.

No defect in order dismissing application to set aside a statutory demand

In Clarke v Cognita Schools Ltd (trading as Hydesville Tower School), the defendant had obtained judgment against the claimants and served a statutory demand on each. The claimants applied to have them set aside. The court dismissed the applications pursuant to rule 6.5(1) of the Insolvency Rules 1986 (r6(5)). The defendant then presented bankruptcy petitions against them and bankruptcy orders were made.

The claimants appealed those bankruptcy orders on the basis that:

  • the orders dismissing their earlier applications to set aside the statutory demands erroneously failed to include a statement notifying them that they could apply to have the orders set aside, varied or stayed.
  • that being the case, their applications to set aside had not been effectively determined.
  • there was, therefore, and remained, outstanding applications to set aside within the meaning of s267(2)(d) of the Insolvency Act (s267(2)(d)).
  • this meant that no bankruptcy petitions could properly be presented and no bankruptcy orders properly made.

The High Court held that although the Civil Procedure Rules (CPR) apply to insolvency proceedings to some extent, they did not apply to r6(5). CPR 3.3(4) provides that the court may make an order of its own volition without hearing the parties or giving them the opportunity to make representation. Where it does so, CPR 3.3(5) provides that when such an order is made the order must contain a statement of the parties' right to apply to set aside, vary or stay the order. There was no equivalent provision in r6(5) or relating to it.

Even if such a statement was required, the court went on to find that the order was still effective unless and until it was set aside - which it hadn't been - and there was, therefore, no outstanding application to set aside the statutory demand within the meaning of s267(2)(d).

The appeals against the bankruptcy orders were dismissed.

Things to consider

The fact that the applications to set aside the statutory demands were dismissed would not have prevented the claimants from disputing their liability under any subsequent petitions.

Validating transactions under s127 of the Insolvency Act 1986

The High Court exercised its discretion to validate a property transaction which completed between presentation of a winding-up petition and the making of the winding-up order.

In Wilson (as liquidator of 375 Live Ltd) and another v SMC Properties and others, 375 Live Ltd (Live) commenced marketing a commercial property in November 2013. A winding-up petition was presented against Live in February 2014. A sale of the property to SMC was agreed and contracts exchanged on 6 March 2014 with the transfer completing on 4 April 2014 for £850,000. A winding up order was then made against Live on 14 April 2014.

A dispute arose as to whether the sale was void. SMC argued that its purchase had been in good faith, at arm's length and had not been at an undervalue. The liquidator argued that the transaction had been at an undervalue and was void. Two earlier offers for the property, which had not proceeded, had been for £1.1 million and £1.3 million respectively.

SMC applied for the purchase to be validated under s127 of the Insolvency Act 1986 (s127).

The High Court held that the policy of s127 is to uphold the principle that the insolvent's estate should be distributed rateably among creditors of the same class and to prevent dissipation. The court would be slow to validate a transaction where there was a significant reduction in the company's assets.

Good faith under s127 related to knowledge of the petition and the court accepted in this case that SMC was unaware of the presentation of the petition when contracts for sale were exchanged. The transaction had been entered into in good faith and at arm's length in circumstances where a secured creditor was pressing for payment and would have taken possession of the property and sold as mortgagee in possession had it not been paid. Good faith on its own is not enough however.

Expert evidence indicated that the appropriate value of the property at the date of sale was £900,000. It had been sold for £850,000. Applying the five % margin of error either way for valuations, the general body of creditors had not suffered significantly or at all. Further, had the property not been sold to SMC, it is likely there would have been a distress sale at a reduced value. The court exercised its discretion to validate the transaction.

Things to consider

S127 applies equally where full value is paid for the asset but one creditor is preferred over others by being paid off and where an asset is sold at an undervalue but creditors are then paid pari passu. Here, the transaction had been an arm's length commercial transaction. The transaction had not favoured a pre-liquidation creditor and there had been no significant loss to creditors.

Untrue representations in public documents bind bank

A bank was found liable to the purchaser of subordinated notes it had issued for misrepresentation following untrue statements in public documents. The interesting point in the case was that there was no direct contract with the bank, the subordinated notes having been acquired by the claimant on the secondary market from a third party bank.

In Taberna Europe CDO II Plc v Selskabet (formerly Roskilde Bank A/S (in Bankruptcy)), following the purchase of the notes by the claimant, the bank went bankrupt and its assets, debts and some liabilities were transferred to another Danish bank. The claimant brought a claim against the bank under the Misrepresentation Act 1967 (the Act) for misrepresentation in relation to non-performing loans.

The representations had been made in publications sent to shareholders and were not aimed specifically at the secondary market. The publications also contained a disclaimer that the bank accepted no liability for errors, omissions or misstatements.

The High Court held that the representations had to play a real and substantial part in inducing the claimant to purchase the notes, but did not have to be relied on solely and exclusively.

The court found that the bank had intended the representations to be available for use by all potential investors and the claimant had been part of the target audience. Its disclaimer in the publications was not sufficiently clear to exclude liability for damages for misrepresentation.

There was overwhelming evidence that the claimant had relied upon the relevant representations (which were false) and the bank was liable to the claimant in damages. The court held that, on the evidence, the effect of the acquisition was to bring the claimant and the bank into a contractual relationship which meant that the Act applied.

The claimant's failure to take specialist advice prior to acquisition of the notes, reliance on out-of-date information and failure to properly assess the bank's capital adequacy did not break the chain of causation or merit a reduction in the level of damages to be awarded.

Things to consider

Although the representations made by the bank were made in publications sent to shareholders, the finding was that they were intended to be relied upon by all potential investors generally (including in the secondary market) and not just a specific, well defined class. Where there is a wide target audience, there follows a wide potential claimant pool.

No extension of time for service of claim form if no exceptional circumstances

It is notoriously difficult to obtain extensions of time for service of a claim form after the relevant period for service has expired.

In Bellcrown Associates Ltd v Royal Bank of Scotland, the claimant issued proceedings against the defendant on 19 May 2014, towards the end of the relevant limitation period. On 19 September, the claimant obtained an extension of time for service of the claim form of one week. The claimant's application for a further extension 8 days later was refused.

The claimant appealed that order but also argued that, in fact, it had already served the claim form on the defendant when the claimant's director hand delivered a letter and the claim form to the defendant on 18 September. That letter had asked the defendant to consent to service of the claim form in January 2015.

The High Court held that it was clear that the claimant's applications for extensions of time had related to service of the claim form as well as the particulars of claim. What amounted to service had to be judged objectively by looking at what had been said and done. Considered objectively, the intention of the letter handed to the defendant was not to serve the claim form but to seek an extension of time for doing so. The claim form had not been served.

A reason justifying an extension of time for serving particulars of claim did not necessarily justify an extension of time for serving the claim form. There had to be exceptional circumstances to justify such an extension and there were none here. The appeal failed.

Things to consider

In the absence of exceptional circumstances - which often relate to a wile defendant evading service - decision after decision confirms that the court has little, if any, sympathy with claimants that leave service to the last minute. Where an application is made after the time for service has expired - as the second application was here - the position is all the more difficult.

In case you missed it

In a significant decision for auditors, the Commercial Court in Barclays Bank v Grant Thornton has confirmed the efficacy of a 'Bannerman clause' intended to preclude liability to third parties for the content of an audit report.

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