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

10 minute read
29 July 2015

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

Failure to co-operate leads to suspension of discharge of bankruptcy

A trustee is entitled to information from a bankrupt to enable a proper investigation of the bankrupt's finances to be undertaken. The discharge of a bankruptcy order can be suspended pending the provision of such information.

In Wilson v Williams (Trustee in bankruptcy for John Wilson), an examination order under s333 and s366 of the Insolvency Act 1986 (the Act) was made against Wilson. He was also ordered to provide the trustee with all information relating to his financial affairs and the automatic discharge of his bankruptcy was suspended under s279 of the Act, pending his compliance with his duties and obligations to the trustee's satisfaction. The orders were made as the trustee considered Wilson had failed to co-operate in the provision of information, particularly in relation to details of his only asset, his £1 million pension fund.

Wilson claimed a right to privacy of his financial affairs regarding his pension fund, which he contended was excluded from his bankrupt estate by law. He appealed the suspension of the discharge of the bankruptcy order. He argued that the terms of the order were disproportionately severe and that he was at the mercy of the trustee and might be left as an undischarged bankrupt for an indeterminate period which was contrary to the policy of the Act.

The High Court dismissed the appeal. The trustee's requests were reasonable and not oppressive, whereas Wilson's default was serious and continuing. His only significant asset was his pension fund which should be investigated by the trustee. Wilson had steadfastly refused to provide the trustee with the information or documentation required to investigate whether the pension did vest in the trustee or not. The order had been properly made and should be complied with.  

Things to consider

The court can only make an order under s279 of the Act if satisfied that the bankrupt has failed or is failing to comply with an obligation under the Act.

The power is intended to be penal as the bankrupt continues to suffer the disabilities arising from his undischarged bankruptcy until he complies with his obligations. A bankrupt can always apply to court under Rule 6.216 of the Insolvency Rules for a s279 order to be discharged.

Occupier's overriding interest claim defeated by activities of agent

The Court of Appeal has applied the principle in Brocklesby v Temperance Permanent Building Society [1895] to preclude a property owner-occupier, whose agent had fraudulently purchased the property with the aid of a mortgage, from claiming a beneficial interest with priority over the mortgage.

In Wishart v Credit & Mercantile PLC, Wishart instructed his business partner (S) to act on his behalf in the purchase of a property as his family home. It was to be acquired with Wishart's share of the proceeds of a project they had been involved in. There was to be no mortgage.

Unbeknown to Wishart, S arranged for the purchase to be made in the name of a company, not Wishart, and then obtained a loan from Credit & Mercantile PLC (C&M), which was secured upon it. S took the loan monies for himself.

The loan was obtained on the basis of vacant possession despite Wishart being in occupation. S disappeared, the company defaulted in payment and C&M re-possessed and sold the property. Wishart claimed the proceeds of sale on the basis of his overriding beneficial interest in the property at the time C&M's charge was registered.

The Court of Appeal, upholding the first instance decision, applied the Brocklesby principle. It held that while Wishart was the beneficial owner from the time the property was acquired, he had left the acquisition of the property entirely to S as his agent, had not been involved in the transaction, had not inspected or signed any documentation and had exercised no supervisory function or control over S.

He had provided S with the means to hold himself out as the true beneficial purchaser and owner of the property for the purposes of borrowing from C&M. C&M had not been on notice of any restriction on S's authority.

As a result, and relying on Brocklesby, Wishart's interests did not qualify as an overriding interest as against C&M under the Land Registration Act 2002.

Things to consider

A party cannot complain when it has given its agent free rein to make the arrangements for the acquisition, or mortgage, of a property, and has taken no steps to control the agent's activities or taken part in the transaction itself or made it known to the lender that there are any limitations on the agent's authority. The courts consider it only fair in such cases that as between the owner and the innocent lender, the owner should bear the risk of fraud on the part of its agent, who he has set in motion and provided with the means of perpetrating the fraud.

Collateral purpose of winding-up petition is not an abuse of process

The issue of a winding-up petition for a purpose other than to ensure the equitable winding-up of a debtor company is an abuse of process. However, where the collateral purpose was to implement a restructuring plan which was for the benefit of creditors as a whole, there was no abuse of process.

In Astra Resources plc v Credit Veritas USA LLC, Credit Veritas USA LLC (CV) served a statutory demand on Astra Resources plc (Astra) for $1.5 million. Astra applied for an injunction to restrain CV from presenting a winding-up petition on the basis that there was a genuine and substantial dispute as to the debt. It also argued that it would be an abuse of process as CV had a collateral purpose in issuing the petition, being to gain control of Astra through the submission of a scheme of arrangement in the London courts, rather than to obtain payment of the amount allegedly due.

The High Court held that, although there was a dispute as to some of the sum claimed, there was no genuine dispute in relation to $600,000, which sum could form the basis of the petition.

Further, the court found that if a scheme of arrangement was the collateral purpose, such arrangement could be achieved only through the proper processes of the liquidation with the support of the liquidator, the majority of the creditors and the approval of the court on the basis of the fairness of the proposals. It would only therefore take effect if it were beneficial to the unsecured creditors as a whole, of whom CV was one, and was not an abuse of process.

The application to restrain the presentation of such a petition was dismissed.

Things to consider

The collateral purpose here was not just for the benefit of CV but for all unsecured creditors as a class, and this was a legitimate and proper purpose for a winding-up petition.

A further warning shot across the bows on proportionality and costs

The Technology and Construction Court (TCC) has recently given a further warning to all those involved in litigation that proportionality must be to the forefront of minds when considering how to conduct litigation. Failure to do so will lead to costs penalties.

In Gotch v Enelco Ltd, a small building dispute, the court reminded the parties, while sending a clear message to others, that it is part of the overriding objective of the CPR that cases be dealt with at proportionate costs and that the parties (and not just their solicitors) are required to help the court to ensure that that objective is achieved.

From the judgment, Mr Justice Edwards-Stuart made it clear that:

  • It is no longer acceptable - if it ever was - for parties to pursue issues or applications that have no real impact on the issues that are central to the dispute.
  • It is no longer acceptable for solicitors to carry on a war of attrition by correspondence, whether instructed to do so or not.
  • Especially in commercial claims there will rarely be any justification for fighting or taking points simply "as a matter of principle".
  • While English law is an adversarial process, that goes to the issues in the case, not to every aspect of procedure.
  • Parties are expected to conduct litigation in an expeditious and economical manner. Bringing the right issues to trial in the most economical fashion and taking steps to ensure that costs are kept at a proportionate level to what is at stake is at the heart of the process.
  • Unreasonableness, intransigence and the taking of every point is unacceptable as such conduct flies in the face of the overriding objective. Procedural squabbles must be banished and a culture of co-operative conduct introduced in its place so contentious issues can be tried fairly.

Things to consider

Although a TCC case, the judge's sentiments apply equally in other courts. The judgment will be useful where an opponent's conduct is preventing a claim being prosecuted or defended at proportionate cost. Where that is the case the court should be invited, at the appropriate time, to express its displeasure in terms of its costs decisions.

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.