Our finance litigation experts bring you the latest on the cases and issues affecting the lending industry.
No unfair relationship
The Court of Appeal has found that where the decision to borrow was driven by the borrower's urgent need for a re-mortgage and her determination to do whatever was necessary to achieve that end, the relationship that arose between the parties was not unfair.
In McMullon v Secure the Bridge Ltd, McMullon attended business coaching courses and was coached and trained by H who was also a financial planning consultant and co-owner of Secure the Bridge Ltd (STB). STB's business was providing bridging finance. McMullon was in financial difficulties and needed to re-mortgage a property. H introduced her to his consultancy. A number of electronic loan applications were made but declined due to McMullon's poor credit card history.
On H's suggestion, McMullon entered into a £25,000 bridging loan from STB to clear her credit card debts to help with her re-mortgage applications. However, subsequent re-mortgage applications were also declined due to further defaults in her card payments. McMullon defaulted on the bridging loan repayments and STB sought repayment.
McMullon claimed she had told H about the payment defaults before taking out the bridging loan; that H had led her to believe a re-mortgage was available when there was no realistic prospect of her obtaining one in time to repay the bridging loan; and that she was rushed into signing the agreement. She alleged unfair relationship under s140 Consumer Credit Act 1974.
At first instance the court held there was no unfair relationship even though the agreement was inappropriate in its origin. McMullon knew H was a director and co-owner of STB, she had not been misled or unduly influenced by him and had acted on her own determination to obtain the loan, not on his advice, when entering into it. H had not known about the further defaults before the bridging loan was entered into. If he had, he would have known not only that a re-mortgage was unlikely but that repayment of the bridging loan was also at risk as McMullon would not have funds to pay.
The Court of Appeal agreed and dismissed McMullon's appeal on this point. It held that McMullon was fully aware of and determined to take the risk that she could only repay the bridging loan if she obtained a re-mortgage and that obtaining a re-mortgage was not guaranteed. There had been no abuse of position, undue influence or non-disclosure by STB and the relationship between the parties was not unfair.
Things to consider
As ever, such cases are fact specific. Here, the borrower entered into the bridging loan with her eyes wide open and being fully aware of the risks. That being the case, on this occasion, the inappropriate nature of the coaching and subsequent lending relationship stood up to scrutiny. Other lenders in similar positions may not survive such scrutiny.
Delay is fatal to annulment of bankruptcy order
The court may annul a bankruptcy order if satisfied that the statutory grounds exist. In exercising its discretion under s282(1) of the Insolvency Act 1986, the court may annul at any time but must achieve a just and proportionate result.
In Taylor v The Macdonald Partnership and others, Taylor was made bankrupt in 2000 following an unsuccessful IVA (individual voluntary agreement). She applied for annulment of the bankruptcy order in 2012 which was refused in 2013. Following a further unsuccessful appeal she appealed to the Court of Appeal.
There were a number of grounds for appeal including that:
- Taylor was illiterate and did not understand documents she had been asked to sign in relation to her IVA;
- she had not been a partner in the business to which the debts related;
- she had been subject to undue influence by her husband in signing papers in relation to his business;
- she had no known creditors or proven debts at the time she was made bankrupt.
On a second appeal the Court of Appeal cannot give permission to appeal unless the appeal raises important points of principle or practice or there is some other compelling reason to hear the appeal.
The Court of Appeal refused permission. It held that the lower courts had considered all the relevant circumstances and had not fallen into error in finding that there were no grounds to conclude that the bankruptcy order should not have been made. Moreover, there had been a delay of over 11 years in bringing the application to annul. It was now far too late to make such an order, irrespective of whether the order ought not to have been made originally.
To allow the appeal would simply increase the costs, length and complexity of already costly and complex proceedings. There was no important point of principle or practice or other compelling reason to hear the appeal.
Things to consider
There is no limitation period for bringing an application to annul a bankruptcy order, but the longer the delay, the less likely the court is to permit annulment as the more difficult it becomes to achieve a just and proportionate result.
The court considers when the lender first suffered measurable loss
For the purposes of determining when a cause of action in negligence accrued, the court has recently had to consider how to value the borrowers' covenant.
In Canada Square Ltd v Kinleigh Folkard & Hayward Ltd, borrowers had entered into a 90% loan to value interest-only re-mortgage. The lender had obtained a valuation from the defendant on 25 January 2006 for the purposes of the loan. The loan was subsequently assigned to the claimant. The borrowers defaulted and the property was repossessed and sold. A shortfall occurred.
The claimant issued its claim for negligent valuation against the defendant on 23 October 2013. The defendant admitted that it had negligently overvalued the property but argued, among other things, that the cause of action in the negligence claim had accrued prior to 23 October 2007 and so the claim was time-barred.
The County Court had to determine whether the claimant had suffered measurable relevant loss before that date. In doing so it had to value both the loan security and the borrowers' covenant to pay to determine when their combined values became worth less than the amount outstanding from time to time under the mortgage.
That valuation included all factors that affected the security at the relevant time and whether known to the parties or not. In relation to the value of the property, that included a right of way that only came to light when the property was sold following repossession. Likewise the value of the covenant had to be determined in the light of all the admissible evidence.
The borrowers' first mortgage payment was missed in February 2007 although a number of payments were made in the following months, with the last payment being made in January 2008. The court held that from February 2007, it was no longer the case that interest payments were duly made or that just because some payments were made, the covenant still appeared good. There were broken promises and assurances throughout 2007 and the borrowers eventually became bankrupt. This was a typical pattern of financially overstretched borrowers.
Further, as the loan was a non-status loan where the borrowers self-certified their income, the lender would have attached considerably less weight to the value of the covenant than it would have done had the borrowers' creditworthiness been fully investigated.
The claimant had failed to discharge the burden of establishing a prima facie case that its loss had not accrued by February 2007. Indeed, on the evidence, the court held it could have accrued much earlier. The claim was held to be statute barred.
Things to consider
This case acts as a useful reminder of what the court will consider when attempting to value the borrower's covenant.
Typographical error did not render statutory demand unclear
The High Court has held a debtor liable for the costs incurred in pursuing a statutory demand and bankruptcy petition despite the first page of the demand indicating incorrectly that nothing was owed. The debtor paid the principal debt the day before the hearing and was liable for the additional costs and interest incurred as she had not been misled by the typographical error.
This was the finding in Munshi v Architectural Association, in which Architectural Association (AA) had issued a statutory demand against Munshi in the prescribed form. The form contained a typographical error on the front page in that the sum claimed, inclusive of interest, was put at £0. On the second page of the demand the correct sum and the claim for interest were properly set out.
The statutory demand also set out the warning that it was an important document, that action needed to be taken within 18 days if the debtor wished to set it aside and that the whole document should be read carefully and advice sought if the debtor was in any doubts as to its contents.
The debtor took no action but paid the principal amount outstanding the day before the hearing of the bankruptcy petition. The petition was dismissed but the debtor was ordered to pay costs.
The debtor alleged the demand was defective due to the typographical error and could have been set aside and also that given she had paid the principal sum, the petition should have been adjourned.
The High Court held that any reasonable objective reading of the demand would have led the recipient to realise there was an error on the first page and that the second page showed what was outstanding. If the debtor had had difficulty understanding the demand, she could have sought help within the time frame allowed so avoiding significant costs being incurred. The demand was not susceptible to being set aside due to the error as the debtor had not been misled. The creditor was entitled to its costs. There was no advantage to the creditor in adjourning the petition as the hearing itself had only incurred modest costs.
Things to consider
A sensible decision indicating that the courts will not take into account minor errors in documentation where the meaning and effect of the document, if read as a whole, would have been clear to any reasonable person in the debtor's position. There was no issue here as to whether the debt was due and the costs had not been unreasonably incurred.
Court delays do not time bar applications for possession and sale of bankrupt's property
The High Court has held that despite an application being issued outside the three-year limitation period for applying for orders for possession and sale in respect of a bankrupt's property, the application had been brought in time.
In Sands and Appleyard (Trustee in Bankruptcy of Tarlochan Sing v Tarlochan Singh and others), Singh was made bankrupt on 28 September 2011. At that time he was the registered proprietor of a property. S283A(2) of the Insolvency Act 1986 (IA) provides that such property will cease to be part of the bankrupt's estate and re-vest in the bankrupt at the end of three years starting with the bankruptcy unless the trustee has realised the interest in the property of applied for an order for possession and/or sale of it (s283A(3)IA).
On 26 September 2014, the trustees lodged the appropriate fee and papers at court for an application for possession to be issued. At some time earlier and at the court's request, the court file had been transferred to another court where other contested proceedings were being dealt with. The bankruptcy proceedings had not, however, been transferred. The application was sent to the court holding the file for processing and was eventually issued on 1 November 2014. Singh submitted that the application was issued out of time.
The High Court found that the trustee had 'applied' within time. S283A(3)IA merely requires the making of an application by the trustee and is not dependent upon the court doing anything. The application was made when the trustees delivered the application notice and tendered the relevant fee to the court in which the bankruptcy proceedings had taken place. What happened to the application thereafter was out of the trustees' hands. They had applied in time and complied with the statutory provision.
Further rule 23.5 of the Civil Procedure Rules (CPR) applies to proceedings under the Insolvency Act 1986. CPR 23.5 provides that where an application has to be made within a specified time, it is so made if the application notice is received by the court within that time.
Things to consider
This is a helpful case as it confirms that the principle that proceedings are 'brought' before issue by delivering the relevant papers and appropriate court fee to the court applies not just to limitation and the bringing of proceedings but to the making of applications generally. The wording used in s283A(3)IA is straightforward with no hidden meaning and applicants should not be subject to the vagaries of the court system.
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