Finance litigation briefing February 2016: report and review on the latest cases and issues

14 minute read
03 March 2016

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

No further advance? No change in priority of charges

Where no further advance was made under new facility letters, the Court of Appeal found that the original facility letter had, in effect, been restated with minor amendments rather than extinguished, thus preventing a second charge from taking priority.

In Urban Ventures Ltd v Thomas & O'Reilly Administrators of The Black Ant Co Ltd (In Administration) and Billsop Properties Ltd (In Administration) and Dunbar Assets PLC (Dunbar), Dunbar advanced loans to the defendants secured on various properties. The claimant also entered into loans with the defendants which were secured as second charges on those properties. Dunbar subsequently required the defendants to sign a series of new facility letters. No further advance was made as a result of the subsequent facility letters. The defendants did not repay the original loans and there were no accounting entries showing notional repayments and further advances.

The defendant companies went into administration. The charged properties were sold but the proceeds were insufficient to clear all sums due to the claimant and Dunbar. The question was whether any of the proceeds should be paid to the claimant in priority to Dunbar?

The claimant alleged that the further facility letters amounted to a new contract and as a result the original advances were deemed repaid and further advances made. It claimed the benefit of the anti-tacking provisions in s49 and s50 of the Land Registration Act 2002, which limit the priority afforded to an earlier registered charge to the advance made at the time of the charge and further advances the holder of the charge is obliged to make under it. It argued that Dunbar's priority had been lost by virtue of the subsequent facility letters and it now had priority.

The Court of Appeal, upholding the first instance decision, held that Dunbar had not lost its priority. Whether or not there was a new contract, that did not mean there had been a new advance. No new advance was made at the time of the new facility letters, nor was there anything to suggest that the parties had treated Dunbar as having made a new advance or the defendants as having repaid the existing loan. Continuing or leaving outstanding an existing loan was not the making of a further loan.

The subsequent facility letters were restatements with minor alterations of the original facility letter. Tacking did not therefore arise. The original facility stayed in place and Dunbar's charge retained priority.

Things to consider

It is only where, on a proper legal analysis on the undisputed facts of a particular case, a further advance has been made that the restriction on tacking is engaged. Essentially all that had happened in this case was that the defendant had been required to sign up-to-date versions of Dunbar's standard terms, and unpaid interest and fees in respect of the original advances had been added to the account.

'Ordinarily resident' test for bankruptcy purposes

The court had to determine whether it had the jurisdiction to make a bankruptcy order against a Pakistani citizen under the Insolvency Act 1986 (IA), s265 (s265).

S265 provides that a bankruptcy petition cannot be presented to the court under s264 IA ( a creditor or by the individual himself) unless a debtor has been ordinarily resident or has had a place of residence in England and Wales at any time in the period of three years immediately prior to the presentation of the petition.

In Reynold Porter Chamberlain LLP V Khan, Khan was a Pakistani citizen and a member of the Pakistan Senate. He had business interests in both Pakistan and the UK and spent time between both countries. He frequently visited England and Wales and owned a number of properties in London where his family resided and where his children were educated. The petitioner obtained a judgment against him and subsequently presented the petition.

The issue was whether Khan passed the 'ordinarily resident' test. Khan disputed jurisdiction and gave evidence that he usually resided in Lahore. The petitioner alleged that Khan was habitually resident in London during the period in which he retained their legal services in 2012.

The court held that whether an individual was 'ordinarily resident' within the jurisdiction is a question of fact and degree. Some permanence is required in that the individual has to intend to and actually reside in the jurisdiction for a substantial period of time. The court set out a non-exhaustive list of situations which might or might not indicate residency. It considered that casual visits did not suffice and generally staying at a hotel for short periods was probably insufficient to amount to residence for these purposes, although a lease or tenancy agreement was not necessary. Residing with family could suffice.

Documentary evidence of residence might be relevant especially if given for official purposes. The purpose of the visits might be relevant and a distinction should be made between using a residence as such and using it for corporate activities. The cumulative effect of all the evidence is important.

The court accepted that Khan usually resided in Lahore given his political and professional interests there, but held that did not preclude him from being ordinarily resident in England and Wales also. Khan conceded that he had been in the jurisdiction for 18 days in 2015, 167 days in 2014 and 100 days in 2013 and more frequently in 2012 but for less than 180 days. The court found that on the balance of probabilities Khan was ordinarily resident within the jurisdiction during the relevant period. That being so, the court went on to make the bankruptcy order.

Things to consider

As made clear in the judgment, whether an individual is ordinarily resident is one of fact and degree to be determined on all the evidence before the court. It is the degree of permanence, or continuity or frequency of the time spent in the jurisdiction which is the determining factor. As in this case, it is possible to be ordinarily resident in more than one country.

The meaning of 'standard terms of business' under S3 Unfair Contract Terms Act 1977

Where one contracting party deals as a consumer or on the other's written standard terms of business, any term excluding or restricting the other party's liability for breach of contract must satisfy the requirement of reasonableness to be valid as per s3 of the Unfair Contract Terms Act 1977 (UCTA).

UCTA does not define 'written standard terms'. Whether parties are contracting upon such terms is not always clear cut but may be a question of fact depending on the terms under consideration.

The court has recently considered whether one party's standard terms formed the basis of the contract despite negotiations upon them, and so s3 UCTA applied.

In African Export-Import Bank and others v Shebah Exploration and Production Company Ltd and others, the parties entered a syndicated loan based on LMA (Loan Market Association) standard terms. Loans of US$150m were made but following payment of one instalment, the defendants failed to make any further repayments. The claimants accelerated repayment of the entire debt pursuant to the agreement and applied for summary judgment of the sums outstanding.

The defendants sought to argue that any sums claimed by the claimants had to be set off against their counterclaims for alleged breaches of the claimants' obligations as arranger of the facility agreement. They argued that the facility agreement constituted the claimants' written standard terms of business within the meaning of s3 UCTA and so the claimants could not rely on the clauses in the agreement purporting to exclude any right of set-off unless they met the requirement of reasonableness. It was accepted by the defendants that the exclusion clauses were effective, subject to this point.

The issue for the court was whether it was arguable that the facility agreement based on the LMA standard terms constituted the claimants' written standard terms of business for UCTA purposes? The claimants argued that it was not and that they had no written standard terms for this type of business but that the documentation for such a transaction was negotiated and agreed on a transaction-by-transaction basis.

The High Court held that where commercial parties with legal representation negotiated a neutral industry model form as the basis for a complex and detailed financial contract, cogent evidence would be required to raise an arguable case that the resulting contract was made on the written standard terms of one of the parties. In this case, there had been a travelling 'red-line' draft and evidence of discussions and negotiations.

There was no evidence to suggest that the claimants habitually proposed the LMA terms as a basis for their syndicated loan transactions or that they always refused to negotiate the terms it contained. The court found there was a degree of real negotiation of the final terms with some of the defendants' proposed substantive amendments being incorporated.

The no set-off provisions were not subject to s3 UCTA and applied with full contractual force so that the defendants' counterclaims could not be used as a defence to the claim. Summary judgment was awarded against the defendants.

Things to consider

For terms to be standard they have to be used for all, or nearly all, of a party's contracts of a particular type. It is important to note that even some negotiation and amendment will not prevent those standard terms being just that, and so within the ambit of s3 UCTA, if that process leaves those terms "effectively untouched". It will be a question of fact and degree in each case.

Test for setting aside final order at trial where a party fails to attend

The court has confirmed that where a party fails to attend a final hearing and then applies to set aside an order made at that hearing, that application has to be made and considered under CPR 39.3(3). The order will only be set aside if the three criteria set out in CPR 39.3 (3) are met.

In Pickard and another v Roberts and another, the claimant trustee in bankruptcy brought proceedings seeking a declaration that a property held by the defendant bankrupt and his wife were held in equal shares and for an order for repossession and sale. A two day hearing was set for 26 February 2015 and the parties were notified that there would be cross-examination of the defendants at that time. The wife failed to attend at that hearing despite having been notified by the court of the date and the court made an order in the trustees' favour.

The wife successfully applied to set aside the order. The judge at that hearing appeared to set the order side pursuant to CPR 3.9 (relief from sanction) as she held that although there had been no good reason for non-attendance, there were real prospects of success at trial and there could be a miscarriage of justice if the earlier order was not set aside.

On the trustees' appeal, the High Court held that the original hearing had been a trial and as such, CPR 39.3 applied and not CPR 3.9. Whether or not a hearing is a trial depends on the context, the purpose of the hearing and the procedural orders which have been made leading up to the hearing. Trials, as opposed to interim hearings, lead to an order which carries with it finality. If there is no appeal, the issue cannot, save in unusual circumstances, be re-litigated.

In this case, there had been a number of procedural steps and interim orders so that the matter could be finally, properly and fairly determined at the hearing on 26 February. Both parties expected a final determination at that time. The court considered that that hearing was therefore a trial to which CPR 39.3 applied.

Pursuant to CPR 39(5), the court can set aside the final order only if the applicant:

  • Applied promptly when it found out the order had been made,
  • Had a good reason for not attending the trial, and
  • Has a reasonable prospect of success at the trial.

Authority suggests that unless a party overcomes all three hurdles, there is no jurisdiction to set aside the order made.

The court found that there was no good reason for the wife's non-attendance at the trial. She knew the date and had chosen not to tell the court why she had not attended on that date.

The court also had to have regard to the overriding objective including the use of court resources, further hearing time and delay, the need for finality of proceedings and fairness to both parties and in doing so it allowed the appeal. The original order was reinstated.

Things to consider

This case provides useful clarification of the position which may prove especially useful where litigants in person are involved and simply don't turn up at the final hearing and then apply to set aside the judgment against them without proffering good reason for their non-attendance.

It is also interesting to note that the case referred to authority that the first hearing of a possession order under CPR 55, whatever it is, is not a trial, and so applications to set aside orders made in a defendant's absence at such hearings will not be dealt with under CPR 39.3.

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