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

14 minute read
31 October 2016

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

Uncrystallised pension pot remains protected following bankruptcy

The Court of Appeal has confirmed that a trustee in bankruptcy cannot compel a bankrupt to draw down payments from his personal pension where he had not elected to make such drawdowns at the time of the bankruptcy.

In Horton (as trustee in bankruptcy for Henry) v Henry, although Henry had a number of pension policies and was entitled to draw down payments under the policies, he had not done so. The trustee sought an income payments order (IPO) in relation to the income Henry would be entitled to if he did elect to draw down payments pursuant to sections 333(1) and 310 of the Insolvency Act 1986 (IA). At first instance, the court - refusing to follow the decision in Raithatha v Williamson [2012] - held that the bankrupt's entitlement to elect to draw down was not included in the assessment of his income. The trustee appealed.

In dismissing the appeal, the Court of Appeal, considered not only the IA but also the Pensions Act 1995 and the Welfare Reform and Pensions Act 1999. It held that before bankruptcy, pensions were not protected so that a judgment creditor could compel a non-bankrupt judgment debtor to draw down his pension to satisfy the debt. However, after bankruptcy, pensions were protected by legislation and did not form part of the estate vesting in the trustee or fall within the after acquired property provisions, albeit income received from a pension could be included in an IPO. S 333 of the IA could not be used to compel the bankrupt to make an election and so make all of his or her pension available to satisfy creditors' claims. Neither was the bankrupt's contractual right to crystallise a pension a payment in the nature of income to which s/he was entitled under s 310 of the IA. A contractual right to elect to receive a pension payment was different from an actual payment or post-election right to receive the payment. S 310 was addressed at capturing income, not at making a bankrupt exercising a power to generate income from property that was excluded from the bankruptcy estate.

Things to consider

It is a public policy decision to distinguishing between safeguarding the savings of private pension holders on the one hand and the interests of bankruptcy creditors receiving repayment of their debts on the other.

This decision will put off creditors from petitioning for a debtor's bankruptcy where he or she has a valuable uncrystallised pension pot where no election to draw down has been made but little or no other assets that would form part of the bankruptcy estate. Excessive contributions to the pension pot can however be challenged under s 342A of the IA.

Challenge by a non-party to a finding in earlier proceedings - an abuse of process or collateral attack?

The court will allow a party to a claim to challenge findings made in earlier proceedings to which they were not a party unless it would be manifestly unjust to do so or would bring the administration of justice into disrepute.

The issue of whether it would be unjust or an abuse of process to permit such a challenge - or collateral attack - was determined in Shalabayev v JSC BTA Bank. The bank had substantial judgments in its favour against Mr Ablyazov (A). It applied for a final charging order over a property registered in the name of a British Virgin Islands company (BVI company) but which, in earlier committal proceedings, A had been held to own. This finding was despite Shalabayev (S) having given evidence in those proceedings that he owned the BVI company and was the beneficial owner of the property, not A. The judge had considered S to be an unreliable witness.

S applied to be joined as a party to the final charging order application. That application was dismissed as a collateral attack on the findings as to ownership in the committal proceedings and an abuse of the court's process. S appealed, arguing that the principle of collateral attack could not apply to someone who was only a witness, and not a party, in the earlier proceedings and was not bound by those findings.

The Court of Appeal allowed the appeal. S had not been given a proper opportunity to establish his claim to ownership of the property. There was a world of difference between being a party to proceedings and being a witness in those proceedings. The evidence relating to the ownership of the property had only been dealt with superficially in the contempt proceedings and the judge's decision on ownership had been based largely on his adverse views regarding the general dishonesty and lack of credibility of A and S. S had had no opportunity to put forward his case in proceedings to which he was a party and which addressed fully the issue of ownership. All of the relevant evidence required proper evaluation with the onus being on the bank to prove its case. There was no abuse of process or collateral attack on the committal hearing findings. The appeal would be allowed and S and the BVI company joined to the charging order application.

Things to consider

Whether there has been a collateral attack on a judgment will be fact specific and is not limited to those cases where the alleged attack is brought by a party to the original proceedings. An abuse of process can be established by non-parties to the earlier proceedings although this is likely to be rare.

No liability for solicitors or estate agent who acted for fraudulent seller

The High Court has recently considered the doctrine of warranty of authority in the context of a sale of property by a fraudulent seller and the tortious duties owed by solicitors and estate agents to ascertain the true identity of their clients.

In P&P Property Ltd v Owen White & Catlin LLP and Crownment Ltd (t/a Winkworth), the claimant purchased a property from a seller, a Mr Harper, who turned out to be a fraudster who didn't own the property. He advised that he wanted to sell the property for £1 million to a cash buyer who could exchange and complete within 10 days. The estate agents (Winkworth) approached the claimant who agreed to buy. The fraudster had satisfied the solicitors' identity and anti-money laundering checks. Exchange took place with completion shortly afterwards with the solicitors transferring the completion monies to the fraudster on the day of completion. The fraud was subsequently discovered. The claimant alleged negligence, breach of warranty of authority and that the completion monies had been held on trust and as valid completion did not occur, payment had been in breach of that trust.

The High Court dismissed the claim. It held that the doctrine of warranty of authority could apply to estate agents. Any agent claiming to have greater authority than in fact existed could be liable but cases were fact sensitive. The solicitors had had the authority of the fraudulent seller, not the true owner of the property. The contract was expressed to be between the seller (who was named and whose address was given) and the buyer. It would be wrong to construe that contract as referring to the actual person who had that name and address, rather than the fraudster claiming to be that person. The solicitor could not be held to be warranting that their client was the registered title holder. The checks that the solicitors and estate agents had done were designed to reduce the risk of fraud but could not eliminate it altogether. The defendants could not be taken as having impliedly represented that their client was the true property owner.

Neither had the defendants been negligent. The solicitors had not accepted a direct responsibility to take reasonable care to ensure the alleged owner was the true owner of the property. Imposing such a duty of care would be inconsistent with the Law Society's Code for Completion by Post 2011. The solicitors had not held the completion monies on trust, but as agent for the seller, and so there had been no breach of trust.

Winkworth had assumed no greater responsibility by approaching the claimant direct and had not assumed responsibility for ensuring that the fraudster was the true owner. It would not be fair to impose such a duty. The court did find however, that had such a duty existed, Winkworth would have been negligent in the manner it had conducted its anti-money laundering checks which had been wholly inadequate.

Things to consider

The case can be distinguished from the ruling earlier this year in Purrunsing v A'Court & Co (a firm) and House Owners Conveyancers Ltd, in which both the buyer’s and the seller’s solicitors were found equally liable in breach of trust to a buyer who was the victim of a property fraud. That case, as well as other earlier cases in which breach of trust had been found against lenders' solicitors in cases of fraudulent sales, had been concerned with an earlier version (1998) of the Law Society's Code with different wording.

The 2011 Code wording appears to offer solicitors some protection against claims for breach of trust in fraud cases. Buyers' solicitors should seek express undertakings from sellers' solicitors that the purchase monies will not be released unless they are satisfied as to the identity of their clients and their title to sell. Will such undertakings be readily agreed to?

No compelling reason for trial

The general common law rule is that a foreign judgment may be enforced by the courts in England and Wales, provided it is a judgment for a debt or definite sum of money and is final and conclusive. However, such judgments can be challenged on the basis of fraud, that its enforcement or recognition would be contrary to public policy or that the proceedings in which it was obtained were contrary to natural justice.

In OJSC Bank of Moscow v Chernyakov and anor, the bank applied for summary judgment against Chernyakov (C) to enforce three Russian judgments it had obtained and which it said were binding, conclusive and final and to which there was no arguable defence. The judgments related to personal guarantees C had entered into in Russia as security for facility agreements between the bank and his group of companies which had been declared insolvent. C defended the application on the basis that:

  • the first Russian proceedings were opposed to natural justice as they had not been served upon him properly in Russia before he had left to reside in the UK
  • that his lawyers had not been given enough time to deal with the second and third proceedings; and
  • that the bank knew he had entered into the personal guarantees under duress and had concealed that from the Russian court.

The judgments had therefore been procured by fraud by the bank.

The Commercial Court held that there was no triable issue as to whether the first judgment was flawed because the proceedings had not been served properly on C in Russia. They had been served in accordance with the Russian Code of Civil Practice (art.165) which provided for deemed service at a registered address. The deemed service provisions were to combat a common practice of abuse whereby addressees of court summonses pretended they had not received it. C had appealed the first judgment on this basis but the appeal judge in Russia had found that the proceedings had been properly served and it was difficult to see how that conclusion could be subject to examination by an English court. The property at which service took place was C's registered address and the address given in the guarantee. Further, no notice of change had been given as required by a clause in the guarantee. The risk lay with C if he did not receive court documents. There was no substance to C's arguments that he had had insufficient time to prepare defences either.

As to fraud, there was insufficient evidence to justify a trial based on such an allegation. There was no evidence of conspiracy or judicial impropriety. Neither was there any other compelling reason for a trial. Summary judgment was granted to the bank.

Things to consider

There was nothing untoward with the Russian judgments which represented a straightforward enforcement of commercial security taken by a bank in the ordinary way. The defendant's arguments were a smokescreen which the court readily saw through as a strategy to delay the inevitable enforcement. Cogent evidence of fraud or a substantial denial of justice, not just a mere procedural defect, is required.

In case you missed it

Regulatory round-up - Autumn 2016

In which the regulatory experts at Gowling WLG provide their bitesize overviews of the latest news and major legal and regulatory developments for the consumer, asset and automotive finance sectors.

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