Finance litigation: the latest cases and issues - July 2017

12 July 2017


This month we consider the court's refusal to imply an obligation into a loan agreement that a lender should take steps in foreign proceedings to preserve security; the court's view on the failure to heed alarm bells in relation to potential undue influence; and more cases and issues affecting the industry.

  • No implied term in a loan agreement that creditor should take steps in foreign proceedings to preserve security
  • Undue influence in signing Tomlin Order
  • Settlement arguably conditional despite condition not being reflected in consent orde
  • Bankrupt has no interest in disclaimed property

No implied term in a loan agreement that creditor should take steps in foreign proceedings to preserve security

The High Court has recently refused to imply into a loan agreement an obligation on the creditor to take particular steps in foreign proceedings that might preserve security.

This was the finding in General Mediterranean Holding SA.SPF v (1) Qucomhaps Holdings Ltd, (2) Harkin, (3) Awni Abu-Taha, in which loans totalling US $6m were advanced to the first defendant and guaranteed by the second defendant. Security for the loan was given over a Czech company, Moravan.

The claimant sought to enforce the guarantee. By this time, Moravan had gone into administration under Czech law. The defendants argued that as a result of the claimant's failure to file a claim as a secured creditor in that administration, Moravan's assets were released to alleged fraudsters (who had held themselves out as creditors) and the assets were lost.

The defendants argued there was an implied term in the loan agreement to the effect that the claimant would co-operate with the defendants in relation to the performance of the loan and would not do or omit to do anything which would prevent the defendants from fulfilling the obligations under the loan. They argued this meant the claimant was under an obligation to take steps to preserve the security and by failing to file a claim in Moravan's administration, its assets were put beyond the reach of the claimant and the sureties under the guarantee. They argued that the defendants' obligations had been discharged by the loss of the security through the fault of the claimant to fulfil its obligation under the implied term.

At first instance, the court granted summary judgment to the claimant. The defendants appealed.

The High Court held that the argument on implication had no real prospect of success. Where a debtor or surety relied on a creditor's omission in order to discharge the obligation to repay, it had to be shown first that the creditor was under a duty in respect of the task it had omitted to do. The duty could be imposed by law, equity or by agreement between the parties. If there was no such duty imposed in equity, it would be unlikely that the courts would impose one by implication. The default position was that creditors did not have to take any steps and clear words in a contract would be needed to show otherwise.

The defendants alleged the claimant knew they were relying on Moravan's assets to repay the loan and the duty to step in should therefore be implied. The court disagreed, holding there was no evidence that the claimant had such knowledge and even if it did, that did not give rise to a duty on the claimant to claim in Moravan's administration. There was no real prospect of showing that the claimant had such a duty as a matter of law or in equity. Such a term would not be implied as it was not obvious and nor was it necessary to do so to give business efficacy to the loan agreement. The appeal failed.

Things to consider

Had the parties intended that the obligation to repay under the guarantee would be treated as discharged in the event that Moravan's business should fail, they could have included an express term to that effect.

Undue influence in signing Tomlin Order

Where alarm bells should have been ringing that a wife's signature to a document may not have been given willingly, it would be wrong to allow a liquidator's claim to succeed and the company to be unjustly enriched as a result.

So held the High Court in Hieber v Duckworth (Liquidator of Hieber Ltd) and another, in which the defendant liquidator sought to recover the sum of £85,000 paid as unlawful dividends from the husband and wife (the claimant) operators of Hieber Ltd.

An insolvency practitioner initially communicated with the defendant on the couple's behalf. Subsequently, a direct-access barrister informed the defendant that he was appointed by the claimant alone. He filed a witness statement on her behalf alleging that she had never received any of the £85,000. Subsequently, a third advisor (M), purporting to act on both the husband's and the claimant's behalves, proposed a settlement whereby the husband would pay £30,000 by instalments and the claimant would grant a charge over her property limited to £11,800.

The defendant accepted that offer and a settlement agreement (Tomlin Order) was signed by the husband and the claimant and returned to the defendant's solicitor from the claimant's email address.

Following the husband's death it transpired that:

  • the claimant had played no active role in the company and was unaware she was a shareholder and company secretary;
  • the husband had been a violent and abusive alcoholic who had bullied and physically abused her;
  • she had never met either the insolvency practitioner or M and had not authorised M to seek a settlement on her behalf; and
  • she had not emailed the liquidator nor seen any emails sent to him or received from him, the email address having been created by her husband to send emails in her name.

The claimant accepted she had signed the Tomlin Order but only under duress and sought to have it set aside.

The High Court found that there was extensive evidence of abuse and it was clear the claimant had not given her willing and informed consent in signing the Tomlin Order. She had not been involved in the discussions leading to it and had signed only under significant duress and undue influence of her husband.

That finding of undue influence and duress on its own was not sufficient to set aside the order as the defendant was not a party to the undue influence. The issue was whether the defendant had been put on inquiry and failed to take reasonable steps in relation to the possibility of undue influence having been exerted.

The court held that as soon as the claimant became separately advised by the barrister, this should have put the defendant on notice that the claimant's and her husband's interests were not aligned. When M then advised he was instructed, this should have started alarm bells ringing, but the defendant failed to obtain confirmation that M was acting on the claimant's behalf. Further, the Tomlin Order should have been sent separately to the claimant for signing, rather than to both her and her husband under cover of a single letter.

The court held that although the defendant could not be treated as having actual knowledge, the events put him and his solicitors on notice of a risk of undue influence and they had failed to take reasonable steps in relation to that risk. The Tomlin Order would be set aside.

Things to consider

The court also held that even if the application relating to undue influence and duress had not succeeded, knowing now how the claimant's apparent consent was procured, it would be unfair for the defendant to take advantage of his strict legal rights as that would result in an unjust enrichment for the company.

Settlement arguably conditional despite condition not being reflected in consent order

Where it was arguable that an offer of settlement to pay an outstanding debt had been conditional on amending a party's credit record, the court refused to strike out a claim for breach of that condition, despite the condition not being included in the settlement agreement.

In Adibe v National Westminster Bank Plc, Adibe brought a claim against the bank for alleged breaches of contract, negligence and fiduciary duty. The claim related to settlement of earlier proceedings brought by the bank whereby Adibe was to pay a sum of money on condition that the bank marked his credit record as settled. The settlement agreement (the Tomlin Order) drafted by the bank's solicitors and signed by the parties neglected to refer to the credit record condition. Adibe alleged the bank was in breach of the condition and brought the present claim. The bank argued that the Tomlin Order was an entire agreement, that there was no such condition and sought to strike out the claim.

At first instance, the court found that Adibe had a real prospect of successfully arguing that the offer was conditional on the bank amending his credit record as settled. However, by signing the Tomlin Order, Adibe accepted that it contained all the agreed terms between him and the bank and the condition was not included as one of the terms. The claim was struck out.

On appeal, the High Court held that the amendment of the credit record was, beyond doubt, of real concern to Adibe and there seemed no commercial or other justification for the bank refraining from marking his credit record as settled. From the evidence it was arguable that the offer was conditional and that that condition was acceptable to the bank. The parties could not have intended that the condition should be excluded from the Tomlin Order. The bank would otherwise be able to take the benefit of the deal struck with Adibe without the burden of the condition placed upon it. The court held there were real prospects of success of Adibe establishing that there was a collateral contract. The appeal succeeded and the claim was reinstated.

Things to consider

This is a reminder that consent orders should be drafted carefully. The court can look at all the evidence in order to see what bargain the parties struck. The bank's solicitor's attendance notes indicated that the core of the offer was acceptable - following the conversation where Adibe put forward his condition - and the court considered that critical to its finding that there was an arguable claim.

Bankrupt has no interest in disclaimed property

Section 315 of the Insolvency Act 1986 (IA) enables a trustee in bankruptcy to disclaim onerous property to limit the exposure of the estate to any ongoing liability. From the date of disclaimer, the rights, interests and liabilities of the bankrupt in respect of the onerous property are determined and the trustee is discharged from personal liability in respect of that property. However, under s316 of the IA, a person 'interested in the property' can serve notice on the trustee to elect within 28 days whether he will disclaim or not. If the property is not disclaimed within that time, the trustee loses the right to do so. If the property is disclaimed, a person who claims a proprietary interest in the disclaimed property, or a person who is under any liability in respect of the disclaimed property can apply to the court for an order vesting the property in them (s320 IA).

In Frosdick v Fox and Anor, the claimant was made bankrupt by his former solicitors against whom he alleged professional negligence. While bankrupt, the claimant wrote to his trustee in bankruptcy, the defendant, seeking to acquire the right to bring a claim against those solicitors from the trustee. The trustee disclaimed any rights of action and claims against the former solicitors as onerous property under s315 four months later.

On his discharge from bankruptcy, the claimant brought a claim against the trustee complaining about the disclaimer of his potential claim which he alleged was worth a substantial sum of money. He argued that his letter to the trustee was a s316 IA notice that he was interested in the claim. He argued the trustee's subsequent disclaimer was not effective as it had not been made within 28 days and so the claim was treated as having been affirmed. The professional negligence claim was now time barred.

The High Court confirmed that a cause of action, such as a professional negligence claim, is capable of being property within the definition of s283 IA. Property is onerous property under s315 IA if 'it gives rise to a liability to pay money…' As an unsuccessful claimant can be ordered to pay an opponent's costs, the potential professional negligence claim could constitute onerous property.

However, the court held that the claimant was not a person 'interested' in the property as a bankrupt cannot make a valid application under s316 in relation to property which had at the time of the application vested in his or her trustee. The 'interest' had to be recognisable at law and the vesting of the bankrupt's estate in the trustee in bankruptcy meant the bankrupt no longer had an interest in his estate. The claimant's letter to his trustee could not therefore be a notice under s316 IA. The trustee's disclaimer was within his discretion and authority to act and could not be challenged. The action was dismissed.

Things to consider

This is understood to be the first decision on this point. S316 IA is not there to protect bankrupts, it is there to protect other persons who have, or may have, an interest in property which is subject of the insolvency.

In case you missed it:

Unfair contract terms - when does a party deal "on the other's written standard terms of business"?

Under the Unfair Contract Terms Act 1977, where one party deals on the other's written standard terms of business, that other party can only exclude or restrict liability insofar as is reasonable within the meaning of the act. But when will a party be deemed to have dealt "on the other's written standard terms of business"?

Here, our Commercial Litigation experts examine the action in light of a recent Court of Appeal case, which considered whether an agreement based on a form recommended by the Loan Market Association constituted 'standard terms' within the meaning of the act.

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Less than a year after it came into effect on 1 August 2016, the first judgment in relation to the Third Parties (Rights against Insurers) Act 2010 has been handed down in the case of BAE Systems Pension Fund (Trustees) Limited v Bowmer and Kirkland Limited and others. We review the key parts of this decision and its implications.

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