Finance litigation: the latest cases and issues in April 2018

24 April 2018

Gowling WLG's finance litigation experts consider consent orders in the context of a regulated activity, when a discharged bankrupt is still liable for bankruptcy debts and whether a deed of assignment pre or post-dated a winding up petition.



Some clarity on 'administering' a registered mortgage contract

The Court of Appeal has recently provided useful clarification that a lender entering into a consent order does not amount to the regulated activity of administering a regulated mortgage.

In Fortwell Finance Ltd v Halstead and Halstead, the claimant lender advance the sum of £2.36 million to the defendant borrowers for a fixed one year term. The loan was secured on a property owned by the defendants which was being converted from three flats to a single dwelling house. It was a special condition of the loan that the borrowers, nor their family, intended to occupy the property as a dwelling. The defendants completed the application form indicating that no one would be residing in the property. They gave their residential address as being in Rome, but told the claimant they intermittently stayed at flat 3 in the property when in London. Flat 3 accounted for less than 40% of the overall square footage of the property.

On the above basis, the claimant considered that the loan was not a regulated mortgage for the purposes of the Financial Services and Markets Act 2000 (the Act). The claimant was not an authorised person under the Act.

The defendants failed to repay the loan. The claimant appointed receivers and commenced possession proceedings. The borrowers argued that the loan was in fact a regulated mortgage as they resided in the whole of the property and, as the claimant was not an authorised person under the Act, the loan was unenforceable under s 26 of the Act.

Immediately before the possession hearing the parties compromised the action by entering into a consent order whereby possession was to be given in 28 days, rather than forthwith. The defendants had been confident they could refinance and repay the loan within that time but failed to do so.

The claimant applied for a warrant of possession and the defendants applied to set aside the possession order, warrant and consent order. They unsuccessfully argued that the mortgage was a regulated mortgage and that by entering into the consent order the lender was 'administering a regulated mortgage' under article 61(2) of Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (RAO) and so the consent order itself was unenforceable.

Possession was obtained and the property was sold.

The defendants appeal before the Court of Appeal was dismissed. The court held:

  • The argument as to whether the mortgage was a regulated mortgage contract was compromised by the consent order which the defendants entered into willingly. It was wrong in principle to allow the defendants to seek to argue that had the regulated mortgage issue gone to trial, they would have succeeded on that point;
  • The specific wording in article 61(3)(b) RAO excluded the taking of legal proceedings to enforce a regulated mortgage contract from being 'administering' a regulated mortgage contract. If taking action to enforce the contract was not administering it, compromising such enforcement action could not be administering it;
  • Further, although taking any necessary steps for the purpose of collecting or recovering payments due under the contract from the borrower were included as 'administering' the contract under article 61(3)(b)(ii) RAO, compromising proceedings did not amount to a necessary step as litigants could always proceed to trial;
  • There was obvious public interest in enabling the compromise of legal proceedings. Parliament could not have intended such a compromise to breach s 19 of the Act and be a criminal offence under s23 of the Act.

The court refused to set aside the consent order.

Things to consider

The court was also aware of the 'unattractive feature' of this case that the defendants' argument depended upon their representations to the lender at the time of the transaction as to their intention not to reside in the property, having been knowingly untrue. There was no evidence the claimant knew of this and the claimant was entitled to rely on the positive representations made by the defendants in the documentation that they would not be occupying the property as a dwelling.

Discharged bankrupt still liable for debt incurred through dishonest actions

The High Court has recently considered the meaning of fraud in the exception under s 281(3) of the Insolvency Act 1986 (IA).

In JSC BM Bank v Kekhman and others, the claimant bank lent approximately US$150m to one of Kekhman's group of companies. That loan was guaranteed by other companies in the group. The loan defaulted and the guarantor companies went into administration or liquidation and so breached the guarantees. Kekhman was made bankrupt and was discharged from bankruptcy a year later.

The claimant successfully brought claims against Kekhman before the High Court under the Russian Civil Code for:

  • fraudulent misrepresentations made to the claimant by the borrower company's staff on the instruction of Kekhman as to the financial standing of the guarantor companies and as to the security offered (the deceit claims); and
  • unlawful means conspiracy in wrongfully dissipating assets and diverting business from the guarantor companies to other companies beneficially owned by him (the conspiracy claim) so as to reduce the recovery the claimant could make.

Kekhman defend the conspiracy claim (valued at in excess of US$18 million) on the basis that as a result of his bankruptcy he was released from all debts provable in the bankruptcy under s281 IA. Kekhman accepted that the word 'fraud' encompassed deceit and so there was no defence to the deceit claims. Kekhman argued that fraud meant only deceit and nothing else and that conspiracy and/or procuring breach of contract under the Russian Civil Code was not fraud or fraudulent breach of trust with the result he was discharged from liability in relation to the conspiracy claim.

The court disagreed. S281(3) IA provides an exception to the release under s 281 IA in that:

"Discharge does not release a bankrupt from any bankruptcy debt which he incurred in respect of, or forbearance in respect of which was secured by means of, any fraud or fraudulent breach of trust to which he was a party".

The court considered that the exception extended to any debts of the bankrupt resulting from his actual dishonesty, not just deceit in the strictest (unconscionable) sense. Kekhman had been a party to a conspiracy to defraud the claimant by the dissipation of assets. That conduct was dishonest so his liability to the claimant was tainted by actual dishonesty and fell within the rubric of fraud in s 281 (3) IA. His bankruptcy had not discharged him from his liability to the claimant.

Things to consider

As held in Templeton Insurance Ltd v Brunswick, the purpose of the qualification in s.281(3) IA is to prevent a person from using the process of bankruptcy or invoking his bankruptcy and discharge therefrom as a medium for becoming free from debts and liabilities resulting from his actual dishonesty. It is an anti-avoidance and preservative provision aimed at continuing the rights of a creditor who has been defrauded by the bankrupt.

Transaction post-dating presentation of winding up petition is invalid

In Barons Finance Ltd (in liquidation) v Barons Bridging Finance 1 Ltd and others, the court had to determine whether a deed of assignment (the Deed) assigning Barons Finance Ltd's (BFL's) book of loans to two other companies, Barons Bridging Finance 1 Ltd (BBF) and Reddy Corporation Ltd (Reddy), was valid. BFL, BBF and Reddy were all owned by Mr Gopee (G) who, along with his various companies, lent money to borrowers at high rates of interest. G and his companies were not properly licensed to lend money meaning most of the loans were invalid.

A winding-up petition was presented against BFL on 9 May 2012 and BFL was wound up on 19 September 2012. The Deed was dated 31 March 2012 i.e. before the petition was presented. However, the liquidator of BFL applied to set aside the Deed on the basis that:

  • The Deed was not entered into until on or around 17 September 2012;
  • As it post-dated the presentation of the winding-up petition it was void pursuant to s127 Insolvency Act 1986 (IA);
  • It was also void as a transaction at an undervalue pursuant to s238(4) IA. The consideration paid by BBF and Reddy was £76,500 whereas the book value was in excess of £612,000;
  • It was also void for being a transaction to defraud creditors pursuant to s423 IA.

The High Court held:

  • There was no contemporaneous documentation which established the existence of the Deed, or referred to it, before the presentation of the winding-up petition;
  • BFL had continued to try to enforce various loans subject to the Deed after 31 March 2012 which was inconsistent with the position that the loans had by then been assigned;
  • There had been no convincing explanation for the six month delay in registering the mortgage transfers between 31 March and 17 September 2012 or why it was registered only immediately before the winding-up order was made;
  • The Deed was referred to in two template letters dated 17 September 2012 giving notice of assignment to borrowers as having been entered into on that date. Again, no mention of 31 March 2012 date was made.

The court concluded that the Deed was made on or about 17 September 2012 as that was the only position consistent with the other documents created by BFL, BBF and Reddy who were all under G's control. It also concluded that the transaction was at an undervalue and was entered into for the purpose of putting assets beyond the reach of creditors.

The Deed would be set aside and any transfers of any charges since 31 March 2012 at HMLR from BFL to BBF, Reddy or G were void and BFL should be reinstated as charge holder.

Things to consider

It was apparent in this case that G had attempted to remove the only significant asset from BFL, to his own benefit, before BFL was wound up. The lack of contemporaneous evidence indicating that the Deed existed prior to 17 September 2012 was very telling.

In case you missed them:

Insolvency Litigation: recent cases and issues in March 2018

In our update this month we take a look at a recent Supreme Court decision which has made it clear a director will not have a limitation defence to a claim for breach of fiduciary duty involving a disposition of company property.

Our insolvency litigation experts take a look at the decision and tell you what you need to know.

When will litigation privilege protect internal investigations?

Communications between lawyers and clients (or between either of them and a third party) which are created for the dominant purpose of litigation are normally privileged and therefore protected from disclosure to an opponent in that litigation. This principle can afford a degree of protection to internal investigations conducted by lawyers.

That general rule is however subject to the conditions set out in the decision in the case of Three Rivers (No 6).

Here we look at the similarities and differences between two recent cases which considered those conditions in the context of regulatory investigations by the Health & Safety Executive and HMRC.

The Basics: Negotiating a contract? Misrepresentation or just exaggeration?

Many things can be said when a contract is being negotiated. Some things become terms of the contract, others will be recognised as mere sales talk or harmless exaggeration. However, some statements may be representations, statements of opinion and other statements which, while not terms of the agreement, will induce a party to enter into a contract.

Here we look at the basics of misrepresentation, how you can avoid making or relying on a misrepresentation and what rights you may have if you do rely on a false statement when entering into a contract.

The Basics: What should a dispute resolution clause say?

Dispute resolution clauses govern how parties will seek to resolve any disputes which arise out of their contract. Disputes are often the last thing on the mind of commercial parties at the outset of a business venture, and so these clauses do not receive the consideration they deserve, with the risk that if and when a dispute does arise, the parties are left with a process which is inflexible and unsuitable.

Here we look at different methods of dispute resolution, and considerations in drafting an appropriate dispute resolution clause.


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