Gowling WLG's finance litigation experts consider some recent cases and issues affecting the lending industry.
Creditor not obliged to take steps in foreign proceedings to preserve security
We first reported on the decision in General Mediterranean Holding SA.SPF v (1) Qucomhaps Holdings Ltd, (2) Harkin, (3) Awni Abu-Taha in July 2017. In brief, the claimant advanced sums to the first defendant secured by a pledge of shares and a charge over a Czech company (S) and personal guarantees from the second defendant. The claimant issued proceedings to recover the loans under the guarantees. By this time, S had gone into administration and the defendants argued that the claimant's failure to file a claim as a secured creditor in S's administration had enabled S's assets to be released to alleged fraudsters rendering the security worthless. The defendants argued that the claimant owed them an equitable obligation to take reasonable steps to protect its rights, and the rights of the defendants, in relation to the security and its failure to do so thereby released the defendants from their liability to the claimant. The claimant successfully applied to strike out the defence and counterclaim. The defendants appealed.
The Court of Appeal refused the appeal. It held that whilst a creditor who had security available for the payment and satisfaction of the debt had to do whatever was necessary to make that security properly available, there could be no question of a creditor having an absolute duty to ensure that a surety could have recourse to that security. A creditor could not be obliged to incur any sizeable expenditure or to run any significant risk to preserve or maintain a security. Further, it was doubtful whether a creditor could ever have an equitable duty to the principal debtor, as opposed to a surety, to take steps to preserve or maintain a security granted by a third party. The defendants had no real prospects of defending the claim.
Things to consider
It is established law that a creditor's release of other security or guarantees, or failure to perfect security, may discharge a guarantor, at least to some degree. It is for this reason that a properly drafted guarantee should provide protective wording along the lines that that guarantor's liability will not be reduced, discharged or otherwise adversely affected by any act or omission of the creditor in taking up, perfecting or enforcing any security.
Income Payment Order survives later bankruptcy order
The High Court has recently held that a discharged bankrupt's obligations under an Income Payment Order (IPO) to make future payments survived a later bankruptcy order.
In Azuonye v Kent (trustee in bankruptcy of Azuonye), Azuonye was made bankrupt in April 2015. An application for an IPO was made under s 310 of the Insolvency Act 1986 (the IA) immediately before Azuonye's automatic discharge from bankruptcy in April 2016 and was granted in November 2016. Azuonye was made bankrupt again (by his own petition) in December 2017. Azuonye claimed that the second bankruptcy order automatically discharged his obligations under the IPO.
The High Court held that it was clear from s 310 of the IA that an IPO may continue in place after the bankruptcy is discharged and that the court has continued power to review it. S 335(2) of the IA indicated, or at least assumed, that amounts under an IPO continue to be payable where an undischarged bankrupt is made bankrupt again. However, s 335(2) makes no reference to where the bankrupt has been discharged prior to the subsequent bankruptcy. The court held that the IPO is a statutory mechanism that Parliament could not have intended would be affected by s 285(3) of the IA as it would be a strange result if a discharged bankrupt, but not an undischarged bankrupt, could avoid an IPO by making himself bankrupt again. Appropriate protection was provided with the court's power to vary the IPO. Further, the fact that future payments under an IPO were inherently uncertain (due to the court's power to vary them), meant they were not provable debts under s 285(3) of the IA in the second bankruptcy.
Things to consider
The decision confirms that bankrupts cannot escape their obligations under an IPO by making themselves (or becoming) bankrupt for a second or subsequent time. The appropriate manner in which to address the relationship between a first and second bankruptcy is to vary the IPO made in the first bankruptcy.
Mortgagee's duty to get best price reasonably obtainable for security
The High Court has recently provided a summary of the relevant legal principles applicable to the relationship between a mortgagee and mortgagor where the mortgagee sells mortgaged assets.
In Close Brothers Ltd v AIS (Marine) 2 Ltd (in liquidation) and Chandler, the first defendant ship owner (AIS) obtained a loan of EUR 2.247 million from the claimant bank secured against its vessel. Chandler acted as guarantor. AIS fell into arrears and the claimant repossessed and sold the vessel for £1.7 million through an independent broker. The claimant brought proceedings to recover the shortfall from the defendants. Chandler defended the proceedings on the basis that no further money was owed to the claimant as it had sold the vessel at an undervalue in breach of its duty to obtain the best price reasonably obtainable.
The High Court summarised the relevant legal principles as follows:
- The mortgagee of a ship owed the same duty of care in relation to the sale as any other mortgagee owes;
- The mortgagee owes a duty in equity to take reasonable care to obtain the best price reasonably obtainable at the time;
- The mortgagee is liable to the mortgagor if he fails to act with reasonable care to obtain a proper price. The timing and manner of sale is a matter for the mortgagee, but the property must be fairly and properly exposed to the market, absent cases of real urgency;
- A mortgagee will not be in default unless he is 'plainly on the wrong side of the line'. A true market value can have an acceptable margin of error;
- The mortgagee must behave as a reasonable man would behave in realisation of his own property so that the mortgagor may receive credit for the fair value of the property sold;
- If the mortgagee breaches his duty, the remedy is not common law damages, but an order that the mortgagee account to the mortgagor, not for what he actually received, but for what he should have received;
- The mortgagee must act fairly to the mortgagor. He can protect his own interests but he is not entitled to conduct himself in a way which unfairly prejudices the mortgagor. He must take reasonable care to maximise his return from the property;
- The mortgagee owes the same duty to a guarantor;
- The mortgagee's duty, to take care to sell for the best price reasonably obtainable, is not delegable. He does not perform his duty merely by appointing a reputable agent to conduct the sale;
- The mortgagee is not entitled to act in a way which unfairly prejudices the mortgagor by selling hastily at a knock-down price sufficient to pay off the debt;
- A sale at just above the sum required to discharge the mortgage may be looked at carefully by the court, although that may ultimately be the proper price or true market value;
- The mortgagee cannot sell to itself, either alone or with others, or to a trustee for himself nor to anyone employed by him to conduct the sale unless the sale is ordered by the court and he has obtained permission to bid; and
- Where the mortgagee sells to a connected person, the burden of proof is reversed and the mortgagee must prove that he took reasonable care to obtain the best price;
The court held that only if the vessel was sold at an undervalue would it then be relevant to consider whether that was as a result of the claimant having acted improperly. The burden of proof was on the defendant.
The court noted that the market for vessels such as the one in question could fluctuate rapidly and significantly and that it was rare for identical vessels to be exposed to the market at the same time. The court preferred the claimant's expert's valuation to the effect that the sale price, albeit perhaps on the low side, was in the appropriate bracket for the vessel when the sale took place and that it was unlikely that a higher price could have been achieved because of the state of the market at the relevant time. It also held that the claimant's ship broker had sufficiently exposed the vessel to the market albeit it had not been publically advertised for sale. The court did not therefore have to consider whether the claimant was in breach of any duty to achieve the best reasonable price.
Things to consider
The case is a useful reminder of the general principles relevant to the sale of secured assets by a mortgagee in possession. It is also a reminder that valuation is not a precise science, particularly where the assets are unusual and the market is restricted or depressed and evidence of directly comparable sales is scarce.
Statutory demand upheld as no genuine triable issue
In Wagner v White, White advanced interest free and unsecured loans to Wagner's company Powa Technologies PLC (Powa) under a Convertible Loan Facility Agreement (the Agreement). Wagner entered into a personal guarantee in relation to those loans. Under the Agreement, the loan could be called in upon specified events of default occurring, including Powa going into administration. Under the guarantee, Wagner agreed to pay on demand if Powa defaulted. Powa was subsequently placed into administration by its main funder (Wellington) and White called in the loan and the guarantee.
Just before the administration occurred, White was appointed a director of Powa. Some of Powa's assets were subsequently acquired by a new company (owned by White and Wellington) from the administrators.
Wagner did not pay under the guarantee and White served a statutory demand.
Wagner sought to set aside the statutory demand on the basis that White had caused Powa's default by persuading Wellington to appoint administrators whereas Wellington's preferred route had been to restructure Powa. Wagner alleged that White had acted in bad faith and to Wagner's prejudice and in breach of fiduciary duty.
At first instance the court refused to set the statutory demand aside finding there was no genuine triable issue as required by rule 6.5(4) of the Insolvency Rules 1986.
The High Court dismissed Wagner's appeal. It considered in some detail the contemporaneous documents and found there was no evidence to support the idea that Wellington was keen on restructuring POWA, rather than putting it into administration. There was no genuine triable issue that White caused Powa to go into administration by persuading Wellington that administration was a better option than restructuring. Whatever White's motivations and actions, they did not change the risk that Wagner had agreed to run when entering into the guarantee and so did not prejudice Wagner in an unfair way.
The court further held that even if White acted in breach of fiduciary duty (to act in the best interests of Powa and to avoid conflicts of interest) by advocating administration with a view to benefiting personally, there was no genuine triable issue that that caused Powa any loss because White did not cause, or materially contribute to, Wellington's decision to put Powa into administration. Powa did not have a cross-claim against White for either equitable compensation for breach of fiduciary duty or for damages for the tort of unlawful means conspiracy. The court therefore considered it unnecessary to determine whether there was any breach of fiduciary duty.
Things to consider
The case shows that the courts are willing to consider contemporaneous evidence in some detail, but without conducting an impermissible mini-trial on the documents, to determine whether there is a genuine triable issue, resulting in the statutory demand being set aside, as opposed to a merely arguable or fanciful claim.