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

Gross carelessness but no duty of care to lender

Despite gross carelessness on behalf of a solicitor when seeking discharge of a loan, the Supreme Court has found that it had not been reasonable for the lender to rely on what the solicitor said.

In the Scottish case of Steel & Anor v NRAM Ltd (formerly NRAM PLC), Steel, a solicitor, acted for a company which had obtained a loan from NRAM Ltd (the lender) secured on four commercial units. Unit 3 was sold. Steel acted for the company on releasing the unit from the security. The lender did not instruct solicitors. Unit 1 was then to be sold. The lender agreed to release unit 1 from the security in return for payment of £495,000 with the balance of the loan remaining secured on units 2 and 4. This was agreed with the company. On the eve of the sale, Steel sent an email to the lender which again had not instructed solicitors to act on its behalf. By mistake, Steel advised the lender that the whole of the loan was being repaid, that she had a settlement figure to do so and attached deeds of discharge for signature.

The lender made no attempt to check the accuracy of the email against the information it had on its system. The deeds of discharge were executed and returned to Steel and the transaction completed. £495,000 was remitted to the lender which did not question the sum received. The deeds of discharge were registered at the Land Registry with the lender's security on the remaining two units thereby being discharged.

The error was only identified when the company went into liquidation some years later by which time units 2 and 4 had been sold. The lender was aware of these sales at the time as it had provided letters of non-crystallisation of a floating charge it also held. It did not raise any query about its security over the units at that time. The lender sustained a loss of almost £370,000 which it sought to recover from Steel and her firm.

The Supreme Court (on appeal from the Scottish appeal court) reinstated the decision at first instance. It held that Steel was not liable to the lender. In the absence of a contract between the parties - as here - a duty of care in making representations arises only if the representor assumes responsibility for the accuracy of the statement towards the representee. The representee must establish that it was reasonable for it to have relied on the representation and that the representor should have reasonably foreseen that it would do so.

The court found that although Steel's misrepresentation in the email had been grossly careless, it was not reasonable for the lender to have relied on the representation without checking its accuracy. Although Steel knew the lender did not have solicitors acting, she had generally expected it to check the accuracy of her requests before complying with them. A commercial lender about to implement an agreement with its borrower referable to its security does not act reasonably if it proceeds without checking that the terms put forward on behalf of the borrower are correct.

Things to consider

It is difficult in situations like the above for a claim to succeed against a solicitor because the reliance on the solicitor in such situations is presumptively inappropriate. Reasonableness is a key factor and the factual and commercial context will be relevant in determining whether, in a particular case, reliance on the representation was reasonable (by the third party) and reasonably foreseeable (by the solicitor). Where there has been no attempt to check the accuracy of the statement - which could be easily determined from the party's own records - it will be hard to prove that that reliance was reasonable.

Clarification of 'consent not to be unreasonably withheld'

Clauses in contracts that provide that where the consent of one party is required it should not be unreasonably withheld are common. The court has recently provided some clarification on what this means.

In Crowther and another v Arbuthnot Latham & Co Ltd, the relevant clause was contained in a facility agreement between the claimant borrowers and defendant bank. It provided that "if, with the prior approval of the bank (such approval not to be unreasonably withheld or delayed) the [claimants'] property is sold, [the claimants] shall immediately repay to the bank the net proceeds of sale."

The claimants owed €5.9 million to the defendant. They sought permission from the defendant to sell the property for over €4 million which was in line with valuations obtained. The defendant refused to consent to the sale in the absence of proposals from the claimants for securing/repaying the remaining indebtedness. The sale was lost and the claimants sought declarations that the defendant's refusal to consent to the sale was unreasonable and in breach of the facility agreement and that the claimants could sell the property at a fair market value without the provision of additional security.

The High Court held the defendant was in breach. The test to be applied was one of objective reasonableness, not whether the decision was irrational or seeking to balance commercial interests. The background and purpose of the provision had to be considered. When the security was first agreed, the defendant knew the property did not provide full security and that there would be an unsecured shortfall. Reasonableness in this instance meant the sale should be at arm's length and at market value. The defendant's desire for further security was collateral to the purpose of the provision in issue and made its refusal to consent unreasonable. The court made the declarations sought.

Things to consider

The defendant had sought to place itself in a better position than it was in at the time the security was agreed and had acted unreasonably in doing so.

The test for restraining the presentation of a winding-up petition

The court has recently reviewed case law and set out a number of propositions to be considered where a debtor company with a cross-claim applies for an injunction to prevent the presentation of a winding-up petition.

In LDX International Group LLP v Misra Ventures Ltd, LDX International Group LLP (LDX) applied for an injunction to stop Misra Ventures Ltd (Misra) presenting, advertising or otherwise publicising a winding-up petition. LDX did not contest the debt - or the statutory demand based on the debt - but argued it had a cross-claim against Misra which exceeded the value of the debt. It argued that presenting and proceeding with the winding-up petition was an abuse of process.

The parties agreed that to succeed, LDX needed to show that there was a genuine and serious cross-claim that exceeded the value of the debt. They differed however on how this was to be proved. Misra argued that bare and vague assertions unsupported by evidence were not sufficient to show evidence of a serious and genuine cross-claim and for an injunction to be granted. A detailed assessment of the strength of the cross-claim was required. LDX argued that the threshold test was relatively low being 'more than merely arguable' with some substance to it.

The High Court set out a number of uncontroversial propositions that can be drawn from the relevant case law:

  • In the absence of special circumstances, it will be appropriate to issue an injunction to prevent the presentation and advertisement of a winding-up order where there is a genuine and serious cross-claim in an amount exceeding the petitioner's debt. The cross-claim must be genuine and serious or, in other words, one of substance;
  • If there is a genuine and serious cross-claim, the company should be allowed to establish this in ordinary civil proceedings. The Companies Court (now the Insolvency and Companies List in the Business and Property Court) is not the right court in which to engage in a detailed examination of claims and counterclaims;
  • The debtor must demonstrate, with evidence, that the cross-claim is genuine and serious. Bare assertions will not suffice: there is a minimum evidential threshold;
  • But it is not practical or appropriate to conduct a long and elaborate hearing examining each sides' case in minute detail - a lengthy hearing would result in a wasteful duplication of court time;
  • If there is any doubt about the claim or the cross-claim, the court should proceed cautiously. A winding-up order is a draconian measure which if wrongly made gives the company little commercial prospect of reviving itself;
  • Petitioning creditors must take a realistic view of whether the debtor is likely to establish a genuine and substantial dispute; and
  • Delay in raising (or litigating) a cross-claim does not prevent a company from subsequently raising it, but the court can take any delay into account in assessing whether the cross-claim is genuine and serious.

The court also held that if a petition is being sought to secure some collateral purpose - such as to stifle related proceedings - it would be an abuse of process and so liable to be restrained.

The court held that LDX did not have to prove that its cross-claim would succeed. On the evidence before it, the court considered that the cross-claim, as set out in the letter of claim sent to Misra, was of substance, was genuine and serious and for an amount in excess of the debt owed to Misra. LDX should be given an opportunity to particularise and file its claim.

Things to consider

The courts will proceed cautiously when dealing with such applications given the draconian result should a winding-up petition be presented. The court in this case also proceeded on the basis that there was no difference in the principles to be applied whether the injunction was to restrain the presentation or the advertising or other publicising of a winding-up petition.

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