Banking update: report and review on recent cases

Personal liability

An agreement signed by a director on behalf of his company containing a promise by the company to pay for goods to be ordered in the future, rendered the director personally liable where he knew at the time of signing that the company was insolvent and had no prospects of becoming solvent.

The Court of Appeal held in Contex Drouzhba Ltd v Wiseman and Anor that the director had impliedly represented that the company could meet its obligations to pay for goods. He knew that it could not and so the representation was fraudulent. As a result the director was held liable for damages for deceit.

The fact that the defendant signed as a director of the company, rather than in his personal capacity, provided no defence under s6 Statute of Frauds Act 1828. That Act is concerned with proving the existence of representations by evidence, not differentiating between capacities in which a person put his name to a document. The defendant was liable not because he was a director but because he committed a fraud.

Things to consider

Creditors may therefore have a direct remedy against a director in deceit enabling all the recovery to be retained. This contrasts with a claim under ss 213 and 214 of the Insolvency Act where any recovery would be distributed on a pari passu basis. This is something to bear in mind if the director has assets which a creditor can enforce against.

Matrimonial clean break not an undervalue

The court will not always set aside a property transfer order in matrimonial proceedings where the party transferring the property, as part of a clean break order, becomes bankrupt shortly afterwards, and there are allegations of lack of consideration or transfer at an undervalue.

In Hill and Bangham v Haines, the Court of Appeal held that the ability of one spouse to apply to court for an order under the Matrimonial Causes Act 1973 was a right conferred and recognised by law. It had value in that its exercise might lead to court orders entitling one spouse to property or money, from or at the expense of the other, and the value of that right was the value of the property or the money.

A property adjustment order was therefore made for consideration. Such an order could still be set aside under s339 Insolvency Act despite the court order if there was evidence of collusion between the parties in order to prejudice the bankrupt's creditors, or there had been fraud or mistakes or misrepresentations. However, it would be contrary to the objectives of the 1973 Act if every ancillary relief order was automatically subject to nullification by a trustee in bankruptcy where one party had become bankrupt after the order was made.

Things to consider

Trustees in bankruptcy will now have an uphill struggle in setting aside such orders unless there is evidence of fraud, mistake, misrepresentation or collusion.

Bank breaches freezing order

In R (on the application of Revenue & Customs Prosecution Office) v R and Lloyds Bank Plc, the bank and R were found in contempt of court. This was when they agreed to transfer money out of an account identified in a freezing order into another, albeit interest bearing, account with the bank, without informing or obtaining the consent of the court or the applicant.

The court held that freezing orders identify the type of transactions which are to be restrained and the expression "dealing with" which is included in such orders is designed to catch any other activity in relation to frozen assets which has not otherwise been expressly identified.

There had manifestly been a 'dealing with' here. The particular bank account had been specified in the order for a purpose and the bank's decision to change that account without consent of the court or applicant had been a deliberate act and a clear breach of the order. As such the bank took upon itself the risk of interfering with justice and was in contempt of court although there had been no loss suffered. Since the applicant had in fact profited in this instance, as there was more money in the account against which to enforce a confiscation order, the court declined to make any order for costs against the bank.

Things to consider

A stark warning for banks - freezing orders are meant to be complied with to the letter. If there is to be any variation of the order, the consent of the applicant and /or the court should be obtained beforehand. Failure to do so can lead to contempt of court and if justice is interfered with by, for example, the restrained assets then being paid away, the consequences can be financially severe.

Joint liability and promissory estoppel

An agreement to pay off part of a judgment debt owed jointly with others will not of itself amount to consideration sufficient to prevent a creditor going against a debtor for the unpaid balance of the judgment.

The Court of Appeal held in Collier v P & M J Wright (Holdings) Ltd that an alleged agreement with one of three judgment debtors to pay off one third of the debt was merely an agreement to accept a lesser sum from the debtor than was due. That, of itself, was not a binding agreement in law as it had no consideration in terms of some detriment to the debtor or benefit to the creditor, to support it. An agreement to pay a debtor's proportionate share of an existing debt is not sufficient to constitute consideration.

However, on the issue of promissory estoppel, the court held that there was at least a triable issue that there was an agreement with the company that they would accept payment of the one third share of the judgment, that the sum had been paid and that it would be inequitable for the company to thereafter insist on payment of the balance. This was sufficient to set aside the statutory demand served in relation to the balance of the judgment debt.

Things to consider

It is therefore important to be very clear what is said and what the terms of payment are when less than the full debt is being accepted from co-debtors.