Banking update: report and review on recent cases

Proposed general pre-action protocol

In addition to the proposed mortgage arrears pre-action protocol for residential possession claims which we referred to in the last Banking Update, the Civil Justice Council has also issued a consultation paper on a proposed general pre-action protocol.  It is proposed that this protocol will apply to all cases that are not currently covered by an existing pre-action protocol.

The proposed protocol largely codifies and clarifies the existing requirements. The following points are of particular interest:

• There will be continued emphasis on the need to consider Alternative Dispute Resolution (ADR) pre-proceedings. The court may require evidence that the parties have considered some form of ADR.
• If the claimant is a business claiming a sum of money from a defendant who is an individual, the claimant must also:
  • Provide details of how the money can be paid (i.e. method and address to which it should be sent)
  • State that the defendant can contact the claimant to discuss the possibility of repaying the money over a period of time, and provide the relevant contact details and
  • Inform the defendant that free independent advice and assistance can be obtained from various organisations such as National Debtline, Citizens Advice etc.

  This is the only additional substantive requirement in the proposed new protocol.

• Where limitation is an issue, if the relevant law applicable to the dispute permits, the parties should seek to agree in writing a reasonable fixed period of time in which to comply with the protocol. As part of the agreement the defendant will need to agree not to raise a time bar defence if the limitation period expires during the protocol period and the claimant subsequently issues proceedings. Where proceedings are issued prior to the protocol being complied with, it is suggested that, as is currently the position, the parties should apply to court for a stay of the proceedings to enable the parties to follow the protocol.

Things to consider

Those involved in debt recovery work will need to bear the proposed new requirements in mind. So long as this information has already been provided as part of the creditor's debt collection routine, the protocol does not require the information to be provided again as part of the letter before claim. Additionally, great care will need to be taken in agreeing any extension of the limitation period or standstill agreement. Claimants must leave themselves sufficient time to issue proceedings within any extended limitation period.

The consultation period will end on 19 May 2008. A full copy of the consultation paper can be obtained from the Civil Justice Council website on http://www.civiljusticecouncil.gov.uk/.

Traceability of payments

Where a payment is made to a company for the specific purpose of settling a third party debt but the company subsequently goes into liquidation without making that payment, the sum involved does not form part of the company's freely disposable assets and can be traced by the payer in full.

This was the finding of the court in Cooper v PRG Powerhouse Ltd (In creditors' voluntary liquidation) and others. The payer has to show that the arrangement pursuant to which payment was made defined the purpose for which it was made so that it was understood by the recipient that the money was not at its free disposal. Therefore, a 'purpose trust' could exist despite the fact that the money might get mingled with the recipient's other funds and there might not have been an express direction by the payer to the recipient that the money paid over was only to be used for the specific event. So long as it could be implied into an arrangement that neither the payer nor recipient regarded the sum paid as part of the recipient's assets at its free disposal, such a purpose trust could be established. Where that is the case, the sum paid over is repayable if it is traceable into the assets which pass to the administrators

Things to consider

Payment into a specifically designated and separate account along with express directions to the recipient as to the specific purpose of the payment and what is to be done with it, would help defeat any argument that the sum so paid should be available towards an insolvent company's general creditors.

Receivers and foreign debts

There is no rule that the court can never make a receivership order by way of equitable execution in relation to foreign debts or in relation to future income from a defined foreign asset.

This was the finding in Masri v Consolidated Contractors International Company SAL and another, in which the judgment obtained against the defendant Lebanese companies was not satisfied. The court appointed a receiver over the second defendant's interest in revenues from an oilfield concession in the Yemen. It further granted a freezing order restraining the second defendant from disposing of its interest in the concession, or from selling oil from the concession otherwise than in the ordinary course of its business.

The Court of Appeal held that there was no rule that the court could never make such a receivership order in relation to foreign debts and that the English courts had long recognised the legitimacy of appointments by the court of receivers over foreign property. The order had no proprietary effect and worked against the company personally. The orders were not proceedings relating to enforcement which would have vested exclusive jurisdiction in the courts of the Member State in which the judgment had been or was to be enforced

Things to consider

Where a foreign judgment debtor is believed to have assets, apply for an order that an affidavit of assets be sworn so their location can be ascertained and, if needs be, similar steps as in the above case can be taken.

Unfair relationship

The test in credit agreements of "unfair relationship" under the Consumer Credit Act 2006, which replaces the previous extortionate credit bargain (ECB) provisions, now applies to all consumer credit agreements and not simply those entered into since April 2007. The courts have the power to re-open credit agreements, and change their terms, if a credit agreement creates an unfair relationship between the creditor and debtor. An unfair relationship can arise where the agreement is unfair to the debtor because of:

• Any of the terms of the agreement
• The way the creditor has exercised or enforced his rights, or
• Anything done or not done before, during or after the making of the agreement.

This applies not only to the credit agreement itself, but also to a related agreement which includes linked transactions under the Act.

Things to consider

The key issue is that the new test makes it clear that matters arising during the course of the agreement can be reviewed to determine unfairness. Under the ECB test, it was only factors relevant at the date of the agreement. Consequently this might cause some older agreements to be vulnerable especially if the interest rate increased but then never reduced.

Uniform Rules for Collection

The Uniform Rules for Collection 522 create a contractual relationship between the remitting and collecting banks, not the payee or customer of the remitting bank and the collecting bank.

This was confirmed in Grosvenor Casinos Ltd v National Bank of Abu Dhabi, in which the claimant had an unsatisfied judgment in relation to two dishonoured cheques. The claimant sued the debtor's bank, the defendant, for breach of contract alleged to have been made directly between the two parties by virtue of the relevant cheque collection being undertaken pursuant to the Uniform Rules for Collection 522.

The court held that, under the common law, there was no privity of contract between the claimant and defendant merely because the claimant knew that its bank would delegate collection of the cheques to another collecting bank (the defendant). The Uniform Rules were not intended to create a contractual relationship between parties who would not otherwise be in such a relationship. The relationship in a collection process was between the remitting bank and the collecting bank. There was therefore no breach of contract.

Consequently, there is no quick fix to get your money back in the event of a bounced cheque.