Banking update: report and review on recent cases

No costs order against receivers

Where a receiver of an insolvent company brings an unsuccessful claim, a personal costs order will not be made against the receiver unless there are exceptional circumstances making it just to do so.

This was the finding in the Court of Appeal in Mills v Birchall and Gilbertson. The receivers of a company appointed by a bank unsuccessfully brought a claim against Mills. The company was unable to pay Mill's legal costs and the receivers refused to do so even though they had realised funds more than sufficient to pay them as an expense of the receivership. Mills sought to recover the costs by way of a third party costs order from the receivers who he claimed had brought the claim for the benefit of the bank.

The Court of Appeal confirmed that a third party costs order could be made against a receiver where litigation is conducted in the name of the insolvent company for the benefit of a secured creditor. The court might exercise its discretion to make such an order especially where security for costs was not available or was inadequate. No impropriety or unreasonableness was required on the part of the receiver although some additional element was required to take the case out of the ordinary run of cases. The current case was an entirely normal case though of receivers seeking to enforce the company's contractual rights. The proceedings were run on behalf of the company without any direction or interference from the bank. The funding of the claim was from realisations in the receivership, not from the defendants and neither did the defendants have any financial interest in the outcome of the claim. Neither the receivers nor the bank were the real party and there was nothing to justify making such an order.

Things to consider

The courts have jurisdiction and are increasingly willing to make costs orders against third parties where the third party has funded, controlled and would benefit from the fruits of the litigation. Where there is an element of funding, control and benefit, receivers and banks should beware.

Winning and losing on costs under Part 36?

The courts will look at all the circumstances of a case to determine whether a claimant's judgment is truly "more advantageous" than a defendant's Part 36 offer to settle when exercising its discretion on the award of costs.

Before the wording of Part 36 changed in April 2007, if a claimant failed to do better than a defendant's Part 36 payment in, it would have to pay the defendant's costs from the time the offer expired, unless the court thought it unjust to make such an order. It was the generally accepted practice that obtaining a judgment for £1 more than a defendant's payment into court meant that the claimant had done better than the payment in and did not have to pay the defendant's costs: the defendant would pay the claimant's costs.

Since April 2007, the above adverse costs consequences for a claimant come into effect where a claimant fails to obtain a judgment "more advantageous" than a defendant's Part 36 offer. The recent decision in Carver v BAA Plc makes it clear that when considering whether the judgment is "more advantageous" or not, the courts will take into account non-monetary considerations. The claimant's judgment in Carver exceeded the defendant's Part 36 payment in by only £51. The Court of Appeal held that the £51 gain was more than set off by the irrecoverable costs incurred in continuing to contest the case, the stress of the litigation and of giving evidence. The lack of any positive response to the defendant's reasonable offers or any counter-proposals by the claimant to try and settle the claim were also factors taken into account by the Court in deciding that the judgment was not, overall, "more advantageous" than the defendant's payment into court. It was just to order the claimant to pay the defendant's costs from the time the offer expired.

Things to consider

Although a low value personal injury case, this decision will be referred to in any case on the issue of costs where the judgment and the offer are at all close. Costs are always in the discretion of the court. The term "more advantageous" permits a wide ranging review of all the facts and circumstances of the case in deciding whether the judgment was worth the fight. The court will, where it considers it appropriate, penalise a party in costs for prolonging litigation for very little gain. All reasonable offers must be carefully considered and parties should consider engaging in settlement negotiations or be prepared to be penalised in costs at the end of the day.

Repossession following fraudulent transaction

Although a fraudulent sale by a mortgagee in possession to a third party will be set aside by a court, it will not prevent the ultimate possession and sale by the mortgagee where the borrower remains in default.

In Lexi Holdings v Pooni and another, Pooni provided a personal guarantee in relation to a loan by Lexi to a company, of which he was a director, to acquire a property. Lexi appointed receivers over the company following default on the loan. Pooni was made bankrupt and his company was subsequently struck off the register of companies and dissolved. Lexi then sought to sell the property to a third party. That transaction was subsequently set aside following Lexi's own administration as being a fraudulent transaction at an undervalue. The struck off company was then restored to the register and challenged Lexi's registration as proprietor of the property. Lexi issued possession proceedings.

The court found that once the fraudulent sale by Lexi to the third party was set aside, the restored company was entitled to be re-registered as owner of the property. Lexi then had to be re-registered as the legal mortgagee and as the restored company was still in default in repaying the loan, Lexi, by its administrators, was entitled to possession and then to sell the property.

Things to consider

Especially where fraud is involved, the courts are willing to unravel transactions.

Business model v business loan

A bank was entitled to demand immediate repayment of loans and to appoint receivers following default by borrowers on various terms of the loan agreements.

In Barclays Bank Plc v Gatpaham Properties Ltd and others, the loans to the defendants were secured against residential properties let on assured short hold tenancies. The loan agreements provided that the bank could call for immediate repayment in certain circumstances, including a breach of any term or condition of any loan or facility provided by the bank. The properties were managed by the defendants on an aggregated basis rather than as properties let to individual tenants. Following default by one defendant in failing to make a payment and another for failing to provide information required under the agreements, the bank called for immediate repayment of all the loans. The defendants argued that the bank was aware of its aggregated business model that allowed for income from different properties in the combined portfolio to be used to cover mortgage payments due on an individual property and so, in effect, there had been no default.

The court held that there was no evidence to show the bank was aware that the defendants were using an aggregated business model. That model was, in any event, inconsistent with the business loan facilities extended by the bank and commercially unattractive to it. There had been a number of defaults on the loans entitling the bank to demand repayment and appoint receivers.

Things to consider

Always go back to the original facility documents to check the enforcement and default terms.

Bank agreed not to repossess

Where a bank allowed a period of time to a borrower to bring his overdraft back within an agreed limit, it was prevented from seeking a possession order over the property against which the overdraft was secured within that period.

In Royal Bank of Scotland v Luwum, the borrower alleged that following a formal demand for repayment of his overdraft account, he had had a conversation with a bank employee to the effect that if he brought his account within the overdraft limit within a three month period the bank would not bring possession proceedings within that period but would review his account following the end of the period. The borrower managed to bring his account within the overdraft limit but the bank issued proceedings before the expiration of the period and obtained a possession order. The defendant appealed.

The Court of Appeal found that the bank had undertaken not to commence enforcement proceedings within the three months and the defendant had altered his position accordingly by borrowing money from friends and family in order to reduce the overdraft. The bank was not therefore entitled to commence possession proceedings within the three month period and the order had to be set aside.

Things to consider

As with all conversations with borrowers, careful notes should be kept as to precisely what has been said and agreed in case it should be called into question, as it subsequently was here. If an agreement not to seek possession for a period of time has been agreed, then possession should not be sought during that period in order to allow the borrower time to meet his part of the agreement.