Banking Update: report and review on recent cases

Settlement by cashing cheque

Paying in a cheque is strong evidence of acceptance by conduct of an offer contained in a letter enclosing the cheque.

Cantor Index Ltd v Thomson is a recent reminder of this. Thomson had an account with Cantor which Cantor demanded payment of. An offer and counter offer were made with Thomson making a final counter-counter offer and his solicitors sending a letter and cheque to Cantor, which Cantor banked. A dispute arose as to whether settlement had been agreed and on what terms. The court confirmed that the banking of the cheque was, objectively, strong evidence of acceptance by conduct of the offer contained in the covering letter and as at the date that it was banked, it was expected by both parties to be the end of the matter. A settlement had been achieved on the terms of the covering letter.

Things to consider

Cashing a cheque is always strong evidence of acceptance, especially if it is not accompanied by immediate rejection of the offer. Retention of a cheque without rejection is also strong evidence of acceptance, depending on the length of the delay in notification of rejection. Rejection of an offer should be clear and quick if the recipient wishes to avoid any argument that settlement has been reached.

Just desserts

The court will not assist a former bankrupt to enforce his interests under an unlawful trust where the purpose of the trust initially had been to deprive the trustee in bankruptcy of the bankrupt's interest.

So confirmed the court in Barrett v Barrett where the court struck out a former bankrupt's claim against his brother in respect of the proceeds of sale of a property allegedly held by the brother on trust for the bankrupt. The property had been the bankrupt's but had been bought from the trustee by the brother who became the sole registered proprietor. The bankrupt alleged there had been an express agreement between the brothers that he would pay the mortgage and all other expenses of the property. In return, the property would be held on trust for him so that he could regain ownership and avoid it being repossessed by the trustee. The brother denied the agreement.

The court held that the alleged agreement's purpose and effect was to evade the rules of bankruptcy and to deprive and defraud the trustee of the opportunity to acquire the bankrupt's interest in the property. This was an illegal purpose and so rendered any interest that the bankrupt might have had in the property unenforceable. The fact that he paid mortgage instalments didn't help him either as to establish that such payments were intended to confer a beneficial interest on him, there had to be some agreement to that effect. The only agreement here had an unlawful purpose and so was unenforceable.

Things to consider

The courts will not allow bankrupts, or others, to have their cake and eat it, if it can be clearly shown that the purpose of an agreement was to place assets beyond the reach of a trustee or other creditors.

Guarantee wording creates primary obligation to pay

The wording of a guarantee is all important in determining whether a borrower's obligations under the guarantee are independent primary obligations.

In IIG Capital LLC v Van der Merwe & anor, IIG entered into a loan agreement with a company of which the defendants were directors. The directors executed deeds of guarantee in favour of IIG who subsequently called in the loan. The directors sought to rely on defences to the claim that were open to their company. IIG argued that on the true wording of the guarantees, the directors were obliged to pay as principle obligors monies certified as due. That being the case, they were not entitled to rely on defences available to guarantors whose liability was secondary.

The Court of Appeal held that there was a strong presumption against guarantees being demand bonds or guarantees outside a banking context and the documents had to be looked at as a whole. Here, the wording used in the guarantee, such as, "on demand," "principal obligor", "unconditionally" and the inclusion of a 'conclusive evidence as to the amount of the debt' clause, put the matter beyond doubt. The directors had bound themselves to pay on demand as primary obligors. IIG was entitled to summary judgment. The defendants could always seek an indemnity from the company.

Things to consider

The guarantee wording is crucial to affix guarantors with primary obligations and to deprive them of defences that could otherwise have been raised by their company.

Proper notice is essential

Notice must be given as per the terms of the agreement if a creditor is not to be precluded from demanding repayment due under a facility arrangement.

Under an intercreditor deed, a senior creditor was assigned priority over the debt of a junior creditor. The junior creditor undertook not to accelerate repayment of the debt before the senior creditor had been repaid unless it had first given 45 days notice of its intention to take such action. The agreement provided for the 'first step' of the junior creditor's action to accelerate repayment having to be taken during the period January to March in any year. In March, notice was given by the junior creditor that following default, if payment was not made within 46 days of the notice it would seek to take action to accelerate repayment. The issue for the court was whether the giving of the notice was the 'first step' in the action to accelerate so entitling the junior creditor to demand repayment, or not.

The court found it was not. The giving of the notice was merely a preliminary step before action to accelerate repayment could be taken. It was not a first step in the acceleration process. That being the case, the time period for taking the first step in any acceleration action had been missed. The notice should have been given at least 45 days before the first step in the acceleration process which itself could only occur during January to March. Even if the service of the notice was the 'first step', the junior creditor had still failed to comply with the requirements of the agreement, as it had failed to give 45 days prior notice of that 'first step'. The junior creditor could not enforce its debt at this stage.

Things to consider

The agreement here was quite specific as to what had to occur and when to bring the enforcement provisions into play. When that is the case, failure to comply with such requirements will preclude a party from enforcing its debt.

Mortgagee's interests prevail

The interests of a mortgagee in an early sale prevails over those of a mortgagor who may desire a longer period of marketing resulting in a potentially larger return.

In Bell v Long and others, the defendant administrative receivers of a company obtained advice from a selling agent as to the price, marketing and disposal of four commercial properties owned by the company. A number of offers for the individual properties were received quite quickly but were rejected as too low. A bid for the entire portfolio was then received. The marketing agents recommended after a very short period of marketing that it would be advantageous to secure an early sale of the entire portfolio. Thereafter, the marketing activities were directed at such a sale with only secondary consideration being given to the possibility of individual sales. The four properties were then sold for a combined purchase price. The director and major shareholder of the company issued proceedings alleging that the receivers had failed to fulfil their duty to obtain the best price reasonably obtainable in the market, as the sale price was significantly lower than the valuations of the four individual properties.

The court dismissed the claim. It is settled principle that mortgagees and receivers must be allowed to decide the timing and method of sale. Once that has been decided, as long as the property is properly marketed, the mortgagee can have regard to its own interests and resolve any doubts in its own favour without being in breach of duty to the mortgagor.

Things to consider

Obtaining and relying upon independent advice from marketing agents as to the appropriate method of sale to be adopted will protect lenders and receivers from claims of breach of duty. This is also a timely reminder given the current state of the property market that lenders do not have to wait for prices to stop falling before selling.