Banking Bulletin September 2007

No prior demand for principal debtors

The defendants, as shareholders, guaranteed the liabilities of their company under a supply contract with the claimant. The claimant served statutory demands upon the defendants who sought to have them set aside on the basis that no demands had been served under the guarantee prior to the service of the statutory demands. The defendants contended that liability under the guarantee was not immediately payable when the statutory demands were served as the wording of the guarantees provided "the guarantor shall pay to the beneficiary on demand," and no demand had previously been made. The claimant argued that the liability under the guarantee was immediately payable without the need for a prior demand as the guarantee also provided that the guarantors were liable as primary obligors.

The court agreed with the claimant. Where sureties covenanted to pay as principal debtors or primary obligors, a demand was unnecessary even if the liability was expressed to be payable on demand. No demand for payment before service of the statutory demands was necessary. There had been an immediate obligation to pay and the statutory demands had been properly served.

TS & S Global Ltd v Fithian-Franks and others

Damages in conversion

The claimant entered into a hire purchase agreement with the second defendant for the acquisition of three dump trucks. The second defendant went into administration and the trucks went into possession of the fourth defendant which then purported to sell them. Two of the trucks were sold at auction in Germany conducted by the third defendant. The third truck was not traced. The claimant obtained summary judgment against the third and fourth defendants for conversion. The issue was the quantum of damages payable.

The court held that the object of an award of damages for conversion was to compensate the claimant for the loss suffered as a result of the conversion. The appropriate award was a question of fact in each case. The starting point may be the market value of the goods at the date of conversion. However, the interest of a finance company in goods let on hire purchase consisted only in being paid sums due under the relevant hire purchase agreement. Damages fell to be assessed having regard to the economic realities of the case. Here, the value of the claimant's interest was the difference between the total sum payable under the hire purchase agreement, had it run its full course and the option to purchase had been exercised, and the sums in fact paid under the agreement.

Any further compensation would have been a windfall for the claimant and more than it had bargained for when it originally entered into the agreement.

VFS Financial Services (UK) Ltd v (1) Euro Auctions (UK) Ltd, (2) Hennelly's Utilities Ltd (in administration), (3) Euro Auctions GMBH, (4) Hennellys Ltd

Trustee's power of sale

In matrimonial proceedings a property adjustment order was made which included a provision that the property be held on trust for sale with sale being postponed until the happening of specified events and that the wife is given exclusive rights of occupation until sale. Subsequently, the husband's trustee in bankruptcy sought an order for sale under s14 of the Trusts of Land and Appointment of Trustees Act 1996. The wife opposed the application on the basis that the trustee took the husband's interest in the property subject to the rights conferred on her by the matrimonial order.

The Court of Appeal held that s14 enabled the court to make any order it thought fit including an order for sale, subject to consideration of the matters in s335A of the Insolvency Act 1986.

The rights conferred on the wife in the matrimonial order were not absolute rights that the property remain unsold unless and until one of the specified events occurred. They were always subject to the possibility that the court might make an order for sale. Her right to resist the sale was qualified by the rights of other persons interested in the property. The merits of the case would need to be determined to ascertain whether the circumstances of the case were exceptional so as to displace the statutory presumption under s335A that the interests of the bankrupt's creditors outweigh all other considerations.

Vivienne Avis v Turner (trustee in bankruptcy of the property of Edmund Avis) and anor

Ownership of chattels on repossession

Having obtained a possession order against the claimant's property the bank then sold it. Issues arose as to whether certain fixtures, fittings and chattels in the property formed part of the sale of the property. The claimant brought claims, amongst others, to recover the fittings and other items, a claim for damages for conversion of those items, and a claim that the property had not been effectively transferred to the buyer as the bank had no title to transfer the chattels to the buyer. The defendants applied to strike out those claims as being either without foundation or an abuse of process.

The court found there was no basis for challenging the efficacy of the transfer of the property from the bank to the buyer. However, as to the issue of title to the fittings, it would not be an abuse of process to bring such a claim which had sufficient prospect of success to justify it being brought. Strike out of that part of the claim was refused.

Lenders must be careful what they do with borrowers' possessions following repossession.

Haydon-Baillie and others v Bank Julius Baer & Co Ltd and 12 ors

Indemnity costs

The defendant raised various counterclaims in the proceedings including allegations of corporate fraud and breach of fiduciary duty. One element of the counterclaim was withdrawn just before trial and another abandoned before the making of final submissions at trial. The claimant succeeded at trial and applied for indemnity costs against the defendant. It claimed that the defendant must have been aware from the evidence available to it before it issued its defence and counterclaim, and subsequently following service of witness statements, that the allegations that it subsequently withdrew or abandoned would be exceptionally difficult to prove and so should not have been pursued. Additionally, it argued that the case advanced by the defendant was not consistent with its pleadings and key features of the case were constantly changed.

The court found that in order to obtain an order for indemnity costs, the losing party's conduct had to be such that there had been a significant level of unreasonableness or otherwise inappropriate conduct in the widest sense in relation to that party's pre-litigation dealings with the winning party or in relation to the commencement or conduct of the litigation itself. The defendant's withdrawn claim was based on far fetched assumptions and was deeply flawed from inception. The procedural history of the defendant's claim evidenced a party casting around for a viable basis on which to claim in the face of very slender evidence. The defendant had been too reluctant to give up untenable points and had conducted the litigation unreasonably and unsatisfactorily and that justified an order for indemnity costs against it in relation to its counterclaim.

If an opponent's claim is spurious from inception and the manner in which they pursue, or defend, the litigation is wholly unreasonable or inappropriate, consideration should be given to making such an order for costs.

National Westminster Bank Plc v Rabobank Nederland

Guarantor's continuing liability

The defendant guaranteed payment of the price of equipment sold by the claimant to the defendant's subsidiary. The claimant then entered into agreements with the subsidiary and various finance companies under which title in certain of the goods passed to the finance companies in return for payment of part of the relevant purchase price. The subsidiary paid some of the purchase price of the goods, as did the finance companies but the balance remained unpaid when the subsidiary went into liquidation. The claimant claimed on the guarantee and issued proceedings. The defendant argued that the original contract for sale had been discharged and its guarantee did not extend to its subsidiary's obligations to the claimant under the new contractual arrangements with the finance companies.

The Court of Appeal held that the new arrangements did not discharge and replace the subsidiary's original obligations. The subsidiary's original obligation to pay for the goods was discharged only to the extent that the claimant obtained the right to obtain payment from the finance companies but remained in place to the extent that it did not. The subsidiary's obligation to pay had simply been reduced not discharged.

Wittmann (UK) Ltd v Willdav Engineering SA

No beneficial interest

The defendant purchased a property in her name for the parties to live in together. The claimant paid the deposit for the purchase and undertook some improvement works on the property but the defendant made all subsequent mortgage repayments. The claimant also prepared a deed which provided that the parties had agreed that the defendant should own the property solely. The claimant later left the property and claimed a constructive trust in his favour alleging that the parties had agreed at the time of purchase that they would have an equal interest in the property. He relied on the payment of the deposit, alleged mortgage payments and the work undertaken on the property as evidence of this. Alternatively, he claimed an implied constructive trust in proportion to the parties' respective contributions. He also claimed that the deed had been written at a time when he was a patient for the purposes of the Mental Health Act 1983 and so could not be relied upon.

The court found that the defendant had discharged the burden of proving that the effect of the deed had not been vitiated by the claimant's continuing mental state. The defendant's evidence as to what was agreed at the time of purchase was preferred to the claimant's. The claimant's contributions had not been for the purposes of repayment or improving a property in which he had an interest. They had been made to assist with the parties' upkeep when they had lived together and out of goodwill to the defendant for providing a home for him and contributing to his living expenses. The claimant had not acquired a beneficial interest in the property.

Griffiths (By his litigation friend the Official Solicitor) v Cork

Only one limitation period

The defendant was the sole director of a company which went into liquidation. Almost six years after his appointment as liquidator, the claimant commenced proceedings seeking an order pursuant to s 212 Insolvency Act 1986 that the defendant contribute to the company's assets on the basis that he had acted in breach of duty of care and skill and in breach of fiduciary duty owed to the company, which had resulted in the company's deficiencies. The defendant submitted that the claims were statute barred as the limitation period ran from the date the damage was suffered by the company, which was more than six years before the proceedings were commenced.

The court held that s 212 was merely procedural in nature providing alternative means for a company to obtain recompense from a director in breach of his duties. In substance, the claimant remained the company whether the claim was brought by the company or the liquidator. A claim under s 212 did not have a limitation period distinct from that applicable to the underlying claim. If the underlying claim if brought by the company was statute barred, as it was here, the same claim but brought by the liquidator would also be statute barred. It would be extraordinary if the result were otherwise. The claim was struck out.

In the matter of Eurocruit Europe Ltd (In Liquidation) sub nom K A Goldfarb (Liquidator of Eurocruit Europe Ltd) v Poppleton

Repossession was unlawful discrimination

The defendant, a schizophrenic, was a secure tenant of the claimant and exercised the right to buy his flat. Before completion of the sale, and whilst he was not taking his medication, he sublet the flat without the claimant's consent and so ceased to be a secure tenant. The claimant subsequently obtained a possession order and the defendant appealed against this on the basis that his schizophrenia meant that he was disabled and obtaining a possession order amounted to unlawful treatment under the Disability Discrimination Act 1995.

The Court of Appeal found that, on the evidence, the defendant's mental impairment did amount to a disability within the meaning of the Act. The defendant did not have to show that the disability was the actual cause of the subletting. His disability had a causal link to the subletting which had then contributed to the possession order. In bringing the proceedings, the claimant had unlawfully discriminated against the defendant. The alleged discriminators did not need to be aware of the disability and lack of awareness was no defence to a discrimination claim.

Lewisham London Borough Council v Malcolm & Disability Rights Commission (Intervener)

Proprietary estoppel and priority of payment

The defendant supplied drink to the owner of a club, the cost of which was secured by a charge over the club premises. The owner wished to re-finance his debt to the defendant and took a remortgage with the claimant to be secured as a fist legal charge on both the club and the owner's house. Part of the remortgage monies were paid to the defendant in partial satisfaction of the sums outstanding. Both the claimant and defendant were granted legal charges over the house. Contrary to intention, the defendant's charge was registered first so took priority to the claimant's under the Land Registration Act 1925. The owner fell into arrears, the club and house were repossessed and sold but the proceeds were insufficient to repay both the claimant's and defendant's legal charges. The claimant brought proceedings for a declaration that its charge ranked in priority to the defendant's charge even though the defendant's charge had been registered first.

The Court of Appeal held that the requirements of proprietary estoppel were made out. The defendant knew the claimant had an expectation of priority in relation to the charge. It had passively acquiesced in the claimant making the advance in that expectation, had taken a benefit from it, but had later asserted priority to counter the claimant's claims to the proceeds of sale. The appropriate relief here was not rectification of the register but a declaration that the claimant was entitled to be paid first and in full out of the proceeds of sale of the house.

Lancashire Mortgage Corporation Ltd v Scottish & Newcastle Plc

OFT test case on bank charges

Following the issue of tens of thousands of claims regarding the unfairness of unauthorised overdraft charges in the county courts, the Office of Fair Trading, in agreement with seven banks and one building society (which together account for over 90 per cent of personal current accounts in the UK), commenced a test case in the High Court at the end of July. The OFT is seeking to establish that the unfairness rules in the Unfair Terms in Consumer Contract Regulations apply to these charges. The OFT claim that the charges are unfair and a penalty for breach of contract, and so unenforceable, rather than simply charges for the provision of services, as claimed by the banks. The OFT is seeking a preliminary declaration as to whether the 'fairness' test applies to bank charges. The trial has been expedited and is due to start in early January 2008 with a time estimate of 8 days.

Pending the outcome of the test case, the FSA has waived its complaints handling rules for any bank or building society that applies for the waiver. It is also likely that individual courts will agree, if the parties cannot, that until the outcome of the test case proceedings all other such claims issued should be stayed