Banking Bulletin - July

Non-payment of mortgage

Halifax obtained a possession order against the borrower suspended on payment of the then current instalments, plus an additional sum towards the payment of the arrears. Only one payment was received and Halifax obtained a warrant of possession.

Relying on the court's extensive discretion under s36 of the Administration of Justice Act 1970, the borrower unsuccessfully appealed on the basis she was about to start a new job and was likely to be able to pay sums due under the mortgage in the future. The judge had held that the borrower's record of past payments was as good a basis as any for assessing the ability to make future payments and that there was no prospect of her being able to pay in the future. The borrower appealed.

The Court of Appeal found that, despite her employment, the borrower had still been unable to maintain the current instalments, let alone any additional payment towards the arrears. It had to be concluded that she could not afford to service the mortgage and the judge's finding would stand.

Halifax Plc v Okin

Appeal it!

At a hearing which the borrower was present, the lender obtained an order for possession of the borrower's property. The borrower applied to set the order aside, on the basis that the original agreement and charge were unenforceable under the Consumer Credit Act 1974. That application was struck out as the court held the original order should have been appealed, rather than an application to set it aside made. That decision in turn was appealed with the borrower alleging that as the court had (so he said) no jurisdiction to make the original possession order, that possession order could only be set aside, not appealed.

The court disagreed, holding that if the borrower's contentions about the underlying agreement were correct, there had simply been an error of law which was only correctable on appeal. The nature of the error here did not mean that the order was outside of the court's jurisdiction. The appeal was dismissed. The borrower had to seek leave to appeal the original decision out of time.

igroup Loans Ltd v Bradshaw

Car dealer not credit broker

The defendant approached a car dealer to purchase a new car. The dealer agreed to accept the defendant's current car in part exchange, to discharge his existing hire-purchase agreement with the claimant and to arrange finance for the new car. The dealer approached a broker who, coincidentally, selected the claimant to provide the fresh finance for the new car. The dealer then sold the new car to the broker who sold it to the claimant, so that the claimant could enter into the new hire-purchase agreement with the defendant. The dealer failed to pay off the original hirepurchase agreement and the claimant sued the defendant for the outstanding sum. The defendant contended he was not liable as the dealer had promised to discharge the balance, and that a promise had been made as the claimant's agent pursuant to s56 Consumer Credit Act 1974. The court at first instance agreed and dismissed the claim.

On appeal the court held that the dealer who had made the representation was not the credit broker for the hire-purchase agreement for the new car. s56 only applied to the credit broker who actually sold the car to the finance company, which was the broker here, not the dealer, and the broker had not made the representation. There was no evidence that the dealer was acting as the agent of the finance company at the time the representation was made and the defendant, albeit the blameless victim, remained liable to pay off the original hire-purchase agreement.

So, good news for the finance company. By getting dealers to set up 'shell' companies through which the finance documentation can be processed, potential liability for dealers' representations in antecedent negotiations could be avoided. That is, until this particular loophole is closed by legislative amendment.

Black Horse Ltd v Langford

It's a penalty

The defendant hired a car for 36 months paying a set monthly amount. He fell into arrears and the claimant recovered the car. The agreement between them provided that upon repudiation, the defendant was to pay the total amount of rentals payable during the hire period, less the amount of rental paid, less a rebate on the rentals that had not become due to take account of early payment. The defendant claimed that the clause was a penalty and unenforceable as it was not a genuine pre-estimate of the loss the claimant was likely to suffer as a result of the breach of contract. It did not take into account the capital value of the car at the end of the hire period, nor the fact that in being returned early the car would have a greater value.

The court agreed that the clause was a penalty and so unenforceable. The value of the car should have been taken into account. There had been no genuine pre-estimate of loss. Just because the defendant was an articulate, intelligent man who entered into the agreement freely, did not mean that he was not entitled to rely on the fact that the clause was unfair and a penalty.

Volkswagen Financial Services (UK) Ltd v Ramage

Partial novation

The defendant operated a paper mill and entered into plant hire agreements for five trucks with the claimant for between three and five years and undertook to pay liquidated damages on early termination. The defendant then sold the mill to a third party who was to have exclusive use of the hired machinery. The third party was invoiced for and paid the charges arising under the hire agreement. The defendant wanted to novate the agreement to the third party so it could discharge its liabilities under the agreement. The third party did not agree a full novation as it did not want to be responsible for the early termination charges. The mill subsequently closed, the trucks were repossessed and a claim for early termination damages was made.

The Court of Appeal found there had been no novation. A novation was a contract between the original parties and a third party, under which the contractual obligations of one of the original parties was extinguished and replaced by obligations of the third party. Here, the third party had only agreed to take on certain financial responsibilities of the defendant's, but had not been prepared to fully novate the original agreement. The defendant remained liable in full for the damages on early termination.

Finning UK ltd v Inveresk Plc

An effective weapon of last resort

The bankrupt's trustee applied for a possession order of his home. The bankrupt unsuccessfully appealed his bankruptcy, the order in litigation that had led to his bankruptcy and the possession order, but he throughout refused to give up possession and the trustee applied for a committal order. The court found the bankrupt in contempt of court for failing to give possession and sentenced him to 6 months' imprisonment.

The Court of Appeal upheld the judge's order. The bankrupt's actions had been wilful, deliberate and maintained on the basis that he did not accept that the bankruptcy order or the possession order were properly made against him, or that he had to comply with them. It was a plain case of contempt. Neither the immediate custodial sanction, nor the length of the sentence was manifestly excessive.

Although applications for committal are relatively rare, when faced with a vexatious litigant, or a debtor's persistent and wilful default, it should at least be considered. The court can, and clearly does, make such orders in appropriate cases.

Trustee in Bankruptcy of R Canty v Canty

No consideration

A husband and wife jointly owned their property. In matrimonial proceedings, the husband was ordered to transfer his interest in the property to the wife. Following his bankruptcy, the husband's trustee applied to set aside the property transfer on the basis that it had been made at an undervalue, and the wife had given no consideration in money or money's worth within the meaning of s339 of the Insolvency Act 1986. The wife contended that the fact she had foregone ancillary relief claims, was capable of amounting to consideration.

The court held that if a husband transfers his interest in property for a consideration that was less than its value in money or money's worth to his wife and is then made bankrupt, such a transfer can be attacked by a trustee under s339. The position is exactly the same whether the husband agrees to such a course in the context of matrimonial breakdown, or where the husband is ordered to adopt such a course following contested ancillary relief proceedings. The matrimonial proceedings were concerned with the division of the matrimonial cake, whereas the size of the cake was liable to be diminished by an order of the Insolvency Court. Neither the receiving party gave, nor did the paying party receive, consideration in such a case which was therefore open to attack by a trustee. Here, the transaction had been at an undervalue and the trustee's application should be allowed.

So any divorce settlement involving the matrimonial home, made within the relevant period before the bankruptcy of one of the spouses, is now vulnerable to reversal by a trustee.

Hill & anor v Haines

The parties' intentions

MB had been the secured tenant of a property in which she lived with B, and which she had bought at a substantial discount. The property was conveyed into the joint names of MB and B as joint tenants. Although MB's mortgage company had insisted the property be in joint names, she claimed that the intention had always been that B would only have a minimal interest in it. He had made no contribution to the purchase price, mortgage repayments or household expenses. When MB had ascertained the effect of the joint tenancy, she gave notice of severance to B. She stated that the property would be held by them as tenants in common, 99 per cent for her and 1 per cent for him. He signed a document acknowledging receipt and acceptance. B was later made bankrupt and the trustee sought to set aside the notice of severance and receipt under s339 Insolvency Act 1986 as there had been no consideration for the transfer.

The court held that although the requirements of s339 were made out, the court had an overall discretion under s339 to make no order at all if justice so required. The evidence was that it was always the parties' intention that B would only ever have a minimal interest in the property and the severance notice and receipt reflected that. Additionally, the mortgage repayments were made by MB alone. The circumstances here were exceptional. Justice required that no order be made.

The distinguishing feature in this case compared to the Hill case is that, in effect, the asset had never been (or was never intended to be) part of the bankrupt's estate, whereas in Hill it had been.

Surjit K Singla (Trustee in Bankruptcy for Brown) v Brown & Malden- Brown

Joint names but not equal beneficial interests

The parties purchased a house in their joint names. The purchase was funded by the sale of their previous property which had been in D's sole name, plus D's savings and a mortgage in both names. S paid the mortgage interest and endowment policy premiums, and they both paid off the capital with D contributing a greater proportion. The parties had cohabited for a long time and had children together, but nearly all aspects of their finances were kept separate. The relationship ended and S sought a declaration that the house was held on trust by the couple as tenants in common, in equal shares and an order for sale. The issue was whether a conveyance into joint names established a prima facie case of joint and equal beneficial interests.

The House of Lords held that the starting point where there was joint legal ownership was joint beneficial ownership. Instances where joint legal owners would be taken to have intended that this was not the case, would be unusual. The onus was on the party seeking to show that the parties intended their beneficial interests to be different from their legal interests, and in what way. Each case would turn on its own facts. Many more factors than financial contributions could be relevant to intention. It was for D to show what the common intention was when they bought the property. The fact that they had kept their financial affairs rigidly separate for such a long time was strongly indicative that they did not intend their shares to be equal. D made good her claim for a higher share.

Stack v Dowden

Good faith agreements

The claimant and defendant both lent money to a company (Y) under a credit facility. Y's financial position deteriorated, the parties appointed investigating accountants and put Y into "workout". Following an assignment of Y's indebtedness to the claimant to the defendant's subsidiary, the claimant brought proceedings against the defendant for breach of an anti-claim clause in the assignment. The defendant counterclaimed rescission of the assignment for misrepresentation and damages for breach of an alleged good faith agreement in relation to the workout. The defendant alleged it was common practice between banks involved in a workout, that each would disclose to the other all facts known to it, that were relevant or material to the other's decision-taking in the course of the workout, and that the claimant had failed to do this.

The court held that although it was good practice for workout banks to make such disclosures, in the absence of an express contractual framework, there was no legal duty to adhere to that practice, or to exercise reasonable care to do so. It was up to each co-workout bank to make its own enquiries and conduct its own due diligence in relation to the debtor. It could not just be assumed that it would have disclosed to it by the other bank all the information that it might consider material. There had been no misrepresentations by the claimant, and the terms of the assignment precluded the defendant from suing on any such good faith agreement. The claimant's claim for damages for breach of the anti-claim clause succeeded.

National Westminster Bank Plc v Rabobank Nederland

No third party costs order

The company, through its receivers, brought and prosecuted an unsuccessful claim against the defendants. The claim was financed from funds subject to the receivers' control but the receivers had no beneficial or personal interest in those funds or the outcome of the proceedings. The first defendant sought to recover his costs of the proceedings from the receivers from funds realised in the course of the receivership on the basis that they were the real claimants, and had conducted the proceedings for the benefit of themselves and the bank that had appointed them. The receivers submitted that they were only acting as agents of the company, that the case was not exceptional and there was no impropriety or unreasonableness so as to justify making a third party costs order against them.

The court agreed. The company's claim had involved an entirely normal case of receivers seeking to enforce a contractual right and there were no exceptional circumstances to warrant such an order. There was no impropriety or unreasonableness in the bringing of the claim. The receivers did not fund the proceedings and would not benefit from them in any relevant way. They were merely agents of the company which remained responsible for their acts or defaults. The defendants should have protected themselves, if they had so wished, by seeking security for costs against the company.

Dolphin Quays Developments Ltd (In Administrative and Fixed Charge Receivership) v Mills & others

The statutory cap applies

The Financial Services Ombudsman had made a direction that financial advisers, having given unsuitable advice to the applicants, should in one case carry out a loss assessment and make redress of any loss shown, and in the other pay whatever shortfall had been suffered. In both cases, the financial advisers were only willing to make payment of £100,000 although the loss assessments showed losses in excess of £100,000 had been suffered. The applicants applied under the Financial Services and Markets Act 2000 s229, for injunctions to enforce the Ombudsman's directions. The financial advisors contended that the Ombudsman had no power to make a direction that required them to pay money to the applicants, or if he did, it was limited to payment of £100,000 (the statutory cap).

The court held that if a determination by the Ombudsman required the payment of money to an individual, it was a money award, even if unquantified at the time of the award. The Ombudsman could not have the power to make a direction that would require a payment to be made that would exceed the statutory cap. If the cost of compliance with a direction was unknown at the time the direction was made, it was subject to an implied limitation that it would not be enforceable beyond the statutory cap, once reached. The Ombudsman had exceeded his powers and the court could not exercise its discretion to enforce an invalid direction by way of injunction.

Bunney v Burns Anderson Plc and Financial Ombudsman Service Ltd: Cahill v Timothy James & Partners Ltd

Consent to be reviewed

The claimant offshore finance company operated solely over the internet offering services including transferring monies to and from other customer accounts it held and making transfers to external bank accounts. It used another company, C, to process the external bank transfers and C used a bank to set up trust accounts for the claimant's customers' monies. The claimant experienced delays with payment requests and it transpired that both C and the bank had made disclosure reports to the SOCA about their suspicions about the claimant. SOCA gave consent to C to release the claimant's funds but not to the bank to do so. The claimant asked SOCA to give its consent to the bank as a matter of urgency but SOCA refused to do so, stating that a direct request from the bank and a change in circumstances would be required before the issue of consent would be considered again.

The Court of Appeal held that SOCA should not withhold its consent without good reason and that it was unsatisfactory that SOCA was not obliged to disclose the reason for its decision, the facts on which it had relied in reaching it and the nature of the investigation it was conducting. Also, nothing in s335 of the Proceeds of Crime Act 2002 required that the request to revisit the decision had to be made by the bank. SOCA was obliged to keep the matter of consent under review and must give consent when there was no longer any good reason for withholding it. SOCA must act independently of a request from anybody, not just the potential offender. The decision refusing to revisit the refusal to consent was quashed.

R (on the application of UMBS Online Ltd v Serious Organised Crime Agency & Revenue & Customs (Interested Party).