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Finance litigation briefing: report and review on recent cases and issues - Lexology
Finance litigation briefing: report and review on recent cases and issues
Discretion to suspend possession order
The court can exercise its discretion to suspend a possession order where there is evidence to show that the mortgagor can repay the sums due within a reasonable period.
This was reaffirmed by the Court of Appeal in Jameer v Paratus AMC. Jameer had fallen into arrears with her mortgage payments and a possession order was obtained. This was suspended on the basis that Jameer would pay the monthly instalment and an amount off the arrears.
Having failed to make those payments, a further warrant was obtained and permission to again suspend it was refused, as was an appeal of that decision. Permission to appeal was subsequently obtained on the condition that Jameer filed up-to-date information about her employment and financial position.
The Court of Appeal held that the information Jameer had supplied was either out of date or confusing. The court has discretion under s 36(1) of the Administration of Justice Act 1970 to suspend a possession order where there is evidence the mortgagor can make the monthly instalment payments and pay off the arrears within a reasonable time. The mortgagor has to produce convincing financial information to the court to show an ability to adhere to the terms of the suspension order.
Here, there was uncertainty and omissions in the financial information Jameer had produced. Even on her own account, she had had the ability to make the repayments but had not done so. The court upheld the earlier decisions not to exercise discretion in favour of suspending the possession order further.
Things to consider
The court will give mortgagors every opportunity to make good on their promise to pay the current instalments and arrears at a reasonable rate to stave off repossession. However, where there are continued applications to suspend without those promises being followed through, eventually the court will have no alternative but to grant an order for possession.
Procedural irregularities lead to set aside
In Barons Bridging Finance PLC and Reddy Corporation Ltd v Nnadiekwe, the defendant entered into a loan facility with the claimants secured over two properties. Following default, judgment was obtained, along with a warrant of possession against one property. The defendant applied to set the possession order aside and the district judge not only set the warrant aside but also struck out the claim.
The claimants appealed on the basis they had been unprepared to defend the strike out application, as no notice of it had been included in the application notice and the possession order had been legitimately made. The defendant alleged the claimants had acted unlawfully as Barons had no credit licence when the loan was entered into: it had acted as agent for Reddy which had been licenced. Additionally, Reddy's credit licence had been revoked due to Barons having engaged in widespread unlicensed trading.
The High Court held that the claimants had not had sufficient opportunity to deal with the applications before them at the original hearing. However, the background to the case placed it in the exceptional category of cases where the court is likely to reopen the issues between the parties.
If a party engages in activities where a credit licence is required, but does not have one, an offence is committed. Any agreement entered into during an unlicenced period would not be met - save in limited circumstances. Barron had never had a licence and there were also questions as to how the loans had been made and administered. These were the sort of issues that could be reopened.
Because of the procedural irregularities, the court would set aside the district judge's order with the exception of the possession order. This would remain suspended until the court had an opportunity to consider the case further.
Things to consider
Although the courts should actively manage cases, applications should not be sprung on a party at the last moment when they have insufficient time to prepare. The appropriate course of action here would have been for the court to suspend the warrant for a short period. The rest of the application should have been adjourned so that it could all be dealt with together when the claimants had had an opportunity to prepare their case.
Valuing valuation claims
A judge does not have to accept the experts' evidence on quantum claims, though often will. So long as the decision on quantum is reasoned or rational, the judge can choose a figure he considers most appropriate.
This was confirmed by the Court of Appeal in Capita Alternative Fund Services (Guernsey) Ltd and another v Drivers Jonas (a firm). The claim related to a valuation by the defendant which the claimants relied on in acquiring the lease of a shopping centre. The defendant provided an open market value of the development of £48.15 million or £62.85 million with the benefit of enterprise zone allowances.
The claimants paid £62.85 million for the lease. The Development was not a success and the claimants brought a claim against the defendant on the basis it had negligently overvalued the development and in particular had failed to prepare an assessment of the development's likely ability to attract consumer spending (a CACI report).
At first instance, the judge held that the correct market valuation was £44.8 million with the benefit of the enterprise zone allowance. He also held that the CACI report was an essential component of a competent valuation. The valuation was based on his acceptance of one of the expert's (B's) evidence. £18.05 million was awarded in damages.
The defendant appealed on the basis that B's evidence had been based on that of another expert which the judge had totally rejected. Consequently, there was no rational basis for the judge's conclusion that B's valuation was correct.
The Court of Appeal held that the judge had considered B to be an impressive witness. His evidence had not been damaged by the judge's findings in relation to the evidence of the expert who B had in turn relied upon. It was not unreasonable for the judge to rely upon B's evidence.
Judges were not confined to the figures contended for by the experts and indeed the valuation arrived at by a judge may lie somewhere between the valuations put forward by the parties' experts. A judge would often find himself having to do the best he could in such cases where pin-point accuracy could not be expected. There was no reason to interfere with the judges findings, although credit should be given to the defendant for tax credits which had, in reality, reduced the purchase price. The sum awarded should therefore be reduced to £11.86 million.
Things to consider
It has long been accepted that due to its imprecise nature, there is a permissible range or bracket of valuation in property valuation cases. The more unusual or unique the property, the wider that range or bracket is likely to be. So long as the judge has taken a reasoned and rational approach in either accepting evidence from an expert or deciding upon a valuation himself, an appeal court is unlikely to interfere with the judge's conclusion.
Compensation from the FSCS for negligent mortgage advice
In Emptage v Financial Services Compensation Scheme Ltd, (FSCS), the claimant sought mortgage advice from her mortgage broker on reducing her repayment mortgage balance (of circa £39,000) and term. He advised her to re-mortgage with an interest only mortgage of £110,000 and invest the balance in a Spanish property scheme which would provide rental and capital to service and pay off the mortgage, as well as give a surplus. She acted on that advice which proved to be negligent.
The Spanish property market collapsed and the claimant's investment became worthless, leaving her with no way of paying the mortgage. The claimant complained to the Financial Ombudsman Service and the complaint was referred to the FSCS. The FSCS conceded that the broker's advice was negligent. However, it rejected the compensation claim on the basis the advice was to buy Spanish property and that was not regulated advice.
The FSCS subsequently reconsidered its decision and awarded compensation of £11,500. This compensation arose only from the unsuitable mortgage contract recommended - not from the loss arising from investing the capital released from the new mortgage in the Spanish property purchase.
On appeal by the claimant, the High Court held that the FSCS had a broad discretion to pay "fair" compensation to claimants for the loss caused by the breach. The precise nature of the breach had to be identified and the losses directly flowing from that breach had to be assessed. The FSCS had failed to do that.
The broker's negligent advice related to both the mortgage and property investment and was indivisible. The claimant had not been adequately compensated for that negligent advice. Her true loss was the £110,000 mortgage liability she had assumed which she was unable to afford. The FSCS was ordered to reconsider the question of compensation.
Things to consider
The claimant was entitled to be put back in the financial position she would have been in had the advice not been negligent. The losses should be calculated on that basis.
No intention to defraud creditors
If a transfer of a property is not concluded with the intent to escape liabilities to creditors, the court will not set it aside.
This was confirmed by the Court of Appeal in Williams trustee in bankruptcy of J J Taylor v Taylor and Taylor. In 2002, Mrs Taylor had lent her husband £120,000 to invest in his company. The company went into voluntary liquidation in 2003 and shortly afterwards, the husband transferred a property into his and his wife's names as tenants in common in equal shares.
The transfer expressed no consideration but a month later they made a declaration of trust that the wife had paid £120,000 as a loan to the company and £120,000 on improvement works to the property. The declaration also provided that the husband was solvent and that a mortgage on the property would be discharged first from his interest in the property. The property was later sold and the mortgage discharged. The wife bought another property in her sole name with her half of the proceeds.
The husband was subsequently made bankrupt and his trustee sought to set aside the transfer of the property into joint names and obtain possession of the property bought by the wife. The trustee considered that the transfer was intended to defraud the husband's creditors.
At first instance, the judge held that the transfer had been undertaken to give effect to the earlier agreement between husband and wife, not to defraud creditors.
On appeal by the trustee, the Court of Appeal agreed with the trial judge. It held that, objectively, the transaction was at an undervalue under s 423(3) of the Insolvency Act 1986, as the loan and value of the improvement works did not amount to 50% of the value of the property.
However, having listened to the oral evidence and considered the documentation, the judge was entitled to accept that the declaration of trust had stated the position between the parties. The transfer into joint names had simply given effect to that position. The judge was entitled to conclude there had been no intention to defraud creditors and the Court of Appeal upheld the decision to refuse to set aside the transfer.
Things to consider
Although objectively a transfer may look like a transfer at an undervalue, there may be compelling evidence indicating that there was no intention to avoid paying creditors. Contemporaneous documentary evidence (or the lack of it) to show parties' intentions when loans or payments were made will also assist the court in reaching its decision.
The right to bring a claim
Before a party can bring a claim, it has to have the legal right to do so.
This was confirmed by the Court of Appeal in Bexhill UK Ltd v Razzaq in which the claimant entered into a facility agreement to provide credit funding to the defendant's company (X). The defendant stood as guarantor and gave a legal charge over a commercial property as security. The claimant funded the sums advanced to X by drawing on a facility agreement with its bank, to which it had granted a debenture.
The debenture assigned absolutely all its rights, interest and benefit in "receivables". These comprised all present and future book and other debts, money claims and other amounts recoverable or receivable by the claimant. It also extended to the benefit of all rights and remedies relating to claims for damages and other remedies for non-payment.
X defaulted and the claimant sought possession of the defendant's property as security for his personal guarantee. The defendant argued the claimant had no right to sue as any such right had been assigned to the bank which was not a party to the proceedings. Although the court agreed with the defendant, it held that the claimant could sue as the bank's agent.
The Court of Appeal disagreed and upheld the defendant's appeal. The sums due from the defendant were receivables and so were caught by the debenture. Given the wording of the debenture, the claimant's right to sue on the charge had been assigned absolutely to the bank in equity. As the defendant was not given express notice of the assignment, the statutory formalities required to make it an absolute legal assignment were not completed.
Once an equitable assignment had taken place, it was the equitable assignee which had the right to sue as the party beneficially entitled. The assignor could not maintain an action on its own and the assignee would have to be joined as a party.
Here, there was nothing in the wording of the debenture to suggest the bank had appointed the claimant as its agent. In addition, the claim form did not indicate that the claimant was acting other than as principal. The claimant had no right to sue and the bank would have to be joined to the action if the claim was to be pursued.
Things to consider
Wherever underlying debts have been assigned or debentures of the above nature entered into, consideration should be given as to who actually has the right to sue before proceedings are commenced. This will avoid unnecessary costs being incurred, as in this case.
Finance litigation briefing: report and review on recent cases and issues
Discretion to suspend possession order
The court can exercise its discretion to suspend a possession order where there is evidence to show that the mortgagor can repay the sums due within a reasonable period.
This was reaffirmed by the Court of Appeal in Jameer v Paratus AMC. Jameer had fallen into arrears with her mortgage payments and a possession order was obtained. This was suspended on the basis that Jameer would pay the monthly instalment and an amount off the arrears.
Having failed to make those payments, a further warrant was obtained and permission to again suspend it was refused, as was an appeal of that decision. Permission to appeal was subsequently obtained on the condition that Jameer filed up-to-date information about her employment and financial position.
The Court of Appeal held that the information Jameer had supplied was either out of date or confusing. The court has discretion under s 36(1) of the Administration of Justice Act 1970 to suspend a possession order where there is evidence the mortgagor can make the monthly instalment payments and pay off the arrears within a reasonable time. The mortgagor has to produce convincing financial information to the court to show an ability to adhere to the terms of the suspension order.
Here, there was uncertainty and omissions in the financial information Jameer had produced. Even on her own account, she had had the ability to make the repayments but had not done so. The court upheld the earlier decisions not to exercise discretion in favour of suspending the possession order further.
Things to consider
The court will give mortgagors every opportunity to make good on their promise to pay the current instalments and arrears at a reasonable rate to stave off repossession. However, where there are continued applications to suspend without those promises being followed through, eventually the court will have no alternative but to grant an order for possession.
Procedural irregularities lead to set aside
In Barons Bridging Finance PLC and Reddy Corporation Ltd v Nnadiekwe, the defendant entered into a loan facility with the claimants secured over two properties. Following default, judgment was obtained, along with a warrant of possession against one property. The defendant applied to set the possession order aside and the district judge not only set the warrant aside but also struck out the claim.
The claimants appealed on the basis they had been unprepared to defend the strike out application, as no notice of it had been included in the application notice and the possession order had been legitimately made. The defendant alleged the claimants had acted unlawfully as Barons had no credit licence when the loan was entered into: it had acted as agent for Reddy which had been licenced. Additionally, Reddy's credit licence had been revoked due to Barons having engaged in widespread unlicensed trading.
The High Court held that the claimants had not had sufficient opportunity to deal with the applications before them at the original hearing. However, the background to the case placed it in the exceptional category of cases where the court is likely to reopen the issues between the parties.
If a party engages in activities where a credit licence is required, but does not have one, an offence is committed. Any agreement entered into during an unlicenced period would not be met - save in limited circumstances. Barron had never had a licence and there were also questions as to how the loans had been made and administered. These were the sort of issues that could be reopened.
Because of the procedural irregularities, the court would set aside the district judge's order with the exception of the possession order. This would remain suspended until the court had an opportunity to consider the case further.
Things to consider
Although the courts should actively manage cases, applications should not be sprung on a party at the last moment when they have insufficient time to prepare. The appropriate course of action here would have been for the court to suspend the warrant for a short period. The rest of the application should have been adjourned so that it could all be dealt with together when the claimants had had an opportunity to prepare their case.
Valuing valuation claims
A judge does not have to accept the experts' evidence on quantum claims, though often will. So long as the decision on quantum is reasoned or rational, the judge can choose a figure he considers most appropriate.
This was confirmed by the Court of Appeal in Capita Alternative Fund Services (Guernsey) Ltd and another v Drivers Jonas (a firm). The claim related to a valuation by the defendant which the claimants relied on in acquiring the lease of a shopping centre. The defendant provided an open market value of the development of £48.15 million or £62.85 million with the benefit of enterprise zone allowances.
The claimants paid £62.85 million for the lease. The Development was not a success and the claimants brought a claim against the defendant on the basis it had negligently overvalued the development and in particular had failed to prepare an assessment of the development's likely ability to attract consumer spending (a CACI report).
At first instance, the judge held that the correct market valuation was £44.8 million with the benefit of the enterprise zone allowance. He also held that the CACI report was an essential component of a competent valuation. The valuation was based on his acceptance of one of the expert's (B's) evidence. £18.05 million was awarded in damages.
The defendant appealed on the basis that B's evidence had been based on that of another expert which the judge had totally rejected. Consequently, there was no rational basis for the judge's conclusion that B's valuation was correct.
The Court of Appeal held that the judge had considered B to be an impressive witness. His evidence had not been damaged by the judge's findings in relation to the evidence of the expert who B had in turn relied upon. It was not unreasonable for the judge to rely upon B's evidence.
Judges were not confined to the figures contended for by the experts and indeed the valuation arrived at by a judge may lie somewhere between the valuations put forward by the parties' experts. A judge would often find himself having to do the best he could in such cases where pin-point accuracy could not be expected. There was no reason to interfere with the judges findings, although credit should be given to the defendant for tax credits which had, in reality, reduced the purchase price. The sum awarded should therefore be reduced to £11.86 million.
Things to consider
It has long been accepted that due to its imprecise nature, there is a permissible range or bracket of valuation in property valuation cases. The more unusual or unique the property, the wider that range or bracket is likely to be. So long as the judge has taken a reasoned and rational approach in either accepting evidence from an expert or deciding upon a valuation himself, an appeal court is unlikely to interfere with the judge's conclusion.
Compensation from the FSCS for negligent mortgage advice
In Emptage v Financial Services Compensation Scheme Ltd, (FSCS), the claimant sought mortgage advice from her mortgage broker on reducing her repayment mortgage balance (of circa £39,000) and term. He advised her to re-mortgage with an interest only mortgage of £110,000 and invest the balance in a Spanish property scheme which would provide rental and capital to service and pay off the mortgage, as well as give a surplus. She acted on that advice which proved to be negligent.
The Spanish property market collapsed and the claimant's investment became worthless, leaving her with no way of paying the mortgage. The claimant complained to the Financial Ombudsman Service and the complaint was referred to the FSCS. The FSCS conceded that the broker's advice was negligent. However, it rejected the compensation claim on the basis the advice was to buy Spanish property and that was not regulated advice.
The FSCS subsequently reconsidered its decision and awarded compensation of £11,500. This compensation arose only from the unsuitable mortgage contract recommended - not from the loss arising from investing the capital released from the new mortgage in the Spanish property purchase.
On appeal by the claimant, the High Court held that the FSCS had a broad discretion to pay "fair" compensation to claimants for the loss caused by the breach. The precise nature of the breach had to be identified and the losses directly flowing from that breach had to be assessed. The FSCS had failed to do that.
The broker's negligent advice related to both the mortgage and property investment and was indivisible. The claimant had not been adequately compensated for that negligent advice. Her true loss was the £110,000 mortgage liability she had assumed which she was unable to afford. The FSCS was ordered to reconsider the question of compensation.
Things to consider
The claimant was entitled to be put back in the financial position she would have been in had the advice not been negligent. The losses should be calculated on that basis.
No intention to defraud creditors
If a transfer of a property is not concluded with the intent to escape liabilities to creditors, the court will not set it aside.
This was confirmed by the Court of Appeal in Williams trustee in bankruptcy of J J Taylor v Taylor and Taylor. In 2002, Mrs Taylor had lent her husband £120,000 to invest in his company. The company went into voluntary liquidation in 2003 and shortly afterwards, the husband transferred a property into his and his wife's names as tenants in common in equal shares.
The transfer expressed no consideration but a month later they made a declaration of trust that the wife had paid £120,000 as a loan to the company and £120,000 on improvement works to the property. The declaration also provided that the husband was solvent and that a mortgage on the property would be discharged first from his interest in the property. The property was later sold and the mortgage discharged. The wife bought another property in her sole name with her half of the proceeds.
The husband was subsequently made bankrupt and his trustee sought to set aside the transfer of the property into joint names and obtain possession of the property bought by the wife. The trustee considered that the transfer was intended to defraud the husband's creditors.
At first instance, the judge held that the transfer had been undertaken to give effect to the earlier agreement between husband and wife, not to defraud creditors.
On appeal by the trustee, the Court of Appeal agreed with the trial judge. It held that, objectively, the transaction was at an undervalue under s 423(3) of the Insolvency Act 1986, as the loan and value of the improvement works did not amount to 50% of the value of the property.
However, having listened to the oral evidence and considered the documentation, the judge was entitled to accept that the declaration of trust had stated the position between the parties. The transfer into joint names had simply given effect to that position. The judge was entitled to conclude there had been no intention to defraud creditors and the Court of Appeal upheld the decision to refuse to set aside the transfer.
Things to consider
Although objectively a transfer may look like a transfer at an undervalue, there may be compelling evidence indicating that there was no intention to avoid paying creditors. Contemporaneous documentary evidence (or the lack of it) to show parties' intentions when loans or payments were made will also assist the court in reaching its decision.
The right to bring a claim
Before a party can bring a claim, it has to have the legal right to do so.
This was confirmed by the Court of Appeal in Bexhill UK Ltd v Razzaq in which the claimant entered into a facility agreement to provide credit funding to the defendant's company (X). The defendant stood as guarantor and gave a legal charge over a commercial property as security. The claimant funded the sums advanced to X by drawing on a facility agreement with its bank, to which it had granted a debenture.
The debenture assigned absolutely all its rights, interest and benefit in "receivables". These comprised all present and future book and other debts, money claims and other amounts recoverable or receivable by the claimant. It also extended to the benefit of all rights and remedies relating to claims for damages and other remedies for non-payment.
X defaulted and the claimant sought possession of the defendant's property as security for his personal guarantee. The defendant argued the claimant had no right to sue as any such right had been assigned to the bank which was not a party to the proceedings. Although the court agreed with the defendant, it held that the claimant could sue as the bank's agent.
The Court of Appeal disagreed and upheld the defendant's appeal. The sums due from the defendant were receivables and so were caught by the debenture. Given the wording of the debenture, the claimant's right to sue on the charge had been assigned absolutely to the bank in equity. As the defendant was not given express notice of the assignment, the statutory formalities required to make it an absolute legal assignment were not completed.
Once an equitable assignment had taken place, it was the equitable assignee which had the right to sue as the party beneficially entitled. The assignor could not maintain an action on its own and the assignee would have to be joined as a party.
Here, there was nothing in the wording of the debenture to suggest the bank had appointed the claimant as its agent. In addition, the claim form did not indicate that the claimant was acting other than as principal. The claimant had no right to sue and the bank would have to be joined to the action if the claim was to be pursued.
Things to consider
Wherever underlying debts have been assigned or debentures of the above nature entered into, consideration should be given as to who actually has the right to sue before proceedings are commenced. This will avoid unnecessary costs being incurred, as in this case.