Bridging Introducer: Summer legal update
Johnathan Newman of Brightstone Law takes us on a short walk through some of the latest court decisions impacting bridging
“I have come to regard the law courts not as a cathedral but rather as a casino”. Not my words, obviously, but those of Richard Ingram past editor of Private Eye.
If the courts are indeed a casino, then we, the lawyers, the lenders, the intermediaries, the valuers, and all the stakeholders are the players. And players have a better prospect of winning when recognising that the rules of the game have changed and the odds have moved.
At times it feels like we live in a world of information overload. It can be hard to keep up with the latest news and developments (that’s my job!), and at the same time carry on with your day job. So with this in mind, I have produced a summer update of the latest court decisions of particular interest to the short term lending community.
Good news for lenders. Bad news for guarantors. In MUR Joint Ventures BV, the Commercial Court confirmed that a guarantor remained liable under the terms of his guarantee notwithstanding a defect in its form. The court was happy to distinguish guarantees from letters of credit, where strict compliance was necessary for the security to be effective.
A proper construction of the documents is all that is required and provided that the guarantee is comprehensible and makes sense, it will be enforceable.
Secured creditors and assets subject to freezing orders
In March, the High Court confirmed that a secured creditor can enforce their security over assets which are subject to a freezing order without necessarily applying to the court (Taylor v Van Dutch Marine Holding Ltd).
It can do so provided that the enforcement is not collusive with the debtor, doesn’t constitute a breach of the freezing order, and does not amount to a disposal by the debtor. Interestingly in this case, Receivers were the party seeking to realise the security, and they were allowed to do so despite the fact that strictly speaking, Receivers act as the agents of the borrowers. So good news for lenders, and good news for LPA Receivers.
Commissions/secret commissions and half secret commissions
There was a potentially game-changing decision for lenders and intermediaries alike when the High Court distinguished Hurstanger v Wilson in the case of Commercial First Business Ltd v Pickup & Vernon. The borrowers took five secured loans with Commercial First. All the loan facilities were unregulated and the total amount borrowed was in excess of £1million. The loans were introduced by two intermediaries who received commissions of between 2% and 4%.
In the first four loans, (which pre-dated the decision in the Hurstanger case) no amounts of commission were disclosed, (though the fact that commission would be paid was). In the last two loans, the amounts of commission were disclosed by the lender.
In a not uncommon story, the borrowers defaulted and sought to relieve themselves of their obligation to repay the debt, by making claims that the loan be rescinded by reason of breach of fiduciary duty on the part of the intermediaries and also sought to reopen the loan agreement under the Unfair Credit Relationship provisions. “No” said the court.
Contrary to the judgment in Hurstanger, the broker/borrower relationship was not necessarily a fiduciary one (this was conceded in the Hurstanger case somewhat foolishly in hindsight), and absent a finding of a fiduciary relationship, there could be no fiduciary breach, by reason of secret or half secret commission.
To determine the true nature of the relationship, the court considered the level of contact between broker and borrower, the borrower’s level of sophistication, and the amount of awareness the borrower had as to how the intermediary was to be remunerated. The Unfair Credit Relationship claim similarly failed.
This case represents the highest level of court to distinguish Hurstanger, the spectre of which has been troubling intermediaries and brokers for a number of years, and the decision is one which throws a spanner in the works of CMC’s looking for their next PPI payday.
Success for Clydesdale Bank against internal fraud and a dishonest borrower
In Clydesdale Bank v Stoke Place Hotel Ltd, Clydesdale successfully obtained judgment against a dishonest borrower personally, notwithstanding that the loan facilities (over £17m in value) were advanced to companies under the borrower’s control, which companies later became insolvent.
Clydesdale’s claim was founded on deceit and was based upon false representations which induced them to release part of their security, and also in relation to additional facilities which the borrower knew were unauthorised or would have been unauthorised but for his conspiracy with an employee of the Bank.
It is rare indeed to go behind the corporate veil, but Clydesdale succeeded in this case. Deceit and dishonesty are complicated claims, lengthy, and costly to pursue but they are not to be discounted and the level of damages available on deceit claims can often exceed those available in contractual or negligence claims.
Enforcement in Scotland of loans subject to assignment
In March, a significant decision was given in Scotland, whereby One Savings Bank Plc were prevented from enforcing their security by reason of a legal title transfer deemed to be invalidly drawn. The impact of the decision could be significant and far reaching for lenders in Scotland.
The original mortgage (Standard Security) had been granted by the borrowers to GMAC but was subsequently transferred to OSB. In Scotland the legislation sets out the form of wording to be used in the creation and transfer of Standard Securities.
The legislation allows for additional or different wording where verbatim forms of wording may not be possible. A practice developed in Scotland whereby lenders decided not to set out (as the required wording does) specific amounts due under the security in the assignment document. The reasoning was in practical terms sensible. Lenders preferred not to set out amounts due in their assignments for fear that the figures may be interpreted as fixing the level of debt and/or where securities formed part of a larger portfolio, transferred for a gross figure.
But the Scottish Court looked closely at the legislation, and then the exact terminology used in the particular form of assignment to determine its enforceability. Omitting the value on its assignment document, was held to be non-compliant, and left OSB with nothing to enforce.
Of course not all loans and security in Scotland are subject to assignments, but lenders who have mortgages subject to such assignments ought to consider carefully the enforceability of the security in light of this decision. They should further consider the costs and risks in seeking to rectify.
By way of some comfort is the fact that the court accepted that the debt had been validly assigned, if not the security itself.
A word of caution, and hope, perhaps is that the decision is almost certainly to be appealed, so watch this space.