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February 2010

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Feb 10 Update
Case name Royal Bank of Scotland Plc v Chandra
Neutral citation [2010] EWHC 105 (Ch)
Legal points Bank guarantee and mortgage - receivers - sham arrangements - undue influence
Facts Mr & Mrs C owned a company which was engaged in the development of a hotel with funds provided by RBS, secured by way of a debenture and a guarantee from Mr & Mrs C together with a charge over their matrimonial home, signed on 30 October 2001. They subsequently signed a second guarantee on 20 May 2003. As costs increased Mr & Mrs C ran into funding difficulties and were unable to pay their main contractor. The bank made formal demand and appointed administrative receivers over the business and assets of the company. In order to complete the development, the Receivers incorporated a separate company – a special purpose vehicle – who agreed to carry on the business of the company and whose liabilities to the contractor were guaranteed by RBS. RBS continued to fund the development through the company in receivership thereby enabling the receivers to settle the contractor’s claims and enable the development to be completed. The property was ultimately sold leaving a shortfall of over £4M.RBS sought to enforce the guarantees by claiming a money judgment and possession of the matrimonial home. Mr & Mrs C, who were separately represented, sought to defend the proceedings on a number of grounds including challenging the arrangements entered into by the SPV and the company whereby the liabilities of the company was increased as a sham. Essentially their case was that after RBS stepped in, all subsequent liabilities to the contractor should have been met by RBS. They also alleged that RBS were in breach of the equitable duty it owed Mr & Mrs C as guarantors on the basis that the settlement of the contractor’s claims by the receivers had been negligently agreed and could have been avoided. In order for this to amount to a defence to the bank’s claim, it was necessary to attribute liability for the receivers’ conduct to the bank since ordinarily the receivers acted as agents of the company. Mr & Mrs C’s case was that RBS effectively controlled the receivers. In addition, Mrs C raised a defence of undue influence, in respect of both (1) the guarantee and mortgage signed on 30 October 2001, and (2) the further guarantee signed on 20 May 2003.
Held The company remained liable to RBS in respect of the liabilities paid to the contractor for a number of reasons including that the company remained liable for the ‘expenses’ of RBS under the terms of the debenture which included the costs incurred in completing the development, and that in any event, the company was liable for a restitutionary remedy for the benefit it enjoyed by reason of the further funding. Having regard to the statement of principle in Snook v London & West Riding Investments Ltd [1967] 2 QB 786 it was not possible on the evidence to characterise the arrangements entered into with the spv as a sham. The receivers had the power to enter to appoint the spv to employ the contractor on the basis that the company should be liable for the further funds it borrowed from RBS. As to the allegation that the settlement of the contractor’s claims had been negligently agreed by the receivers acting under the control of RBS it was argued that since the receivers took their instructions from RBS, RBS became liable for any lack of competence and diligence (relying on American Express International Banking Corpn v Hurley [1985] 3 All ER 564 and Medforth v Blake [2000] Ch 86). On the facts it was held that the receivers acted independently and reached their own decisions and there was no interference by RBS such as to make the receivers its agents. As to the allegation of undue influence, the court directed itself in accordance with Royal Bank of Scotland Plc v Etridge (No.2) [2002] 2 AC 773 per Lord Nicholls and adopted a two-fold approach (1) was Mrs C’s execution of the documents procured by undue influence, (2) was RBS put on notice? In respect of the guarantee and mortgage signed on 30 October 2001, and in respect of issue (1) above, Mrs C relied on allegations of misrepresentation coupled with pressure and bullying, and a failure by her husband to disclose material facts. The court proceeded on the basis that undue influence consists of unacceptable conduct, which could include overt acts of improper pressure or coercion (such as bullying) and the taking of unfair advantage (such as where a husband prefers his own interests over those of his wife). The court accepted that mis-stating the position or misleading a wife is different from an inadvertent failure to disclose. Non-disclosure of material facts was not itself undue influence. On the facts, Mrs C’s execution of the guarantee and mortgage had not been procured by undue influence or misrepresentation and were not liable to be set aside. That made is strictly unnecessary to decide (2) whether RBS had been put on notice, but the court went on to deal with it. RBS accepted that it had been put on inquiry in the absence of firm evidence that Mrs C was actively involved in the company’s business. However, its case was that it had obtained a certificate signed by a solicitor, albeit one acting for both Mr & Mrs C, in similar terms to the one used in Barclays Bank Plc v Coleman which had been approved by the House of Lords in Etridge. An issue arose as to whether this was a ‘past transaction’ given that the speeches in Etridge were given on 11 October 2001, 19 days before the guarantee and mortgage were executed on 30 October 2001. However, the court considered that while the guidance in Etridge was intended to represent a significant change in practice, it would inevitably take some time for banks and lenders to aborb the law and adjusts their practices. Hence a reasonable period must be allowed for the introduction of the new guidelines after 11 October 2001. In respect of the second guarantee signed on 20 May 2003, the court rejected Mrs C’s account of the circumstances leading up to the execution of the document. Her evidence disclosed a stressful situation in which she had apparently only been told that she was to sign the guarantee when in the car on the way to the bank, but the court found that this did not involve bullying or harassment. The court also rejected as very unlikely the suggestion that the guarantee had only been opened at the signature page and that the limit had not been mentioned. Although RBS had not gone through the document line by line it had explained the principal features. Further, the guarantee had not been entered into as a result of any misrepresentation by RBS that it would grant further finance and the court rejected Mrs C’s evidence that this is what she had been told by Mr C, or that she had been told there was no risk involved. However, as to the allegation that Mr C failed to have proper regard for her interests, the court accepted that Mrs C had been given no real opportunity to consider whether to give the guarantee and that the circumstances of the car journey provided a hopelessly inadequate opportunity for Mrs C to make a decision. Although their solicitor had called to offer advice about the guarantee when they were in the car, there was no adequate legal advice. The pressure combined with the lack of opportunity for any reflection meant that Mrs C’s agreement had been induced by actual undue influence. RBS accepted that in those circumstances it had not properly complied with the Etridge guidelines, so that as against Mrs C, the second guarantee would be set aside. The court invited agreement on the form of order, including the claim for possession.
Comment This is a lengthy judgment (67 pages, 256 paragraphs) which follows a 10-day trial and inevitably turns on detailed findings of fact. The case is however significant for two main reasons: (1) It is an example of the difficulty involved in getting behind the agency principle involving the appointment of receivers. As noted, receivers (in this case administrative receivers appointed pursuant to the terms of a company debenture, as opposed to Law of Property Act receivers appointed pursuant to a mortgage) ordinarily act as agents of the borrower rather than the lender who appointed them. In order to set up a defence to the bank’s claims on the guarantees, the guarantors had to prove that negligence by the receivers could be attributed to the bank – in this case by alleging that the bank had a sufficient degree of control over the receivers as to make the bank liable for any negligence. The claim was rejected on the facts. The legal basis for liability was not explored in any great detail. (2) It is also contains a useful review of the principles involved in undue influence claims, and in particular the type of conduct that might amount to undue influence – including bullying and harassment coupled with misrepresentations, but significantly, does not extend to simple non-disclosure of material facts.
Item MORTGAGE REPOSSESSIONS (PROTECTION OF TENANTS Etc.) BILL 2009-10
Details The Bill which seeks to provide limited protection to unauthorised tenants of borrowers passed through its 1st Reading in the House of Lords on 1st March 2010. To follow progress of the Bill go to http://services.parliament.uk/bills/2009-10/mortgagerepossessionsprotectionoftenantsetc.html
Item BUILDING SOCIETIES ASSOCIATION MORTGAGE INSTRUCTIONS
Details The BSA’s Mortgage Instructions provide a full set of conveyancing instructions for conveyancers acting on behalf of BSA Members and their subsidiaries in residential conveyancing transactions. The Instructions came into full effect on 1st January 2010. As with the Council of Mortgage Lenders Handbook, the BSA’s Instructions are in two parts – a core set of mortgage instructions, and specific requirements setting out individual lenders’ policies. There are separate Instructions for England & Wales, Scotland, Northern Ireland, and the Isle of Man. If the instructing lender has adopted the BSA’s Instructions, it will say so in the offer of mortgage. To date, the following lenders have adopted the BSA’s Instructions: • Astra Mortgages • Bath Building Society • Beverley Building Society • Buckinghamshire Building Society • Cambridge Building Society • Chesham Building Society • Chorley Building Society • City of Derry Building Society • Cumberland Building Society • Earl Shilton Building Society • Hanley Economic Building Society • Hinckley and Rugby Building Society • Ipswich Building Society • Kent Reliance Building Society • Leek United Building Society • Loughborough Building Society • The Mansfield Building Society • Marsden Building Society • Melton Mowbray Building Society • mbs Lending Ltd • Newbury Building Society • Newbury Mortgage Services • Newcastle Building Society • Norwich & Peterborough Building Society • Nottingham Building Society • Penrith Building Society • Stafford Railway Building Society • Teachers' Building Society • Tipton & Coseley Building Society • West Bromwich Building Society • West Bromwich Mortgage Company Ltd •
Case name WEBB v MacDONALD
Neutral citation [2010] EWHC 93 (Ch)
Legal points Barrister’s and Solicitor’s negligence – mortgage proceedings – summary judgment
Facts W was represented by Leading and Junior Counsel, and Solicitors in defending mortgage possession proceedings brought by a bank following default in payment of sums due by a company which had been secured by a guarantee given by W, together with a legal charge over his interest in a property. The company went into liquidation and W entered into an IVA. The bank initially admitted its claim in the IVA, although subsequently sought to rely on its security. W sought to defend the proceedings on the basis that the bank’s proof in the IVA amounted to a release of its security over the property. W was advised that his defence was unlikely to succeed, and he was advised to settle on terms which he did, reluctantly. Nearly six years later, W issued proceedings for damages for negligence against his Leading Counsel and Solicitors. He alleged that he had been advised to settle at too high a figure and that he had effectively been told his public funding would be withdrawn and his lawyers would withdraw from the case is he did not accept the settlement on offer.
Held On the facts, W had been correctly advised that his defence was unlikely to succeed and had been offered sensible advice to settle in the run-up to trial Moy v Pettiman Smith (a Firm) [2005] UKHL 7 considered. He had not settled at too high a figure and properly assessed he had been correctly warned that public funding may be withdrawn if he did not accept the settlement. Overall, W had no reasonable prospect of showing that the advice he had received to settle was such that no reasonably competent Chancery Silk or Solicitor could have given. The applications were therefore dismissed.
Comment This case is worth a read. It involves criticisms about client care; “pulling the plug” at a late stage in the proceedings; and managing clients’ expectations. It also contains a useful review of some of the principles involved in assessing both Barristers and Solicitors negligence in settling proceedings.