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June 2011

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June 11 Update

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Case name Zinda v Bank of Scotland Plc
Neutral citation [2011] EWCA Civ 706
Legal points Mortgages – arrears – s 36 - enforcement of suspended possession order after consolidation – Greyhound Guaranty v Caulfield
Facts In 2003, Z obtained a 25-year interest-only mortgage of £133,000 from BoS, secured on a residential property. He fell into arrears and in 2005 the court made an order for possession in 28 days, suspended on payment of a reasonable sum off the arrears together with the current monthly instalment. In 2008 BoS agreed to consolidate the arrears with the outstanding balance of the loan. Z fell into further arrears and in 2009 BoS applied for a warrant of possession. Z applied to suspend the warrant. His application was dismissed by the District Judge and his appeal to the Circuit Judge was also dismissed. Z’s application for permission to appeal to the Court of Appeal was allowed on a renewed oral application on the ground that it raised an important point of law or practice under CPR 52.13(2)(a). The point in issue was whether the original suspended order for possession had been extinguished following consolidation of the arrears on which the order was based.
Held Once the court overcomes the jurisdictional hurdle in s 36(1) Administration of Justice Act 1970 that the mortgagor is likely, within a reasonable period, to pay any sums due under the mortgage (which, by s 8 Administration of Justice Act 1973, means the arrears of instalments due) the court is then given a wide discretion under s 36(2) and (3) to suspend a possession order subject to such conditions with regard to the payment by the mortgagor of any sum secured by the mortgage as the court thinks fit. The order for possession was suspended on two conditions (1) payment of a reasonable sum off the arrears, and (2) payment of the current monthly instalment. The effect of the consolidation of the arrears was to substitute a new loan for the original loan, with a consequential adjustment of the current monthly instalment. Although the consolidation had removed the arrears, so that the first part of the order had been complied with, Z remained subject to the second part of the order – a requirement to pay the current monthly instalment. The District Judge had been entitled to refuse to suspend execution and the Circuit Judge was right to refuse Z’s appeal. The outcome was not ‘tantamount to an indefinite death sentence’, it was merely the consequence of non-compliance with the contract of mortgage. Appeal dismissed.
Comment The principle at the heart of this case, and one which frequently causes some confusion, is whether a lender, seeking to enforce an order for possession which has been suspended on the usual terms as to payment of a reasonable sum off the arrears and the current monthly instalment, has to start fresh proceedings if the borrower pays off the arrears but subsequently defaults again. The answer is no, and the Court of Appeal in this case referred to the previous authorities: Greyhound Guaranty v Caulfield [1981] CLY 1808; Bradford & Bingley Plc v Harris (unrep); and Halifax Plc v Taffs [1999] EWCA Civ 698. In this case, there was a slight twist. After obtaining its suspended possession order, the lender consolidated the arrears, however, the same principle applied. The borrower was still required to comply with the second part of the suspended order – payment of the current monthly instalment, and subject to any application to vary or revoke the conditions under s 36(4), that followed him for the remainder of the mortgage term. The judgment of Munby LJ contains a useful analysis of the some of the basic principles of mortgage law, and the application of s 36 AJA 1970.
Case name Mahon v FBN Bank (UK) Limited
Neutral citation [2011] EWHC 1432 (Ch)
Legal points Bank guarantee – husband and wife - undue influence of wife as company secretary - Etridge guidelines – misrepresentation by enticing new business - statutory demand
Facts Mr M was the sole director of a property development company. His wife, Mrs M was the company secretary and sole shareholder, although she had taken no active part in the management of the company and claimed to be a full-time housewife. In 2007 the company proposed to obtain funding from F Bank, which represented that it was experienced and interested in funding property development. F Bank subsequently offered banking facilities comprising a loan and overdraft facility totalling £1.1M subject to taking a personal guarantee from Mr & Mrs M. Arrangements were made for Mr & Mrs M to be seen by the company’s solicitors who certified that they had explained the effect of the guarantee to them. After the loan was drawn down, F Bank baulked at providing further finance, citing the lack of experience in the type of finance and its fit with their core business. The company subsequently exceeded its borrowing facility and F Bank made formal demands of Mr & Mrs M under their guarantee followed by service of statutory demands. Mr M applied to set aside the statutory demands, alleging amongst other things misrepresentation by the Bank. Mrs M relied on similar grounds, but principally undue influence exerted by Mr M of which the Bank took with constructive notice. The District Judge refused to set aside the statutory demands. Mr & Mrs M appealed.
Held Under the Insolvency Rules 6.5(4), the court is engaged in a summary process requiring consideration and some evaluation of the available evidence, but not a conclusive or final determination. Sub-paragraphs (a)-(c) address particular grounds for the exercise of discretion with sub-paragraph (d) providing a residual ground. In relation to Mrs M’s principal ground of appeal of undue influence, the court considered the guidance given in Royal Bank of Scotland Plc v Etridge (No.2) [2002] 2 AC 773 and held as follows: 1.Whether the transaction was brought about by undue influence is a question of fact where the burden of proof rests on the wife; 2. At a summary pre-trial hearing, credible evidence that the wife placed trust and confidence in her husband for the management of her financial affairs will normally suffice to raise the rebuttable presumption of undue influence, so that the bank will be ‘put on inquiry’. 3. The court should then consider whether there is evidence that the bank complied with the guidance in Etridge. 4. If so, the court should consider whether that evidence undermines the undue influence claim to the extent that (a) there does not appear to be claim equalling or exceeding the debt or a substantial ground for disputing the debt under IR 6.5(4)(a) or (b), or (b) that the court is not satisfied that the demand based on the guarantee should be set aside under IR 6.5(4)(d). The court noted from Etridge (Lord Nicholls at para 49) that whether or not a wife is a minority, 50% or 100% shareholder is not the telling factor; what matters is the substance of any relationship between the wife and the business or company and the extent, if any, of her knowledge of and involvement in that business or company. Mrs M had raised a triable issue that F Bank was ‘put on inquiry’ and that the steps taken by the Bank fell short of those identified as the core minimum in Etridge. The debt was therefore disputed on substantial grounds which – if established at trial – would render the debt unenforceable. In relation to Mr M’s principal ground of appeal, namely misrepresentation by F Bank in inducing the company to enter into banking arrangements and Mr M to become a guarantor, this was realistically arguable and raised a genuinely triable issue. A “mere extravagant enticement of new business” to the effect that the bank is experienced in residential property development and wishes to develop a banking relationship, made orally and confirmed in writing to a prospective customer which conducts such business as its principal activity is arguably more than mere “puff” and is arguably a representation having legal effect. Where the bank then says to the customer, who has transferred his banking relationship to the bank in reliance, that such relationships are not part of its core business etc, it is realistically arguable that the representation is an actionable misrepresentation, or that such representation became an implied term of the banker/customer contract which has been broken. As to causation issues, the mere fact that primary loss or damage is occasioned to the company does not mean that the guarantors have not suffered any loss. Misrepresentation raises a dispute as to liability under the guarantee which appears to be substantial. Appeals allowed.
Comment This is not a mortgage case but it does contain some helpful and important indications about the way in which courts exercising summary jurisdiction will approach the defences open to husband and wife guarantors of their company’s debts. Helpful first of all because it sets out the approach to be taken when considering a plea of undue influence raised by the wife who is also a shareholder and company secretary. Important as well because it sounds a warning to banks who entice new business with extravagant business pledges.
Case Summary Scullion v Bank of Scotland (t/a Colleys)
Neutral Citation [2011] EWCA Civ 693
The principle established in Smith v Eric S Bush (a Firm) [1990] 1 AC 831, that a residential mortgage valuer owes a duty of care to the purchaser does not extend to a valuation obtained for an investment in a buy-to-let property. The valuer could reasonably expect a buy-to-let purchaser to obtain his own advice, including the ease with which the property could be let; the level of rent he could expect to achieve; the rent-free period he may have to allow; and other fees or terms that would need to be agreed. Accordingly, no duty of care was owed.
Update Secured Lending Reform Bill 2011
This private members bill which was presented to Parliament on 30th June 2010 is now due for its second reading in the House of Commons on 9th September 2011. It proposes significant amendments to: • Section 109 Law of Property Act 1925 by inserting new provisions which restrain a receiver appointed under the Act from bringing proceedings for possession of any property; exercising a right of peaceable re-entry; or conducting the sale of a property or receiving the proceeds of sale EXCEPT where an order for possession of the property has been granted by the court • It extends the statutory and common law duties of a receiver appointed under the Act to the mortgagor, mortgagee and any other person for the time being interested in the equity of redemption and provides for the Secretary of State to make regulations to define the scope and nature of the duties and to specify any additional categories of persons to whom the duties are owed • It provides for the Secretary of State by regulations to abolish the right of a mortgagee to obtain peaceable re-entry of a property and to prescribe the maximum penalties that may be imposed on a mortgagee who peaceably re-enters a property • It provides for the Secretary of State by regulations to ensure that a possession order is not made by the court on the application of a mortgagee unless the court is satisfied that the mortgagor has received an adequate opportunity to raise any counterclaim, set-off or other defence that may be available against the mortgagee and the court has determined the merits of any such counterclaim, set-off or other defence (although this shall not prevent the court from making a possession order where the mortgagor has unreasonably delayed pursuing any such counterclaim, set-off or other defence • It provides for the Secretary of State by regulations to make provision to ensure that the court has power on the application of a mortgagor or mortgagee to vary any of the following terms of the mortgage deed or instrument where it appears just to do so – the rate of interest, the schedule of payments, or the value of payments. Regulations must also ensure that an application can be made by the mortgagor or mortgagee to vary an order made pursuant to this provision where there has been a change in circumstances. To follow progress of the Bill and for a link to the Bill as printed,click on the UK Parliament website.
Consultation Solving disputes in the county court
On 29th March 2011 the Ministry of Justice issued a consultation ‘solving disputes in the county courts: creating a simpler, quicker and more proportionate system’. The consultation sought views on proposals to reform the civil justice system in the courts in England and Wales. It runs to 100 pages and includes sections on alternative dispute resolution and debt recovery and enforcement. The Council of Mortgage Lenders responded on 30th June 2011 with a brief response which comments upon pre-action and mediation steps, the Pre-Action Protocol and MCOB, and Possession Claims online.
Consultation Forbearance measures
On 3 May 2011 The Financial Services Authority published a consultation document seeking views on guidance primarily aimed at residential mortgage lenders and administrators concerning forbearance and impairment policies. On 22 June 2011 the Council of Mortgage Lenders published its response stating that the CML supports the FSA’s view that any forbearance measure deployed on an account needs to work in the interests of both the firm and borrower. However, the CML believes that aspects of the FSA’s guidance appear to be moving firms and borrowers away from reaching a mutually agreeable compromise of how to address a financial difficulty, towards a position where the firm effectively imposes a forbearance solution on a borrower.