Category Archives: Administration

Third parties who induce breaches of personal rights may not rely on non registration

To make a purchaser of a registered land title subject to personal liability in respect of adverse contractual rights concerning land, not disclosed on the register, may seem contrary to the entire scheme of land registration.

Section 29(1) Land Registration Act 2002 is the section that regulates priorities but it does not concern itself with purely personal rights. It postpones any interest affecting land to any later land dealing, if the priority of that interest was not protected at the Land Registry at the time of registration of that later land dealing so long as that later land dealing has been done for value.

The key to this conclusion is that the phrase an interest affecting land covers proprietary rights – but would not extend to purely contractual rights as section 132(3)(b) of the Land Registration Act 2002 defines “any interest affecting the estate” as “an adverse right affecting the title to the estate…”

In the High Court case of Lictor Anstalt v Mir Steel UK Ltd & Another [2014] a hot steel strip mill (“HSM”) was in a factory which the claimant (Lictor) had procured for Alphasteel (now in administration).

The removal of a HSM would have been complex, very expensive and time consuming and would have required some remedial repair works to the site.

The court ruled that the HSM formed part of the site and so, part of the land itself. Given it’s very nature, the HSM was intended as a permanent or semi permanent structure. The purpose of securing the HSM to the site had been to enjoy the site as a functioning steel mill.

An HSM of this kind would have been expected to have an operable life of up to fifty years and would only be removed in exceptional circumstances.

It therefore rejected Lictor’s primary claim that the HSM was a collection of chattels which Lictor had retained title to despite Alphasteel’s ownership of the site.

Although the HSM had become part of the land an agreement between the Lictor and Alphasteel (“the April Agreement”) had sought to:

– regulate Alphasteel’s use of the HSM creating contractual and equitable rights and obligations in relation to the it;
– to classify the HSM as a chattel;
– to preserve a contractual right for Lictor to prevent dealings with the HSM by Alphasteel as if it were the owner; and
– to preserve a contractual right for Lictor to enter onto the site in order to sever the HSM from the land and remove the HSM.

When the Administrators of Alphasteel later sold the site including the HSM on to Mir, Mir actually knew through the Administrators that by executing the associated hive down agreement and the land transfer the April Agreement would be breached.

This exposed Mir to liability to Lictor for the tort (legal wrong) of inducing breach of contract.

Will this lead to a need for additional enquiries in every case? No because the tort is based upon actual knowledge by the purchaser of the contractual rights being broken.

However it does mean that a buyer with knowledge that it’s purchase proposals will contravene someone else’s contractual rights cannot simply close their eyes and rely on the fact that those rights are not protected by a notice or a restriction on the land register.

This blog has been posted out of general interest. It does not replace the need to get bespoke legal advice in individual cases.

Mortgagee could enforce mortgage just to pressurise

If a lender is enforcing a mortgage it should do so to recover it’s debt. Usually this will be by selling or letting the property.

It cannot do so for a collateral purpose.

Most mortgages entitle a lender to recover, also, the costs it incurs in enforcing the mortgage.

In The Co-Operative Bank Plc v Phillips (2014) the bank had a legal charge which stood second to Barclays Bank’s first mortgages over the properties.

The Co-Operative Bank Plc (“Coop”) had no realistic chance, or therefore intention, of recovering the borrower’s indebtedness by selling or leasing the properties.

It withdrew the enforcement proceedings.

Mr Phillips claimed the bank had merely brought the proceedings to frighten family members into paying. Indeed his daughter had raised £50,000 to pay to the bank. He said this was an invalid collateral purpose entitling him to recoup his costs from the bank on the much more generous “indemnity basis”.

The High Court took a broader view. Whilst there was no prospect, or intention, of the bank recouping itself by a sale or letting of the properties, it was quite entitled to take proceedings to bring pressure on the family to pay money to the bank. The bank was merely seeking to get its money back, which was the whole purpose of mortgages. So Mr Phillips’ claim to indemnity costs failed.

Nevertheless, as there was no realistic prospect of a sale or letting, the legal costs the bank had caused to be incurred by enforcing the charge were not “properly incurred” as the legal charge’s cost recoupment clause had stipulated. This may seem strange to some, given the court’s earlier ruling that the proceedings were a legitimate tactic to enforce the legal charge’s purpose of getting the money back.

As such the bank was neither entitled to recoup it’s own legal outlay through the legal charge, nor was it entitled to recoup, through the legal charge, the legal costs the court had awarded Mr Phillips against the bank when the bank withdrew its proceedings against him.

This blog has been posted out of general interest. It does not remove the need to get bespoke legal advice in individual cases.

Zurich insurance claim survived accepting insolvent developer’s repudiation

In Bache & Ors v Zurich Insurance Plc [2014] the new property buyers benefited from an insurance policy which said:

“We will pay where, due to the developer’s bankruptcy, liquidation or fraud, the developer fails to complete the construction of the new home in accordance with the requirements and the buyer loses a deposit paid to the developer under the terms of the purchase contract for the new home, we will at our option

(a) Pay the reasonable cost of completing the home to the original specification; or

(b) Pay to the buyer the amount of any such lost deposit.”

The Claimants treated the non-commencement and non-completion of Block A as repudiatory and sought recovery of their deposits.

Zurich refused to pay out because the vendor was in administration and not yet in liquidation. Though it did later go into liquidation.

Looking at the commercial purpose underlying the insurance the High Court declined to accept as significant a temporal difference between those purchasers, such as the Claimants, who treated the non-commencement and non-completion of Block A as repudiatory, and those purchasers who did not do so but simply waited until the liquidation.

Zurich had paid and would pay out on the latter. This implied that the timing was important. However, the court rejected this as a distinction without a commercial difference.

The reality was that the construction project was never going to be completed by the vendor – particularly during the recession. There was no obvious or logical reason why there should be a distinction between the two types of purchaser i.e. the purchaser who was prepared to wait or who could not be bothered to do anything about the failure to complete the work and the purchaser who felt that he or she could not wait, possibly, for a very long time.

A purchaser in the latter category could only try to secure the recovery of his or her deposit by accepting any repudiation on the part of the developer vendor.

The commercial reality, envisaged as at the date of the insurance policies in question, was that the purchasers’ right to secure the return, by the vendor, to the purchasers of the deposits would only arise on either a repudiatory failure by the vendor to start or complete the development, or a refusal or inability on the part of the vendor to complete the long leases.

In practice the latter case would only arise where the flat construction had been substantially completed. So the parties to the policy must be taken to have foreseen the possibility of the deposits being recoverable by the purchasers from the vendor if the latter had repudiated the agreements for lease by being unable or unwilling to proceed with construction of the flats.

Furthermore the policy wording had to be construed in this way to enable it to fulfill its commercial purpose for it would be relatively uncommon that the formal bankruptcy or liquidation caused the developer’s inability to complete the construction. Mostly the developer’s inability to complete will be the actual or impending insolvency of the developer which will lead to either a creditor or lender or the developer itself putting the developer into liquidation.

Whilst the final liquidation of the developer would finally rule out any theoretical possibility of the developer actually completing the development, the underlying cause of the failure to complete the development would be the actual or impending insolvency of the developer beforehand.

The court did accept that the insolvency of the vendor was not in itself an event which engaged the policy. The relevant section of the policy was not engaged unless and until there was a bankruptcy, liquidation (including dissolution) or fraud. Otherwise, there would have been no need to mention those contingencies.

However the fact that the insured purchasers have accepted a repudiation on the part of the developer vendor was not in any way a bar to recovery under the policy after liquidation had occurred because the failure of the developer “to complete the construction” was not reliant on their being “a subsisting contractual obligation”. That would require an unnecessary gloss on the word “fail” and in effect require the addition of words. The words: “the developer fails to complete the construction” meant simply that the developer did not complete the construction. It tied in with the Introduction to the policy which summarised the commercial purpose of the relevant part of the policy. If there was an ambiguity as to what “fails to” meant then it should be construed in favour of the insured.

The case would have been decided the same whether or not the developer was insolvent at the time of the acceptance of the repudiation.

This blog has been posted out of general interest. It does not replace the need to get bespoke legal advice in individual cases.

Bank didn’t get Property Company’s Director’s Guarantee by misrepresentation or duress

One of the main features of economic duress is that it involves “illegitimate pressure”: that’s to say pressure without any commercial or similar justification. The “rough and tumble of normal commercial bargaining” is not to be mistaken for illegitimate pressure. Whether it is will depend upon a consideration of all of the circumstances in any given case.

In Bank of India v Riat [2014] Nirpal Singh Riat, the Defendant, signed two limited guarantees as security for facilities provided by the Bank of India (“the Bank”) to Globepark Developments Limited (“the Company”). The Company was a family run business with Mr Riat and his son Ashwin Riat being the sole directors and shareholders. Mr Riat was a 98% shareholder. The Company developed and rented out properties.

He signed a guarantee in January 2006 (“the first guarantee”) in respect of a facility letter (“the first facility”). The first guarantee was limited to £1,237,000 together with interest, costs and expenses. He signed a second guarantee in August 2006 (“the second guarantee”) in respect of another facility letter (“the second facility”). The second guarantee was limited to £490,000 together with interest, costs and expenses.

The Company entered administration on 31 March 2010. The Bank made formal demands under the guarantees which he had resisted on various bases since March 2011.

Prior to the first facility the Claimant allegedly negligently misrepresented to the Defendant that the Claimant wished to expand its involvement in the property development sector which the Defendant said was not a true representation as to the, then, existing intention of the Claimant and induced the Defendant to enter into both of the guarantees.

The Defendant also said the first guarantee was voided for economic duress. He said the requirement of a guarantee was not mentioned at all by the Bank until the last possible moment, at a point when the Defendant had “burned his bridges” with Natwest Bank who were the, then, bankers for the Company leaving him with no practical alternative financiers.

The High Court accepted in principle that a bank’s statement that it wanted to increase its exposure in a particular business sector may, if untrue, be capable of providing the basis for a claim in misrepresentation. For example, the Bank’s policy may in fact have been to reduce lending in that business sector, or the lending may not have been its core business, or may have been limited to particular geographical areas.

The court found that the total amount of exposure in the Real Estate Sector, at the Bank’s main office, rose from £60.436 million as at 30 November 2005 to £68.287 million as at 31 January 2006. Relative to the total amount of actual advances that was an increase from 8.05% to 11.42%. So the first representation was actually true.

Even if the representation had been untrue, the court was not persuaded it had been relied on. Moreover it would have had no causal link to the facilities being taken up. They would have been taken up in full any way.

The requirement of a personal guarantee was standard practice under the Bank’s policies unless there was a good reason to waive the requirement. In fact the court found that there had been a discussion about the personal guarantee as early as 15 November 2005 because the Defendant had failed to provide a Statement of Assets and Liabilities as had been requested by the Bank. The Defendant must have known he was being requested to provide this on the sole basis that it was to ascertain his ability to give a worthwhile personal guarantee to support the Company’s application to the Bank.

The most important motivation for the Defendant choosing the Bank was that it was prepared to provide a 75/25 loan to value ratio on the Bremic Hotel which would enable the release of further funds for the purchase of other property.

There was no significant pressure from the Bank let alone “illegitimate pressure”. The requirement for a personal guarantee was not unusual and had been brought to the Defendant’s attention by 15 November 2005 at the latest. He had other options for refinancing with Handelsbanken and other institutions and had sufficient time even to obtain independent legal advice. Indeed the solicitor concerned had confirmed that he appeared to understand the implications of what he was doing before signing the guarantee.

The court was also unimpressed by the length of time it had taken the Defendant to challenge the first guarantee.

So the court confirmed that the Defendant was bound by the guarantees and refused a declaration that he could cancel them.

This blog has been posted out of general interest. It does not remove the need to get bespoke legal advice in individual cases.

Fruitless unsecured member claim in LLP administration insufficient to put administrators through examination

In Berntsen & Anor v Tait & Anor [2014] the administrators of Coniston Hotel (Kent) LLP (the “LLP”) sought an order that the Applicants’ proceedings be struck out and that the Applicants’ claim be dismissed.

The Applicants were the LLP’s members. The LLP’s hotel, the Coniston Hotel, at Sittingbourne needed further funds to enable it to complete works and to open for business. The LLP’s Bank, National Westminster Bank PLC, was not prepared to lend more without personal guarantees from one or both Members. The Members would not give them.

The Members put the LLP in Administration with the Respondents appointed as Administrators.

The Administrators sold the Hotel to West Register Limited, an associated company of the Bank.

The Claimants alleged that the Hotel was worth in excess of £7 million and had been sold for £4.25 million, which was an undervalue. They could not criticise anything specific in the marketing and sale process itself but said that the marketing process was a “sham” leading to a sale to a predetermined purchaser, which for non specific reasons, was part of a conspiracy to defraud by members of the Bank, the Valuer and the Administrators. Those who suffered from the alleged conspiracy were the LLP and, indirectly, therefore, the Members.

Rejecting the undervalue and conspiracy claims as “unviable”, and ordering the proceedings to be struck out, the court said the costs would have been significant and Members had evidenced an inability to pay the Respondents’ costs.

The final allegation, under paragraph 75 of Schedule B1 to the Insolvency Act 1986, was that the Administrators had handled the Administration badly. But their pleading had not identified any of that mishandling. However in order for the Members in this case to bring the claim, whether in the capacity of Members or as creditors, they had to show they had a “sufficient interest” in the remedy which was being sought. Here that remedy was that the Administrators pay compensation to the LLP, which might mean the Administrators remitting some or all of their fees (£130,000). However those fees could only be distributed, first to the secured creditors i.e. the Bank. As the Bank was owed over £1 million any such recovery by the LLP would be for the exclusive benefit of that secured creditor. Nothing would be paid to unsecured creditors. or the Members. So the Members did not have the necessary pecuniary interest in the remedy they were seeking. to qualify to make that claim. Their human interest in seeing the Administrators subjected to a trial did not give them standing to bring an examination claim. So the court dismissed that claim also.

This blog has been posted as a matter of general interest. It does not remove the need to get bespoke legal advice in individual cases.