Category Archives: Bankruptcy

Receivers owed no duty of care directly to bankrupt mortgagor

Where a mortgagor is subject to the appointment by the mortgagee of a receiver over the mortgaged property the receiver owes a duty to the mortgagor to look after the property if and to the extent that the mortgagor retains an interest in what remains of the property after the mortgage debt and the receiver are paid off {the equity of redemption).

Where the mortgagor becomes bankrupt, the mortgagor ceases to have any such interest. The equity of redemption becomes vested in their trustee in bankruptcy. Though the mortgagor retains a legal liability under the mortgage, that is limited in nature and duration. Upon his discharge from bankruptcy it is automatically extinguished. The mortgagor walks free from the mortgage and the benefit of the equity of redemption stays vested in the trustee in bankruptcy for the benefit of the general creditors.

In the event of a surplus in the bankruptcy, then under section 330(5) of the Insolvency Act 1986, the trustee must return that surplus to the bankrupt: But the bankrupt has no right to the mortgaged property as such and his interest in any possible surplus can be and is protected by the duties which both the receivers and the mortgagee will owe the trustee in bankruptcy as to their management of the property and its realisation.

The creditors and the bankrupt mortgagor have a shared interest that the property should be managed and disposed of for the best price reasonably obtainable but that does not mean that they are owed any duty by the receivers.

In the Court of Appeal case of Purewal v Countrywide Residential Lettings Ltd & Anor [2015] all the foregoing factors were in play. The residential property had been subject to water damage but the receivers had failed to take timely action to stop the problem, which the mortgagor had told them about, or to claim the insurance proceeds in time. On getting the property back the mortgagor had spent £16000 fixing it.

The court said no legal precedents suggested the receivers’ duty being owed to a bankrupt mortgagor nor was there any justification for imposing such a duty. The mortgagor has ceased to have any interest in the equity of redemption and his ultimate entitlement under s. 330(5) to any surplus in the bankruptcy did not require the imposition of a duty to anyone beyond the trustee in bankruptcy so the receivers were not liable to him.

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.

Bankrupt son’s assets not shielded from creditors by trust

Property held by a bankrupt on trust for another person does not form part of the bankrupt’s assets that can be seized and sold by their trustee in bankruptcy for creditors.

In the absence of evidence to show a different interest, the starting point is that the beneficial interest in the assets is the same as the legal interest. The onus is on the person asserting the separation of legal and beneficial interests to prove it by convincing evidence.

If it’s alleged that the interest arises by way of a common intention trust, the whole of the circumstances must be looked at to determine whether such an interest exists, and (if relevant) the extent of it.

The necessary intention may be found from express words spoken or written, or by inference from the actions of the parties (as in the case of a resulting trust found on the basis of contribution to the purchase price).

But in deciding what inferences are to be drawn from conduct, the court must look at the relevant conduct as a whole.

In the High Court case of Thandi v Sands & Ors [2014] a son had become bankrupt in 2011. His father now alleged that the properties he owned were held by that son on bare trust for the father and so did not form part of the assets owned by the son beneficially as well as legally.

The father said that the son had executed a declaration of trust in his favour in 2003 to that effect.

Whilst the court accepted that the father had provided all or substantially all the finance for buying the initial properties, the court found that the declaration of trust had only been executed in 2006.

The court was wary of the parties’ evidence of their intentions as given in court regarding it as self serving evidence of subjective intention to substantiate a trust that they thought would assist them to keep the family assets away from the son’s creditors.

The most reliable evidence of the father and son’s actual intentions was what could be inferred from what they actually did. Whilst the father chose to have the properties all transferred to, or purchased in the name of his son, the son holding them on trust was by no means the only possible intention, particularly in the context of the acquisition and management of family assets and family wealth.

It was equally possible that the father had intended to build up a portfolio of assets that his son would own, or that would be regarded as assets of the family to be dealt with in future as they might agree or as the father might secure using his influence as head of the household.

Neither such arrangement would have given rise to a trust in the father’s favour.

The contemporary objective evidence clearly showed that all the properties were, from purchase, treated as belonging to the son beneficially.

They were presented in that way to third parties whenever the true beneficial ownership might be relevant. Those third parties included various mortgage companies he applied to with statements of his assets, income or status as a sole trader. In particular, the major applications to Mortgage Express and Nationwide were on that basis. Also his tax returns were consistent only with his being the beneficial owner of the income arising from those properties, and therefore with him and not his father being the beneficial owner of those properties.

No trust was recorded on the title of any of the properties, nor was there any evidence that any of the solicitors were told of any trust at the time they were bought.

So the assets were not held on trust for the father and were owned by the son beneficially as well as legally. As such they vested in the trustee in bankruptcy and were available to that trustee to sell to pay the proceeds to the secured and unsecured creditors respectively.

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