CreditFILE November 2009

In House News: Award Winning Firm

The ongoing success of Banbury and Rugby’s largest law firm was recognised with a double award win from two highly esteemed industry publication awards:

• ‘Insolvency Litigation Firm of the year’ - Credit Today Insolvency & Rescue Awards 2009

• ‘Regional Enfranchisement  Solicitor of the Year’ - News on the Block Awards 2009

Both awards faced strong competition from national law firms, the ceremonies were both held in London and attended by professionals from the world of Insolvency and Property Law. Edward Bible who heads up the Insolvency team at Brethertons  accepted  the award for national Insolvency Litigation Team  of the year and Yashmin Mistry who heads up the Property Enfranchisement team won the award for Regional Enfranchisement Solicitor of the Year.

Richard Pell, Senior Partner at Brethertons explains: “These awards recognise all the work, effort and specialist legal expertise both Edward and Yashmin along with their teams have delivered to their clients, they are very much deserved.  Client satisfaction is the real measure of the success for the work we do.  It’s a real honour and mark of our success to win such prestigious awards which saw us judged alongside some of the best organisations operating in the legal profession.” 

Established 200 years ago, Brethertons is one of the fastest growing and innovative firms of solicitors in our region.  Brethertons have 170 staff in 5 office locations in Banbury and Rugby and provide commercial and private client services.

Potential Unfair Relationship defence sees  debtor awarded 5-year stay on mortgage repossession

The Circumstances

In February 2007, Mr Bentley entered into financial difficulty. In an attempt to alleviate his financial difficulties, Mr Bentley took out a secured loan against his home for £40,000.00 with the lender Blemain Finance.

Shortly after entering into the loan agreement, Mr Bentley was forced to reduce his working hours from 48 hours to 19 hours per week in order to care for his father who was suffering from Alzheimer’s.  Although his father was moved to a care home for the last eight months of his life, and died in January 2009, Mr Bentley was unable to increase his loan repayments as the recession meant that he was unable to be reemployed full-time.

As a result in his reduced income, Mr Bentley began to have problems making his repayments and Blemain Finance refused to accept lower payments on the account, repeatedly requesting payment of the arrears in addition to interest and late payment charges.

At the time of the hearing at the High Court in October 2009, Mr Bentley’s debt had grown to £47,000.00.

The Argument

As a result of Mr Bentley’s failure to maintain his payments, Blemain Finance issued repossession proceedings to secure repayment of the loan.

Mr Bentley sought to challenge the right of Blemain Finance to repossess him, claiming the agreement was unfair under the meaning of s.140 Consumer Credit Act 1974 and it been irresponsible in lending him the money and took advantage of his naivety, vulnerability and desperation. It was argued that the shortcomings in the decision making procedure on granting the loan, such as in the under-writing, affordability checks and valuation process all led to the agreement being unfair.

Section 140A of the Consumer Credit Act 1974 (“the Act”) provides that a Court may determine that the relationship between a lender and a borrower arising out of a credit agreement is unfair to the borrower because of:-

(i) any of the terms in the credit agreement, or
(ii) the way in which the lender has exercised or enforced its rights under the credit agreement, or
(iii) any other thing done (or not done) by or on behalf of the lender either or before or after the making of the credit agreement or a related agreement

The Outcome

Under the Act, in determining an agreement as unfair, the Court has a wide range of powers including the ability to alter the terms of the agreement; reduce the amount payable by the borrower; require the lender to refund the money; remove any duty placed on the borrower and/or impose requirements on the lender.

The parties agreed that in exchange for Mr Bentley withdrawing his argument that there had been an unfair relationship under the Act, Blemain Finance would agree a settlement with Mr Bentley that it would:-

• re-write the secured loan accounting, reducing the payments from £550 per month to £150 per month
• not levy further interest on the £40,000 loan
• not levy any charges or legal costs “whatsoever”

Blemain Finances’ repossession claim was thereby dismissed and it was told it could not enforce the repayment of the loan by repossession for five years. After the period of five years has surpassed, Blemain Finance will only be able to bring repossession proceedings if there at least 12 months’ arrears on the new level of payments i.e. £1,800.00.

The Brethertons LLP view…. Why is it important?

In the event Mr Bentley had successfully defended the grounds of the repossession using section 140 of the Act and determined the relationship as unfair, the Court would have the power to vary the terms of the credit agreement or vary the enforcement rights of the credit agreement.

In agreeing an out of court settlement, the Court has been prevented in setting a legal precedent against the company’s lending practices. This decision would have impacted upon all companies who provide agreements regulated by the Act.

To avoid falling prey to such defences, we advise companies to firstly review their decision-making procedure when granting loans and/or agreements. Companies should make every effort to ensure they are not enticing parties into an unfair agreement and therefore should evidence they have successfully conducted the relevant affordability checks during the evaluation process prior to granting the loan and/or agreement. In the event there is a default in payment under any agreement and it becomes necessary to enforce the terms, companies need to be certain their terms and conditions are enforceable and they have complied with all relevant sections of the Act. Should you be uncertain about the enforceability of your terms and conditions, seek immediate legal advice.

Had Blemain failed to negotiate a settlement, it could have been labelled an irresponsible lender; forced to change the terms of its credit agreements and potentially faced a blanket review of all its ongoing agreements governed by the Act. In the event the Court had created a legal precedent, it would have been relied upon by all manner of borrowers seeking to claim their consumer credit agreement as unfair.

Whilst this case does not prevent other individuals bringing a claim against Blemain or any other provider of credit under the Act, it does mean that each case will continue to be dealt with on an individual basis. How long this continues to be the case is a matter of speculation.

Possible liabilities of Directors

With the economy showing slight signs of recovery, it is still an important time for directors to understand the extent of their liabilities in their attempts to keep their company afloat in the current economic climate. 

In English law, a company has its own legal identity.  This legal identity is completely separate from the company’s shareholders or directors.  In general, directors are therefore not liable for a company’s debts.  However, there are certain situations where courts are prepared to lift the “corporate veil”, and disregard the separate legal personality of a company.

The Court of Appeal’s decision in Contex Drouzhba Ltd v. Wiseman and another [2007] is an example of lifting the corporate veil. The Court of Appeal held that a director was personally liable for deceit, where he had signed an agreement on behalf of the company committing the company to making payment for goods, knowing that it had no prospect of being able to afford to do so in the future.  The decision sends a warning to all directors to be careful what you sign.

The Facts

Mr Wiseman (W) was the director of Scott Daniel Limited (S Ltd). W signed a purchase agreement on 9th January 1998, on behalf of S Ltd, with Contex Drouzhba Ltd (Contex) to pay for goods to be ordered in the future. W knew that S Ltd could not meet the requirements of the agreement as it was insolvent, unlikely to receive an injection of capital and had no prospect of ever being able to pay for the goods. When this became apparent Contex brought a claim against W. 

At trial the judge found the following:

• The act of signing the agreement created an implied representation that S Ltd had the capacity to pay for the goods and that W’s representation was fraudulent as he was aware that S Ltd was insolvent and on this basis W was liable for damages in deceit.
• The judge also found that the defence in section 6 of the Statute of Frauds (Amendments) Act 1828 did not apply as the representation had been made in writing and had been signed by the party to be charged (W).

W appealed against the final point of the decision that the defence in section 6 did not apply. He argued that the judge should have found that the representation made to Contex (signing the agreement) was one of conduct, and not a representation in writing and that accordingly the defence in section 6 should have applied. W also submitted that he had signed the document on behalf of the company, and thus had not signed it in his personal capacity and so should not have been the 'the person to be charged' under the Act.

The Court of Appeal dismissed the appeal. It held that where the director was effectively the mind of the company, as W was in this case, and where he signed a document on behalf of the company containing a representation he knew to be fraudulent, it was clear that the director could be personally liable for his own fraud.  In this case, W had impliedly represented that S Ltd had the capacity to pay. W had known this to be untrue and the judge had been entitled to hold W had made a fraudulent representation in writing, and was therefore the 'person to be charged' within section 6. 

The implications for directors

The case is relevant in respect of the potential liability of directors who sign agreements on behalf of their company. The case highlights the following points:

• A director (who is the controlling mind of the company) who makes a fraudulent representation that the company can make a payment (i.e. when the directors know the company cannot) by signing a contract on behalf of the company, will be personally liable in deceit
•  This represents another possible action, available to creditors of an insolvent company to obtain redress against its directors. The decision is of particular concern for directors trading in insolvency situations or situations of doubtful solvency.  This decision may mean that where situations arise in which directors, by signing contracts, are guilty of fraudulent trading, creditors have a direct remedy against the directors in deceit.  This remedy will avoid the consequences of the Insolvency Act 1986, which leave the decision whether to pursue directors in the hands of the liquidator and require that any proceeds recovered go to the general body of creditors
• The Court of Appeal emphasised the fraudulent nature of W's conduct and gave no indication that the principle of personal liability could be extended to negligence
• The directors could consider including a disclaimer of personal liability in any agreements they sign on behalf of their company. This will not assist where the representation is made fraudulently but could assist against claims for negligent representations
• Directors of companies in trading difficulties need to consider carefully their personal position when committing companies to long term commitments. The key question is whether they genuinely believe that the company will be financially able to meet its commitments.

Avoiding Payment by Bankruptcy Plan Fails

A husband who had himself declared bankrupt in order to avoid making a financial settlement to his ex-wife recently found his plan stymied by the court.

The man had many business interests and had purchased a substantial house through an Isle of Man company. When his wife issued a petition for divorce proceedings in 2006, she obtained freezing orders to prevent him from dissipating his assets. He then petitioned to be made bankrupt, claiming debts of £191,000. A few days before the bankruptcy petition was lodged with the court, he transferred the only issued share in the company to a third party, in breach of the freezing order. He was subsequently made bankrupt, but the order was not ‘sealed’.

The bankruptcy order was opposed by his ex-wife on two grounds. Firstly, that the judge could change his mind about granting the bankruptcy petition before it was sealed and secondly that a bankruptcy order can be annulled on the petition of a debtor.

The house was sold, yielding a surplus of £1 million which was paid into court. The company which had owned the property was then put into liquidation, with an alleged debt due to another company exceeding £1 million. The ex-wife claimed that the debt due to the second company was a sham and that her ex-husband had organised his affairs to ensure there was no money with which to make a financial settlement.

The ability of the ex-wife to obtain a settlement depended on getting her ex-husband’s bankruptcy order annulled. In order to do that, it had to be shown that he was capable of paying his debts at the time the order was made.

The application to annul the order was successful. Inevitably, the matter ended up in the Court of Appeal, which, after lengthy consideration, concluded that the husband was able to pay his debts when he was made bankrupt.

By this decision, the Court has sent out a warning to those who seek to avoid their liabilities through financial manipulations.

Company Director Convicted for Using Prohibited Name

In a recent case a company director, Paul Edward Raine, was prosecuted for committing what the courts deemed a serious and deliberate breach of section 216 of the Insolvency Act 1986. This states that it is an offence for someone to become a director of another company under or known by a prohibited name within a period of five years if they were a director of the insolvent company at any time during the year before it went into liquidation. A prohibited name is any name by which the liquidated company was known at any point in the twelve months prior to the liquidation, or any name similar enough to suggest an association with that company.

Mr Raine was a director of a bed company called Furntex Ltd., which used the trading name Dreamsleeper. The company had entered into voluntary liquidation, owing more than £500,000 to creditors. Shortly before the insolvency took place, Mr Raine incorporated a ‘new’ company called Dreamsleeper Ltd., which was also a bed company, breaching Section 216. This company also failed and was placed into liquidation, costing creditors nearly £200,000.

The Department for Business, Enterprise and Regulatory Reform as was (now the Department for Business, Innovation and Skills) sought a conviction due to Mr Raine’s contravention of Section 216. He pleaded guilty and was sentenced to a twelve week suspended prison sentence and 150 hours of community service. In addition, he was ordered to pay costs of £591 and was handed a three year blanket ban from serving as a director.

Executor With Hand in Till Jailed

The UK has some of the strictest laws in the world to protect beneficiaries from rapacious executors and trustees. Recently, a woman who was the co-executor of a man’s will and trustee for his minor child was jailed for three years after making improper withdrawals from the funds under her care.

The circumstances were that a man had died at the age of 41, leaving a widow and minor son. The man’s pension fund was put in trust for the son and the man’s widow and sister were the trustees of the fund and his executors.
The sister forged the widow’s signature in order to make withdrawals of money from the trust account.

She was convicted of forgery and has had her personal assets frozen pending a confiscation order being made under the Proceeds of Crime Act 2002.

Freezing Orders

As anyone who has ever tried to collect a debt knows, there is a big difference between obtaining a judgment on the debt and obtaining payment.

In difficult cases, one of the ways a debtor can be encouraged to pay is by obtaining a freezing order against his or her assets: this is a court order which prevents the subject of the order from disposing of assets or removing them from the country. It is often described as a ‘nuclear option’, because of the effect it has on the subject of the order, and is only granted in serious cases. If an application for a freezing order turns out to be inappropriate, it is normal for the applicant to bear both their own and the debtor’s legal costs.

To obtain a freezing order, the person owed the money will firstly have to establish that there is a good case for a sum being due and then show that there is a real risk that the debtor will dissipate the assets over which a freezing order is sought

Ignoring Court Demands is Costly

In litigation, it is common for the court to order the production of documents from the parties to the case. Failing to comply with such orders is unwise, as the court has the power to strike out (i.e. refuse to hear) a case unless the documents are produced. It will issue an ‘unless order’, which in simple terms states that unless the requested material is produced, the case will be struck out.

There are several criteria the court will apply when considering an application for relief against an unless order. These include considering whether the administration of justice will be served, whether the failure to supply the requested information is intentional and the extent to which the person has complied with other requests, orders etc.

In a recent case, the ex-husband of a woman failed to comply with an order of the court to produce documents and information relating to a property dispute. He applied for relief against the unless order and the case reached the Court of Appeal. One of the arguments employed was that striking out his claim because of non-compliance with the order would breach his human rights under Article 6 of the European Convention on Human Rights. His appeal was rejected.

Brethertons’ say:

“When disclosure of documents is required by the court, the demand must be treated seriously. Ultimately, failing to comply with the court’s rulings can result in your case simply being rejected.”

When Equal Shares Change

It may be assumed that when a couple purchase a property in equal shares, that is how ownership remains, but it isn’t necessarily so.

In a recent case, the High Court had to rule on the ownership of a house, which had been bought for £30,000 by a cohabiting man and woman who lived in it between 1985 and 1993. When the relationship broke up, the man moved out and ceased to contribute to the mortgage and running expenses of the property and made no contribution towards maintenance of the couple’s children. He bought another property and moved there. The couple cashed in a joint insurance policy to assist him to finance his new home.

The question of the respective shares of ownership of the property had to be decided in 2008, by which time the property’s value had risen to £245,000. The County Court ruled that the share of the remaining former partner should be 90 per cent. On appeal, the High Court upheld this decision.

One interesting aspect of such cases is that the Court is primarily concerned with the intention of the two parties with regard to their beneficial interests, given the change in their circumstances. In the absence of any indication by words or conduct as to how the beneficial interests should be altered, the appropriate criterion is what the Court considers to be fair and just.

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