Does an LPA Receiver owe any duties to a bankrupt borrower?

In Rajinder Singh Purewal v Countrywide Residential Lettings Limited [2015] EWCA Civ 1122 the court dismissed a borrower’s claim for breach of duty against Law of Property Act Receivers. This decision is a useful reminder that receivers are not obliged to carry out repairs to the property and can apply any insurance monies received in reduction of the mortgage instead.

Background

The borrower, Mr Purewal, entered into a mortgage with his lender which was secured over a property in Birmingham. The borrower’s mortgage account fell into arrears and as the mortgage was a buy to let, on 10 March 2009 Law of Property Act 1925 Receivers were appointed. On 9 September 2009, the borrower was declared bankrupt.

On 18 September 2009 the borrower visited the property and informed the LPA Receivers a water leak had caused considerable damage to the property. However, the LPA Receivers did not take any action to remedy the situation before February 2010 when Mr Purewal again contacted the LPA Receivers about the water leak.

Following this further contact from Mr Purewal, the LPA Receivers decided not to pursue an insurance claim in respect of the damage caused by the water leak. The LPA Receivers’ appointment was terminated by the lender on 29 April 2010.

Mr Purewal’s bankruptcy was discharged in April 2011 and thereafter the Trustee in Bankruptcy transferred the property back to him for a nominal consideration. Mr Purewal also took steps to repair the property, which were completed in May 2011 before the property was transferred back to him. In January 2013, Mr Purewal issued a claim against the receivers for a breach of duty in failing to bring an insurance claim and sought damages in the sum he had expended carrying out the repairs to the property.

At first instance, the court dismissed the borrower’s claim on the basis that as he was bankrupt at the time the damage was caused to the property, he had no cause of action because any duty owed was owed to his Trustee in Bankruptcy and because in completing the repairs to the property, prior to the property being transferred back to him, he had carried out the repairs to the property as a volunteer.

The borrower made an application to appeal the decision of the lower court on the basis that the vesting of the title in the Trustee in Bankruptcy had not deprived him of legal title as mortgagor meaning he continued to have an interest in the value of the property when the LPA Receivers' alleged breach of duty occurred.

Held

The court dismissed the borrower’s appeal and upheld the original decision to dismiss the claim on the basis that any duties owed by the LPA Receivers in relation to the insurance claim were owed exclusively to the trustee in bankruptcy.

The court also considered whether the provisions contained in s108(3) and section 109(8) of the Law of Property Act 1925 would have required the LPA Receivers to use any monies which may have been received under any insurance claim made to make good the damage caused by the water leak. The court concluded the provisions of the Law of Property Act 1925 meant that even if the LPA Receivers had received insurance monies they were under no obligation to use the insurance monies to repair the damage caused by the leak but could instead use the insurance monies to reduce the sums owing on the mortgage.

When will the court grant a civil restraining order?

In Moosun v HSBC Lender Plc t/a First Direct [2015] EWHC 3308 (Ch) the court examined the differences between extended civil restraint orders and general civil restraint orders and when it is appropriate to grant such orders.

Background

The borrower was the owner of a property which she purchased in February 2008 with the assistance of a mortgage from the lender. In September 2008, the local council issued an enforcement notice against the borrower because there had been an unauthorised extension to the cottage. The borrower also fell into arrears on the mortgage and the lender commenced possession proceedings.

Between 2009 and 2015 the borrower issued numerous and varying applications, claims and appeals in various courts on behalf of herself, her children and her dogs including a claim for judicial review against the council and an application to ‘quash all previous orders’ in the possession proceedings. On several occasions, the court recorded that the applications/ claims were entirely devoid of merit. It took until 12 January 2015 for the lender to finally obtain possession of the property.

On 2 September 2015 the borrower issued proceedings in her name and that of her two children against the asset managers and auctioneers appointed to conduct the sale of the property. On 21 September 2015, the borrower issued two further sets of proceedings. The first was a claim for £3.5m against the lender and its solicitors issued on behalf of the borrower, her children, and her dogs in which the borrower again sought to rehearse all the matters raised previously. The second set of proceedings was a claim for £5m for discrimination, issued on behalf of the borrower and her children against a firm who acted for the buyers of the property at auction.

Held

The hearing before the court on 2 November 2015, was an application by the lender to strike out and/or for summary judgment in respect of these latest two claims.

Both claims were struck out as being wholly without merit. The court stated ‘It is trite law that it is an abuse of process to seek to re-litigate claims which have already been the subject of a final and binding determination between the parties on an earlier occasion: see e.g. Virgin Atlantic Airways v Zodiac Seats [2014] AC 160.’

At the hearing, the court was also obliged to consider whether it was appropriate to make a civil restraint order against the borrower. CPR 3.4 (6)(b) states “If the court strikes out a claimant’s statement of case and it considers that the claim is totally without merit (a) the court’s order must record that fact; and (b) the court must at the same time consider whether it is appropriate to make a civil restraint order”.

Civil restraint orders are orders which prevent a party from issuing claims or making applications without permission and are governed by CPR 3.11 and practice direction 3C. There are three types of civil restraint orders:

  • A limited civil restraint order prevents a party from making any further applications in the proceedings in which the order is made without first obtaining the permission of a judge identified in the order. It may be made where a party has made two or more applications which are totally without merit.
  • An extended civil restraint order prevents a party from issuing claims or making applications in certain courts concerning any matter involving or relating to or touching upon or leading to the proceedings in which the order is made without first obtaining the permission of a judge identified in the order. It may be made when a party has persistently issued claims or made applications which are totally without merit. It should be made for a period not exceeding two years.
  • A general civil restraint order prevents a party from issuing any claims or making any application in certain courts without first obtaining the permission of a judge identified in the order. It may be made against a party who persists in issuing claims or making application which are totally without merit in circumstances where an extended civil restraint order would not be sufficient or appropriate.

The guidance that has been given by the courts in relation to such orders can be found in two Court of Appeal decisions, Bhamhee v Forsdick [2004] 1 WLR 88 and Mahajan and Department for Constitutional Affairs [2004] EWCA Civ 946. Taking these authorities into account, the court determined that the borrower was ‘one of those very rare litigants for whom an extended civil restraint order would not be sufficient or appropriate’ and found that it was necessary to make a general civil restraint order for a period of two years.

Recommended action

A civil restraint order is one of the few tools available to lenders faced with vexatious litigants. Where a borrower makes an application or claim which is wholly without merit, consider whether to ask the court to record the lack of merit in the order. If two or more such orders have been made, it may be worth reminding the court that they are obliged by CPR 3.4 (6)(b) to consider whether it is appropriate to make a civil restraint order and if they are reluctant to do so, you may wish to remind them that vexatious litigants are a drain on the courts’ already stretched resources.

Will the restoration of a dissolved company revive a disclaimed freehold?

The court considered this in the matter of Fivestar Properties [2015] EWHC 2782 (Ch). The decision is a useful reinforcement of the position that a disclaimer does not terminate a mortgagee’s charge.

Background

A company was dissolved and consequently a freehold property which it owned vested in the Crown pursuant to s. 1012 Companies Act 2006 (the Act). The Crown subsequently disclaimed the freehold to avoid liabilities to a leaseholder. Upon an application by a mortgagee to restore the company, the court considered whether a restoration of the company would serve to revive the freehold and vest it back in the company.

Held

The court reviewed the authorities relating to disclaimer including Scmlla Properties Ltd v Gesso Properties (BVI) Ltd [1995] BCC 793 and noted that the freehold interest was extinguished upon the dissolution of the company, with the property being vested in the Crown. The effect of the Crown’s disclaimer thereafter did not extinguish the Crown’s ultimate right to the land, only its title to it under s. 1012 of the Act (thus enabling it to avoid the liabilities associated with the title). It was further noted that the disclaimer did not terminate subordinate interests arising out of the freehold, such as the mortgagee’s charge or the leaseholder’s interest. The court found that the disclaimer of the freehold did not amount to a “disposition” pursuant to s. 1034 of the Act. It was held therefore that restoration of the company recreated the freehold estate and re-vested it in the company as if the company had never been dissolved and the freehold never disclaimed.