A referral to the financial list!

In GSO Credit v Barclays Bank plc, the Commercial Court has given guidance on the interpretation of terms in, but not directly defined by, standard Loan Market Association (LMA) documentation which was used in the context of secondary trading of a commitment under a surety bonds facility.

The dispute concerned the nature of what had been transferred under the secondary trades in June 2013 after the claimant, GSO, agreed to purchase from the defendant, Barclays, and Barclays agreed to buy on a back to back basis from HCC (the original lender), a portion of HCC's commitment under the facility.

HCC contended that the subject matter of the secondary trades was only its rights as lender to the borrower; GSO said that it also comprised HCC's contingent obligations under issued surety bonds. The difference between the two positions affected the calculation of the Settlement Amount and whether and to whom this was due.

The LMA terms that required interpretation were "funded" and "unfunded" within a calculation of "Settlement Amount" and "interest", "utilisation" and "participation" within a definition of "Purchased Assets".

HCC contrasted the definitions of "Purchased Assets" and "Purchased Obligations" in the LMA documentation arguing that Purchased Assets excluded Purchased Obligations including obligations under the surety bonds. The Purchased Assets included reference to the "Seller's ... interest", "other utilisations" and "participation under …Credit Documentation" all of which supported a construction that HCC was selling the entirety of its position under the surety bonds, both rights and obligations. In relation to the calculation of the Settlement Amount HCC argued that Purchased Assets were "funded" to the extent they had been drawn and were unavailable to be utilised, and "unfunded"

where they had not been drawn or utilised. GSO argued what it had purchased was unfunded because no money had been paid out under the relevant surety bonds.

On the basis that cases on construction provided for an approach that sought to respect the parties' choices, to understand the commercial context, and to provide certainty and consistency in matters of business, the court held the HCC had sold its rights as well as its obligations and that the Purchased Assets were funded to the extent of the money HCC had paid out under the surety bonds for the purposes of calculation of the Settlement Amount. Funded was not just another word for "drawn" or utilisation of the facility at the point of issue.

This was the second case so far to be referred to the Financial List.

Solicitors not guilty of dishonest assistance

Reversing the first instance judge in his finding of dishonesty, in Clydesdale Bank plc v John Workman and others, the Court of Appeal allowed an appeal against a decision that two solicitors had dishonestly assisted in a mortgage fraud against the bank.

The dispute involved the sale of land over which the bank had an unregistered equitable charge. The solicitors, who were acting for the seller of the land, were aware of the equitable charge and had concluded that a registered legal charge in favour of a third party took priority over the bank's unregistered charge. On this basis, the solicitors followed their client's instructions and transferred the sale proceeds of the land to the third party without enquiring as to how much was secured by the charge. The charge secured less than the sale proceeds and turned out to be a sham and a fraud on the bank.

The High Court's decision was overturned on the basis that the finding should have been based on what the solicitors believed the facts to have been. The Court of Appeal held that the trial judge should not have found the solicitors guilty of dishonesty in circumstances where he did not make any findings as to what they believed about the amounts secured by the third party's charge.

Further advance - a tack?

In Urban Ventures Limited v The Black Ant Company Limited (in Administration) and Ors [2016] EWCA Civ 30 the issue on this appeal was whether in the circumstances of the case any  new or further advances  were made by a first charge holder such that the restrictions on "tacking" were engaged. Tacking is the process by which a creditor with an existing charge can use that charge to secure priority for further advances over sums secured by a subsequent chargor.

In 2006 the first charge holder and respondent Dunbar Assets Plc had advanced a company a loan in the sum of £2.47 million secured by a first legal charge. The second charge holder and Appellant, Urban Ventures Limited, had made subsequent advances secured by a second charge on the same property.

In 2009, Dunbar provided the borrower with a revised facility  letter which was in almost exactly the same terms as the 2006 facility letter except that the amount of the facility was shown as £2.593 million. Dunbar made no payment to the borrower at this time or subsequently.

Urban argued that the effect of the 2009 facility letter was that Dunbar made a new or further advance to the borrower in place of the previous advance and as a consequence of the restrictions on tacking was unable to tack that further advance to its existing first legal charge such that Urban's second and subsequent charges should take priority. The economic effect of that where the borrower was insolvent was that Urban would have been able to lay claim to funds recovered by the administrators on the sale of the properties.

As the High Court had done before it, the Court of Appeal rejected Urban's arguments that there was a new or further advance on the basis no monies were paid by Dunbar and no monies repaid by the borrower pursuant to the 2009 facility letter The purpose of the 2009 facility letter was to set out the terms applicable to the existing advance and as such amounted to a restatement of that facility and not its replacement. As a consequence this was not a case where tacking arose and Dunbar retained it priority as first charge holder.

A ripe time for reform?

On 28th January 2016 Lord Justice Jackson delivered the IPA Annual Lecture about his proposals to move claims in the fast track and lower reaches of the multi track to a fixed costs regime.

Jackson said that "high litigation costs inhibit[ed] access to justice" and that this was a problem "not only for individual litigants, but also for public justice generally."

Jackson has proposed a costs grid for consideration, which sets out the amount of costs he thinks should be recoverable in multi-track claims up to £250,000. The grid is based on the value of the claim against ten different phases of litigation, which mirror those stages currently set out in the Precedent H costs budget. Jackson has also provided 5 rules to accompany the grid, which take into account factors such as an increase of 15% should the work need to be done in London.

When asked when these changes would come through, Jackson said that his proposals could be in place before the end of the year"if the political will is there".

Limitation period in tortious mis-selling claims

In CGL Group Limited v Royal Bank of Scotland  (unreported), the Mercantile Court considered the extent of "knowledge" needed to rely on s.14A of the Limitation Act in the context of an application by the Bank to strike out the claimant property company's misselling claim on the basis they were statute barred.

The claimant alleged that it had been mis-sold two interest rate hedging products by the Bank in 2006 as a consequence of breaches of the Bank's duties to advise and provide information. One of the products fell within the terms of the FCA mandated review which was widely reported in 2012. The primary limitation period of six years had expired, However, the Claimant argued that in accordance with section 14A it had 3 years from the date it acquired the knowledge required to bring the claim and that it had only obtained that knowledge from the media reports of the FCA review in 2012.

The Court observed that the extent of knowledge required depended on the facts of the individual case. Here the Claimant was found to have had more than a mere suspicion that it had been a victim of misselling by September 2009 and therefore had sufficient knowledge then for the purposes of section 14A to bring the claim. Accordingly, the Court held that the claim was statute-barred.The Court also refused an application by the Claimant to amend the claim to allege breaches of alleged duties of care by the Bank under the FCA's review on the basis it would not be right to impute a duty of care in to a clearly defined scheme.

Comfort for mortgagees – duties on a sale

In Alpstream AG and others v PK Airfinance Sarl and (2) GW Capital Aviation Services Limited [2015] EWCA Civ 1318 the Court of Appeal reaffirmed that a mortgagee can decide on the timing and method of sale of mortgaged property, and does not owe duties to those with no registered interest in the mortgaged property, including an unsecured junior lender.

The case saw the Court of Appeal overturn a decision that the mortgagee in conducting a half hearted auction and not obtaining an independent valuation of seven aircrafts  had breached its duty to an unsecured junior lender to obtain the best price when the mortgaged property was sold.

The mortgagee (A) lent monies to a number of parties (the respondents) to purchase aircraft. Mortgages were secured on the aircrafts to repay A for the monies lent. The security was cross-collaterised. Under waterfall provisions in a deed of proceeds, one respondent (B) which was a junior, unsecured creditor of the buyer of three of the aircraft, was entitled to the proceeds of the sale of the aircraft once all the mortgage debts were repaid. Following default and repossession of the aircraft by A, seven aircraft were sold at auction. A purchased all of them for the benefit of an affiliated company.

The respondents alleged that the sale of these aircrafts was conducted at an undervalue. The High Court agreed. It also held that A owed a duty to B, as residual beneficiary of the proceeds within the same contractual structure, to obtain the best price and that B was therefore entitled to damages.

The Court of Appeal did not agree. The appeal was allowed and it was held that A's duty was confined to those who had an interest in the mortgaged property. B had no more than a contractual right to receive anything left once all the aircraft were sold.

Regulatory Decisions

FCA fines and restricts W H Ireland Limited for market abuse risks

The FCA found that during January and June 2013, the wealth management firm failed to ensure it had proper systems and controls in place to prevent market abuse  being detected or occurring.

The company has been fined £1.2 million and is restricted for 72 days from taking on new clients in the corporate broking division.

£2.9 million to be returned to investors following FCA prosecution

Southwark Crown Court has ordered that almost £2.65 million is returned to investors who had invested in a fraudulent collective scheme which was established and operated by Alex Hope.

Mr Hope has been made the subject of a Proceeds of Crime Act confiscation order and must pay over £166,000 within three months to avoid imprisonment.

FCA fines former Head of JP Morgan's CIO International £792,900 for failing to be open and co-operative

Achilles Macris has been fined  £792,900 for failing to be open and co-operative with the FCA.

Mr Macris did not inform the Authority about concerns with the synthetic credit portfolio and as a result he failed to meet the standards of an approved person.