Gowling WLG's finance litigation experts look at a number of cases and issues affecting the lending industry.
Default notice served pursuant to s 87(1) of the Consumer Credit Act 1974 starts time running for limitation purposes
The Court of Appeal has recently confirmed that service of a compliant default notice under s 87(1) of the Consumer Credit Act 1974 (CCA) is not merely a procedural precondition to issuing proceedings but is required to start time running for the purposes of the six-year limitation period under s 5 of the Limitation Act 1980.
In Doyle v PRA Group (UK) Ltd, Doyle entered into a credit card agreement (the Agreement) subject to the CCA with the card issuer. Clause 8f of the Agreement provided for payment of the whole outstanding balance in certain circumstances. Doyle defaulted in early 2009 and in December 2009 the card issuer served a default notice as required under clause 8f and under s 87(1) CCA requiring part payment of the debt by 21 December 2009. No payment was made. The debt was ultimately sold to PRA Group (UK) Ltd (PRA). PRA commenced proceedings to recover the entire amount outstanding on 31 October 2015, being within six years of the date specified in the default notice but more than six years since Doyle's last payment.
Did the cause of action for the outstanding sums accrue (time start to run) when Doyle made his last payment in April 2009 (as Doyle argued) or only when he failed to comply with the default notice i.e. 21 December 2009? Doyle contended that the claim had been issued out of time as service of the default notice was irrelevant for limitation purposes, being no more than a procedural requirement.
The Court of Appeal upheld the High Court decision that the claim had been issued within the limitation period. It held that the effect of s 87(1) CCA is that the cause of action arises from the date the default notice expires. S 87(1) CCA is not merely a procedural requirement providing that a default notice is required before proceedings can be commenced. Critically, it provides that without service of a valid default notice there is no right to bring such an agreement to an end or to demand accelerated payment of outstanding sums and a debtor would have a complete defence to a claim for recovery. It qualified the creditor's legal right to recover. Clause 8f of the Agreement had the same effect. Further, the court found that ss 88 and 89 CCA provide that the creditor can take no action until the end of the period mentioned in the default notice and that the debtor can remedy the breach specified in the default notice by the date stated in it. If it does so, the breach will then be treated as not having occurred, reversing the substantive legal rights and obligations of both parties. These sections had to be read together and interpreted consistently.
Things to consider
This decision provides clarification and comfort to lenders who may allow significant arrears to accumulate before taking steps to commence proceedings and who might otherwise have been out of time to do so. It also acts as a warning that where a lender's processes have failed and either an invalid default notice has been served and steps have been taken to enforce it, or steps are taken to enforce a valid default notice but before the time stipulated for compliance has expired, the borrower will have the right to strike out the claim.
The basic banker-customer relationship is that of debtor and creditor, not of trustee and beneficiary
So held the Court of Appeal in its recent judgment in First City Monument Bank PLC v Zumax Nigeria Ltd. Zumax provided engineering services to oil companies. It invoiced for its services in US dollars and received payment in US dollars into an account of a nominee company, Redsear Ltd. That account was used to pay Zumax's US dollar business needs with any surplus ultimately transferred to Zumax in Nigeria. This was done through an account held by Zumax's main banker, First City Monument Bank PLC (and its predecessors) (First City), at a London based 'correspondent' bank, Commerzbank, and then by transfer to Zumax's account with First City in Nigeria. The transfer instructions to Commerzbank would name First City as beneficiary of the transfer, but noted that the transfer was for further, or final, credit to Zumax.
Zumax alleged that a number of transfers made in this way to the Commerzbank account had not subsequently been transferred to its account in Nigeria. Zumax claimed that First City held the funds transferred to it on either a resulting or constructive trust and was liable to account to Zumax as trustee for the missing funds.
The High Court held that the funds had been held on either an express or a Quistclose trust when they arrived at the Commerzbank account. First City appealed.
The Court of Appeal held that no trust had arisen. It held that an express trust required certainty of intention, subject matter and objects. A Quistclose trust arose where one party had transferred money to another for a particular purpose only, and the parties had not intended that money to be at the free disposal of the recipient. If the purpose of the loan failed, the money was returnable under a resulting trust that was no longer subject to any power of the recipient to make use of it.
The court held:
- The fact that a transfer had been made for a particular purpose did not necessarily mean that it was impressed with a trust;
- Although First City and Zumax were identified as payees, that did not manifest an intention to create a trust - the payees had to be identified in any event;
- The funds had not been segregated in any meaningful way. They had not been paid into an account opened specifically for the purpose but had been mingled with other monies transferred into the Commerzbank account from numerous sources for the benefit of a range of recipients; and
- The context, including the structure of the arrangements and contractual mechanisms involved suggested that there was to be no trust. The transfers were made because Zumax banked with First City and the basic banker-customer relationship is a contractual one of debtor and creditor, not trustee and beneficiary.
The court found that it was a long established and fundamental principle of banking that money placed in the custody of a banker was his to do with as he pleased. A banker could become a trustee for a customer but that was the exception rather than the rule. Although having accepted the transfers First City was obliged to credit Zumax with them, that obligation was personal and did not arise form a trust relationship. Any contractual claims were by this time out of time.
Things to consider
The decision provides welcome clarity (and a return to the status quo). The identification of the payee is a necessary part of the instruction and does not, of itself, create a trust. If it did, it would paralyse the business of banking. Likewise, the recording of the credit and corresponding debit does not amount to a segregation of funds - that is no more than bookkeeping. As this case shows, much more than such routine banking transactions is required for a trust to be created and to overturn the heavy presumption that the money paid into a bank belongs to the bank.
Opposed bankruptcy petitions should be heard in specialist court centres
So found the High Court in Siddiqi v Taparis Ltd in which it held that a county court tribunal judge had made a serious procedural error in holding that a bankruptcy petition was unopposed due to the late filing of a notice of opposition, giving the county court jurisdiction.
The petition debt of £2.4 million was not disputed but the debtor contended that the debt was secured against his shares in his company and that there was a reasonable prospect of the debt being paid in full within a reasonable time due to an IPO of shares in his company. He also offered security over a property. However, the debtor failed to file and serve his notice of opposition to the petition at least five days before the hearing as required by Rule 10.18 of the Insolvency (England and Wales) Rules 2016. At the hearing, the judge refused the debtor's application to adjourn and transfer the proceedings to the Central London County Court. He held that due to the late filing, the petition was unopposed and in any event, the material provided by the debtor was insufficient to show that there was a reasonable prospect of payment within a reasonable time. He proceeded to make the bankruptcy order.
The debtor successfully appealed.
The High Court held that under Practice Direction 57AA of the Civil Procedure Rules (PD57AA), only certain specified county court centres are appropriate venues to hear specialist Business and Property Court work. Such work includes insolvency proceedings unless the proceedings are designated as 'local business'. A bankruptcy petition is only local business if it is unopposed. A court should normally adjourn a hearing in circumstances such as the present unless the opposition to the petition can be dismissed as invalid or fanciful. If a debtor raises any arguable grounds of opposition - a low threshold - an adjournment should be granted. Here, the debtor had a difficult, but not insurmountable, case which should be heard before a specialist court and the judge's failure to comply with the relevant Practice Directions was a serious procedural irregularity.
Things to consider
To the great frustration of creditors, debtors often advance grounds of opposition late, often at the hearing itself, but there is no authority to suggest that timing is critical. So long as that opposition passes the low threshold required, a county court should adjourn the hearing and transfer it to the relevant specialist court centre for hearing pursuant to PD57AA.
Lender has no duty to advise on the suitability or prudence of a mortgage
This was the finding in Mason and anor v Godiva Mortgages Ltd. In 2008, the claimants, who were property developers in their sixties, obtained a five year term mortgage for approximately £486,000 on a self-certifying, interest only basis from the defendant lender through a regulated intermediary (B). On the application form B incorrectly stated the claimants' income as £100,000 each. The loan was secured against the claimants' home. The claimants met all the mortgage payments but failed to repay the capital sum at the end of the mortgage term as their property venture had failed.
The claimants argued that the defendant should never have offered them the mortgage. It should have known that their income figure was implausible and so likely to be false and therefore that the mortgage was unaffordable. They claimed damages for breach of a common law or contractual duty of care and for breach of the duty imposed by the Financial Services and Markets Act 2000 s150 (1), for breach of the rules in the Mortgages and Home Finance: Conduct of Business Sourcebook (MCOB). The defendant counterclaimed for the outstanding balance on the claimants' account and for an order for possession of the mortgaged property.
The High Court held that the relationship of lender and customer did not give rise to an obligation on the lender to consider, and advise on, the prudence of a loan requested by the customer. There was no duty to exercise care and skill on the part of a lender to explain the nature, effect or suitability of the proposed mortgage, whether in tort or as an implied term of the particular contract. To imply any such duty in this case would be inconsistent with the express terms of the contract as the offer itself made it clear that no advice was being given and the claimants confirmed in writing that the defendant had not given them any advice. Indeed, in this case, the claimants had engaged B whose responsibility it was to advise on the suitability of the mortgage.
Under MCOB, a lender owes borrowers the following duties with which the defendant had complied:
- To take account of their ability to repay the mortgage. Confirmation had been obtained from the claimants that they intended to continue to work beyond the age of 75 and the application form showed the claimants intended to repay the advance through the sale of a property. The mortgaged property was valued at more than the sum advanced. It was also not implausible that, as property developers before the financial crash, their income was as stated on the application form;
- To only enter into a self-certification mortgage where it considered it appropriate, having regard to the interests of the customer, and where it had no reasonable grounds for doubting the information provided. The defendant had considered the claimants' previous mortgage which had had similar monthly repayments and where no default had occurred. They were also being advised by B who could be assumed to have given competent advice; and
- To have in place, and operate in accordance with, a lending policy setting out the factors it would take into account in assessing a customer's ability to repay.
In all the circumstance, no duty of care was owed and there was no breach of any of the relevant MCOB rules. The claimants' claim was dismissed.
Things to consider
Of course, if a lender does give an explanation or tender advice in relation to a loan, then it owes a duty to give that explanation or tender that advice fully, accurately and properly. How far that duty goes will depend on the precise nature of the circumstances and the explanation or advice which is tendered.
In case you missed it
In this update we reviewed some decisions of interest to those involved in insolvency litigation including:
- A technology & construction court decision providing for action to be taken against two individual directors who had caused a company to enter into insolvency to avoid paying a specific debt;
- A decision of the high court that concluded privilege in a dissolved company's documents should be maintained until there is no prospect of the privilege being enforced; and
- A chancery court decision that deals with the validity of a notice of appointment of an administrator, when the date and time of the appointment are not specified on the notice.