Gowling WLG's finance litigation experts bring you the latest on the cases and issues affecting the lending industry.

Exceptional circumstances won't prevent possession indefinitely

A trustee in bankruptcy's rights to obtain a possession order and order for sale against a bankrupt's property will not be suspended indefinitely even where there are exceptional circumstances.

In Grant and Anor v Baker and Anor, the claimants were the trustees in bankruptcy of Mr Baker, the first defendant. The trustees applied for an order for the sale under s283 of the Insolvency Act 1986 (the Act) of Baker's family home which he owned jointly with his wife. Their 30-year-old daughter who had a mental age of eight or nine, and who was incapable of independent living, also resided at the property.

At first instance the county court granted an order for sale. However, pursuant to s335A of the Act, the court considered that the needs of the adult daughter, which could not be met by moving to a rented property, were sufficiently exceptional circumstances as to outweigh the creditor's interests. In exercising its discretion, the court ordered that the sale be postponed until the adult daughter no longer resided at the property. The daughter's life expectancy was unimpaired which meant that postponement could be measured in years or decades.

The trustee in bankruptcy appealed on the basis that a longstop date should have been set. Baker's share in the property was his only asset of any value and until it was sold there were no funds to make a distribution to the only creditor or to pay the trustee's costs.

The High Court allowed the appeal. It held that the first instance judge had been entitled, on the medical evidence adduced, to find that the daughter's circumstances were exceptional and outweighed those of the creditor. However, when exercising discretion under s335A of the Act, the court had to look at all the circumstances. That included the underlying statutory purpose of the bankruptcy legislation being to realise assets and distribute the net proceeds among the unsecured creditor. An indefinite suspension of the order for sale was incompatible with that underlying purpose.

Save in truly exceptional circumstances, realisation of assets should take place within a much shorter time.

The court considered that the judge at first instance had erred in the exercise of her discretion. A move into rented property could not be dismissed as unreasonable and it had been wrong not to consider any alternative to indefinite postponement. The court agreed a further postponement of 12 months so alternative accommodation could be found and the move properly planned.

Things to consider

The court, when applying s335A of the Act, makes a value judgment and has to strike a balance between the interests of the unsecured creditor(s), the reasonable needs of the bankrupt's spouse and any children and the underlying purpose of the bankruptcy code. The statutory scheme requires the property to be realised even if the proceeds may be swallowed up in meeting the trustee's reasonable costs with nothing left for the unsecured creditors.

Claiming compound interest in 'no-transaction' cases

A lender cannot generally claim interest as damages unless it can prove that, had the transaction in question not gone ahead, it would have used the money profitably elsewhere.

In Mortgage Express v Countrywide Surveyors Ltd, the defendants had been found liable in deceit in relation to 39 inflated property valuations further to which the claimant had advanced loans. It was agreed that damages were to be assessed on the basis that the loans would never have been made in the absence of the deceit. The loans represented a small proportion of the lender's overall lending. It was agreed that the damages should be assessed as the amount loaned plus the cost of realisation, less the sale price achieved, plus repayments made by the borrowers.

The claimant also sought interest as damages calculated on a compound basis - as this was a "no transaction" or loss of opportunity case, the interest represented the amount it would have earned had the monies advanced on the 39 loans been available to make alternative loans to other borrowers. It estimated the sum to be over £1,395,000 on a compound LIBOR basis from the date of the advance to the date of sale of the properties.

The High Court refused to award interest as damages, on the basis that the burden was on the claimant to establish that it would have made alternative loans and it had failed to do so. The limited evidence indicated that the claimant had in fact been able to satisfy all requests for loans made at the time. The claimant was only entitled to simple interest on its loss.

Things to consider

The aim of a damages award is to put the claimant into the position it would have been in had there been no tort. This case acts as a reminder that it can be a difficult task for a lender to prove that it would have made alternative loans so as to justify a claim for compound interest. Vague and imprecise evidence will not suffice.

Supporting and opposing creditors' views need considering in bankruptcy application

We last reported on the ongoing and complex bankruptcy proceedings in Maud v Aabar Block Sarl. and anor in June, at which stage a bankruptcy order made against Maud had been made but was stayed pending an appeal of that order. Details of the case and previous orders can be accessed from our June and January briefings.

The issue in the bankruptcy proceedings revolved around whether the petitioners had an ulterior objective in seeking the bankruptcy order. The alleged motive was to enable them to acquire shares in a company held by Maud and through those shares a very valuable property. The shares were his only valuable asset. The argument was that this was not in the best interests of all of the creditors, some of which opposed the bankruptcy application given that there were insolvency proceedings in Spain that could lead to all creditors being paid.

The Registrar making the bankruptcy order had concluded that there was insufficient evidence to support an ulterior motive in pursuing the petition, and so the burden had shifted to Maud to provide credible evidence as to why the bankruptcy order should not be made. Having concluded that Maud's ability to pay his creditors within a reasonable time was uncertain, he made a bankruptcy order. Maud appealed.

The High Court held the Registrar had erred in law. Motive did not turn a petition that was not otherwise an abuse of process into an abuse of process, but motive was not necessarily irrelevant. The collective nature of bankruptcy proceedings required the court to evaluate the wishes of the creditors, both those that supported and opposed the order, and to attribute weight to the views of individual creditors in deciding whether to grant the order sought in the interest of the class. The Registrar had omitted the critical stage of considering the interests of the class as a whole, but had moved straight to a consideration of whether the debt could be paid within a reasonable time or not. This was an error in approach to the exercise of his discretion and meant the order was flawed and should be set aside.

Things to consider

Although successful on appeal in setting aside the bankruptcy order, that is still not an end to the matter as the petition has been adjourned for further argument at a later date, not dismissed.

The price paid for changing experts

By way of a reminder, a recent High Court decision has reaffirmed that if a party to litigation wishes to change its expert in court proceedings, there will generally be conditions imposed on its ability to do so. The most usual condition will be an order to disclose the original expert's draft report, but the court can go much further than this if it considers there is an element of expert shopping, i.e. a party is shopping around for a more favourable expert opinion. A disclosure condition could extend to the expert's notes, preliminary reports and other documents setting out his or her opinion on the issues. The fact that any such documents would be considered privileged, and not therefore disclosable, is irrelevant and such privilege as does exist will need to be waived.

The case of Allen Tod Architecture Ltd (in liquidation) V Capita Property & Infrastructure Ltd was not a case involving expert shopping as such, rather it was one in which the claimant had lost confidence in its expert to properly manage the documents in the case, express his views sufficiently clearly, or to provide responses and/or his report on time. Permission to adduce expert evidence was by reference to discipline rather than name but permission was required to call the expert to give evidence orally at trial.

The defendant sought to make that permission conditional upon the disclosure of the claimant's letters of instruction to both the original and new experts and, more controversially, any report, documents or correspondence in which the original expert had expressed his opinion, including:

  • notes addressing questions raised by the claimant's counsel;
  • the summary of his views provided to the solicitor; and
  • any document within which the expert had provided his view prior to a mediation

The claimant argued that anything other than the letters of instruction and the final draft report were privileged and declined to disclose the additional documents.

The High Court ordered all of the requested documents be disclosed. The judge confirmed that the court had a wide power to exercise its discretion to impose conditions irrespective of whether there is any expert shopping. The conditions imposed will depend on all the circumstances of the case. The requirement to disclose documents that may be cloaked by privilege was a price the party had to pay to call the replacement expert witness at trial and was not a reason to refuse such disclosure.

Things to consider

The case reaffirms that the court will use its powers to prevent expert shopping and can impose conditions even where expert shopping is not particularly relevant. Parties will need to bear in mind that any communications with experts and any documents in which their opinion is expressed may be disclosable, and so care must be taken in all such communications. Where expert shopping is strongly suspected, the disclosure condition could be more extensive and also include solicitors' attendance notes of meetings with the expert.

In case you missed it

Gowling WLG's insurance experts consider the recent Supreme Court decision in Hayward v Zurich Insurance Company Plc which has confirmed that in such circumstances, a settlement can be set aside if evidence later comes to light to prove a fraud has been perpetrated.