Time limits apply to a mortgagee's right to take possession of land under a mortgage - do not leave enforcement action until the last moment!
The Court of Appeal has held that the right of a mortgagee to enforce a mortgage by recovering possession of the mortgaged property was extinguished under the Limitation Act 19802.
The mortgagors defaulted on a loan secured by a mortgage over a residential property. Although the mortgagee made formal demands for payment, it delayed taking enforcement action and the mortgagors remained in exclusive possession of the property for more than twelve years following the date of default.
One of the mortgagors was made bankrupt and the trustee in bankruptcy commenced legal proceedings seeking a declaration that the mortgage was no longer valid because, although the mortgagors had made some payments under the mortgage, the last payment had been more than twelve years prior to the action. The twelve year time frame was significant because the Limitation Act 1980 bars claims in relation to land made more than twelve years after the right of action first accrued.
The key issue here was that the mortgagors were in "adverse possession" of the property for twelve years (ie possession without the consent of the owner - in this case the mortgagee). During this twelve year period, the mortgagee had failed to take any action to protect its security by enforcing its right to possession or to obtain payment from the mortgagors (which would have prevented the mortgagors from being in "adverse possession" and giving the mortgagee a fresh cause of action). The mortgagee had suggested that by not enforcing possession it had given an implied permission to the mortgagors to remain in possession (which would have stopped the "adverse possession"), but the court did not uphold this argument.
Cross-border insolvency - the universal approach continues
Under section 426 of the Insolvency Act 1986 (the "Act"), the courts of a country designated by the Secretary of State can apply to the UK courts for assistance with insolvency proceedings over which the applicant court has jurisdiction. Where the application requests that the insolvent company's assets in the UK are handed over to the liquidators in the applicant country for distribution in accordance with that country's insolvency regime, such application should not be refused simply because a certain class of creditors would do better under the applicant country's insolvency regime than it would under that of the UK.
In a recent case3 the House of Lords, reversing a decision at first instance that had been upheld by the Court of Appeal, held that section 426 of the Act gave the UK courts jurisdiction to accede to a request made by an Australian court for the remission to the Australian liquidators of assets in the UK of four insolvent Australian insurance companies, notwithstanding the fact that the Australian and UK insolvency regimes were not totally aligned in the way in which such assets were treated in the insolvency.
It is worth noting that the Lords could not agree on the appropriate response to a request made by the courts of a country which is not "designated" for the purposes of section 426 of the Act, those "designated" being present or former Commonwealth countries, including Australia. Two of their Lordships felt that the UK courts were entitled to assist the courts of non-"designated" countries following the general, long-established principle that a universal approach to insolvency is desirable, and that the similarities and differences between the relevant insolvency regimes were part of the assessment which the courts should make in determining whether or not, and how, to assist. A further two Law Lords took the view that whilst the UK courts were entitled to assist the courts of such countries, they would only do so if their insolvency regimes aligned with those of the UK.
Take care to abide by "no dealing" rules when served with a freezing order
A bank was held to be in breach of a freezing order over funds in a current account, because it moved the funds from the current account and credited them into higher interest bearing accounts without informing or obtaining the consent of the person seeking the order or the court. The main concern was that details of the current account were specified in the freezing order which meant that the funds had a clearly identified location. This was no longer the case when the funds were moved out of that account. It did not matter that the nature of the asset covered by the freezing order - the debt with the bank - had not changed, and even though the court accepted that the bank's actions were done with the best possible motives (to enable the bank to more effectively police the account for the purposes of enforcement of the order), they still found the bank to be in breach.
The bank was also held to be in contempt of court, because the judge found that the bank had acted deliberately and took upon itself the risk that what it did would interfere with the course of justice. However, given that the bank had not caused any loss, there were no orders for costs against it4.
Financial Assistance - going, going, but not quite gone yet...
The recent case of AMG Global Nominees (Private) Limited v SMM Holdings Limited, THZ Holdings Limited and Africa Resources Limited5, another in a long line of case law on the subject, has reconfirmed the view that where an English parent company arranges for a wholly owned foreign subsidiary to provide financial assistance (out of the subsidiary's assets) for the purpose of the acquisition of shares in its English parent company, this does not amount to financial assistance for the purposes of section 151 of the Companies Act 1985 as the relevant provisions only govern UK incorporated companies.
The new Companies Act 2006 rules allowing private companies to give financial assistance for the purchase of their own shares (subject only to any restriction or prohibition in their articles and without the need for any "whitewash") are due to come into force on 1 October 2008.
Further erosion in the value of floating charges
Under section 176A(2) of the Insolvency Act 1986, an insolvency office holder is obliged to set aside a "prescribed part" of realisations made from a company's assets comprised within any floating charge it has granted. He (or she) is not entitled to distribute such portion to the holder of a floating charge except to the extent that it exceeds the amount required pursuant to the section for the satisfaction of unsecured debts. Parliament decided that this pot of money should be set aside so that floating charge holders were not the exclusive beneficiaries of the abolition of the Crown's status as a preferential creditor (under changes brought about by the Enterprise Act 2002) at the expense of unsecured creditors.
A recent case has brought much need clarity to the scope of this provision. As a result of Re Permacell Finesse Limited (in liquidation)6, it is now clear that a floating charge holder is not entitled to participate as an unsecured creditor in the prescribed part to make up for any shortfall under its floating security.
Permacell only addressed the status of a shortfall on a secured creditor's floating charge. It was, however, promptly followed by the decision in Re Airbase (UK) Limited7 where the more typical position of a debenture-holder (whose security comprises both floating and fixed charges) was addressed. In this case, it was held that a secured creditor cannot look to recover any unsecured shortfall by participating in the prescribed part, whether the shortfall arises under its fixed or floating charges. As a result of these two cases, the position should now be considered to be closed as regards secured creditors and the prescribed part.
In another development that brings additional clarification, but which works to the detriment of secured creditors, a further change recently introduced (on 6 April 2008) to the new Companies Act 2006 saw the insertion of a new clause 176ZA into the Insolvency Act 1986. This provides that the expenses of a winding up in England and Wales will, so far as the assets of the company available for the payment of general creditors are insufficient to meet them, have priority over any claims to floating charge realisations ahead of the floating charge holder.
Syndicating - beware the role(s) of the lead bank
The Court of Appeal has held that where a party enters into an agreement in multiple capacities, the agreement must be considered on a clause by clause basis in order to determine in which capacity the party had entered into each clause8.
The claimants, banks in a loan syndicate, sought to rely on a clause in an option agreement which imposed a restriction on the transfer options. The defendants argued that they were not parties to the agreement as it had been signed by Barclays in its capacity as security trustee for the syndicate and not as an agent of the defendants or the other banks.
After carrying out a detailed textual analysis, the court concluded that some clauses had been entered into by Barclays solely as security trustee whereas others had been entered into by it in its capacity as both security trustee and agent for the banks. The non assignment clause fell into the latter category and so the defendants were bound by the restriction.
This case emphasises the importance of clearly delineating the roles of the lead bank when drafting the inter-bank provisions in loan syndication documents.
Should debts falling due in the future be taken into consideration when determining whether or not a company is insolvent?
In one of the first cases concerning a defunct structured investment vehicle, it has been decided that the words "as they fall due" in section 123(1)(e) of the Insolvency Act 1986 (the "Act") had a similar meaning to the words "taking into account...contingent and prospective liabilities" in section 123(2) of the Act, with the result that future debts as well as those presently due should be taken into account in determining whether a company was insolvent on a cash flow basis.
In an earlier application by the receivers of Cheyne Finance plc9, the court had ruled that until an "Insolvency Event" occurred, the receivers should apply money coming into their hands by paying first the debts of senior creditors as and when they fell due, rather than providing for payment to all senior creditors on a pari passu basis.
Senior creditors with shorter-term maturity dates would recover more on this "pay as you go" basis than they would if an "Insolvency Event" occurred and provision had to be made for all senior creditors irrespective of when their investments matured. Thus, in this second application, the receivers sought clarification from the court as to how the definition of "Insolvency Event" should be construed.
"Insolvency Event" was defined in a common terms agreement as a determination by the receivers that Cheyne "is, or is about to become, unable to pay its debts as they fall due...as contemplated by Section 123(1) of the Insolvency Act 1986". The judge held that the absence of any reference to section 123(2) (the balance sheet solvency test) did not mean that the parties had agreed that contingent and prospective liabilities were not to be taken into account in determining whether Cheyne was insolvent; it simply meant that the determination was to be made on a cash flow basis rather than a balance sheet basis. Future debts should be taken into account when applying either solvency test.
Citing Australian case law on the point, the judge suggested that the question of how far into the future any enquiry as to present insolvency should go was to be decided on a case-by-case basis. In this case, the fact that Cheyne was not a going concern and had clearly ascertainable future liabilities may have been persuasive, since this meant that it was clear that Cheyne was going to become insolvent and that it would therefore be inequitable for the senior creditors holding shorter-term debts to receive preferential treatment. The decision may, however, encourage creditors in other cases to construct technical defaults based on cash flow insolvency, even though a company may, by the time a future debt becomes due, have remedied such default.
You may be aware that Bird & Bird has just opened its 15th office as a further step in our increasing consolidation in western Europe. In particular, the office in Helsinki demonstrates our leading Scandinavian and Nordic presence and features a number of banking and finance specialists whom we hope to be able to introduce to you in the coming months.
To mark the ongoing expansion of our international finance practice, we are hoping to offer a more multinational slant, focusing on legal, regulatory and practice developments in other jurisdictions in future newsletters. Meanwhile, if there are any particular issues of interest or relevance from a finance perspective in other countries on which you would like to know more, please mention this to your usual Banking and Finance Group contact.