• Kayrul Meah v GE Home Finance Ltd – the court decided that the best price reasonably achievable for a property was obtained, despite flaws in the marketing process
• Shah Din & Sons Ltd (CVA) v Dargan Properties Management Ltd – a Northern Ireland case, which I think demonstrates the need to consider the context of a company’s activity before presenting a CVA proposal
• Highbury Pension Fund Management Company & Anor v Zirfin Investments Ltd & Ors – a case for insolvency geeks: an example of marshalling security over a second debtor
Shortcomings in marketing a property not considered fatal to discharging duty to take reasonable care to obtain the best price reasonably achievable
Kayrul Meah v GE Money Home Finance Limited ( EWHC 20 (Ch)) (18 January 2013)
Summary: The claimant sought compensation from his mortgagee for allegedly selling a property at an undervalue. Whilst there was no formal insolvency or IP involved – the sale was conducted by the mortgagee in possession – I thought it provided some useful pointers on how the court views the duty to take reasonable care to obtain the best price reasonably achievable for a property. The judge levelled some criticisms at the marketing process, but ultimately decided that the property had been sufficiently exposed to the market.
The Detail: The property was put on the market at the beginning of 2006 for £185,000 through a local agent who had valued the property between £165,000 and £185,000. Within a matter of days, offers were received at and then above this asking price. Meah complained that the asking price had been set too low and in February 2006 GE consulted another agent who valued the property at £235,000 and suggested raising the asking price to £245,000. The local agent reluctantly did this and the property was sold in March 2006 to a developer for £221,500. Based on the value of the property post-development, Meah’s expert assessed the “true market value” of the property at the time of the sale having regard to the obvious development potential at £325,000.
The claimant’s counsel argued that the low asking price depressed offers from potential purchasers and that the low asking price had been set because the agents had failed to appreciate the property’s development potential. GE’s agent argued that the asking prices needed to be set to attract a good level of interest and that many of the recipients of the sales particulars were property developers to whom the development potential would have been obvious. The judge was not wholly convinced that putting a grossly inadequate asking price on a property to generate interest was sensible and he observed that the agent had valued the property at less than the asking price, so clearly the agent had been mistaken as to the value. Neither was the judge entirely convinced that it was sensible not even to mention the development potential in the sales particulars, although he also was not convinced that, as the claimant had argued, the agent should have gone to the length of commissioning a residual development assessment, noting that potential purchasers would carry out their own assessments. GE’s agent also came in for criticism when the court learned that he had expressed to the then front-runners who had offered £218,500 his view that the revised asking price, which he had been instructed by his clients to seek, was unrealistic. The judge referred to the principle in Raja v Austin Gray that, if the valuers were negligent, the borrower had a good claim against the receiver who did not discharge his duty of care to the borrower by entrusting the sale to apparently competent professionals.
However, notwithstanding these shortcomings, the judge concluded that the property had been sufficiently exposed to the market to enable all potential purchasers to bid for it if they so wished. With regard to the expert’s valuation of £325,000, the judge stated: “unless a bidding war developed between two or more such developers who had made similar calculations, this sum cannot be said to represent the best price reasonably achievable for the Property at that time” (paragraph 23). The judge used a phrase that IPs know well: “The market value of a property is the price which a willing purchaser is prepared to pay for the property to a willing vendor after the property has been exposed to the market for a reasonable period of time”.
It should be noted that the accepted practice of sales by mortgagee involves the advertising by so-called “public notice” in a local newspaper inviting further offers above the price accepted subject to contract. It appears that GE’s agent relied on this process to flush out the best offer, rather than seeking sealed bids.
N Ireland: CVA no protection for persistent non-payer of rent
Shah Din & Sons Limited (CVA) v Dargan Properties Management Limited ( NICh 34) (5 December 2012)
Summary: Although this is a Northern Ireland case, I feel that it serves as a reminder to take care to consider the context of a company’s pursuit of a CVA, whether it is fair and whether the company’s past behaviour supports the case for its protection.
In refusing to grant relief from forfeiture in this case, the court considered “the backdrop of culpable and wilful non observance of [the company’s] obligations” (paragraph 22).
The Detail: The company in CVA applied for relief from forfeiture. The only asset in the CVA was a lease on a property that the company had vacated some six years earlier, but which the landlord had only re-entered and recovered possession of shortly before the proposal was put together. After exploring the chronology of events, the court found that the company had wilfully failed to pay rent over a number of years; Burgess J stated that the company had “to all intents and purposes taken a free ride from the outset” (paragraph 21) and he found that “the plaintiff’s attitude towards its responsibilities in the face of legal proceedings and warnings has been culpable to the highest degree” (paragraph 22). The judge also had difficulty with the terms of the arrangement, which introduced an uncertainty as to what would happen if the lease had not been assigned in the CVA’s 18-month period, noting that the landlord would continue to have to meet its obligations to the Council and to maintain the property during that time. Relief from forfeiture was refused.
A case for insolvency geeks: marshalling across two debtors
Highbury Pension Fund Management Company & Anor v Zirfin Investments Limited & Ors ( EWHC 238 (Ch)) (14 February 2013)
Summary: This is a complex case, with which, to be honest, I only persevered out of a sense of stubbornness that I would not be beaten! It demonstrates the exception to the general rule that there must be a single debtor for marshalling. If marshalling holds no interest for you, then you might want to stop reading now… but if ever you do want to explore the principles of marshalling, this summary might come in handy.
The Detail: Barclays Bank Plc loaned monies to Zirfin Investments Limited and to four associated companies, “the Affiliates”. The loans were secured by means of legal charges over a property owned by Zirfin, “No. 31”, and properties owned by the Affiliates. As additional security for the loans to the Affiliates, Barclays also had the benefit of a guarantee from Zirfin, secured by means of the same charge over No. 31. Subsequent to Barclays’ charge, two other charges were granted over No. 31, in favour of Highbury Pension Fund Management Company and Cezanne Trading (described collectively as “Highbury”).
When Zirfin and the Affiliates defaulted on the loans, receivers were appointed over No. 31 and the eventual sale proceeds were applied to settle Zirfin’s debt to Barclays and to settle in part the Affiliates’ debt to Barclays by reason of Zirfin’s guarantee. The immediate consequence, therefore, appeared to be that Highbury had lost the benefit of their charges over No. 31 and sat as unsecured creditors in relation to the monies owed to them by Zirfin. However, this would not have been the case had Barclays looked to the Affiliates’ properties to discharge their debt, rather than calling on Zirfin’s guarantee.
To further complicate matters, the Serious Fraud Office obtained a Restraint Order over the assets of Mr Kallakis (consultant to a shareholder of Zirfin and the Affiliates) and the SFO regarded the assets held by Zirfin (including No. 31) and the Affiliates as subject to the Restraint Order.
The questions for the court were: (i) is a creditor of a guarantor entitled to marshal (or be subrogated to) securities which have been granted to another creditor of the guarantor by the primary debtor liable under the guaranteed debt and (ii) does any such claim to marshalling or subrogation take precedence over prohibitions contained in the Restraint Order?
The principle of marshalling “operates where a debtor (D) owes money to two creditors (C1 and C2), and where C1 has security over two properties (or some other call on two funds) (S1 and S2) but C2 has security over (or a right of resort to) only one (S1). In those circumstances C1 has a choice of recovering his money out of either S1 or S2. If C1 chooses to enforce the security over (or resort to) S2, then that leaves S1 available for C2. But if C1 chooses to enforce security over (or resort to) S1, then C2 has nothing to look to, and the security over S2 is not relied on at all, and becomes available to unsecured creditors (amongst whom C2 is now numbered). In that situation, in order to do justice equity applies a principle of maximum distribution and by a process akin to subrogation in effect gives C2 the benefit of C1’s unused security over S2, thereby ensuring that both C1 and C2 are paid by D as far as possible” (paragraph 15).
In this usual application of the principle, the debtor, D, is common to both creditors, C1 and C2. However, in this case, the Affiliates were debtors only to Barclays, not also to Highbury. Counsel for Highbury submitted that “although the general rule is that two or more creditors must be able to resort to two funds belonging to the debtor, this general rule is subject to an exception where… there is a common debtor who owes money to both creditors and he has a right, as between himself and a debtor who owes money to only one creditor, to ensure that the latter bears the ultimate liability” (paragraph 25). Counsel for Highbury acknowledged that there was no decided case in England and Wales that applied this principle, but relied on statements in text books and decisions in other jurisdictions.
In Norris J’s view, the doctrine of marshalling applied in this case: “Barclays has a claim against Zirfin as surety. It can look to two funds to satisfy that indebtedness. The first is the Zirfin Charge. The second is the Affiliates’ Charge. As regards Highbury’s claim to marshal, the Affiliates’ Charges can be bought into account (even though they are not over property belonging to Zirfin) because in equity Zirfin could call on the Affiliates to bear the burden of the debt and the Affiliates had the Affiliates’ Properties to enable them to do so” (paragraph 45). A limitation that Norris J noted regarding the rights acquired by Highbury on marshalling was that, “if Zirfin would not be subrogated to Barclays’ rights until such time as the Barclays debt had been entirely repaid, then Highbury cannot by a process akin to subrogation become entitled to any greater right” (paragraph 50).
Then the judge considered the SFO’s argument that Highbury has no “interest” in the Affiliates’ properties subject to the Restraint Order. Norris J did not believe that the Proceeds of Crime Act 2002 should be construed so as to “enrich the Crown by depriving Highbury of the right it otherwise would have had to marshal the securities” (paragraph 68). He therefore held “that the actions of Barclays have not deprived Highbury of the ‘interest’ which was previously recognised by the Restraint Order, and that if Highbury were to seek to bring itself within paragraph 25 of the Restraint Order or to seek a variation of the Restraint Order so as to make clear that it (rather than Barclays) was now contingently entitled to enforce the Affiliates’ Charges, the discretion given to the court ought to be exercised to permit that variation” (paragraph 70).
[UPDATE 26/11/2013: On 03/10/2013, Highbury’s appeal was allowed in relation to an element of the earlier decision that Highbury was not entitled to realise the securities until Barclays had been paid out in full (http://www.bailii.org/ew/cases/EWCA/Civ/2013/1283.html). In a more recent post, http://wp.me/p2FU2Z-4I, I summarise the appeal decision, which highlighted the difference between rights of subrogation and equity of exoneration.]