Sheriff Court case concerning a petition for sequestration of a debtor by Glasgow City Council.

In terms of the Bankruptcy (Scotland) Act 1985[1], sequestration will not be awarded in favour of a creditor where the debtor “forthwith pays or satisfies, or produces written evidence of the payment or satisfaction of, or gives or shows that there is sufficient security for [the debt]”.

In this case the sheriff accepted an argument by the debtor that, because the Council held a standard security over subjects owned by the debtor’s brother in law, the debtor had shown that there was “sufficient security for payment of” the debt in question and refused the petition for sequestration.

That decision was appealed by the Council which argued that, in terms of the relevant provision of the 1985 Act, the debtor had to show not only that a security covering the debt existed but also that the security was capable of immediate realisation so as to lead to payment of the debt without undue delay. In that regard, Council pointed to the fact that the standard security in this case had been granted by a party other than the debtor and that the subjects secured were residential (meaning various statutory pre-actions requirements would have to be carried out before the security could be realised) thus leading to a delay in payment of the debt.

The Sheriff Principal found that the authorities supported the Council’s argument, allowed an appeal of the sheriff’s decision and awarded the sequestration.

 “Sufficient security for the payment of the debt, in my opinion, means a form of security which, by its nature, brings about immediate payment or guarantees such payment…”

 The full judgement is available from Scottish Courts here.

All of our property and conveyancing case summaries are contained in the LKS Property and Conveyancing Casebook here.

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[1] Section 12(3A)(b).

Inner House Case in which the administrators of Oceancrown Ltd and other associated companies (including Loanwell Ltd and Questway Ltd) sought reductions of the sales of various properties by the companies as gratuitous alienations[1].

Background
The companies in administration were part of a group under the control of a Mr Pelosi. The group was involved in the development and letting of commercial and residential properties. Mr Pelosi had effective control of all of the companies which were operated as one enterprise and operated on the basis of one bank account in the name of Questway Ltd. The companies also had a group facility of around £17m from the bank which was subject to cross guarantees by the group companies.

Mr Pelosi negotiated the sale of 278 Glasgow Road, Rutherglen to Clyde Gateway Development Limited. On 10 November 2010 Oceancrown disponed 278 Glasgow Road to Strathcroft (then 99% owned by Mr Pelosi) for £762k. On the same day Strathcroft disponed the same property to Clyde Gateway for £2.1m (plus VAT of £367.5k[2]).

The bank’s solicitors were advised that sale of 278 Glasgow Road to Strathcroft was part of a series of transactions also involving 110, 210 and 260 Glasgow Road, and 64 Roslea Drive (owned by Oceancrown, Loanwell and Questway and over of which the bank held standard securities), the total sale price for which was £2.414m. When the bank’s solicitor (who was unaware of the subsequent sale of 278 Glasgow Road to Clyde Gateway for £2.4m) received the sale proceeds, it delivered discharges of the securities. Dispositions were executed (On 24 November 2010) transferring 110, 210 and 260 Glasgow Road to Stonegale Limited (of which Mr Pelosi’s son was the sole shareholder and director) and 64 Roslea Drive to Mr Pelosi’s son. The son then sold 64 Roslea Drive to a third party for £125k. Although no money was paid, the dispositions for the four properties recorded a consideration of £1.652m in total. Stonegale did not dispute that all the funds paid to the bank to discharge the securities came from the purchase of 278 Glasgow Road by Clyde Gateway.

Argument for the administrators
The administrators argued that a large proportion of the money received from Clyde Gateway (in respect of 278 Glasgow Road) was attributed to the other dispositions in order to make it appear that the transfers to Stonegale and Mr Pelosi’s son were made for consideration. In the view of the administrator, the back-to-back sale and transfers had been structured so as to keep £1.7075m out of reach of the bank and to transfer the properties to Stonegale and Mr Pelosi’s son for no consideration. The court was therefore asked to reduce the transfers of 110, 210 and 260 Glasgow Road, and 64 Roslea Drive.

Argument for Stonegale
Stonegale argued that the issue for the court was whether the alienations of 110, 210 and 260 Glasgow Road and 64 Roslea Drive, Glasgow were made “for adequate consideration”. Oceancrown, Loanwell and Questway had each received consideration which was paid to their secured lender. The parties agreed that the sums attributed to 110, 210 and 260 Glasgow Road, and 64 Roslea Drive exceeded their market value. The source of the funds was irrelevant. The bank had decided to discharge the security over 278 Glasgow Road on the basis of a valuation it had received and had made a bad bargain. The other transactions were separate. Consideration had been paid to Oceancrown, Loanwell and Questway as they had reduced their indebtedness to the bank.

Outer House Decision
In the Outer House Lord Malcolm found otherwise. “Consideration” is “something which is given, or surrendered, in return for something else”[3] No one paid anything for 110, 210, 260 Glasgow Road and 64 Roslea Drive. Oceancrown, Loanwell and Questway did not receive anything in return for the dispositions. They gifted the properties to the disponees. The fact that the bank was misled into using part of the sale price of 278 Glasgow Road to discharge all the standard securities did not supply the missing consideration. If the bank had known that 278 Glasgow Road had been sold for £2.4m, the same overall reduction in bank indebtedness would have occurred, but only the standard security over 278 Glasgow Road would have been discharged. The transfers under challenge were gratuitous alienations. As such, reductions of the dispositions of 110, 210, 260 Glasgow Road were granted and Mr Pelosi’s son was be ordered to repay the £125k paid to him by the third party for the purchase of 64 Roslea Drive.

Appeal to Inner House
On appeal to the Inner House, Stonegale argued that Lord Malcolm had erred in reaching the conclusion that no consideration had been paid in respect of the transfers being challenged. Firstly, Stonegale contended that the fact that the bank was not aware of the sale to Clyde Gateway (and would not have discharged the standard securities if it had been) was irrelevant to the question as to whether consideration had been provided for the properties.  Secondly, Stonegale argued that the fact that the consideration had been paid to the bank by Strathcroft (and not Stonegale and Mr Pelosi Junior) did not preclude its contention that adequate consideration had been paid. Essentially Stonegale argued that the payment by Starathcroft to the bank (in return for which the bank discharged the standard securities over the properties) reduced Oceancrown’s debt to the bank (which was guaranteed by Loanwell and Questway) and that consideration could include the discharge of a debt. As the consideration was in excess of the open market value of the properties, it was “adequate”[4].

Decision
The Inner House refused the appeal.  It was noted that, although a court can conclude that alienation has been made for adequate consideration irrespective of what the individuals involved think, the intention of the individuals may be relevant if only because the alienation must be foradequate consideration. In this case the whole motivation for the transaction was to divert the company’s assets away from its creditors which was exactly what the legislation is intended to prevent. The argument that the consideration for the transactions was the reduction of the debt was an artificial construct which bore no relation to the intention of the controlling minds of the companies involved (Mr Pelosi and his son). Oceancrown could be taken to have received £2.4m but, in disponing 278 Glasgow Road, it had conveyed a property which its controlling mind had previously agreed to sell at that price. In the absence of further evidence, Oceancrown could be regarded as having received adequate consideration for 278 Glasgow road (the transaction for 278 Glasgow Road was not challenged) but not for the other properties. With regard to the argument that consideration could be the reduction of debt over which the companies were guarantors, it was noted that attaching a value to the reduction in debt over which the guarantee was held was difficult and complex. However, the court followed the guidance of Lord Drummond Young in Jackson v The Royal Bank of Scotland plc [5] to the effect that “if the transaction as a whole appears commercial it should generally be assumed that the consideration is adequate”. In this case the court found that:

 “[t]he transactions under consideration were devices for the diversion of assets from creditors, facilitated by a misrepresentation to the banker of the companies which were involved.  They were accordingly not commercial transactions.”

The full judgement is available from Scottish Courts here.

All of our property and conveyancing case summaries are contained in the LKS Property and Conveyancing Casebook here.

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[1] In terms of s242 of the Insolvency Act 1986.

[2] The administrators investigations indicated that the VAT element on the sale of 278 Glasgow Road had not been paid to HMRC.

[3] MacFadyen’s Trustee v MacFadyen 1994 SC 416 at 421

[4] In terms of s242 of the 1986 Act.

[5] 2002 SLT 1123 at 1128D.

Case from the Court of Appeal for England and Wales considering the treatment of rent payable during an administration and whether part of a payment of rent payable in advance could be treated as an expense of administration (and thus paid in priority to unsecured debts).

One of the companies in the Game group of companies was the tenant of many hundreds of properties from which the group traded. The rent in respect of most of those properties was payable quarterly in advance on the usual English quarter days (which include 25 March). On 25 March 2012 approximately £10m in rent became due under the leases and on the following day the Game Group went into administration. Trading continued from some stores which were included in a sale of the business and assets of the group to Game Retail Limited which was outwith the group. Approximately £3m in rent was said to be outstanding in respect of those stores.

The cases of Goldacre (Offices) Limited v Nortel Network UK Limited[1] and Leisure (Norwich) II Limited v Luminar Lava Ignite Limited[2] had decided that part of an instalment of rent cannot be treated as an expense in the context of insolvency. In Goldacre  it was found that, where a quarter’s rent payable in advance fell due during a period in which the administrators were retaining the property for the purpose of the administration, then the whole of the quarter’s rent was payable as an administration expense, even if the administrators were to give up occupation later in the same quarter. In Luminar  it was decided that, where a quarter’s rent payable in advance fell due before entry into administration, none of it was payable as an administration expense even if the administrators retained possession for the purposes of the administration.

As a result of Goldacre and Luminar it has become increasingly common for companies to enter administration on the day immediately following a quarter day, thus avoiding liability to pay the rent in full even if they retain possession of their leased property. A quick sale of the business to a new company can also mean that the new company can, in effect, trade for the first three months rent free.

The High Court in this case followed Goldacre and Luminar. However, the Court of Appeal applied the “salvage principle” under which liability for rent incurred before the winding up may be treated as if it were an expense of the winding up (on equitable grounds) where a liquidator or other office holder retains the property for the benefit of the winding up or administration. Consequently, the court allowed the Landlords’ appeal and over-ruled Goldacre and Luminar finding that an application of the salvage principle means that:

“the office holder must make payments at the rate of the rent for the duration of any period during which he retains possession of the demised property for the benefit of the winding up or administration (as the case may be). The rent will be treated as accruing from day to day. Those payments are payable as expenses of the winding up or administration. The duration of the period is a question of fact and is not determined merely by reference to which rent days occur before, during or after that period.”

The full judgement is available from BAILII here.

All of our property and conveyancing case summaries are contained in the LKS Property and Conveyancing Casebook here.

Inner House case in which SEPA and others appealed against a decision of Lord Hodge in the Outer House to the effect that the liquidators of Scottish Coal could (1) abandon mining sites and (2) abandon/disclaim the related statutory licences/permits (which in effect allowed the liquidators to avoid onerous obligations requiring restoration of the sites).

SEPA’s arguments
Abandonment of land
SEPA argued that the liquidator did not have the power to abandon or disclaim property.  Whilst a liquidator could disclaim land in the sense of declining to deal with it, the land continued to be owned by the company and the liabilities arising from ownership continued to be enforceable. Lord Hodge, they argued, had been in error when he stated that a liquidator could disclaim “by taking steps to terminate the company’s ownership of the land”.

Abandonment of the statutory licences
With regard to the liquidator’s power to abandon or disclaim the statutory licences:

1. there was no power to “disclaim” in the sense that a liquidator could terminate a licence unilaterally and without reference to the statutory surrender procedures;
2. even if  1. were wrong and a liquidator did have a general power to disclaim property, the scheme laid out in the CARs[1] created a form of licence that could not be renounced in that way, even if other licences could be so renounced; and
3. it had been within the legislative competence of the Scottish Parliament to promulgate the CARs with that effect.

Decision
Abandonment of land
A person can abandon land, in the sense of leaving it physically, intending to give up its use permanently. However, the Inner House found that that was not what was under consideration in this case. What required to be decided was whether a person can “abandon” or “disclaim” ownership of land. There are a number of methods by which a person’s ownership can be terminated: destruction of the land itself, where the owner ceases to exist, by operation of law (e.g. enforcement of a security or a compulsory purchase) or by voluntary transfer to another person. However, there is no legal process whereby a person can transfer land into oblivion. A person cannot abandon the ownership of land in the sense of casting away the real right.

The court also noted the difference between the insolvency regimes in England and Scotland created by s178 of the Insolvency Act 1986, which allows a liquidator in England (but not in Scotland) to “disclaim” onerous property[2].

Abandonment of the statutory licences
The CAR regime prohibits activities which have or are likely to have a significant adverse impact on the water environment. In particular, activities liable to cause pollution are controlled but controlled activities can be carried out by a “responsible person” on the grant of a licence by SEPA. Liquidators are expressly included within the definition of “responsible person”. In addition to being an asset, licences bring with them associated liabilities and can be varied or terminated on application to SEPA which, if it grants an application to surrender a licence, must specify the steps necessary to avoid a risk of adverse impact on the water environment and to leave the water environment in a state that complies with European, UK and Scottish legislation.  On a broad interpretation of the regulations the provisions expressly impose the surrender regime on liquidators[3]. In the view of the Inner House:

“The alternative and narrower interpretation would require the CARs to be read in a way that goes against the ordinary meaning of the language used. Specifically, the CARs do not say that a liquidator is a “responsible person” only for so long as he does not exercise a power to disclaim. Such an interpretation is contrary to the plain meaning of the CARs and ignores the additional problem that a Scottish liquidator does not, in any event, have a general or statutory power to disclaim. It would be a curious construction of an explicit provision that a liquidator is a responsible person and, therefore, responsible for ensuring compliance with the statutory licence, only for as long as he chooses. The narrower interpretation of the CARs is further undermined by the existence of the specific surrender provisions.”

Competence of the CARs
In the Outer House Lord Hodge had the view that the Scotland Act 1998[4] required him to take a narrow interpretation of the CAR regime. However, the Inner House disagreed. Even when taking a broad approach to interpreting the provisions, and although the effects of the provisions would be felt by liquidators of companies being would up in England, the CAR regime dealt with matters which formed part of the law of Scotland and did not form part of the law of England. Also, when considering whether the provisions dealt with reserved matters (i.e. corporate insolvency) the court found:

 “The purpose of the CARs as a whole, and the provisions relating to a liquidator in particular, is an environmental one. Neither the CARs as a whole, nor the provisions relating to liquidators, have as their purpose an insolvency objective. The effect on liquidators of companies possessing a CARs licence is no more than a loose or consequential connection. In all the circumstances, those provisions of the CARs which are said to restrict the power of a liquidator cannot be said to relate to reserved matters.’”

The Inner House allowed the appeal and directed that the liquidators did not have the power to “abandon (otherwise disclaim)” the sites or the statutory licenses.

The full judgement is available from Scottish Courts here.

Outer House Case in which the administrators of Oceancrown Ltd and other associated companies (including Loanwell Ltd and Questway Ltd) sought reductions of the sales of various properties by the companies as gratuitous alienations[1].

Background
The companies in administration were part of a group under the control of a Mr Pelosi. The group was involved in the development and letting of commercial and residential properties. Mr Pelosi had effective control of all of the companies which were operated as one enterprise and operated on the basis of one bank account in the name of Questway Ltd.

Mr Pelosi negotiated the sale of 278 Glasgow Road, Rutherglen to Clyde Gateway Development Limited. On 10 November 2010 Oceancrown disponed 278 Glasgow Road to Strathcroft (then 99% owned by Mr Pelosi) for £762k. On the same day Strathcroft disponed the same property to Clyde Gateway for £2.1m (plus VAT of £367.5k[2]).

The bank’s solicitors were advised that sale of 278 Glasgow Road was part of a series of transactions also involving 110, 210 and 260 Glasgow Road, and 64 Roslea Drive (owned by Oceancrown, Loanwell and Questway and over which the bank held standard securities), the total sale price for which was £2.414m. When the bank’s solicitor (who was unaware of the sale of 278 Glasgow Road to Clyde Gateway) received the sale proceeds, it delivered discharges of the securities. Dispositions were executed (On 24 November 2010) transferring 110, 210 and 260 Glasgow Road to Stonegale Limited (of which Mr Pelosi’s son was the sole shareholder and director) and 64 Roslea Drive to Mr Pelosi’s son. The son then sold 64 Roslea Drive to a third party for £125k. Although no money was paid, the dispositions for the four properties recorded a consideration of £1.652m in total. Stonegale did not dispute that all the funds paid to the bank to discharge the securities came from the purchase of 278 Glasgow Road by Clyde Gateway.

Argument for the administrators
The administrators argued that a large proportion of the money received from Clyde Gateway (in respect of 278 Glasgow Road) was attributed to the other dispositions in order to make it appear that the transfers to Stonegale and Mr Pelosi’s son were made for consideration. In the view of the administrator, the back-to-back sale and transfers had been structured so as to keep £1.7075m out of reach of the bank and to transfer the properties to Stonegale and Mr Pelosi’s son for no consideration. The court was therefore asked to reduce the transfers of 110, 210 and 260 Glasgow Road, and 64 Roslea Drive.

Argument for Stongale
Stonegale argued that the issue for the court was whether the alienations of 110, 210 and 260 Glasgow Road and 64 Roslea Drive, Glasgow were made “for adequate consideration”. Oceancrown, Loanwell and Questway had each received consideration which was paid to their secured lender. The parties agreed that the sums attributed to 110, 210 and 260 Glasgow Road, and 64 Roslea Drive exceeded their market value. The source of the funds was irrelevant. The bank had decided to discharge the security over 278 Glasgow Road on the basis of a valuation it had received and had made a bad bargain. The other transactions were separate. Consideration had been paid to Oceancrown, Loanwell and Questway as they had reduced their indebtedness to the bank.

Decision
Lord Malcolm found otherwise. “Consideration” is “something which is given, or surrendered, in return for something else”[3] No one paid anything for 110, 210, 260 Glasgow Road and 64 Roslea Drive. Oceancrown, Loanwell and Questway did not receive anything in return for the dispositions. They gifted the properties to the disponees. The fact that the bank was misled into using part of the sale price of 278 Glasgow Road to discharge all the standard securities did not supply the missing consideration. If the bank had known that 278 Glasgow Road had been sold for £2.4m, the same overall reduction in bank indebtedness would have occurred, but only the standard security over 278 Glasgow Road would have been discharged. The tranfsfers under challenge were gratuitous alienations. As such, reductions of the dispositions of 110, 210, 260 Glasgow Road were granted and Mr Pelosi’s son was be ordered to repay (to the administrators) the £125k paid to him by the third party for the purchase of 64 Roslea Drive.

The full judgement is available from Scottish Courts here.

All of our property and conveyancing case summaries are contained in the LKS Property and Conveyancing Casebook here.

The weekend before last was supposed to play host to one of the biggest electronic music events in the UK, Baselogic Productions’ Bloc Festival. Following 6 successful annual events and despite a move from Butlins holiday park to the London ‘Pleasure Gardens’ the festival sold almost 15,600 tickets out of a capacity of 18,000. Replete with techno godfathers Richie Hawtin and Carl Craig it looked set to be the event of the summer.  However, it was not to be.

The chosen site in central London, which saw the festival spread out over venues including a ship moored at the Royal Victoria docks, was not equipped to handle the crowd capacity, with most punters spending the first evening queuing rather than watching any bands and those who entered the separate venues not being able to leave due to too few exits.  Ticketing was handled by the unfortunately named ‘Crowdsurge’, who maintain the site was under capacity The plug was pulled at 12:45am Saturday morning, with 15,000 festival-goers informed that the remainder of the festival was cancelled.

Interestingly, as the dust has settled, BP have gone into administration. Unable to honour their debts to the artists due to the obligation to refund 15,600 tickets, BP find themselves in a position not faced by any other festival organiser before in the UK.  After a mere 2 weeks of lectures on the Glasgow University LLB course on corporate administration, this raised more questions than I can find answers to, from a legal perspective, given how different a festival organisers business is compared to a company that trades all year round. At face value, if they are obliged to refund all tickets for the events, this would mean their liabilities (artist payments for the artists who either played Friday night or were in London prepared to play their time slot) exceed their assets, so administration would be unavoidable. But even trying to organise thoughts on the consequences into a logical order is proving impossible, almost as hard as trying to fathom why so many people like techno….

How does a ‘festival’ trade throughout the year?
How are the administrators, appointed under the Insolvency Act 1986, going to continue trading as BP? Administrators are tasked with rescuing the company as an ongoing concern, but BP only host one event a year. A festival organiser such as All Tomorrow’s Parties host events worldwide every couple of months and have a steady stream of revenue all year long, whereas bloc presumably take in ticket sales in advance of the festival and a percentage of catering /onsite entertainment/drinks/merchandise sales for only one weekend of the year.  The amount that currently remains from the proceeds of ticket sales will depend on money already expended on upfront costs – venue rent, live music and alcohol permits, flights for performers (which some insist on in advance) and other attendant costs of putting on a festival. Assuming they have the credit facilities to last until a new festival can be organised, how will BP be able to put on another festival successful enough to recoup the money lost on the 2012 fiasco and cover the costs of the make-up festival?  Do the electronic artists that travel from all over the globe have enough solidarity with the genre and festival that they will perform out of charity? How will BP convince administrators that this could even be accomplished? Do they have financial reserves built up from previous years?

How are ingoings and outgoings handled for a festival?
Organisation starts almost immediately after the end of the prior year’s festivals. Live event permits have to be paid upfront as do the costs for renting the venues.  Organisers must take a wage, either monthly or following the completion of accounts for the previous festival. The online records available for BP’s financial year ending 31/3/2011 put ‘cash at bank’ (the same value as ‘total assets’) at £167,636 and their ‘total liabilities’ at £140,886. In short, BP look roughly £27,000 in the red.  Bloc 2011 took place on the weekend accounts were filed. Whether this means all bands fees are paid out of ticket sales prior to the festival commencing and all other percentage cuts are handled after the festival, I don’t know. This puts BPs theoretical reserves at £27,000. As a small festival, it would stand to reason that BP as a private limited company lease rather than own, which would explain why total assets are the same as cash assets in their accounts. Suffice to say, their reserves do not look substantial.

Do the festival attendees and performers both rank as unsecured creditors?
BP have not announced how ticket refunds will be handled, but affirmed that they will be. Is the consequence of administration that festival goers rank as unsecured creditors?  If so, where will they rank? There are also the performers (that actually performed, those who found out about the cancellation may have been able to mitigate their losses and avoid unnecessary travel and expense) and security staff (provided by agencies).  And before this, the administrators fees have to now be satisfied, which as witnessed in the ongoing Rangers administration case can reach up to £130 per hour per administrator.  Someone has to lose out.  The bulk of the costs will be non-recoverable: permits, venue rent, alcohol licenses etc. If ticket sales went to satisfying those costs, where will refund money for 15,800 disappointed festival-goers come from? It doesn’t exist anymore, which suggests Bloc’s audience will bear the brunt of the affair. Festivals thrive on reputation and regular annual attendees, which Bloc had up until this weekend.  The shame of it is that with the disappearance of Glade festival and Barcelona’s Sonar being a more expensive affair, Bloc has always represented an excellent festival for a cheap ticket price. It begs the question, how could something as fundamental as crowd capacity and control be handled so terribly in the festival preparation?

UPDATE: – Since starting this blog, The Guardian has revealed that BP have gone into voluntary liquidation.  Sean Michaels reports that BP’s assets are going to be sapped by liquidators fees and claims of other creditors. Refunds for ticket-holders look increasingly unlikely, but I can’t imagine 15,800 ticket holders are going to techno for an answer….

Application for an administration order in respect of FM Front Door Ltd. The application followed FM’s failure to make payments under a loan from the Dunfermline Building Society obtained to assist with the purchase of flats at the Skyline development on Finniestoun Street in Glasgow.  The loan was secured by a floating charge and standard securities over each of the flats. FM’s parent company FM Developments also granted a guarantee for the loan.

Clause 13 of the loan agreement provided that the grounds for default included:

1. failure to pay sums due under the loan agreement;
2. inability to pay debts as they fall due (or deemed inability in terms of the Insolvency Act 1986); and
3. circumstances arising, which in the opinion of the building society, had a materially adverse effect on the ability of FM to perform it’s obligations under the agreement or on the value, validity and enforcement of the security or the security documents.

In terms of the loan agreement, FM were to make quarterly payments to the building society. They failed to do so timeously (in respect of payments due in July and October 2010 also January and April 2011) but on each occasion paid after they were sent reminders by the building society which noted the sum due and the bank account to which it was to be paid. However, when FM again failed to pay the sum due in July 2011, the building society wrote to FM indicating that they were in default and demanding payment of the principle sum with interest.

The defaults on which the building society sought to rely were the late payment of the July instalment, a reduction in the value of the property which in its opinion constituted a materially adverse effect on both FM’s ability to perform its obligations under the loan agreement and also on the value of the securities.  It also took the view that the administration of the guarantor, FM Development materially affected the value of the guarantee.

FM argued that it was not in default contending that the parties had varied their contract so that FM did not have to pay the quarterly instalments of interest until the building society had informed it of the sum due and the bank account into which the sum should be paid. Further, FM claimed that the building society had acquiesced in late payment and was personally barred from founding on the delayed payment in July.

Lord Hodge rejected these arguments and granted the administration order sought by the building society.

In terms of the Insolvency Act 1986, before a court can grant an administration order, it must be satisfied that:

1.  the company is or is likely to become unable to pay its debts; and
2.  the administration order is reasonably likely to achieve the purpose of the administration. 

Default
Variation of the contract
Lord Hodge was not persuaded that the email correspondence vouched for any variation of contract. It was consistent with the building society politely reminding its borrower that sums were overdue and pressing for payment. It did not establish the agreed practice claimed by FM. Also there was no suggestion that, before the default, anything occurred to cause uncertainty as to the amount due for quarterly payment. On the contrary, the sum due in each quarter remained the same and the bank account into which it was to be paid did not change. 

The loan agreement also contained a “no waiver” clause to the effect that failure or delay on the part of the building society to exercise powers or rights under the agreement did not preclude further exercise of the powers or rights. Whilst there is some uncertainty as to the boundaries of the efficacy of “no waiver” clauses, the effect of the clause was that FM could not found on a failure by the building society to assert a default when there had been a delay in making a quarterly payment in order to argue that the building society could not give notice of a default on the occurrence of a further failure to make a payment. Personal bar seeks to prevent unfairness caused by inconsistent behaviour. But in this case FM had to be taken to have been aware of the clause and thus to have known that a failure by the building society to exercise a right or remedy did not amount to an abandonment of that right on a later non-performance.

FM was therefore in default when it failed to make the payment on 1 July 2011. 

Materially adverse effects under clause 13
Lord Hodge was also satisfied that the building society has established a default under clause 13. The insolvency of FM’s guarantor, FM Developments was likely to have had a material adverse effect on the value of its guarantee.  Further, the building society was entitled to take the view that the fall in value of the flats which FM acquired was likely to have a material adverse effect on the value of its standard securities and on FM’s ability to repay the advances.  Whilst both parties relied on different valuations, whichever valuation was taken, it was clear that there has been a material fall in the value of the properties and that the outstanding balance of the loan exceeded their value. That was a position which was materially adverse to the circumstance in 2007 when the building society stipulated that the maximum that it would lend was 85% of the market value of the properties.

The administration order
Inability to pay debts
Having found that the building society was entitled to treat FM as being in default, Lord Hodge was satisfied that FM was unable to pay its debts as they fell due. FM’s failure to repay the principal sum in response to the building society’s demand and the evidence of the current value of its property portfolio demonstrated that inability.

The effect of the administration order
As to whether an administration order was likely to achieve the purpose of the administration, one of the two purposes which the intended administrators advanced was to make a distribution to the building society as a secured creditor. There is no suggestion that they would not be in a position to do so and Lord Hodge was satisfied that it was likely that that purpose would be achieved.

The full judgement is available from Scottish Courts here.

All of our property and conveyancing case summaries are contained in the LKS Property and Conveyancing Casebook here.