The Court of Appeal (CA) has upheld a decision of the Chancery Court that dismissal of a defence and counterclaim to a bank's claim for payment of debts prevented a fresh claim from being made against the bank on the same basis. It has also re-affirmed the duties owed by administrative receivers.
In Amir Ahmad & others v Bank of Scotland Plc & Others, the appellants appealed against the decision of the Chancery Court to strike out its claim for damages against the defendant bank and against the receivers appointed by that bank.
Background
The claimants were shareholders and directors and their corporate entities (ZDL and ZTL), as well as individuals trading in a partnership. The claimants had a number of facilities with the bank, secured by properties and subject to guarantees given by the individuals and the corporates.
The claimants fell into arrears, following which the bank made demands for payment totalling just over £5.2 million. The individual claimants were liable under the terms of their personal guarantees for £1.25 million.
The bank appointed the PwC receivers as fixed charge receivers of the properties, as well as administrative receivers of the assets and undertakings of one of the corporate entities, ZTL. For regulatory reasons, the PwC receivers were subsequently replaced as the fixed charge receivers by the Grimley receivers. However, the PwC receivers remained as administrative receivers for ZTL.
The PwC and the Grimley receivers realised the value of the various assets over which they had been appointed. The realisation of the properties made enough to settle the partnership account, however the sale of ZDL's and ZTL's assets was insufficient to discharge the corporate borrowing. The bank sought payment of just over £900,000 under the Personal Guarantees. No payment was made and the bank issued proceedings.
The claimants filed a defence and counterclaim, however, the judge at first instance found that the defence disclosed no real prospect of successfully defending the claim and that the counterclaim had no real prospect of success.
The claimants appealed and applied to amend the defence and counterclaim. The main defence to the claim under the personal guarantee relied on an alleged agreement with the bank - reflected in a letter from the bank dated 27 May 2008 (the May 2008 Agreement).
The claimants alleged that the May 2008 Agreement allowed them to market the properties and pay over the proceeds of sale to the bank before receivers would be appointed. They argued that the properties had been placed on the market as agreed. The appointment of receivers in September 2008 was therefore a breach of the May 2008 Agreement, as a result of which the claimants had lost the opportunity to control and realise or retain the fair market value of the assets of the businesses. The claimants argued that they would have realised more and counterclaimed for damages.
Both the appeal against the first instance decision and the application to amend were dismissed. The claimants applied for permission to appeal to the CA.
The CA confirmed the decision that there was no answer to the guarantees and, as judgment was given in the bank's favour, it was also right to refuse permission to bring in cross-claims by way of counterclaim. The court did, however, go on to say that "the right course would be for those claims to be made the subject of a fresh claim by guarantors as against the bank".
The claimants (which now included ZDL and ZTL) did just that - issuing a new claim against the bank and the PwC and the Grimley receivers. The Defendants applied to strike out the claims and for summary judgment.
The judge held there was no claim to answer against the bank or the receivers. The claim against the bank now was exactly the same claim the claimants had tried to bring in by way of counterclaim in the earlier proceedings brought by the bank - i.e. that the bank was in breach of the May 2008 Agreement when it appointed the receivers.
The claimants appealed to the CA.
Court of Appeal decision
The CA held that the claimants had no prospect of succeeding with its claim. The claimants had tried to amend its defence and counterclaim to the claim made by the bank - to include a claim on this basis. Permission to amend had been refused and the defence and counterclaim struck out.
It is an established principle that a party cannot re-litigate an issue or defence that has already been determined (known as cause of action estoppel). On that basis the claim against the bank must fail - there was no arguable case for the bank to answer.
ZDL and ZTL had not been a party to the earlier proceedings and as a result no 'cause of action estoppel' arose in respect of their claims. However, the claims by ZDL and ZTL were based on a breach by the bank of the May 2008 Agreement - and the fact that that the receivers had not been validly appointed as a result.
The CA did not accept that the May 2008 Agreement had bound the bank such that it could not appoint the receivers over ZDL's and ZTL's assets. At most, the agreement delayed their appointment, but the appointment was valid. In any event, the agreement could not have constituted promises made to ZDL and ZTL - they were not parties to the May 2008 Agreement.
The CA also held that the claimants had failed to make out the claim that the receivers had failed in the performance of their function. It confirmed that as regards the duties on the receivers:
- an administrative receiver or a fixed charge receiver is the agent of the relevant companies and not the bank;
- absent any contractual relationship, the duties owed by the receivers to the bank and ZDL/ZTL were equitable duties only;
- the receivers' primary duty owed to the bank was to realise the bank's security in the best interests of the bank. The receivers' owed a secondary duty to the claimants to exercise care to avoid preventable loss;
- receivers are free to sell an asset or property in the condition it is in and as they find it. A receiver is not under a duty or obligation to await or effect any increase in value or improvement in the property;
- if the receiver decides to exercise a power of sale, he will generally owe a duty to the companies to take reasonable care to obtain the best price reasonably obtainable at the time of sale in doing so;
- a receiver owes a duty in exercising his powers to do so in good faith and for a proper purpose, that is to say, for the purpose of realising the assets comprising the security and obtaining repayment of the sum secured. In this regard, breach of the duty involves something more than negligence or even gross negligence: it requires some dishonesty, or improper motive or element of bad faith to be established;
- an administrative receiver does not have a duty to consider a rescue of the company. Nor is he under any duty to trade on, or under any duty to conclude that trading on is not realistic, before seeking to sell assets.
The claimants's claims against the bank and the receivers were dismissed.
Comment
While the law in the area of contractual estoppel is established, this case is a good example of how a party to litigation will be stopped from having two bites of the same cherry.
An unsuccessful attempt to make a claim by way of a defence and counterclaim must prevent the same party from trying to make exactly the same claim by way of fresh proceedings. Once an issue has been determined by the court a party cannot get a second chance at the same argument by issuing the claim under a different banner.
This claim is also a useful reminder of the obligations on receivers and, in particular, as concerns the sale or disposal of assets. An interesting element of the claim was the settlement by the receivers on behalf of ZTL of a claim against their insurers (NIG). The claim for £5 million had been settled by the receivers, on advice, for £1.55 million at mediation.
One of the grounds of appeal was whether the settlement reached at mediation was reasonable. The CA concluded that the correct approach to this was that adopted in solicitors negligence cases, in particular in Moy -v- Pettman Smith [2005] UKHL 5 [2005] 1 WLR 581 and also in Karpenko -v- Paroian, Courey, Cohen & Houston (1981) 117 DLR (3d) 383 (which approach it found was also applicable to the settlement of a claim by administrative receivers) where the correct question was whether there had been any "egregious error".
In the circumstances, the CA concluded that the claim against the receivers (and the evidence advanced by C in support) failed to identify any such egregious error and that the claimants had no real prospect of successfully impugning the settlement figure achieved by the receivers.
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