Guarantees – no need to demand before statutory demand

The court looked last week at whether a guarantee was a secondary or a primary obligation to pay and concluded that the wording of the guarantee in question was quite clear that the guarantors were liable “as primary obligors”.  An argument had arisen as to whether the guarantors had to pay up under the guarantee when they were served with statutory demands, even though no demand under the guarantee had been served first.  On appeal from the district judge who had agreed with the guarantors that the statutory demands could not be relied on for the purpose of establishing the guarantors were unable to pay their debts under the Insolvency Act 1986, the court held  that the guarantor’s liability under the guarantee was immediately payable by them without need for a demand.

In a way it is odd that this case got this far, as it has long been recognised that you need to write into a guarantee a provision that the guarantor is liable as primary as well as secondary obligor.  This has been done for years to get over exactly the sort of time-wasting, defensive tactics adopted by the guarantors in this case.  It is helpful to know that the primary obligor clause has been upheld (though I might have been holding my breath if I had seen a report of the case at first instance in front of the district judge).  What does it mean in practice?  My view is that if you stop to think about enforcement of a guarantee, and if you are not up against time, it doesn’t hurt to serve a demand under the guarantee in the usual way just so that everybody is clear about your intentions.

Case: TS & S Global Ltd v Fithian-Franks and others [2007] EWHC 1401 (Ch) 18 June 2007

Lasting Powers of Attorney – less certainty?

When Lasting Powers of Attorney (LPAs) come into effect on 1 October 2007, banks will need to check they are registered before acting on them.  And they will be deprived of the clearest, simplest proof they had of the continuing mental incapacity of their customer.  I mean that under the current regime of Enduring Powers of Attorney (EPA), which will end on 30 September this year, it is a requirement for the attorney to register the power of attorney when the donor has lost mental capacity at the Court of Protection (now the Public Guardianship Office and from 1 October, The Office of the Public Guardian).  Registration was clear proof to a bank, without further enquiry, that their customer had regrettably lost mental capacity. 

This matters at law because it is not possible to contract (or to give instructions for the operation of a bank account) if you do not have mental capacity.  If a bank acts on the instructions of a customer who lacks mental capacity, the bank potentially renders itself liable, depending on the facts of the matter, for paying away money, for example, from the customer’s account without having authority to do so.

The new Lasting Powers of Attorney are to be registered as soon as they are created.  The donor does not need to have lost mental capacity and the bank cannot act on the Power until it is registered.  From then on, in theory (but surely this is impractical) the bank will have to continue to assess the capacity of the customer on every transaction.  The Mental Capacity Act 2005, which introduces the LPAs says that a person lacks capacity … if he is unable to make a decision for himself … because of an impairment or disturbance in the functioning of the brain (ss 2, 3). Banks have to make these sort of assessments of their customer’s capacity on a daily basis unless the customer is invisible, tapping away on-line or speaking to their call centre or withdrawing from an ATM – actually, how many times does a bank get to see its customer nowadays?  So there is nothing new in that, but they will have to get used to the new LPA and its registration requirement and the absence of the registered EPA which was the final proof that the customer could not longer manage its affairs.

Existing EPAs will continue to have effect, but no new ones can be created after 1 October.  There will be two sorts of LPA: a “property and financial affairs LPA” which is the type a bank is likely to see, and a “personal welfare LPA”.  The forms are separate and lengthy.  Banks will need clear procedures and good training in place to advise staff what to do when they suspect that a customer lacks capacity to make a decision about his property and affairs.

The “ring-fenced fund” is – unusually – not distributed

When the administration procedure was reformed by the Enterprise Act 2002, unsecured creditors were protected by a new ring-fenced fund to ensure that they had some payout despite the interests of the secured creditors.  A case (Hydroserve) was reported on 19 June 2007 which is the first known case of the court disapplying the ring-fenced fund provisions. Under the Act, the ring-fenced fund does not have to be made available for unsecured creditors if the liquidator or administrator thinks the cost of making a distribution to unsecured creditors would be disproportionate to the benefits.  

In this case the company had gone into administration, owing about £3.5 million to 126 unsecured creditors, and having given a floating charge to its bank. A major part of the £3.5 million was owed to the four group creditors. The ring-fenced fund would have amounted to some £35-40,000, but the share of this which would have been available for the 122 non-group creditors would have been only about £5,000 before costs, and a mere £2,000 or so after the costs of agreeing their claims. The group creditors were prepared to forego their share of the ring-fenced fund provided that it was paid to the bank, which had the benefit of group guarantees. The company argued that the cost of agreeing the claims of the 122 non-group creditors, and making a distribution to them, would be disproportionate to the benefits. The court agreed and made an order disapplying section 176(A)(2).

Case: Re Hydroserve Ltd [2007] All ER (D) 184 (Jun) Chancery Division Rimer J 19 June 2007 Law: Section 176A(2) of the Insolvency Act

Financial Collateral Directive – why incorporate book debts?

A robust appreciation of the Financial Collateral Directive has been published by Dermot Turing (2007) 5 JIBFL 254. He is enthusiastic about its impact but makes a side-swipe at the “gripes and moans” of people – I am one – who complain the implementation of the Directive was flawed in the UK.  This, I believe, probably rendered our Regulations ultra vires.  A useful point he makes is that the proposed extension of the Directive to include “credit claims” (bank loans and book debts, to you and me) is driven by reforms in the European Central Bank which has also reformed its collateral arrangements. The ECB already permits credit claims as Eurosystem collateral.

Securitisation is the obvious way of making “credit claims” (locked up and hard to get at) into transferable instruments that qualify as financial collateral as the Directive stands. But the Commission think an alternative to securitisation is needed: it is too costly and unfamiliar in some countries.

The problems with transferring credit claims are numerous: conflict of law issues, set-off, enforcement, consumer credit law, registration and perfection issues to name but a few. The Commission is looking into these and the interplay with Rome 1 proposals to harmonise the law of contractual choice of law in all member states.  As Dermot Turing says, if they sort out the problems, the potential for banks wanting to use book debts as collateral will be immense.

Bank Law Blogger had a look at the original proposals by the Commission: http://banklawblog.wordpress.com/2007/01/12/financial-collateral-arrangements-an-evaluation/

When Poseidon wields his Trident …

Another example of the failure of the rescue culture? Gabriel Moss (Insolvency Intelligence May issue page 72 ff) shows how the case of Trident (that business-rates-in-Exeter case) has interpreted the Insolvency Rules to mean that rates are to be treated as an automatic expense of an administration regardless of whether there is any benefit to the creditors in incurring rates liabilities. So, although the Enterprise Act 2002 aimed to promote the rescue culture, its own Insolvency Rules have undermined it. He says, the Trident decision is a disaster for retail chains where the administrator is faced with a massive expenses claim depriving the administrator of breathing space to allow him or her to decide whether trading from the premises would benefit creditors. And abandoning the property won’t help: administrators can’t disclaim leases like liquidators can.

Exeter City Council v Bairstow Chancery Division (Companies Court) 2 March 2007 [2007] EWHC 400 Ch)

European orders for attachment of bank accounts

The European Commission came up with the idea in a green paper some time ago that if they legislate for a European-wide order for attachment of bank accounts, then the world will be a happier place – or at least, they think it will improve cross-border debt collection. The Financial Markets Law Committee now begs to differ.

They point out that such orders would have unattractive consequences for account-holding banks receiving the orders, as there could potentially be multiple concurrent proceedings: an application for an EU order and an application for a domestic order at the same time, perhaps – and the latter could be under review in the court of the country where the bank account is located, resulting in costs and legal uncertainty. They say, it should be made clear that a bank who has paid away sums before freezing the account should not be expected to recover the funds. And only bank accounts where the debtor has an immediate right to call for payment should be included in the regime – as opposed to securities accounts where the value is always fluctuating.

There is some interesting commentary by the British Institute of International and Commercial Law and the Law Society waded in too. 

Completely off the point, Bank Law Blogger was happier in the old days, with the (shorter, more poetical but yes, more obscure) language of “garnishees” for “orders for attachment of bank accounts”.

The Wolfsberg Group

The Wolfsberg Group is an association of 12 gobal banks that aims to reach common standards on Know-your-Customer and Anti-Money Laundering issues.  The Group has issued various papers that aim to give guidance on areas where there is no law or further guidance is felt helpful.  The papers include:

• FAQ’s on AML issues in the context of Investment and Commercial Banking
• AML guidance for Mutual Funds and other pooled investment vehicles
• Guidance on a risk based approach for managing money laundering risks
• FAQ’s on Correspondent Banking

Tracy Paradise has recently written an article on the Group for Sweet & Maxwell’s Company Lawyer (2007 Vol 28, no 5, p 150-151).

EC consult on bank account switching

The European Commission launched a consultation on 6 June addressing possible ways to simply switching bank accounts between financial institutions both domestically as well as cross border within the European Union. There is some coverage here.

The report suggests introducing an EU-wide “account number portability” system which would allow customers to change banks but keep their account number, thus making it easier to transfer services tied to accounts such as direct debits and standing orders.

The consultation follows the publication of a report drafted by an ‘expert group on customer mobility’ identifying the obstacles customers face when switching bank accounts, both nationally and within the European Union. The findings showed that clients face four main obstacles when switching accounts (1) Lack of consistent information and non-transparency of prices (2) Bundling and tying practices by banks (3) Substantial administration and (4)high closing charges.

Current bills in Parliament

The current status of Bills in Parliament has just been published in the June edition of the “Tracker“, by Bank Law Blogger’s alter ego.

The tussle between the Lords and the Commons over the scope of the Corporate Manslaughter and Corporate Homicide Bill continued this month. The argument is over whether the Bill should extend to deaths in custody; the Commons resist the notion that the Crown should be liable for deaths on the same basis as commercial organisations.

The Legal Services Bill has also taken its share of Parliamentary time, perhaps to the detriment of the Tribunals, Courts and Enforcement Bill, which hasn’t seen the light of day since March and those worthy new Bills that appeared early in this Session and, like unloved toys in the nursery, haven’t been touched since. What’s happened to the Climate Change (Effects) Bill? (my guess is it will be superseded by the draft Climate Change Bill), the Corruption Bill, the Development Orders (Microgeneration) Bill (formerly, the Energy Efficiency and Microgeneration Bill)?

Should insolvency law be reformed?

A few weeks ago, Bank Law Blogger posted on the European High Yield Association’s call to the Treasury for English insolvency law to be reformed.  The members of EHYA are, largely, American and their interest is to get efficiency in corporate restructuring.  The UK has become an important centre for US private equity and hedge funds involved in the distressed debt market.    They seem to be thinking well ahead and are taking advantage of a (relative) lull in the distressed market at present.  Presumably, the Treasury will be taking advice from its colleagues in the Insolvency Service, but it is hard to see time being allocated by the government very soon to such an enormous undertaking.