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IN THE SUPREME COURT OF JUDICATURE FC3 97/6893 CMS3

COURT OF APPEAL (CIVIL DIVISION) CHBKI 97/0562 CMS3

ON APPEAL FROM THE HIGH COURT OF JUSTICE CHBKI 97/0563 CMS3

Royal Courts of Justice

Strand, London WC2

Tuesday, 3rd March 1998

B e f o r e :

LORD JUSTICE NOURSE

LORD JUSTICE POTTER and

LORD JUSTICE MUMMERY

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AIB FINANCE LIMITED Appellant (Respondent)

-v-

(1) ALAN JOHN ALSOP

(2) ANGELA ALSOP Respondents (Appellants)

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Computer Aided Transcript of the Palantype Notes of

Smith Bernal Reporting Limited

180 Fleet Street London EC4A 2HD

Tel: 0171 421 4040 Fax: 0171 831 8838

(Official Shorthand Writers to the Court)

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MR PETER LEIGHTON (instructed by Messrs Vickery & Co, Bexleyheath) appeared on behalf of the Appellant Respondents Mr and Mrs Alsop.

MR D IWI (instructed by Messrs Moran & Co, Tamworth, Staffs) appeared on behalf of the Respondent Appellant AIB Finance Ltd.

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J U D G M E N T

(As Approved by the Court)

Crown Copyright

Tuesday, 3rd March 1998

LORD JUSTICE NOURSE: Lord Justice Mummery will deliver the first judgment.

LORD JUSTICE MUMMERY:

On 6th September 1996 District Judge Fawcett, sitting in the Brighton County Court, set aside two statutory demands dated 22nd February 1996 served by AIB Finance Limited ("AIB") on the appellants. Each demand was based on a judgment obtained by AIB in the Eastbourne County Court on 14th September 1995 in the sum of £212,806.72.

On 2nd October 1996 AIB appealed. The hearing of the appeal was adjourned on 14th November 1996 and, in due course, heard by Mr Justice Carnwath on 19th March 1997. He allowed the appeal, discharged the order of the district judge and authorised AIB to present bankruptcy petitions against the appellants forthwith pursuant to rule 6.5(6) of the Insolvency Rules 1986. On 14th April 1997 he gave leave to appeal. Mr Justice Carnwath's judgment is reported in [1997] 4 All ER 677.

The principal issue before the district judge and Mr Justice Carnwath, and, as things have turned out, the decisive issue on this appeal, is whether the appellants appear to have a counterclaim against AIB which equals or exceeds the amount of the debt specified in the statutory demands. That is a ground on which a court may grant an application to set aside a statutory demand: rule 6.5(4)(a) Insolvency Rules 1986.

The first part of that question in this case is: does it appear to the court that AIB, as mortgagees, acted in breach of duty in relation to the realisation of the appellants' assets subject to a mortgage in AIB's favour? Both the district judge and Mr Justice Carnwath answered that question in the affirmative. But they differed on the second part of the question, which is: does the value of the counterclaim for breach of duty appear to be equal or in excess of the amount of the statutory demand? The district judge decided that it did and set aside the statutory demand. Mr Justice Carnwath decided that it did not and allowed AIB's appeal.

The appellants bought the Post Office Stores at Cross-in-Hand, Heathfield, East Sussex, from Mr and Mrs Ainsley in October 1988 with the assistance of a loan of £160,000 from AIB. The Post Office Stores consisted of a general stores with a newspaper round, an off-licence and a Post Office concession from Post Office Counters Limited. The first appellant held the Post Office appointment at an initial annual salary of £7,600, later increased to £10,000. The purchase by the appellants was of both the freehold premises, which contained residential property as well as the stores, and the goodwill of the business carried on there. The loan by AIB was secured by a first legal mortgage dated 10th October 1988 on both the freehold and the goodwill. Goodwill was defined as including the goodwill in connection with the Post Office Stores carried on at those premises, as well as the benefit of all licences held in connection therewith. The mortgage was in common form, securing both principal and interest on the property.

In February 1994 the appellants were in arrears with payments of principal and interest. AIB sent a letter to the appellants dated 15th February 1994 stating that the balance due was £191,521.46 and that the arrears were £17,775. The letter from the Recoveries Division of AIB said:

"Clearly it would appear, particularly since September that your business is not self financing, and requires immediate assistance. To this end I would wish to instruct our retail consultants to visit you and report back on the business. It is vital that this exercise is carried out as soon as possible and your full co-operation is requested.

I must also advise that it will be necessary to carry out a valuation on the Abbey Wood property. This will necessitate our valuers accessing the property. Please advise how entry can be gained to this property. [That is property in London owned by the appellants and mortgaged to AIB.]

Again I would stress the importance of your full co-operation in the above matters. Should you choose to resist our instructions, it will leave me with no option but to call in the debt and commence Possession Proceedings."

The background to that letter was that there had been a dramatic decrease in the weekly takings of the business, attributed by the appellants in part to the opening of a superstore in the neighbourhood.

On 27th April 1994 Asset Management and Recovery Services Limited (AMR) made an appraisal report on behalf of AIB in respect of the premises and the business. AMR was instructed by AIB to visit the property and report on the estimated value and the feasibility of AMR running the business on AIB's behalf. They met the appellants. The detailed report contained a section on valuations. Under the heading "Valuations", it is stated:

"Assuming the property to be offered in the present market conditions, with no major structural defects or onerous covenants, and to include fixtures, fittings and trade chattels, in our opinion the valuations are:-

(a) The property and the business, as a going concern, assuming a bricks and mortar and contents value of £95,000:-

£130,000

(b) As in (a) above, closed for trading, but caretaken:-

£85,000

(c) As (b) above, under forced sale conditions and assuming 90 day disposal is sought:-

£75,000.

We would recommend an asking price of £150,000 assuming the business as a going concern, as in (a) above, were offered to the market, to allow room for negotiation and to test the market.

In each of the above cases where appropriate stock will be in addition at valuation."

The report concludes with these recommendations:

"In our view the best course of action would be to repossess and appoint AMR as Managers. Every effort should be made to maintain the co-operation of the borrowers, perhaps by freezing the interest, as significant goodwill could be lost if the borrowers become alienated. However there is little doubt, at this time at least, that the borrowers would be extremely reluctant to voluntarily surrender their occupation of the property and this could quite easily turn out to be an extremely messy repossession.

We do not know if the Bank have a charge over the fixtures and fittings but clearly one is called for in any event to increase the Bank's security.

Because the borrowers live on the premises, a Possession Order would be necessary before repossession (and management) could take place. The threat of this might induce the borrowers to recommencing repayments and grant a Bill of Sale, but failing that we see no alternative to obtaining such an Order and subsequent enforcement of it."

Possession proceedings were started by AIB. Following service of the proceedings, the first appellant wrote to AIB on 20th June 1995. The letter suggested that a meeting would be beneficial so that they could agree the best way forward. That letter referred to an earlier letter written by the first appellant on 4th April 1995. In the concluding page of that letter the first appellant wrote:

"I do not want us to get into any nasty dialogue and believe that we should see if there is anything we can do together to protect both of our interests. I should be grateful therefore if you would arrange to meet us as soon as possible.

In view of my comments above we are not in a position to pay increased mortgage charges from the April payment but suggest this is covered when we meet.

I look forward to hearing from you."

No meeting took place. The possession proceedings were heard in the County Court. The appellants were not represented. An order was made on 14th September 1995 for possession of the premises on 8th November 1995. Judgment was also given for £212,806.72 principal and interest.

On 18th September 1995 the second appellant wrote to AIB in these terms:

"I am writing to ask that you send me a copy of the following documents.

1. The retail consultants' report for April 1994 on the above premises.

2. The valuation for August 1994 on 321 Wickham Lane [the Abbey Wood property].

3. The Bill of Sale from September 1994 with items of included fixtures and fittings.

With regard to the pending repossession and your apparent ´anxiety to realise your security' I am sure you will agree that if this is to happen there are other parties involved with the business concerned, as stated in the original mortgage conditions of 15th August 1988, with whom business arrangements need to be sorted out.

It will presumably be in the interest of all parties concerned if you inform me of your future intentions regarding such matters."

There was no reply from AIB.

With effect from 17th October 1995 the Post Office appointment, which was personal to the first appellant, was revoked. The newspaper round was sold to another local newsagent. On 1st November 1995 the appellants ceased to trade at the stores. The shop was closed down and they moved out.

On 14th December 1995 the bank repossessed the premises and then instructed two local firms to provide valuations. The first valuation from an Eastbourne firm, Brian Kingston Associates, chartered surveyors, was dated 18th January 1996. They valued the freehold title as having a current open market value in the region of £35,000 to £40,000. A second valuation from a Brighton firm of chartered surveyors, Crickmay & Partners, was dated 22nd January 1996. That report stated that the figure of £50,000 might be achievable for the freehold property. Both valuations were put in evidence by AIB before the district judge in support of their contention that they had sold the property for the best price reasonably obtainable at the time of the sale. The sale took place on 19th April 1996. A sum of £43,000 for the freehold was obtained.

No expert valuation report was put before the district judge on behalf of the appellants. But on the hearing of the appeal, Mr Justice Carnwath, despite the objections of AIB, gave leave to adduce in evidence a report dated 4th December 1996 by Mr K Mustafa, a chartered surveyor. The relevant parts of his report contain these valuations:

"Goodwill: £70,000

Fixtures and Fittings: £15,000

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Total valuation of the business: £85,000"

He valued the shop premises and first floor accommodation of the freehold property in the region of £100,000. That produced a total valuation of the freehold and goodwill of £185,000.

The property was sold on 19th April 1996, following an advertisement placed in Property Express on 16th February 1996. In March 1996 the statutory demands were served on the appellants. In the demands, based on the money judgment, credit was given for the value of the security, the Post Office Stores at Cross-in-Hand, in the sum of £43,500, and the Wickham Lane property, Abbey Wood, in the sum of £32,299.62, reducing the amount owing at the date of the demand to £143,951.42.

THE JUDGMENT

Mr Justice Carnwath was satisfied that there was a serious issue on the extent of AIB's obligations and whether they had fallen short of them on the facts. He concluded that there was an arguable counterclaim. He said in his judgment [1997] 4 All ER 677 at 690g:

"Conclusion

In conclusion, I am satisfied that there is a serious issue as to the extent of a mortgagee's obligations in circumstances such as this, and as to whether the bank fell short of them on the facts. There is an arguable counterclaim."

He held, however, that there were serious weaknesses in Mr Mustafa's report. He dealt with the report in detail in the earlier section of his judgment headed "Value of the counterclaim". He said at 690h:

"In summary, there is an arguable counterclaim, but not one which has any prospect of being found to ´equal or exceed' the amount of the statutory demand. In these circumstances the requirements of ground (a) are not met, and I cannot uphold the district judge's order. The appeal is allowed."

In his judgment, Mr Justice Carnwath dealt first with AIB's duties as mortgagees and, secondly, with the value of the counterclaim. On the duties point, the judge reviewed the decided cases, commenting that there appeared to be little authority on the point taken on behalf of the appellants that AIB had been negligent in failing to ensure that the business was preserved pending realisation of the security.

The judge identified the relevant duties of AIB in the following passages. At 686j he said: "In principle, where, as here, the goodwill of a business forms part of the mortgagee's security, the same approach should apply."

The approach is that stated by Sir Donald Nicholls V-C in Palk v. Mortgage Services Funding plc [1993] Ch 330 at 337-338, quoted immediately before this passage. He continued at 686j-687a:

"It is not sufficient for the mortgagee simply to repossess the property, without regard to the effect on the value of the goodwill. If he is to take ´reasonable care to maximise his return from the property', he must, in exercising his right to repossess and sell the property, take account of the effect of that on the value of the goodwill."

Later, at 687f-688b, Mr Justice Carnwath said this, after citing the decisions of Goulding J in Palmer v Barclays Bank Ltd (1972) 23 P & CR 32 and of Bowen LJ in Whitley v Challis [1892] 1 Ch 64:

"Although that case does not refer to the duty of the mortgagee in such circumstances, the corollary of the power there recognised is that he should act fairly to the mortgagor in the exercise of that power, to ensure that the value of the combined asset is maximised. He may have a free choice as to the timing of any sale, but once he decides to exercise his power of sale over the property, fairness requires that he should take into account the effect of that sale on the value of the goodwill.

Accordingly, I reject the submission that there is no duty in law to maintain the business, merely because running a business inevitably involves taking some degree of risk. Mr Iwi [who appeared for AIB in the court below and on this appeal] says that in any event there could be no duty here, as the business had been closed down before the bank took possession. However, that may have been the inevitable consequence of the enforcement of the order for possession. If the bank had a duty to safeguard the business, it would normally involve making arrangements to ensure continuity before taking physical possession. Otherwise there would inevitably be a break in the business, and consequent damage to its value as a going concern.

I do not find it possible to reach a conclusion that there is no arguable merit in the debtors' case without more detailed investigation of the events leading up to the possession than is appropriate at this stage. If this were the only point in the case I would regard it as being a matter properly within the discretion of the district judge, with which it would not be appropriate for me to interfere. The precise nature of the mortgagee's duty in such circumstances and its application to the facts of this case is something which would require investigation at trial. The fact that a property and business, valued by the bank's own advisers at £130,000 in 1994, realised a figure of only £43,000 in 1996 appears to me (as it did to the judge) to raise at least a prima facie case that the bank fell short of the duties it owed to the mortgagor."

There is a further passage at 388j, where the judge recorded Mr Iwi's first submission on behalf of AIB in relation to Mr Mustafa's report in these terms:

"(1) The value prior to closing is irrelevant since the business was closed before the bank took possession, and there was no duty on the bank to re-establish the business."

I omit the three further submissions made by Mr Iwi. At 689b, the judge comments on point (1):

"Mr Iwi's first point to my mind begs one of the questions which is at the heart of the negligence case. As I have said, I do not accept that it is open to a mortgagee, whose security includes both the property and the business, simply to seek possession of the property, without taking such steps as are reasonable to ensure that the value of the other part of the security is protected."

Mr Leighton, on behalf of the appellants, adopted the formulations of a mortgagee's duty made by Mr Justice Carnwath (which are challenged in AIB's Respondent's Notice) but criticised the judge's conclusion on the value of the counterclaim. In support of his criticisms on the value point he sought leave from this court to adduce yet further evidence from Mr Mustafa.

Mr Leighton accepted that, in order to succeed on the duty point, he had to persuade this court that there was an arguable breach of duty by AIB both in relation to the disposition of the freehold premises on 19th April 1996 and in relation to the preservation of the goodwill and the business prior to that date. A breach of duty on the disposition of the freehold property would not, on Mr Leighton's own evidence (in Mr Mustafa's reports), suffice, because it would not produce a figure which either equalled or exceeded the amount of the statutory demand.

Mr Leighton submitted that AIB was under a duty of care in respect of the sale of the mortgaged property; that the mortgaged property included the benefit of the goodwill, the licences and the business; that, although AIB was not under a duty to sell the security at any particular time, or indeed under a duty to sell at all, AIB should, when there was such a goodwill, include that benefit in a sale. AIB should have taken prompt steps to safeguard the assets while in their possession. They should have taken reasonable steps to market the security to best advantage. AIB had enforced the order for possession against the appellants without taking any steps to safeguard and preserve the existing business. When asked at what date this duty of AIB in relation to the goodwill arose, Mr Leighton said that it arose on receipt of the letter from the second appellant dated 18th September 1995. He argued that it was a breach of duty on the part of AIB thereafter to allow the business at the stores to run down and disappear before selling the premises. AIB should have sold the premises with the business straight away or, alternatively, should have made arrangements to manage it until it was sold, so that the best price reasonably obtainable in the market would be secured both for the property and the business. The security had not been properly marketed. There was an arguable counterclaim on the basis of AIB's negligence. He said, finally, that the bankruptcy debt could have been extinguished if proper steps had been taken to market the property as a going concern, with the benefit of the Post Office concession and justices off-licence.

In my judgment this appeal fails because, on a proper appreciation of the nature and extent of AIB's duty as mortgagee in the particular circumstances of this case, there is no arguable counterclaim against AIB. I have read in draft the judgment of Lord Justice Nourse and I agree with it.

The legal position can be briefly stated as follows:

(1) AIB did not repossess the property until 14th December 1995. By that time the appellants had (a) lost the Post Office concession; (b) disposed of the newspaper round; (c) closed down the business, and (d) moved out of the premises. The going concern had ceased to exist on the appellants ceasing to trade. There was no goodwill for AIB to preserve when they went into possession. All that was left in the hands of AIB as security was the freehold property.

(2) It is accepted by Mr Leighton that AIB could not have obtained possession of the premises or of any business carried on there earlier than 8th November, the date for possession stated in the order of 14th September 1995. By that date all of the events mentioned in (1) above had occurred. In those circumstances, I find it difficult to see how there could be any duty on AIB to preserve and safeguard the goodwill of the business carried on there. Without possession and control of the property, there were no steps which AIB could reasonably have taken to preserve and dispose of the business as a going concern.

I have been unable to find in the cases cited by Mr Justice Carnwath any authority for the proposition that the mortgagee is under a general duty to take steps to preserve the value of a security in the exercise of his security rights ahead of obtaining possession and control of the property subject to the mortgage.

(3) The evidence does not establish that prior to 8th November 1995 AIB had acted in breach of any duty as a mortgagee to act fairly towards the appellants in respect of the realisation of the security or that the appellants had been unfairly prejudiced by any actions on the part of AIB. The most that could be said against AIB was that they had failed to respond to the appellants' letters suggesting that meetings take place. That failure does not, in my judgment, amount to a breach of duty on the part of AIB. No suggestions were made in the letters to AIB about giving up possession or handing over the business at an earlier stage to AIB. No information was provided by the appellants to AIB in relation to prospective purchasers of the business as a going concern.

For all those reasons there was no arguable breach of duty by AIB and no arguable counterclaim against AIB. The appeal must fail, even if the appellants were able to show that there had been an arguable breach of duty in relation to the sale of the freehold in April 1996 by AIB on the basis of the two valuations by local firms.

As the appellants have no arguable counterclaim, it is unnecessary, for the purposes of disposing of this appeal, to express any view on the challenge to the judge's conclusions on the value of the counterclaim; or on the nature of the hearing on an application to set aside a statutory demand; or on the nature of an appeal to the High Court against a decision on such an application; or on the circumstances in which it is proper to give leave on the hearing of an appeal to adduce further evidence.

While feeling sympathy for the appellants, I am unable to reach a conclusion in their favour. For the reasons given, I would dismiss this appeal.

LORD JUSTICE POTTER: I agree.

LORD JUSTICE NOURSE: I also agree.

It was established by the decisions of this court in Cuckmere Brick Co Ltd v Mutual Finance Ltd [1971] Ch 949 and Parker-Tweedale v Dunbar Bank Plc [1991] Ch 12, first, that a mortgagee, although he may exercise his power of sale at any time of his own choice, owes the mortgagor a duty to take reasonable care to obtain a proper price for the mortgaged property at that time; secondly, that the duty is not tortious in nature but one recognised by equity as arising out of the particular relationship between mortgagee and mortgagor.

One of the claims made by the appellants is that in selling the property for £43,500 in April 1996 AIB did not take reasonable care to obtain a proper price. However, as Lord Justice Mummery has explained, it is recognised by Mr Leighton on their behalf that a successful outcome to that claim would not by itself achieve a victory for the appellants. So everything depends on their being able successfully to contend that AIB owed them, and was in breach of, an additional and anterior duty.

This contention has been put by Mr Leighton in two different ways. First, he submits that on receipt of the second appellant's letter of 18th September 1995 AIB came under a duty to the appellants to co-operate with them in procuring a sale of the property and the business as a going concern at a proper price; a duty which was breached by AIB's failure to answer the letter and by its subsequent enforcement of the order for possession and the sale of the property alone.

While it may be possible to conceive of circumstances in which a mortgagee could come under a duty of that kind, they are not the circumstances of the present case. I certainly accept that the letter of 18th September should be read with the earlier letters to which Lord Justice Mummery has referred. Nevertheless, and making every allowance for the inexperience of the second appellant in these matters, I am unable to read the letter of 18th September as anything more than a request for information as to how AIB, having obtained its judgment, intended to proceed. It cannot be read as a request that AIB should co-operate with the appellants in procuring a sale of the property and the business as a going concern. On that footing, all other considerations apart, AIB could not have come under any duty to the appellants on the receipt of that letter.

Alternatively, Mr Leighton submits that AIB was in any event under a duty to the appellants, before they effectively closed down the business and left the property on 1st November 1995, to preserve the business and thus to facilitate a sale as a going concern. This submission is simply unsustainable. A mortgagee who has the necessary powers (as AIB had here - see clause 5(a) of the mortgage) may, if he chooses to do so, appoint a receiver and manager of a business whose goodwill is comprised in the security. But he is under no duty to take that or any other step to preserve the business, any more than he is under a duty to preserve any other form of security, unless and until he takes possession of it. In the present case such a duty could only have arisen, at the very earliest, on 8th November 1995, that being the date on which AIB was entitled, pursuant to the order made on 14th September, to take possession of the property. By that time the appellants had, of their own volition, subtracted the goodwill of the business from the security. After 1st November AIB could never have owed a duty to the appellants in respect of the business and it did not owe them one before that date.

It follows that I respectfully disagree with the views expressed by Mr Justice Carnwath in the passages which Lord Justice Mummery has read and with his conclusion that there was an arguable counterclaim in regard to AIB's obligations to the appellants. That is enough to entitle AIB to succeed on this appeal and it becomes unnecessary to consider the different ground on which the judge decided the case in its favour. While sharing my Lord's sympathy for the appellants in the predicament in which they find themselves, I too would dismiss their appeal.

Order: appeal dismissed with costs; the appellants' liability under that order for costs having been determined at nil during any period or periods when they have been legally aided, order nisi made against the Legal Aid Fund pursuant to section 18 of the Legal Aid Act 1988 and adjourned to the Registrar; legal aid taxation of the appellants' costs for the period or periods when they have been legally aided.