Finance Litigation: Recent Cases And Issues In January 2019

Creditor not obliged to take steps in foreign proceedings to preserve security

We first reported on the decision in General Mediterranean Holding SA.SPF v (1) Qucomhaps Holdings Ltd, (2) Harkin, (3) Awni Abu-Taha in July 2017. In brief, the claimant advanced sums to the first defendant secured by a pledge of shares and a charge over a Czech company (S) and personal guarantees from the second defendant. The claimant issued proceedings to recover the loans under the guarantees. By this time, S had gone into administration and the defendants argued that the claimant's failure to file a claim as a secured creditor in S's administration had enabled S's assets to be released to alleged fraudsters rendering the security worthless. The defendants argued that the claimant owed them an equitable obligation to take reasonable steps to protect its rights, and the rights of the defendants, in relation to the security and its failure to do so thereby released the defendants from their liability to the claimant. The claimant successfully applied to strike out the defence and counterclaim. The defendants appealed.

The Court of Appeal refused the appeal. It held that whilst a creditor who had security available for the payment and satisfaction of the debt had to do whatever was necessary to make that security properly available, there could be no question of a creditor having an absolute duty to ensure that a surety could have recourse to that security. A creditor could not be obliged to incur any sizeable expenditure or to run any significant risk to preserve or maintain a security. Further, it was doubtful whether a creditor could ever have an equitable duty to the principal debtor, as opposed to a surety, to take steps to preserve or maintain a security granted by a third party. The defendants had no real prospects of defending the claim.

Things to consider

It is established law that a creditor's release of other security or guarantees, or failure to perfect security, may discharge a guarantor, at least to some degree. It is for this reason that a properly drafted guarantee should provide protective wording along the lines that that guarantor's liability will not be reduced, discharged or otherwise adversely affected by any act or omission of the creditor in taking up, perfecting or enforcing any security.

Income Payment Order survives later bankruptcy order

The High Court has recently held that a discharged bankrupt's obligations under an Income Payment Order (IPO) to make future payments survived a later bankruptcy order.

In Azuonye v Kent (trustee in bankruptcy of Azuonye), Azuonye was made bankrupt in April 2015. An...