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[1997] 4 ALL E.R. 677

21 FEBRUARY, 18 MARCH 1997

3PLR/1997/9  (CA)






Celia Fox Barrister.




Mortgage – Sale – Duty of mortgagee – Standard of duty in exercising power of sale – Security including business – Duty to ensure that value of combined asset maximised – Duty to take into account effect of sale on goodwill – Duty to safeguard and maintain business.

Evidence – Fresh evidence – Appeal – Bankruptcy – Evidence relating to valuation of premises subject to a charge – Court’s power to receive evidence submitted after trial – Whether petition to set aside a statutory demand in bankruptcy proceedings hearing on the merits – RSC Ord 59, r 10(2).

The defendants were the registered proprietors of premises which they ran as a post office, newsagent and off-licence. In October 1988 they entered into a mortgage with the plaintiff bank under the terms of which both the premises and the goodwill of the business were charged by way of security for a loan of £160,000. By 1994 they had ceased making payments and a restructuring of the loan was agreed. In September 1995, after further defaults in payments, the bank obtained an order for possession and judgment for arrears amounting to £212,806·72. The property was sold in April 1996 for £43,500 and statutory demands were served by the bank for the balance of the judgment debt which amounted to £143,951·42. The defendants applied to set aside the statutory demands on the grounds that if the premises had been sold as a going concern the proceeds of sale would have amounted to approximately £180,000. They did not however adduce any valuation evidence to support that assertion. The district judge allowed the application, holding that there was an arguable case that the bank had been negligent in failing to ensure that the business was preserved as a going concern and that the defendants had a substantial counterclaim. However, she failed to take account of whether the amount of the counterclaim equalled or exceeded the amount of the debt as required by r 6.5(4)(a)a of the Insolvency Rules 1986. The bank appealed, contending that it had owed no duty in law to maintain the business because doing so involved taking some degree of risk. At the hearing of the appeal the defendants applied to place new valuation evidence before the court.

A Rule 6.5(4) is set out at p 680 c to e, post




(1)     When exercising his power of sale, a mortgagee whose security included a business carried on the property charged, had a duty to ensure that the value of the combined asset was maximised. Accordingly, although he had a free choice as to the timing of the sale, once he decided to exercise his power to repossess and sell the property, he had to take into account the effect of that on the value of the goodwill. In such circumstances, therefore, he had a duty to safeguard and maintain the business and should normally make arrangements to ensure continuity before taking physical possession as otherwise there would inevitably be a break in the business and consequent damage to its value as a 677 going concern. It followed therefore that it was arguable that the bank had been negligent (see p 686 j to p 687 a f to j and p 690 g, post); Cuckmere Brick Co Ltd v Mutual Finance Ltd [1971] 2 All ER 633 and Palk v Mortgage Services Funding plc [1993] 2 All ER 481 applied.

(2)     On an appeal to the High Court from the decision of a bankruptcy county court, the court had power by virtue of r 7.49b of the 1986 rules and RSC Ord 59, r 10(2)c to receive further evidence on special grounds where there had been a trial or hearing on the merits. In the context of an application to set aside a statutory demand in bankruptcy proceedings the merits in question were the merits of the potential defences specified in paras (a) to (d) of r 6.5(4) of the 1986 rules and there could only be said to have been a final decision on the merits where the application to set aside the statutory demand had failed. It followed, in the instant case, where the application to set aside the statutory demand had succeeded, that there had been no hearing on the merits. Nevertheless, the court still had a general discretion whether to admit fresh evidence and in the circumstances would do so since the justice of the case required it. However, having regard to the evidence, although the defendants had an arguable counterclaim, it was not one which had any prospect of being found to equal or exceed the amount of the statutory demand. Accordingly, the appeal would be allowed (see p 680 j, p 681 b to d g, p 684 b d, p 685 d e and p 690 g to j, post).


b Rule 7.49, so far as material, is set out at p 680 j, post

c Rule 10(2) is set out at p 681 c d, post


By notice dated 2 October 1988 the appellant bank, AIB Finance Ltd, appealed from the order of District Judge Fawcett sitting at Brighton County Court on 6 September 1996 setting aside the statutory demands dated 22 February 1996 served by the bank on the respondent debtors. The facts are set out in the judgment.

David Iwi (instructed by Moran AND Co, Tamworth) for the bank.

Peter Leighton (instructed by R G F Vickery AND Co, Bexleyheath) for the debtors.

Cur adv vult

18 March 1997. The following judgment was delivered.

CARNWATH J. The appellant bank appeals against two orders made by District Judge Fawcett at Brighton County Court on 6 September 1996. The cases relate respectively to the respondent debtors, and the facts are for material purposes the same in each case. The district judge set aside statutory demands served by the bank on the debtors, and the bank appeals against that decision.

The debtors were the registered proprietors of the Post Office Stores at Cross-in-Hand. They ran it as a post office, newsagent and off-licence. On 10 October 1988 they entered into a mortgage with the bank, charging both the premises and `the goodwill’ by way of security for a loan of £160,000 and interest. `The goodwill’ was defined in the preamble as including the goodwill of the business carried on on the premises and the benefit of any licences held in connection with it or any ancillary rights. They fell into arrears and by 1994 they had stopped making any payments. A restructuring of the loan was agreed in August 1994 but following a further default the bank sought repossession.

On 14 September 1995 the bank obtained judgment in the Eastbourne County Court for possession, and arrears of principal and interest totalling £212,806·72. The bank repossessed the property in December 1995. It was sold in April 1996 for £43,500. The sale by the bank followed advice from two sets of local surveyors. Brian Kingston advised that the possibility of continued use as a shop in the long term was limited, and put the current market value at £35-40,000. Crickmay AND Partners saw the possibility of continued Post Office use as a `substantial incentive’, but thought it to be a `longshot’ whether anyone would be prepared `to risk substantial sums of money to relaunch the retail trade once the business had been closed for a number of months’. They recommended an asking price of £49,950 and consideration of offers over £40,000. The marketing of the property is described in Crickmay’s letter of 9 May 1996.

The bank also obtained £32,299·62 in respect of the sale of other property subject to a charge at Wickham Lane, London. Statutory demands for the balance, by then amounting to £143,951·42, were served on 22 February 1996. Applications were made by the debtors on 27 March 1996 to set aside the statutory demands. The grounds of the application, in summary, were that the Post Office Stores should have been sold as a going concern, and if it had been it 679 would have been worth approximately £180,000. The district judge allowed the applications. She said:

`The crucial question is whether AIB Finance Ltd was negligent in not ensuring that the business was preserved. In my opinion, there is an argument that AIB Finance Ltd should have ensured that the business was preserved. Failure to preserve the business affords the debtors with a defence of some substance and possibly a substantial counterclaim and the point should be argued elsewhere. Since there is a possibility that there is a defence, it is appropriate for the statutory demands to be set aside. The point in issue should be argued in other proceedings.’

The relevant statutory provisions relating to the setting aside of statutory demands are in the Insolvency Rules 1986, SI 1986/1925. The grounds upon which the court may allow the application are in r 6.5(4), as follows:

`(a) the debtor appears to have a counterclaim, set-off or cross demand which equals or exceeds the amount of the debt or debts specified in the statutory demand; or (b) the debt is disputed on grounds which appear to the court to be substantial; or (c) it appears that the creditor holds some security in respect of the debt claimed by the demand, and either Rule 6.1(5) is not complied with in respect of it, or the court is satisfied that the value of the security equals or exceeds the full amount of the debt; or (d) the court is satisfied, on other grounds, that the demand ought to be set aside.’

Before me it is agreed that the only relevant ground is para (a).

It is also common ground that the district judge’s reasoning is flawed, because she has based her decision on her conclusion that there was an arguable counterclaim, without considering whether such counterclaim `equals or exceeds the amount of the debt’. Had she addressed that issue she would have found herself in some difficulty, since the applicants adduced no valuation evidence before her to support their assertion that the premises as a going concern were worth £180,000.

Before me they seek to supplement the evidence by adducing a report by a firm of chartered surveyors, Langleys, dated 4 December 1996, which concludes that the value of the freehold, goodwill, fixtures and fittings prior to closing would have been `in the region of £185,000′. They also give their views as to the manner in which the property ought to have been marketed, including advertising in specialist publications. The bank submit that this evidence is not admissible, since it could and should have been obtained prior to the hearing before the district judge. This raises an issue of principle as to the court’s discretion to admit evidence in such circumstances.

New evidence in insolvency appeals

The authorities to which I have been referred do not disclose a straightforward answer to this question and it is desirable therefore to consider it in some detail. The right of appeal to the High Court against decisions of the county court in bankruptcy matters is conferred by s 375(2) of the Insolvency Act 1986 and r 7.48(2). Procedure is governed by r 7.49, which provides that `the procedure and practice of the Supreme Court relating to appeals to the Court of Appeal’ are to apply, save that references to the Court of Appeal are to be treated as replaced by references to a single judge of the High Court.

So far as this court is concerned, it is established that the appeal is a `true appeal’, rather than a complete hearing de novo, so that the court will only interfere with the decision below if the judge has erred in law or otherwise in principle (see Re Gilmartin (a bankrupt), ex p the bankrupt v International Agency and Supply Ltd [1989] 2 All ER 835,[1989] 1 WLR 513 per Harman J, Re Industrial and Commercial Securities plc (1989) 5 BCC 320 per Knox J and Re a debtor (No 2389 of 1989), ex p Travel and General Insurance Co plc v The debtor [1990] 3 All ER 984,[1991] Ch 326 per Vinelott J). The approach follows that of the Court of Appeal in relation to decisions of the judge at first instance on matters of discretion.

The provisions relating to the admission of new evidence are in RSC Ord 59, r 10(2), which provides:

`The Court of Appeal shall have power to receive further evidence on questions of fact, either by oral examination in court, by affidavit, or by deposition taken before an examiner, but, in the case of an appeal from a judgment after trial or hearing of any cause or matter on the merits, no such further evidence (other than evidence as to matters which have occurred after the date of the trial or hearing) shall be admitted except on special grounds.’

Thus, where there has been `a trial or hearing on the merits’ it is necessary to show `special grounds’ before fresh evidence may be admitted. The grounds upon which the Court of Appeal will act in such cases are well established. Three conditions must be satisfied:

`… first, it must be shown that the evidence could not have been obtained with reasonable diligence for use at the trial: second, the evidence must be such that, if given, it would probably have an important influence on the result of the case, although it need not be decisive: third, the evidence must be such as is presumably to be believed, or in other words, it must be apparently credible, although it need not be incontrovertible.’ (See Ladd v Marshall [1954] 3 All ER 745 at 748,[1954] 1 WLR 1489 at 1491, approved by the House of Lords in Skone v Skone [1971] 2 All ER 582 at 586,[1971] WLR 812 at 815.)

Where there has not been a trial on the merits, the court has a general discretion whether to admit fresh evidence, although clearly one factor to be taken into account is the reason why the evidence was not adduced in the court below.

I have been referred to Re a Debtor (No 59 of 1987, Newcastle-upon-Tyne)(1988) Independent, 1 February, in which Knox J refused to admit evidence on the appeal to the High Court. The case summary records the matter thus:

`The single High Court judge sitting on appeal against the dismissal refused to admit affidavits sworn after the dismissal on the grounds that Ladd v Marshall was applicable having regard to the way in which the Rules of the Supreme Court had been drafted and that in principle, the procedure applicable to the Court of Appeal under RSC Ord 59, r 10(2) had been imposed upon the single High Court judge when exercising appellate jurisdiction unless there was overwhelming reason for not so doing.’

Unfortunately, the judgment is not reported more fully elsewhere.

In Re Gilmartin Harman J cited this decision in support of his conclusion as to the appropriate approach to the substantive appeal, but he did not need to deal specifically with the question of new evidence. Normally, of course, I would 681 regard such a decision as that of Knox J as sufficient for my purposes. However, the short report does not show how the learned judge dealt with the question whether there had been `a hearing on the merits’. In the context of a petition to set aside a statutory demand in bankruptcy proceedings, that does not seem to me an easy concept to apply. Furthermore, that case differed from the present, in that the county court had dismissed the application, thereby impliedly holding that there was on the merits no answer to the bankruptcy notice; in the present case the district judge has allowed the application, on the basis that there is an arguable counterclaim, which ought to be tried on the merits. Accordingly, it is right that I should look at the matter de novo.

The Supreme Court Practice 1997 para 59/10/8 cites as the leading authority a decision of the House of Lords, Langdale v Danby [1982] 3 All ER 129,[1982] 1 WLR 1123. In that case the plaintiff had obtained summary judgment under Ord 86 for specific performance of a contract with the sale of land. On the appeal he sought to adduce fresh evidence, including evidence contradicting an admission made before the judge. The Court of Appeal admitted the fresh evidence and allowed the defendant’s appeal in the light of that evidence. The House of Lords held that the summary judgment was a judgment after a hearing on the merits for the purposes of Ord 59, r 10(2), and that accordingly the Court of Appeal had misdirected themselves in holding that it was open to them to admit the new evidence in the absence of special grounds. Lord Bridge thought the words `hearing on the merits’ were-

`as clearly apt to embrace a hearing under Ord 86 which results in judgment for the plaintiff as the trial of an action. What the judge must do before he gives judgment for the plaintiff under r 4 is to be satisfied that the merits of the plaintiff’s claim are duly verified as required by r 2 and, more importantly, that the defendant has failed to mount a sufficient challenge to those merits on the law or on the facts to show that there is any issue or question in dispute which ought to be tried. In other words, the judge can only give judgment for the plaintiff if satisfied that there are no such merits on the defendant’s side as to warrant giving leave to defend. In the ordinary use of language, a hearing leading to the conclusion that there are no merits to be tried is just as much a hearing “on the merits” as a full scale trial of the disputed issues.’ (See [1982] 3 All ER 129 at 137,[1982] 1 WLR 1123 at 1132.)

Lord Bridge referred to the ability of `people who have the legal aid fund at their command … to exhaust the resources of an antagonist who does not qualify for legal aid’. He continued ([1982] 3 All ER 129 at 137,[1989] 1 WLR 1123 at 1132):

`But, leaving that aside, the principle that a successful litigant is not likely to be deprived of his judgment seems to me of particular importance to a plaintiff, frequently pursuing a recalcitrant and obstructive defendant, who has secured a judgment by showing that a defendant has no defence.’

Commenting on the conditions laid down in Ladd v Marshall, he said ([1982] 3 All ER 129 at 138,[1982] 1 WLR 1123 at 1133):

`In the situation arising on an appeal to the Court of Appeal from a summary judgment, the application of these conditions and perhaps the conditions themselves will require some modification. It may well be that the standard of diligence required of a defendant preparing his case in opposition to a summons for summary judgment, especially if under 682 pressure of time, will not be so high as that required in preparing for trial. The second and third conditions will no doubt be satisfied if the further evidence tendered is sufficient, according to the ordinary principles applied on applications for summary judgment, to raise a triable issue. But I can see no injustice at all in requiring a defendant to use such diligence as is reasonable in the circumstances to put before the judge on the hearing of the summons, albeit in summary form, all the evidence he relies on in defence, whereas it would be a great injustice to the plaintiff to allow the defendant to introduce for the first time on appeal evidence which was readily available at the hearing of the summons but was not produced.’

Lord Bridge’s reasoning is specifically directed to summary judgment in favour of the plaintiff, since that requires a decision that the defence has no merits justifying a trial. The same reasoning does not apply to a decision refusing summary judgment, since such a decision recognises that there are merits in the defence which require a full hearing.

The Supreme Court Practice 1997 para 59/10/8 does not refer to any authority specifically on the latter point, but it refers to Weller v Dunbar [1984] CA Transcript 18, in which it was conceded that an order setting aside a default judgment is not a decision after a `hearing on the merits’ for these purposes. The Court of Appeal regarded that concession as correct. Stephenson LJ said:

`Mr Nelson has properly conceded that this is not a case in which it can be said that the judgment of Farquharson J was a judgment on the merits after a trial; it clearly was nothing of the kind. There was a reference to the merits which enabled the judge to say, not after a trial but in advance of a trial, “I think there ought to be a trial”.’

The court accepted that even in such a case the Ladd v Marshall tests should be taken into account, but the court was not limited to those considerations:

`In this case as it seems to me this court must look at the whole position and consider whether, in the interests of justice, it is right or wrong to allow this evidence to be given.’

The court allowed the new evidence to be admitted, even though it directly contradicted the position taken by the defendant before the judge, and even though he had delayed for two years in applying to set aside the judgment. The only mitigating factor appears to have been the fact that the defendant was aged 14 at the date of the accident which was the subject of the claim.

The Supreme Court Practice, correctly in my view, suggests that the same reasoning would apply by analogy where an application for summary judgment is refused, or where conditional leave to defend is granted. In such cases the court is not reaching a judgment after a hearing on the merits, but is saying that there are merits which ought to be further investigated in a full trial.

Similar considerations arise in the context of applications to set aside statutory demands, but with different effects. The issue for the court (at least under paras (a) to (c)) is whether the applicant’s case `appears’ to have merits which ought to be further investigated. If it does, the statutory demand is set aside. For this reason, Mr Iwi for the bank, submits that there has been a decision after a hearing on the merits of the particular `cause or matter’, namely the application to set aside the statutory demand, which has been finally disposed of on its own 683 merits, even though the merits of the underlying case fall to be investigated in further proceedings.

I see the force of this argument on a strict reading of r 10(2), but it does not seem to me to give effect to the purpose of that provision or the reasoning of the House of Lords. In the special context of this procedure the relevant `merits’ in my view are the merits of the potential defences specified in paras (a) to (d). Only if the application to set aside the demand fails, can there be said to have been a final decision `on the merits’, in the sense explained by Lord Bridge. If the application succeeds, the merits fall to be investigated in separate proceedings. Although the decision may finally dispose of the particular application to set aside the statutory demand, it does not dispose of the underlying cause. It is therefore directly analogous to a decision to refuse summary judgment, or to give conditional leave to defend. The position is distinguishable from the decision of Knox J, to which I have referred, where the application had been dismissed, this amounting in effect to a decision that the defence had no merits.

In my view therefore, the decision of the district judge in this case to set aside the statutory demand was not a judgment after a hearing `on the merits’ for the purposes of r 10(2). It therefore becomes a matter of my discretion as to whether the new evidence should be admitted. To that question I now turn.

Admission of evidence

The reasons for the late submission of the expert evidence are given in an affidavit of the solicitor Anita Bharaj. It was only on 6 August 1996 that the legal aid certificates were transferred to her firm from the previous solicitors, in advance of the hearing before District Judge Fawcett fixed for 6 September. Counsel was instructed on 14 August and her advice was received on 27 August. At that stage counsel did not advise seeking an expert’s report and in any event there would not have been time to obtain it before the hearing. However, an affidavit of the second debtor was sworn on 27 August, in which she referred to her own researches with local estate agents and others, and sales of other properties in the area. On 4 September the bank filed two further affidavits in response to the second debtor’s affidavit, and there was no opportunity for a further response to that before the hearing on 6 September. Following the district judge’s decision in the debtors’ favour, and the bank’s notice of appeal on 2 October, there were further applications to the Legal Aid Board to enable the debtors to be represented on the appeal. At the end of October new counsel was instructed who advised at the beginning of November that expert evidence would be required if the appellants were to have reasonable prospects of upholding the appeal. The hearing of the appeal had been fixed on 14 November 1996 before Judge Weeks, but this was adjourned to enable a report to be obtained, without prejudice to the bank’s case that the evidence would not be admissible.

A further affidavit of the second debtor was sworn on 9 December 1996 exhibiting the report of Mr Mustapha of Langleys dated 4 December. She also exhibited a report prepared for the bank in April 1994 by a Mr Madden of Asset Management and Recovery Services Ltd (AMR), which was disclosed by the bank following the hearing before Judge Weeks. This had recommended the appointment of a manager following repossession, and had expressed the view that the value at that time of the property and the business as a going concern was £130,000, as compared to a value if closed for trading and under a forced sale of £75,000. Finally, a further affidavit was sworn by Mr Isherwood for the bank on 68417 December 1996, again without prejudice to the contention that no further evidence should be admitted.

If my discretion were confined by the conditions laid down in Ladd v Marshall, then they would not in my view be satisfied. The mere fact that the solicitors acted with reasonable diligence, following their instructions shortly before the September hearing, would not be enough for the respondent, who must accept responsibility for the previous conduct of the matter, of which I have no evidence. In one of the cases referred to in The Supreme Court Practice 1997, Lodge Green Ltd v Leitch (t/a Manx Electronics)[1982] CA Transcript 436 (a transcript of which I have seen since the hearing), the Court of Appeal dealt specifically with the position of a solicitor recently instructed and faced with inadequate affidavits and material. It held that in those circumstances, the test of reasonable diligence being objective, it was the duty of the solicitor if he found the material to be inadequate to apply for an adjournment, and if he failed to do so he would subsequently be bound by the material on which the judge was then asked to exercise his discretion.

However, for the reasons I have given, I think I am entitled to exercise a wider discretion. It seems to me that the justice of the case requires that the new evidence should be admitted. There is no evidence of any prejudice to the bank. This is not a case where they are being deprived of a final judgment. The district judge’s decision meant that they had to come to this court in any event. The issues with which they had to deal are not materially widened in scope by the new evidence. Bearing in mind the seriousness for the respondents of the bankruptcy procedure, the interests of justice would not be served if the court had to consider the material without the assistance of the new evidence, in particular the consideration given by the bank’s own adviser in 1994 and the independent report for Langleys. I therefore hold that the new evidence should be admitted.

The bank’s duty as mortgagee

As I have said, the judge held that there was an arguable case that the bank was negligent in failing to ensure that the business was preserved. Mr Iwi, for the bank, before me, submits that this assumes a duty which the law does not impose. As he puts it in his skeleton argument: ‘Running a business involves taking risks … However a mortgagee who sells property is not obliged to run risks in order to effect the sale …’ He cites in support the words of Lord Templeman in Tse Kwong Lam v Wong Chit Sen [1983] 3 All ER 54 at 59,[1983] 1 WLR 1349 at 1355:

`The mortgagee is however not bound to postpone the sale in the hope of obtaining a better price or to adopt a piecemeal method of sale which could only be carried out over a substantial period or at some risk of loss.’

This raises the question as to the extent of the mortgagee’s duty where the charge extends not simply to the property but to a business carried on there. Lord Templeman’s words were not directed to that situation, and there appears to be little authority on the matter. The duties of a mortgagee exercising a power of sale have been the subject of considerable discussion, and the expressions used to describe it have not always been consistent. I was referred to a valuable discussion of the authorities in Gray Elements of Land Law (2nd edn, 1993) pp 1010ff. However, the modern law is normally taken as authoritatively explained by the Court of Appeal in Cuckmere Brick Co Ltd v Mutual Finance Ltd, Mutual Finance Ltd v Cuckmere Brick Co Ltd [1971] 2 All ER 633,[1971] Ch 949. The 685 crucial passage is in the judgment of Salmon LJ, where he said ([1971] 2 All ER 633 at 644,[1971] Ch 949 at 966):

`Given that the power of sale is for the benefit of the mortgagee and that he is entitled to choose the moment to sell which suits him, it would be strange indeed if he were under no legal obligation to take reasonable care to obtain what I call the true market value at the date of the sale. Some of the textbooks refer to the “proper price”, others to the “best price”… I cannot see any real difference between them. “Proper price” is perhaps a little nebulous, and “the best price” may suggest an exceptionally high price. That is why I prefer to call it “the true market value”.’

He concluded ([1971] 2 All ER 633 at 646,[1971] Ch 949 at 968):

`… a mortgagee in exercising his power of sale does owe a duty to take reasonable precautions to obtain the true market value of the mortgaged property at the date on which he decides to sell it. No doubt in deciding whether he has fallen short of that duty the facts must be looked at broadly, and he will not be judged to be in default unless he is plainly on the wrong side of the line.’

One important qualification to this general principle is established, that is that once a power of sale has accrued the timing of the sale is a matter for the mortgagee. As Salmon LJ put it ([1971] 2 All ER 633 at 643,[1971] Ch 949 at 965):

`Once the power has accrued the mortgagee is entitled to exercise it for his own purposes whenever he chooses to do so. It matters not that the moment may be unpropitious and that by waiting a higher price could be obtained. He has the right to realise his security by turning it into money when he likes.’

A more recent statement of the same principle is to be found in Palk v Mortgage Services Funding plc [1993] 2 All ER 481 at 486-487,[1993] Ch 330 at 337-338, where Nicholls V-C expresses the matter thus:

`… a mortgagee does owe some duties to a mortgagor. As Lord Templeman noted in China and South Sea Bank Ltd v Tan [1989] 3 All ER 839 at 842,[1990] 1 AC 536 at 545, a mortgagee can sit back and do nothing. He is not obliged to take steps to realise his security. But if he does take steps to exercise his rights over his security, common law and equity alike have set bounds to the extent to which he can look after himself and ignore the mortgagor’s interests. In the exercise of his rights over his security the mortgagee must act fairly towards the mortgagor … he must take reasonable care to maximise his return from the property. He must also take reasonable care of the property. Similarly, if sells the property: he cannot sell hastily at a knock-down price sufficient to pay off his debt … He must exercise reasonable care to sell only at the proper market value. As Lord Moulton said in McHugh (decd) v Union Bank of Canada [1913] AC 299 at 311:”It is well settled law that it is a duty of a mortgagee when realizing the mortgaged property by sale to behave in conducting such realization as a reasonable man would behave in the realization of his own property, so that the mortgagor may receive credit for the fair value of the property sold.”‘

In principle, where, as here, the goodwill of a business forms part of the mortgagee’s security, the same approach should apply. It is not sufficient for the 686 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.

The only case cited to me in which this question is touched upon, is Palmer v Barclays Bank Ltd (1972) 23 P AND CR 30. In that case the charge was over a property, which had the benefit of planning permission for use as a restaurant and guest house, and for which the owner had obtained a Justices’ on-licence and a music and dancing licence. The property had been advertised for sale by the mortgagee, without mentioning the planning permission or the music and dancing licence. One of the issues considered by Goulding J was whether the goodwill of the current business, with the benefit of the permission and a licence, should have been included in the sale. It was held (at 37) that, since the charge did not in terms extend to the goodwill, there was no such duty:

`… the mortgagee can pass the building with all its advantages, but cannot restrain the competitive activity of the mortgagor (unless his charge expressly or by necessary implication includes the goodwill of the business)… In my judgment, the defendant in the present case offered and sold all that its charge empowered it to sell.’

Goulding J referred to Whitley v Challis [1892] 1 Ch 64, where the Court of Appeal refused to appoint a manager of a hotel, at the instance of a mortgagee whose security comprised the building but did not mention the goodwill. That case itself contrasts the position where the goodwill is included in the charge. In such a case, as Bowen LJ (at 71) recognised:

`If indeed the business and the goodwill of the hotel had been included in the security, either by express terms or by implication, then I do not doubt that the court might in a fit case appoint a manager to manage that which, as being included in the security, those entitled to the benefit of the security might have a right ultimately to sell.’

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 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 687 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.

Value of the counterclaim

Contrary to the judge’s view, however, the matter does not rest there. It is not sufficient to show that there is a substantial counterclaim; it must be a counterclaim `which equals or exceeds the amount of the debt or debts specified in the statutory demand’. The demand in this case was dated 22 February 1996. The amount specified as owing was £187,451·42. This represented the judgment debt of £212,806·72 with interest, less the sum of £32,299·62 stated as received on 21 December 1995. The value of the charge over the Post Office Stores, was put at £43,500, leaving the amount owing payment of which was claimed by the demand as £143,951·42. The matter was put in that way because, at the time of the demand, the sale of the property had not been completed. In April 1996 it was, as I have said, sold for £43,500.

It follows that, for the applicants to succeed in setting aside the demand, they must show a prima facie case that the counterclaim is likely to exceed £143,951·42; in effect that the property should properly have been sold for £187,000-odd rather than £43,500. The debtors’ case as put in their original affidavit was that the property was worth £180,000 at the time of the repossession hearing, and that `provided that the Post Office and off-licence business was to be on-going they would have at that time been able to make monthly repayments in the sum of £1,750′.

As I have said, Mr Mustapha’s report supports a figure of £185,000 for the value of the property, business, and fixtures and fittings immediately prior to closing in November 1995. There is a small gap between this figure and the amount which would need to be established to show a counterclaim equal to or greater than the amount in the statutory demand. However, the claim has not yet been formulated in detail. It seems to me likely that if the debtors were to succeed on their basic claim of negligence, it is at least arguable that the bank’s duty commenced before the actual date of repossession, and there would be some consequential loss arising from that period, if only because, if continuity of the business was to be achieved, it is likely that they would have continued to be employed and earning salary during the transition period. It seems to me therefore it would not be right to refuse the application merely because of the small potential gap between Mr Mustapha’s figure and the figure required to meet the statutory demand.

The issue therefore is whether the debtors have any realistic prospect of establishing at trial the full amount of Mr Mustapha’s valuation, against the background of the other evidence. Mr Iwi, for the bank, makes four main criticisms of the report.

(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.

(2)     Mr Mustapha has ignored material evidence. In particular, the trading figures used by him are inconsistent with figures that the borrowers themselves had supplied to the bank earlier in 1995, and he ignores the valuations obtained by the bank prior to the sale.

(3)    The valuation takes no account of the discount appropriate when considering a sale by a mortgagee in possession.

(4)     Mr Mustapha has failed to make allowances for the dilapidated state of the property.

I shall take these points in turn. 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.

The evidence before me contains very limited information on this aspect. Mr Madden of AMR advised in April 1994 that the best course of action for the bank would be to repossess, and to appoint AMR as managers, and they advised seeking the co-operation of the borrowers `as significant goodwill could be lost if the borrowers become alienated’. I am told there was some form of restructuring of the loan in August 1994, but it is not clear what form that took. At around the time of the possession order, on 18 September 1995, the second debtor wrote to the bank referring to `other parties involved with the business concern … with whom business arrangements need to be sorted out’. It is not clear precisely what she meant by this or whether there was any response. Mr Isherwood’s affidavits for the bank rest on the position that since the business had closed by the time the bank took possession, the question of a `going concern’ sale did not arise. He does not deal with the events leading up to that position. Mr Iwi suggests there would have been difficulty in securing the transfer of the Post Office contract and the licences to a new manager, but the evidence does not show that this would have been an insuperable problem. It is implicit in Mr Madden’s report that the goodwill could, with co-operation, be protected.

The second point is of more substance. Mr Iwi’s most recent affidavit exhibits a letter from the first debtor dated 4 April 1995 (addressed to a Mr Glendenning of the bank) in which he is asking for some indulgence in relation to payments. In that letter he says:`I want to explain from the outset that our trade has been devastated since the opening of a new Co-op Superstore in Heathfield.’ He goes on to enclose details of the weekly takings to show that the weekly turnover has reduced to `under £3,000 and towards the lower end of £2,000′. He says that as a result there is `no money left to pay the last month’s mortgage payment’. These figures are to be contrasted, says Mr Iwi, with the average annual turnover used by Mr Mustapha of £200,000, which implies average weekly takings of some £4,000. Furthermore, the fact that Mr Mustapha does not mention the more recent information, or the effects of the opening of the superstore in Heathfield suggests that either he has not investigated the matter fully, or the debtors have not been wholly open with him.

Unfortunately, there is no independent evidence of the value of the business in the period leading up to the possession order during 1995. There is the Madden report in April 1994, and there are various reports, including that of Mr Mustapha, in 1996. The bank’s experts have considered the position following closure of the business and therefore do not assist on the value before closure. The only evidence of the 1995 position is that of the first debtor’s letter. It is fair to say that, although he refers to the business being `devastated’, he goes on to speak of his current negotiations with the `Spar’ group and his hopes that there will be some return of shoppers from the Co-op after the initial interest has been lost. He also reports an increase in the Post Office business. Mr Leighton, for the debtors, on 689 instructions told me that Mr Mustapha had been given the accounts up to the time of closure, and that the downturn referred to by the first debtor in his letter was a temporary factor. However, I have no actual evidence on this, even though Mr Isherwood’s latest affidavit has been available since December. I find it hard to believe that Mr Mustapha would not have referred specifically to the recent figures, if he had seen them.

The omission, in Mr Mustapha’s report, of any reference to the most recent trading figures does seriously diminish its authority. A further weakness of Mr Mustapha’s report is that, while it refers to the 1994 report, it does not mention the valuations obtained by the bank immediately prior to the sale, nor Crickmay’s letter of 9 May 1996 giving details of the sale. It is not clear whether he was shown this evidence. Although they did not consider the going concern value, they are relevant to the valuation of the premises themselves. The reports are particularly important, because it was on the basis of that advice that the bank conducted the sale and accepted the offer of £43,500. Whatever criticisms may be made of it in relation to the failure to maintain the business, the premises themselves were marketed in accordance with proper professional advice. Even allowing for the points made in Mr Mustapha’s report, it is difficult for the court to accept as credible a valuation for the premises (£100,000) more than twice that which was actually obtained.

I can deal more quickly with the other two points made by Mr Iwi. The proposition that Mr Mustapha should have assumed a discount for a sale by a mortgagee in possession again begs the question what the nature of the mortgagee’s duties is. If proper arrangements had been made to secure continuity of the business, it is not self-evident that there would have been a discount on sale. As to the state of the property, again I have no satisfactory evidence of this at or about the time of the possession order, assuming this to be the relevant time. The reports which the bank obtained prior to sale were made after the property had been left vacant over the winter. Mr Mustapha has taken account of his own limited inspection, the information obtained from his clients, and the earlier report. However, it is inevitably a weakness of his evidence that he did not see the property at the time to which his valuation applies.


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. However, even accepting Mr Mustapha’s evidence at its highest, the case on the figures is marginal. To justify setting aside the statutory demand, there would need to be a realistic prospect that his evidence would emerge from a trial wholly unscathed. This in my view is not credible. There are serious weaknesses in his report, to which I have referred, particularly his failure to address the expert reports on which the bank acted, and his failure to refer to the up-to-date trading figures. 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.

Appeal allowed.

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