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You are here: BAILII >> Databases >> England and Wales High Court (Admiralty Division) Decisions >> Close Brothers Ltd v AIS (Marine) 2 Ltd & Anor, Re: OCEAN WIND 8 [2018] EWHC B14 (Admlty) (17 September 2018) URL: http://www.bailii.org/ew/cases/EWHC/Admlty/2018/B14.html Cite as: [2018] EWHC B14 (Admlty) |
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QUEEN'S BENCH DIVISION
ADMIRALTY COURT
B e f o r e :
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CLOSE BROTHERS LIMITED |
Claimant |
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-and- |
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1. AIS (MARINE) 2 LIMITED (in liquidation) 2. MR PAUL SIMON CHANDLER |
Defendants |
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For the Claimant - Mr James Watthey instructed by Shoosmiths LLP
For the Second Defendant - Mr Marc Rivalland instructed by Direct Access
Hearing dates: 3rd- 5th July 2018
Handed down 17th September 2018
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Crown Copyright ©
Jervis Kay QC:
The Claim
Background
a) By Clause 3.1 of the Loan Agreement, that the First Defendant would repay the Claimant the amount of the loan together with contractual interest and make the payments in the manner and times set out in Schedule 1 of the Loan Agreement.
b) The Repayments in Schedule 1 were to be made by way of 59 monthly instalments of €27,500 starting one month after drawdown, followed by a balloon payment of €1,149,850.60.
c) Interest chargeable at 5.9% above base and upon late payments at the rate of 1.5% per month from the due date until payment, including after judgment.
d) By Clause 8.1 of the Loan Agreement that the full loan would become repayable immediately together with interest, costs and expenses upon various listed acts of default, which included failure to pay instalments.
e) By Clause 14, in the event of default the Claimant was entitled to take possession of the Vessel and to sell her.
The Claimant's Case
a. That this matter began as a claim for a shortfall under a Ship Mortgage against the First Defendant and for a full indemnity under a Deed of Guarantee and Indemnity against the Second Defendant.
b. That the First Defendant was placed in Compulsory Liquidation by Court Order of 23rd November 2017, therefore the claim against the First Defendant cannot be determined because it is stayed under s. 130 Insolvency Act 1986.
c. Regardless of the Defendants' case of "sale at an undervalue", the claim against the Second Defendant is made upon an express contractual indemnity for which, under its terms, "sale at an undervalue" is not an available defence.
d. With respect to the costs and expenses of the sale the relevant vouchers have been provided and duly proved.
e. With respect to whether the sale of the Vessel was at Arm's Length or made to a connected person:
i. The burden rests upon the debtor to show that a bank has acted unreasonably unless and until the debtor establishes that the sale was to a "connected person".
ii. There was no evidence of such a relationship between the Claimant and the C-Wind Group of companies and that point has been abandoned by the Defendants.
iii. Therefore the burden rests upon the Defendants to show that the Vessel was sold below value due to the lack of reasonable care on part of Close Brothers.
f. With respect to whether the Claimant failed to take reasonable care to sell the Vessel for the best price reasonably obtainable and whether, in doing so, the Claimant was in breach of its obligations to the Defendants:
i. The Second Defendant is not just a guarantor with secondary liability, he is a primary obligor who, having agreed to the express terms of Clause 2.3 of the Indemnity, has undertaken to indemnify the bank against all losses. There is no scope of language in this Clause 2.3 for construing the words in such a way that the Second Defendant's liability is limited by any so-called sale at an undervalue. Therefore the question of sale at undervalue does not arise.
ii. The expert evidence does not support a sale at undervalue.
1. Even if the bank owed a duty to the Second Defendant to expend reasonable efforts to obtain a proper price, they did so. Bowtle - "The Law of Ship Mortgages" makes it clear that, in any event, the threshold is a low one and should take into account commercial realities.2. The Claimant's expert evidence demonstrated that the Vessel was sold within a proper price bracket and therefore that should be the end of the matter because only if the sale price was low enough to raise eyebrows would the Claimant need to show it has exercised reasonable efforts.3. The Claimant relies on evidence on valuation from Mr Mross, Managing Partner and Owner of Global Renewable Shipbrokers GmbH (or "GRS"), which is in fact the broker that the Defendants insist that the Claimant should have used in the first place.4. Unlike the Defendants' expert evidence from Mr Finlay, Mr Mross' report took into account "real life" value, market conditions and the value of other comparable vessels subject to "correction factors".5. Mr Mross' graph in his report shows a likely spread of market values at various times in 2016 and, even before applying any margin of error, the sale price of the Vessel was clearly within that spread.6. The Court should accept Mr Mross' opinion that "It is questionable whether a higher sales price could have been obtained, given the poor market conditions for second-hand sales at that time and after the down cycle in CTV charter rates in 2016". And further "it is the Author's opinion that the obtained price was under the given circumstances within the range of obtainable prices."7. In the experts' Joint Statement, even Mr Finlay accepted that the applicable market was "quiet" and, in his report, it was described as "poor or depressed".
g. With respect to the allegation, raised by the Second Defendant, that there was a personal vendetta by Mr Kearsey against the Second Defendant ("the Kearsey factor"):
i. The Claimant denies the Second Defendant's campaign that Mr Kearsey had a personal vendetta against Mr Chandler, was out to get him and therefore sought a low valuation.
ii. The reality is more mundane. The Second Defendant has had a series of failed and inoperative businesses and by the time of repossession, the First Defendant was in arrears, had been given its final chance and had no satisfactory plan to get back on track; further, it was alarming the bank with its lack of management control, the Second Defendant had disastrously fallen out with his joint venture partner Mr Chris Church and the Vessel was unemployed with no future business lined up.
iii. No bank in these circumstances would have continued to extend credit.
iv. There was no vendetta, the bank had simply and justifiably lost all confidence in the Defendants.
h. With respect to the choice of Braemar as broker:
i. Close Brothers appointed Braemar ACM Offshore as broker; a well-known London PLC that is entirely reputable with a large offshore department. Despite the Defendant claiming otherwise, this was an appropriate choice of broker.
ii. It is hard to see where this point, that Braemar was an inappropriate choice, takes the Second Defendant given that he says GRS was the right broker and GRS says the Vessel was sold in an appropriate price band.iii. Braemar expended more than adequate efforts to sell the Vessel at a decent price, despite receiving little interest in the Vessel. It is to be noted that the Vessel's particulars were sent to 245 addresses and then to another 75 and that Braemar did a good job of selling the Vessel quickly in a weak market.iv. The only offer higher than that of the eventual buyers, CWind Ltd who paid £1,700,000, was from JR Shipping who offered "EUR 2.2 to 2.3m" on the condition that the bank funded the purchase with EUR 2.3m loan. This was rightly considered to be unacceptable by the bank. As was the offer from the First Defendant itself at £1.4m.v. Therefore, the Claimant took reasonable care to sell the vessel for the best price reasonably obtainable.
i. With respect to whether there was a recoverable shortfall and, if so, the quantum thereof:
i. In the circumstances, the full amount claimed of £220,602.35 together with costs and interest is owing.
ii. Close Brothers is entitled to a full contractual indemnity. Even if the bank owed duties to the Second Defendant, the Claimant did expend reasonable efforts and the Vessel was sold within a reasonable price bracket.
The Second Defendant's Case
a. With respect to the Mortgagee's Rights and Obligations:
i. Although the timing and the manner of sale is a matter for the mortgagee, the mortgagee owes a duty in equity to take reasonable care to obtain the best price reasonably obtainable at the time (Tse Kwong Lam v Wong Chit Sen [1983] 1 WLR 1349 at 1355 and others) which has been equated with the true market value (Cuckmere Brick Co v Mutual Finance Ltd [ 1971] Ch 949).
ii. The mortgagee will not be adjudged to be in default unless he is "plainly on the wrong side of the line". A true market value can have an acceptable margin of error (Michael v Miller [2004] EWCA Civ 282 where a bracket between £1.6 million and £1.9 million was permissible).
iii. "It is well settled law that it is the duty of a mortgagee when realising the mortgaged property by sale to behave in conducting such realisation as a reasonable man would behave in the realisation of his own property" (McHugh v Union Bank of Canada [1913] AC 299 at 311. Cases predating this one need to be treated with caution for the reasons that appear in Cousins The Law of Mortgages 3ed at 26-52ff. From McHugh onwards, it is clear that good faith is not enough to rescue a mortgagee who sells at too low a price.)
iv. The mortgagee must act fairly towards the mortgagor. He can protect his own interests but he is not entitled to conduct himself in a way which unfairly prejudices the mortgagor. He must take reasonable care to maximise his return from the property (Palk v Mortgage Services Funding Plc [1993] Ch 330).
v. The mortgagee owes the same duty to a guarantor. (Standard Chartered Bank Ltd v Walker [1982] 1 WLR 1410; China and Southsea Bank Ltd v Tan [1990] 1 AC 536).
b. With respect to whether and the extent to which the sale should be reviewed by the Court, the so-called 'Red Flag test' should be applied.
i. Fisher and Lightwood's Law of Mortgage suggests at 30.254 that a sale at just above the sum required to discharge the mortgage may be looked at carefully by the court, although there may well be occasions when that is the proper price or true market value.
ii. It is questionable:
1. How many mortgagees know that it is the law that the mortgagee must behave as a reasonable man would behave in the realisation of his own property, so that the mortgagor may receive credit for the fair value of the property sold.
2. How many times a mortgagee sells a property to the first half-decent buyer, without ever giving the mortgagor's equity of redemption a thought. Yet the law is that the mortgagee may not sell hastily at a knockdown price sufficient to pay off the debt: Palk v Mortgage Services Funding [1993] Ch 330.
iii. There are five reasons why this Vessel was sold at an undervalue of £1.7 million:
1. The Kearsey factor. It is reasonable inference that the hurried sale process and the final selling price was driven by Mr Kearsey or Mr Kearsey/Mr Dramby. There is clear enough oral and written evidence from both Mr Chandler and Mr Bagshaw about Mr Kearsey's hostility. In fact Braemar notionally offered the Vessel for sale at €2.5 million) although "anything with a 2 in front of it will do". Who could that have come from and why such a large drop? Who tries to sell a property by saying the sale price is €2.5 million but €2 million will do. And why? Because the price has been set to cover the book debt of €1.98m. In the end they settled for €1.9 million. The reason in part is because Mr Kearsey had formed such a negative view of the business that even paying off the arrears was rejected. He wanted out. He was entitled to get out. But he wanted out too much.
2. The Braemar Factor. Braemar was not experienced in the CTV field. There is no explanation as to how they came to a figure of €2,250,000 on 30th September 2015. The comparables of which Mr. Chandler has given evidence were not discussed in the Braemar report. It may be that Braemar did not research the field properly through inexperience, or it may be that they took the comparables into account, but didn't refer to them or raise their valuation as a result and if not why not. It is clear that Mr Kearsey and the Claimants sold the ship in ignorance of the value of any comparables. Mr Blundell confirmed that there was no file note suggesting that they looked for comparables and the Braemar report doesn't draw their attention to it. It is trite law that it is no answer for a mortgagee to say that he hired a generally competent broker: Raja v Austin Gray [2002] EWCA Civ 1965 at [34]. The duty is not delegable by the mortgagee. If the broker fails to bring something to the mortgagee's attention, the penalty is not paid by the mortgagor.
3. The failure by the mortgagees to know their necessary obligations. Mr Blundell conceded that there is not a single note or email on the file in which the mortgagor's equity of redemption is ever discussed. By November 2016, driven by Mr Kearsey, Close Brothers did not conceive of any duty it owed to the mortgagor. They should have had a more reasoned approach which should have required Close Bros to ask questions such as: (i) We've been doing this for years, has the market turned this bad? Or (ii) are we selling for the wrong price now? (iii) Why has the mortgagor's equity of €963,000 been wiped out so quickly and contrary to the Bank's projections when there were only two and a half months of arrears?
4. The personal guarantee factor. It may be and probably is a very sensible commercial approach for a mortgagee to have regard to a personal guarantee from the mortgagor's director. But it can lead a mortgagee astray because: (i) A bank that fails to sell a chattel for the right price because it knows it can make the shortfall elsewhere will be held to account, (ii) Instead of 'sticking to its guns' at the counter-offer price of £2 million (€2.3m), the Claimant collapsed and accepted an offer of £1.7 million (€1.944m). No doubt the Claimant would have preferred C-Wind to offer another £200,000, but when they didn't the Claimant had no compunction accepting the lower offer, not because it was behaving as a reasonable man would, but because it knew it could sue the Second Defendant on his personal guarantee, (iii) That is not a legitimate way for a mortgagee to market a vessel. In focusing on the personal guarantee, the Claimant lost sight of its duty to achieve the best price reasonably obtainable. The Claimant has a duty to take reasonable steps to achieve the best price reasonably obtainable and it is not a reasonable step to sell at a price on the grounds that any shortfall will be made up elsewhere.
5. The failure to start off the sale process at the right price.
a. This depends upon the effect of the expert evidence.
b. It is not correct that the Claimant cannot be criticised for the timing of the exercise of its power of sale because it does not have a freestanding discretion. The Court won't countenance a mere criticism of the timing or the method of the sale but the mortgagor, is required to take such steps as will realise the "proper" price. Timing may be a matter for the mortgagee, but not if it also results in a reasonable price not being obtained.
c. The indemnity point. With respect to the Claimant's argument to the effect that even if the Vessel should have been sold for more than €1.9 million that would provide a defence only for the insolvent First Defendant but not for the Second Defendant because the document that he signed entitled "Guarantee and Indemnity" is, on its true construction, not a guarantee but an indemnity.
i. It is too late to take this point on the first day of trial. It should have been pleaded in the Particulars of Claim or, after Mr Chandler's denial of liability, by way of Reply. The Court should not hear this argument without requiring a further amendment to the pleading which should be refused at this stage. Mr Chandler may well have a Defence to a claim on an indemnity like misrepresentation or rectification. It's too late to investigate that now.
ii. The point is, in any event, bad. This Court is exercising its equitable jurisdiction, not a common law jurisdiction involving the true meaning of the words in the personal guarantee. Equity would never allow contractual words to defeat in these circumstances: China and South Sea Bank v Tan Soon Gin [1990] AC 536.
d. With respect to the sale costs. Although certain costs can be accepted as proper nonetheless it is for the Claimant to prove its case adequately which has not been done.
Consideration
a. The mortgagee of a ship owes the same duty of care in relation to the sale as any other mortgagee owes, see Gulf and Fraser Fisherman's Union v Calm C Fish Ltd [1975] 1 Lloyds Rep 188.b. The mortgagee owes a duty in equity to take reasonable care to obtain the best price reasonably obtainable at the time, see Tse Kwong Lam v Wong Chit Sen [1983] 1 WLR 1349 at 1355 and others, which has been equated with the true market value Cuckmere Brick Co v Mutual Finance Ltd [1971] Ch 949.
c. Although the timing and the manner of sale is a matter for the mortgagee, he will be liable to the mortgagor if he fails to act with reasonable care to obtain a proper price. The property must be fairly and properly exposed to the market, absent cases of real urgency, see Silven Properties Ltd v Royal Bank of Scotland [2003] EWCA Civ 1409.
d. The mortgagee will not be adjudged to be in default unless he is "plainly on the wrong side of the line". A true market value can have an acceptable margin of error, Michael v Miller [2004] EWCA Civ 282 where a bracket between £1.6 million and £1.9 million was permissible.
e. The mortgagee must behave as a reasonable man would behave in the realisation of his own property, so that the mortgagor may receive credit for the fair value of the property sold, see McHugh v Union Bank of Canada [1913] AC 299. (Cases predating McHugh are to be treated with caution for the reasons that appear in Cousins The Law of Mortgages 3rd ed. at 26-52ff).
f. If the mortgagee breaches his duty, the remedy is not common law damages, but an order that the mortgagee account to the mortgagor, not for what he actually received, but what he should have received.
g. The mortgagee must act fairly towards the mortgagor. He can protect his own interests but he is not entitled to conduct himself in a way which unfairly prejudices the mortgagor. He must take reasonable care to maximise his return from the property, Palk v Mortgage Services Funding Plc [1993] Ch 330.
h. The mortgagee owes the same duty to a guarantor, Standard Chartered Bank Ltd v Walker [1982] 1 WLR 1410; China and Southsea Bank Ltd v Tan [1990] 1 AC 536.
i. The mortgagee's duty, to take care to sell for the best price reasonably obtainable, is not delegable. He does not perform his duty merely by appointing a reputable agent to conduct the sale, see Raja v Austin Gray [2002] EWCA Civ 1965 at [34].
j. The mortgagee is not entitled to act in a way which unfairly prejudices the mortgagor by selling hastily at a knock-down price sufficient to pay off the debt": Lightman J sitting in the Court of Appeal in Silver Properties.
k. A sale at just above the sum required to discharge the mortgage may be looked at carefully by the court, although there may well be occasions when that is the proper price or true market value, as suggested by Fisher and Lightwood's Law of Mortgage at 30.254.
l. The mortgagee cannot sell to himself, either alone or with others, or to a trustee for himself, nor to anyone employed by him to conduct the sale unless the sale is ordered by the court and he has obtained permission to bid, Farrar v Farrars Ltd (1888) 40 ChD 395 at 409, and
m. Where the mortgagee sells to a "connected" person, the burden of proof is reversed and the mortgagee must prove that he took reasonable care to obtain the best price, Saltri III Ltd v MD Mezzanine SA Sicar & ors [2012] EWHC 3025.
n. The reason for considering whether the mortgagee and the purchaser are or may be "connected" is the need to guard against unconscious bias as well as the risk of other forms of skulduggery, Australia & New Zealand Banking Bangadilly (1978) 139 CLR 195, quoted with approval in Alpstream AG & ors v PK AirFinance SARL & ors [2013] EWHC 2370.
a. With respect to the appointment of Braemar. If a mortgagee, which is a professional lending bank, wishes to repossess and sell a vessel it is hardly surprising that it would employ a broker to perform this duty and to give the Bank advice. Braemar is a well established International Ship broker of good reputation and I do not consider that making such an appointment can seriously be regarded as acting in breach of an obligation to the mortgagor or guarantor.
b. However, as the authorities indicate that the mere appointment of a broker cannot diminish the duties of the mortgagee itself, this must mean that the mortgagee will be liable for any failings by its broker. In other words the broker is acting as a selling agent of the mortgagee rather than as an independent contractor for whose actions the mortgagee is not liable. That being so, the question is whether the actions of the broker or the Bank brought about the sale of the vessel at an undervalue.
c. Although a criticism has been made that Braemar did not advertise the Vessel nonetheless the evidence showed that it sent the particulars to over 300 recipients. Given the restricted nature of the market and the number of operators involved it seems probable that Braemar's marketing efforts were more than adequate. No evidence was provided and no case put forward as to what Braemar should have done to improve the marketing. For instance no case was made out as to where or how Braemar could or should have advertised or whether that would have had a significant effect.
d. The reality is that there was a response which was muted. The only offer made which exceeded the sale price was based upon borrowing conditions which would have meant that the Bank was wholly or almost wholly financing the deal. No reasonable Bank could have been expected to accept such conditions.
e. Mr Watthey submitted that Mr Chandler agreed to his suggestion that Braemar did nothing wrong. That is correct but Mr Chandler qualified that by saying that "they do what they are told by Close Bros". Insofar as that referred to whether a broker would actually conclude a sale without the instructions of its principal I consider that is correct. However there is no evidence that Close Bros ever suggested to its broker, or would have been likely to suggest, that the vessel should be deliberately sold at an undervalue. I regard that a such a suggestion is so far fetched that it should be discarded.
f. The First Defendant relied upon the fact that vessel was apparently sold in haste. However ships are wasting assets which cost money to moor and maintain. In the present case the mooring and maintenance costs put forward were £33,570.54. This demonstrates that a mortgagee is usually justified in obtaining a sale at the earliest date which is commensurate with recovering as much of the capital as possible.
g. With respect to the apparent antipathy between Mr Chandler and Mr Kearsey. The evidence is that Mr Kearsey, according to Mr Chandler, took a strong dislike to him. That is not contested as Mr Kearsey did not give evidence. However Mr Watthey submitted that this probably arose out of the fact, which is demonstrated in the documentary evidence, that Mr Kearsey was concerned about the state of the loan, its security, Mr Chandler's business record which was very poor and the fact that Mr Church and Mr Chandler had fallen out so that the Vessel was not under charter. It is a fact that Mr Chandler's business record was poor and that the existing business was obviously foundering in circumstances where the Bank was likely to lose money. I consider that Mr Watthey is probably correct in his analysis and that Mr Kearsey had lost all confidence in the Defendants. The most important factor is that the First Defendant was in arrears with its repayment schedule and the Bank was entitled to realise its security. In my view the apparent antipathy, although real, had little to do with the sale of the vessel or how it took place.
Conclusion
Dated this 17th day of September 2018