Obligation on banks to assess creditworthiness of borrowers

In 2012 the High Court awarded KBC Bank €17,694,130 in damages against Dublin based law firm BCM Hanby Wallace (now Byrne Wallace) over failures to ensure the bank had security for the loans.

The Supreme Court has directed the High Court to reconsider findings that there was no contributory negligence by KBC Bank in how the bank suffered muti-million euro losses to struck-off solicitor Thomas Byrne and property developer John Kelly.

KBC Bank incurred the losses due to the failure in having security for €25m loans advanced to Mr. Byrne and Mr. Kelly.

The Supreme Court ruling addressed seminal issues relating to the duties of banks to the shareholders when advancing loans, including the responsibility to investigate the financial standing of borrowers.

Mr. Justice Brian McGovern in the High Court found the matter was about ‘multiple failures’ repeated across several separate loan transactions. He rejected arguments of contributory negligence by KBC Bank on the grounds that the bank was entitled to rely on assurances from professionals retained by KBC Bank. The Supreme Court ruled Mr. Justice McGovern had erred in how the issue of contributory negligence by KBC Bank was addressed.

Mr. Justice Nial Fennelly said that while BCM Hanby Wallace negligence related to obtaining security for the loans was a direct and proximate cause of the loss, there was an issue as to whether it was the only effective cause of the loss. It was important in this context to distinguish between the two types of contributory negligence alleged against KBC Bank. The first type of contributory negligence is the want of care in making decisions to lend. The second type of contributory negligence is the failing to verify or supervise the solicitors’ performance of their duties.

On the assumption KBC Bank failed to exercise due care in lending, Mr. Justice Fennelly was satisfied KBC Bank was exclusively responsible for those decisions.

Mr. Justice Fennelly found it was not the task of BCM Hanby Wallace to check the financial soundness or reliability of Mr. Byrne and Mr. Kelly. He also found that the High Court erred in finding there was no contributory on grounds of finding the actions of the borrowers were merely an inevitable or necessary cause, and not a proximate cause, of the loss.

Mr. Justice Fennelly noted the effective cause of the loss was the decision to lend to Mr. Byrne and Mr. Kelly, combined with the negligence of BCM Hanby Wallace.

Mr. Justice McGovern remarked that aspects of the loans to Mr. Byrne were "highly questionable". He noted the "somewhat careless" approach of KBC Bank in its actions.

On the second type of contributory negligence, the failure to verify or supervise the solicitors’ performance of their duties, KBC Bank was entitled to rely on the expertise of BCM Hanby Wallace to put in place security. Although it may be argued that the responsibility of KBC Bank in this context was so small it should not be fixed with any responsibility, there is no absolute rule.

Mr. Justice McGovern argued that if evidence showed the errors of BCM Hanby Wallace were so obviously the errors could not have been overlooked, there was a fault on the part of KBC Bank and it was open to BCM Bank Wallace to argue the obligations KBC Bank had in accordance with European Union Regulations on Licensing and Supervision of Credit Institutions. Also see 2009 and 2013.

The European Union Regulations requires the banks to manage business in accordance with ‘sound administrative and accounting principles’. The banks are also required to put in place and maintain internal control and reporting arrangement to ensure  business in managed.

Mr. Justice Fennelly directed that Byrne Wallace appeal  be allowed on the issue of contributory negligence and the matter should be reconsidered by the High Court.   

Prison authorities have duty of care to inmates

A recent High Court ruling could have implications for prisoners attacked in custody, after a former prisoner sued for negligence and a breach of duty. Almost four times the amount awarded in 2009.

Peter Creighton was serving a sentence in Wheatfield Prison when he was attacked with a knife in January 2003. Mr. Creighton needed 120 stitches for two-and-a-half feet of lacerations to his body.

Mr. Creighton claimed the prison and the state failed to take reasonable precautions for his safety. He said he did not know his attacker, and the system for bringing prisoners from the cells to receive methadone was dangerous.

Counsel for the state argued that it was not possible in a prison to guarantee the safety of a prisoner and ensure his protection.

Mr. Justice Iarfhlaith O’Neill said there could be few tasks more difficult than the management of the prison system. Mr. Justice O’Neill added that the courts would not impose on prison authorities a duty of care that was not capable of being preformed, but said it was necessary for the courts to intervene were there were systems or practices that have obvious deficiencies and foreseeable risks.

The case of Mr. Creighton previously came before the High Court in October 2009. The state appealed the High Court ruling. The Supreme Court ruled the case should be re-heard.

UK: Assets vested in a company may belong beneficially to the controller, if the arrangement in respect of the assets are such as to make the company its controller's trustee for that purpose

The Supreme Court has ruled that assets vested in a company may belong beneficially to the controller, if the arrangement in respect of the assets are such as to make the company its controller's trustee for that purpose.

In November 2011, Mr. Justice Moylan, sitting in the High Court, ordered the husband, Michael Prest, to procure the conveyance of the matrimonial home to his wife, Yasmin Prest. Mr. Justice Moylan also ordered that Mr. Prest make a lump sum payment and periodical payments at a rate of two percent of that sum while it remained outstanding, together with school fees for the children. In addition Mr Justice Moylan awarded costs in favour of Ms. Prest, with a payment on account. He also ordered Mr. Prest to procure the transfer of seven UK properties owned by Mr. Prest's companies, Petrodel Resources Ltd and Vermont. The transfer of these seven properties to Ms. Prest is in partial satisfaction of the lump sum order.

Mr. Justice Moylan concluded that there was no general legal principle of law which entitled him to reach the companies' assets by piercing the corporate veil. This is because precedent shows that the separate legal personality of a company cannot be disregarded expect where it is being abused. While accepting there is no relevant impropriety, Mr. Justice Moylan found that in applications for financial relief ancillary to a divorce there exists a wider jurisdiction to pierce the corporate veil. 

However, the majority of the Court of Appeal disagreed with Mr. Justice Moylan. Lord Justice Rimer held that the practice developed by the Family Division was beyond the jurisdiction of the Court except where either the corporate personality was being abused, or on the particular facts of the case it could be shown that an asset legally owned by the Company was held in trust for Mr. Prest. Lord Justice Rimer considered that Mr. Justice Moylan had rejected both of these possibilities on the facts, and therefore should not have made the order.   

The question before the Supreme Court was whether the Court has the power order the transfer of seven properties to his wife given that the properties legally belong to the companies.

In his written judgment Lord Sumption outlined three possible legal bases on which the assets of the companies may be able to satisfy the lump sum order against Mr. Prest.

The first basis is where a court is at liberty to disregard to corporate veil in order to provide effective relief. On this point, Lord Sumption agreed with Mr. Justice Moylan. While Lord Sumption acknowledged that Mr. Prest has acted improperly in many ways, he found no evidence that Mr. Prest was seeking to avoid any obligation relevant to the divorce proceedings.

However Lord Sumption disagreed with Mr. Justice Moylan that the legislation on property adjustment orders in connection with divorce proceedings might be regarded as conferring a distinct power to disregard the corporate veil in matrimonial cases:

I do not accept this, any more than the Court of Appeal did. [Mr. Justice Moylan] was entitled to take account of [Mr. Prest's] ownership and control of the companies and his unrestricted access to the companies' assets in assessing what his resources were for the purpose of section 25(2)(a). But he was not entitled to order the companies' assets to be transferred to [Ms. Prest] in satisfaction of the lump sum order simply by virtue of section 24(1)(a). (emphasis added)

Lord Sumption outlined three reasons for not giving the legislation the same effect as Mr. Justice Moylan did. The first reason is because it is axiomatic that the words in the statute are not read in a way that departs from the general system of law without expressing the intention of the legislation with "irresistible clearness". The second reason is the type of transfer in this case is ordinarily unnecessary to achieve a fair distribution of the assets. The third reason is because there is legislation on the avoidance of transactions intended to prevent or reduce financial relief. This is designed, in certain circumstances, to remedy a situation where a party attempts to frustrate proceedings by disposing of assets.

The third basis is on which the companies can be ordered to convey the properties to Ms. Prest is if the properties may belong beneficially to Mr. Prest. However Mr. Justice Moylan did not feel the need to make any decision on this issue.

In respect of the matrimonial home Lord Sumption concluded that, because the Prest family were not paying rent to Petrodel Resources Limited, this is a clear case of Mr. Prest using the company as a vehicle to hold legal title on the trust for himself. While the other five properties, Lord Sumption observed, were acquired by Petrodel Resources Limited in each case for a nominal consideration of one pound. As no explanation was provided to the Court for the "gratuitous transfer", there was nothing to rebut the presumption of equity that the company was not intended to acquire a beneficial interest in the properties.

The question for Lord Sumption now, was, who did hold the beneficial interest.

Of the seven properties, two of which were acquired in the name of Vermont, Lord Sumption concluded that Mr. Prest is the beneficial owner.

Therefore, in a unanimous verdict, the Supreme Court held that all seven properties should be transferred to Ms. Prest.

Commercial rent must be in line with present market conditions

A High Court ruling in March that will see the rent paid by Bewley’s for its Grafton Street premises fall, could have far-reaching implications for upward only rent reviews in Ireland.

Mr. Justice Peter Charleton said the amount of rent Bewley’s pays Ickendel Limited must fall in line with current market conditions.

Upward only rent reviews, where commercial leases were subject to occasional reviews, and where rent could only rise or remain flat but never fall, have been a contentious issue in recent years with the dramatic decline property prices.

Ickendel, owned by developer Johnny Ronan’s Treasury Holding Group, had taken a case against Bewley’s arguing that it could not reduce rents because its lease agreement only permitted upward only rent reviews.

The High Court had heard that both parties entered into a lease agreement in 1987 with rent reviews every five years since then, and the 2007 review, at the height of the boom, fixed at €1.46 million. Despite this, the same figure was claimed in 2012.

Bewley’s had claimed that the rent review was ambiguous and argued that the lease agreement did have a provision to allow rent to fall as long as it was not below the threshold set in 1987.

Mr. Justice Charleton concurred, saying that:

[t]he parties bargained so as to agree never to fall below that initially agreed rent and I cannot see that they bargained thereafter for anything other than a fair open market rent. That can rise and that can fall.

Mr. Justice Charleton said that it was not in accordance with “business sense” that a rent agreed five years ago “should govern a hospitality market changed for the worse”.

Comment: The objective of section 132(3) of the Land and Conveyancing Law Reform Act 2009  is that any reviewed rent is to reflect the market conditions prevailing at the time of the review. However, this section does not apply where the lease, or an agreement for such a lease, is entered into prior to the commencement of the section. Thus, this section would not have been applicable in the case of Bewley’s. Section 132 came into effect from February 28, 2010 (S.I. 471/2009).  

McCann Fitzgerald PDF    

The function of legislation is one that cannot be delegated by the Oireachtas to any other body

The Supreme Court has ruled that Registered Employment Agreements which set the pay rates for several employment sectors are unconstitutional.

The Supreme Court found that the provisions of Part III of the Industrial Relations Act 1946 unconstitutional, observing that:

there is a wholesale grant, indeed abdication, of lawmaking power to private persons unidentified and unidentifiable at the time of grant to make law in respect of a broad and important area of human activity and subject only to a limited power of veto by a subordinate body ... Nor did the Oireachtas retain any capacity for review either by the Oireachtas or by a member of the Executive responsible to it, of the agreements actually made.

The Supreme Court found that there was no obligation on the Labour Court or the parties to the agreements to consider the interests of the parties who would be bound by the agreements and those who are not parties to the agreements. Moreover, once the agreement is registered it is binding on everyone, and it may only be varied on the application of the original parties.

The Supreme Court found that the Act allowed the parties to an agreement to make any employment related law on the condition that the Labour Court considers such a law to be "substantially representative" of those working in the sector.

Comment: The McGowan ruling mirrors the John Grace Fried Chicken ruling, where the High Court found the Joint Labour Committee wage settings mechanism unconstitutional.

Genetic mother has right to legal recognition on birth certificate

A genetic mother ("CR") has been declared the legal mother of twins born to a surrogate mother in a significant case at the High Court. By arrangement with her sister, "CR" provided ova, fertilised by sperm provided by the husband of the genetic mother, "OR". As a result of that fertilisation, which took place in vitro, the twins, "MR" and "DR" were created.

Mr. Justice Henry Abbott in the High Court ruled that the "CR" was the legal mother and that she was entitled to have her name on the birth certificates. Until now, only the women who gave birth can be registered as the mother.

The couple had sought to challenge the refusal of the State to allow the genetic mother to be listed as the mother on the birth certificates. 

The surrogate, sister of  "CR", did not object to the couple’s application.

Mr. Justice Abbott said the input of the birth mother was to be respected and treated with "care and prudence". But 'the mother is always certain' (maxim mater semper certa est) principle, which the state argued meant the birth mother was always the legal mother, did not survive the enactment of the Constitution, "as it applies to the situation of in-vitro fertilisation".

"To achieve fairness and constitutional and natural justice for both the paternal and maternal genetic parents, the feasible inquiry in relation to maternity ought to be made on a genetic basis and on being proven, the genetic mother should be registered as the mother," Mr. Justice Abbott said.

Mr. Justice Abbott also ruled that the word "mother" in Article 40.3.3 of the Constitution had a meaning "specific to the article itself". This was related to the existence of the unborn only when the foetus was in the womb and not otherwise.

The state argued that Article 40.3.3 had defined motherhood as the birth mother only.

Mr. Justice Abbott noted that positive legislation in Ireland on surrogacy was "totally absent" and so the contract entered into by the couple and the surrogate mother was "not illegal". But he said its performance in the Irish legislative context "would not be enforceable by any court".

View: Guidance Document 2012 (Justice)

NAMA is a public authority for the purpose of EU Regulations on access to information on the environment

Mr. Justice Colm Mac Eochaidh yesterday ruled that the National Asset Management Agency (or “NAMA”) is a public authority for the purposes of the European Communities (Access to Information on the Environment) Regulations 2007.

The ruling by Mr. Justice Mac Eochaidh is considered as having implications for a range of public authorities.

However, the ruling will have no implication for the Freedom of Information Act, which is due to be amended as part of a process that will include the National Asset Management Agency under the legislation.

The Agency claimed that it was not a public authority within the meaning of the 2007 European regulation. But Mr. Justice Mac Eochaidh said this was “absurd”.

Mr. Justice Mac Eochaidh re-affirmed the ruling of Ms. Emily O’Reilly, Commissioner for Environmental Information, who ruled in September 2011 that the Agency is a public authority within the meaning of the regulation.

An application to remit the matter to the commissioner was yesterday dismissed by Mr. Justice Mac Eochaidh.

Ms. O’Reilly issued her ruling in light of a refusal by the National Asset Management Agency to supply information, sought by a journalist in 2010, on the basis that the Agency is not a public authority within the meaning of the 2007 regulations.

An appeal to the Supreme Court is open to the National Asset Management Agency.