Insolvency Update: Error in Redemption Statement does not Prevent Reliance on Cross Security
07 July 2016
In AIB Mortgage Bank -v- O'Toole & anor  IEHC 368 the High Court determined that a bank was not prevented from relying on a mortgage as security for all sums due by the defendants, despite issuing a redemption statement which omitted this fact.
In order to understand this case, it is necessary to set out the chronology of events:
- The plaintiff (the "Bank") had advanced certain loans to the defendants, which were performing loans at all material times (collectively referred to by the court as the "first loan").
- The Bank had also advanced a loan (the "second loan") to the defendants and a third party, which was a non-performing loan.
- Following unsuccessful negotiations the Bank demanded repayment in full of the second loan.
- The Bank issued proceedings against the defendants and the third party seeking summary judgment on the second loan.
- The defendants' solicitors requested redemption statements in respect of the first loan, which the Bank issued, in error, failing to note that the security was security for all sums due by the defendants to the Bank.
- The defendants proceeded to sell one of the assets provided as security for the first loan, remit the amount set out in the redemption statement to the Bank and request a discharge of the charge.
- The Bank then realised that it had made a mistake in issuing the redemption statements and that it should properly have required the full proceeds of sale to be remitted to the Bank against any amounts owed by the defendants to the Bank.
- The defendants then agreed to place the proceeds of sale in their solicitor's client account pending the decision of a court as to who was entitled to the funds.
There appears to have been considerable debate whereby the defendants contended that the Bank was seeking to consolidate mortgages and that it was not entitled to do so as the mortgages were not originally granted by the same parties.
The Bank, for its part, submitted that it was not seeking to consolidate mortgages, rather it was simply relying on its contractual entitlements i.e. the all sums nature of the security.
Binchy J., having considered the contractual terms in the facility letters (including the Bank's general terms and conditions) and the security documents held that:
"It could not be more clear that both the loan contracts and the deeds of mortgage and charge provide that the security being provided is in connection with all present and future liabilities to the Bank." and
"While therefore, the plaintiff is not entitled to rely upon the doctrine of consolidation, in my view the plaintiff is entitled to rely upon its express contractual rights..".
The judgment is a useful restatement of a lender's right to rely on security expressed to be for all sums due by one or more borrowers to it.
That said, it cannot be relied upon as determining:
- That all errors in redemption statements will be forgiven. Such decisions are likely to turn on the precise wording of the redemption statement and borrowers may be in a position to raise estoppel arguments. Moreover, the courts may penalise errors by lenders by awarding costs against them.
- More generally, that there is no scope for a borrower to successfully contend that a security document providing, on its face, that it is for all sums due by the borrower is more limited. This will depend on the precise terms of the document and any agreements varying the extent to which the lender is entitled to rely on it.
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