Insolvency Update: Procedural Rights in Bank Decision Making
04 July 2018
AIB Mortgage Bank (AIB) granted Patrick and Helena Hayes (the Borrowers) a loan in 2005 for the purpose of refinancing existing loans. The Borrowers originally sought a 10 year facility on an interest only basis and had an alternative offer from Bank of Ireland on those terms.
At that time, AIB was not offering interest-only mortgages for periods over 5 years. The Borrowers asserted that AIB assured them that it would review the loan facility after the first 5 years with a view to extending the loan for an additional 5 years on an interest-only basis. Ultimately the loan facility would be a 10 year interest-only loan akin to the Bank of Ireland offer. The Borrowers accepted the AIB loan offer on this basis. In 2012, AIB issued a demand seeking repayment of capital and interest.
High Court decision
In the High Court, AIB sought judgment and orders for possession against the Borrowers, who defended the proceedings asserting that the facility was not in default as interest-only payments were being made by the Borrowers.
The Borrowers did not deny that they borrowed money or that the loan remained outstanding. However, they contended that AIB issued its demand for payment prematurely and ignored the terms of a collateral agreement.
The Borrowers argued that they received a number of oral and written assurances from AIB staff indicating that if the Borrowers accepted the loan from AIB, the 5-year interest-only loan would be reviewed favourably and extended for a further 5 years on an interest-only basis. In particular, the Borrowers relied on a statement made on behalf of AIB that “all things being equal there wouldn’t be any issue in extending at that stage for a further five years”.
Ms Justice Baker held that the phrase “all things being equal there wouldn’t be any issue in extending at that stage for a further five years”, conveyed that AIB would extend the interest-only arrangement for a further 5 years absent some significant change. However, the financial crisis had a catastrophic impact on AIB, the loans and the value of the security held. As such, the court effectively held that the circumstances arising from the intervening financial crisis entitled AIB to refuse to extend the interest-only period, thus there was no breach of the collateral contract. Ms Justice Baker granted judgment in the sum of €3.9 million in favour of AIB.
Court of Appeal decision
The Court of Appeal (CoA) proceeded on the basis that a collateral contract existed between the parties, as found by the High Court. However, the CoA overturned the High Court decision, on the basis that AIB did not carry out the review in accordance with the terms of the collateral contract.
While there was a review, Mr Justice Gilligan held that there was no review in the terms as represented to the Borrowers because, in 2010, AIB indicated to the Borrowers that it was not in a position to grant a further 5-year interest only loan.
Mr Justice Gilligan stated that AIB could not benefit from its failure to honour the terms of the collateral contract, set aside the money judgment and order for possession of 22 properties and permitted the Borrowers to proceed with their counterclaim in the High Court.
Although certain aspects of the evidence are unclear from the judgments, it appears that if AIB had formally:
- made a policy decision that, even where it had offered to review loans with a view, all things being equal, to extending them for a further 5 years on an interest only basis, economic circumstances had changed such that all things were not equal and such extensions should not be offered; and
- directed that where a lending manager felt that, notwithstanding such decision, loans should be renewed on such a basis, the decision should be escalated to an appropriate level within AIB where a derogation from policy could be granted,
it may be that the CoA could have reached a different conclusion in the circumstances.
Accordingly, the CoA appears to have made its decision on the basis of a form of procedural unfairness, in a judgment emphasising form over substance.
This decision suggests that lenders should strive to ensure:
- to the extent possible, that written agreements capture the entire agreement between the parties – entire agreement clauses and no oral variation clauses, while not watertight are helpful in this regard;
- that all relevant materials are before persons carrying out reviews of loans; and
- that those carrying out reviews of loans have the requisite authority to make any appropriate decision, or refer the decision to those with such authority,
to mitigate any risk of a successful challenge.
For more information, contact a member of our Insolvency & Restructuring team.
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