financial services litigation advice

Case Study: Mis-sold bridging loan to obtain bankruptcy annulment

You can apply to annul your bankruptcy on the basis that all of your debts and expenses have been repaid in full or to the satisfaction of the Court. Third parties such as claims management companies commonly assist bankrupts in obtaining a bridging loan or other short term finance. Due to the nature of these complex, high interest rate loans, you should seek legal advice in relation to the same, which loans are commonly mis-sold and can result in the individual finding themselves in further financial difficulty e.g. facing possession.

You can apply to annul your bankruptcy on the basis that all of your debts and expenses have been repaid in full or to the satisfaction of the Court. Third parties such as claims management companies commonly assist desperate bankrupts in obtaining a bridging loan or other short term finance. Due to the nature of these complex, high interest rate loans, you should seek legal advice in relation to the same, which loans are commonly mis-sold and can result in the individual finding themselves in further financial difficulty e.g. facing possession.

We specialise in bankruptcy annulments and bridging loan finance disputes and can advise you on a potential claim against a broker, lender or solicitor.

In Annulment Funding Company Ltd v Cowey and Cowlam [2010] EWCA Civ 711, the Court of Appeal upheld a County Court Judge’s finding that a bridging loan agreement and legal charge were affected by undue influence on the joint owner of a bankrupt’s property and set aside the affected agreement.

Bankrupt seeking to annul bankruptcy order

Mr Cowey and Ms Cowlam were co-habitees and joint owners of the property, 11 South Croxton Road (“the Property”), over which Cheltenham & Gloucester Plc had a first legal charge. The value of the house had been assessed at £800,000 and the sum due to the first chargee was approximately £370,000 and therefore the equity in the house was £430,000 split equally between Mr Cowey and Ms Cowlam.

On 5 May 2006, Mr Cowey was made bankrupt following a bankruptcy petition by HMRC for the sum of £120,000 for unpaid tax and costs of the Petitioner. A trustee was appointed in Mr Cowey’s bankruptcy and all of Mr Cowey’s property including his half share in the house (£215,000) was vested in his trustee pursuant to section 306 of the Insolvency Act 1986. The trustee was entitled to seek to realise Mr Cowey’s half share in the house for the benefit of the creditors.

Mr Cowey received some advice on seeking an annulment of his bankruptcy from an accountant and a solicitor.

Can I annul a bankruptcy order?

You can apply to have your bankruptcy annulled on the following grounds:

  • The bankruptcy order should not have been made;
  • The bankruptcy debts and expense of the bankruptcy have all been paid or secured to the satisfaction of the court; or
  • You have entered into an Individual Voluntary Arrangement since the bankruptcy order was made.

How do I annul a bankruptcy order?

To annul your bankruptcy you must submit an application to the court, which will include a witness statement and evidence. You will also be required to pay a court fee.The court will then list your application for a hearing.

It is important you get legal advice throughout the process and a legal representative to represent you at any hearing in order to get the best possible outcome and your bankruptcy successfully annulled.

Bridging loan assistance with bankruptcy annulment

A bridging loan is a temporary short term financing option normally with a maturity of less than 18 months and which is usually secured against a property. Bridging finance provides quick access to, what can be, large sums of money ordinarily used by a borrower purchasing a property or repay debts e.g. debts in a bankruptcy.

The Claimant, Annulment Funding Company Ltd was a company specialising in providing finance to people who had either been made bankrupt or held valuable interests in land. Annulment Funding Company Ltd approached Mr Cowey to assist in obtaining funds to secure an annulment of his bankruptcy.

The basic idea is that the Claimant provides to a bankrupt the funds which are needed to obtain the annulment(and to pay further fees) and, following annulment, the former bankrupt will be able to obtain a mortgage from another lender who will advance monies to pay the debt due to the Claimant and, normally, pay off any prior charge on the property.

The property can then be the subject of a first charge to the new mortgage lender. The funds advanced by the Claimant will be short term funds and will beat a level of interest which reflects that fact and the further fact that the borrower is not in a position to borrow elsewhere.  “

After obtaining a bridging loan and repaying his creditors, Mr Cowey’s bankruptcy was annulled on 22 November 2007 on the grounds that the bankruptcy debts and expenses had been paid or secured for.

Undisclosed links between brokers and bridging loan lenders and broker’s commission

Mr Cowey and Ms Cowlam signed a document appointing Insol Financing Sourcing Limited to act as a mortgage broker and that they would charge a significant fee of £10,000 plus VAT for arranging the bridging finance. On Companies House it can be seen that the two companies, Insol and Annulment Funding Company Limited are the same.

There are situations where an dishonest broker will recommend a borrower get the bridging loan from a sister company which will provide the loan financing. Often bankruptcy annulment advisers will refer the bankrupt to a connected bridging finance company to obtain funds and will benefit from a hefty commission.

In this case, borrowers may have a claim against the broker for a breach of the common law duty to advise. Moreover, particulars of claim would also include a claim for misrepresentation as the lender is really acting as the borrower’s agent when the true agency was between the lender and the broker.

Bridging loans provided to inexperienced bankrupt borrowers

On 3 July 2007, Mr Cowey and Ms Cowlam entered into an agreement for the lender to offer an advance sum of £138,000 to be secured by a second charge over their house. The interest rate would be 1.5%. On 7 September 2007, a sum of approximately £124,000 was advanced to Mr Cowey’s solicitors to pay his creditors and obtain the annulment of his bankruptcy.

An inexperienced borrower can include for example a borrower who is inexperienced with financial services, has poor management of money or a history of bad debts or a borrower with limited grasp of English. In that case, undue influence or unconscionable bargain provides an equitable remedy to protect those from abuse from stronger parties under contract law.

Bankrupt borrower unable to redeem bridging loans

Mr Cowey was unable to find a mortgage lender to provide the funds needed to repay the Annulment Funding Company, one reason for which was Mr Cowey’s credit rating as a previous bankrupt, and Mr Cowey was subsequently unable to repay the bridging loan.

Borrowers in loan agreements which have onerous redemption clauses potentially have the equitable right to argue that a court should not enforce the terms of a contract that make it difficult to repay. This equitable doctrine is known as “clogs on the equity of redemption”, Lindley M.R. in Santley v Wilde (1899) 2 Ch 474 provided the first expounding of this equitable principle:

“Any provision inserted to prevent redemption on payment or performance of the debt or obligation for which the security was given is what is meant by a clog or fetter on the equity of redemption and is therefore void. It follows from this, that ‘once a mortgage always a mortgage”

What may be considered to amount to a clog includes onerous penalty clauses or unconscionable repayment provisions (such as redemption only permitted if one lump sum payment is made), may be considered to be caught by the equitable doctrine.

If you have been recommended or encouraged to enter into into a bridging loan which makes it difficult to redeem, then seek legal advice as soon as possible as you may have a claim once the loan agreement has been analysed, the circumstances surrounding the parties entering into the loan have been ascertained, the amount advanced quantified and the nature of the transaction understood.

Possession proceedings by Annulment Funding Company

On 17 April 2008, Annulment Funding Company Ltd brought possession proceedings against Mr Cowey and Ms Cowlam and demanded the full amount of the loan plus interest.

Mr Cowley and Ms Cowlam argued that the transaction with the Annulment Funding Company was not readily explicable and was manifestly disadvantageous to Ms Cowlam; the charge had been entered into as a result of undue influence and that Ms Cowlam had not been independently advised.

It was argued that that even if the charge were set aside, Ms Cowlam was nonetheless liable, as a joint debtor with Mr Cowey to repay the loan to Annulment Funding company however the Lambeth County Court Judge held Ms Cowlam was not liable in that way and that she had entered into the charge as a result of undue influence of Mr Cowey. The Judge gave the Annulment Funding Company permission to appeal on that point.

The County Court Judge accepted Mr Cowey’s evidence that he did not want a bridging loan and held that Mr Cowey and Ms Cowlam did not understand the the nature of the transaction they were entering into with the Annulment Funding Company and thought following the annulment of Mr Cowey’s bankruptcy they would enter into a conventional long term first mortgage on the house. They did not think they were granting a second charge over the house to the Annulment Funding Company.

Bridging loan entered into under undue influence

The Judge also referred to the pressure of the situation which affected Ms Cowlam however the Judge considered whether Ms Cowlam had been placed under any pressure by Mr Cowley. The Judge held that the Annulment Funding Company had notice of the potential undue influence over Ms Cowlam.

The Annulment Funding Company argued that even if the charge was induced by undue influence or misrepresentation, so that it must be set aside against Ms Cowlam, the loan was not so induced and should be allowed to stand.A finding that Ms Cowlam was liable to repay the loan would open the door to the Annulment Funding Company obtaining a charging order in relation to her beneficial interest in the house. The Judge held that there was no distinction to be drawn between the loan and the charge and both were disadvantageous to Ms Cowlam. She entered into both in the mistaken belief that she was entering into a short term loan which would be replaced at an early point by a conventional mortgage, at interest rates which were much less than the interest rates being charged by the Annulment Funding Company. The Judge held that both the loan and the charge were affected by the misrepresentation and the loan.

Why should you use specialist lawyers instead of a claims management company?

Claims Management Companies (CMCs) are only regulated by the Ministry of Justice and are not law firms made up legally qualified solicitors and barristers. CMCs can only complain to the Financial Ombudsman Service (FOS).

They cannot issue legal claims nor represent their clients at Court and may lack expertise in this area. You do not need a CMC to assist you and they do not have the required specialist knowledge and understanding of the insolvency rules when making applications relating to bankruptcy.

I received negligent legal advice on a bridging loan

A borrower may approach a solicitor to seek advice before entering into a bridging loan agreement or the lender or broker will refer the borrower to a solicitor.

If you believe you were not properly advised on a bankruptcy annulment or a bridging loan or the advice you received was incorrect or inadequate, you may have a potential claim for negligence against the solicitor.

Why you should use specialist bankruptcy lawyers

We are leading experts specialising in Bankruptcy Petitions. We regularly assist with issuing petitions or setting aside statutory demands or defending petitions. We also specialise in making bankruptcy annulment applications.

We can guide you through the minefield of complex bankruptcy rules and procedure and help your company to manage the entire process.

We have years of experience in negotiating with creditors and their solicitors (in particular HMRC). We regularly represent our clients in the High Court/Bankruptcy Court and successfully obtain adjournments (e.g. to allow time to negotiate and settle or to defend a bankruptcy petition) or apply for annulment.

I was mis-sold a bridging loan

Bridging loans often have very high interest rates and even higher default rates. Failure to repay a bridge loan will likely lead to repossession and very significant adverse costs consequences.

Bridging agreements can be complex financial agreements and it is important to seek legal advice before entering into such an arrangement.

Book an Initial Consultation with Our Financial Services Litigation Lawyers 

Our Financial Services Litigation team of Solicitors and Barristers in London are highly experienced in mis-selling litigation and specialise in representing SMEs, high net worth individuals and companies in high value bridging finance mis-selling disputes. Our high profile and high value cases regularly appear in the national and international media. We have successfully managed and settled mis-selling court litigation against all major UK banks and regulated financial advisers.

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