Mortgage lenders who take possession of defaulting debtors’ properties are obliged, when selling them, to obtain the best price reasonably obtainable. The High Court made that point in overturning a seven-figure statutory demand in the context of a bankruptcy case.
A businessman loaned sums of £180,000 and £3 million to another. The loans were secured by way of mortgage on properties owned by the borrower. Although some interest was paid, the principal sums remained outstanding on the dates by which the loans should have been fully discharged.
In those circumstances, the lender took possession of the properties and sold them to a company which he owned and controlled for £2,050,000. The lender argued that, with accrued interest, over £3.9 million remained outstanding following the sale and issued a statutory demand against the borrower in that amount.
In seeking to have the demand set aside, the borrower argued that, given the connection between the lender and the company, the sale had not been at arm’s length. The sale was in any event said to have been at a very substantial undervalue, in that the properties had previously been valued at £5.5 million.
The lender pointed out that he had obtained no less than eight valuations of the properties from reputable sources before selling them to his company. The sale price, although calculated on the basis of a speedy sale within 90 days and without the benefit of vacant possession, was perfectly reasonable.
In upholding the borrower’s arguments, however, the Court found that his defence to the lender’s claim was better than fanciful. There was, amongst other things, no evidence that the lender had made inquiries of occupants of the properties as to whether they would be willing to give up possession before he pressed ahead with the sale to his company.
The Court also noted that the sale to the company had been at a price that was less than half that for which the properties had been sold only a year previously. There had been no marketing of the properties and it could be realistically argued that, had they been sold at the best price reasonably obtainable, the proceeds would have been sufficient to wipe out the borrower’s debt. The statutory demand was set aside.