Tuesday’s first instance judgment in Wood v Commercial First Business Ltd (in liquidation) and Business Mortgage Finance 5 PLC and another will interest securitisation and ABL lawyers and anyone else who is interested in the interplay of set-off rights versus an assignee post-notice of assignment. The case is mainly about Mrs Wood’s successful attempt (i) to rescind loans made to her (and subsequently assigned to BMF5 and BMF7 for subsequent securitisation) which were secured on her two buffalo farms in Somerset, on the grounds that the original lender (CFB, now in creditors voluntary – i.e. insolvent – liquidation) had paid commissions to her mortgage broker (who was acting as her agent) and not disclosed that to her and (ii) to recover the commissions. The judge found in her favour under general contract law principles. He also found that this constituted an unfair relationship under the CCA 1974 but the remedies were no more extensive than under general law apart from a point of detail concerning the Limitation Acts. BMF5 and BMF7 had sought to enforce their security over her farms, but her victory means she has won some time to try to refinance – rescission does not of course relieve her of the debt. Separately, CFB will be in breach of the warranties it gave to BMF in the mortgage sale agreement but as it is insolvent, the put-back would be worthless.
The point that many readers will find interesting is as regards the effect of the assignment. The broker was long insolvent, and she did not waste time trying to sue it, and she was awarded judgment against CFB, but that too is insolvent. So her only remedy of value would be if she could set off the return of the commissions against the mortgage debts owed to BMF. So could she? It is trite English law that any assignee takes subject to equities, and these include rights of set-off, but that once notice of assignment has been given, these are available only if they arise under either the contract for the assigned debt or else are so closely connected with it that it would be “manifestly unjust” not to allow set off. That is an equitable test and so, in the old saying of the great jurist Selden, depends on the length of the Lord Chancellor’s foot. In this case, the judge thought Mrs Wood’s claim for return of the commissions was not a claim for breach of or otherwise arising out of the loan agreements, and so could not be set-off. The test stems from a general desire to avoid creditors being able to cherry-pick, improving the quality of their asserts by unilaterally assigning them to third parties who would take free of legitimate defences to payment which the debtor should be able to assert because they are an intrinsic part of the self-same debt. He did not expand on his thinking here, and one wonders whether a different judge would have decided otherwise. There may not have been an express covenant by CFB not to pay undisclosed commissions, but it does not seem to involve much to argue that this was either implied or, even if not, that the circumstances were sufficiently close; and although there was nothing wrong about CFB paying the commission, by not informing its borrower direct, it was leaving itself open to exactly these causes of action.