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High Court of Justice in Northern Ireland Chancery Division Decisions
You are here: BAILII >> Databases >> High Court of Justice in Northern Ireland Chancery Division Decisions >> Northern Bank Ltd v McKinstry & Anor [2001] NICh 6 (22 March 2001)
URL: http://www.bailii.org/nie/cases/NIHC/Ch/2001/6.html
Cite as: [2001] NICh 6
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Neutral Citation no.[2001] NICh 6
Ref:
GIRE3384
Judgment: approved by the Court for handing down
Delivered:
22.03.2001
(subject to editorial corrections)
GIRVAN J
Introduction
This application raises a question of some importance in the field of mortgage law namely whether a bank's "all monies mortgage" gives the bank a security over the premises subject to the mortgage in respect of monies due under a regulated consumer credit agreement governed by the Consumer Credit Act 1974 which is not in itself a secured debt but breach of which has led the bank to obtain a judgment for the debt due under the agreement.
The background to the application
By a mortgage dated 1 August 1996 the defendants mortgaged in favour of the plaintiff ("the Bank") the premises known as 34 Brae Park Road, Ballyclare, County Antrim ("the premises") as security for the repayment to the plaintiff of all and every the sum or sums of money then or at anytime thereafter owing to the Bank. The mortgage was made in consideration of the Bank making or continuing advances or otherwise giving credit or affording banking facilities for as long as the Bank might think fit to the defendants and any other person or firm or company for the liabilities of which the defendant might thereafter become surety.
Clause 10 of the mortgage provided:
"This security shall not cover any sum or sums of money arising under a regulated consumer credit agreement failing within Part V of the Consumer Credit Act 1974 unless specifically agreed between the Mortgagor and the Bank."
The mortgage was subject to standard terms conferring a power of sale at any time after demand made as therein provided and notwithstanding that the notice required by section 20 of the Act had not been given for either of the defaults therein mentioned. The mortgage contained a proviso that the monies due thereunder should be deemed to become due within the meaning of section 19 of the Conveyancing and Law Property Act 1881 and Section 4 of the Conveyancing and Law Property Act 1911 immediately on demand for payment being made.
The plaintiff operated for the defendants a current account and a house mortgage account. This latter account was opened on 11 July 1996 when the plaintiff advanced to the defendants the sum of £30,480 to be repaid over 19 years 8 months by monthly instalments. At the date of issue of the originating summons the defendants had defaulted in the payment of four monthly payments. By letter of 24 July 2000 the Bank called in the debts. As of the date of the affidavit grounding the originating summons (19 September 2000) the sum claimed due on foot of the mortgage was £31,453.41.
In a subsequent affidavit the relevant bank official claimed that the defendants were also liable to the Bank on foot of a personal loan account which had not been secured by the mortgage but which had become the subject matter of a judgment. The Bank accepted that that agreement was a regulated and unsecured agreement for the purposes of the Consumer Credit Act 1974 and was not covered by the mortgage. The defendants having defaulted under the agreement on 4 October 2000 the Bank obtained a judgment for £8,180.13 inclusive of costs against the defendants. The Bank argued that the all monies mortgage now covered the judgment debt which was of a different nature from the debt due under the regulated agreement.
The Master's approach
The Master considered that the mortgage did not provide security for the judgment debt. The mortgage deed expressly provided that the security did not cover monies arising under a regulated agreement. The Master directed that a letter be sent by the Chancery Office to the defendants putting them on notice of the relisting of the matter on 15 December, informing them that his view (which was presently the subject of an appeal in another case) was that the judgment debt, if it related to monies arising under a regulated agreement as defined in the 1974 Act, was not secured by the mortgage in favour of the plaintiff and pointing out that it was open to the defendants to attend the hearing on 15 December 2000 if they had any representations or evidence they wish to put before the court. The Master had a concern that on reading the Bank's affidavits the defendants might have been misled into the belief that the total amounts secured were so large that they could not put forward reasonable proposals to discharge the arrears within a reasonable period.
When a mortgagee is seeking possession of a dwelling house on foot of his rights under a mortgage since the court is required by section 36 of the Administration of Justice Act 1970 (as amended) to exercise the statutory discretion therein set out, it is incumbent on the mortgagee to put before the court details of the sums claimed to be due by the mortgagor. In its initial affidavit the Bank did not seek to rely on the monies due under the regulated agreement and did not put forward any evidence about those monies. It subsequently sought to adduce evidence that the mortgage did secure the judgment debt obtained after the issue of the originating summons as a result of the default under the regulated agreement.
The Bank should have sought leave to adduce the additional evidence and since it was seeking determination of a discreet issue as to whether the mortgage covered the judgment debt it should have been put in terms that it should amend the summons to seek either a declaration that the mortgage secured the monies due under the judgment or alternatively determination of the question whether the mortgage covered that judgment debt. At the hearing before this court Mr Devlin sought and was given leave to make an amendment to the summons to seek a declaration that the mortgage did secure the judgment debt. Since the Bank should have sought leave to adduce the additional affidavit and to amend the summons the court could and should have put the Bank on terms that it re-serve the amended summons on the defendants. This would then have made clear to the defendants that a separate issue arose as to whether the mortgage covered the judgment debt. While the Master's concern that the defendants might have been misled as to the extent of the debt as a result of the Bank's new affidavit was not unjustified, his decision to direct a letter to be sent by the court to the defendants in the terms in which it was sent unnecessarily appeared to draw the Master into the arena and was liable to give the impression that the Master was not acting in a fully dispassionate way. If he was concerned about the matter, as he was, it would have been within his powers as a condition of granting leave to amend and to adduce the additional evidence to require the Bank, when re-serving the originating summons, to deliver to the defendants a letter indicating that the Master wished to hear argument on the question whether the security covered the judgment debt.
Determination of the question whether the judgment debt was secured
There are two grounds for holding that the judgment debt is not secured by the mortgage, one based on a narrow point of construction of the mortgage and one based on a wider principle under the Consumer Credit Act 1974.
As already noted the mortgage provided that it did not cover any sum "arising" under a regulated consumer credit agreement without specific agreement. Mr Devlin strenuously argued that once the Bank had obtained a judgment debt in respect of the monies due under the agreement the debt merged in the judgment debt which was of a higher and different order from the debt due under the agreement. While the doctrine of merger in judgment is clearly established by the authorities, it is pointed out by Templeman LJ in London Borough of Ealing v El Isaac [1980] 2 All ER 548 that merger does not apply where there is an independent covenant nor does it apply to a security as distinct from a contract. He referred to Economic Life Assurance Society v Osborne [1902] AC 147. There there was a mortgage with a covenant to pay interest half-yearly on so much of the principal as should remain unpaid. The mortgagors defaulted and the mortgagees recovered judgment against them for principal and interest. It was held that:
"… though the personal remedy on a covenant to pay a debt merges in a judgment and a judgment carries only 4% interest, yet upon the true construction of this mortgage deed the mortgagees were entitled to retain their security until they were paid the principal sum and interest at 5%."
Lord Davey at 152 referring to preceding authorities said that the question to be considered is whether the covenant for the payment of interest was an independent covenant or a covenant which was merely ancillary to the payment of principal money and the conclusion was that it was an independent covenant which was not merged in or extinguished by the judgment obtained upon the principal covenant.
In El Isaac Templeman LJ at 552 went on to say:
"It appears, therefore, that merger has a very restricted operation. It does not, as appears from the Osborne case which I have just cited, apply to a security. It does not apply to what is said to be an independent covenant and in most mortgages and deeds of borrowing these days care is taken to make the covenant an independent covenant."
While the security authorities there discussed establish that interest secured by a mortgage at a higher rate will continue to be payable notwithstanding the obtaining of a judgment debt which would carry interest at a lower rate and while the issue in those cases is different from the issue in this case, nevertheless they do make clear that a question of construction of a security will arise in determining what effect is to be given to a judgment.
In this case the judgment related to a debt which had fallen due under a regulated agreement and clause 10 in my view is clear in providing that the security does not cover that sum. While the money is now due as a judgment the debt "arose" out of the regulated agreement. A judgment debt cannot be looked at in total isolation from the underlying legal basis giving rise to the judgment.
The wider ground for holding that the mortgage does not cover the judgment debt lies in the proposition also established in London Borough Council v El Isaac namely that the doctrine of merger cannot be allowed to contradict a statute.
The Consumer Credit Act 1974 in Part VIII sets out the statutory provisions which must be complied with to create a valid security in relation to a regulated agreement. Regulations made thereunder prescribe the form and content of documents, those regulations to be made in compliance with section 105. Section 105(9) provides that regulations shall include provision requiring documents embodying regulated agreements also to embody any security provided in relation to a regulated agreement by the debtor. The regulated agreement in this case was a unsecured agreement. If it was the intention of the Bank to make it secured at some point such as after obtaining judgment for the debt then the agreement was not in the proper statutory form. Section 173(1) provides that a term contained in a regulated agreement or linked transaction or in any other agreement relating to a regulated agreement or a linked transaction is void if and to the extent that it is inconsistent with the provisions of the Act. To hold that the separate all monies mortgage provided a security for the debt on a judgment arising from the regulated agreement would run quite contrary to the spirit and intent of the provisions of the 1974 Act. As already noted the mere fact that a judgment is obtained does not mean that the money due on foot of the judgment did not arise under the regulated agreement.
The Master was properly satisfied that by reason of the defendants' defaults an order for possession should be made in respect of the premises and I uphold his decision in that regard. He properly disallowed the costs of the affidavit of 13 November 2000. I declare that the Bank does not have security for the judgment debt. Since the Bank's appeal was unsuccessful the Bank is not entitled to add the costs of this appeal to its security.
In practical terms the consequences of this decision are that when the Bank effects the sale of the premises after discharging prior incumbrances (if any) and then the monies properly due to the Bank the balance will be payable to subsequent incumbrancers (if any) and thereafter to the defendants. In order to enforce its judgment the Bank would be entitled to apply to the Enforcement of Judgments Office for an appropriate enforcement order against the net proceeds of sale and that application and enforcement would be at the expense of the defendants. It would clearly be in the interests of the defendants to reduce the costs of enforcement to agree to the Bank retaining the judgment debt and interest thereon out of the net proceeds of sale.
IN THE HIGH COURT OF JUSTICE IN NORTHERN IRELAND