The Supreme Court has upheld a High Court ruling dismissing technical challenges to the appointment of a receiver. In December 2013 we reported on a High Court case in which the borrowers unsuccessfully argued a number of technical points challenging the appointment of a receiver including the substantive argument that the underlying security held by Bank of Scotland (Ireland) Limited (BOSI) did not form part of the assets which were transferred to Bank of Scotland plc (BOS) when the two entities merged.

In appealing the High Court decision, the borrowers argued that the relevant security was not captured by the Directive on cross-border mergers and did not transfer across to BOS by operation of the merger. It was on this ground of appeal that the Supreme Court afforded priority to the appeal because this issue had the scope to be of significant importance well beyond this case and had the potential to impact all cross-border mergers.

The Supreme Court ultimately concurred with the High Court that there was no basis for concluding that the Directive on cross-border mergers intended that a security instrument would not be an “asset” (within the meaning of the Directive) that transfers on a merger. The Court held that if that was the effect of the Directive, the cross-border regime would have little or no application in the case of secured lenders and would result in the “direct opposite intention” of the Directive which was to facilitate cross-border mergers.

A second ground of appeal centred on an argument that BOSI (and now BOS) was not entitled to call in the relevant loans by virtue of an alleged agreement between BOSI and the borrower that BOSI would not call in its loans until one of the secured assets had been sold. The Court decided that there was no legally binding agreement in place such that prevented BOSI (and now BOS) from enforcing the loans.

The third substantive ground of appeal, also of potentially wider significance, was the question of whether the failure to specifically register BOS as the registered owner of the underlying security following the merger had the effect, at least in the land registry, of preventing BOS from enforcing that security. The Court decided that BOS had a contractual power under the underlying security instrument to enforce the security and appoint the receiver. However, the judge remarked that if BOS had sought to rely on its statutory powers of enforcement under the Registration of Title Act 1964, it would have had to become registered as owner of the security.

This remark by the judge should be taken into account by lending institutions merging with any entity which holds secured assets. While the majority of receiver appointments and enforcements are made on foot of an underlying security instrument, it would be prudent to ensure that a lending institution that acquires a security interest in registered land is registered as the owner of that security.

Contributed by Craig Sowman.

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