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The High Court found that a purported purchaser of the underlying assets in a securitisation scheme was not a bona fide purchaser for value without notice, as the receiver who purported to sell had no actual or ostensible authority. Alex Cunliffe, a barrister at Lamb Chambers, examines the court’s decision.
Business Mortgage Finance 6 Plc v Roundstone Technologies Ltd  EWHC 2917 (Ch)
The judgment highlights the limits of the internal management rule established in Royal British Bank v Turquand (1856) 6 E & B 327, reiterating that the doctrine of ostensible authority is a species of estoppel, requiring the person dealing with the agent to show a holding out by the principal of the purported agent. In addition, unless clear words are used, a clause protecting third party purchasers does not operate where a person only purports to be a trustee or receiver, but only where a person is properly appointed, but there was an improper exercise of their powers.
The claimant was the issuer of six classes of notes following a securitisation in 2007. The transfer of assets to the claimant was a true-sale securitisation structure proceeding by assignment of the rights under commercial mortgages, financed by the issuance of notes with values of £161,250,000 and €495,400,000. The notes were constituted and governed by a trust deed under which a note trustee was appointed.
In Business Mortgage Finance 6 plc v Greencoat Investments Ltd and others  EWHC 2128 (Ch), the first defendant was found to have had no power to appoint receivers and therefore the purported sale of the assets to a third party was invalid. However, the declaration to that effect was limited so that it did not prevent the purchaser, who was not a party to the case, from seeking to rely on the transfer of title under the asset sale agreement.
In this case the claimant sought a declaration that the asset sale agreement was not valid.
The defendant argued firstly that it was a bona fide purchaser for value without notice of an irregularity and, alternatively, that its purchase was protected by a specific clause in the charge over the assets.
In relation to the first argument, the court agreed with the decision of Zacaroli J, that Greencoat had not become a ‘noteholder’ for the purposes of the securitisation documentation and therefore it could not have appointed a receiver. In those circumstances, the receiver did not have actual authority, but nor did he have ostensible authority, since neither the claimant nor the actual trustee had held him out as such (East Asia Co Ltd v PT Satria Tirtatama Energindo  UKPC 30,  6 WLUK 436). The asset sale agreement could not therefore be binding and the defendant was not a purchaser at all.
In addition, the defendant had not seen evidence of the appointment of new trustees or their power to appoint a receiver. The asset sale agreement was also in an unusual form. Both of these matters put the defendant on notice, but it had not then made the enquiries a reasonable person should make as to the validity of the receiver’s appointment. In those circumstances, the defendant would not have been able to rely on ostensible authority.
Nor could the defendant rely on the ‘protection of third parties’ clause, which read, ‘No Purchaser from … the Trustee and/or the Receiver shall be concerned to enquire whether any of the powers which they have exercised or purported to exercise has arisen or become exercisable, or whether the Secured Amounts remain outstanding, or whether any event has happened to authorise the Trustee and/or the Receiver to act or as to the propriety or validity of the exercise or purported exercise of any such power; and the title and position of such a Purchaser ... shall not be impeachable by reference to any of those matters’.
In that clause, Nugee J decided that the use of the word ‘purported’ related to the exercise of a power by a trustee or receiver as defined in the charge and did not cover a person held out as a trustee or receiver in circumstances where they were not. As the court held that only BNY Corporate Trustee Services Limited fit the definition of trustee and that no one fit the definition of receiver, it followed that the clause did not assist the defendant.
Court: High Court (Chancery Division)
Judge: Mr Justice Nugee
Date of judgment: 22 October 2019
Alex Cunliffe appeared for the defendants in Business Mortgage Finance 6 plc v Greencoat Investments Ltd and others. He practises in a wide range of commercial and chancery work including banking and finance, civil fraud and insolvency.
Interviewed by Kate Beaumont.
The views expressed by our legal analysis interviewees are not necessarily those of the proprietor.
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Zahra started working as a paralegal at LexisNexis in the Lexis®PSL Banking & Finance and Restructuring & Insolvency teams in April 2019 and moved to the Corporate team in June 2020, where she currently works as a Market Tracker Analyst. Zahra graduated with 2.1 honours in BA French and Spanish and completed the GDL at BPP University. She has undertaken voluntary work for law firms in London, Argentina and Colombia.
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